Mad Hedge Technology Letter
November 25, 2019
Fiat Lux
Featured Trade:
(AI HAS REACHED FARTHER THAN YOU THINK),
(AMZN), (MSFT), (AAPL)
Posts
I was lucky enough to get my hands on the Deloitte Private Technology Trends report named, “Seizing Opportunity.”
I’ll break down some of the gems I took away that will give us insight into the current state of technology.
This might not be necessarily a new idea because artificial intelligence has been around for a while, but it certainly is gaining steam with respondents placing greater value on artificial intelligence to drive business results.
Firms are using AI for analysis automation 48% of the time in 2019 versus 30% in 2018, putting the responsibility on this technology to super-drive profits.
It’s not a surprise that big data analysts have become one of the most sought-after commodities in Silicon Valley.
It’s appropriate to say that the FANGs have pulled away from any resemblance of competition in 2019 and this if forcing many mid-market and private companies to view talent and emerging technologies as the x-factors to stay competitive.
Behemoth tech companies have the luxury of cheap access to capital to buy out competition or break it by throwing money at problems until they can copy the technology and scale it applying force multiplier ecosystems to cross-pollinate and intertwine services with each other.
These same companies buy back their own stock with cheap capital enriching stakeholders and management.
In fact, Apple (AAPL) is buying back so much stock that it will have bought out its entire trove of stock by 2030 to effectively go private.
Deloitte found that 43% say they are spending more than 5% of their firm’s revenue on technology, a 15-point increase since 2016.
More than half of respondents forecast annual growth rates of 11% or higher and 68% plan to hire to harness the emerging technology.
Another trend that will pick up steam that I have noted before is the predictive analytics and legacy system modernization, and this is topping private companies’ investment priorities list.
In fact, the number of private companies surveyed using predictive analytics to diagnose business results skyrocketed 65% over the past five years.
Firms are prioritizing information security risks, the adoption of 5G technology, and business innovation over the next 365 days.
Digital disruption is the norm du jour.
Firms expect shifts in sales (55%), marketing (50%), and supply chain roles (49%) in the next 3-5 years.
In preparation, 54% of mid-market and private companies are re-skilling employees and 52% are reconfiguring jobs to accommodate this shift.
Also, 72% believe internal development and reskilling is a method to enhance employees’ potential because of the exorbitant costs of talent acquisition.
Over two-thirds (69%) will construct new talent acquisition strategies to marry it up with the trend of hiring in data analytics, AI and other emerging technologies.
In a major reversal, respondents are less likely to seek out crowdsourcing and gig economy workers because these types of workers are less effective than full-time workers and have high turnover rates.
More than 32% of private companies acknowledge that embedded value is trending towards machine learning, robotic process automation and other cognitive capabilities, a 12% increase from 2018’s survey results.
Although executives are experiencing greater benefits from AI technologies, more than one-half of respondents (55%) are worried about the use of AI, particularly when it comes to HR decision-making.
Personally, I believe using AI in HR is mostly flawed.
In short, firms are doubling down on “emerging technologies” and to combat the superior business models of big tech companies.
They almost have no choice.
These conditions favor the status quo of behemoth tech titans who can invest in machine learning and artificial intelligence because of their cheap sources of capital.
From the data, smaller companies are desperate to hang on to their talent because of a shrinking talent pool and high talent acquisition cost.
The belief that leveraging foundational technologies to springboard revenue is only getting stronger. This favors the goliaths at the top because they have the resources to integrate these levers unlike companies further down the food chain.
This article could almost signal why investors can’t be short Apple (AAPL), Microsoft (MSFT), and Google (GOOGL).
They are at the vanguard of every major technology trend and they have demonstrated that they are definitely “seizing opportunity.”
This week, I had to fly off to a party given by my biggest hedge fund client at the Penthouse Suite at the Bellagio Hotel in Las Vegas. And what a party it was!
The showgirls were flowing hot and heavy, roaming magicians performed magic tricks, and there was the odd fire-breather or two. For entertainment, we were treated to rock legend Lenny Kravitz who played his signature song, American Woman.
I managed to get a few hours in private with my client, one of the wealthiest men in the world whom you would all recognize in an instant, and this is what I told him.
