Posts

May 30, 2019

Mad Hedge Technology Letter
May 30, 2019
Fiat Lux

Featured Trade:

(IS TARGET THE NEXT FANG?)
(TGT), (AMZN), (WMT)

May 29, 2019

Mad Hedge Technology Letter
May 29, 2019
Fiat Lux

Featured Trade:

(CHINA TO BAN FEDEX)
(HUAWEI), (AMZN), (FDX), (UPS), (DPSGY), (BABA), (ZTO)

China to Ban FedEx

Sell any and all rallies in FedEx (FDX) – that’s my quick takeaway from the Chinese communist party publishing a sharp retort to their de-facto mouthpiece of a publication called the Global Times signaling FedEx’s imminent demise in greater China.

The Global Times is often used as thinly veiled statements to a wider global audience and mimics the ideology of the ruling communist party and their main positions on critical issues.

As regards to FedEx’s business in China, it said:

There are rising calls for China’s postal service regulator to cut off FedEx from China market, as Huawei has accused the US express courier of diverting and rerouting its packages.

FedEx is crushing the Chinese logistics market currently and is the go-to carrier holding firm at 54.6% market share.

They have been around in China for as long as the economic boom has percolated inside the mainland from 1984, far before any of its local competitors were even up and running by a decade or two.

FedEx’s latest acquisition of Dutch-based TNT Express in 2016 solidified its dominance.

Foreign competition is a mainstay of international shipping patterns in China with the top three rounded out by DHL (DPSGY) with a 25.07% market share and United Parcel Service (UPS) with a 16.94% market share.

If these assertive claims do result in FedEx meaningfully losing China revenue, UPS wouldn’t stand to pick up the leftovers and could be put out to pasture by the same issue of hailing from a country that has an active adversarial economic policy against China’s.

If anyone would benefit, it would by DHL, given that Germany has a far less hawkish stance towards China, and they are unwilling to bite off the hand that feeds them.

The current situation is a concerning sign for the future of Germany as an industrial power and ability to sustain itself against China Inc.

It could be somewhat true that Germany has overextended themselves and only time, Made in China 2025 project, and the mood of the Chinese communist party can delay the inevitability of full tech hegemony over their western European counterpart.

The communist party could choose to just bypass DHL altogether and kick out all foreign invaders gifting courier responsibilities to Alibaba-based (BABA) subsidiaries and the likes of ZTO Express (ZTO) who provide express delivery and other value-added logistics services in China.

DHL will hope that China delays any draconian measures and pray that its active partnership with a local logistic firm has real legs.

DHL’s revenue sharing agreement with SF Express does not preclude them from the anger of Chinese regulators, but the risk of Chinese regulators favoring local couriers has risen another 25%.

Playing by the rules goes a long way in China, even if they change every day, and for customers across DHL’s target audience of industries including technology, health care, retail, automotive, and e-commerce.

DHL CEO Frank Appel said, “Combined with our global operations standards and network support, the agreement provides a solid foundation to continue exploring further opportunities in China in the coming years.”

From an outside perspective, this sounds more like forced cooperation with forced technology transfers with the mainland companies slurping up Germany tech knowhow.

Doing a deal with the devil for access to a 1.3 billion customer market is being put through the ringer.

When I view the snippets through the lens of geopolitics, it’s hard to believe that at such a sensitive time, FedEx would actively “reroute” packages and knowingly approved this behavior, they simply can’t be that clumsy.

The situation smells like an overt show of nationalism by a group of individuals, and it questions the longevity of FedEx operating in China all the same.

FedEx promptly responded confessing:

We regret that this isolated number of Huawei packages were inadvertently misrouted.”

An unintentional mistake offered a golden opportunity to tie the logistics company to the U.S. government’s aggressive nature and going forward FedEx will remain in a shroud of mystery until investors can get further grips on the rates of growth of their Chinese operations.

If FedEx were afraid about this, then they must be tearing their hair out about the domestic behemoth that is Amazon (AMZN) and their desires to install a full-service logistic service to blanket FedEx from e-commerce deliveries.

