Global Market Comments
August 12, 2022
Fiat Lux
Featured Trade:
(AUGUST 10 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (TSLA), (GOOGL), (ROM), (FCX), (AMZN), (AAPL), (MSFT), (MU), (ARKK), (TSLA), (F), (GM)
Posts
Below please find subscribers’ Q&A for the August 10 Mad HedgeFund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: What are your yearend targets for Nvidia (NVDA), Tesla (TSLA), and Google (GOOGL)?
A: Higher for all but I can’t give you the exact date and time. Google has a special situation in that they might be hit with an anti-trust suit in September, so that could cap things. For Tesla, we have the Twitter overhang, and Elon Musk sold $6.9 billion worth of stock last week to fund that. And then Nvidia could have another dive, depending on how much of a glut in chips there is, but I'd be buying any chips from here on. By the way, if Tesla breaks the old high of $1,200, which I expect by the end of the year, we could get to $2,000 very rapidly on yet another massive short squeeze against the permanent Tesla haters, who’ve already been completely decimated by the last 60% move.
Q: How would I play Amazon (AMZN) going forward?
A: Buy the dips. I think they’re going to be the world's dominant retailer going forward and they’re doing the right things and going crazy.
Q: Which sectors?
A: Well, for ETFs, you can look at the ProShares Ultra Technology ETF (ROM). That’s 2x leveraged long tech. But only do that on dips because the volatility of the ROM is enormous since it’s 2x in the most volatile sector. Also, I think we can start taking a look at banks again, what with interest rates rising and a recovery on the horizon, banks could come back into play after sitting at the bottom for the last 3 or 4 months.
Q: I’m doing a LEAP on Freeport-McMoRan Inc. (FCX); should I go for January 2025 or 2024?
A: I’d go longer dated—that way you can get a bigger move and will almost certainly be on a full-on economic recovery, and massive electrification of the auto fleet by 2025, thanks to the climate bill that will be passed Friday. That means the demand for copper is about to go absolutely through the roof—I'm looking for (FCX) to go from $30 to $100 in the next 3 years.
Q: Thoughts on Disney (DIS)?
A: No one can believe how cheap Disney has gotten, it’s been a disaster. Obviously (DIS) took it on the nose with the recession and some of the parks still have limitations on the number of visitors. It should do better and I'm amazed it got this cheap. I would expect a move to the $200 level by the end of next year.
Q: What LEAPS do you recommend for January 2023?
A: Well it’s not really a LEAPS if you’re only going out 6 months; that’s just a long-dated call spread. LEAPS are usually a year or longer. I’d say pretty much anything in any sector will be higher except maybe energy by 2023. We’re not at LEAPS territory yet, but we’re getting close. The next major selloff I might start putting LEAPS out there.
Q: Is the Consumer Price Index (CPI) dropping from 9.1% YOY down to 8.5% meaning the top is in and deflation’s over?
A: I think so, because there are a lot of price declines that were not reflected in this July number that have yet to come. I'm talking about wheat, lumber, and energy. So yes, we could get another big move down in August, and if that’s the case, the Fed may only raise by 50 basis points in September. That's the hope. The things that aren’t going to go down are rental costs and labor costs. We may never get back to the inflation rate that we had 2 years ago of 2%. The long-term average for the last 100 years is 3% and certainly a move down to 4% is possible this year (and would be very welcome by the stock market as part of my long-term bull case).
Q: What are your thoughts on Elon Musk selling $6.9 billion worth of Tesla shares?
A: It’s amazing he sold that amount of stock last week and only went down $100. It does remove a big overhang on the stock and paves the way on a much bigger move up later in the year. By selling the $9 in January and $7 now, that’s $16 billion he sold this year. He could almost pay for Twitter with a little outside bank financing.
Q: How far above current prices should I place a LEAPS?
A: It depends on where the market is; if we’re having a cataclysmic selloff down 1,000-point days, then you can have the luxury of going 10%, 20%, or even 30% out-of-the-money; and that of course gets you a 100%, 200% and 300% returns. If we have a higher low, then you may want to go lower risk and go at the money, that might get you a 50% return. On LEAPS that are only slightly in-the-money, even those generate 25% returns one year out with the most conservative possible position.
Q: Would you load the boat on dips?
