Global Market Comments
April 2, 2018
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOODBYE THE QUARTER FROM HELL),
(SPY), (INTC), (AMZN), (CSCO),
(MONDAY, JUNE 11, FORT WORTH, TEXAS, GLOBAL STRATEGY LUNCHEON),
(THE HARD/SOFT DATA CONUNDRUM)
Global Market Comments
March 26, 2018
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT WASHINGTON FINALLY MATTERED),
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(TESTIMONIAL)
I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals.
So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, who is known as ?Hoss? to his close subordinates.
Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes.
As he spoke, I was ticking off the stock, ETF and futures plays that would best capitalize on the long term trends he was outlining.
The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO) and (PANW). Peer nation states, like Russia, are no longer the main concern.
Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.
The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general.? However, the 30,000-man surge there brought a dramatic improvement on the ground situation.
Iran is a big concern and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.
Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.
Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites.?
We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.??
The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI).? The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.
I left the dinner with dozens of ideas percolating through my mind, which I will write about in future letters.
One couldn?t help but notice the outbreak of recollection, reminiscing and schadenfreude that took place yesterday when the NASDAQ briefly tipped over 5,000.
I remember it like it was yesterday. I am still amazed by the frenzy that took place, witnessing the kind of bubble one only sees twice a century. And I was right in the thick of it, living in nearby Silicon Valley.
Business school students were raising $50 million with a one-page business plan. An analyst predicted that Amazon (AMZN) shares would double to $400 in a year. It happened in only four weeks.
All of my attorneys quit, taking up prestige jobs as chief legal counsels at new start ups, taking stock in lieu of pay, dollar bills dancing in front of their eyes. They were replaced by the ?B? team. Other law firms started accepting stock as payment of legal fees.
I knew more than one office secretary who took pay cuts to $15,000 a year in exchange for stock, which they later sold for $2 million.
When I tried to expand my company, I couldn?t find a larger office to rent. San Francisco had run out of office space. So I bought a house for $7 million instead and worked from there. That was no problem, as everyone had $7 million then.
But what I remember most fondly were the parties. The beneficiaries of every IPO sought to celebrate with the biggest party in Bay Area history, each one eclipsing the last. An entire industry of creative party organizers sprung up, seeking to outdo every competitor.
I remember most fondly the Vodka luge carved out of a giant block of ice, where a pretty hostage poured 100 proof super cooled rocket fuel straight down your throat. By midnight, the passed out bodies started piling up on the periphery.
Those were the days!
Which brings us to today, when handwringing is breaking out all over. Investors are afraid that we are just now putting in the double top of the century in NASDAQ, with a very neat 15 years taking place between peaks.
Is it time to sell?
I think not.
Today, we see a completely different world from the one we knew in 2000. Global GDP then was a mere $32 trillion. Today it is 2.5 times higher at $78 trillion. Using this simplistic measure, the GDP adjusted value of NASDAQ should be 12,187.
The high tech index peaked at a price earnings multiple of 100 times earnings. Today it is 30 times. That means the multiple adjusted high for NASDAQ today would be 16,650.
Technology stocks then didn?t pay dividends. Today, look at Apple (AAPL), which pays a 1.50% dividend worth $11.25 billion in annual payouts. This revenue stream provides enormous support under the market, and almost makes Apple shares perform more like bonds than stocks.
Which brings me to a new investment thesis.
What if the stocks that peaked in 2000 are only now just breaking out and starting long bull runs? I am thinking of quality technology names that have completed long, sideways, basing moves. Ebay (EBAY), Broadcom (BRCM), and Cisco (CSCO) leap to the fore.
The possibilities boggle the mind.
I think that in order to get NASDAQ to really get the bit between its teeth, one thing has to happen. Apple has to stop going up.
You really only had to make one stock call in 2014. You had to be overweight Apple. If you did, you were a star. If you didn?t, then you are still probably looking for a new job on Craig?s List.