This has been the initial premise of my short call on FedEx, which has proved correct, and the regulatory nightmare in China will cast another cloud around its business.

Any strength in FedEx shares will be met with a cascade of selling activity, and as the economy slows down because of tariff-induced headwinds, this is a stock to outright short.

Back to China, FedEx slashed its full-year profit forecast for the second time in three months after reporting weaker-than-expected third quarter earnings.

The Chinese economy is absolutely slowing down, and its effects are impacting surrounding Asian nations.

Manufacturing cuts will cause the number of courier packages to slide in China and there is no telling how bad this trade stand-off could get.

It doesn’t look good for FedEx, and I reiterate my short stance on the company.

 

April 30, 2019

Mad Hedge Technology Letter
April 30, 2019
Fiat Lux

Featured Trade:

(AMAZON’S NEW GAME CHANGER)
(AMZN), (WMT), (TGT), (UPS), (FDX)

Amazon’s New Game Changer

Amazon’s free 2-day shipping for Prime Customers is on the verge of becoming free 1-day shipping after the company recently announced this new wrinkle to their business model.

Amazon’s competitors should be shivering in their wake.

But it’s not all doom and gloom for the other e-commerce giants, hardly so, the gap up in the fierce competition will do what General Data Protection Regulation (GDPR) rules in Europe did to competition – enclose the existing players off from the smaller fish.

In examining who will be the last man standing, I have come to the conclusion that it will not just be one or two grinding it out in a vacuum, but more like several winners that will all benefit to certain degrees.

The outsized denominating factor in the e-commerce wars is logistics and who can best put this segment together.

E-commerce companies are being bullied into leaner models because of the premium on heavy scaling that will pile on added costs to make 1-day free shipping a reality.

This isn’t selling lemonade on your driveway, getting 1-day shipping to work will be a tough nut to crack.

The result will be the imminent deterioration of FedEx (FDX) and United Parcel Service (UPS) on the expectation that Amazon will crowd them out.

It could be the case that Amazon improves its logistical capabilities to the point that FedEx and UPS will have to sell itself off or risk death by a thousand cuts.

There looks like no navigational path ahead for these two legacy logistic companies because of the nature of being lower down on the value chain.

The only other choice is if FedEx or UPS is able to jump into the e-commerce business themselves by buying a Kroger to maneuver into the integration process through the other side.

Either way, acquiring a supermarket is no guarantee of future success considering the stakes are about to become higher and higher.

I believe that Walmart will respond to Amazon by rolling out free 1-day shipping with no membership fee, boosting its customer experience while attracting and retaining customers.

Walmart is in this fight until the bitter end and they have invested heavily in improving the technological aspects of the company.

Where does this end?

Logistics will perpetually improve as companies drain more money into logistics, and customers will eventually receive their e-commerce packages in a drone less than 1-hour after payment.

Amazon CFO Brian Olsavsky told investors that Amazon is plunking down $800 million over the quarter in its fulfillment network and that number should rise every year as Amazon has targeted logistics as a huge competitive advantage that they must capitalize on and thrive in.

Amazon already has the option for 1-day free shipping in the European Union and Japan where the delivery distances are truncated.

America poses geographical challenges that will cost more to solve and will rely on the deregulation of future drone flights and cooperation with Amazon sellers to deliver this big step up in customer experience.

The constant iteration upgrades in logistics for the past 20 years have made this possible, and I believe Amazon would be well served to bite the bullet and splurge for UPS or FedEx to make it easier on themselves.

It is not shocking there is a scarcity value of logistic carriers and e-commerce giants will need more logistical capacity to execute free 1-day shipping and eventually free 1-hour shopping.

Amazon hasn’t figured out how to transport physical goods through a computer yet, but I am certain, if there was the technology, they would spend unlimited amounts to get it to that point.

The most ironic aspect of the e-commerce wars is that supermarkets, being a part of e-commerce and the logistics behind it, is the most innovative part of technology at this moment.

