Mad Hedge Technology Letter
October 30, 2018
Fiat Lux
Featured Trade:
(HOW ARTIFICIAL INTELLIGENCE WILL ENHANCE OR DESTROY YOUR PORTFOLIO)
(TSLA), (AMZN), (FB)
Posts
Anti-AI physicist Professor Stephen Hawking was a staunch supporter of preserving human interests against the future existential threat from machines and artificial intelligence (AI).
He was diagnosed with motor neuron disease, more commonly known as Lou Gehrig's disease, in 1963 at the age of 21 and sadly passed away March 14, 2018, at the age of 76.
Famed for his work on black holes, Professor Hawking represented the human quest to maintain its superiority against quickly advancing artificial acculturation.
His passing is a huge loss for mankind as his voice was a deterrent to AI's relentless march to supremacy. He was one of the few who had the authority to opine on these issues. Gone is a voice of reason.
Critics have argued that living with AI poses a red alert threat to privacy, security, and society as a whole. Unfortunately, those most credible and knowledgeable about AI are tech firms. They have shown that policing themselves on this front is remarkably unproductive.
Mark Zuckerberg, CEO of Facebook (FB), has labeled naysayers as irresponsible and dismissed the threat. After failing to prevent Russian interference in the last election, he is exhibiting the same defensive posture translating into a de facto admission of guilt. His track record of shirking accountability is becoming a trend.
Share prices will materially nosedive if AI is stonewalled and development stunted. Many CEOs who stake careers on doubling or tripling down on AI cannot see it die out. There is too much money to lose.
The world will see major improvements in the quality of life in the next 10 years. But there is another side of the coin in which Zuckerberg and company refuse to delve into the dark side of technology.
Defective Amazon (AMZN) Alexa has been producing unexplained laughter because of a mistaken command to start laughing. Despite avoiding calamity, these small events show the magnitude of potential chaos capable of haywire AI functions. If one day, a user attempts to order a box of tissues and Alexa burns down the house, who is liable?
Tesla's (TSLA) CEO Elon Musk has shared his anxiety about robots flipping the script on humans. Elon acknowledges that AI and autonomous vehicles are important factors in the battle for new technology. The winner is yet to be determined as China has bet the ranch with unlimited resources from Chairman Xi.
Musk has hinted that robots and humans could merge into one species in the future. Is this the next point of competition among tech companies? The future is murky at best.
Bill Gates noted that robots should be taxed like humans. This reflects the bubble in which the ultra-elite reside. This comment implies that humans and robots are on the same level and shows a severe lack of empathy for the 40% of working Americans who will be replaced by machines over the next 10 years.
The West is comprised of a deeply hierarchical system of winners and losers. Hawking's premise that evolution has inbuilt greed can be found in the underpinnings of America's economic miracle.
Wall Street has bred a culture that is entirely self-serving regardless of the bigger system in which it finds itself.
Most of us are participating in this perpetual money game chase because our system treats it as a natural part of life. AI will help more people do well in this paper chase to the detriment of the majority.
Quarterly earnings performance is paramount for CEOs. Return value back to shareholders or face the sack in the morning. It's impossible to convince anyone that America's capitalist model is deteriorating in the greatest bull market of all time.
Wall Street has an insatiable hunger for cutting-edge technology from companies that sequentially beat earnings and raise guidance. Flourishing technology companies enrich the participants creating a Teflon-like resistance to downside market risk.
The issue with Professor Hawking's work is that his time frame is too far in the future. Professor Hawking was probably correct, but it will take 25 years to prove it.
The world is quickly changing as science fiction becomes reality. The year 2019 will signal the real beginning of AI in tangible form when autonomous fleets flood main streets.
People on Wall Street are a product of the system in place and earn a tremendous amount of money because they proficiently execute a specialized job. Traders are busy focusing on how to move ahead of the next guy.
Firms building autonomous cars are free to operate as is. Hyper-accelerating technology spurs on the development of AI, machine learning and enhanced algorithms. Record profits will topple and investors will funnel investments back into an even narrower grouping of technology stocks.
Professor Hawking said we need to explore our technological capabilities to the fullest in order to avoid extinction. In 2018, exploring these new capabilities still equals monetizing through the medium of products and services.
