Mad Hedge Technology Letter
July 15, 2019
Fiat Lux
Featured Trade:
(HOW SOFTBANK IS TAKING OVER THE US VENTURE CAPITAL BUSINESS),
(SFTBY), (BABA), (GRUB), (WMT), (GM), (GS)
Posts
The man with the 300-year vision - Softbank’s Masayoshi Son.
He is the sole force exerting stultifying pressure on the venture capitalists of Silicon Valley.
What a ride it has been so far.
His $100 billion SoftBank Vision Fund has put the Sand Hill Road faithful in a tizzy – utterly revolutionizing an industry and showing who the true power resides with.
He has even gone so far as to double down on his exploits by claiming that he will raise additional $100 billion fund every few years and spend $50 billion per year.
This capital logically would flow into what he knows best – technology and the best technology money can buy.
Lately, Son said it best of the performance of the Vision Fund saying, “Results have actually been too good.”
So good that after this June, Son changed his schedule to spend 3% of his time on his telecom business down from 97% before June.
His telecommunications business in Japan has turned into a footnote.
It was just recently that Son’s tech investments eclipsed his legacy communications company.
Son vies to rinse and repeat this strategy to the horror of other venture capitalists.
The bottomless pit of capital he brings to the table predictably raises the prices for everyone in the tech investment world.
Son’s capital warfare strategy revolves around one main trope – Artificial Intelligence.
He also strictly selects industry leaders which have a high chance of dominating their field of expertise.
Geographically speaking, the fund has pinpointed America and China as the best sources of companies. India takes in the bronze medal.
His eyes have been squarely set on Silicon Valley for quite some time and his record speaks for himself scooping up stakes in power players such as Uber, WeWork, Slack, and GM (GM) Cruise.
Other stakes in Chinese firms he’s picked up are China’s Uber Didi Chuxing, China’s GrubHub (GRUB) Ele.me and the first digital insurer in China named Zhongan International costing him $500 million.
Other notable deals done are its sale of Flipkart to Walmart (WMT) for $4 billion giving SoftBank a $1.5 billion or 60% profit on the $2.5 billion position.
In 2016, the entire venture capitalist industry registered $75.3 billion in capital allocation according to the National Venture Capital Association.
This one company is rivalling that same spending power by itself.
Its smallest deal isn’t even small at $100 million, baffling the local players forcing them to scurry back to the drawing board.
The reverberation has been intense and far-reaching in Silicon Valley with former stalwarts such as Kleiner Perkins Caufield & Byers breaking up, outmaneuvered by this fresh newcomer with unlimited capital.
Let me remind you that it was once considered standard to cautiously wade into investment with several millions.
Venture capitalists would take stock of the progress and reassess if they wanted to delve in some more.
There was no bazooka strategy then.
SoftBank has promised boatloads of capital up front even overpaying in some cases in order to set the new market price.
Conveniently, Son stations himself nearby at a nine-acre estate in Woodside, California complete with an Italianate mansion he bought for $117.5 million in 2012.
It was one of the most expensive properties ever purchased in the state of California, even topping Hostess Brands owner Daren Metropoulos, who bought the Playboy Mansion from Hugh Hefner in 2016 for $100 million.
If you think Son is posh – he is not. He only fits himself out in the Japanese budget clothing brand Uniqlo. He just needed a comfortable place to stay and he hates hotels.
SoftBank hopes to cash in on its $4.4 billion investment in WeWork, an American office space-share company, proclaiming that WeWork would be his “next Alibaba.”
The company plans to shortly go public.
Son continued to say that WeWork is “something completely new that uses technology to build and network communities.”
Other additions to SoftBank’s dazzling array of unicorns is Bytedance, a start-up whose algorithms have fueled shot form video content app TikTok.
The deal values the company at $75 billion.
They have been able to insulate themselves from local industry giants Tencent and Alibaba.
Son has revealed that the Vision Fund’s annual rate of return has been 44%.