Tech companies have identified that customers need to eat three times per day as paramount and are sizzling through cash to build this unfathomable logistics system – effectively working miracles and becoming whirling dervishes to seize this part of the economy.

I would probably label automobiles and the self-driving autonomous technology behind logistics as the second most innovative part of technology at this moment.

As for Amazon’s earnings report, it was a mixed bag, but the good in the bag was astounding.

Profitability boosts through the scaling and efficiency savings inflated the bottom line with EPS in Q1 at $7.09 compared to expectations of $4.72.

Amazon Web Services (AWS) is still commanding enormous growth rates which is miraculous for a division its size, the cloud unit grew 41% YOY which is down from 49% last year.

On the negative side, the advertising business experienced a sharp slow down growing only 34% YOY to $2.7 billion.

Remember that ad sales were expanding over 100% YOY in prior quarters.

Total Revenue only grew 16.9% which shows how difficult it is to grow at Amazon’s size and brings down the digital ad growth rate almost on par with Facebook.

Walmart and Target will be forced to compete with free 1-day shipping, and this will make their services better as well.

The question is how much pain can investors handle in terms of capital investments?

I believe substantially more.

Walmart and Target shares are poised to move higher on the news because the improvements in their logistical services will widen the gap between the haves and have nots. 

These companies are in the midst of persuading investors they should be revalued as tech companies and duly receive growth multiples.

They are doing a great job and imagine how badly this news feels for medium-tier grocers with a minimal digital footprint.

Investors will come to grips that Amazon, Walmart, and Target will pull away from the pack and trade blows with each other.

This time it’s Amazon, but it’s not the last laugh.

Where does this all lead?

The end game is voice-triggering smart speakers where Amazon and its Echo speaker have a distinctive lead and a market share of around 70%.

Graphic interfaces will exist in only voice-activated form and content will be bundled into voice technology where even managing a Walmart order will require Amazon Echo to register sales.

That type of future is still a way off, but these are the next baby steps in that direction.

In short, revelations of free 1-day shipping to Amazon prime customers is convincingly bullish for Amazon, quite bullish for Walmart, Target, and a death knell for smaller e-commerce platforms and logistic dinosaurs.

 

 

 

 

January 9, 2019

Mad Hedge Technology Letter
January 9, 2019
Fiat Lux

Featured Trade:

(TOP 8 TECH TRENDS OF 2018),
(GOOGL), (FB), (WMT), (SQ), (AMZN), (ROKU), (KR), (FDX), (UPS), (CRM), (TWLO), (ADBE), (PYPL)

Top 8 Tech Trends of 2018

As 2019 christens us with new technological trends, building our portfolio and lives around these themes will give us a leg up in battling the algorithms that have upped the ante in our drive to get ahead.

Now it’s time to chronicle some of these trends that will permeate through the tech universe.

Some are obvious, and some might as well be hidden treasures.

  1. Smart Areas Will Conspicuously Advance

American consumers will start to notice that locations they frequent and the proximities around them will integrate more smart-tech.

The hoards of data that big tech possesses and the profiles they subsequently create on the American consumer will advance allowing the possibilities of more precise and useful products.

These products won’t just accumulate in a person’s home but in public areas, and business will jump at the chance to improve services if it means more revenue.

Amazon and Google have piled money into the smart home through the voice assistant initiatives and adoption has been breathtaking.

The next generation will provide even more variety to integrate into daily lives.

  1. Location-based Dispersion Will Ramp Up

The gains in technology have given the consumer broader control over their lives.

The ability to practically manage one’s life from a remote location has remarkably improved leaps and bounds.

The deflation of mobile phone data costs, the advancement of high-speed broadband internet services in developing countries, more cloud-based software accessible from any internet entry point, and the development of affordable professional grade hardware have made life easy for the small business owners.

What a difference a few years make!

This has truly given a headache for traditional companies who have failed to evolve with the times such as television staples who rely on analog advertising revenue.