SELL THE NEXT BIG RALLY IN STOCKS. IT MAY BE YOUR LAST CHANCE TO GET OUT AT THE TOP BEFORE THE NEXT BEAR MARKET. ANY STOCK YOU KEEP AFTER THAT YOU WILL HAVE TO OWN FOR AT LEAST TWO YEARS AND 4-5 YEARS TO GET BACK UP TO YOUR ORIGINAL COST!
The markets are coiled for a sharp year-end rally for the following 16 reasons:
1) The S&P 500 (SPY) is more overbought than at any time in a decade, according to my Mad Hedge Marketing Timing Index at 90. Technology is the most oversold since the Dotcom bubble. We are in the early stages of the final melt-up.
2) The algorithms that drove the markets down so quickly and severely are now poised to flip to the upside.
3) Bear markets never started with real interest rates of zero (1.75% inflation rate – 1.75% ten year US Treasury yield).
4) Bear markets also don’t start with all-time high profits reported by the leading companies like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)
5) We are now in the strongest seasonal period of market gains from November to May.
6) Sales during both Black Friday and Cyber Monday will do exceptionally well as the consumer is on fire.
7) At least $100 billion in corporate share buybacks have to kick end by yearend.
8) Risk Parity Traders, another new hedge fund strategy bedeviling the markets, are now in a position to strongly buy stocks, and sell bonds, which have gone nowhere.
9) Both month-end and year-end window-dressing purchases are not to be underestimated.
10) Much stock selling is being deferred to January when capital gains taxes are not payable for 16 months.
11) A lot of hedge fund shorts have to be covered by the end of 2019.
12) Global liquidity growth is slowing but is still enormous. There is nothing else to buy but US stocks. If you missed 2019, you get to do it all over again in 2020.
13) The collapse of oil prices from $77 to $50 a barrel has created a $200 billion surprise economic stimulus package for the US, especially for big energy consumers like transportation.
IT ALL ADDS UP TO A BIG FAT “BUY.”
I expect this rally to set up a classic head and shoulders top in the first quarter of 2019 (see chart below). Here’s where stocks fail, and we enter a new bear market. Here are ten reasons why:
1) Next year, S&P 500 earnings growth will sharply downshift from a 26% annual growth rate in 2018 to zero in 2020.
2) The upfront benefits of the corporate tax cuts will be all spent. With all the tax breaks in the world, companies won’t spend a dime if they believe the US is going into recession.
3) The massive expansion of government spending Trump brought us will be slowed by a Democratic-controlled House of Representatives, especially for defense.
4) The trade war with China will continue, cutting US growth. The Chinese are determined to outlast Donald Trump. The Middle Kingdom can take far more pain than the US, which has open elections.
5) The global synchronized recession worsens, dragging the US into the tar pit.
6) The Fed will cut interest rates any more in this cycle. You’re going to have to live on the hyper stimulus you have already received.
7) If the Fed had any doubts, they only need to look at the inflationary impacts of new duties on most imported goods.
8) A continuation of the China trade war also will trigger depression in the agricultural sector which is suffering from a China boycott that has crushed prices. Millions of tons of crops rotting in storage silos. This will spill over into a regional banking crisis.
9) The mere age of this Methuselah-like bull market at 11 years is an issue. Too many people have made too much money too easily for too long.
This all adds up to a big “SELL” sometime in the spring.
I just thought you’d like to know.
To watch the video of Lenny Kravitz playing, please click here.
Global Market Comments
November 6, 2019
Fiat Lux
Featured Trade:
(THE QUANTUM COMPUTER IN YOUR FUTURE),
(AMZN), (GOOG),
(THE WORST TRADE IN HISTORY), (AAPL)
Global Market Comments
November 4, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE SUMMIT)
(GM), (BA), (MSFT), (SPY), (TLT), (TSLA), (AMZN)
In 1976, I joined the American Bicentennial expedition to climb Mount Everest led by my friend and mentor, Jim Whitaker. Since I was a late addition, there was no oxygen budget for me which, in those days, was very heavy and expensive.
Still, I was encouraged to climb as far as I could without it, which turned out to be up to Base Camp II at 21,600 feet. At that altitude, you couldn’t light a cigarette as the matches went out too quickly. There just wasn’t enough oxygen.
Out of 700 men on the team, including 600 barefoot Nepalese porters, only two made it to the top. By the time I made it back to Katmandu 150 miles away, I had lost 50 pounds, taking my weight down to a scarecrow 125.
You can see the metaphor coming already.
