Mad Hedge Technology Letter
August 15, 2018
Fiat Lux
Featured Trade:
(HOW TO PLAY THE NEW FORTNITE GAMING FAD),
(ATVI), (EA), (AMD), (NVDA), (MSFT), (AAPL), (GOOGL), (TWTR), (SNAP), (FB), (SPOT), (GAMR)
Posts
Each generation grows up in its own unique environment.
Childhood experiences differ more and more as the world rapidly changes because of hyper-accelerating technology.
Millennials are usually defined as children born between 1981 to 1996.
They were the last generation to grow up outside breathing crisp, fresh air and meandering around the neighborhood with their friends looking for excitement.
Generation Z is the first generation in America generally raised indoors because of their overwhelming preference and broad-based addiction to technology.
Social media stocks have been a huge winner from this new paradigm shift in the behavior of young adults.
Instead of running around the block in packs, children are laser focused on these platforms communicating with the entire world and propping up their social lives.
Children meet a lot less than they used to and convening on a social media platform of choice has become the new normal.
Platforms such as Twitter (TWTR), Instagram and Snapchat (SNAP) have convincingly won over these new eyeballs even so much so that the new "going out" is congregating on Snapchat with a group of friends.
Facebook (FB) is now considered a legacy social media platform full of millennials and the older crowd.
Generation Z do not fancy drugs or drinking like the youth before them, rather, their panacea is video games and a lot of them.
These new societal trends will hugely affect your portfolio going forward.
A battle royal game is a video game category mixing the survival, exploration and scavenging elements together with last-man-standing gameplay.
These types of games predominantly contain 100 players sharing the same experience on a broadband connection.
This genre has been all the rage with PlayerUnknown's Battlegrounds (PUBG) piling up 400 million gamers across the globe selling 50 million copies of the game.
Of the 400 million gamers, 88% access the game via mobile devices highlighting the vigorous shift to mobile for younger generations.
PUBG made more than $700 million in sales in 2017.
The rise of the billion-dollar video games is alive and well.
In fact, Activision Blizzard (ATVI) stakes claim to eight gaming franchises commanding more than $1 billion in annual revenue with titles such as Overwatch, Candy Crush, and Call of Duty.
The popularity of video games will drive GPU manufacturers Nvidia (NVDA) and AMD (AMD) to new heights because gamers require high-quality GPUs to effectively game.
Nvidia CEO Jensen Huang even spouted that "the success of Fortnite and PUBG are just beyond comprehension" boosting GPU sales and capturing the imagination of global youth.
Fortnite, a "Hunger Games" style battle royal video game mirroring PUBG, has taken the world by storm in 2018.
This cultural juggernaut surpassed the 125 million gamer mark in just one year.
In February 2018, Epic Games, the maker of Fortnite, earned $126 million in one month, and it was the first time it passed PUBG in monthly sales.
In April 2018, it followed up monster February numbers by pulling in $296 million.
The growth trajectory is parabolic. Hold onto your hats.
Fortnite sparkles in the sunlight because its free-to-play model does not exclude anyone and is available on all devices.
At first, Fortnite was available for iOS customers and Samsung Android holders because it inked an exclusive deal with Samsung.
This week is the first week Epic Games is rolling out Fortnite to non-Samsung Android users with an interesting caveat.
The Android version of Fortnite bypasses Google Play (Google's app store on Android) preferring to sell the game direct for download from its official website.
This highlights that content is truly king.
Epic Games is betting the surge in popularity for its juggernaut game will sell itself.
This decision will cost Alphabet (GOOGL) $70 million per year in commission.
Apple makes it mandatory that any app downloaded to its devices must be downloaded from Apple's app store.
However, Android doesn't have the same requirements as its system is more functional, open, and a developer's dream.
Simply put, there are ways to download the game on Android without ever touching Google Play.
Going forward this could have a similar effect Spotify (SPOT) had on Wall Street on its IPO.
The middlemen or broker app could get bypassed in favor of direct sales.
Apple pockets commission on 30% of all in-app spending raking in around $60 million from Fortnite.
