Mad Hedge Technology Letter
July 19, 2018
Fiat Lux
Featured Trade:
(AVOIDING THE BULLY),
(MSFT), (AMZN), (WMT), (GME), (ORCL), (GE), (CPB)
Posts
A bully stealing your lunch is not fun.
Partnering up to subdue a bully isn't only happening on the school playground.
Walmart (WMT) is doing it now, too.
Let me explain.
The Amazon (AMZN) effect is understood as the disruption of traditional brick-and-mortar business by Amazon's domination in e-commerce sales.
This phenomenon was all about how Amazon would take over, and by all means they are, and in brisk fashion.
That is why Amazon trade alerts from the Mad Hedge Technology Letter are nestled away in your email inbox.
Desperate times call for desperate measures.
Amazon competitors are facing an existential crisis they have never seen before.
The newest member of the FANG group, Walmart, is transforming into a tech company, and this metamorphosis is picking up steam.
To read my recent story about Walmart's headfirst dive into India, the newest battleground country, by way of its purchase of Indian e-commerce juggernaut Flipkart, please click here.
The second part of its strategy was revealed by announcing that Walmart would partner with Microsoft's (MSFT) cloud platform Azure to tap into the deep A.I. (artificial intelligence) and machine learning expertise.
If you can't beat them, find another competitor to help you change the status quo.
The five-year deal is a game changer in a coveted cloud industry pitting David vs. Goliath.
Amazon's footprint is wide reaching and bosses 33% of the cloud market it invented, far and away surpassing runner-up Microsoft, which garners just 13% market share.
Microsoft is catching up fast and that 13% was just 10% in 2016.
Microsoft and Walmart have a common foe that haunts them in their dreams.
These companies feel they are better served combining forces than being isolated from each other.
In an exclusive Wall Street Journal interview with Satya Nadella, Microsoft's CEO, Nadella directly confirmed what people already knew.
This strategic move "is absolutely core to this (Amazon threat)."
Walmart will use Microsoft's advanced cloud technology to optimize its operations from managing inventory, selecting the most suitable products to display, and running its equipment efficiently.
In 2016, Walmart's purchase of e-commerce company Jet.com was thoroughly integrated onto the Microsoft Azure. This further cooperation will help boost a company that has been aggressively vocal about its tech exploits.
High-quality products sell themselves and the story has played itself over again.
Microsoft is a master at luring in business through the front door, and padlocking the front gate procuring business for decades.
This case is no different and a vital reason the Mad Hedge Technology Letter has pinned down Microsoft as a top three tech stock.
Walmart also has made it crystal clear that a prerequisite for doing business with them is not doing business with Amazon Web Services (AWS), Amazon's lucrative cloud division.
Any profit dropping down to the (AWS) bottom line is used to wield against the retail landscape, damaging Walmart's prospects.
The Amazon effect is starting to work against Amazon, as the threat is forcing other businesses to adopt the same mind-set as Walmart.
Snowflake Computing, a private data firm focused on warehouse databases established by Bob Muglia in 2014, was exclusively available on the AWS platform.
However, more and more retailers such as Walmart started banging on Snowflake Computing's door demanding that it offer its cloud services on a cloud platform that is not its competitor.
Snowflake Computing obliged and is now up and running on Microsoft Azure.
Can you imagine the competition being able to sift through troves of data understanding every strength and weakness?
It's a one-way street to bankruptcy court.
Perhaps that explains why GameStop (GME) is such a poor performer, as its operations are entirely on (AWS).
GameStop is a stock that I am bearish on, because selling video games as a middleman is a legacy business.
Kids just download everything direct from the manufacturer from their broadband connection, making GameStop's business model obsolete.
It has a turnaround plan, apparently Oracle (ORCL) has one too, but it's barely begun.
Microsoft is a bad choice as well for GameStop, which is heart and center in the video game industry as well.
There are many alternatives; someone should notify recently installed GameStop CEO Daniel A. DeMatteo about one.