Here I am at my screen looking at 27,500 in the Dow Average and not only am I gasping for oxygen, I am ready to pass out. My Mad Hedge Market Timing Index hit a new high for 2019 at an acrophobic 85. All of this is happening in the face of slowly eroding fundamentals and a global economic slowdown.
Could the market go higher? You betcha! At least a couple percent more by yearend. Market bottoms are easy to identify when valuations hit decade lows. Market tops are impossible to gauge because greed is unquantifiable and knows no bounds.
I’ll give you a perfect example. The US and Japan signed the Plaza Accord in 1985 calling a doubling of the value of the yen against the dollar and the eventual transportation of half of Japan’s auto production capacity to the US. We all knew this would eventually destroy the Japanese economy. Yet the Nikkei Average rose for five more years until it finally crashed.
Of course, the impetus for all of this are artificially low-interest rates, which dropped 25 basis points again last week for the third time this year.
There were with two dissents, while the December rate cut futures fall to 20%. If we get Japanese levels of interest rates, we might get a Japanese type 30-year stagnant economy.
US Q3 GDP came in at 1.9% in its most recent report, better than expected, but we are still in a serious downtrend. The economy is most likely running at a lowly 1.5% rate now. Weakness is a sure thing, now the government has run out of money for special projects. Don’t count on more with a Democratic house. It’s not the bed of roses I was promised.
However, if there is trouble, you won’t see it in the employment data. The October Nonfarm Payroll Report surprised to the upside, at 128,000. Many expected much worse in the aftermath of the GM (GM) strike and Boeing (BA) grounding.
The headline Unemployment Rate ticked up 0.1% to 3.6%. The big gains were in Hospitality and Leisure, up a stunning 61,000, Health Care & Social Assistance, up 31,000, and Professional and Business Services, up 22,000. Manufacturing lost 36,000 jobs, a ten-year high. 20,000 temporary jobs were lost from the 2020 census wind down.
August and September were revised up by an unbelievable 95,000. The market loves these numbers.
Tesla shocked, bringing in a profit for only the third time in company history, and causing the stock to soar $55. The 100,000-unit production target within yearend looks within reach. Most importantly they opened up a new supercharger station in Incline Village, Nevada!
Tesla is now America’s most valuable car maker, beating (GM). The ideological Exxon-financed shorts have been destroyed once and for all. Buy (TSLA) on dips. There’s still a ten bagger in this one.
Amazon put out a gloomy Christmas forecast on the back of a disappointing earnings report, crushing the shares by 7%. Looks like the trade war might cause a recession next year. Q3 revenues were great, up 24% to an eye-popping $70 billion.
Good thing I took profits on the last option expiration. Poor Jeff Bezos, the abandoned son of an alcoholic circus clown, dropped $7 billion in net worth on Thursday. Buy (AMZN) on the dips.
The safest stock in the market, Microsoft (MSFT), says it’s all about the cloud. Azure revenues grew a stunning 59% in Q3. (MSFT) is now up 37% on the year. Keep buying every dip, if we ever get another one.
The Chicago PMI crashed, plunging from to 43.2, a four-year low. This horrific number was last seen during the recession scare of 2015. New orders have virtually disappeared, or order backlogs have vaporized. Inventories are soaring. This is the worst economic report this year and will cause a lot of economists’ hair to catch on fire.
This was a week for the Mad Hedge Trader Alert Service to stay level at an all-time high. With only two positions left, in Boeing (BA) and Tesla (TSLA), not much else was going to happen.
My Global Trading Dispatch reached new pinnacle of +350.03% for the past ten years and my 2019 year-to-date accelerated to +49.89%. The notoriously volatile month of October finished at +12.23%. My ten-year average annualized profit held steady at +35.29%.
The coming week is pretty non eventful of the data front after last week’s fireworks. Maybe the stock market will be non-eventful as well.
On Monday, November 4 at 8:00 AM, US Factory Orders for September are out. Uber (UBER) and Under Armor (UAA) report.
On Tuesday, November 5 at 8:00 AM, the October ISM Nonmanufacturing Index is published. US API Crude Oil Stocks are released at 2:30 PM EST. Peloton (PTON) reports.
On Wednesday, November 6, we get a raft of Fed speakers unrestrained by any impending meetings. QUALCOM (QCOM) and Humana (HUM) report.
On Thursday, November 7, there are a heavy duty series of bond auctions. Walt Disney (DIS) and Zoetis (ZTS) Report.
