Posts

September 6, 2019

Global Market Comments
September 6, 2019
Fiat Lux

Featured Trade:

(SEPTEMBER 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (FXY), (FXB), (USO), (XLE), (TLT), (TBT),
(FB), (AMZN), (MSFT), (DIS), (WMT), (IWM), (TSLA), (ROKU), (UBER), (LYFT), (SLV), (SIL)

September 4 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 4 Global Strategy Webinar broadcast from Silicon Valley with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

 

Q: If Trump figures out the trade war will lose him the election; will he stop it?

A: Yes, and that is a risk that hovers over all short positions in the market at all times these days because stocks will soar (INDU) when the trade war ends. We now have 18 months of share appreciation that has been frustrated or deferred by the dispute with China. The problem is that the US economy is already sliding into recession and it may already be too late to turn it around.

Q: Do you see the British pound (FXB) dropping more on the Brexit turmoil? Do you think the UK will stay in the EU?

A: If the UK ends Brexit through an election, then the pound should recover from $1.19 all the way back up to $1.65 where it was before Brexit happened four years ago. If that does happen, it will be one of the biggest trades of the year anywhere in the world, going long the British pound. This is how I always anticipated it would end. I was in England for the Brexit vote and I was convinced that if they held the election the next day, it would have lost. The only reason it won was because nobody thought it would— a lot like our own 2016 election. That brings Britain back into the EEC, saves Europe, and has a positive impact on markets globally. So, this is a big deal. Not to do so would be economic suicide for Britain, and I think wiser heads will prevail.

Q: Do you think it’s a good idea for Saudi ARAMCO to go public in Japan as reports suggest?

A: When the Arabs want to get out of the oil business (USO), (XLE), you want to also. That’s what the sale of ARAMCO is all about. They’re going to get a $1 trillion or more valuation, raising $100 billion in cash. And guess who the biggest investors in alternative energy in California are? It’s Saudi Arabia. They see no future in oil, nor should you. This is why we’ve been negative on the sector all year. By the way, bankruptcies by frackers in the U.S. are at an all-time high, another indicator that low oil prices can’t be tolerated by the US industry for long.

Q: Is it time to buy the ProShares Ultra Short 20 year Plus Treasury Bond Fund (TBT)?

A: No, not yet; I think we’re going to break 1.33% — the all-time low yield for the (TLT) will probably be somewhere just below 1.00%. We probably won’t go to absolute zero because we still have a growing economy. The countries that already have negative interest rates have shrinking economies or are already in recession, like Germany or Great Britain can justify zero rates.

Q: Are you going to run all your existing positions into expiration?

A: I’m going to try to—it’s only 12 days to expiration, and we get to keep the full profit if we do. As long as the market is dead in the middle here, there are no other positions to put on, no extreme low to buy into or extreme high to sell into. It’s a question of letting this sort of nowhere-trend play out, but also there’s nothing else to buy, so there is no need to raise cash. So, we’re 60% invested now and we’re going to try running as many of those into expiration as we can. Looks like all the long technology positions are safe (FB), (AMZN), (MSFT), (DIS). The only thing we’re pressing here are the shorts in Walmart (WMT) and Russell 2000 (IWM).

Q: Do you think it’s a good idea for Tesla (TSLA) to build another Gigafactory in Shanghai, China during a trade war? Will this blow up in Elon’s face?

A: I don’t think so because the Chinese are desperate for the Tesla technology and they just gave Tesla an exemption on import duties on all parts that need to go there to build the cars. So, that’s a very positive development for Tesla and I believe the stock is up about $10 since that news came out.

Q: Will Roku (ROKU) ever pull back? Would you buy it up here?

A: No, we recommended this thing last year at $40; it’s now up to $165, and up here it’s just wildly overbought, in chase territory. Of course, the reason that’s happening is that the big concern last year was Amazon wiping out Roku, yet they ultimately ended up partnering with Roku, and that’s worth about a 400% gain in the stock. You know the second you get into this, it’s over. There are just too many better fish to fry in the technology area.

