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The Best Tech Stocks to Buy at the Bottom

Tech stocks that are begging to be picked up on the back of the coronavirus pandemic are Netflix (NFLX), Zoom Video Communications (ZM), workplace collaboration service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company.

Their short-term outperformance indicates that these stocks work well during mass pandemics shelving most outdoor activity and commerce.

The basket of 3 stocks has easily beat the S&P 500 since the coronavirus emerged as a threat in mid-January.

Home sitting doesn’t generate a net output of business activity unless that job is digital.

The majority of workers still commute in a physical car only to sit in an office, restaurant, or some other type of self-contained space.

That is the underlying problem that has no solution, and any rate cut by the Fed cannot ultimately solve consumers holed up in their house.

If the companies that could opt to go pure digital do take up the option, the number of remote workers would rise and digital products would be the ultimate beneficiary of this trend.

Companies that promote remote working such as Slack (WORK) and Google Hangouts are in pole position to reap the rewards.

These services include video conferencing software, logistical services, administrative services, network security services, ecommerce and any service that aids in generating digital content like Adobe and its umbrella of assets.

The trend was already transforming American culture, but the virus vigorously pulls forward a trend that was already in overdrive.

Enabling information workers to produce outside the traditional office environment is one of the lynchpins of the Silicon Valley model.

Companies will ultimately realize that spending big bucks on business travel to meet face to face for 30 minutes is probably not an optimal allocation of resources.

Business travel is getting cut with a cleaver such as Amazon.com (AMZN) who are forcing employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.

Other companies will get in on the action by directing their employees to work from home in the coming weeks.

Coronavirus mania has reached the U.S. shores with consumers stocking up on all the essentials at the local Costco.

If this gets worse, there is no solution unless a viable medical solution starts improving the health crisis.

There are still only 7 known fatalities from the coronavirus, all in the state of Washington, and limiting that number is critical to the health of the tech market.

Another company is Okta (OKTA), a leader in authentication security cloud software.

The company’s offering allows employees to use corporate applications on-site and remotely and protecting their access to their digital services is just as important as the work itself.

As consumer spurn movie theaters, concerts, and gyms, the entertainment space will give way to digital entertainment that includes Netflix (NFLX) and Roku (ROKU).

Roku is a great place to hide out in the world where Covid-19 meets daily consumers in the U.S. in a more meaningful way during 2020.

Netflix is a company that has defied gravity this year by bull-rushing its way through the competition and proving there is space for everyone.

The increase in incremental demand for digital content will only help Netflix claim a bigger part of the pie.

We can also lump the videogame industry into this cohort such as Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO).

They have faced serious headwinds from gaming phenomenon Fortnite, but prolonged home sitting will even boost their shares.

The spine of digital services will receive a boost as well from the usual cast of characters such as Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB).

As investors wait for the climax of the coronavirus and the Central Bank has indicated that they are open to more accommodative policy, we could be ripe for more volatility.

Chinese coronavirus cases have started to taper off and if the rest of the world trends in a similar fashion, this virus scare could be in the history books in 2-3 months.

However, the trajectory of the virus is still a massive unknown in the U.S. and winning the health battle is the only panacea to this dilemma.

March 4, 2020/by Mad Hedge Fund Trader

The True Cost of the Coronavirus

Tech Letter

Tech shares are hoping to stage a rebound after the coronavirus-fueled rout that saw the Nasdaq’s 2-day drop by 6.38%, which is its worst since June 2016.

Readers can now pencil in a fresh readjustment to growth expectations of zero to low single digits in tech shares for fiscal year of 2020.

That is why Thursday morning was greeted by another 3% drop at the open - proceed with caution to not get trapped in the proverbial dead cat bounce vortex in the short-term.

A major tech consolidation could take place because let’s get real, the unpredictability is having a major impact on technology companies and uncertainty is a substantial input in heightened risk.

What are the realistic scenarios that are still left on the table?

Tech firms could slash prices, a deflationary element that promotes deteriorating profit margins seen as a net negative to revenue causing companies to miss revenue targets.
Unsold inventory could lead to working capital issues crushing balance sheets for the smaller tech firms.
Loss-making enterprise confront solvency issues if debt repayment hardship ripples through finance departments and could be a serious threat to credit markets as a whole.

Firms trading on the Nasdaq will slash price targets and profit estimates that could uncoil another leg down in the Nasdaq index.

In fact, it has already happened as PayPal (PYPL), Microsoft (MSFT), and Apple (AAPL) issued revenue warnings saying they do not expect to meet their revenue goals because of the coronavirus.

On an operational level, softness is what I see when delving into the semantics of Amazon (AMZN) whose ranking algorithm demotes product sellers who go out of stock.

The coronavirus has crippled supply chains, and to avoid a lack of stock, sellers are raising prices to slow sales, while planning to move production to other countries.

This is on top of the backbreaking supply problems that companies face because of the ill-effects of the trade war.

