Mad Hedge Technology Letter
May 10, 2018
Fiat Lux
Featured Trade:
(WHO'S TRYING TO BREAK INTO YOUR HOME NOW?),
(GRUB), (DPZ), (AMZN), (BABA), (YUM), (YELP), (MS)
Posts
Penetrating the home is the holy grail for tech companies, and soon the smart home will be full of gizmos and gadgets that will accompany Alexa.
Not so fast.
Before we enter the abode, there is a war taking place right before our eyes.
The last mile.
This industry focuses on monetizing the transportation route to people's doorsteps whether its food delivery, ride-shares, or a dog-walking app.
The intense obsession with this last mile stems from the shift in consumers' behavior because of online commerce.
People just aren't going out and buying stuff anymore like they used to do.
Particularly, Millennials have a pension for binge-watching Netflix while gorging on food deliveries.
In the current climate, brick-and-mortar's future prospects look bleak as foot traffic disappears and mega-malls shutter at an accelerating rate.
As a last resort, companies have no choice but to evolve, reinvent themselves, and execute a digital strategy based on fast fulfillment through a smartphone app to attract new transactions.
Enter the food delivery industry.
China's food delivery industry has matured faster than America's food delivery industry. And precious pearls of wisdom can be gleaned by the developments in China.
The Chinese food delivery industry is a $32 billion industry compared to a $5 billion industry in America.
Consolidation ran rampant in the early days while the migration to mobile was more pronounced in China. The multiple players burning cash faster than Elon Musk were subsidized by private funds.
Then Tencent and Alibaba (BABA) snapped up the last two remaining combatants resulting in a blossoming of a new duopoly.
Alibaba's Ele.me commands about half the market share in China while Tencent's Meituan-Dianping has a 43% share.
Meituan-Dianping is valued at $30 billion at the last stage of fundraising making it the fourth biggest unicorn in the world.
The food delivery industry could gradually mirror the situation in China, but America is still in its nascent stage, and the industry still offers viable growth chances for the participants.
The industry leader is Grubhub and it has been able to avoid the insane cash burn with which Chinese food deliverers grappled.
Shockingly, Grubhub turns a profit showing how last mile delivery in China has been reduced to a data grab.
The margins are juicier stateside.
On March 1, 2017, Grubhub's shares were trading at $33. Fast-forward to today and the shares are doing extraordinarily well, topping $102 giving investors more than a 300% return on capital in more than a year.
Grubhub was able to perform this feat in the face of harsh downgrades caused by Amazon's epic rise as the No. 4 player.
Numerous Amazon induced sell-offs could not hold back the stock with each stock dump being an attractive entry point.
Morgan Stanley's (MS) Brian Nowak went neutral on the stock in June 2017 and issued a price target between a range of $43 and $47 because of enhanced competition.
The analysts were all wrong again.
Grubhub has secured 34% of the market share followed by Uber Eats at 20% and Amazon at 11%. The third player was Eat24, which was recently acquired by Grubhub bolstering its market position an additional 16% to 50%.
The key metric for Grubhub is DAG - Daily Active Grubs.
This number was up 35% YOY to 437,000. Management has highlighted Tier 2 and Tier 3 cities as noticeable growth levers, and the Tier 1 cities such as New York and Chicago remain solid.
The rampant growth resulted in $233 million for the quarter, which is up 49% YOY. The integration of Eat24 will result in cost efficiencies and synergies across its operation.
Grubhub also entered into a partnership with online restaurant review platform Yelp (YELP) integrating the Grubhub platform onto the Yelp platform.
Actions speak volumes and aggressive tactics securing further market share gains are required to stave off Amazon whose rapid ascent has management's nerves hanging by a thread.
Despite being defensive in nature, the Yelp and Eat24 deals should give Grubhub a wider digital footprint stimulating business.
Grubhub also agreed to a deal with Yum! Brands (YUM) to lure premium restaurant assets such as KFC and Taco Bell into the Grubhub ecosphere.
The company has many irons in the fire and will not rest on its laurels.
After last quarter, Grubhub tallied up 15.1 million active diners, which is up 72% YOY. Annual guidance came in at between $930 million to $965 million.