Q: What happens if our existing Russell 2000 (IWM) September 2019 $153-$156 in-the-money vertical BEAR PUT spread Russell 2000 position closes between $156 and $153?

A: You lose money. You will get the Russell 2000 shares put to you, or sold to you at $153.00, which means you now own them, and you’ll get a big margin call from your broker for owning the extra shares. If ever it looks like we’re getting close to the strike price going into expiration, I come out precisely because of that risk. You don’t want random chance dictating whether you’re going to make money in your position or not going into expiration. If you’re worried about that, I would get out now and you can still come out with a nice profit. Or, you can always wait for another down day tomorrow.

Q: Is it time to get super aggressive shorting Lyft (LYFT) or Uber (UBER) when they openly admit that they won’t make a profit anytime in the near future?

A: The time to short Uber (UBER) and Lyft was at the IPO when the shares became available to sell. Down here I don’t really want to do very much. It’s late in the game and Uber’s down about one third from its IPO price. We begged people to stay away from this. It’s another example where they waited for the company to go ex-growth before it went public, but it didn’t leave anything for the public. It was a very badly mishandled IPO—it’s now at $31 against a $45 IPO price and was at a new all-time low just 2 days ago. You knew when they offered the drivers shares, the thing was in trouble. Sometime this will be a buy, but not yet. Go take a long nap first.

Q: Is the fact that rich people are hoarding cash a good indicator that a recession is approaching?

A: Yes, absolutely. Bonds yielding 1.45% is also an indication that the wealthy are hoarding cash from other investment and parking it in US treasury bonds. I went to the Pebble Beach Concourse d’ Elegance vintage car show a few weeks ago and all of the $10 million plus cars didn’t sell, only those priced below $100,000. That is always a good indicator that the wealthy are bailing ahead of a recession. If you can’t get a premium price for your vintage Ferrari, trouble is coming.

Q: Argentina just implemented currency controls; is this the start of a rolling currency crisis among emerging nations?

A: No, I believe the problems are unique to Argentina. They’ve adopted what is known as Modern Momentary Theory—i.e. borrowing and printing money like crazy. Unfortunately, this is unsustainable and results in a devalued currency, general instability, and the eventual hanging of their leaders from the nearest lamppost. This is exactly the same monetary policy that the Trump administration has been pursuing since he came into office. Eventually, it will lead to tears, ours, not his.

Q: Is the new all-electric Porsche Taycan a threat to Tesla?

A: No, it’s not. Their cheapest car is $150,000 and it gets one third less range than Tesla does. It’s really aimed at Porsche fanatics, and I doubt they will get outside their core market. In the meantime, Tesla has taken over the middle part of the electric market with the Model 3 at $37,000 a car. That’s where the money is, and Porsche will never get there.

Q: How will the US pull out of recession if the interest rates are at or below zero?

A: It won’t—that’s what a lot of economists are concerned about these days. With interest rates below zero, the Fed has lost its primary means to stimulate the economy. The only thing left to do is use creative means like feeding the economy with currency, which Europe has been doing for 10 years, and Japan for 30, with no results. That’s another reason to not allow rates to get back to zero—so we have tools to use when we go into a recession 12-24 months from now.

Q: What’s the best way to buy silver?

A: The ETF iShares Silver Trust (SLV) and, if you want to be aggressive, the silver miners with the Global X Silver Miners ETF (SIL).

Q: Have global central banks ruined the western economic system as we know it for future generations?

A: They may have—mostly by printing too much money in the last 10 years in order to get us out of recession. This hasn’t really worked for Europe or Japan, mind you, though who knows how much worse off they would be if they hadn’t. What it did do here is head off a Great Depression. If we go back to money printing in a big way, however, and it doesn’t work, we will not have prevented a Great Depression so much as pushed it back 10 or 15 years. That’s the great debate ongoing among economists, and it will eventually be settled by the marketplace.

 

 

 

 

 

 

August 9, 2019

Mad Hedge Technology Letter
August 9, 2019
Fiat Lux

Featured Trade:

(HIGH-RISK LYFT)
(LYFT), (UBER)

High-Risk Lyft

Lyft (LYFT) has the wind at its back but that doesn’t mean you should bet the ranch on it.