If the Amazon algorithm punishes the seller, once stock is replenished, they must overspend on advertising to climb back to the top of product searches.

The surveys I have taken out with Amazon sellers in the last few days show a precarious situation where sellers are stretched to the limit relying on numerous uncertain variables that are completely out of their control,

Even if the local government allows Chinese factories to restart, it will be understaffed while workers from other provinces self-quarantine.

The third-party marketplace accounts for more than half of Amazon’s retail sales with a robust base of manufacturers and sellers in China.

Google (GOOGL) and Microsoft are accelerating efforts to shift hardware production to Southeast Asia amid the worsening coronavirus outbreak, opening factories in Vietnam and Thailand as well.

Google is set to begin production of the Pixel 4A smartphone and also plans to manufacture its next-generation flagship smartphone called the Pixel 5 in Vietnam.

Google is also on the verge of building factories in Thailand for "smart home" related products, including voice-activated smart speakers like the Nest Mini.

Google and Microsoft’s plans are a giant shift away from their prior generation-long China manufacturing strategy and the coronavirus has only supported a strategy to remove China as a core manufacturing hub.

It is getting so bad in China that they are evaluating the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam, literally packing up and taking their show on the road.

The have already initiated the process by asking a key sourcing contact to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones.

Data center server production was also rerouted to Taiwan last year.

The coronavirus threat is only speeding up the move into South East Asia and Google and Microsoft hope to avoid the geopolitical risk in the region.

Remember that all of this rejigging of production will add costs and only the biggest can absorb mega hits to the balance sheets.

As for the coronavirus, business is becoming more complicated as the ban on Chinese nationals and flights from China could build barriers to business, and now South Korea has joined the list.

Korea’s Samsung Electronics, the world's largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China.

While there are many moving parts, the average investor needs to wait on optimal entry points.

Japan announced school shutdowns for a month and tech shares have only priced in the coronavirus eventually entering the U.S., but if there are mass shutdowns of American cities and schools, then tech shares will see another stinging sell-off.

The contagion could eventually lead to the Olympics in Tokyo being canceled, high-profile corporate management getting infected, and the Chinese economy being sidelined for most of 2020.

All of these events are highly negative to the global economy which is why potential risks have exploded through the roof in such a short time.

Slinging mud at the wall will not work in times like this, but this does have the makings of a once-in-a-year entry point into tech shares.

February 28, 2020/by Mad Hedge Fund Trader

February 26 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?

A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.

Q: How low will interest rates go after the coronavirus?

A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.

Q: What is the best way to know when to buy the dip?

A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.

Q: Do recent events mean that Boeing (BA) is headed down to 200?

A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.

Q: What does a Bernie Sanders presidency mean for the market?

A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.

Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?

A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.

Q: Can you explain what lower energy prices mean for the global economy?

A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.

Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.

A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.

Q: Was that an Amazon trade or a Google trade?

A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.

Q: Are chips a long term buy at today’s level?

A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.

Q: When will Foxconn reopen, the big iPhone factory in China?

A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.

Q: Are bank stocks a sell because of lower interest rates?

A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.

Q: What about future Fed rate cuts?

A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.

Q: Once your options expire, is it still affected by after-hours trading?

A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.

Q: What’s the worst-case scenario for this correction?

A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.

Good Luck and Good Trading

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

February 28, 2020/by Mad Hedge Fund Trader

Data Tells the Whole Story

Tech Letter

Behavioral trends have a sizable say in which tech companies will outperform the next and a recent report from SimilarWeb offers insight into how much users navigate around the monstrosity known as the internet.

The optimal way to comprehend the trends are from a top-down method by absorbing the divergence between desktop traffic and mobile traffic.

It’s no secret that the last decade delivered consumers a massive leap in mobile phone performance in which tech companies were able to neatly package applications that acted as monetization platforms by offering software and services to the end-user.

Thus, it probably won’t shock you to find out that desktop traffic is down 3.3% since 2017 as users have migrated towards mobile and the trend has only been exaggerated by the younger generations as some have become entirely mobile-only users.

All told, the 30.6% expansion in mobile traffic has penalized tech firms who have neglected mobile-first strategies and one example would be Facebook (FB), who even though has a failing flagship product in Facebook.com, are compensated by Instagram, who is showing wild growth numbers.

The fact that mobile screens are smaller than desktop screens means that users are staying on web pages not as long as they used to – precisely 49 seconds to be exact.

This trend means that content generators are heavily incentivized to frontload content and scrunch it up at the top of the page. This also means that sellers who don’t populate on Google’s first page of search results are practically invisible.

The high stakes of internet commerce are not for the faint of heart and numerous companies have complained about algorithm changes toppling their algorithm-sensitive businesses.

Even using a brute force analysis and investing in companies that are in the top 15 of internet traffic, then the companies that scream undervalued are Twitter (TWTR) and eBay (EBAY).

Twitter is a company I have liked for quite a while and is definitely a buy on the dip candidate.