A: I would but remember: a dip is not one hour or on down days, it’s like half of the recent gain, which would be down 1,500 Dow points, or all of the recent gain, which would be down 3,000 points. So be careful that you don’t get too aggressive just because you’ve gotten bullish.
Q: Do you think the semiconductor chips will lead the tech recovery in the second half of the year?
A: I do, but we do have an inventory problem to digest first, and we have to figure out the implications of the CHIPS act that was signed this week which makes available a couple hundred billion dollars to build new chip factories in the US. Chip companies are particularly challenged right now because they have to provision for a recession which is going to cut chip demand, and they also have to provision for a potential oversupply created by the CHIPS Act. Remember that for the industry, creating safe supplies of chips means more lots of chips at lower prices for consumers. Great for us, great for the auto industry, not so great for chip companies. You have to be careful. On the other hand, on the bullish side, chips are being designed into more products faster and in larger numbers than ever before. This is the main reason why most investors underestimated the chip industry for the last 10 years. That also is a factor that’s accelerating. The average car now has 100 chips. 20 years ago they had maybe 10 chips, and 30 years ago they had none.
Q: Will the eventual big win of Ukraine against Russia result in inflation going back to 2%?
A: No, but it will result in it going back to 3% or 4%, which we could hit next year. You get oil back down below $50, gasoline down to $2/gallon, and the world's food supply opened up once again, and inflation will disappear in a heartbeat.
Q: What’s the deal with the 1% buyback tax in the inflation reduction package?
A: Well they had to get revenue somewhere, and 1% is so small it won’t inhibit anyone from buying back stock, especially if it makes the CEO a billionaire. That is a great incentive—even if you had a 50% tax, they would still be doing buybacks for things like Apple (AAPL), Microsoft (MSFT), and the other buyback players.
Q: What will high energy prices do to crypto?
A: It might actually make it go up because the cost of electricity feeds straight into the manufacturing/programming cost of crypto. And if you notice, Bitcoin bottomed at $17,000 per bitcoin. But that's exactly where the new mining cost is. Just like all of the commodities, when you hit cost of production, the supply suddenly dries up because nobody can make any money at it.
Q: Will US homebuyers buy the dip since mortgage rates have come down?
A: Yes, and we’re already seeing that in the statistics. The fact is we still have a huge housing shortage in the United States. You don’t get big price falls when you have a shortage of supply, and you have 10 million millennials who still need to trade up from their one and two-bedroom apartments all over the country. So, things may stall a bit in home buying, but I don’t think you get very big price drops.
Q: Do you think the US consumer is strong?
A: They never stopped being strong, even throughout recession fears. Never, ever bet against the propensity of Americans to spend money, both individuals and governments.
Q: What are the chances the US goes to war with China over Taiwan?
A: Zero. # 1 China doesn't have ships, #2 we have the 7th Fleet there, and #3 they have been threatening to invade Taiwan for 70 years and done nothing. The Taiwanese are used to this. Though there is the other side issue that most of the other private companies in Taiwan are already owned by the Chinese and have Chinese capital, so it’s unlikely they want to blow up their own facilities. So, the answer is no.
Q: What is the Long term outlook for gold and silver?
A: It’s been dead for so long that I’m not inclined to rush into gold. But you have to expect that when you get a recovery in the commodity boom, it’s going drag gold and silver along with it. I see upsides for both of these, especially silver.
Q: Should student loans be paid off by the federal government?
A: I think yes, because as long as these people have massive debts, they cannot borrow and they cannot enter the US economy as consumers. If you forgive all student debt, you unleash 10 million new customers onto the market who can now borrow, get credit cards, and take out home mortgages. As long as they have massive debts, they can’t do that.
Q: With all the major companies in the world moving to EVs, where are we going to get these commodities?
A: We’re not. Tesla (TSLA) has already locked up major supplies of commodities over the next 10 years, and everyone else will have to pay more money. Some of the weaker producers like Ford (F) and General Motors (GM), are being restrained on shortages of not just chips but also basic commodities like chromium for stainless steel. They’re going to have a real problem competing with Tesla, which is why you own Tesla.
Q: What do you think about the unprofitable tech companies like those in the ARK ETFs (ARKK)?