In-game add-on revenue is how Fortnite makes money from this free-to-play game.
The bulk of spending comes in the form of costumes better known as skins, where players pay to dress up their character in various garments selected for purchase.
The other revenue stream is a season subscription on sale for $10.
The tech sector has been migrating to subscription-based offerings and video games are no different.
This could play havoc with Alphabet's Google Play and Apple's app store down the line if prominent content producers choose to bypass their stores to sell directly.
The lack of video game exposure to the FANG group is mind-boggling. It seems they have their finger on the pulse of every other major trend in technology but have missed out on this one.
Microsoft (MSFT) is the closest FANG-like stock deep inside the video game ecosphere by way of its famous console Xbox.
In fact, Microsoft earns more than $10 billion per year from its gaming segment surpassing Nintendo at $9.7 billion per year.
This doesn't eclipse Sony's gaming revenue, which is $17 billion per year, but the 36% YOY growth in Xbox-related revenue signals its intent in the gaming industry that plays second fiddle to its cloud and software businesses.
Gaming is just a side business for Microsoft right now.
Ironically, Tencent has a 40% stake in Epic Games and is patiently waiting for government approval to sell Fortnite in China, which could be painstakingly arduous.
If Tencent gets the green light, Fortnite could develop into a monster business in 2018, and this is just the beginning.
Regrettably, Tencent has been mired in regulatory issues with the communist government reluctant to approve selling in-game products, which usually make up the bulk of revenue.
Recent blockbuster hit "Monster Hunter: World" was blocked by censors after debuting to great fanfare on August 8, 2018.
This title was expected to be one of the most popular video games of 2018.
Chinese state censors are on a short-term crusade to block the video game industry from receiving critical licenses and is the main reason for Tencent shares' headwinds.
Tencent shares peaked in January and are down almost 15% in 2018 because of uncertain gaming revenues.
Investors need to wake up and understand the gaming industry is about to mushroom because of demographics and the migration away from outdoor activity.
Following generations will have an even stronger bias toward technology-based indoor entertainment.
We are entering into the unknown of $4 billion per year video game businesses based on just one title and not one company.
Fortnite made PUBG's $700 million in revenue last year look paltry.
Gamers will soon see the rise of a $5 billion game franchise in 2019 and the sky is the limit.
This industry has growth, growth, and more growth and these single titles could surpass revenue of large semiconductor or hardware companies.
Don't underestimate the power of your child gaming away in your basement, he or she is part and parcel of a wicked tech growth driver about which not many people know.
Unfortunately, Epic Games is not a public company and shares cannot be purchased, but the success of Fortnite means that investors must pay heed to these new developments.
I am highly bullish on the video game sector and a big proponent of Activision (ATVI). A secondary name would be EA Sports (EA), which curates the Madden and FIFA franchises.
ATVI has felt the Fortnite effect in its share price selling off 11% because of investors' nervousness of Fortnite siphoning off ATVI gamers.
This short-term drop is a nice entry point into a solid video gaming company with various successful franchises that have withstood the test of time.
The 200-day moving average has provided ironclad support on the way up, and the Fortnite phenomenon won't last forever.
I would avoid the video game ETF ticker symbol GAMR because it includes one of my bona fide shorts - GameStop (GME).
It's mainly comprised of American, Japanese, and a Korean name but it would be sensible to focus on the companies with the highest quality comprehensive content.
The ETFs recent drop is also due to the strength of Fortnite.
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Quote of the Day
"Companies in every industry need to assume that a software revolution is coming." - said Silicon Valley venture capitalist Marc Andreessen.
Mad Hedge Technology Letter
August 14, 2018
Fiat Lux
Featured Trade:
(BUY ADVANCED MICRO DEVICES ON THE INTEL STUMBLE),
(AMD), (NVDA), (INTC)
It's not an ideal time to own chip stocks because of the trade war jading the chip sector that has inextricable revenue links to mainland China.
But if you feel audacious and want a name to sink your teeth into that is hitting all the right notes, readers must look at Advanced Micro Devices, Inc. (AMD).