Millennials are more interested in flicking on their favorite YouTuber channel who broadcast from anywhere and aren’t locally based.

Another example is the quality of cameras and audio equipment that have risen to the point that anybody can become the next Justin Bieber.

Music executives are even using Spotify to target new talent to invest in.

  1. Overhyped Bitcoin Will Finally Take A Siesta From The Mainstream

Blockchain technology has the makings of transforming the world we live in.

And the currency based on the blockchain technology had a field day in the press and backyard summer barbecues all over the country.

Well, 2019 will finally put this topic on the backburner even though Bitcoin won’t disappear into irrelevancy, the pendulum will swing the other direction and this digital currency will become underhyped.

The rise to $20,000 and the catastrophic selloff down to $4,000 was a bubble popping in front of us.

It made a lot of people rich like the Winklevoss brothers Cameron and Tyler who took the $65 million from Facebook CEO Mark Zuckerberg and spun it into bitcoin before the euphoria mesmerized the American public.

On the way down from $20,000, retail investors were tearing their hair out but that is the type of volatility investors must subscribe to with assets that are far out on the risk curve.

The volatility that FinTech leader Square (SQ) and OTT Box streamer Roku (ROKU) have are nothing compared to the extreme volatility that digital currency investors must endure.

  1. E-Sports Will Become Even More Popular

Video games classified as a spectator sport will expand up to 40% in 2019.

This phenomenon has already captivated the Asian continent and is coming stateside.

This is a bit out of my realm as standard spectator sports don’t appeal to me much at all, and watching others play video games for fun is something I am even further removed from.

But that’s what the youth like and how they grew up, and this trend shows no signs of stopping.

Industry experts believe that the U.S. is at an inflection point and adoption will accelerate.

Remember that kids don’t play physical sports anymore because of the risk to head trauma, blown ligaments, and the sheer distances involved traveling to and from venues turn participants away.

Franchise rights, advertising, and streaming contracts will energize revenue as a ballooning audience gravitates towards popular leagues, tapping into the fanbase for successful video game series such as Overwatch.

The rise of eSports can be attributed to not only kids not playing physical sports but also younger people watching less television and spending more time online.

Soon, there will be no difference in terms of pay and stature of pro athletes and video gaming athletes.

The amount of money being thrown at the world’s best gamers makes your spine tingle.

  1. Data Regulation Will Tighten

The era of digital data regulation is upon us and whacked a few companies like Google and Facebook in 2018.

Well, this is just the beginning.

The vacuum that once allowed tech companies to run riot is no more, and the government has big tech in their cross-hairs.

The A word will start to reverberate in social circles around the tech ecosphere – Antitrust.

At some point towards the end of 2019, some of these mammoth technology companies could face the mother of all regulation in dismantling their business model through an antitrust suit.

Companies such as Amazon and Facebook are praying to the heavens that this never comes to fruition, but the rhetoric about it will slowly increase in 2019 because of the mischievous ways these tech companies have behaved.

The unintended consequences in 2018 were too widespread and damaging to ignore anymore.

Antitrust lawsuits will creep closer in 2019 and this has spawned an all-out grab for the best lobbyists tech money can buy.

Tech lobbyists now amount to the most in volume historically and they certainly will be wielded in the best interest of Silicon Valley.

Watch this space.

  1. Software Favored To Hardware

The demand for smart consumer devices will fall off a cliff because most of the people who can afford a device already are reading my newsletter from it.

The stunting of smart device innovation has made the upgrade cycle duration longer and consumers feel no need to incrementally upgrade when they aren’t getting more bang for their buck.

The late-cycle nature of the economy that is losing momentum because of a trade war and higher interest rates will see companies look to add to efficiencies by upgrading software systems and processes.

This bodes well for companies such as Microsoft (MSFT), Salesforce (CRM), Twilio (TWLO), PayPal (PYPL), and Adobe (ADBE) in 2019.