To put the diminutive size in perspective, Grubhub liaises with 80,000 restaurants while Ele.me in China served 1.2 million restaurants.
Rough estimates show that 11% of Americans will use food delivery apps by 2020.
The nascent industry in America has a long runway ahead as the American consumer has been slower than the Chinese to adopt a thoroughly digital life.
This will all change.
Amazon is swiftly ramping up its food delivery business in conjunction with food ordering platform Olo based in New York. Outsourcing back-end support and partnering with Olo is a sign that Amazon sees this as a side job.
Amazon is still in the process of blending in Whole Foods within the existing framework of the company. Last mile food delivery is not a pure Amazon type of business.
Any potential business Amazon hopes to disrupt is leveraged by advantages in execution of volume (using state-of-the-art fulfillment centers) and low margins.
Thus, groceries fit these criteria to a T. However, value-added food meals delivered to the home cannot take advantage of the expensive fulfillment centers because the products' main point of transport is the restaurant's kitchen.
The analysts' bearish calls revolve around the grim margin prospects.
They could be correct, but the timing of the call is too early.
Yes, the opportunity to ruin margins is there for the taking in this industry.
Grubhub earned $99 million off of a miniscule $683 million of revenue in 2017, and technological innovations will devour margins to the bone.
After the mythical run-up in the face of the Amazon threat, the stock is expensive, but the company is still healthy and expects another record year.
Any sniff of margin headwinds will cripple the stock trajectory. It's not a matter of if but when.
Any big data play is ripe for competition because of the appreciation of the value of the data itself. Buy low and sell high.
At the height of competition in China, consumers were eating for free along with free deliveries because of the massive subsidies with companies seeking to gain market share any way possible.
Any similar repeat would put Grubhub's stock in the doldrums.
There are alternatives in the last mile food space.
Domino's Pizza (DPZ) is not a food delivery business nor is it a tech company.
However, it is a restaurant that fuels growth with one of the best digital strategies in the food business.
Domino's Pizza is an A.I. play.
The stock's epic rise is directly correlated with a smorgasbord of tech enhancements.
In 2014, Domino's launched DOM, a virtual ordering assistant created by A.I. voice recognition technology.
The heavy investments into the tech side have borne fruit with 65% of Domino's sales resulting from a myriad of digital platforms.
CEO J. Patrick Doyle has chimed in promulgating the desire for 100% digital sales.
Doyle believes voice is the future and implementing voice into Domino's structure will free up workers' time to focus on producing the pizzas instead of manning the phone lines thus reducing operating costs.
Domino's has been investing in its A.I. capabilities for the past five years and would be a better way to play the food space with a few extra degrees of separation with Amazon than Grubhub.
The digital strategy is about five years in, and during that time, Domino's has seen its stock rise from $46.57 to $245 today and most analysts attribute the success to its excellent digital strategy.
Would I take a flyer on Grubhub? Yes.
Would I rather buy Microsoft? Yes.
_________________________________________________________________________________________________
Quote of the Day
" 'User' is the word used by the computer professional when they mean 'idiot.' " - said Pulitzer Prize-winning American author Dave Barry.
Mad Hedge Technology Letter
April 23, 2018
Fiat Lux
Featured Trade:
(HOW NETFLIX CAN DOUBLE AGAIN),
(NFLX), (AMZN), (IQ), (ORCL), (MU), (AMAT), (CRUS), (QRVO), (IFNNY), (NVDA), (JD), (BABA), (MSFT)
The first batch of earnings numbers are trickling in, and on the whole, so far so good.
A spectacular earnings season will further cement tech's position at the vanguard of the greatest bull market in history.
The bull case for technology revolves around two figures indicating "RISK ON" or "RISK OFF".
The first set of numbers from Netflix (NFLX) emanated sheer perfection.
Netflix has gambled on its international audience to drive its growth and unceasing creation of premium content to reach these lofty targets set forth.
It worked.
Consensus was that domestic subscription growth had peaked, and Netflix would have to lean on overseas expansion to beat earnings estimates.
American subscription growth knocked it out of the ballpark, beating expectations by 480,000 subscriptions. The street expected only 1.48 million new adds. The 1.96 million shows the American online streamer is resilient, and the migration toward cord-cutting is happening faster than initially thought.
