Mad Hedge Technology Letter
June 13, 2019
Fiat Lux
Featured Trade:
(THE TRADE WAR MOVES DOWN MARKET)
(DOCU), (PSTG), (ZUO), (MSFT), (PYPL), (ADBE)
Posts
To understand the consequences of the global trade war, just take a look at the second-tier software companies.
There has been softness in the latest earnings reports and guidance signaling a lukewarm upcoming summer.
The best-case scenario is the likes of DocuSign (DOCU) and Zuora (ZUO) rallying into the end of the year.
That is hardly a given considering the global turmoil has shifted supply chains in every which way as well as denting overall demand.
Cloud-based companies have seen meaningful weakness this earnings season, even some of them absorbing heavy losses in the wake of their quarterly results, but analysts aren’t ready to write off this industry yet.
Referencing the latest industry survey, 20 software companies reported results in the last month, and of those, only six saw a positive response in their stock prices.
DocuSign and Pure Storage (PSTG) were among names that got clobbered, along with cloud-computing plays like Cloudera Inc., Nutanix Inc., Box Inc., and Pivotal Software Inc.
The current malaise in software is due to higher valuations and macroeconomic issues which subsequently elevates uncertainty.
There is no reason to go hysterical over this, and in no way, shape, or form, does this signal an imminent implosion of cloud companies, any incremental caution may be reversible if macro indicators and sentiment rebound.
And this rebound can be swift once all the stars align together.
Adding to the comfort is that some of the sharp drawdowns were company-specific reasons.
MongoDB Inc. or Zscaler Inc., were coming off strong year-to-date advances in their shares and it was time to take profits before the next upward explosion.
Cybersecurity company Zscaler, is appropriately accounting for outperformance and have already been crushing higher than normal expectations.
DocuSign eclipsed expectations on some metrics but disappointed on others, such as billings growth.
This disappointing miss punished the company with a drop of 15% in the pre-market session, as DocuSign grew sales by 27%, a lower rate than in previous quarters.
Management blamed the poor performance to an elongated sales cycle.
Bulls were hoping for a beat-and-raise quarter and instead got in-line numbers with some soft spots around the periphery.
Investors aren’t in a charitable mood and the sensitive mood around geopolitics has made investors more agitated with a shorter leash.
There was a tone of a broader deceleration in software demand prompting stronger names to get comingled together, but the bulk of this negative price action has been overdone.
Even further down the pecking order, results from smaller cloud firms have pointed to more fundamental issues, and these stocks have emerged as a particularly weak sub-sector.
A number of these companies reigned in their forecasts, a trend that has buttressed analyst caution over the group.
Considering that many companies have labored and there exist clear narrative similarities, it’s hard not to surmise that some real systemic pains in infrastructure exist.
Many in the industry are acutely aware of the growing chorus of companies blaming competition or poor sales execution.
Lower growth rates are effectively the predominant reason for lower stock prices in this group of cloud companies.
On the flipside of this weaker cloud growth are the heavy hitters who are throwing around their weight getting through largely unscathed.
If any of these bigger cloud companies can fuse together a business model with no China exposure, then shares are likely stable to upward trending.
A company like Adobe (ADBE) is a perfect company to look at with an unpretentious yet steady growth rate and wildly successful products.
If we were to look at more growth-based companies with larger scale, then PayPal (PYPL) and Microsoft (MSFT) epitomize the type of cloud companies that are thriving in this environment and if geopolitics subsides, take on another 10% in sales.
Not only is the weather hot in the summer, but the anti-trust regulators are turning up the heat on certain tech companies on anti-trust concerns.
This could be a time to wait out those stocks and there could be another move to the upside if regulation is weaker than expected.
Global Market Comments
May 17, 2019
Fiat Lux
Featured Trade:
(APRIL 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(MSFT), (GOOGL), (AAPL), (LMT), (XLV), (EWG), (VIX), (VXX), (BA), (TSLA), (UBER), (LYFT), (ADBE),
(HOW TO HANDLE THE FRIDAY, MAY 17 OPTIONS EXPIRATION), (INTU),
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 15 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Where are we with Microsoft (MSFT)?
A: I think Microsoft is really trying to bottom here. It’s only giving up $8 from its recent high, that's why I went long yesterday, and you can be hyper-conservative and only do the June $110-$115 vertical bull call spread like I did. That will bring in a 13.68% profit in 28 trading days, which these days is pretty good. This morning would have been a great entry point for that spread if you couldn’t get it yesterday.
Q: How will tariffs affect Apple (AAPL) when they hit?
A: The price of your iPhone goes up $140—that calculation has already been done. All of Apple's iPhones are made in China, something like 220 million a year. There’s no way that can be moved, they need a million people for the production of these phones. It took them 20 years to build that facility and production capacity; it would take them 20 years to move it and it couldn't be done anywhere else in the world. So, that's why Apple led the charge on the downside and that's why it will lead the charge to the upside on any trade war resolution.
Q: How bad is the trade war going to get?