The asset is the 7^th most visited property on the internet behind the likes of Instagram, Google, Baidu, Wikipedia, Amazon, and Facebook.

This position puts them just ahead of Pornhub.com, Netflix, and Yahoo.

And if you take one step back and analyze traffic from the top 100 sites, traffic is up 8% since 2018 and 11.8% since 2017 averaging 223 billion visits per month.

Rounding out the top 15 is eBay who I believe is undervalued along with Twitter - these two are legitimate buy and holds.

Ebay was the recipient of poor management for many years and they are now addressing these sore points.

Certain content is suitable for mobile such as adult sites, gambling sites, food & drink, pets & animals, health, community & society, sports, and lifestyle.

And just over the last year or two, other categories are gaining traction in mobile that once was dominated by desktop such as news and media, vehicle sites, travel, reference, finance, and others.

Many consumers are becoming more comfortable at doing more on mobile and spending more to the point where people are making large purchases on their iPhones.

The biggest loser by far was news - they are losing traffic in droves.

Traffic at the top 100 media publications was down 5.3% year-over-year from 2018 to 2019, a loss of 4 billion visits, and down by 7% since 2017.

Personally, I believe the state of the digital news industry is in shambles, and Twitter has moved into this space becoming the de facto news source while pushing the relevancy of news sites down the rankings.

Facebook and Twitter are essentially undercutting the news by forcing news companies to insert them between the reader and the news company because they have strategized a position so close to the user’s fingertips.

The negative sentiment in news is broad based on popular news, entertainment news and local news all showing decreases of more than 25%.

Finance and women’s interest news categories are the only ones showing positive traffic growth.

The state of internet traffic growth supports my underlying thesis of the big getting bigger and the subsequent network effect stimulating further synergies that drop straight down to the bottom line.

The top 10 biggest sites racked up a total of 167.5 billion monthly visits in 2019, up 10.7% over 2018 and the remaining 90 largest sites out of the top 100 only increased 2.3%.

This has set the stage for just five gargantuan tech firms to become worth more than $5 trillion or 15.7% of the S&P 500’s market value and 19.7% of the total U.S. stock market’s value.

Now we have real data backing up my iron-clad thesis and these cornerstone beliefs underpins my trading philosophy.

Many of the biggest wield a two-headed monster like Google who has Google.com and YouTube video streaming and Facebook, who have Facebook.com and Instagram.

It doesn’t matter that Facebook has lost 8.6% of traffic over the past year because Instagram compensates for Facebook being a poor product.

And if you are searching for another Facebook growth driver under their umbrella of assets then let’s pinpoint chat app WhatsApp who experienced 74% year-over-year traffic.

Beside the news sites, other outsized losers were Yahoo’s web traffic shrinking by 33.6% and Tumblr, which banned adult sites in 2018, leading to a 33% loss in traffic.

If I can sum up the data, buy the shares of companies who are in the top 15 of internet traffic and be on the lookout for any dip in eBay or Twitter because they are relatively undervalued.

February 14, 2020/by Mad Hedge Fund Trader

Uber's Dark Future

Tech Letter

Autonomous or bankrupt; that is the ultimate fate of Uber (UBER).

In the short-term, Uber is a master at moving the goalposts in order to breathe life in the stock.

CEO of Uber Dara Khosrowshahi can only pray that the Fed will continue to pump cheap money into the market because without artificially low-interest loans, tech firms like Uber would implode.

Is it really time to give Uber the benefit of the doubt?

No more hype, just profits? Is the calculus to profits legitimate?

That's what we call a bubble. Bubbles always burst. Here's the scary part.

Many people are counting on the continued existence of Uber and Lyft to provide "cheap transportation."

Commuters will have to get suddenly unused to it.

There are many companies today that are running the same scheme as Uber in the “gig economy.”

It’s true that management loves to use a lot of flowery language to disguise a lack of profitability.

But as the conditions are ripe for a leg up in tech, the tide rises, and even Uber’s boat rises with it.

I have yet to see even one realistic analysis of how Uber or Lyft is going to become profitable - not even basic math!

I have met a plethora of drivers for both companies, and hope they do well, but there is only so long that one can put lipstick on a pig.

So here we are, Uber in the green everyday because they moved the goalposts yet again and promise us earlier than expected profitability but still losing billions of dollars.

Lyft and Uber have apparently increased revenues somewhat by reducing promotional discounts to riders, but that does not project to even a breakeven point and the unit economics tell me no even if my heart says yes.

The only trick up their sleeve seems to be fare increases, but where is the roadmap detailing this treacherous path?

Once we get to the point in time when Uber is supposed to be profitable, I bet that management will call in another trick play and move the goal posts yet again.

It is quite laughable when so called “tech experts” want Uber to join the ranks of Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc.’s Google (GOOGL) as part of a FANGU acronym.

Reasons for this new bundle is thought to be because of the ability to take advantage of its massive scale while working toward profitability.