International adds were pristine, beating the 5.02 million estimates by 440,000 million new subscribers.
Content is king as Netflix has proved time and time again (we notice that here at Mad Hedge Fund Trader, too). Netflix plans to fork out about 700 original series in 2018.
By 2023, Netflix could grow its subscriber base to close to 400 million. The potential for international advancement is immense considering foreign companies are playing catch-up and cannot compete with the level of Netflix's content.
The earnings report coincided with Netflix announcing a forceful push into Europe, doubling its allocated content-related investments to $1 billion.
All of Netflix's estimates take into consideration that it is shut out of the Chinese market. Ironically, the Netflix of China, named iQIYI (IQ), just recently went public on the Nasdaq.
Amazon Web Services (AWS), the cloud-arm of Amazon (AMZN), revenue numbers are the other numbers that are near and dear to the pulsating heartbeat of the bull market.
Jeff Bezos, Amazon's CEO, penned a letter to shareholders that Amazon prime subscribers blew past the 100 million mark.
The positive foreshadowing augurs nicely for Amazon to surprise to the upside when it reports earnings next week on April 26.
Expect more of the same from cloud companies that are overperforming.
The few glitches in tech are minor. It is mindful to stay on the right side of the tracks and not venture into marginal names that haven't proved themselves.
For instance, Oracle (ORCL) had a good, not great, earnings report but shares still cratered after CEO Safra Catz dissatisfied analysts with weak cloud forecasts of just 19%-23% growth.
The street was looking for cloud guidance over 24%. Oracle is still being punished for its legacy tech segments.
The chip sector got pummeled after several chip manufacturers announced weak supply order from Apple.
This is hardly a surprise with Apple slightly missing iPhone estimates last quarter by 1%.
Chip stocks such as Lam Research (LRCX), Micron (MU), and Applied Materials (AMAT) look like affordable bargains. They should be seriously considered after share prices stabilize buttressed by support levels.
The outsized problem is that hardware suppliers have headline risks because of large cap tech's preference toward vertically integrating.
Along with price efficiencies, vertically integration aids design aspects and streamline product production time horizons.
This is not the end of chips.
Consumers need the silicon to generate and extract all the data coming to market.
Particularly, Apple (AAPL) went over its skis trying to push expensive smartphones to a saturated market when all the rip-roaring growth is at the low end of the market.
Apple still managed to sell more than 77 million iPhones, but the trade war rhetoric will deter Chinese consumers from purchasing American tech products. Until now, Apple has counted on China as its best growth prospect. The administration had other ideas.
Any noteworthy Apple supplier has gotten punched in the nose, but crucially, investors must stay out of the SMALLER chip players that rely on narrow revenue sources to keep them afloat.
Bigger chip companies can withstand the shedding of a few revenue sources but not Cirrus Logic (CRUS).
(CRUS) shares have been beaten mercilessly the past year sliding from $68 to a horrifying $37.74 today.
(CRUS) produces audio amplifier chips used in iPhone devices, and weak iPhone X guidance is the cue to bail out of this name.
The company extracts more than 75% of its revenues by selling audio chips used in iPhone devices. Ouch!
Last quarter saw horrific performance, stomaching a 7.7% decline in revenues due to tepid demand for smartphones in Q4 2017.
Cirrus Logic provided an underwhelming outlook, and it is not the only one to be beaten into submission behind the woodshed.
Apple has signaled to its suppliers that it will view production in a different way.
Imagination Technologies, a U.K. company, was informed that its graphic chips are not needed after 2018.
Dialog Semiconductor, another U.K.- based operation, shared the same destiny, as its power management chip was cut out of the production process, sacrificing 74% of revenue.
To top it all off, Apple just announced it plans to manufacture its own MicroLED screens in Silicon Valley, expunging its alliance with Samsung, Sharp, and LG, which traditionally yield smartphone screens for Apple. And Apple plans to make its own chips, phasing out Intel's chips in Apple's MacBook by 2020.
Qorvo (QRVO), Apple's radio frequency chips manufacturer, also can be painted with the same brush.
Apple was responsible for 34% of the company's total revenues in 2017.