On Friday, November 8 at 8:00 AM, the University of Michigan Consumer Sentiment Indicator is learned.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I am heading for Santa Cruz, California for the weekend to get out of the smoke and do some serious backpacking. I might even try to squeeze in a surfing lesson there. I’ll never give up.
By the way, several guests at the Tahoe conference remarked on the prominent scar on the side of my nose. That was caused by an ice ax that plunged straight through it in a fall while climbing Mount Rainer in 1967. Who patched it up and got me back down to the bottom? My friend Jim Whitaker.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mount Everest 1976
Mad Hedge Technology Letter
November 4, 2019
Fiat Lux
Featured Trade:
(THE CHICKENS COME HOME TO ROOST WITH SMALL TECH),
(AAPL), (MSFT), (AMZN), (GOOGL), (WDC), (TXI), (ANET), (PINS)
The tech story is still intact, but the edges are losing its shine.
That is the takeaway from the recent slew of earnings reports from many of the prominent yet second-tier tech companies.
On one hand, companies like Apple (AAPL) have been holding the fort as it blasts through to new highs even amid the backdrop of the Chinese trade war that has dragged many of the strong tech names into the mud.
What we did see lately was a magnificent swan dive by chip names like Western Digital (WDC) and Texas Instruments (TXI) which were blindsided by 10-15% haircuts because of lackluster guidance.
The agony didn’t stop there with second rate cloud names like Pinterest (PINS) and Arista Networks, Inc. (ANET) reaching for scapegoats for their weak guidance. These took instant 20% haircuts.
The problem with smaller stocks like these besides having narrower spreads, they are slaves to just a few contracts and when one goes, their guidance and revenue estimates implode in their faces.
Arista slid more than 25% on news that they expect quarterly revenue of $540 million-$560 million, with the midpoint about 20% below the previous Street consensus at $686.2 million.
Arista CEO Jayshree Ullal said in a statement that the company expects “a sudden softening in Q4 with a specific cloud titan customer.”
That is Facebook who comprise about 10% of Arista’s revenue composition because Facebook has pulled back the reigns on cloud spend to cut costs amid a murky global backdrop and regulatory minefield.
Unfortunately, second tier cloud names must accept that they do not offer the best pricing when directly competing with the superior cloud names of Google Cloud, Microsoft Azure, and Amazon Web Services (AWS) because they simply can’t scale as well to the extent these monopolistic FANGs can.
Data storage often comes down to whoever has the cheapest cost of capital to pile into server farms allowing pricing to be ultra-cheap and these three companies win out.
If these firms lose one contract like Walmart’s switch over to Microsoft Azure from Amazon, it’s not a big deal.
It doesn’t put a 10% black hole in the revenue stream like for Arista.
Pinterest was one of the most overhyped IPOs of 2019 promising growth, growth and more growth.
Its digital ad business needs to deliver accelerating growth for its share price to rise and when the latest earnings report showed year-over-year growth slow from 62% to 47%, investors saw the writing on the wall.
The company only grew its users 8% in the lucrative North American market and 38% abroad.
But the foreign markets were tainted by the gruesome underbelly of earning only 13 cents per foreign users.
There is user growth but at the cost of an inferior quality of growth.
Analysts can clearly observe the accelerated erosion of Pinterest, and I can say from a personal point of view that the website isn’t that useful.
Management’s excuse was a tough comparison to the prior year but if a growth firm has a superior model, they should be able to grow past any minor problems if the secular trends stay hemmed in.
Weak excuses now and probably weak excuses next quarter as the global tech landscape gets squeezed even more at the periphery.
What does this all mean?
There has been a flight to tech quality into the Teflon names like Microsoft and Apple.
Names that are showing growth headaches saddled with too much competition and structural softness are getting killed.
Don’t even think about investing in the marginal names like Pinterest and Arista.
Better to be safe on your perch inside the moat than outside isolated from the drawbridge.
Not all tech is created equal and it's rearing its ugly face in a frothy market.
Global Market Comments
October 29, 2018
Fiat Lux
Featured Trade:
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
(WHY TECHNICAL ANALYSIS DOESN’T WORK)
(FB), (AAPL), (AMZN), (GOOG), (MSFT), (VIX)
Global Market Comments
October 28, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DON’T FIGHT THE FED),
(BIIB), (IBB), (TSLA), (VIX), (BA), (AMZN), (AAPL), (MSFT), (GM)
