Mad Hedge Technology Letter
August 21, 2020
Fiat Lux
Featured Trade:
(THE THINKING BEHIND RAY DALIO)
(ZLAB), (TME)
Every time I watch an interview with the Bridgewater hedge fund manager Ray Dalio, what he doesn’t say really paints the picture of who he really is.
Yes, it’s undeniable that he is incredibly wealthy, successful, and has returned shareholder profits continuously, but his support for the Chinese communist party has to be called out.
Dalio necessarily isn’t anti-American, but he loves to trot out propaganda that America is a “weakening” power confronting a “rising” power.
I would argue this isn’t true and that China is just a paper Tiger with infinite more problems than the U.S. and has been hit infinite times harder economically because of this pandemic.
China is hoping to solve the issue from going from the world’s growth engine to 250 million unemployed Chinese on the streets, thanks to the city of Wuhan.
His response is almost automatic at this point in regard to China as he skirts around specifics and issues general statements to avoid criticizing the land of Chairman Xi Jinping.
Why does Ray Dalio give a free pass to China?
The easiest way to understand is to look where he deploys his money.
It’s well known that criticizing the Chinese government is a red line for the communist party and they will sabotage, swindle, destroy anyone that steps over this line, and even more so for a foreigner.
Ray Dalio doesn’t want his capital nicked in China where he would have zero chance of navigating through the corrupt judicial system successfully in a land that has zero rule of law.
As long as Dalio has meaningful investments in Chinese tech companies, he will never say anything bad about China. He is part of the problem that has spread through the U.S. system of self-censored Americans who have a financial interest in China.
What does he own?
Tencent Music Entertainment (TME).
Offering one-stop music services and solutions designed to create a complete music entertainment ecosystem, Tencent Music Entertainment has solidified its status as the biggest online music company in China by monthly active users (MAUs).
Dalio has upped his holdings by a staggering 858% in TME, Bridgewater has pulled the trigger on 620,000 shares in Q2. At 692,262 shares, the total position is valued at $9,318,000.
TME added 4.4 million subscribers in the quarter versus 2.8 million in Q1, and subscriber average revenue per user also grew 8% year-over-year.
What about the direction of the company?
The company renewed the Universal Music Group (UMG) licensing deal.
Additionally, it organized nine TME Live performances in Q2 and long-form audio licensed titles increased 300% year-over-year, with penetration of 9.4% compared to 4.6% last year.
What other Chinese investments does Dalio own? You would think an American billionaire would help the U.S. health industry find solutions against a global health crisis, but no, Dalio is investing in Chinese health companies.
What does he own?
Zai Lab Ltd. (ZLAB)
Zai Lab offers transformative medicines for cancer, autoimmune, and infectious diseases to patients in China.
Dalio's Bridgewater made a splash with a new position buying 63,837 shares. The value of this holding? It lands at $5,243,000.
The firm has performed well driven by Zejula's second-line ovarian cancer (OC) launch in China. Total sales from China, Hong Kong, and Macau reached $13.8 million.
The Chinese government is already requesting applications for the National Drug Reimbursement List (NDRL) for this year. ZLAB is expected to apply for Zejula's second line OC indication, with the results potentially coming in November 2020 and driving upside.
As for its other launch, Optune became commercially available at the end of June. Optune is priced like a premium therapeutic and would be with a list price of $19,000 and a net price around $11,000. This is at a modest discount price of that of the U.S. list price of around $20,000. Most patients in China are self-paying for this innovative device.
Why invest in Chinese tech firms when the U.S. has a perfectly operating tech industry that has seized even more market share from the broader economy?
Growth.
Watching Dalio’s interview, it’s clear to me that he is a numbers guy. The genesis of his logic originates from the debt cycle and how investments and payments function derive from this concept.
It’s hard for Wall Streetists to ignore the growth numbers in China and Chinese tech firms have the best growth numbers in any industry in an otherwise faltering Chinese economy.
Chinese tech firms have the best growth numbers out of any tech industry in the world, that is, if you believe them.
Dalio has put his money where his mouth is and clearly believes in Chinese tech and makes sure his toes are set squarely behind the Chinese communist line.
I just would remind Ray Dalio that he is one investigative report away from losing his money because industry experts agree that no number out of China is even close to accurate.
I again strongly urge readers to never deploy capital in any mainland Chinese tech firm, simply because there are too many great tech firms in the U.S., and also from the risk control perspective.
Do not follow Dalio down this path where you need to drink the same Kool Aid as him.
We are entering into the golden age of U.S. tech and there will be vast amounts of opportunity moving forward.