Cherry-picking off the top of the heap from the best artificial intelligence companies in the world is the secret recipe to outperforming your competitors.
At the same time, aggressively throwing money at these companies has effectively frozen out any resemblance of competition. Once the competition is frozen out, the value of these investments explodes, swiftly super-charged by rapidly expanding growth drivers.
How can you compete with a man who is willing to pay $300 million for a dog walking app?
This genius strategy has made the founder of SoftBank the most powerful businessman in the world.
Son owns the future and will have the largest say on how the world and economies evolve going forward.
Global Market Comments
June 14, 2019
Fiat Lux
Featured Trade:
(WEDNESDAY JUNE 26 BRISBANE, AUSTRALIA STRATEGY LUNCHEON)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (BYND), (AMZN), (GOOG), (AAPL), (CRM), (UT), (RTN), (DIS), (TLT), (HAL), (BABA), (BIDU), (SLV), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader June 12 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Do you think Tesla (TSLA) will survive?
A: Not only do I think it will survive, but it’ll go up 10 times from the current level. That’s why we urged people to buy the stock at $180. Tesla is so far ahead of the competition, it is incredible. They will sell 400,000 cars this year. The number two electric car competitor will sell only 25,000. They have a ten-year head start in the technology and they are increasing that lead every day. Battery costs will drop another 90% over the next decade eventually making these cars incredibly cheap. Increase sales by ten times and double profit margins and eventually, you get to a $1 trillion company.
Q: Beyond Meat (BYND)—the veggie burger stock—just crashed 25% after JP Morgan downgraded the stock. Are you a buyer here?
A: Absolutely not; veggie burgers are not my area of expertise. Although there will be a large long-term market here potentially worth $140 billion, short term, the profits in no way justify the current stock price which exists only for lack of anything else going on in the market. You don’t get rich buying stocks at 37 times company sales.
Q: Are you worried about antitrust fears destroying the Tech stocks?
A: No, it really comes down to a choice: would you rather American or Chinese companies dominate technology? If we break up all our big tech companies, the only large ones left will be Chinese. It’s in the national interest to keep these companies going. If you did break up any of the FANGS, you’d be creating a ton of value. Amazon (AMZN) is probably worth double if it were broken up into four different pieces. Amazon Web Services alone, their cloud business, will probably be worth $1 trillion as a stand-alone company in five years. The same is true with Apple (AAPL) or Google (GOOG). So, that’s not a big threat overhanging the market.
Q: Is it time to buy Salesforce (CRM)?
A: Yes, you want to be picking up any cloud company you can on any kind of sizeable selloff, and although this isn’t a sizeable selloff, Salesforce is the dominant player in cloud plays; you just want to keep buying this all day long. We get back into it every chance we can.
Q: Do you think the proposed merger of United Technologies (UT) and Raytheon (RTN) will lower the business quality of United Tech’s aerospace business?
A: No, these are almost perfectly complementary companies. One is strong in aerospace while the other is weak, and vice versa with defense. You mesh the two together, you get big economies of scale. The resulting layoffs from the merger will show an increase in overall profitability.
Q: I had the Disney (DIS) shares put to me at $114 a share; would you buy these?
A: Disney stock is going to go up ahead of the summer blockbuster season, so the puts are going to expire being worthless. Sell the puts you have and then go short even more to make back your money. Go naked short a small non-leveraged amount Disney $114 puts, and that should bring in a nice return in an otherwise dead market. Make sure you wait for another selloff in the market to do that.
Q: What role does global warming play in your bullish hypothesis for the 2020s?
A: If people start to actually address global warming, it will be hugely positive for the global economy. It would demand the creation of a plethora of industries around the world, such as solar and other alternative energy industries. When I originally made my “Golden Age” forecast years ago, it was based on the demographics, not global warming; but now that you mention it, any kind of increase in government spending is positive for the global economy, even if it’s borrowed. Spending to avert global warming could be the turbocharger.
Q: Why not go long in the United States Treasury Bond Fund (TLT) into the Fed interest rate cuts?