Weak iPhone guidance set off a chain reaction, and the trembles were most felt at the bottom feeder group.
Put Infineon Technologies (IFNNY) in the same egg basket as Qorvo and Cirrus Logic. This company installs its cellular basebands in iPhones.
FANG has split into two.
Netflix and Amazon continue producing sublime earnings reports, and Apple and Facebook have hit a relative wall.
It will be interesting if the government's harsh rhetoric toward Amazon amounts to anything.
One domino that could fall is Amazon's lukewarm relationship with the US Postal Service.
Logistics is something the Chinese Amazon's JD.com (JD) and Alibaba (BABA) have successfully adopted. Look for Amazon to do the same.
However, I will say it is unfair that most tech companies are measured against Netflix and Amazon, even for Apple, which earned almost $50 billion in profits in 2017.
It is insane that companies tied to a company that prints money are reprimanded by the market.
But that highlights investors' pedantic fascination with pandemic growth, cloud, and big data.
Making money is irrelevant today. Investors should be laser-like focused on the best growth in tech such as Amazon, Netflix, Lam Research, Nvidia (NVDA), and Microsoft (MSFT), which know how to deliver the perfect cocktail of results that delight investors.
__________________________________________________________________________________________________
Quote of the Day
"$500? Fully subsidized? With a plan? That is the most expensive phone in the world. And it doesn't appeal to business customers because it doesn't have a keyboard. Which makes it not a very good email machine." - said former CEO of Microsoft Steve Ballmer on the introduction of the first iPhone.
Mad Hedge Technology Letter
April 16, 2018
Fiat Lux
Featured Trade:
(THE HIGH COST OF DRIVING OUT OUR FOREIGN TECHNOLOGISTS),
(EA), (ADBE), (BABA), (BIDU), (FB), (GOOGL), (TWTR)
There is only so much juice you can squeeze from a lemon before nothing is left.
Silicon Valley has been focused mainly on squeezing the juice out of the Internet for the past 30 years with intense focus on the American consumer.
In an era of minimal regulation, companies grew at breakneck speeds right into families' living quarters and was a win-win proposition for both the user and the Internet.
The cream of the crop ideas were found briskly, and the low hanging fruit was pocketed by the venture capitalists (VCs).
That was then, and this is now.
No longer will VCs simply invest in various start-ups and 10 years later a Facebook (FB) or Alphabet (GOOGL) appears out of thin air.
That story is over. Facebook was the last one in the door.
VCs will become more selective because brilliant ideas must withstand the passage of time. Companies want to continue to be relevant in 20 or 30 years and not just disintegrate into obsolescence as did the Eastman Kodak Company, the doomed maker of silver-based film.
The San Francisco Bay Area is the mecca of technology, but recent indicators have presaged the upcoming trends that will reshape the industry.
In general, a healthy and booming local real estate sector is a net positive creating paper wealth for its people and attracting money slated for expansion.
However, it's crystal clear the net positive has flipped, and housing is now a buzzword for the maladies young people face to sustain themselves in the ultra-expensive coastal Northern California megacities. The loss of tax deductions in the recent tax bill make conditions even worse.
Monthly rental costs are deterring tech's future minions. Without the droves of talent flooding the area, it becomes harder for the industry to incrementally expand.
It also boosts the salaries of existing development/operations staffers who feed into the local housing market spiking prices because of the fear of missing out (FOMO).
After surveying HR tech heads, it's clear there aren't enough artificial intelligence (AI) programmers and coders to fill internal projects.
Compounding the housing crisis is the change of immigration policy that has frightened off many future Silicon Valley workers.
There is no surprise that millions of aspiring foreign students wish to take advantage of America's treasure of a higher education because there is nothing comparable at home.
The best and brightest foreign minds are trained in America, and a mass exodus would create an even fiercer deficit for global dev-ops talent.
These US-trained foreign tech workers are the main drivers of foreign tech start-ups. Dangling financial incentives for a chance to start an embryonic project at home is hard to pass up.
Ironically enough, there are more AI computer scientists of Chinese origin in America than there are in all of China.
There is a huge movement by the Chinese private sector to bring everyone back home as China vies to become the industry leader in AI.
Silicon Valley is on the verge of a brain drain of mythical proportions.