A: I would avoid those for now. Why take on additional risk buying a non-earning company when the highest quality companies are selling at the cheapest valuations in ten years? Maybe when the big companies like Apple get overvalued—go up another 100% — then you might look at the smaller companies if they’re still cheap. But the risk/reward on the nonearners right now is no good, while it’s fantastic in the large tech companies. That is my opinion and I’m sticking to it.
Q: It seems Russia’s strategy has mirrored those of the Czars.
A: Actually, what they’re doing is repeating their WWII strategy, which worked in 1945— not so much in 2022; and that was massive artillery barrages against retreating Germans. Except this time Ukrainians are not retreating and have far more modern weapons than the Russians.
Q: Would you buy Micron Technology (MU) on bigger dips?
A: Absolutely yes; but again, wait for the down days. You have plenty of volatility in chip stocks, no need to pay up or chase higher prices.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
August 8, 2022
Fiat Lux
Featured Trade:
(DO THE ROOMBA)
(IRBT), (AMZN), (GOOGL)
You thought you could close the front door and be at peace – wrong.
You thought you could hide under the bed – wrong.
How about speaking freely in your house – triple wrong.
Whether it’s Google Nest Doorbell videoing your front porch or Amazon’s Alexa recording every sound from your kitchen, the data serpents are here to slurp up consumer personal data at a level we have never seen before.
Then when we thought it could go no further, bam!
Hit with another “Device” tracking our whereabouts and that sums up Amazon.com (AMZN) gobbling up a maker of robot vacuum cleaners IRobot Corp (IRBT).
Perhaps CEO of Amazon Andy Jassy can figure out how to train the robot vacuum cleaner to drop individual packages from the front door to the bedroom.
We need this type of innovation in Silicon Valley!
How would that happen?
Well, it basically acquired a mapping company. To be more precise: a company that can make maps of your home.
The company announced a $1.7 billion deal on Friday for iRobot Corp., the maker of the Roomba vacuum cleaner. And yes, Amazon will make money from selling those gadgets. But the real value exists in those robots’ ability to map your house.
This reinforces that data is the new oil.
Monopolizing the smart home is the holy grail for Amazon.
Its Echo smart speakers still outsell those from rivals Apple and Google, with an estimated 9.9 million units sold in the three months through March.
It’s followed that up with a $1 billion deal for the video doorbell-maker Ring in 2018, and the wifi company Eero a year later.
But you still can’t readily buy the Astro, Amazon’s household robot that was revealed with some fanfare last year, is still only available in limited quantities. That, too, seemed at least partly an effort to map the inside of your property, a task that will now fall to iRobot. The Bedford, Mass.-based company’s most recent products include a technology it calls Smart Maps, though customers can “opt” out of sharing the data. Amazon will get your data – mark my words they will some way and somehow.
What’s more, the acquisition looks like peanuts for eGiant which had $61 billion of cash at the end of June. The $1.7 billion deal represents a 22% premium to iRobot’s share price before the deal was announced. Less than a year ago, iRobot was valued at $2.5 billion. And it won’t take much to cover the target’s cost of capital. Its predicted profit may only be about $78 million next year, but it also has sales, marketing, and administrative costs of $389 million, a number that Amazon can surely bring down by pumping the products through its existing sales channels.
This deal represents a drop in the bucket for cash-rich Amazon.
As geopolitics mixes with stagflation elements, it’s easy to see how certain companies fall through the cracks.
Amazon is ready to scoop every smart home company and paying 22% premium for a $1.7 billion valuation is a chump change for AMZN.
As dip buyers come out of the woodwork, it’s hard to think that the bottom isn’t in.
The risk rewards favor tech stocks to the upside in what Fed officials have claimed is a “strong” economy and one that is certainly not in recession at all.
Buy every substantial dip in every one of your favorite stocks from here on out. You might be risking 10%-20% over the short term but gain 100% on a three-year view.
Global Market Comments
August 8, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BOTTOM IS IN),
(AAPL), (AMZN), (GOOGL), (MSFT), (TSLA)
When the train conductor says “Run”, it’s generally not a good sign.
That’s what happened to me when I had to make a crucial transfer in Visp, Switzerland last month. I’m fine with running. With 200 pounds of luggage? Not so much.
A lot of fund managers started running from their cash positions last week. Tesla (TSLA) shorts ran even faster.
There is a rising sense of panic among money managers today.