After all, what follows a trade war is trade peace, and the chips are the most oversold tech sector out there.
Intel Corporation's (INTC) loss is (AMD)'s gain.
It's a zero-sum game where companies are battling for the same contracts.
Chip companies are under relentless pressure to innovate and enhance bit growth and chip capacity.
They spend billions of dollars to retain and expand their talent pool and on R&D to produce the type of high-end chips for which end product companies clamor.
Sometimes, the development process stifles, delaying chip production and delivery of the chips.
Intel botching the 10nm (nanometer) process technology is a kick in the teeth opening up the pathway for (AMD) to harvest further market share gains.
Intel is experiencing a management crisis as of late with former CEO Brian Krzanich resigning in humiliation after details of an inappropriate relationship with an employee surfaced which breached company rules.
The delay is further proof that Intel fails to execute and develop chips relative to competition, and these announcements hurt investor sentiment and the bottom line.
AMD's comparable 7nm Rome is set to hit the market six to nine months before the Intel chips.
This time frame will allow AMD to make an all-out assault on the CPU market and adoptees will be plenty.
The recent success of AMD has coincided with the heaps of innovation generated by this reinvigorated company.
Namely the Radeon GPUs and Ryzen mobile processors have knocked the cover off the ball.
The Ryzen processors are hot because of their competitive power mixed together with a relatively lower cost.
With Intel on the back burner, these prominent chip models will boost earnings growth for AMD in the short term explaining AMD's meteoric rise from a year-to-date low of $9.50 on April 3, 2018, to an intraday high of more than $20 on July 30, 2018.
Any company that doubles in four months warrants my attention.
How did this all happen?
December 1, 2005 represented the high-water mark for (AMD) when shares surged past $40 only to crumble like a stale cookie down to $2 on September 1, 2008.
The price action was nothing short of horrific, and the three years of sequential decline was an investors nightmare.
The story starts in 1993 when AMD created a 50-50 partnership with Fujitsu called FASL to manufacture flash drives.
This monumental loss-making subsidiary later changed its name to Spansion and tore into AMD's profitability losing more than $250 million in its last nine months being an arm of AMD.
AMD divested from this business with Spansion spinning itself out into its own public company.
Spansion was a disaster operating solo leading the company to file for Chapter 11 bankruptcy on March 1, 2009 and sacking 3,000 employees without severance pay.
AMD's turnaround started in 2014 when it hired Dr. Lisa Su who was once vice president of IBM's semiconductor research and development center.
She replaced Rory Read whose PC background made him highly expendable and unsuitable for the future of AMD as well as lacking the technical pedigree to make the decisions for the long-term vision of AMD.
His background as chief operating officer of Lenovo Group, Ltd. influenced him to heavily bet the ranch of the PC flash drive market, which has been in sequential decline for years.
This masterstroke is paying dividends for AMD.
Out of the gates, Lisa Su presented her vision in May 2015 when she detailed her long-term blueprint focusing on developing high-performance computing and graphics technologies for three growth areas: gaming, datacenter, and "immersive platforms" markets.
The change in direction worked out for AMD increasing top-line growth from $4 billion in 2015 to $5.33 billion in 2017.
The outperformance continues with AMD ringing in $3.41 billion for the first two quarters of 2018.
Because of Lisa Su, AMD chips found their way into Microsoft Xbox consoles among other businesses and the long-term vision is playing out positively to the benefit of shareholders.
AMD goes mano a mano with Nvidia (NVDA) in the highly lucrative GPU segment and data center.
Many analysts believed there was no way to come out of this unscathed. But as we have found out, this market is not a winner-takes-all market and there is space for other players to take a piece of the pie.
The Data Center market is poised to eclipse $70 billion by 2021.
AMD server chip projects to command 5.5% of market share in 2019, up from the 2.2% market share in 2018.
Two years later should be even healthier for AMD whose market share will rapidly grow to around 9.5%.
Crypto mining-based purchases of AMD GPU's were all the rage in 2017 with their products flying off shelves like hotcakes.