In Silicon Valley, “peak losses” are two words that can deliver a great earnings report.

That is where we are at with tech’s risk tolerance.

It’s no surprise some of these outfits burn money like no other, Lyft rejigged guidance from EBITDA losses of $1.15 billion to $1.175 billion down to $850 million to $875 million.

The main reason Uber (UBER), Lyft, and I’ll lump Netflix (NFLX) into the mix too, lose money is because they intentionally underprice their services allowing consumers to take advantage of a great deal in relative terms stoking outperforming revenue growth.

All those years of losses can be shouldered by the venture capitalists if revenue growth outweighs the pain of short-term losses.

But when a company takes that step to go public, everything changes.

No longer can they sweep the mountain of losses under the carpet to the deep-pocketed VCs, but they are penalized for it by a lower share price under the control of panicky shareholders.

Lyft started to raise prices in June and since Uber went public as well, the duopoly is in the same boat.

This means that your rideshare route home from the bar after the last call is about to get more expensive.

Since Lyft and Uber have a boatload of data, they will surgically pick and identify the routes and distance that do the least damage to end demand.

This will clearly be the routes and distances that have such an overwhelming and pent up demand that they can nudge up prices an extra 5% or more if they can get away with it.

In my head, these routes mean downtowns in metros with high paying jobs with poor public transportation links such as Los Angeles or Seattle.

Another route that I believe will get a bump in price is late-night surcharges often when partygoers are inebriated or out on the town.

Lyft has pockets of opportunities to exploit.

The cost inflation won’t stop there because even though Lyft “beat expectations” due to this pricing change, there is the long-term fixation on profitability that haunts management.

The pricing trick made Lyft rejig its annual targets expecting revenue of between $3.47 billion and $3.5 billion this year, up from a previously stated range of $3.275 billion to $3.3 billion.

The one metric that bodes well for the service is the 21.8 million “active riders” on its platform beating expectations by about 0.7 million year-over-year.

Lyft’s services are scalable and the growth will help mitigate losses and even though it’s in the public market, that doesn’t mean that it can’t stop growing.

Both ride-sharing services going public at almost the same time has meant that the price war that resulted in massive discounts to riders is no more.

Each service has incentives to raise prices in the most pain-reductive way possible for riders.

This particular tech category is certainly high risk – high reward as Lyft and Uber still face ongoing litigation in California courts concerning the job status of its drivers about whether they are classified as employees or independent contractors.

The more imminent issue is how much can they price hike before consumers balk.

Riders certainly have a price threshold that they aren’t willing to accommodate.

Luckily, Uber and Lyft have a treasure trove of data and can manipulate it to their interests by floating out trial balloons to test bold initiatives.

These two tech companies will not be able to shake off the volatility disease for the foreseeable future as the laundry list of predicaments spell turbulence.

Long term, they must show more to investors than “peak losses” but for the time being, they have survived the gauntlet.

I would not buy shares short-term, the most recent spike has snatched away an accommodative entry point.

 

 

July 16, 2019

Global Market Comments
July 16, 2019
Fiat Lux

Featured Trade:

(THE BIGGEST TELL IN THE MARKET RIGHT NOW),
(GOOGL), (FRC), (PINS), (WORK), (UBER),
 (ADSK), (WDAY), (SNE), (NVDA), (MSFT),
(POPULATION BOMB ECHOES),
(CORN), (WEAT), (SOYB), (DBA), (MOS)

The Biggest “Tell” in the Market Right Now

I am constantly looking for “tells” in the market, little nuggets of information that no one else notices, but gives me a huge trading advantage.

Well, there is a big one out there right now. San Francisco commercial real estate prices are going through the roof, smashing new all-time records on a monthly, if not weekly, basis.

The message for you traders is loud and clear. You should be picking up the highest quality technology growth stocks on every dip for they all know some things that you don’t. Their businesses are about to triple, if not quadruple, over the coming decade.