A: The market is betting now by only going down 1,400 Dow points it will be resolved on June 28th in Osaka. If that doesn’t happen it could get a lot worse. It could get down to my down 2,250-point target, and if it continues much beyond that, then we’ll get the whole full 4,500 points and be back at December lows. After that, you’re really looking at a global recession, a global depression, and ultimately nearing 18,000 in Dow, the 2016 low.
Q: Will global trade wars force US Treasuries down to around 2.10% on the ten year?
A: Yes. Again, the question is how bad will it get? If we resolve the trade war in six weeks, treasuries will probably double bottom here at around a 2.33% yield. If we go beyond that, then 2.10% is a chip shot and we go into a real live recession. The truth is no one knows anything, and we really don’t have any influence over what happens.
Q: How will equities digest and increase in European tariffs for cars?
A: It would completely demolish the European economy—especially that of Germany (EWG) which has 50% of its economy dependent on exports (primarily cars) and mostly to the U.S. And if we wipe out our biggest customer, Europe, then that would spill over here very quickly. Anybody who sells to Europe—like all the big Tech companies—would get slaughtered in that situation.
Q: Is it time to buy the Volatility Index (VIX)?
A: It’s too late to buy (VIX) now. I don’t want to touch it until we get down to that $12-$13 handle again because the time decay on this is enormous. Time decay is more than 50% a year, so your timing has to be perfect with trading any (VIX) products, whether it’s the (VXX), the (VIX) futures, the (VIX) options, or so on. There are countless people shorting (VIX) here, and they will short it all the way down to $12 again.
Q: What should I do about Boeing at this point?
A: We went long, got out, took our profit and caught this rally up to $400 a share. Then (BA) gave it up and it broke down. It’s a really tempting long here. Along with Apple, Boeing has the largest value of exports to China of any company. They have orders for hundreds of airlines from China, so they are an easy target, especially if there is a ramp up in the intensity of the trade war. That said, something like a June $270-$300 vertical bull call spread is very tempting, especially with elevated volatility up here, so I’m watching that very closely. We’re looking for the recertification of the 737 MAX bounce which could happen in the next few weeks; if that does happen it should rally at least back up to 380.
Q: Are your moving averages simple or exponential?
A: I just use the simple. I find that the simpler a concept is, the more people can understand it, and the more people buy it; that’s why I always try to keep everything simple and leave the algorithms for the computers.
Q: What stocks are insulated from a US/China trade war?
A: None. When the whole market goes risk off, people sell everything. Remember that an overwhelming portion of the market is now indexed with passive investment funds, so they just go straight risk on/risk off. It makes no difference what the fundamentals are, it makes no difference who has a lot of Chinese business or a little—everyone gets hit and everyone will get boosted when the trade war ends. There is no place to hide except cash, which is why I went 100% cash going into this. People seem to forget that cash has option value and having a lot of cash going into one of these situations is actually worth a lot of money in terms of opportunities.
Q: Do you have any thoughts on Uber’s (UBER) bad performance?
A: Yes, the whole sector was wildly overvalued, but no one knew that until they brought it to market and found out the real supply and demand for the issue. The smartest company of the year has to be Lyft (LYFT), which got a nice valuation by doing their issue first and keeping it small. So, they kind of rained on Uber’s parade; at one point, Uber was down 25% from their IPO price. That’s awful.
Q: Is Trump forcing the Fed to drop rates with all this tariff threat?
A: Yes, and if you remember, Trump really ramped up the attacks on the Fed in December. And my bet is at the first sign the trade talks were in trouble, they wanted to lower rates to offset the hit to the U.S. economy. There was no economic reason to suddenly demand huge interest rate cuts last December other than a falling stock market. The tariffs amount to a $72 billion tax increase on the American consumer, felt mostly at the low end, and that is terrible for the economy in that it reduces purchasing power by exactly that much.
Q: Would you buy the dollar as a safe haven trade?
A: No, I would not. The dollar may actually go down some more, especially with the collapse in our interest rates and European interest rates bottoming at negative levels. The best thing in the world in a high-risk environment like this is cash—don’t try to get clever and buy something you think will outperform. You could be disappointed.
Q: Why is healthcare (XLV) behaving so badly?
A: You don’t want to get into political football ahead of an election. That said, they're already so cheap that any kind of recovery could very well take healthcare up big, especially on an individual company basis. This is a sector where individual stock selection is crucial.
Q: Would you buy deep in the money calls on PayPal (PYPL)?
A: Yes, I would. Wait for a down day. Today we’re up slightly, but if we have a weak afternoon and a weak opening tomorrow morning, that would be a good time to add more longs in technology. PayPal is absolutely at the top of the list, as are names like Adobe (ADBE) and Alphabet (GOOGL).
Q: Should I be buying LEAPS in this environment?
A: No; a LEAP is a one-year long term deep out-of-the-money call spread. That was a great December bottom trade. The people who bought leaps then made huge fortunes. We’re too high here to consider leaps for the main market unless it's for something that’s just been bombed out, like a Tesla (TSLA) or a Boeing (BA), where you had big drops—then I would look at LEAPS for the super decimated stocks. But the rest of the market is still too high for thinking about leaps. Wait a couple of months and we may get back to those December lows.
