Global Market Comments
June 5, 2018
Fiat Lux
Featured Trade:
(THURSDAY, JUNE 14, 2018, NEW YORK, NY, GLOBAL STRATEGY LUNCHEON),
(DON'T MISS THE JUNE 6, 2018, GLOBAL STRATEGY WEBINAR),
(THE TALE OF TWO ECONOMIES),
(FB), (AAPL), (AMZN)
Posts
Global Market Comments
June 4, 2018
Fiat Lux
Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON)
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or NEW ALL-TIME HIGHS AND NEW ALL-TIME HIGHS),
(AAPL), (FB), (AMZN), (MSFT), (TLT)
Mad Hedge Technology Letter
June 4, 2018
Fiat Lux
Featured Trade:
(THE INNOVATOR'S DILEMMA),
(UBER), (WMT), (SNAP), (MSFT), (GOOGL), (AAPL), (GM), (IBM)
We knew the May Nonfarm Payroll Report was coming in hot when the president leaked the numbers ahead of time. He tweeted that he "Was looking forward to" the numbers hours before the official release.
Last month, when the report was weak, we heard nary a word from Twitter. Just add that to the ever-growing list of unpredictables we traders have to deal with on a daily basis.
As for myself, I was looking for robust numbers last Tuesday when I piled on an aggressive, highly leveraged short position in the bond market, right at the four months highs. When bonds collapsed my reward was a 62.50% profit in only three trading days.
In the blink of an eye, we have made back half of the drop in interest rates prompted by the Italian political crisis. Ten-year U.S. Treasury yields plunged from 3.12% all the way down to 2.75% and are now back up to 2.92%. Bonds have almost fallen three points in three days.
This trade instructs you on the merits of going outright long options instead of more conservative spreads when you expect a very sharp, rapid move in the immediate term.
The result was to take the performance of the Mad Hedge Trade Alert Service to yet another all-time high. Those who signed up at any time in the past 12 months have to be extremely happy.
After one trading day, my June return is +2.94%, my year-to-date return stands at a robust 23.31%, my trailing one-year return has risen to 59.20%, and my eight-year profit sits at a 299.78% apex.
The payroll report suggests that the nine-year economic expansion will easily growth to 10. Never mind that we are putting it all on an American Express card and that our kids are going to have to pick up the tab. For now, it's happy days.
That means my 2018 year-end forecast is alive and well for a (SPY) of 3,000. If earnings continue to grow at a 25% annual rate and you assume a modest 17.5 X, getting there is a chip shot. Next year is another story, when year-on-year growth rates fall to zero.
The jobs report came in at 223,000 versus the three-month average of 175,000, and the Headline Unemployment Rate dropped to 3.8%, a new decade low. Average Hourly Earnings rose to an inflationary 0.3%.
Retail gained 31,0000 jobs, Health Care 29,000, and Construction 25,000. Only Temporary Workers lost 7,800.
The broader U-6 "discouraged worker" unemployment rate fell to 7.6%, a 17-year low.
The major hallmark of the week was an upside breakout of technology. Microsoft (MSFT), Amazon (AMZN), Apple (AAPL), and Facebook (FB) all hit historic highs.
I don't know why tech is breaking out here. Maybe the market is discounting another round of blockbuster quarterly earnings that starts in two months. Possibly the tech growth rate is accelerating at the granular level.
Perhaps there is nothing else to buy. But for whatever reason, tech is going up and I want in. Tech is the secular growth story of our generation and will remain so for the foreseeable future.
The smartest that I have done this year is to start my Mad Hedge Technology Letter in February as it added 60 hours of research into tech companies into our research mix. As a result, the readers are swimming in profits.
This coming week is nearly clueless in terms of hard data releases.
On Monday, June 4, at 10:00 AM, we get May Factory Orders.
On Tuesday, June 5, May PMI Services is announced.
On Wednesday, June 6, at 7:00 AM, the MBA Mortgage Applications come out.
Thursday, June 7, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 11,000 last week from a 43-year low.
On Friday, June 8, at 8:30 AM EST, we get the Baker Hughes Rig Count at 1:00 PM EST, which rose by only 1 last week.