If America allows all these brilliant minds to fly home, not only to China but everywhere else, America is just training these workers to compete against American companies in the future.
A premier example is Baidu co-founder Robin Li who received his master's degree in computer science from the State University of New York at Buffalo in 1994.
After graduation, his first job was at Dow Jones & Company, a subsidiary of News Corps., writing code for the online version of the Wall Street Journal.
During this stint, he developed an algorithm for ranking search results that he patented, flew back to China, created the Google search engine equivalent, and named it Baidu (BIDU).
Robin Li is now one of the richest people in China with a fortune of close to $20 billion.
To show it's not just a one-hit wonder type scenario, three of the top five start-ups are currently headquartered in Beijing and not in California.
The most powerful industry in America's economy is just a transient training hub for foreign nationals before they go home to make the real cash.
More than 70% of tech employees in Silicon Valley, and more than 50% in the San Francisco Bay Area are foreign, according to the 2016 census data.
The point that really hits home is that the insane cost of housing is preventing burgeoning American talent from migrating from rural towns across America and moving to the Bay Area.
This trend was reinforced by domestic migration statistics.
Between 2007 and 2016, 5 million people moved to California, and 6 million people moved out of the state.
The biggest takeaways are that many of these new California migrants are from New York, possess graduate degrees, and command an annual salary of more than $110,000.
Conversely, Nevada, Arizona, and Texas have major inflows of migrants that mostly earn less than $50,000 per year and are less educated.
That will change in the near future.
Ultimately, if VCs think it is expensive now to operate a start-up in Silicon Valley, it will be costlier in the future.
Pouring gasoline on the flames, Northern Californian schools are starting to close down as there is a lack of students due to minimal household formation.
The biggest complaint is that there is no affordable housing.
A 1,066-square-foot property in San Jose's Willow Glen neighborhood went on sale for $800,000.
This would be considered an absolute steal at this price, but the catch is the house was badly burned two years ago. This is the price for a teardown.
When you combine the housing crisis with the price readjustment for big data, it looks as if Silicon Valley has peaked.
Yes, the FANGs will continue their gravy train but the next big thing to hit tech will not originate from California.
VCs will overwhelmingly invest in data over rental bills, and the percolation of tech ingenuity will likely pop up in either Nevada, Arizona, Texas, Utah, or yes, even Michigan.
Even though these states attract poorer migrants, the lower cost of housing is beginning to attract tech professionals who can afford more than a burnt down shack.
Washington state has become a hotbed for Bitcoin activity. Small rural counties set in the Columbia Basin such as Chelan, Douglas, and Grant used to be farmland.
The bitcoin industry moved three hours east of Seattle for one reason and one reason only - cost.
Electricity is five times cheaper there because of fluid access to plentiful hydro-electric power.
Many business decisions come down to cost, and a fractional advantage of pennies.
Once millennials desire to form families, the only choices are regions where housing costs are affordable and areas that aren't bereft of tech talent.
Cities such as Las Vegas and Reno in Nevada; Austin, Texas; Phoenix, Arizona; and Salt Lake City, Utah, will turn into hotbeds of West Coast growth engines just as Hangzhou-based Alibaba (BABA) turned that city into more than a sleepy backwater town with a big lake at its center.
The overarching theme of decentralizing is taking the world by storm. The built-up power levers in Northern California are overheated, and the decentralization process will take many years to flow into the direction of these smaller but growing cities.
Salt Lake City, known as Silicon Slopes, has been a tech magnet of late with big players such as Adobe (ADBE), Twitter (TWTR), and EA Sports (EA) opening new branches there while Reno has become a massive hotspot for data server farms. Nearby Sparks hosts Tesla's Gigafactory 1 and most likely its next addition.
The half a billion-dollars required to build a proper tech company will stretch further in Austin or Las Vegas, and most of the funds will be reserved for tech talent - not slum landlords.
The nail in the coffin will be the millions saved in taxes.
The rise of the second-tier cities is the key to staying ahead of the race for tech supremacy.