A: I would, but only on a larger pullback. The problem is that at a 2.06% ten-year Treasury yield, three of the next five quarter-point cuts are already priced into the market. Ideally, if you can get down to $126 in the (TLT), that would be a sweet spot. I have a feeling we’re not going to pull back that far—if you can pull back five points from the recent high at $133, that would be a good point at which to be long in the (TLT).
Q: Extreme weather is driving energy demand to its highest peak since 2010...is there a play here in some energy companies that I’m missing?
A: No, if we’re going into recession and there’s a global supply glut of oil, you don’t want to be anywhere near the energy space whatsoever; and the charts we just went through—Halliburton (HAL) and so on—amply demonstrate that fact. The only play here in oil is on the short side. When US production is in the process of ramping up from 5 million (2005) to $12.3 million (now), to 17 million barrels a day (by 2024) you don’t want to have any exposure to the price of oil whatsoever.
Q: What about China’s FANGS—Alibaba (BABA) and Baidu (BIDU). What do you think of them?
A: I wanted to start buying these on extreme selloff days in anticipation of a trade deal that happens sometime next year. You actually did get rallies without a deal in these things showing that they have finally bottomed down. So yes, I want to be a player in the Chinese FANGS in expectation of a trade deal in the future sometime, but not soon.
Q: Silver (SLV) seems weaker than gold. What’s your view on this?
A: Silver is always the high beta play. It usually moves 1.5-2.5 times faster than gold, so not only do you get bigger rallies in silver, you get bigger selloffs also. The industrial case for silver basically disappeared when we went to digital cameras twenty years ago.
Q: Does this extended trade war mean the end for emerging markets (EEM)?
A: Yes, for the time being. Emerging markets are one of the biggest victims of trade wars. They are more dependent on trade than any of the major economies, so as long as we have a trade war that’s getting worse, we want to avoid emerging markets like the plague.
Q: We just got a huge rebound in the market out of dovish Fed comments. Is this delivering the way for a more dovish message for the rest of the year?
A: Yes, the market is discounting five interest rate cuts through next year; so far, the Fed has delivered none of them. If they delayed that cutting strategy at all, even for a month, it could lead to a 10% selloff in the stock market very quickly and that in and of itself will bring more Fed interest rate cuts. So, it is sort of a self-fulfilling prophecy. The bottom line is that we’re looking at an ultra-low interest rate world for the foreseeable future.
Good Luck and Good Trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
May 30, 2019
Fiat Lux
Featured Trade:
(IS TARGET THE NEXT FANG?)
(TGT), (AMZN), (WMT)
Mad Hedge Technology Letter
May 29, 2019
Fiat Lux
Featured Trade:
(CHINA TO BAN FEDEX)
(HUAWEI), (AMZN), (FDX), (UPS), (DPSGY), (BABA), (ZTO)
Sell any and all rallies in FedEx (FDX) – that’s my quick takeaway from the Chinese communist party publishing a sharp retort to their de-facto mouthpiece of a publication called the Global Times signaling FedEx’s imminent demise in greater China.
The Global Times is often used as thinly veiled statements to a wider global audience and mimics the ideology of the ruling communist party and their main positions on critical issues.
As regards to FedEx’s business in China, it said:
“There are rising calls for China's postal service regulator to cut off FedEx from China market, as Huawei has accused the US express courier of diverting and rerouting its packages.”
FedEx is crushing the Chinese logistics market currently and is the go-to carrier holding firm at 54.6% market share.
They have been around in China for as long as the economic boom has percolated inside the mainland from 1984, far before any of its local competitors were even up and running by a decade or two.
FedEx’s latest acquisition of Dutch-based TNT Express in 2016 solidified its dominance.
Foreign competition is a mainstay of international shipping patterns in China with the top three rounded out by DHL (DPSGY) with a 25.07% market share and United Parcel Service (UPS) with a 16.94% market share.