We are just scratching the surface here as technology will become a bigger part of our lives, it’s up to you if you want to be a participant or not.
“I would trade all of my technology for an afternoon with Socrates.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
August 19, 2020
Fiat Lux
Featured Trade:
(ROBINHOOD – TRADE WITH THE RICH AND GIVE TO THE POOR)
(TECH STOCKS)
In our world of the stock market, one of the big trends that are taking place is not only the digitization of the whole economy, but the secondary effect of a giant tsunami of day traders that are opening day trading accounts with their stimulus checks.
This is moving markets and we must take note!
One thing almost universally preventing day traders from day trading is that it’s a hard hobby — and make no mistake, that’s what it is — to combine with a 50-hour-a-week job or full-time studies.
With the real unemployment rate almost surpassing 20%, there are tens of millions of Americans sitting around doing nothing.
At the same time, many entertainment options revolving around communal gatherings are cancelled for the foreseeable future.
There is undeniable evidence that many of the newly minted day traders are simply frustrated sports gamblers seeking a new addiction.
All this fuss with the growth of apps that, like Robinhood, offer commission-free trading, making it seem all but painless to enter the market and join us professionals at riding this bucking bronco.
This confluence of factors creates a perfect storm for uninformed day trading and brazen risk trading.
Watching the markets on a day to day basis, I can vouch that there is some peculiar price action taking place.
One example: Stocks of companies that file for bankruptcy almost always plunge to near zero for the common-sense reason that they are worthless.
But shares in bankrupt car rental giant Hertz, which should be moribund, exploded from 56 cents per share to more than $5 this month, before falling to less than $2.
I welcome the added volume in the market place, and the increased liquidity means the chances of the market lurching higher increases too, which we have seen with the S&P 500 index reaching new all-time highs partly fueled by the day traders' willingness to dive head first into monopolistic tech stocks and even penny stocks like Hertz.
Also, remember that many of these fresh day traders are Millennials who have an inherent bias towards the tech sector because they literally grew up with it in the palms of their hands.
Studies have shown repeatedly that the typical investor had odds of 0.5% of consistently beating the market.
The increased knowledge of this fact is what has driven the widespread move over the past decade into index funds that replicate such things as the S&P 500.
Robinhood, the stock-trading platform that popularized free trades, grew its user base from 1 million users to over 13 million in just four years.
That explosion of new subscribers forced older online brokerages to offer free trades, destroying their business models and forcing them to consolidate or go extinct.
With no knowledge about financial markets, how are these new traders placing their capital?
Robinhood regularly updates its list of the 100 most popular stocks that Robinhood traders put their money in, which predictably include big tech companies like Amazon (AMZN), Microsoft (MSFT), and Google (GOOGL).
Crazy or not, this list is the rough guide to new traders on where to invest.
Peloton (PTON) is another tech stock that has made this crisis their heaven by frontrunning the shelter-at-home trend, selling a treadmill with a screen on it and hooking up subscribers to fitness classes.
Not a brilliant model, but it will do for now.
They are on the top 100 as well.
I was highly bearish on Peloton before the crisis, but the virus has pumped life into the business model that was marginal at best when the lack of differentiation didn’t allow investors to put a higher premium on this stock.
Other stocks like GoPro (GPRO), Fitbit (FIT), Lyft (LYFT), and Uber (UBER) are pegged as companies that aren’t popular in the data.
GoPro labored to expand beyond its core market of outdoor enthusiasts and failed to pull mainstream users away from increasingly powerful smartphone cameras. Fitbit handed over the low-end market to criminal organizations like Chinese Xiaomi and ceded the high-end market to premium smartwatch makers like Apple.
Google agreed to acquire Fitbit last year for $7.35 per share, but that deal is now being closely scrutinized by U.S. and EU regulators.
If the deal is killed, expect a massive sell-off in Fitbit.
Without Google, Fitbit would be in serious trouble: Its revenue fell 23% annually in the first half of 2020 and it remained deeply unprofitable. Fitbit's share of the wearables market also fell from 7.8% in 2018 to 4.7%
The popularity or unpopularity of these stocks directly correlates to additional volume spiking in these names.
There is no coincidence that these “popular” stocks are some of the market winners of the Covid era and it will continue that way until the next market-changing event hits.
Not only do I love investing in tech stock, but the silver-haired investor loves it; and now we have data points with convincing evidence that young people are pouring their savings into the U.S. tech sector.
At some point soon, Americans won’t be able to achieve a middle-class standard of life unless they are leveraged deeply into the tech sector via the stock market.