__________________________________________________________________________________________________
Quote of the Day
"Twitter is about moving words. Square is about moving money." - said CEO of Twitter, Jack Dorsey, to The New Yorker, October 2013
Mad Hedge Technology Letter
April 9, 2018
Fiat Lux
Featured Trade:
(HOW TO LOSE MONEY IN TECHNOLOGY STOCKS),
(AAPL), (MSFT), (OFO), (UBER), (MOBIKE), (OneCoin), (BABA)
Every new bull market in technology brings its excesses, and this time is more different.
Today, I'll outline some of the more egregious cases, which you and your money should avoid like the plague.
Spoiler alert: You are better off just parking your money in Apple (AAPL) or Microsoft (MSFT) and then forgetting about it.
The thirst to own a little sliver of technology in the greatest bull market of all time has reached a fever pitch with capital allocating to marginal assets.
Serious investors need to avoid the madness.
The excess was bred from the realization of how valuable data extraction and generation is to profitability.
The investment climate is reminiscent of the dot-com bubble during the 1990s that spawned companies with no intention of ever turning a profit.
This time, loss-making is blatant.
Ride-share vehicle services such as Uber and Lyft are great at losing money, and passengers would stand aside if prices became exorbitant.
Paying a derisory sum to ride in someone else's car while being chauffeured around is part of the allure of this business model.
The result is an artificially low price for the benefit of consumers amid a vicious price war with competitors.
The biggest problem with these ride-share services is they create nothing.
They are not building a proprietary operating system or creating technology that did not exist before.
Hence, these types of companies execute risky strategies that backfire.
Any technology company that expects to be in the game long term must create something unique and organic that other companies value and cannot copy.
These ride-hailing companies simply use an app on a smartphone, and this smartphone app can be created by any half decent high school app programmer.
Uber lost $4.5 billion in 2017, and that was great news for CEO Dara Khosrowshahi because Uber is losing less than before.
If you thought a tech company glorifying an annual loss of $4.5 billion was strange, then analyzing the state of the ride-share business model for the industry one degree further out on the risk curve will leave you scratching your head.
And by the way, Uber will try to soak your wallet when it launches its initial public offering next year.
Enter dockless ride-sharing bicycles.
Dockless bike-sharing has mushroomed around the world, spreading like wildfire fueled by grotesquely large injections of venture capital.
Ofo, a Chinese firm, initially raised more $1.2 billion and another $866 million from Alibaba (BABA) from a recent round of fundraising. CEO Dai Wei has stated that his company is worth north of $2 billion.
Mobike lured in more than $900 million in venture capital.
China is the epicenter of the bicycle ride-sharing experiment. More than 40 firms have sprouted up creating a bizarre scenario in major Chinese cities because of these companies dumping bicycles on every public street corner.
According to Xinhua News Agency, more than 2.5 million bikes are littered throughout the city by 15 companies in Beijing alone.
Local American firms have jumped on the bandwagon, too, with examples such as LimeBike, based in San Mateo, CA, that raised $12 million from Andreessen Horowitz in 2017, and topped up another $50 million from Coatue Management.
Meanwhile, Spin, the first stationless bikeshare company in the US, raised $8 million led by Grishin Robotics.
More than 40 bike-sharing companies have beat down the price of renting a bicycle to the paltry rate of 1 RMB (renminbi) ($0.15 USD) per 30-minute trip.
The intentional dumping at absurd price levels is not sustainable. The business model is predicated on collecting an initial deposit of $15 before a customer can hop on a bike.
The deposit has proved high risk as some companies have disappeared or gone bust.
Bluegogo, the third leading company in this space, emptied out its headquarters office, locked the doors, and failed to notify employees who claimed their wages had been garnished.
By last count, Bluegogo had distributed roughly 700,000 bicycles, and was estimated to have 20 million users, each paying $15 deposits to use the service.
Bluegogo was considered a legitimate competitor in the space along with Mobike and Ofo.
The $300 million dollars in Bluegogo deposits floated up to money heaven, and the deposits will never be repaid to customers.
Didi Chuxing, China's version of Uber and subsidiary of Tencent and Alibaba (BABA), purchased the bankrupt bike-sharing company, paid the work staff, and slipped them inside its portfolio of emerging tech firms in January 2018.
Mingbike, which failed in Shanghai and Beijing, migrated to emptier pastures in third and fourth tier Chinese cities and sacked 99% of its staff.