If these assertive claims do result in FedEx meaningfully losing China revenue, UPS wouldn’t stand to pick up the leftovers and could be put out to pasture by the same issue of hailing from a country that has an active adversarial economic policy against China’s.
If anyone would benefit, it would by DHL, given that Germany has a far less hawkish stance towards China, and they are unwilling to bite off the hand that feeds them.
The current situation is a concerning sign for the future of Germany as an industrial power and ability to sustain itself against China Inc.
It could be somewhat true that Germany has overextended themselves and only time, Made in China 2025 project, and the mood of the Chinese communist party can delay the inevitability of full tech hegemony over their western European counterpart.
The communist party could choose to just bypass DHL altogether and kick out all foreign invaders gifting courier responsibilities to Alibaba-based (BABA) subsidiaries and the likes of ZTO Express (ZTO) who provide express delivery and other value-added logistics services in China.
DHL will hope that China delays any draconian measures and pray that its active partnership with a local logistic firm has real legs.
DHL's revenue sharing agreement with SF Express does not preclude them from the anger of Chinese regulators, but the risk of Chinese regulators favoring local couriers has risen another 25%.
Playing by the rules goes a long way in China, even if they change every day, and for customers across DHL’s target audience of industries including technology, health care, retail, automotive, and e-commerce.
DHL CEO Frank Appel said, "Combined with our global operations standards and network support, the agreement provides a solid foundation to continue exploring further opportunities in China in the coming years."
From an outside perspective, this sounds more like forced cooperation with forced technology transfers with the mainland companies slurping up Germany tech knowhow.
Doing a deal with the devil for access to a 1.3 billion customer market is being put through the ringer.
When I view the snippets through the lens of geopolitics, it’s hard to believe that at such a sensitive time, FedEx would actively “reroute” packages and knowingly approved this behavior, they simply can’t be that clumsy.
The situation smells like an overt show of nationalism by a group of individuals, and it questions the longevity of FedEx operating in China all the same.
FedEx promptly responded confessing:
“We regret that this isolated number of Huawei packages were inadvertently misrouted.”
An unintentional mistake offered a golden opportunity to tie the logistics company to the U.S. government’s aggressive nature and going forward FedEx will remain in a shroud of mystery until investors can get further grips on the rates of growth of their Chinese operations.
If FedEx were afraid about this, then they must be tearing their hair out about the domestic behemoth that is Amazon (AMZN) and their desires to install a full-service logistic service to blanket FedEx from e-commerce deliveries.
This has been the initial premise of my short call on FedEx, which has proved correct, and the regulatory nightmare in China will cast another cloud around its business.
Any strength in FedEx shares will be met with a cascade of selling activity, and as the economy slows down because of tariff-induced headwinds, this is a stock to outright short.
Back to China, FedEx slashed its full-year profit forecast for the second time in three months after reporting weaker-than-expected third quarter earnings.
The Chinese economy is absolutely slowing down, and its effects are impacting surrounding Asian nations.
Manufacturing cuts will cause the number of courier packages to slide in China and there is no telling how bad this trade stand-off could get.
It doesn’t look good for FedEx, and I reiterate my short stance on the company.
Mad Hedge Technology Letter
May 22, 2019
Fiat Lux
Featured Trade:
(WHY YOU NEED TO CONSIDER ALIBABA)
(BABA), (AMZN)
If you’re looking for a long-term trend that highlights the state of the world, then there is no other source than Alibaba (BABA), the Amazon (AMZN) of China.
I am not saying to go out and buy this e-commerce juggernaut hand over fist, but understanding the essence of Alibaba offers an insight into the technological effects that big tech companies have on the global consumer.
Alibaba and Amazon, together, and their success have had an outsized influence on central banks around the world.
Back stateside, mixed data of persistently low inflation has confounded economists in the years since the Federal Reserve first adopted its 2% inflation target after the financial crisis.
These e-commerce firms' endeavors mean that we can whittle down expenses, migrating pricing power away from the middle class while padding the pockets of a few tech shareholders.