Last year saw crypto mining make up a material 10% of revenue because of Bitcoin's dazzling run up to $20,000.
High demand for Ryzen and Radeon products continues unabated and this segment will take in more than $4 billion in 2018.
This division's performance is the main reason why AMD annual revenues will increase 47% YOY in 2018 after a YOY rise of 50% in 2017.
Not only are GPU chips needed for crypto mining, the main buyers of GPU are companies developing artificial intelligence and machine learning.
The data center business is tied to the cloud industry, which is one of the hottest parts of technology in the world.
These robust secular trends and AMD's migration to these premium businesses solidifies the genius decision to allow Dr. Lisa Su to steer the ship.
Veering away from the legacy business that cratered its share price down to $2 and being part of a high-growth industry with great products will fuel the share price skyward.
The technology sector has been rife with M&A activity in 2018 with successful and failed mergers happening left and right.
AMD has been rumored for takeover numerous times. The share price received short boosts highlighting the attractiveness this name commands to outside investors.
Top-line growth is what is driving AMD in 2018, and it is in the middle of a growth sweet spot.
Nvidia has gone up 1,750% in the past five years while laying claim to 70% gross margins in its vaunted GPU division.
It will be demonstrably bullish if AMD can mildly replicate this growth trajectory, and I believe it will.
The Mad Hedge Technology Letter has advised readers to stay away from chip companies because of the complicated trade war.
If the trade war subsides or even ends, semiconductor chips will be the first group of stocks whose shares explode to the upside.
In any case, it's always great to understand the premium names in each industry, and I am bullish on AMD.
After the spike to more than $19, a pullback is warranted but it won't be long before these shares go back into overdrive.
Directly after the macro headwinds pass by will be the preferred time to enter into AMD unless you are a long-term investor and plan to buy and hold.
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Quote of the Day
"Especially in technology, we need revolutionary change, not incremental change," - said cofounder and CEO of Alphabet Larry Page.
Mad Hedge Technology Letter
August 7, 2018
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT TECH NOW),
(AAPL), (FB), (NFLX), (AMZN), (GOOGL), (AMD), (MSFT)
Is it time to dump tech?
Short term, yes - long term, no.
Recently, a series of big tech earnings misses throttled the market tearing into the positive investor sentiment, which was holding up nicely after the early year sell-offs.
Every precipitous and steep drop this year has followed with a mammoth dip buying spree lifting stocks to newer highs.
This is the type of robustness investors rejoice in when talking about the price action of technology stocks.
Not only is the dip buying awe-inspiring, but the lack of hesitation in the dip buying is even more impressive.
Investors have scant time to pick up these precious names before the entry points disappear like an invisibility cloak.
Ditch these stocks at your peril, because the buying queue represents the likes of all the tech behemoths waiting to buy back their own stock, namely Warren Buffett, and the flight to quality brigade that view big cap stocks as a de-facto cash sanctuary.
The anxiety was palpable when Netflix's (NFLX) management badly miscalculated new subscription business after a brilliant earnings report from Microsoft.
Investors got another wrench in their stomach when Facebook (FB) followed Netflix with dismal guidance ripping apart the growth narrative and pivoting toward ameliorating its controversial business model giving investors a fresh dose of uncertainty.
All eyes were planted on Alphabet (GOOGL), Amazon (AMZN), and Apple to provide some calm to the markets.
That's exactly what they did.
Part of the problem now is that expectations are so exaggerated, these companies have little wiggle room to overdeliver.
Industry specialists largely believe tech profits to rise 20.9% YOY this earnings season. The lion's share of the growth has been contained to the headliner names such as Amazon, which has grown like no company has ever grown before.
Estimates show a slide in YOY tech profits for the third-quarter earnings decelerating down to less than 15%. While still good, it's not the 20% growth YOY, and over that it has been fueling tech's rise in increasingly precarious market conditions.
The downshift in profit growth has been anticipated for the past few quarters, as investors thought a trip wire would at some point bring down the entire FANG group.
What we have found out is that not all FANGs are created equal. Some are more equal than others.