Uber is the global ridesharing leader and is becoming the global food delivery leader, but do they really add value?

What if the local government finally got their finger out and built a proper transport system?

They are merely taking advantage of a broken system and passing on the costs of paying drivers to the drivers themselves by designating them as hourly workers.

Are we supposed to celebrate when Uber becomes more “rational?”

Meaning that players have limited their attempts to undercut one another with the sorts of pricing and big discounts that had at one time suggested the business might be a race to the bottom.

Uber projected a lower loss than analysts were expecting for 2020, does less loss mean profits in 2020?

And I do agree that it is encouraging that the company is finally disclosing more data, but shouldn’t they be doing that in the first place?

Love it or hate it, there is a “war” going on between profitability and growth at Uber as the company manages the trade-offs.

Uber had previously talked up that it would become Ebitda profitability by the end of 2021, but Khosrowshahi now forecasts profitability for the fourth quarter of this year.

He says it is possible because Uber initiated a “belt-tightening program” in the last half of 2019, exiting unprofitable ventures and laying off about 1,000 employees.

For instance, Uber sold its food-delivery business in India to a local startup, Zomato, in return for a 9.9% stake in that company.

I do believe that they haven’t done enough to build credibility with investors and the stock’s price action is behaving as we should trust Uber’s management with whatever comes out of their mouths.

The lack of visibility and uncertainty around trends in ridesharing and Eats outside the U.S. continue to be hard to quantify.

So that sounds great! Uber is more serious than ever about becoming profitable and investors have backed them up with the stock flying to the moon.

The trend is your friend and I would suggest readers to get out of the way of this one because you could get trampled on just like the Tesla bears.

And I do support Uber in making steps in the right direction and it also can be said that stocks appreciate the fastest when they transform from a horrible company to a less horrible company.

But there is no way that I am giving Khosrowshahi a pass for Uber’s current situation and no chance I am praising him to the hills.

It is what it is, and Uber is less bad than before, and if they don’t meet their targets, I don’t think investors will believe Khosrowshahi version of a spin doctor forecast anymore.

Uber will rise in the foreseeable future and if they fail to become profitable by 4^th quarter, expect a massive drawdown.

If they succeed, expect a vigorous wave of new players to buy into Uber shares.

The stakes have never been higher for Uber and Khosrowshahi.

February 12, 2020/by Mad Hedge Fund Trader

Learn More About Me Than You Probably Want to Know

Diary, Newsletter

As you may imagine, the most interesting man in the world is impossible to shop for when it comes to Christmas and birthdays.

So, it was no surprise when I opened a box and found a DNA testing kit from 23 and Me. So, I spit into a small test tube to humor the kids, mailed it off, and forgot about it.

I have long been a keeper of the Thomas family history and legends, so it would be interesting to learn which were true and which were myths.

A month later, what I discovered was amazing.

For a start, I am related to Louis the 16^th, the last Bourbon king of France who was beheaded after the 1789 revolution.

I am a direct descendant from Otzi the Iceman who is 5,000 years old and was recently discovered frozen in an Alpine glacier. He currently resides in mummified form in an Italian museum.

Oh, one more. The reason I don’t have any hair on my back is that I carry 346 gene fragments that I inherited directly from a Neanderthal. Yes, I am part caveman, although past girlfriends suspected as much.

There were other conclusions.

I have a higher than average probability of getting prostate cancer, advanced macular degeneration (my mother had it), celiac disease, and melanoma.

The service also offered to introduce me to 1,107 close relatives around the world who I didn’t know, mostly in New York, California, and Florida.

The French connection I already knew about. During the 16^th century, my ancestors rebelled against the French kings over the non-payment of taxes and were exiled to Louisiana. Fleeing a malaria epidemic, they moved up the Mississippi River to St. Louis and stayed there for 200 years. When gold was discovered in California in 1849, they joined a wagon train west. We have been here ever since.

I am half Italian and have birth certificates going back to 1800 to prove it. But 23 and Me says that I am only 40.7% Italian (see table below). It turns out that your genes show not only where you came from, but also who invaded your home country since the beginning of time.

In Italy’s case that would include the ancient Greeks, Vikings, Arabs, the Normans, French, Germans, and the Spanish, thus making up my other 9.3%. Your genes also reflect the slaves your ancestors owned, for obvious reasons, as well as many of the servants who may have worked for them.

It gets better.

All modern humans are decended from a single primordial “Eve” who lived in Eastern Africa 180,000 years ago. Of the thousands of homo sapiens who probably lived at that time, the genes of no other human made it into the modern age. We are all decended from a single “Adam” who lived 275,000 years ago. Obviously, the two never met, debunking some modern conventions.

Around 53,000 years ago, my intrepid ancestors cross the Red Sea to a lush jungle in the Sinai Penninsula probably pursuing abundant game. 53,000 years ago, they moved on the vast grasslands of the Cental Asian Steppes. As the last Ice Age retreated, they moved into the warmer climes of South Europe. We have been there ever since.