All told, $3 billion to $4 billion has been funneled into these bicycle-share monstrosities in the past 18 months.
It gets a lot worse in terms of high risk.
Another frontier of interest that has gone absolutely bananas is the ICO (Initial Coin Offering). ICOs are an unregulated new cryptocurrency venture raising funds by crowdfunding. A certain percentage of coins is sold to early investors in exchange for legal tender or Bitcoin.
This controversial means of raising money is a hotbed for scams galore. Of 1,000 that now exist, maybe 10 are legit.
These criminals are taking advantage of the headline effect of cryptocurrencies, promising every Joe and Jane early retirements and an easy way to provide college funds for children.
It's true that a founder of a cryptocurrency demonstrably benefits financially from leading this new form of payment.
Simply put, these ICOs function as Ponzi schemes with the last one to buy holding the bag when the sushi hits the fan after the founders run for the exits.
These fraudulent ICOs take on some of the characteristics of real Ponzi schemes such as guaranteed profits, promising their blockchain technology will solve all of the world's ills, no detailed roadmap except collecting funds, and lack of an online digital footprint.
Adding to the outsized risk is the confusion of which jurisdiction these companies are in and absence of any proper compliance.
OneCoin was a cryptocurrency promoted by offshore companies OneCoin Ltd (Dubai) and OneLife Network Ltd (Belize), founded by Ruja Ignatova. Many of the shady characters crucial to OneCoin were architects of similar Ponzi schemes, which was a dead giveaway to authorities.
Bulgarian enforcement officials raided and hauled away servers and other sensitive evidence at OneCoin's office in Sofia, Bulgaria, at the request of the prosecutor's office in Bielefeld, Germany.
German police and Europol also busted 14 other companies connected to OneCoin.
OneCoin CEO Ignatova was imprisoned in India for swindling investors after being investigated by Indian authorities in 2017.
The Ministry of Planning and Investment of Vietnam even issued a rebuttal that a forged document OneCoin used as proof to show it was the official licensed cryptocurrency in Vietnam was fake. It stated there was no possibility this document could ever exist.
SEC chairman Jay Clayton recently chimed in after being asked if all ICOs are fraudulent, boldly stating, "Absolutely not."
Uber and Ofo also are not frauds, but that does not mean investors should take a flier on it.
The strength of technology has attracted the marginal character to its doorstep; separating the wheat from the chaff is more important than ever.
These nascent industries can look good in the shop window, and slick advertising campaigns numb our rational decision making, but investors need to stay away at all costs.
The bicycle-sharing industry is a way for cash-rich venture capitalists to hoard data for applications irrespective of operating at a profit. The ICOs are charlatans attracted to the fluid cash flow tech companies command desiring a share in the spoils.
Keep your money in your pockets and wait for my next actionable trade alert.
__________________________________________________________________________________________________
Quote of the Day
"Stay away from it. It's a mirage, basically." - said legendary investor Warren Buffett when asked about cryptocurrency.
I stopped at a Wal-Mart (WMT) the other day on my way to Napa Valley.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 at Wal-Mart.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there.
So I was not surprised when the company announced that it was closing 267 stores worldwide. The closures amount to only 1% of Wal-Mart?s total floor space. Some 10,000 American jobs will be lost.
The Wal-Mart downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached a tipping point, and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.
I remember the first purchases I made at Amazon 20 years ago. The idea was so dubious that I made my initial purchases with a credit card with a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
This is despite the fact that I knew Jeff Bezos personally as a former Morgan Stanley colleague. And how stupid was that name, Amazon? At least he didn?t call it ?Yahoo?.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don?t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front door icemaker and water dispenser? Have it there in two days, with free shipping.
In 2000, after the great ?Y2K? disaster that failed to show, I met with Bill Gates Sr. to discuss the foundation?s investments. It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn?t invested a dollar in commercial real estate.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paint ball game centers.
Mr. Gates? prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.
It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home across the country and around the world.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch).
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we?re hiring, especially in marketing.
You can see this in the business prospects of traditional brick and mortar retailers last year, which were dire.