The past earnings performance indicated this with Amazon's emphatic top-line growth numbers blowing away the most adamant bear.
Netflix's narrative is still intact, and consolidation is badly needed for a stock that has gone parabolic in 2018.
The short-term capitulation of Facebook and Netflix is proof that large cap tech also has downside risk embedded in its model.
It was starting to seem like down days were never in the cards.
Lowered tech guidance for next quarter will really test the market's resiliency during next earnings season.
If these numbers miss spectacularly, expect the tech sector to give back a good chunk of the year's gains back.
Decelerating profits is never a positive sign. However, after coming from Mt. Everest profit levels, will the markets brush it off and power higher?
There is a lot more juice left in this tech story, and sharp corrections should still be bought.
Tech is becoming quite frothy at these levels and choosing the right tech story will go a long way to sleeping well at night.
It will be excruciatingly difficult for tech companies to impressively beat on the upside next quarter.
However, the secular story and unique earnings growth are treasures compared to other sectors that are getting beaten into submission.
When you delve into the numbers, the success becomes comical.
Apple is the first company to cross the $1 trillion of market cap.
This company prints money to the tune of $11 billion in profits each quarter.
It possesses a devoted userbase, surging software and services segment, and premium grade smartphones allowing Apple to cash in profits to the extent they do.
CEO Tim Cook sent an email to Apple's employees downplaying the milestone, instead saying "financial returns are simply the result of Apple's innovation."
He is completely correct.
The innovation has fed back through spiking profits and boosting sales allowing Apple to make money hand over fist.
This in turn is a big reason why Apple's share price has almost quadrupled with Cook at the helm.
The best and brightest tech companies in 2018 share one unified trait: innovation.
And it is not a surprise that Amazon and Microsoft (MSFT) will be next to join the trillion-dollar club as they boast some of the most innovative staff in the world.
As these two companies pass the trillion-dollar market cap, it will encourage the next tier of flourishing tech companies to make the jump to the trillion-dollar club.
The tech sector is still eating everybody's lunch with every business in the world migrating to their front yard.
Some weakness in the extended tech shares have been a matter of when and not if.
Advanced Micro Devices, Inc. (AMD) is a stock gaining 22.8% just in the month of July underlining the overheated price action of some of these tech names.
I am largely staying away from chip stocks now because trade tensions have bred uncertainty around Chinese chip revenues.
The tech sector has many moving parts and a trade war can hurt one part of tech while others remain unblemished.
Another front of concern is data regulation headlines rearing their ugly heads from time to time.
There are more hurdles for tech stocks going forward, but that does not mean they will get tripped up.
I am in a tech holding pattern until I find an opening to issue my next slew of tech trade alerts.
Year Over Year Profit Growth
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Quote of the Day
"I will always choose a lazy person to do a difficult job because a lazy person will find an easy way to do it." - said founder of Microsoft Corporation Bill Gates.
Mad Hedge Technology Letter
June 26, 2018
Fiat Lux
Featured Trade:
(THE CHIP DILEMMA)
(MU), (NFLX), (AMZN), (NVDA), (AMD), (RHT)
The hawks are circling around 2019 chip guidance and that is bad news for chip equities.
Perusing through recent earnings reports, it's not a surprise that investors are uncertain whether tech can bail the rest of the equity market out of this slow macro malaise.
The deterioration in the macro climate has given added dependence to the tech vanguard with investors piling into large cap tech as a flight to quality ensues.
It helps when the tech sector is at the heart of every and any future business.
Names such as Amazon (AMZN) and Netflix (NFLX) are so far above their 50-day and 100-day moving averages that investors will take this mild sell-off as a healthy sign of consolidation.
This also means that traders will pin down Netflix's and Amazon's 50-day and 100-day moving averages as the line in the sand for technical support.
The equity weakness underscores that not all tech names are created equal, and firms without moats have been the leakiest.
Red Hat, the up-and-coming enterprise cloud company, became the scapegoat for mid-cap cloud companies triggering a massive sell-off dipping 14.23% instigated by weak guidance.