As for me, I will be glued to my TV watching the local Golden State Warriors trounce the Cleveland Cavaliers. That's providing they can overcome LeBron James, who seems to be a force of nature.
Good Luck and Good Trading.
New Highs!
I must confess, innovation can't be taught.
You are innovative, or you aren't. Don't pretend otherwise.
Innovation drives companies to outperform.
The economic environment becomes more cutthroat by the day rendering complacent companies obsolete.
Top-quality innovation leading to outstanding entrepreneurship is a well-traversed theme transcending industries across the American economic landscape.
The reservoir of innovation in 2018 is primarily flowing from one narrow source - the tech sector.
This is the primary motive for many adjacent industries to incorporate tech expertise into existing and commonly ancient legacy systems.
Tech promises laggards a ride atop the gravy chain.
In many instances, these companies are grappling with existential threats from all directions.
The best example is Walmart (WMT), which effectively mutated into the next FANG with its majority stake in Indian e-commerce juggernaut Flipkart. This deal followed its purchase of Jet.com in 2016, which was its first foothold in the e-commerce world.
Traditional companies are becoming tech companies because of the ability to innovate all leads through the fingertips of talented coders.
When all roads lead to Rome, you will have to go through Rome.
The hunger for innovation has had major implications to the financial side of technology.
The story picks up from a recent report disclosing the 2017 remuneration of co-founder and CEO of Instagram competitor Snapchat (SNAP) Evan Spiegel.
The $637.8 million he received in 2017 was the third-highest annual compensation ever to be collected by a CEO.
Snapchat has tanked following its 2017 IPO and the main reason is Facebook is stealing its lunch and leaving Snap the crumbs on which to nibble.
Instagram, using a cunning strategy of cloning Snap's best features, single-handedly bludgeoned Snap's share price cutting it by half after the successfully launched IPO.
Snap has been an unequivocal sell on the rallies stock since the inception of the Mad Hedge Technology Letter and the disastrous redesign did no favors either.
My first risk off recommendation was Snapchat and at the time it was trading at $19. To revisit the story, please click here.
Microsoft (MSFT) is a great stock because it posts accelerated revenue and earnings, while Snapchat is a terrible company because it produces accelerated losses and lousy user growth.
A company almost 100 times smaller than Microsoft should not be struggling to grow.
It's a failure of epic proportions.
Small companies expand briskly because the law of numbers is leveraged in their favor and the tiniest bump of additional business has a larger effect on the bottom line.
As it stands, Snapchat lost $373 million in 2015, and followed that up with a disastrous $514 million loss in 2016, and a gigantic $3.45 billion loss in 2017.
Losses accelerated by 800% but annual revenue only doubled last year.
It was no shocker that the poor relative performance resulted in the sacking of 100 Snapchat developers.
Smart people would assume an annual salary of this magnitude (Spiegel's) would be the result of excellent performance.
Why else would a CEO get a lavish payout?
I'll explain.
The demand for tech knows no bounds.
In this environment, venture capitalists will pay up for brilliant ideas.
The problem is that brilliant ideas don't grow on trees.
The few cutting-edge ideas have stacks of money thrown at them.
In this sellers' market, founders can cherry-pick the best financing deal that will enrich them the quickest and empower them the most.
Multiple offers have become the norm just as with the Silicon Valley housing market.
The consequences are the premium for these brilliant ideas keeps rising and investors keep paying higher prices without a second thought.
Therefore, founders and CEOs are opting for the financial packages that offer them bulletproof voting shares, allowing the innovators to control operations to the very last detail.
The founders are responsible for leading innovation, and investors are offering glorious pay terms for this innovation because it can't be substituted. Low-quality tech has less of a premium because the technology can easily be rebranded and substituted.
Technology from the ground up is slowly being automated away leaving runaway valuations the norm.
Giving the keys to the Ferrari makes sense as tech companies formulate long-term strategies based on scale. And securing job security without the threat of an activist takeover offers peace of mind for CEOs who are focused on the daily grind.
Knowing their baby won't get stolen from the carriage goes a long way in tech land.