The stock market just brought in a blockbuster 7.9% return in July, and they are underweight stocks and loaded with cash. What they DO own are in all the wrong defensive sectors.
A panic is imminent.
A soft landing for the economy is in the cards. There are still plenty of risks out there, as there always are. But bond yields have collapsed, commodity and energy prices are in free fall, and the futures markets are indicating that interest rate hikes ahead will be modest at best.
The Fed is also getting an assist in its tightening efforts from a strong dollar, which pares U.S. multinational earnings, and a recessionary China and Europe. Those two alone are the equivalent of another 100 basis points in rate rises.
The Fed’s work has already been done for it.
The Fed’s Quantitative Tightening is also sucking $120 million a month out of the economy.
The bond vigilantes who were riding hard in the first half have gone to sleep, or at least gone on vacation. That has dropped ten-year US Treasury yields by an amazing 100 basis points in seven weeks. That doesn’t seem to warrant an over-aggressive Fed to me.
Remember also that interest rates no longer have the impact on the economy they once had. The stock of every company I buy has no net debt and are in fact huge net creditors, like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT).
Those that have refinanced their debts at 150-year lows over the last three years, including myself (30-year fixed rate mortgage at 2.75%, some 6.35% under the current inflation rate!).
No credit crunch here, or distressed financial institutions, the fodder of past recessions.
Sure, earnings have come down. But they are being shaved, not decimated. Again, the companies I buy aren’t growing at a modest 5%-10%, but more like 40%-50%, like Tesla (TSLA). Slow growing companies are other peoples’ problems, not mine.
Better yet, they are likely to bounce back hard next year, which is what the market is discounting now.
I’m buying next year’s market, while everyone else is still selling this year’s.
The bottom line is that the U.S. has the strongest economy and currency in the world, making its stocks deserving of a serious premium. Add up rate rises, QT, a strong greenback, a recessionary world, the largest deficit reduction in history, war, and stocks STILL can’t go down.
It's an old trader’s nostrum that if you dump bad news on a market and it fails to go down, you buy the heck out of it. This is one of those times.
That makes my yearend forecast of an S&P 500 of 4,800 by year-end not only possible but likely. Buy every substantial dip in every one of your favorite stocks from here on out. You might be risking 10%-20% over the short term but gain 100% on a three-year view.
The risk/reward is overwhelmingly in your favor.
I hope this helps.
July Nonfarm Payroll Hits a Blockbuster 528,000, double expectations, the best since February. The Headline Unemployment rate fell to 3.5%, a new post pandemic low. No recession here. Average hourly earnings popped 0.5%. The Dow dropped $250 as possible scenarios were already discounted in the market in a classic “Buy the rumor, sell the news” move. Bond yields soared. The difficulty in finding workers is overwhelming recession fears. Hotels and restaurants created enormous numbers of jobs. The Fed now has a license to maintain aggressive interest rate rises. My bond short in the (TLT) is looking good.
Weekly Jobless Claims hit 260,000, an 8-month high, as recession fears fan the flames. That beats the 1 million figure we saw at the pandemic high two years ago. Layoffs are falling. That makes tomorrows July Nonfarm Payroll Report more important than usual.
Fed Says More Rate Hikes Coming but No Recession, says St Louis Fed president James Bullard. I couldn’t agree more. If inflation dips look for only a 50-basis point rate hike in September. Stocks will soar.
England Predicts Major Recession after hiking interest rates by 0.50% to 1.75%. The Bank of England expects inflation to peak at 13.3%. Europe economy is in the toilet and China is weak. It all highlights how America now has the strongest economy in the world and is therefore the first choice for equity investors.
Weak Chinese Data Torpedoes Oil, down 34% from its February peak. Oil is now lower than when the Ukraine War started. Manufacturing PMI dropped from 51.7 to 50.4, barely outside recessionary data. New Chinese Covid shutdowns are the cause. Could this recession go global?
Home Prices fall at a Record Pace, down from a 19.3% annual gain to 17.3% in June, according to Black Knight, a mortgage analytics firm. Some 25% of major U.S. markets saw growth slow by three percentage points in June. It’s all about interest rates.
Mortgage Rates Drop Below 5%, for the 30-year fixed, a four-month low. It’s putting a floor under the housing market. Refi’s are still near zero. The collapse in bond yields is feeding through.