It was one of the first cloud snafus for a few quarters fueling an intense risk off surge in cloud and chip names.
It seems not a day goes by where the administration does not announce another provocative countermeasure to the tit-for-tat trade skirmish being played out at the highest levels of government.
Analysts have been trigger-happy as the few bears out there are incentivized to be the first one to call the peak of the chip market.
Careers are made and lost with these bold calls.
As bad as the Red Hat (RHT) miss was to the tech narrative, Micron (MU) made a big splash on its quarterly earnings report boding well for large cap tech names.
Micron beat estimates and surprised on the upside on guidance.
Micron was the first recommendation of the Mad Hedge Technology Letter at a cheap $41.
To read the first article of the Mad Hedge Fund Technology Letter about Micron, please click here.
The stock rocketed to more than $60 at the end of March and the end of May, each time dragged down by big picture headwinds.
Micron is a great long-term hold and the volatility in the stock is not for everyone.
If you want to avoid mind-numbing volatility, then stay away from chip stocks as the boom-bust nature of this sector has created a paranoia bias among analysts generating stock downgrades.
Cloud stocks are succinct, zeroing in on the few growth metrics that matter.
The guesswork involved in chip stocks is the perfect formula that leads to downgrades, because the silicon is distributed to other companies for end products of which are hard to keep tabs.
Hence, the chips industry has experienced a tidal wave of wrong analysts calls that unfairly taint chip stocks and the price action that follows.
Micron's data center cloud revenue, a huge driver of DRAM chips, were up 33% QOQ.
The cornerstone of Micron's business and the reinvestment into cloud products has made this stock best of breed in the chip sector and a top 3 chip stock of the Mad Hedge Technology Letter.
The only other stocks that compare with this outstanding growth story and that are at the cutting edge of innovation are hands down Nvidia (NVDA) and Advanced Micro Devices (AMD) in that order.
Next year's profit margins are the next conundrum for the chip industry.
The huge sums of money required to stay ahead of competition could crush profitability.
Pricing is currently stable but stagnant.
The additional marginal costs could be the reason for investors to flee.
More specifically DRAM pricing for 2019 is under the microscope and soft numbers could spell doom for a company that extracts 71% of its revenue from DRAM chips.
All these negative whispers come at a time where DRAM chips are lifting Micron shares to the heavens. And if there was no international friction, the share price would be substantially higher than it is today.
As of today, the chip industry is still grappling with DRAM supply shortages causing costs per unit to spike.
When you consider that DRAM demand is so healthy that China is once again investigating large cap chip companies, investors should be jumping for joy.
These probes are unfounded and are brought about because DRAM pricing is one of the main inputs to setting up data centers and self-driving technology among other businesses.
If China is forced to pay exorbitant prices for groundbreaking chips that can only be found at American and Korean companies, it makes producing every digital end product costlier. infuriating Chinese management.
SK Hynix, Samsung, and Micron comprise more than 90% of the DRAM market, to which Chinese companies need unfettered access.
DRAM chips, unlike other hardware components, are traded on a transparent public market and the probe highlights the building anxiety if Chinese companies are priced out of this sector.
China views the price spike phenomenon in chips as entirely favoring foreign companies that lap up the DRAM profits like money falling from the sky.
Micron carves out half its sales from China, but it is untouchable because loads of chips are required to fuel its global technological supremacy initiative, which is being chipped at by the administration.
CEO of Micron Sanjay Mehrotra has continued to brush off the China threat because he knows Chinese firms cannot fabricate its products.
If this ever happened, kiss the preferential DRAM pricing goodbye, because China would flood the market with substitutes, which has happened to various end markets in the digital and non-digital ecosphere.
The investigation could end in some sort of monetary slap on the wrist and could be payback for blasting a massive hole in Chinese telecommunications hardware conglomerate ZTE's business model.
The administration's heavy-handed response to ban Chinese investment in technology is a long-term victory for Micron, SK Hynix, and Samsung, which have the DRAM market cornered.
These three companies will corner the market even more going forward thanks to help from Washington, widening each moat.