Venture capitalists are reticent about following through with proper governance because they do not want to alienate the innovators who could choose to stop innovating.
These investors also know that tech is the least regulated industry in the world, so it's better to turn a blind eye to cunning growth strategies that push the border of regulation.
The competition to fund these emerging tech companies is borderline criminal.
Uber declined a $3 billion investment by no other than the Oracle of Omaha Warren Buffett.
Buffett described himself as a "great admirer" of Uber CEO Dara Khosrowshahi.
Uber is one of the most unlikely Warren Buffett investments because it doesn't create anything and burns cash faster than a Kardashian.
Buffett's faith in Uber underscores the reliance on tech to fuel the stock market to new heights.
Buffett also admitted mistakes on missing out on Alphabet (GOOGL) and Apple (AAPL).
Rightly so.
Then add in the mix of SoftBank's $100 billion vision fund that just announced an upcoming sequel with another $100 billion vision fund.
Where is all this money flowing into?
Of the tech companies that went through an IPO last year backed by venture capitalist money, 67% relinquished superior voting rights to key founders, a rise of 54% since 2010.
Compare that to non-tech companies that only allow 10% to 15% of CEOs to institute a voting structure that will put them in charge indefinitely.
In many instances, the persona of these ultra-famous tech CEOs has taken on a life of its own.
Elon Musk, CEO of Tesla, is the most prominent example of a celebrity tech innovator milking every possible penny from his shareholders and is not shy about flaunting it.
News has it that Musk needs to go back to the well for another stage of financing later this year.
Don't worry, the money will be there in this climate.
Buffett's rejection was due to losing out to SoftBank, which beat out Buffett to invest in Uber.
SoftBank just announced a $3.35 billion investment into GM's (GM) autonomous driving unit called Cruise enhancing the best big data portfolio in the world.
At this pace, CEO of SoftBank Masayoshi Son will have a piece of every major big data company in the world.
This all bodes well for tech equities as the insatiable hunt for emerging, innovative tech spills over into daily equity market driving up the prices for all the top innovating public companies such as Salesforce, Amazon, Microsoft and Netflix.
Buffett, down on his luck after being shafted by Uber, picked up more Apple shares.
He sold all his IBM (IBM) shares after reading the Mad Hedge Technology Letter advising him to stay away from legacy companies.
Smart move, Warren. You can pick up the tab for our next lunch date.
If you have a few billion to throw around, expect multiple offers over the asking price for any high-grade tech innovation.
The going rate is shooting through the roof and you might NEVER be able to sack the founder.
Caveat emptor.
_________________________________________________________________________________________________
Quote of the Day
"We knew that Lyft was going to raise a ton of money. And we went (to their investors): 'Just so you know, we're going to be fund-raising after this, so before you decide whether you want to invest in them, just make sure you know that we are going to be fund-raising immediately after.' " - said former CEO and founder of Uber Travis Kalanick when asked how he copes with competition.
Global Market Comments
June 1, 2018
Fiat Lux
SPECIAL REAL ESTATE ISSUE
Featured Trade:
(TUESDAY, JUNE 12, 2018, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(WHY YOUR FANG STOCKS ARE ABOUT TO DOUBLE IN VALUE),
(FB), (AAPL), (NFLX), (GOOGL), (LMT), (ROKU),
(HERE IS YOUR TOP-PERFORMING INVESTMENT FOR THE NEXT FIVE YEARS),
(ITB), (PHM), (KBH), (DHI), (AVB), (CPS)
The shares of FANGs are all about to double in value in the Silicon Valley if commercial real estate is any indication of the future growth rates.
The group is gobbling up office space at such a prodigious rate that only a vast expansion of their business would justify these massive long-term commitments.
Commercial real estate commitments are one of the most valuable leading indicators of stock performance out there. They show what the companies themselves think are their future prospects.
Apparently, the stock market agrees with me. Technology is virtually the only group of shares moving to new all-time highs in these otherwise dismal trading conditions.
Just this month Facebook (FB) signed a lease for the entire brand new 43-story Park Tower in downtown San Francisco, and that's just to house its Instagram business.