This is all bullish for equities as the leading companies associated with AI will not be subject to any imminent regulation, blowback or government intervention.
The only solution is keeping companies accountable by a function of law or creating a third-party task force to regulate AI.
In 2018, the thought of overseeing robots sounds crazy. However, by 2019, it might be as normal as uncontrollable laughter from your smart home.
Global Market Comments
October 23, 2018
Fiat Lux
Featured Trade:
(WATCH OUT FOR THE UNICORN STAMPEDE IN 2019),
(TSLA), (NFLX), (DB), (DOCU), (EB), (SVMK), (ZUO), (SQ),
(A NOTE ON OPTIONS CALLED AWAY), (MSFT)
I am always watching for market topping indicators and I have found a whopper. The number of new IPOs from technology mega unicorns is about to explode. And not by a little bit but a large multiple, possibly tenfold.
Six San Francisco Bay Area private tech companies valued by investors at more than $10 billion each are likely to thunder into the public market next year, raising buckets of cash for themselves and minting new wealth for their investors, executives, and employees on a once-unimaginable scale.
Will it kill the goose that laid the golden egg?
Newly minted hoody-wearing millionaires are about to stampede through my neighborhood once again, buying up everything in sight.
That will make 2019 the biggest year for tech debuts since Facebook’s gargantuan $104 billion initial public offering in 2012. The difference this time: It’s not just one company, and five of them are based in San Francisco, which could see a concentrated injection of wealth as the nouveaux riches buy homes, cars and other big-ticket items.
If this is not ringing a bell with you, remember back to 2000. This is exactly the sort of new issuance tidal wave that popped the notorious Dotcom Bubble.
And here is the big problem for you. If too much money gets sucked up into the new issue market, there is nothing left for the secondary market, and the major indexes can fall, buy a lot.
The onslaught of IPOs includes ride-sharing firm Uber at $120 billion, home-sharing company Airbnb at $31 billion, data analytics firm Palantir at $20 billion, FinTech company Stripe at $20 billion, another ride-sharing firm Lyft at $15 billion, and social networking firm Pinterest at $12 billion.
Just these six names alone look to absorb an eye-popping $218 billion, and that does not include hundreds of other smaller firms waiting on the sidelines looking to tap the public market soon.
The fear of an imminent recession starting sometime in 2019 or 2020 is the principal factor causing the unicorn stampede. Once the economy slows and the markets fall, the new issue market slams shut, sometimes for years as they did after 2000. That starves rapidly growing companies of capital and can drive them under.
For many of these companies, it is now or never. The initial venture capital firms that have had their money tied up here for a decade or more want to cash out now and roll the proceeds into the “next big thing,” such as blockchain, health care, or artificial in intelligence. The founders may also want to raise some pocket money to buy that mansion or mega yacht.
Or, perhaps they just want to start another company after a well-earned rest. Serial entrepreneurs like Tesla’s Elon Musk (TSLA) and Netflix’s Reed Hastings (NFLX) are already on their second, third, or fourth startups.
And while a sudden increase in new issues is often terrible for the market, getting multiple IPOs from within the same industry, as is the case with ride-sharing Uber and Lyft, is even worse. Remember the five pet companies that went public in 1999? None survived.
The move comes on the heels of an IPO market in 2018 that was a huge disappointment. While blockbuster issues like Dropbox (DB) and DocuSign (DOCU) initially did well, Eventbrite (EB), SurveyMonkey (SVMK), and Zuora (ZUO) have all been disasters.
Some 80% of all IPOs lost money this year. This was definitely NOT the year to be a golfing partner or fraternity brother with a broker.
What is so unusual in this cycle is that so many firms have left going public to the last possible minute. The desire has been to milk the firms for all they are worth during their high growth phase and then unload them just as they go ex-growth.
The ramp has been obvious for all to see. In the first nine months of 2018, 44 tech IPOs brought in $17 billion, according to Dealogic. That’s more than tech IPOs reaped for all of 2016 and 2017 combined.