(AWS)'s dominance is benefitting Microsoft Azure explaining the rapid pace of cloud market share advancement.
This is just the tip of the iceberg. Walmart has some other irons in the fire.
Enter Project Kepler.
This is Walmart's response to Amazon Go stores, a partially automated retail store with no cashiers or checkout station, which currently has one functional location in Seattle.
Project Kepler is being developed by Jet.com co-founder and CTO Mike Hanrahan. And guess who is providing the technology for this alternative retail experience store - Microsoft.
Microsoft poached a computer vision specialist from Amazon Go who will help develop the appropriate sensors and computer vision algorithms necessary to get this store up and running.
These same sensors can be found in autonomous driving technology.
Shopping cart cameras could also be added to the mix to ensure quality and hopefully avoid the teething pains new technology grapples with.
Microsoft Azure CTO Mark Russinovich commented lately saying firms are on the front foot utilizing "A.I. and machine learning to automate processes to get insights into operations that they didn't have before."
Microsoft is perfectly set up to harvest many of these new contracts.
The deals have started to roll in.
Microsoft is successfully broadening its relationship with GE (GE), using the Azure data analytics capabilities to transform GE Digital's industrial IoT solutions.
This week also saw Microsoft scoop up Campbell Soup Company (CPB) as a new client, which decided on Microsoft Azure to modernize its IT infrastructure.
Campbell Soup will deploy Azure for real-time access to critical operations data, offering deeper intelligence for Campbell's senior management team.
This robust business activity is all because Microsoft is not Amazon, along with having a stellar product about which companies gloat.
Retailers have chosen Microsoft as the cloud platform of choice and expect the majority of retailers to tie their futures to Microsoft.
That's not the only iron in the fire.
Jetblack is another experimental retail service that Walmart is testing as we speak.
The service is still in beta mode in Manhattan targeting urban, high net worth mothers.
It emphasizes a personalized shopping experience in a narrow segment of goods that include household products, cosmetics, health and beauty products.
Shoppers will be able to snap photos of products and send them to Jetblack, receiving them at home with free shipping.
Customer service will be carried out by a high-quality lifelike bot, and Walmart intends to charge a membership fee to take part in this specialized shopping experience.
Microsoft subsidiary LinkedIn has also been leaning more on its parent company's technology lately.
LinkedIn software engineer Angelika Clayton wrote in her blog that "dozens of languages" are being converted into English via Microsoft Translator Text application programming interface, ballooning the candidate database for English speaking headhunters.
Could foreign language learning soon go way of the dodo bird and woolly mammoth?
Machine learning and A.I. have that type of power.
Tech analysts on the street must avoid issuing reports boasting that "everything is priced in," because these tech behemoths are driving innovation faster than people can understand it.
Walmart has turned into one of the most innovative companies around.
Who would have imagined this development a few years ago?
Nobody, not even Walmart itself.
Everything Microsoft touches lately turns into gold, along with being one of the more trusted tech titans out of the motley crew that has ruffled a few feathers this year.
Walmart is aggressively experimenting, systematically attempting to hop on new trends in retail hoping one or two will catch fire.
The credit must go to CEO Doug McMillon who has brought a tech first approach since being installed as CEO in 2014.
Even though conservative Walmart investors have penalized Walmart for the heavy spending, they must come to terms that Walmart's model is plain different now.
It's either spend or die in 2018.
Microsoft is in store to report its status on its pursuit of AWS, and I expect the company to inch closer with each earnings report.
Its outperforming Azure cloud business is in the first stages of a marathon, and sometimes it's not always salubrious to be the schoolyard bully because everybody starts avoiding you like the plague.
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Quote of the Day
"They broke the law on several occasions after being warned," said Larry Kudlow, director of the United States National Economic Council, when asked about Chinese company ZTE, which sold telecommunications equipment to Iran and North Korea.