Managers are behaving as if the past were a prologue, loading the boat with Apple with their eyes firmly fixed on the rear view mirror. That explains the blowout 13% jump in Steve Jobs? creation so far in 2015, some $90 billion in market capitalization.
All you need is for investors to stop buying Apple for 15 minutes and rotate into other big tech names. That was my logic behind my Trade Alert to buy Cisco two weeks ago. If that occurs, it will be off to the races for NASDAQ once again.
Remember that old saw in technical analysis land, ?the longer the base, the bigger the air above it.?
A vodka martini, anyone?
I thought I noticed a spring in the step of Cisco Systems (CSCO) CEO John Chambers when he strutted out on TV to announce earnings last week.
Revenue came in just shy of $12 billion, a 7% improvement over fiscal 2014's Q2, and earnings per share really popped -- up 70% on a GAAP basis (including one-time items) to $2.4 billion from the prior year's "paltry" $1.4 billion.
Yikes!
Business in the US for the router and telecommunication company is going gangbusters. What is more important is the Chambers is seeing ?green shoots? is Europe, which has been a drag on the company?s earnings over the past several years.
This all presents important implications for the health of the global economy, which could be about to get dramatically better. Bring Europe, Japan, and China online, and we?re there.
It all fits in nicely with my own bullish forecasts for stocks in 2015. This has major implications for your own investment portfolio.
Cisco?s hardware is essential for connecting America?s 336 million cell phones. The Broadband spectrum needed for these devices to talk to each other is the new raw material of the 2000?s, replacing the oil, coal, and steel of an earlier century.
Cisco Systems (CSCO) believes that data delivered to mobile devices will skyrocket, from 4.2 billion gigabytes this year to a breathtaking 24.3 billion gigabytes by 2019 (or 24.2 Exabytes if you are interested). That is a fivefold increase in five years.
Blame all those kids watching full-length high definition motion pictures on their cell phones. My own tracking of share prices is no doubt making its contribution.
That means that at the current rate of capital investment, the US will completely run out of broadband capacity sometimes in 2018.
The answer? A lot more investment spending on all things broadband. This includes, the pipes, fiber optic cable everywhere, transmission towers, repeaters, and of course, lots of new routers.
This is all great news for Cisco.
Indeed, this is creating a gold rush for new spectrum as investors rush to buy the few free frequencies that are left.
In January, the Federal Communications Commission (FCC) auctioned off some government owned airwaves. It expected to receive $15 billion for the Licenses. What did it get? An eye popping $44.9 billion.
This is a game changer, and is enough to pay off 10% of this year?s total federal budget deficit. No doubt, they were popping the Champaign at the Treasury Department.
This has whetted appetites for a much larger auction due in 2016 or 2017, when the government sells off its last pieces of useable bandwidth. Like highly valued beachfront property, they?re not making it anymore.
Having covered the computer industry for nearly 50 years, I find all this fascinating. Processing advances have been driven by Moore?s law since 1965. That?s when Intel?s Gordon Moore predicted that computing speed would double every 2 years, while costs halved for the indefinite future. He later amended his theory to 18 months. Here we are in 2015, and he has proved dead on correct.
Telecommunications has its own version. Motorola engineer, Marty Cooper, invented the mobile phone in 1973. He has calculated that ?spectral efficiency? has doubled every 2 ? years since Guglielmo Marconi made his first broadcast in 1910.
Since then, efficiencies have improved by a trillion-fold. Analysts now refer to this forecast as ?Cooper?s Law.?
The logic in picking strikes for the Cisco Systems (CSCO) March, 2015 $27-$29 in-the-money vertical bull call spread is that we can trade against the gap created by the blowout earnings announcement.
With the market having the bit between its teeth, I doubt we will retrace that gap anytime soon.
To visit Cisco?s home page, please click here at http://www.cisco.com/c/en/us/index.html.
Way to Go MartyI have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, and known as ?Hoss? to his close subordinates.
Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.
The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO), and (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.
Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.
The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general. However, the 30,000-man surge there brought a dramatic improvement on the ground situation.
Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.
Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.
Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.?
The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.
I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.