Also holding back some firms from launching IPOs is the fear that public markets will assign a lower valuation than the last private valuation. That’s an unwelcome circumstance that can trigger protective clauses that reward early investors and punish employees and founders. That happened to Square (SQ) in its 2015 IPO.
That’s happening less and less frequently: In 2017, one-third of IPOs cut companies’ valuations as they went from private to public. In 2018, that ratio has dropped to one in six.
Also unusual this time around is an effort to bring in more of the “little people” in the IPO. Gig economy companies like Uber and Lyft are lobbying the SEC for changes in new issue rules that will enable their drivers to participate even though they may be financially unqualified.
As a result, when the end comes, this could come as the cruelest bubble top of all.
Don’t Get Run Over
Global Market Comments
October 12, 2018
Fiat Lux
Featured Trade:
(WHY THE STOCK MARKET IS BOTTOMING HERE),
(SPY), (INDU),
(NETFLIX SAYS WE BECOME A NATION OF COUCH POTATOES),
(NFLX), (M), (AMZN), (TSLA), (DIS), (GOOG)
While much of the artificial intelligence focus has been on Amazon (AMZN), Apple (AAPL), Tesla (TSLA), and Alphabet (GOOG) this year, there is another firm in the field making money hand over fist.
That would be Netflix (NFLX), whose earnings have been on a tear all year, sending the shares soaring.
By this summer the company boasted a staggering 130 million subscribers, with much of the recent growth coming from overseas.
Traders went gaga over the numbers.
Indeed, the firm tracks every keystroke you make.
Watch the sultry tropical thriller Bloodline (sadly scheduled for cancellation), and the company’s clever AI will steer you straight into a like-minded series.
It’s like the “roach motel” network. Once you check in, you can never check out.
Analysts briefly worried about Netflix when Disney (DIS) announced it was pulling its offerings from the omniscient online streaming company, a major seller.
To watch Buzz Lightyear, Woody, and an interminable number of nearly identical princesses (I have three daughters) you’ll have to seek out Disney’s own distribution channel sometime in the future.
But the firm shot back with an $8 billion budget for original content for 2018, in one fell swoop making it one of the largest Hollywood production firms.
Now Netflix is a regular feature of the annual Oscar presentations. Last month it won an impressive 23 Emmys, tying AT&T Warner Media’s HBO for the first time.
They say a picture is worth a thousand words, and I just found 3,000 of them.
Look at three stock charts and you will immediately understand some of the most important structural trends now sweeping through our economy.
Those would be the charts for Amazon (AMZN), Netflix (NFLX), and Macy's (M).
Retail Sales are clearly in a secular long-term decline. Indeed, Macy’s (M) announced last year that it is closing 100 of its 769 stores.
Are these numbers revealing a major new trend in our society? Are we soon to have our every need catered to without lifting a finger?
Have We Become a Nation of Couch Potatoes?
After spending weeks preparing a major research piece for a private client on artificial intelligence, I would have to say that the answer is an overwhelming “Yes!”
Artificial intelligence, or AI, is far more pervasive than you think. Half of all apps now rely on some form of AI, and within five years, all of them will.
Within a decade, AI will cure cancer and most other human maladies, drive our cars, decide our elections, and do our shopping.
You probably all know that Northern California has been besieged with wildfires lately.
Guess what has suddenly started populating my screen? Adds for smoke detectors!
AI has become the leading market theme for 2018.
People my age all remember George Jetson, the space age cartoon series, who only had to work an hour a day because machines did the rest of the work for him.
The modern incarnation of his ultra-light workweek will be far darker and more sinister.
Instead of a one-hour day, it is far more likely that one person will keep a full time eight-hour a day job, while another seven unfortunates become full time unemployed.
By the way, I am determined to be that one guy with a job. So should you.
Indeed, I am increasingly coming across dire predictions that 30% of all jobs will disappear within ten years.
I’m sure that they will.
The real question is whether that 30%, or more, will be replaced by jobs yet to be invented. I bet they will.
Evolution and creative destruction are now happening on fast forward.
After all, some 25% of the professions listed on the Department of Labor website did not exist a decade ago.
SEO manager? Concert social media buzz creator? Online affiliate manager? Solar panel installer? Reputation defender?