Half of U.S. Homes are Equity Rich, indicating homeowner equity is more than 50% of market value. That makes available trillions of dollars in potential second mortgages to support the economy. Americans are richer than they think.
Tesla Voted to Split Shares. The 3:1 split will make the shares more affordable for lower-end (poorer) investors who want to make the millions we have for the past decade. Watch for a spike in the price as share splits always attract a hoard of short-term meme investors. The last 5:1 split in 2020 brought an eye-popping near doubling of the shares in six months
ISM Non-Manufacturing Gains 2%, in June where tech lives. It shows that our “recessionary” economy may be stronger than you think, especially in the right sectors. No wonder stocks are going up every day.
Carried Interest Lives Again, with Arizona’s Kristin Sinema stopping the abolishment of tax-free treatment of hedge funds and private equity funds as her pound of flesh for backing Biden’s stimulus bill. People have been trying to end carried interest since President Carter pushed it through in 1979 to jump-start venture capital and Silicon Valley. It truly demonstrates the power of lobbying and will lead to more concentration of wealth at the top. Look for a vote next week.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my August month-to-date performance reached +0.46%.
My 2022 year-to-date performance expanded to 55.29%, a new high. The Dow Average is down -9.64% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 74.73%.
That brings my 14-year total return to 567.85%, some 2.39 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.83%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 91 million, up 300,000 in a week, and deaths topping 1,033,000 and have only increased by 2,000 in the past week. You can find the data here at https://coronavirus.jhu.edu.
On Monday, August 8, there is no data of note.
On Tuesday, August 9 at 8:30 AM, the NFIB Business Optimism Index for July is out.
On Wednesday, August 10 at 8:30 AM, the CPI Index for July is published.
On Thursday, August 11 at 8:30 AM, Weekly Jobless Claims are announced. The Producer Price Index for August is printed.
On Friday, August 12 at 7:00 AM, the University of Michigan Consumer Sentiment Index is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I had the good fortune to live with a Nazi family in West Berlin during the 1960s. While working at the Sarotti chocolate factory in Templehof, my boss took pity on me and invited me to move in with his family. I jumped at the chance of free rent and all the German food I could eat.
What I learned was amazing.
Even though the Germans had lost WWII 20 years earlier, they still believed in the core Nazi beliefs. However, they loved Americans as we had saved them from the Bolsheviks, especially in Berlin. President Kennedy had delivered his famous “Ich bin ein Berliner” speech only seven years earlier.
There have been thousands of books written about wartime Germany, but almost none about what happened afterwards. I absorbed dozens of stories from my adopted German family, and I’ll tell you one of the most unbelievable ones.
In the weeks after the German surrender on May 7, 1945, Berlin was shattered. The city had been the subject of countless 1,000 bomber raids and the population had shrunk from 5 million to only 1.5 million. Most of the military-aged men were absent. Survivors were living under the rubble.
What’s worse, everyone knew that the allies would soon declare the German currency, the Reichsmark, worthless and replace it with a new one, wiping out everyone’s life savings. So, they had to spend as fast as they could. But with the economy in ruins, there was nothing to buy. In any case, the only thing they really wanted was food, which they could get on a thriving black market.
It turned out that there was only one thing they could buy in unlimited quantities:
Movie tickets.
When Hitler came to power in 1933, one of the first things he did was ban American movies. The industry was taken over by propaganda minister Joseph Goebbels who only permitted propaganda films promoting Nazi values for domestic consumption.
The only American film permitted in Germany during the 1930s was Grapes of Wrath because it highlighted U.S. weaknesses. Movie production was shut down completely in 1943 because of the war’s demands on supplies.
When the war ended, suddenly, the iconic movies of the Great Depression became available, such as the works of the Marx Brothers, Shirley Temple, The Wizard of Oz, Gone with the Wind, and King Kong.
Impromptu movie theaters were thrown up against standing walls of destroyed buildings. Within two weeks of the surrender, half of Berlin’s prewar 550 theaters had reopened. Of a population of 1.5 million, 850,000 movie tickets were sold every weekend. The summer of 1945 became one long film festival. The Germans laughed, cried, and were enthralled.
Every weekend was a sellout. The only movie that bombed that summer was a U.S. Army documentary about the concentration camps. But even that one sold 400,000 tickets.