Imagine if that market crashes, and the pain it would incur. We would go from a rapidly shrinking middle class to no middle class in a blink of an eye.
Welcome to the high stakes world of 2020!
“Life's too short to hang out with people who aren't resourceful.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
August 17, 2020
Fiat Lux
Featured Trade:
(U.S. STYMIES THE ADVANCEMENT OF FOREIGN BAD ACTORS)
(BABA), (AAPL), (IQ), (NFLX), (FB), (GOOGL), (AMZN)
Stay away from Chinese tech companies listed on the U.S. exchanges. I wouldn’t touch them with a 10-foot pole.
Not only are these firms unscrupulous, but the U.S. administration is specifically attacking them as a cornerstone campaign strategy as we close in on the November election.
The blitzkrieg has been increasing at a rapid clip with U.S. President Donald Trump banning social media asset TikTok and chat app WeChat.
Just in the last few hours, the U.S. administration has said they are also “looking at” going after Chinese eCommerce firm Alibaba (BABA) who is the Chinese Amazon.
If the trends continue, there could be no Chinese tech companies freely extracting American revenue by this November.
Things will only get worse.
No doubt the coronavirus fiasco has exacerbated tensions between the countries with both sides dealing with a plunging economy.
The only reason we do not hear about the depths of despair going on in the Chinese economy is because the media is suppressed there.
Chinese media is tightly controlled disabling any negative news that shines an unfavorable light on the Chinese communist party.
Then there is the immoral fraud aspect of Chinese tech companies as every mainland Chinese firm wishes to go public in New York because company financials are never audited, and they are immune from any criminal liability.
This is a recipe to enable reckless Chinese management who state opaque numbers in their financials in the hope that American investors will take the bait.
Another cheater has been unearthed by Wolfpack Research who along with Muddy Waters have made it their mission to root out the bad actors.
The supposed “Netflix (NFLX) of China” Chinese streaming service iQiyi (IQ) plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission (SEC) has launched a probe into the company.
The case revolves around iQiyi falsifying their subscription numbers which everyone knows is the key to exhibiting growth in the company.
iQiyi said the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.”
Wolfpack Research has accused iQiyi of inflating 2019 revenue by around 44%.
Wolfpack also said iQiyi artificially overexaggerated expenses among other data.
The SEC probe into iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee debacle in which they committed the same act of falsifying numbers.
This copycat crime is clearly seen as a big winner in Mainland China encouraging a slew of companies to decide on the same strategy.
The Coffee company admitted to fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June.
China and its tech firms are one of the few bipartisan issues with strong support from both sides of the aisle and I can only see the temperature in the kitchen getting hotter.
The side effect of purging the Chinese tech out of the U.S. is that it bolsters the investor case for American tech.
Not that they needed help in the first place.
If the government won’t allow foreign companies to compete with Silicon Valley, then the monopolies built by the likes of Apple (AAPL), Facebook (FB), Google (GOOGL), and Amazon (AMZN) will feel protected because of the government effectively widening their moats.
One might argue that the crimes these American companies have committed are just as bad as the Chinese firms, but they get a free pass for being American.
Remember this is the age of de-globalization with national governments protecting national companies and not the other way around.
Silicon Valley companies have tried to pervert the U.S. employment situation by maneuvering around U.S. nationals by applying for the foreign HB-1 visas in droves and underpaying mostly Chinese and Indian nationals to work for the likes of Google and Facebook.
We can’t say these Silicon Valley companies are saints. They certainly are not, but that doesn’t matter in today’s climate when government, billionaires, and tech moguls are assumed as scum from the get-go.
Then there is the personal data issue that can’t be said to be much better than what the Chinese companies are doing.
The double standard is not surprising, and a heavy dose of politics has been injected into the global tech ecosphere to the detriment of cross border trade.
In the fog of war, this is why I have largely focused on U.S. software companies with subscription revenue because it offers more visibility than an unstable revenue model like Uber or Lyft.
In any case, nobody can blame the U.S. government for going this route since, after all, Facebook, Google, Amazon, and Netflix are all banned in China as well.
You don’t see U.S. tech companies trading on the Shenzhen tech index for a reason and after this monster run-up from the March nadir, it’s obvious why Chinese tech firms want to keep that funnel to U.S. investor capital clear.
This series of events that effectively coddles American big tech will insulate them from any real share weakness. The trend is your friend and I am bullish on American big tech.
“I don't think of Apple as a stock. I think of it as our third business.” – Said Legendary U.S. Investor Warren Buffet
Mad Hedge Technology Letter
August 14, 2020
Fiat Lux
Featured Trade:
(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)