What does the stock market do in this new dystopian society? It goes through the roof.
After all, far fewer workers creating a greater output generate much larger earnings that send share prices soaring.
It is all a crucial part of my “Golden Age” scenario for the 2020s.
Having said all that, I think I’ll go binge-watch Netflix’s tropical film noir “Bloodline.” I hear it’s hot.
“Game of Thrones” and “House of Cards” don’t restart until next year.
Our Future?
Global Market Comments
October 10, 2018
Fiat Lux
SPECIAL TESLA ISSUE
Featured Trade:
(OCTOBER 14 SAVANNAH GEORGIA STRATEGY BREAKFAST),
(THE BULL CASE FOR TESLA),
(TSLA), (GM), (F)
Talk about a bad news factory.
A short interest of 26% in Tesla (TSLA) stock has the tendency to manufacture bad news on a daily basis, whether it is true or not. It really has been a black swan a day.
This really is the most despised stock in the market. But you have to expect that when you are simultaneously disputing the auto, oil, dealer, and advertising industries, and doing it all union-free.
It also doesn’t help that Tesla is on the Department of Justice speed dial, undergoing no less than three investigations since the advent of the new administration. I can’t imagine why this is happening, given that the White House is now packed with oil industry executives.
That’s why I have been advising investors to buy the car and not the stock.
That is until now.
The truth is that all of this negativity is generating the best entry point for Tesla shares in two years.
In the meantime, the San Francisco Bay Area has become flooded with new Tesla 3’s. These are suddenly everywhere and soon will outnumber the ubiquitous Toyota Prius, until now the favorite of technology employees.
Q3 production of Tesla 3’s reached an eye-popping 55,840, up from 18,440 the previous quarter, taking Tesla’s total output to 80,000 including the model X.
That puts the company on target to reach 250,000 units in 2019. Tesla may be about to see something it has not witnessed in the company’s 15-year history: a real profit.
When I picked up my first Tesla 1 in 2010, chassis no. 125, I was all alone and treated like I was visiting royalty. The sales staff fawned all over me, offering me free hats, coffee mugs, and other tchotchke. Today, a staggering 200 people a day are gleefully driving their new wheels away from the Fremont factory, and another 200 getting them home-delivered by semis. Take a number and wait in line.
I have pinned down several of these drivers in parking lots, shopping malls, and trailheads to quiz them about their new ride and the answer is always the same. It’s a car from 20 years in the future, the best they have ever driven, and they will never buy another marque again.
Sounds pretty good, doesn’t it?
So I perked up the other day when I heard my old pal, legendary value investor Ron Baron, make the bull case for Tesla.
Ron has never done things by halves. He expects Tesla’s market capitalization to soar from $43 billion today to $1 trillion by 2030, a mere 12 years away. By then, Tesla should be generating $150 billion a year in profits. That implies that a 23-fold increase in the share price to $5,570 is ahead of us.
Half of this will be generated by the auto sales, while the other half will be produced by a burgeoning battery business. Tesla will easily become the largest auto manufacturer in the world within a few years.
Tesla will sell 10-15 million cars a year by 2030, compared to the current 300,000 annual rate.
It already is the one American auto maker with the highest US parts content, nearly 100%. It has also been one of the largest creators of new jobs over the past decade, right behind Amazon (AMZN), at some 46,000.
It’s really all about the math. Today, Tesla is building its Tesla 3’s at a cost of $28,000 apiece and selling them for $62,000. That’s the high price they have been realizing with extra options like four-wheel drive, 300-mile extended range batteries, painted wheels, and all the other bells and whistles. That gives you a $34,000 profit per vehicle.
Tesla’s “cheap” cars, the stripped-down rear wheel drive Tesla 3’s that will sell for a modest but world-beating $35,000 won’t be available until early 2019.
At this rate, the entire company will become profitable when it hits a production rate of 10,000 units a week compared to the current 6,000 units. They should achieve that sometime in early 2019.
Much has been made of drone video footage showing vast parking lots in Fremont, CA chock-a-block with shiny new Tesla 3’s. This creates a false sense of poor sales.