China is not short on funds; it is short on technological expertise because a generation of copy and paste youth cannot compete with the best and brightest minds in Silicon Valley.
Not only can it not compete, it cannot lure the best and brightest to the mainland capitulating local innovation standards.
Its only hope was to pay premium prices for emerging American technology and now that spigot has been turned off.
Technology is in its infancy and is in the early innings of a stunning growth trajectory with a one-way ticket to singularity.
There will be zigs and larger zags on the way. If you thought the Chinese could just ignore Micron and buy from the Koreans, you were wrong.
The relentless demand for DRAM chips is wilder than a British soccer hooligan. Cutting off access to one massive avenue of DRAM chips would be a death knell for any scalable production process that relies on heavy shipments of DRAM chips.
Although markets have been haywire lately, these developments are incredibly bullish, unless China can suddenly produce high-quality chips, which won't be anytime soon.
For the short term, try to pick up the best chip names at yearly lows as tech will not stay suppressed forever.
If you want to scale down the risk, park your funds in the best cloud tech names to weather the storm.
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Quote of the Day
"We've had three big ideas at Amazon that we've stuck with for 18 years, and they're the reason we're successful: Put the customer first. Invent. And be patient," - said founder and CEO of Amazon Jeff Bezos.
Global Market Comments
June 25, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR IS THIS A 1999 REPLAY?),
(AAPL), (FB), (NFLX), (AMZN), (GE), (WBT),
(JOIN ME ON THE QUEEN MARY 2 FOR MY JULY 11, 2018 SEMINAR AT SEA),
(JUNE 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SQ), (PANW), (FEYE), (FB), (LRCX), (BABA), (MOMO), (IQ), (BIDU), (AMD), (MSFT), (EDIT), (NTLA), Bitcoin, (FXE), (SPY), (SPX)
Below please find subscribers' Q&A for the Mad Hedge Fund Trader June 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!
Q: What are your thoughts on Square (SQ) as a credit spread or buyout proposition?
A: I love Square long term, and I think there's another double in it. They were a takeover target, but now the stock's getting so expensive it may not be worth it. So, Square is a buy. However, look for a summer sell-off to get into a new position.
Q: The FANGs feel a little bubbly here; will they pull back on a market dip?
A: Yes, my entire portfolio of FANG options is designed to expire on the July 20th expiration. In fact, I may even come out before then as we reach the maximum profit point on these option call spreads. Then look for a summer meltdown to get back in. The FANGs could double from here. If I am wrong they will just continue to go straight up.
Q: Palo Alto Networks (PANW) has a new CEO; are you concerned?
A: Absolutely not, I love Palo Alto networks, as well as the (FEYE) FireEye. It's just a question of getting in at the right price. It's one of the many ballistic stocks in Tech this year that we've been recommending for a long time. Hacking an online theft is never going to go out of style.
Q: Is it time to sell Facebook (FB)?
A: Yes, if you're a trader. No, if you're a long-term investor. There's another double in it. You're going to have natural profit taking on all of these Techs for the short-term, and possibly for the summer, because they've just had enormous runs. If you aren't in the FANGs this year, you basically don't have any performance because almost all of the rest of the market has gone down.
Q: What are your thoughts on Lam Research (LRCX)?
A: The whole chip sector has had two big sell-offs this year because of their China exposure and the trade wars. Expect more to come. China gets 80% of their chips from the U.S. This is normal at the end of a 10-year bull market. It's also normal when a sector transitions from highly cyclical to secular, which is what's happening in the chip sector. Twice the volatility gets you twice the returns.
Q: Would you stay away from Chinese stocks like Alibaba (BABA), Momo Inc.(MOMO), IQ (IQ), and Baidu (BIDU)?
A: I have stayed away because of the trade war fears, and it was the completely wrong thing to do, because they've gone up as much as our Tech stocks, except for the last week. So yes, I would be buying dips on these big Chinese Tech stocks, because they are drinking the same Kool Aid as our Techs, and it's working.
Q: I hear that short selling of volatility is coming back; is that a good thing?