The movies had a therapeutic effect on the German people. It distracted them from their daily privations, starvation, and suffering. It also allowed them to reconnect with western civilization. Ask any Berliner about what they did after the war and all they will talk about are the movies.
The allies finally did withdraw the Reichsmark in 1948. Individuals were only permitted to convert $40 out of the old currency into the new Deutschmark, which was then worth 25 cents. Only those who had title to land maintained their wealth, and most of those were farmers in the new West Germany.
I hope you enjoyed this little fragment of unwritten history, which I find amazing. But then, I find everything amazing.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Berlin in 1945
Berlin in 1968
Mad Hedge Technology Letter
August 3, 2022
Fiat Lux
Featured Trade:
(LOSING ITS MOJO)
(NFLX), (AMZN)
The reversion to the mean crowd who like to do no research and just buy certain shares when they go down anticipating a quick rebound needs to avoid former streaming darling Netflix (NFLX).
The company has gone from bad to worse and like your black sheep little brother who loves to play the victim, avoid at all costs!
NFLX has parlayed deteriorating content with an even worse future game plan that screams subscriber bleeding.
The headwinds are adding up to something that will be insurmountable quite soon and I don’t believe that has been accurately reflected in the stock price yet.
Let’s take the running of their clean brand.
They are damaging the brand by integrating it with a lower-cost, ad-supported tier in early 2023. This comes on the heels of Netflix tapping Microsoft to be its partner on the ad-supported offering.
For many years, NFLX was adamant they would never go this route only to do an about-face.
Already losing subscribers, inserting ads to only muddy the content further won’t move the needle in terms of improving the quickly eroding content quality.
Like on a sinking ship, they are trying to chug as many whiskey bottles as possible before the ship goes underwater.
Netflix had warned investors last quarter that it expected to shed around 2 million subscribers but only lost around 970,000 during the three-month period ending June 30.
This artsy game of claiming a pyrrhic victory because the subscriber loss was only around a million and not 2 is insane.
A million subscribers lost is detrimental to any subscriber-based company in any sphere of business.
And remember, NFLX is supposed to be the preeminent growth company, yes, the one that is losing 1 million subscribers every 3 months.
Let’s rate the business model today.
Will the median consumer bite at a monthly NFLX subscription?
In the current market environment, which is characterized by inflation, consumers alter spending. In concrete terms, this means that consumers are concentrating on fewer streaming services.
Also, an NFLX content archive that is shrinkflating doesn’t help and I am not talking in terms of volume.
They no longer have access to the hit shows of old like Friends or Seinfeld that many Millennial viewers love to watch because other streaming platforms have recalled that content.
Times are lean to the bone for NFLX these days.
What we have today is a streaming service that can’t make in-house blockbusters apart from Stranger Things and after that, the kitchen is barren.
Weirdly enough, NFLX executives have turned to anime as if it’s a broad solution to the content woes.
I’ll give you a hint - it’s not.
Stealing content ideas from their 14-year-old daughter won’t hack it in this climate.
Even worse, they are taking classic anime titles from Japan and Americanizing them.
This type of Frankenstein anime is hard to watch.
The conclusion of Stranger Things Season 4 is peak NFLX for 2022 as pitiful as that sounds.
The search for content has really gone into full drive with Amazon (AMZN) picking up France Ligue 1 soccer league rights for $250 million per year on a 3-year contract.
Things have moved on a lot in the content world with American tech companies scouring the world for quality content while NFLX has been stuck in neutral.
The stock has gone from $700 to $200, and the poor executive decisions today mixed with inferior content means that they will underperform any tech rally that is manufactured to end the year.
Global Market Comments
August 2, 2022
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (META)
Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.
The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information, I had to promise the utmost confidentiality. If I mentioned his name, you would say “oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on this lowest of margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer who, once in, buy more services.
Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 25X. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from upfront sales to a lifetime subscription model will also give it a boost.
Half of these are more than four years old, and positively geriatric in the tech world. More than half of these are outside the US. 5G has added a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 44 Emmys last year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world.
5G has enabled better Internet coverage for everyone and increased the competitiveness of the telecom companies. Factory automation has been another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government-threatened break-ups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies of its own, views big American tech companies simply as a source of revenue through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Meta (META) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract services revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several millions of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
Tech stocks have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your short list for LEAPS to buy at the coming market bottom.