23 and Me was founded in 2006 by Anne Wojcicki, wife of Google founder Sergei Brin. It is owned today by her and a few other partners. Its name is based on the fact that humans' entire DNA code is found on 23 chromosomes.

23 and Me and other competitors like Ancestry.com, MyHeritage, and Living DNA have sparked a DNA boom that has led to once unimaged economic and social consequences. DNA promises to be for the 21^st century what electricity was to the 20^th century. The investment consequences are amazing.

Talk about unintended consequences with a turbocharger.

A common ancestor going back to the early 1800s enabled Sacramento police to capture the Golden State killer. Unsolved for 40 years, it took a week for them to find him after a DNA sample was sent to a DNA database.

Thirty and 40-year cold cases are now being solved on a weekly basis. Long ago kidnapped children are being reunited with parents after decades of separation.

California just froze all executions. That’s because DNA evidence showed that approximately 30% of all capital case convictions were of innocent men. That was enough for me to change my own view on the death penalty. The error rate was just too high. Dozens of men around the country have been freed after new DNA evidence surfaced, some after serving 30 years or more in prison.

23 and Me had some medical advice for me as well. They strongly recommended that I get tested for diabetes and high blood pressure as these maladies are rife among my ancestors. They even name the specific guilty gene and haploid group.

This explains why major technology companies, like Amazon (AMZN) and Apple (AAPL), are pouring billions of dollars into genetic research.

I have long had a personal connection with DNA research. I worked on the team that sequenced the first ever string of DNA at UCLA in 1974. It was groundbreaking work. We obtained our raw DNA from Dr. James Watson of Harvard who, along with Francis Crick, was the first to discover its three-dimensional structure. As for my UCLA professor, Dr. Winston Salser, he went on to found Amgen (AMGN) in 1980 and became a billionaire.

The developments that are taking place today then seemed to us like science fiction that was hundreds of years into the future. To see the paper created by this work, please click here.

As research into DNA advances, it is about to pervade every aspect of our lives. Do you have a high probability of getting a disease that costs a million dollars to cure and is counting on getting health insurance? Think again. That may well bring forward single-payer national healthcare for the US, as only the government could absorb that kind of liability.

And if you can only hang on a few years, you might live forever. That’s when DNA-based monoclonal antibodies and gene editing are about to cure all major human diseases. DNA is about to become central to your physical health and your financial health as well.

To learn more about 23 and Me please visit their website here.

Maybe the next time I visit the Versaille Palace outside of Paris, I should ask for a set of keys now that I’m a relative? Unfortunately, it’s much more likely that I’ll get the keys to my Neanderthal ancestor’s cave.

February 12, 2020/by Mad Hedge Fund Trader

Can't Hold Down Amazon

Tech Letter

The recent Chinese pandemic over the coronavirus is overshadowing a sensational start to tech earnings.

The big have only gotten bigger!

Apple, Microsoft, and now Amazon and Founder Jeff Bezos have clearly tweaked the business into a well-oiled machine.

I won’t lie – expectations were a little shaky going into the earnings’ report because of expense worries on turning the 2-day free shipping for Amazon Prime members into a 1-day affair.

The narrative was whether Amazon could deliver enhancements that could overcome the high cost of making Amazon Prime better.

It’s not cheap to make the logistical improvements in the warehouses and transportation functions.

A lot of money has been poured into air cargo transport efficiency and last-mile developments as well.

Profitability was supposed to bear the brunt of the expense surge, but just take a peek at EPS performance of $6.47 per share vs. expectations of $4.03 per share, and rejoice in relief that expense worries were overblown.

The only conclusion that I can make is that the spoils from investments into logistics have outweighed the costs of the investments.

In total, revenue expanded 21% to $87.44 billion for the quarter which is a robust growth trajectory for a company as gargantuan as Amazon.

Amazon unleashed the head turner metric this time around too sharing that Amazon already has over 150 million Amazon Prime members.

That is almost the equivalent of half of the U.S. population paying Amazon $119 per year.

The higher logistic costs were deemed necessary to stay in front of the rest and expectedly ballooning costs showed up in the earnings report with shipping expenses up 43% year over year to $12.9 billion.

Other segments of the business have been just as prolific as Kansas City Chief’s quarterback Patrick Mahomes.

Streaming and subscriptions pulled in a massive $5.24 billion for the quarter, up 32% from the year-ago period.

Amazon’s cloud business AWS was up 19% to almost $10 billion last quarter.

The 19% represents a significant slowdown from the 35% they grew during the 3^rd quarter of last year but still brings in the lion's share of the profits.

Are there any other dark horse growth drivers in Amazon’s arsenal?

Certainly, Amazon’s advertising segment can be pigeonholed as the rising star and generated $4.8 billion in revenue during the quarter, a 41% increase from the year-ago period.

Amazon is also bullish on the Amazon’s “stores,” allowing the company to customize and curate a multipage digital storefront.