  1. Logistics Gets A Boost From Technology

This is where Amazon has gotten so good at efficiently moving goods from point A to point B that it is threatening to blow a hole in the logistic stalwarts of UPS and FedEx.

Robots that help deploy packages in the Amazon warehouses won’t just be an Amazon phenomenon forever.

Smaller businesses will be able to take advantage of more robotics as robotics will benefit from the tailwind of deflation making them affordable to smaller business owners.

Amazon’s ramp-up in logistics was a focal point in their purchase of overpriced grocer Whole Foods.

This was more of a bet on their ability to physically deliver well relative to competition than it was its ability to stock above average quality groceries.

If Whole Foods ever did fail, Amazon would be able to spin the prime real estate into a warehouse located in wealthy areas serving the same wealthy clientele.

Therefore, there is no downside short or long-term by buying Whole Foods. Amazon will be able to fine-tune their logistics strategy which they are piling a ton of innovation into.

Possible new logistical innovations include Amazon attempting to deliver to garages to avoid rampant theft.

This is all happening while Amazon pushes onto FedEx’s (FDX) and UPS’s (UPS) turf by building out their own fleet.

Innovative logistics is forcing other grocers to improve fast giving customers better grocery service and prices.

Kroger (KR) has heavily invested in a new British-based logistics warehouse system and Walmart (WMT) is fast changing into a tech play.

  1. Tech Volatility Won’t Go Away

Current Chair of the Federal Reserve Jerome Powell unleashed a dragon when he boxed himself into a corner last year and had to announce a rate hike to preserve the integrity of the institution.

Markets whipsawed like a bull at a rodeo and investors lost their pants.

Tech companies who have been leading the economy and trot out robust EPS growth out of a whole swath of industries will experience further volatility as geopolitics and interest rate rhetoric grips the world.

Apple’s revenue warning did not help either and just wait until semiconductors start announcing disastrous earnings.

The short volatility industry crashed last February, and the unwinding of the Fed’s balance sheet mixed with the Chinese avoiding treasury purchases due to the trade war will insert even more volatility into the mix.

Powell attempted to readjust his message by claiming that the Fed “will be patient” and tech shares have had a monstrous rally capped off with Roku exploding over 30% after news of positive subscriber numbers and news of streaming content platform Hulu blowing past the 25 million subscriber mark.

Volatility is good for traders as it offers prime entry points and call spreads can be executed deeper in the money because of the heightened implied volatility.

 

 

September 24, 2018

Global Market Comments
September 24, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S FED WEEK),
(SPY), (XLI), (XLV), (XLP), (XLY), (HD), (LOW), (GS), (MS), (TLT),
(UUP), (FXE), (FCX), (EEM), (VIX), (VXX), (UPS), (TGT)
(TEN TIPS FOR SURVIVING A DAY OFF WITH ME)

Watch Out for the Jobs Trap

We are about to get some wild, seasonal gyrations to the jobs numbers, and I think you will be well advised to know about them in advance.

A large part of our economy is moving online more rapidly than most people and governments realize. According to ComScore, a marketing data research firm, online sales leapt by 15% to $35.3 billion during the last November-December holiday period, an all-time high.

I speak from a position of authority here as I happen to run one of the most successful financial sites on the Internet, which I kicked off four years ago with a $500 investment.

Much of this migration is being captured by FedEx and UPS, the nexus at which Internet commerce meets the real world. After all, virtual products require a real world delivery. This explains why the couriers are seeing a booming business in an otherwise flat economy. FedEx (FDX) hired 10,000 temporary workers to deal with the last Christmas surge in 2012, a gain of 18% over the same period the previous year. UPS added a stunning 55,000, a 10% increase.

Watch for the other shoe to drop. That will become apparent when that the newly hired become the newly fired, leading to a sudden and rapid deterioration of the jobs data. This could be the information the stock market and other risk assets need to put in a top for the year. The scary part is that this may happen sooner than you think.

FDX 11-21-13

UPS 11-21-13

Cargo PlaneYup, I Just Got My Pink Slip Too