The actual fact is that Tesla has no dealer network. All of those parked cars have been sold and are awaiting owners to pick them up. The months it takes from payment to actual delivery gives Tesla a free float on billions of dollars. That’s worth a lot in a world of steadily rising interest rates.
Oh, and those notorious tents? They could withstand a category 5 hurricane. However, like everything else the company does, they’re revolutionary. They enable bypassed permitting procedures and can be built very quickly and cheaply.
How are things going with the competition? Not so good. The traditional internal combustion car industry has hundreds of billions of dollars tied up in engine factories that will eventually become worthless. They really are the 21st century equivalent of buggy whip makers.
General Motors (GM), Ford (F), and Chrysler are executing slow motion roll out of electric cars in order to squeeze a few more years of use out of these legacy plants. Electric cars don’t use engines. That is putting them ever further behind.
This is what the poor share performance of auto shares has been screaming at you all year despite one of the strongest economies and stock markets in history. Yes, “peak Auto” is at hand.
The high-end brands like Mercedes, BMW, Audi, and Porsche that just entered the all-electric market are a decade behind Tesla in autonomous software and manufacturing processes. They all have huge, expensive dealer networks.
Let’s see how sales go after they suffer their first fatal crash. In the meantime, Tesla has run up 200 million miles worth of driving data.
Factory insiders say a speed-up of new Tesla orders is in the works. Orders placed before December 31, 2018 are entitled to a $7,500 federal tax credit. That drops to $3,750 in the first half of 2019, only $1,750 in the second half, and zero in 2020.
In the meantime, the oil industry is still collecting $55 billion a year of federal oil depletion allowances. Go figure.
At the same time, many states like California, far and away Tesla’s largest market (Texas is no. 2), are either maintaining or expanding their own electric car subsidies or gas guzzler penalties. It is $2,500 per car in California.
Ron Baron is not alone in his admiration of Tesla. Macquarie Research has just initiated coverage with a strong “BUY” and a target of $430 a share, up 70% from today’s close.
Next in the works will be a Tesla Model Y, a small four-wheel drive based on the Tesla 3 chassis. A Roadster relaunch comes next in 2022, a $250,000 super car that will be doubtless aimed at Arab sheiks and billionaire car collectors.
By then the entire product line will spell SEXY. See! Elon Musk does have a sense of humor after all!
My First S-1
RIP
My New Wheels
Global Market Comments
October 8, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or GET ME OFF THIS ROLLER COASTER),
(THE INCREDIBLE FUTURE OF THE AUTOMOBILE),
(TSLA), (GM), (F), (TM)
It was the kind of dinner invitation I couldn’t turn down. What I learned was amazing.
I usually prefer to spend my evenings at home catching up on my research, calling customers, and plotting my next great Trade Alert.
So, it takes a lot to get me out of my cozy digs, especially given the recent incredible sunsets we have been getting.
Attending would be senior executives from Tesla (TSLA), General Motors (GM), and engineering professor from the University of California at Berkeley, and the California Air Resources Board.
With US car stocks going ballistic lately, I thought the event would be timely.
The dinner was hosted by a retired billionaire from Microsoft at the top of the Mark Hopkins Hotel in San Francisco.
The topic for discussion would be the very long-term future of the car industry.
I get invited to these things because the guests want to know how their views would fit in within a long-term global geopolitical/economic context, my own particular specialty.
I didn’t want to cramp anyone’s style so I kept my notebook under the table and scribbled away blindly, and illegibly. There’s no particular story line here.
I’ll just give you my random thoughts.
(GM) launched its second-generation Chevy Volt in 2015, and the customer response has been fantastic. The company is building a new $400 million battery plant on the east coast to help meet demand.
Some 60% of the buyers are coming from other automakers. It is fast becoming the new face of Chevy, like the Corvette Stingray and Camaro of years past.
The future is in a 200-mile range $30,000 car, and the Volt is that car, followed by the recently launched all electric Bolt.
Customers want to get away from oil and will only buy the products that accomplish that, be they hybrids or all electric.
He also mentioned that GM is launching an electric bike, which is already widespread in Europe. Not a big needle mover there.