Stores are getting a refresh and the company has added features like shoppable images and the ability to schedule updates like new releases or seasonal changes.

Other advertising tools like the ability for brands to create posts, which consumers can view to discover products and brands through a curated feed, will help the company become an advertising juggernaut.

The company launched “Posts” in beta last year which shows that Amazon plans to double down in marketing.

The marketing space serves as a critical area for incremental growth potential and profitability flow-through.

This is because the marketing space is the largest and least penetrated total addressable market, ahead of retail, cloud, and business-to-business segments.

Amazon is a sure-fire buy and hold tech company because it simply is the second-best tech company behind Microsoft.

There will also be opportunities to trade this short-term from the long side, but the volatility might turn off some investors.

February 3, 2020/by Mad Hedge Fund Trader

The Hollow Victory for Tech in the China Trade Deal

Tech Letter

The Davos World Economic Forum is the optimal place to get a snapshot of the state of the American technology sector and apply its underpinnings to an overall trading strategy for 2020.

Stepping back, one clear theme is the lasting effects of the trade war and how that will manifest itself in the broader tech sector.

We got some serious sound bites from CEO of Microsoft Satya Nadella at Davos who is convinced that mutual economic saber-rattling between the US and China will show up in higher costs because of the misallocation of resources.

The most critical point of contention is the development in the semiconductor space as we move into the 5G world and this $470 billion industry which realizes cost savings from scaling by global supply is splintering off as we speak into two separate industries.

This just translates into higher costs to source components for your Microsoft Surface laptop or your Apple Ear Buds.

The follow-through effect is ultimately bludgeoning global growth rates and tech intermediaries will be forced to pick up the extra tab or face the looming decision to pass costs on to the consumer.

As we move forward, the administration is considering more limits to US semiconductor companies’ access to the Chinese consumer market.

The scaremongering fueled by the rise and threat of Huawei has reached fever pitch.

Remember that even with the aggression of the American administration hoping to cap Huawei’s revenue explosion, Huawei still managed to grow sales 18% last year to $122 billion.

I can tell you that if the U.S. administration came after the Mad Hedge Technology Letter guns blazing, we wouldn’t be sitting here growing 18% annually!

The U.S. administration hasn’t stopped at Huawei and is putting in shifts attempting to convince other nations to avoid using Chinese infrastructure equipment for the 5G revolution.

The “Phase One” of the trade agreement is largely seen as a moot point in the technology community and in some cases can be argued as a net negative to component makers whose access to the local Chinese market has narrowed.

The agreement signed also delivered no meaningful protection to intellectual property for US technology companies working with China which was largely viewed as the main catalyst provoking a geopolitical fight.

The trade war has sped up the bifurcation of internets, better known as “splinternet,” and I believe that sometime in the near future, you will need to download Chinese software and platforms to function inside of China.

Much of these misunderstandings stem from the lack of trust that has accumulated between the two parties.

The American tech sector and Wall Street have indirectly subsidized China’s technological rise to this point and now they must go head-to-head in every future technology such as artificial intelligence, 5G, fintech, augmented reality, and virtual reality.

This appears to be the new normal - a frosty and adversarial tech relationship.

There is now zero good will between each other.

The trust of tech on American shores could almost be ironically argued that it is worse than the trust level with China.

Edelman’s 20th annual trust barometer surveyed more than 34,000 adult respondents in 38 markets around the world.

It found that 61% of participants said the pace of change in technology is too fast and government does not fully understand emerging technologies enough to regulate them efficiently.

Trust in tech from 2019 to 2020 declined the most significantly in France, Canada, Italy, Russia, Singapore, the U.S. and Australia.

Much of the narrative has been about the domination of American tech by a handful of actors that has seen American companies go up against foreign governments.

France and America recently announced a temporary truce after the French President Emmanuel Macron reached out by phone to President Trump hoping to end the threat of tariffs while they work out a broader accord on digital taxation.

The French leader agreed to postpone until the end of 2020 a tax that France levied on big tech companies last year and in turn, the U.S. will delay the counter-tariffs that were in the works set to be levied on the French.

And it’s not just the French.

India has taken heed from the brooding trouble between the encroachment on sovereignty and American tech giants by adopting an aggressive stance towards Amazon.

Amazon CEO Jeff Bezos' lowlight of a recent India work trip came in the form of being snubbed by the Indian government.

India’s commerce minister Piyush Goyal said, “It’s not as if they (Amazon) are doing a great favor to India when they invest a billion dollars.”

He called Amazon a capital guzzler equating its mounting losses up to “predatory pricing or some unfair trade practices.”

India is on the verge of turning protectionist on foreign tech and this flies in the face of the tech atmosphere even just a few years ago.

Governments have come to realize that America’s FANGs are too dominant and entrenched often resulting in a net negative to the local populace.

More often than not, American tech found ways of rerouting local revenue to coffers of a few billionaires while paying zero local tax.