Technology stocks, which now account for 26% of stock market capitalization, will make up more than half of the market within ten years, much of that through stock price appreciation. And they are all racing to lock up the office space with which to do that….now.

San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by nearly $100 billion in new capital raised in a series of initial public offerings — met a severe space crunch.

Asking rents rose to a staggering $84.16 per square foot annually for the newest and highest quality offices in the central business district and citywide asking rents for such spaces known as Class A are up over 9% from the prior year. The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago.

Demand shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. Google and Facebook each want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.

Google (GOOGL) confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth expansion since 2018.

First Republic Bank (FRC) signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.

What’s the tech connection here? The bank’s expansion is fueled largely by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stock-market debuts — an example of how the booming tech sector also lifts the financial sector.

In addition, local Bay Area home prices could get a turbocharger by the fall when restrictions on stock sales expire for some companies that went public in the spring.

San Francisco companies that have gone public continue to grow by leaps and bounds. Pinterest (PINS), Slack (WORK), and Uber (UBER) also signed office leases this year with room for thousands of new employees.

Tech companies Autodesk (ADSK) and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s rapidly changing economy, old line construction firm Bechtel and Blue Shield, the legacy health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday (WDAY), and Sony’s (SNE) PlayStation video game division also expanded.

Globally, San Francisco has the seventh-highest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi (San Francisco’s average office rents beat out New York.)

Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot.

Only a handful of new office projects are being built, and future supply is further constrained by San Francisco’s Proposition M which limits the amount of office space that can be approved each year. That is creating a steadily worsening structural shortage. Only two large office projects are under construction without tenant commitments.

Which tech stocks should you be picking up now? NVIDIA (NVDA) has recently suffered a major haircut, thanks to the trade war with China. Microsoft (MSFT) seems hellbent on making its way from $140 to $200 a share due to its massive expansion into the cloud.

 

 

Suddenly, it’s Getting Crowded in San Francisco

June 28, 2019

Mad Hedge Technology Letter
June 28, 2019
Fiat Lux

Featured Trade:

(THE PATH TO THE HOLY GRAIL)
(UBER), (LYFT)

The Path to the Holy Grail

The pieces are starting to fall together.

This is what Lyft and Uber were hellbent on and they will finally get their cake and eat it too.

At least one of them will.

The holy grail of Lyft and Uber is eliminating the human element to the business.

Phoenix, Arizona is the first site for Lyft’s app collaborating with Waymo’s technology to offer autonomous rides via Lyft’s platform.

This could be the beginning of the end for Uber if Lyft meaningfully pulls ahead.

Why is the human element a roadblock?

Humans complain, get sick, file lawsuits for a lack of benefits, and humans post exposes on companies running amok.

Doing away with that will not only rid Lyft and Uber of high-risk liabilities, but it will boost profitability to the point where these companies will be healthily in the green.

Uber riders were only on the hook for 41% of the actual cost of transportation in 2016, the rest was comprised of generous subsidies making up part of the payments to the driver on top of the driver’s wage.

Let me put this in perspective. Lyft made $2.2 billion in revenue last year according to the filing for their IPO, and they lost $900 million from servicing this revenue.

Everybody knows that the gig economy is just a stop-gap measure until tech companies can go full on autonomous and direct operations with one click of a button buttressed by an all-terrain algorithm.

If you thought Uber was a tad better, then you were wrong. Operating losses of $3 billion on $11.8 billion in revenue and a total debt on $8 billion is tough to stomach.

If Lyft were finally able to remove the subsidies because of cost associated with human drivers and then kick the driver to the curb, margins would explode by around 50%.

Being a public company now, the competition will rise to a fever pitch.

The first to remove the driver is effectively an existential dilemma for both companies and I believe Lyft partnering with best in class Waymo will give them the upper hand.

Giving the keys to a vaunted FANG to supercharge your business isn’t a bad idea.

And remember, if you short Lyft, you are betting against Alphabet engineers who have made Waymo into the best in show.

You could do a lot worse.

And it could so happen that Lyft might even tap more Alphabet expertise to hypercharge its business.