And if you thought Amazon offers low prices, Alibaba often offers even lower price tags because of knockoffs that are blatantly hawked on their platform.
These two companies have rocked the current marketplace by jacking up supply, which in effect brings prices down with their volume-first business models.
Inflationary signals have continued to be suppressed below the Federal Reserve’s 2% target and is mostly likely to stay low into the foreseeable future.
The Fed’s concocted measure of inflation – or the “core” personal consumption expenditures index excludes the volatile categories of food and energy.
This slowed to a rate of 1.6% year-over-year in March, marking the slowest pace since January 2018.
Combine low inflation with a national unemployment rate cratering to a 49-year low in April, and economists start to sniff around attempting to understand what is truly happening.
Theoretically, a low unemployment rate generally translates into higher levels of inflation, but the inflation is being captured by tech CEOs who are offering free services or something close to it that destroys traditional pricing mechanisms.
Once ingrained economic relationships are going extinct, and the underlying relationship has mutated to the benefit of Silicon Valley.
The economic models you once learned in school are now dead and I am giving you the reasons why.
In the Federal Reserve’s most recent policy meeting, Chairman Jerome Powell attributed factors blaming lower inflation on “transitory” variables including slipping financial service fees after the stock market’s fourth-quarter slide, along with healthcare costs.
The consequence is massive with the Fed unable to aggressively raise rates while putting the kibosh on any meaningful wage growth even while the economy is growing at 4% annually.
This has given the Fed the impetus to put rates on pause this year, which is a net dovish outcome after offering a more hawkish stance last winter.
The closely watched Fed Funds Futures tool signaled markets pricing in a 75% probability that the central bank would cut rates at least once by its December meeting which could be an overzealous prediction.
Alibaba is doing its best to crush global inflation by selling over $850 billion in Gross Merchandizing Volume (GMV) last quarter.
Not only are they selling physical goods, but they hope to crash the price for storing digital data with its cloud revenue growing 84% last year dotting Europe with new data centers.
Alibaba’s core e-commerce revenue was up 51% YOY last quarter with 721 million monthly active users.
Alibaba’s monthly active user totals are twice the population size of the United States epitomizing the breadth of this business that is quickly gaining traction in parts of Europe and Russia.
And even with Silicon Valley hijacking inflation, their interests are being staunchly defended by the current American administration from the Chinese who have copied the Silicon Valley deflation model themselves.
The trade fallout could cause massive store closures in America with more malls shuttering from the extra costs of the levied tariffs giving tech even more leeway into the e-commerce game enabling them to capture more revenue.
Brick & mortar retail is incrementally struggling with less foot traffic as customers stay home and click away on Amazon, and the new 25% bump in costs of goods could be the death knell for a large segment of physical stores.
UBS issued a note projecting nearly 21,000 retail stores will close by 2026 in the U.S.
The trade war will put into question future American jobs and increase costs for consumers.
Ultimately, Silicon Valley can have their cake and eat it too boding well for future tech stocks.
The most powerful part about Silicon Valley is the speed in which they can put analog firms out of business leaving the tech wolves to scoop up the most scrumptious leftovers.
We are just scratching the surface of what Silicon Valley will deliver for its stakeholders giving the average investor a strong hint that if you don’t have skin in the tech game yet, then it’s time to join the bandwagon.
Technology will outperform every sector going forward in almost every feasible circumstance, contrast this with sectors who are burning before our eyes, and the smart investor will understand that the deflation signs of the economy are a gilded edge buy sign for the best of breed tech.
Investors should be aware long-term that Amazon and Alibaba will harvest the inflation and pocket it in terms of revenue instead of profits because of the decision to prioritize growth over profits growing so large that they will be akin to a monopoly.
In either outcome, it equates to buy and buy some more of these shares.
Mad Hedge Technology Letter
May 14, 2019
Fiat Lux
Featured Trade:
(CHINA’S COUNTERATTACK)
(AAPL), (MSFT), (ADBE), (PYPL), (QCOM), (MU), (JD), (BABA), (BIDU)