Google (GOOGL) is leasing 39% of the office space in Mountain View, CA. It is currently in negotiations with the nearby city of San Jose to build a skyscraper occupying an entire city block that will house 10,000 tech workers. It also is building another 1 million square feet near an old prewar dirigible landing strip in Moffett Park.
Apple (AAPL) is hogging some 69% of the office space in Cupertino, CA. It is just now moving into its new massive spaceship-inspired headquarters, where 10,000 workers will slave away. The world's largest company is currently on the hunt for a second headquarters location.
Netflix is slowly gobbling up Los Gatos, CA. It was recently joined by the set top device company Roku (ROKU), which is growing by leaps and bounds.
Fruit canning was the original industry of Silicon Valley at the turn of the 20th century, taking advantage of the surrounding peach, plum, and apricot groves. When I was a kid after WWII, defense firms such as Lockheed (LMT) took over, creating thousands of high-paying engineering jobs.
It didn't hurt that Stanford University was spitting distance away, and the University of California was just on the other side of the bay. These two schools supplied the manpower to fuel the hypergrowth ahead.
To say the growth has caused local headaches would be an understatement in the extreme. The San Francisco Bay Area now sports the world's most expensive residential housing. The median San Francisco home price has skyrocketed to $1,334,000 and requires an annual income of $334,000 to support it.
Small businesses such as dry cleaners, nail salons, restaurants, and barber shops have been driven out by soaring rents. It's not uncommon now to go out to dinner only to find a "closed" sign on your favorite nightspot. Your personal assistant now has to travel miles just to get your suits pressed.
As for traffic, forget about it. Rush hour has ceased to exist. Freeways are now jammed a nonstop 12 hours a day in the worst neighborhoods.
Success has its price, and this was never truer than in Silicon Valley.
The New Apple HQ
Where Instagram Now Lives
Mad Hedge Technology Letter
May 25, 2018
Fiat Lux
Featured Trade:
(WHERE 5G CONNECTIVITY WILL TAKE US),
(T), (VZ), (INTC), (TSLA), (AAPL), (GOOGL)
AT&T (T), Verizon (VZ), and the other telecom heavies are in the process of investing $30 billion to make sure that fifth-generation wireless, or 5G, will roll out on time in 2020.
What 5G will do is improve the functionality of IoT (Internet of Things) by 10 times at one-tenth the cost, bringing a 100X increase of functionality over price.
The last time I saw a leap that great was when Intel (INTC) brought out its groundbreaking 8008 8-bit microprocessor chip in 1972. I remember it like it was yesterday.
The news that gravitational waves were discovered, as well as wrinkles in the space-time continuum, was big news in my family. 5G will be of that order.
Of course, we knew it was coming. It was just a matter of when.
I have 11- and 13-year-old girls (I can't help it if the plumbing still works!). Whenever we drive somewhere, we carry out what Einstein called "thought experiments."
They will come up with scientific questions, and I then direct them into finding their own answers through a series of prodding and hopeful questions.
It is much like how the children of royalty were tutored during the Middle Ages.
So they asked, "When will we get driverless cars?" which they had heard about on TV.
I answered in about two years, but that I had friends who run Tesla (TSLA) who already have them now.
And you know the interesting thing they discovered? After two years of beta testing, the cars are starting to develop their own personalities.
Each car has highly advanced learning software. When the mapping software requires one to take a difficult sharp left turn, the vehicle may miss it the first time.
It will then make the next legal U-turn, and then nail that turn every time in the future.
The cars are all programmed to drive like little old ladies. It will never speed, break the law, and always lets other cars cut in front. Over time, some are becoming cautious, while others are getting more aggressive depending on each individual's driving experience.
In other words, experience is turning them into "people."
I asked my daughters, "What would the world be like if everyone had driverless cars?" which will occur in about 30 years, or during their middle age.
They pondered for a moment. Then my older daughter shouted out, "There won't be car accidents anymore!" "Right!" I answered.
"But what will that mean?" I asked.
They puzzled over this.
A few seconds passed. Then it came. "The people who fix cars won't have anything to do!"
"You got it," I replied.
In fact, about 1 million people in the car repair industry will lose their jobs. A small group of vintage car fanatics will survive, much like horse and buggy hobbyists do today.