It’s definitely not in the realm of fantasy and I already know that Lyft is receiving substantial help from Google ad.  

Pre-IPO days were all about jockeying for market share to see who could grab the most volume and now the battle stands with Lyft holding 34% of the market with Uber pocketing with the rest.

Uber has relinquished much of their dominance after bleeding users stemming from bad management decisions.

Now the pendulum is swinging towards the big question of how soon will these companies be profitable?

Luckily for Uber and Lyft, future trends are quite favorable, with data showing that by 2040, 33 million of the vehicles sold annually will be fully autonomous.

Nearly every automaker is developing self-driving systems right now, and semi-autonomous features such as automatic braking, lane-keep assist, adaptive cruise control already are complementary in new vehicles.

Now the game is to continue the subsidies in order to tighten market share but integrate autonomous cars into the business model as fast as possible.

This is all about execution and the management behind the reigns.

By doing this, Lyft and Uber will reduce its expenses and finally become profitable, it would almost be akin to if Spotify stopped paying for music royalties.

Lyft has set the first cone on the floor and I found it interesting that it was Lyft and not Uber.

When we peel back the layers, investors must understand that Alphabet made bets on both Uber and Lyft.

Six years after making what at the time was its largest venture investment ever, Google’s $258 million bet on Uber has multiplied by about 20-fold to be worth more than $5 billion.

But it’s not about the appreciating assets that matter the most.

Alphabet knows that one of these platforms will dominate in the end and want to benefit from it either way.

CapitalG, the late stage investing arm of Alphabet, has almost tripled the value of its investment in Lyft at today’s prices after investing $500 million in Lyft in October 2017.

Alphabet has its fingerprints all over Uber and Lyft at this point with not only supplying the map that is displayed on these platforms through Google maps but also leading the marketing operation infusing its best of breed ad tech into these platforms.

It’s obvious that Alphabet has covered its bases with the autonomous transport services and whether its Lyft or Uber that wins out, Waymo taking the initiative to partner with these platforms will make Alphabet the clear winner.

Lyft has all its eggs in one basket with a domestic transportation app while Uber has different interests which could be dragging them away from the autonomous driving opportunity.

Uber did have major setbacks after their technology was the fault of several fatalities.

The first-mover advantage is the key to seizing the bulk of the market.

I am interested to see when Uber will partner with autonomous technology, but for the moment they aren’t because they are developing their own self-driving tech.

This is a risky strategy because Lyft has understood its shortcomings and paid heed to the more sophisticated technology being Waymo and is now actively partnering with them.

They probably understood that they would never be able to beat Waymo.

This unit started off shrouded in secrecy in 2008, a full 5-years before anyone moved a finger of autonomous driving.

Uber is developing its own autonomous fleet which in theory could become a larger business than Waymo and Lyft, but they are battling a company who had a 7-year start and the result of that is Uber trying to shortcut to the top resulting in its technology getting sidelined.

Uber’s self-driving unit is in the bad graces of safety regulators and I would only give Uber a 15% chance of usurping the leader Waymo.

To this point, I believe Lyft will be the main transport app for Waymo in the future, and Waymo having the highest chance to be rolled out nationally.

This is incredibly bullish for Lyft and Alphabet.

Uber still isn’t on the radar with its self-driving technology and being a frenemy in this sense with Alphabet will hurt Uber.

If Alphabet cashes out on its Uber shares, not only could they earn a hefty profit, but it would signal that Lyft will be their main transport app for autonomous driving and Uber has lost out on self-driving technology.

I am now bullish on Lyft and neutral on Uber but waiting on how Uber responds to this massive leg up by Lyft.

 

June 19, 2019

Mad Hedge Technology Letter
June 19, 2019
Fiat Lux

Featured Trade:

(FREELANCING TO THE TUNE OF THE GIG ECONOMY)
(FVRR), (LYFT), (UBER), (UPWK)

Freelancing to the Tune of the Gig Economy

The company who exploits workers in the gig economy, Fiverr International Ltd. (FVRR), went public and is a terrible long-term buy and hold for investors.