Q: What happened to your May 10th bear market call?
A: Actually, it’s kind of looking good. It’s looking in fact like the market topped on May 2nd. If saner heads prevail, the trade war will end (or at least we’ll get a fake agreement) and the market will go to a new high. If not, then that May 10th target forecast I made two years ago IS the final top.
Q: You’re saying today we’re at a bottom?
A: We’re at a bottom for a short-term trade with a June 21st target. That was the expiration date of the options spreads I did this week. Whether this is the final bottom in the whole down move for a longer term, no one has any idea, even if they try to say differently. This is totally dependent on political developments.
Q: What do you have to say about Lockheed Martin (LMT)?
A: This sector usually does well with a wartime background. Expect that to continue for the foreseeable future. But at a certain point, the defense stocks which have had fantastic runs under Trump will start to discount a democratic win in the next election. If that does happen, defense will get slaughtered. I would be using any future strength to sell out of the whole defense area. Peace could be fatal to this sector.
Mad Hedge Technology Letter
May 14, 2019
Fiat Lux
Featured Trade:
(CHINA’S COUNTERATTACK)
(AAPL), (MSFT), (ADBE), (PYPL), (QCOM), (MU), (JD), (BABA), (BIDU)
Ratcheting up the trade tensions, China is pulling the trigger on retaliatory tariffs on $60 billion worth of U.S. goods, just days after the American administration said it would levy higher tariffs on $200 billion in Chinese goods.
American President Donald Trump accused China of reneging on a “great deal.”
The mushrooming friction between the two superpowers gives even more credence to my premise that hardware stocks should be avoided like the plague.
I have stood out on my perch in 2019 and proclaimed to buy software stocks and if you need one name to hide out in then I would confidently choose Microsoft (MSFT).
Microsoft has little exposure to China and will be rewarded the most on a relative basis.
The last place you want to get caught out is buying hardware stocks exposed to China and Apple is quickly turning into the largest piece of collateral damage along with airplane manufacturer Boeing.
Remember that 20% of Apple’s revenue comes from China and Apple bet big to solidify a complex supply chain through Foxconn Technology Group in China.
When history is recorded, CEO of Apple Tim Cook not hedging his bets exposing Apple’s revenue machine could go down as one of the worst ever managerial decisions by tech management.
The forced intellectual property transfers in China from western corporations was the worst kept secret in corporate America.
Being an operational guru as he is, and the hordes of data that Apple have access to, this was a no brainer and Cook should have mitigated his risks by investing in a supply chain that was partially outside of China, and not incrementally spreading out the supply chain through other parts of Asia is coming back to bite him.
China's most recent tariffs will come into effect on June 1, adding up to 25% to the cost of U.S. goods that are covered by the new policy from China's State Council Customs Tariff Commission.
The result of these newly minted tariffs is that importers will probably elect to avoid absorbing the costs themselves and pass the price hikes to the consumer sapping demand.
The American consumer still retains its place as the holy grail of the American economic bull case, but this will test the thesis.
For the short term, it would be foolish to hang out to Chinese companies listed in New York through American depository receipts (ADR) such as JD.com (JD), Alibaba (BABA).
Baidu (BIDU) is a company that I am flat out bearish on because of a weakening strategic position versus Alibaba and Tencent in China.
Even with no trade war, I would tell investors to short Baidu, and the chart is nothing short of disgusting.
Wei Jianguo, a former vice-minister at the Chinese Ministry of Commerce who handled foreign trade, said to the South China Morning Post that “China will not only act as a kung fu master in response to U.S. tricks but also as an experienced boxer and can deliver a deadly punch at the end.”
It is clear that any goodwill between the two heavyweight powers has evaporated and the hardliners inside the communist party pulled all the levers possible to back out at the last second.
Many of us do not understand, but there is a complicated political game perpetuating inside the Chinese communist party pitting reformists against staunch traditionalists.
This is not only Chairman Xi’s decision and appearing weak on the global stage is the last concession the communist government will subscribe to.
Along with the iPhone company, semiconductor stocks will be ones to avoid.
The list starts out with the chip companies leveraged the most to Chinese revenue as a proportion of total sales including Qualcomm (QCOM) with 65% of revenue in China, Micron (MU) who has 57% of sales in China, Qorvo who has half of sales from China, Broadcom who has 48% of sales from China, and Texas Instruments rounding out the list with 43% of total revenue from China.
The first 5 months of the year saw constant chatter that the two sides would kiss and makeup and chip stocks benefitted from that tsunami of positive momentum.
The picture isn’t as pretty when you flip the script, and chip stocks could suffer a gut-wrenching summer if the two sides drift further apart.
After Microsoft, other software names I would take comfort in with the added bonus of strong balance sheets are Veeva Systems (VEEV), PayPal (PYPL), and Adobe (ADBE).
The new tariffs will burden American households to up to $2 billion per month going forward, and new purchases for discretionary items like extra electronics will be put on the back burner extending the refresh cycle and saddling chip companies and Apple with a glut of iPhone and chip inventory.
Buy software companies on the dip.
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)
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