The easy money has been made and now the Tim Cooks and Sundar Pichais of the world will have to fight tooth and nail with not only the U.S. antitrust regulators, but foreign governments.

This is why a handful of tech companies this dominant has been the outsized winners over the past generation as their share prices have gone from the lower left to the upper right but now command minimal consumer trust.

The ultimate Davos message is that big tech continues to grind higher, but alarm bells have started to ring.

There’s only so much friction they can handle before investors pull the rug.

January 22, 2020/by Mad Hedge Fund Trader

The Trade Alert Drought Explained

Tech Letter

Why has there been a dearth of Mad Hedge Tech trade alerts to start the year?

Let me explain.

Love it or hate it – earnings' season is about to kick off.

And now, this is the part where it starts to get ugly with consensus of a 2% year-over-year decline in fourth-quarter S&P 500 earnings.

Banks are expected to be a rare bright spot and JPMorgan (JPM) delivered us stable results as one of the first to report.

The unfortunate part of the equation is that a lot has to go right for tech shares to go unimpeded for the rest of the year.

What we have seen in the first 2 weeks of the year is a FOMO (fear-of-missing-out) environment in which valuations have lurched forward to 20 times forward earnings.

Tech is overwhelmingly carrying the load and I have banged on the drums about this thread advising readers to be acutely aware of a heavy positive bias towards the FANGs in 2020.

Well, that is already panning out in the first two weeks.

Examples are widespread with Facebook (FB) up over 8% and Apple (AAPL) already topping 6% to start the year.

It would be farfetched to believe that the tech sector can keep pilfering itself higher in the face of negative earnings growth.

However, behind the scenes, relations between China and America are improving, the threat of war with Iran is subsiding, and the Fed continues strong support tempering down risk to tech shares.

The situation we find ourselves in is that of an expensive tech sector that will again guide down on upcoming earnings’ reports telegraphing softness moving into the middle part of the year.

The ensuing post-earnings sell-off in specific software stocks will offer optimal short-term entry points.

The current risk-reward of chasing FANGs at these levels is unfavorable.

Another glaring example of the FANG outperformance is Alphabet who rose 26% last year.

They are on the brink of joining the $1 trillion club that Apple and Microsoft (MSFT) have joined.

Its market value currently sits idling at $985 billion and its surge towards the vaunted trillion-dollar mark is more of a case of when than if.

Alphabet (GOOGL), more or less, still expands at the same rate of low-20% annually that it did 10 years ago.

Sales have ballooned to $160 billion annually and they sit at the forefront of every cutting-edge sub-sector in technology from artificial intelligence, autonomous driving, and augmented reality.

The engine that drives Google is still its core advertising business and strategic premium acquisitions like YouTube and penetration into other fast-growing areas such as cloud computing.

It has rounded out into a broad-based revenue accumulator.

Apple was the first public company to surpass a $1 trillion market cap and ended the year up 86% in 2019, and it has only gone up since then currently checking in at a $1.36 trillion market cap.

Microsoft followed Apple, hitting the $1 trillion mark during the first half of 2019, and it is now worth $1.23 trillion.

Amazon fell back after surging past the $1 trillion mark but inevitably will achieve it on the next heave up.

Amazon shares have been quickly heating up since its capitulation from $2,000 in July 2019 and round out the group of overperforming tech behemoths.

Although the rush into big-cap tech stocks in the first two weeks has been a bullish signal, it still doesn’t marry up with the lack of earnings growth in the overall tech sector.

Companies beating meager expectations will experience strong share appreciation although not at the pace of last year and will still serve investors pockets of overperformance.

We will find our spots to trade shortly, but better to keep our gunpowder dry at the moment.

January 15, 2020/by Mad Hedge Fund Trader

The Big Tech Trends of 2020

Tech Letter

The year is almost in the rear-view mirror – I’ll make a few meaningful predictions for technology in 2020.

Although iPhones won’t go obsolete in 2020, next year is shaping up as another force multiplier in the world of technology.

Or is it?

A trope that I would like to tap on is the severe shortage of innovation going on in most corners of Silicon Valley.

Many of the incumbents are busy milking the current status quo for what it’s worth instead of targeting the next big development.

Your home screen will still look the same and you will still use the 25 most popular apps

This almost definitely means the interface that we access as a point of contact will most likely be unchanged from 2019.

It will be almost impossible for outside apps to break into the top 25 app rankings and this is why the notorious “first-mover advantage” has legs.

The likes of Google search, Gmail, Instagram, Uber, Amazon, Netflix and the original list of tech disruptors will become even more entrenched, barring the single inclusion of Chinese short-form video app TikTok.

The FANGs are just too good at acquiring, cloning or bludgeoning upstart competitors.

It’s the worst time to be a consumer software company that hasn’t made it yet.

Advertising will find itself migrating to smart speakers

Amazon and Google have blazed a trail in the smart speaker market but ultimately, what’s the point of these devices in homes?