A: Actually, it is a good thing, because it creates buyers on these dips when you had no short sellers left. The entire industry got wiped out in February creating $8 billion in losses. There was no one left to cover those shorts and support the market. Of course, the result was we got a lower low down here because of that. It's always better to have a two-way market to get a real price. Now professionals are sneaking back in on the short side, which is as it should be. This should never have been a retail product.
Q: Why are international markets so disconnected from the U.S.? Many Asian markets are down heavily while the U.S. are up.
A: The U.S. stock market benefits from a rising dollar and rising interest rates, whereas international markets suffer. When you have weak currencies in the emerging markets, people sell their stocks to avoid the currency hit, and that takes the emerging markets down massively. A lot of emerging market companies have their debts denominated in U.S. dollars, so they get killed by a strong greenback. Also, the emerging markets make a lot of money selling goods into China, so when the Chinese economy gets attacked by the U.S. and growth slows, it has the byproduct of attacking all our other allies in Southeast Asia.
Q: Is it a good idea to sell everything for the summer and just de-risk for my portfolio?
A: That's what I'm doing. Summer trading is usually horrible, and now we're going into the summer at close to a high for the year, with a terrible political backdrop and possible economic growth peaking right here. So, yes, it's a good time to sit back, count your money, and maybe even spend some of it on a European vacation.
Q: When do you think the yield curve will invert?
A: In a year, and that is typically when you get a peaking of economic growth and the stock market.
Q: Is the Fed's faster-than-expected desire to raise rates good for equities, or will investors likely sell this news as quantitative tightening continues?
A: Short-term they will buy the market on rising rates, they always do at the early part of an interest rate rising cycle. They sell stocks when you get to the middle or the end of a rate rising cycle.
Q: Do you think large Tech stocks are expensive here?
A: No, I think the Large-Cap Tech stocks can potentially double here. It can take another year to year and a half to do it, and if they don't do it in this cycle they will certainly do it in the next one, after the next recession in the 2020s. So, long term you want to think FANG, FANG, FANG, TECH, TECH, TECH. You really shouldn't have anything else in the long term, except for maybe Biotech, where you can now get in at a multiyear low.
Q: Can I buy a chip company like Advanced Micro Devices (AMD), or should I buy a cloud company, like Microsoft (MSFT)?
A: I would go with the Cloud company. The innovation there is incredible. Cloud is growing like the Internet itself was growing on its own in 1995, and with chip stocks like (AMD), you're going to get much higher volatility, but more gain. So, pick your poison. But I would go with the Cloud plays.
Q: Can we watch the recorded version of this webinar later?
A: Yes, we post the webinar on our website a couple hours later, if you're a paid subscriber.
Q: What about the CRISPR stocks?
A: They are a screaming buy right now, buy Editas Medicine (EDIT) and Intellia Therapeutics (NTLA) on the dip. The paper that triggered the sell-off saying that CRISPR causes cancer is complete BS.
Q: Only 30 million in Bitcoin was stolen in South Korea so will that still have an impact?
A: Yes, but there have been countless other hacks this year and the total loss is well over $500 million. In addition, Bitcoin is now down 70% from its December top so not all is well in cryptocurrency land.
Q: Should we expect any Trade Alerts before August 8?
A: Yes, some of my best trades have been done while only vacation. I once sold short the Euro (FXE) from the back of a camel in Morocco. Another time, I bought the S&P 500 (SPY) while hanging from a cliff face on the Matterhorn. Both of those made good money.
Q: Will the S&P 500 reach new highs before the end of the year?
A: Yes, once you get the election out of the way, that removes a huge amount of uncertainty from the market. If we could end our trade war before then, I think you're looking at another 10-15% in gains from this level by the end of the year. That takes you to an (SPX) of 3,100 by the end of 2018, which was my January 1 prediction.
Q: What does all the heavy mergers and acquisition activity mean for the market?
A: It means fewer stocks are left to trade. Stock shortages leads to higher prices, always, so it is a big market positive this year
Good Luck and Good Trading.
John Thomas
CEO and Publisher
The Diary of a Mad Hedge Fund Trader