As a result, Macy?s (M) stock plunged by a shocking -53%, Nordstrom (JWN) by -43%, and Best Buy (BBY) by -39%. Value players have mistaken the present low prices and subterranean price earnings multiples for a ?Black Friday? sale.
It has been like leading lambs to the slaughter.
Yes, some of this was caused by record warm temperatures on the US East coast, which led many to cancel their purchases of a new winter coat. But it is also happening because the entire ?bricks and mortar? industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of amazon, with higher prices. It is all ?Hour late and dollar short? stuff.
In the meantime, Amazon soared by 150%, and was one of the top performing stocks of 2015. It is thought that Amazon accounted for a staggering 25% of all the new growth in US retail sales last year.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There?s a good reason why you haven?t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition which I was unwilling to invest in. There were always better trades.
I confess that I had to look up the ticker symbols for this story, as I never use them.
However, I also missed the miracle at Amazon. I could never grasp their long tail strategy and their 100 X multiples. I have had to admire it from the sidelines. At least I wasn?t short.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers.
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when ?cheap? was on its way to zero.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read ?An Evening with Bill Gates Sr.?, please click here.
The Death of Retail?
If I warned them once, I warned them 1,000 times!
The Australian dollar (FXA) is going to fall.
That?s why I cautioned my Aussie friends to sell their homes, get the money the hell out of the country, and pay for their overseas vacations in advance.
As long as it is a de facto colony of China, the fortunes of the Land Down Under are completely tied to economic prospects there.
It is almost a waste of time looking at the Reserve Bank of Australia?s data releases. They have become a deep lagging, and really irrelevant indicators. You are better off going to the source, and that is in Beijing.
And therein lies the problem.
It is highly unlikely that the government in China has any idea what their economy is actually doing. Sure, they pump out the usual figures on a reliable basis like clockwork. These are educated guesses, at best.
Even in a perfect world, collecting numbers from 1.3 billion participants is a hopeless task. The US is unable to do these with any real accuracy, and we have one quarter of their population and vastly superior technology.
For what it is worth, Chinese President Xi Jinping has promised that his country?s GDP growth will not fall below a 6.5% annual rate for the next five years. At this pace, China is still creating more economic activity that any other country in the world.
Which leaves us nothing else to rely on but commodity prices to look at, far an away Australia?s largest earner. These are suggesting that the worst has yet to come.
Virtually the entire asset class hit new six year lows yesterday. I had to go to the weekly charts to see how ugly things really are.
Australia?s largest exports are iron ore (26%, or $68.2 billion worth), coal (KOL) (16%), gold (GLD) (8.1%), and petroleum (USO) (5.7%). When the world?s largest consumer of these slows down, so does demand for these commodities.
BHP Billiton Ltd. (BHP), the largest producer of iron ore, has seen its shares plunge 57% from last year?s high.
But wait! It gets worse.
I have written at length about the transition of China from an industrial to a services based economy. You would expect this, as the Middle Kingdom has virtually no commodity resources of its own, but lots of smart people.
In a nutshell, they wish they had America?s economy. Where services now account for a staggering 68% of all economic activity.
This is why China?s future lies with Alibaba (BABA), Baidu (BIDU), and JD.com (JD). It does NOT lie with its steel factories and coalmines, which by the way, recently announced layoffs of 100,000, the largest in history.
To learn more about the structural remaking of China, please click here for ?End of the Commodities Super Cycle?.
There is one bright spot to mention. Australia is making a transition to a services based economy of its own. Tourism is rocketing, as is the influx of flight capital from the Middle Kingdom.
Walk the streets of Brisbane these days, and you are overwhelmed by the abundance of Asians coming here to learn English, attain a high education, or start a new business. When I came here 40 years ago, they were virtually absent.
How low is low?
It doesn?t help that the governor of the Reserve Bank of Australia, Australia?s central bank, Glenn Stevens, despises his nation?s currency.
He has used every rally this year to talk down the Aussie, threatening interest rate cuts and quantitative easing.
The hope is that a deep discount currency will allow the exporters to maintain some pricing edge on the commodities front.
The market chatter is that the Aussie will take a run as low as $0.55, the 2008-09 Great Recession low.
Whether we actually get that far or not is a coin toss.
And will even $0.55 below enough for Glenn Stevens?