I’ll tell you exactly why you should stay away from it like the plague.

Take a look at one of the sad side effects of the tech industry – 58% of full-time gig workers said they would have a hard time finding $400 to cover an emergency bill compared to 38% of people who don’t work in the gig economy.

The large discrepancy indicates that the informal economy is far more destabilized from Silicon Valley than investors care to admit.

And in many cases, the brutal economic conditions don’t underline the lack of upward mobility too.

While some are drawn to flexible roles, the gig-economy has faced condemnation, particularly because it has enabled companies to marginalize workers as contractors rather than employees who would be entitled to benefits and wage protections.

What about the risks of Washington smushing their business models?

Fiverr confesses that policy changes could destroy their business model if the ability to designate their workers as contractors is banned.

The freelance model could also become less attractive if it means higher regulatory risk or even higher perceived regulatory risk.

Another stain on Fiverr’s reputation is that, like many other tech companies of its ilk, it is loss-making.

Fiverr posted a net loss for 2018 of $36.1 million, compared to a net loss of $19.3 million in the prior year.

The lack of profitability is absorbed for the ultimate goal of gouging a total addressable market within the U.S. of $100 billion.

Fiverr’s $82.5 million in trailing revenue is less than a third of fellow freelance platform operator Upwork (UPWK) at $263.1 million.

Uber (UBER) and Lyft (LYFT), ridesharing services, are considerably larger than that as Uber and Lyft command trailing top-line results of $11.8 billion and $2.5 billion, respectively.

Revenue expanded 45% last year and this year 42% annualized through the first three months of 2019.

Fiverr is growing faster than Upwork with just a 16% top-line gain in the first quarter and Uber which decelerated to a 20% increase in the same reporting period.

But all three gig-economy players still trail behind Lyft with its first-quarter revenue surge of 95%.

None of these companies are currently profitable.

Is it worth it to pay a premium for cash burners?

Fiverr, Upwork, Uber, and Lyft are fetching between six- and nine-times trailing revenue.

Fiverr shares are 50% above its IPO price after just two days of trading and is somewhat misleading but mister market is always right.

Lyft and Uber have been losers this year after going public and the jury is out to whether they are really worth a long-term duration trade.

It can be argued that Uber is a better bet long-term bet because of a bold aerial service that could eventually unlock massive value, but I would say its current model is somewhat underwhelming and could be called a fancy taxi service.

The best type of tech companies right now are software companies insulated from the turmoil of the trade war.

If you are interested in pure software companies, there are a handful of names out there that fit the bill, but if you are looking at a company attempting to crowbar itself into the idea of a software company then Fiverr is it.

That unflattering description is entirely justified as well.

Don’t forget they have real competition in the marketplace to supply freelance jobs in Upwork who has a bigger market share.

These type of broker apps do not have much pricing power and their only sell is the prospect of scaling as fast as possible meaning a volume play.

I can honestly ask, why buy Fiverr when there is a much better option out there?

The success of Fiverr is reliant on maintaining and expanding the scale of operations to generate a sufficient amount of revenue to offset the associated fixed and variable costs.

In my eyes, growing the number of users to benefit from the scale might happen after it does not exist anymore.

Investors must really ask themselves if gig workers will even be around in 8-10 years.

Why is that?

The gig economy is a battle down to zero and as tech companies become more sophisticated with expanding their artificial intelligence capabilities, it will remove the demand for gig economy taking away a huge swath of the addressable market with it.

This stock is a bet against artificial intelligence and the application of it, and if anyone has been reading this newsletter, they know it would be akin to throwing your hard-earned money down the toilet.

Specifically speaking, every cornerstone industry from national defense, consumer products, the trappings of Wall Street, industrial production, robotics, autonomous driving technology, and transportation is moving full speed ahead with implementing and harnessing artificial intelligence.

The technology isn’t quite there yet and humans are just a quick stop-gap until the optimal technology can be achieved.

Then it will be arrivederci to the human element, stripped away like my innocence in high school. 

This is a bet on the upward trajectory of gig economy workers and the fate of them and that is a bad gamble to make long-term.