Global Market Comments
May 21, 2018
Fiat Lux
Featured Trade:
(JOIN ME ON THE QUEEN MARY 2 FOR THE MAD HEDGE JULY 11, 2018 SEMINAR AT SEA),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or NO TRADE),
($INDU), (SPY), (TLT), ($TNX), (CPB)
That was the most boring week of 2018.
Not only did we get no net movement; the range was an infinitesimal 200 Dow points. It was hardly enough to make a dog's breakfast.
Of course, the big news was the yield on the 10-year U.S. Treasury bond (TLT), which rose to 3.12%, a seven-year high. You might have expected this to prompt a complete stock market rout. It didn't. Maybe that is next week's business.
It is rare that the bullish and bearish arguments reach a perfect balance, but that is what we got. In the meantime, trading volume is shrinking, never a good sign. Will the last one to leave please shut out the lights?
Which is all an indication of what I have been warning you about for months. This is setting up to be a dreadful summer. If you've already made your year, with a 19.88% gain like I have, you're better off taking a long cruise than trying to outsmart the algorithms.
I managed to squeeze off only one trade so far this month. I sold short the S&P 500 (SPY) right at the high of the week. However, when the downside momentum failed, and a Volatility Index (VIX) spike failed to confirm, I bailed for a small profit. Pickings are indeed thin.
Whenever my trading slows down, I get the inevitable customer complaints. My answer is always the same. Reach for the marginal trade and you will get your fingers bit off. Don't be in such a hurry to lose money. As my wise Latin professor used to say, "Festina lente," or "make haste slowly."
My May return is +0.53%, my year-to-date return stands at a robust 19.83%, my trailing one-year return has risen to 56.25%, and my eight-year profit sits at a 296.30% apex.
And remember, the market is making this move in the face of rising oil prices and interest rates, always bull market killers.
To mix a few metaphors, when the sun, moon, and stars line up once again I'll go pedal to the metal with the Trade Alerts once again.
If you held a gun to my head and ordered me to tell you how the markets will play out for the rest of the year, try this.
We remain is this narrowing trading range for months, ending with a final decisive break of the 200-day moving average to the downside, now at 23,909. But we find a new low only 1,000 points, or 4% below that.
Then we launch into the post midterm election year-end rally, which could take stocks up 15% to 20% from the 23,000 low. This is why I have been saying that the best trades of 2018 are ahead of us.
So, renew that subscription!
To witness how cruel and stock specific the current market is, look no further than hapless Campbell Soup (CPB), the first ticker symbol I have had to look up this year. There is probably not a reader alive who was not nursed back to health by its iconic red canned chicken noodle soup.
A surprise earnings loss triggered a hellacious 14% one-day plunge. It is the first big victim of the new steel tariffs. Although it amounts to only a few pennies a can, that can be disastrous in this hyper-competitive world. It also turns out that Millennials prefer eating fresh food rather that the canned stuff.
Give thanks for small mercies. With three daughters I am at ultimate risk for a tab for three weddings. The nuptials for Meghan Markle and Prince Harry are thought to cost $45 million, most of it on security. Hopefully I will not someday become the father-in-law of a prince.
This coming week has a plethora of Fed speakers, some key housing numbers, and that's about it.
On Monday, May 21, at 8:30 AM, we get April Chicago Fed National Activity Index.
On Tuesday, May 22, nothing of note is announced.
On Wednesday, May 23, at 10:00 AM, the April New Home Sales.
Thursday, May 24, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a rise of 11,000 last week from a 43-year low. At 10:00 AM, we get April Existing Home Sales.
On Friday, May 25, at 8:30 AM EST, we get April Durable Goods Orders.
We wrap up with the Baker Hughes Rig Count at 1:00 PM EST.
As for me, I will be spending the weekend putting the finishing touches on my 2018 Mad Hedge European Tour.
Thanks to rising U.S. interest rates and a strong dollar, the price of a continental trip has dropped about 10% since the beginning of the year. Got to love that Swiss franc at 1:1 parity with the greenback. Maybe I can afford an extra cheese fondue.
Good Luck and Good Trading.
Yes, It All Looks Like Magic