Exaggerated discounting means hardware profits have been sacrificed, and the lack of paid services means that they aren’t pocketing a juicy 30% cut of revenue either.

These companies might come to the conclusion that the only way to move the needle on smart speaker revenue is to infuse a major dose of audio ads to the user.

So if you are sick to your stomach of digital ads like I am, you might consider dumping your smart speaker before you are forced to sit through boring ads.

Amazon’s Alexa will lose momentum

In a way to triple down on Alexa, Amazon has installed it into everything, and this is alienating a broad swath of customers.

Not everyone is on the Amazon Alexa bandwagon, and some would like Amazon’s best in class products and services without involving a voice assistant.

Privacy suspicion has gone through the roof and smart speakers like Alexa could get caught up in the personal data malaise dampening demand to buy one.

Your voice is yours and 2020 could be the first stage of a full onslaught of cyber-attacks on audio data.

Don’t let hackers steal your oral secrets!

Cyber Warfare and AI

Hackers have long been experimenting with automatic tools for breaking into and exploiting corporate and government networks, and AI is about to supercharge this trend.

If you don’t know about deep fakes, then that is another thorny issue that could turn into an existential threat to the internet.

Not only could 2020 be the year of the cloud, but it could turn into the year of cloud security.

That is how bad things could get.

A survey conducted by Cyber Security Hub showed 85% of executives view the weaponization of AI as the largest cybersecurity threat.

On the other side of the coin, these same companies will need to use AI to defend themselves as fears of data breaches grow.

AI tools can be used to detect fraud such as business email compromise, in which companies are sent multiple invoices for the same work or workers duped into releasing financial information.

As AI defenses protect themselves, the sophistication of AI attacks grows.

It really is an arms race at this point with governments and private business having skin in the game.

Facebook gets out of the hardware game because consumers don’t trust them

Remember Facebook Portal – it’s a copy of the Amazon Echo Show.

The only motive to build this was to bring it to market and expect Facebook users to adopt it which backfired.

Facebook will find it difficult convincing users to use more than Facebook and Instagram software apps.

Don’t wait on Facebook to roll out some other ridiculous contraption aimed at stealing more of your data because there probably won’t be another one.

This again goes back to the lack of innovation permeating around Silicon Valley, Facebook’s only new ideas is to copy other products or try to financially destroy them.

China continues to out-innovate Silicon Valley.

The rise of short-form video app TikTok is cementing a perception of China as the home of modern tech innovation, partly because Silicon Valley has become stale and stagnated.

China has also bolted ahead in 5G technology, fintech payment technology, unmanned aerial vehicle (UAV) and is giving America a run for their money in AI.

China’s semiconductor industry is rapidly catching up to the US after billions of government subsidies pouring into the sector.

Silicon Valley needs to decide whether they want to live in a tech world dominated by Chinese rules or not.

Augmented Reality: Is this finally the real deal?

Augmented reality (AR) is still mainly used for games but could develop some meaningful applications in 2020.

Virtual Reality (VR) and AR will play a big role in sectors such as education, navigation systems, advertising and communication, but the hype hasn’t caught up with reality.

One use case is training programs that companies use to prepare new workers.

However, AR applications aren't universally easy or cheap to deploy and lack sophistication.

AR adoption will see a slight uptick, but I doubt it will captivate the public in 2020 and it will most likely be another year on the backburner.

Apple’s New Projects

Apple has two audacious experimental projects: a pair of augmented-reality glasses and a self-driving car.

The car, for now, has no existence outside of a few offices in California and some hires from companies like Tesla.

And, at the earliest, the glasses won’t hit shelves until 2021,

The car is likely to fizzle out and Apple will be forced to double down on digital content and services to keep shareholders happy which is typical Tim Cook.

The 5G Puzzle

Semiconductor stocks have been on fire as investors front-run the revenue windfall of 5G and the applications that will result in profits.

Select American cities will onboard 5G throughout 2020, but we won’t see widespread adoption until later in the year.

5G promises speeds that are five times faster than peak-performance 4G capabilities, allowing users to download movies in five seconds.

With pitiful penetration rates at the start, the technology will need to grow into what it could become.

The force multiplier that is 5G and the high speeds it will grace us with probably won’t materialize in full effect until 2021.

Each of the nine tech developments in 2020 I listed above negatively affects US tech margins and that will follow through to management’s commentary in next year’s earnings and guidance.

Tech shares are closer to the peak and the bull market in tech is closer to the end.

Innovation has ground to a halt or is at best incremental; companies need to stop cloning each other to death to grab the extra penny in front of the steamroller.

Profit margins will be crushed because of heightened regulation, transparency issues, monitoring costs, and the unfortunate weaponizing of tech has been a brutal social cost to society.

Tech is saturated and waiting for a fresh catalyst to take it to the next level, but that being said, tech earnings will still be in better shape than most other industries and have revenue growth that many companies would cherish.

December 20, 2019/by Mad Hedge Fund Trader

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