I pointed out that this is already happening because electric cars don't require any maintenance. You just rotate the tires every 6,000 miles (because electric batteries are so heavy).
I moved on. "Who else will lose their jobs when cars become self-driving?" They hit a brick wall. Then I asked "What else breaks when cars have accidents?"
A few seconds later it came. "People!"
"For sure," I shot back.
Actually, about 35,000 people die in car accidents every year in the United States, and another 500,000 are injured.
This means the demand for doctors, hospitals, and ambulances will go down. Say goodbye to another 1 million jobs.
"So, what else will self-driving cars do?" I was relentless.
My older girl was first: "If cars are driven by computers, it means they can drive closer together." I said, "That was true, but what was the consequence of that?"
The mountain scenery whizzed by. Then they got it.
"There won't be traffic jams anymore."
"Yes!" I blurted out. If a car can drive 70 miles per hour, but only needs to remain one car length behind the one in front of it, that effectively increases the capacity of freeways seven times.
We will never need to build another freeway again. Another 1 million jobs go down the drain.
"What else will self-driving cars do?" I carried on.
They hit a dead end. So, I gave a hint. "What do you see in cities?" After going through buildings, parks, roads, lots of cars, and bridges, I finally got the answer I wanted: "Parking lots."
I then posed the conundrum, "What's the connection between self-driving cars and parking lots?"
Now they were getting into the spirit of the thing. "They won't need them." I replied, "Absolutely."
Self-driving cars won't need to park. They'll just be able to drop you off and drive around the block until you are ready to go home.
This will be economical because after three decades of battery and solar improvements, energy will effectively be free, like air is today.
Oh, and at least 100,000 parking attendants might as well start joining the unemployment lines now.
It gets better.
Entrepreneurs now are developing apps for cars so they never need to park.
In an iteration of the sharing economy, and in a club or membership type format, your car will just drive person to person, selling rides, until you are ready to go home.
Think of it as Uber, without the drivers, that pays you.
Today, parking lots occupy about 15% of the land area of large cities. Self-driving cars will free up a lot of that space for other uses, such as housing and parks.
Then I asked the really big question. "What do all of these changes have in common?"
My 11-year-old picked up on this immediately. "A lot of people are going to lose their jobs!"
"For sure," I bubbled. Notice that every new technology improvement creates a lot of job losses. I went on.
"The trick for you girls is to always stay ahead of the technology curve so your job doesn't get lost, too." This is why I have been sending them to Java development school since they were 8 and 9.
They looked daunted.
And this is what 11- and 13-year-olds were able to figure out. Granted, they were MY kids.
Imagine what Google (GOOGL), Apple (AAPL), and Tesla are doing with this idea. It has become a hot bottom "next big thing." Silicon Valley is now rife with rumors of breakthrough developments and the poaching of staff.
The U.S. military and the Defense Advanced Research Projects Agency (DARPA) are involved in self-driving vehicles in a big way as well, holding regular contests with big prize money and the prospect of mammoth government contracts.
More and more generals and admirals are telling me that the wars of the future will be fought with software.
The bottom line is that things are happening much faster than we imagined possible only a few years ago.
Then my oldest daughter piped up.
"Dad, can I get my driver's license before all the cars are self-driving?" I said, "Sure. What kind of car do you want?"
"A red one."
My first car was a red 1957 Volkswagen Beetle.
On our next trip we will cover gravitational waves, Einstein's Theory of Relativity, and the significance of the clock tower in Bern, Switzerland.
By the way, these girls will be graduating from college in 2026 and 2027 and will be looking for jobs.
Just let me know. :-)
_________________________________________________________________________________________________
Quote of the Day
"Homo sapiens, the first truly free species, is about to decommission the natural selection, the force that made us," said E.O. Wilson, a Harvard University biology professor.
Mad Hedge Technology Letter
May 24, 2018
Fiat Lux
Featured Trade:
(MICRON'S BLOCKBUSTER SHARE BUYBACK)
(MU), (AMZN), (NFLX), (AAPL), (SWKS), (QRVO), (CRUS), (NVDA), (AMD)