The Tesla guy then proceeded to jump all over him, saying the Volt was “green washing” as usual, since it represents only a tiny fraction of the company’s sales.
GM had a vested interest in promoting the internal combustion engine, in which it had made a century long investment.
Its real focus can be seen in the giant new Suburban factory it was now building in Texas.
Mr. Tesla had driven from the south Bay with his S-1 entirely on autopilot.
The hardware has already been pre-installed in every S-1 produced since 2014, and all that is needed to make them self-driving is to execute a wireless overnight software upgrade.
What is truly amazing is that each car will have a learning program unique to the vehicle. If it misses a hard turn the first time, it will remember that turn and then make it perfectly every time from then on.
The Tesla person said that with the new Gigafactory the company will be on schedule for a tenfold ramp up in car production by 2020.
The $35,000 Tesla 3 that will make this possible will be offered in two wheel and four wheel drive variations. That will take them from 92,000 units a year to 500,000. Q3 2018 Production has already reached 53,000.
I asked him if this means that if your wife suspects you of cheating, will your Tesla rat you out. He answered, “Only if she is a coder.”
Then I wondered what would stop Tesla from selling your driving habits to marketers who would then make special offers from stores you prefer.
A previous Tesla experiment landed me a pair of Seven for All Mankind designer jeans for half off.
Tesla outsells every other luxury car of its class, including the Mercedes S class, the BMW Series 7, and the Audi 8.
Among the US car industry, only Ford and Tesla have never filed for bankruptcy. Tesla is the first new car manufacturer to succeed since Chrysler made its debut in 1928.
I asked about the S-1 maximum single charge range achieved by a driver.
An enthusiast in Norway managed to take one 800 miles on a flat track with no wind and perfect conditions. Wow! My drive from Lake Tahoe record of 400 miles doesn’t come close, and that involved a 7,000 foot decline from the High Sierra crest.
I also enquired about the Cambridge University battery breakthrough (click here for “Battery Breakthrough Promises Big Dividends.”
He said he was aware of it, but that it takes a long time to get a technology from the bench to the marketplace.
Just with their own in-house tinkering, Tesla is boosting battery ranges by 3-5% a year. The current S-1 gets a 305-mile range, compared to my four-year-old 255-mile range.
The Berkeley professor made some interesting observations about Millennials.
He said that while 75% of baby boomers got drivers licenses at 16, and 70% of Generation Xer’s did so by then, only 55% of Millennials took to the road at that age.
The rule of thumb for anything regarding Millennials is that they do everything late.
The gentleman from the Air Resources Board brought out some interesting facts.
More than 80% of all cancer-causing chemicals entering the atmosphere come from diesel engines, so a major effort will be made to cut back emissions from commercial trucks.
Look for the electric fleet coming to a neighborhood near you. Goodbye Volkswagen!
Workplace charging of employee cars will be the next big growth area for charging stations.
Half of all greenhouse gases derive from the burning of oil. The biggest savings in greenhouse gas emissions will come from a clampdown on the refining industry.
Think Koch Brothers.
I was amazed at his commitment to meet California’s goal of obtaining 50% of its energy from alternative sources by 2030.
The oil industry managed to exempt gasoline from the legislation, SB 350. But Governor Jerry Brown put it back in through an executive order.
The state is paying for the initial build-out of hydrogen refueling stations for the new $57,500 Toyota Mirai. A single tank will take the fuel cell vehicle 312 miles.
The state is making major investments in biofuel, planning to obtain 10% of the 50% target from this source.
During a slow moment, I asked a bleach blond trophy girlfriend sitting next to me of her interest in electric cars, expecting the worst.
To my surprise, she said that last summer, she drove an electric bike from New York to Los Angeles, towing a trailer with a solar panel cut in half to provide power.
The southern route avoided the high mountain ranges. I noticed she seemed unusually tanned, and it wasn’t from a can.
I was humbled. For once, I knew less about electric cars than anyone else in the room.
After the dinner, I went up to the Tesla executive and told him “Job well done.” I used to own one of the oldest S-1’s, number 125 off the assembly line, until it was totaled by a drunk driver on Christmas Eve.
I even tested to their safety claims.
Thank you, Tesla! You saved my life!
