Mad Hedge Technology Letter
August 7, 2019
Fiat Lux
Featured Trade:
(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)
Posts
Cord-cutting is picking up steam – that is the last thing traditional media want to hear.
There are several foundational themes that this newsletter has glued onto readers' foreheads.
The generational pivot to cloud-based media is one of them.
It’s easy to denominate this phenomenon down to Netflix (NFLX) but in 2019, this trend is so much more than Netflix.
E-marketer published a survey showing that cord-cutters will surpass 20% of all U.S. adults by the end of 2019.
The rapid demise of traditional television has been equally as mind-numbing with the 100.5 million subscribers in 2014 turning into 86.5 million subscribers today.
Comcast (CMCSA) has tried to buck the trend by homing in on fast broadband internet, but that strategy can only go so far.
Disney (DIS), WarnerMedia, and NBCUniversal Disney have really gotten their ducks in a row and are on the verge of launching their own unique streaming services.
Disney's service entails a 3-segment strategy bringing in Hulu and ESPN Plus to the Disney fold.
The Disney service will revolve around family content at its core so don’t expect Game of Thrones lookalikes.
WarnerMedia's hopes to cash in on its HBO brand while peppering it with original series and programming from Warner Bros. and DC.
Disney will be able to lean on family brands of Marvel, Star Wars, and Pixar, and newly acquired National Geographic.
Marvel Cinematic Universe is a growth asset pumping out more than $22 billion at the box office across 23 movies.
Disney Plus will also have a solid collection of Disney films to play with, which could make it indispensable to parents and comes with no ads making it even more appealing to kids.
Disney will also deploy some mix of bundles to diversify its offerings and personalize services for viewers who do not want its entire lineup of content.
The soon-to-be HBO Max will implement HBO original content along with WarnerMedia brands like Warner Bros., DC Entertainment, TBS, TNT, and CNN.
HBO Max will have a treasure trove of old Warner Bros. movies and TV shows, like "Friends" and "The Fresh Prince of Bel Air," that has played extremely well on Netflix.
HBO will get those titles back at the end of 2019.
HBO has also tied up with BBC Studios to stream "Doctor Who."
"You should assume that HBO Max will have live elements," said Randall Stephenson, chairman and CEO of AT&T, on the company's second quarter conference call.
This roughly translates into HBO Max snapping up live sports and music events to complement scripted content.
This is something that Netflix has shied away from and live events are best monetized through live ads.
The last big label service to go into effect is NBC’s yet to be named streaming service.
NBCUniversal will have the luxury of offering their cable subscribers a chance to pivot to an in-house online streaming service making the move seamless.
At first, the 21 million US cable-TV subscribers will receive the streaming content for free.
Some of the assets that will trot out on the NBC platform are "The Office," because NBC is removing it from Netflix for 2021.
As cord-cutters hasten their move to streaming, this trio of loaded content-creating firms will benefit as long as they maintain a high quality of content and the pipeline to please fidgety consumers.
Mad Hedge Technology Letter
July 5, 2019
Fiat Lux
Featured Trade:
(THE BALL IS IN NETFLIX’S COURT)
(NFLX), (DIS), (AAPL), (IQ), (KHC)
Being as volatile as it is, investors are afforded ample opportunity to get into one of the premium tech stocks in the land Netflix (NFLX).
Chasing this one higher is a dangerous thought, as habitual 30% dips is part and parcel of being attached to this supreme online streaming stock.
December of 2018 gave you that sinking feeling when Netflix dropped off a cliff dipping to $260 but spiking after the turn of the year as the Fed swiveled on a dime to save the equity market from implosion.
Let’s make no bones about it, the long-term narrative for Netflix is intact as it’s ever been.
The company simply makes a great product, period, and systematically taps endless demand.
What many cable companies don’t understand is that you cannot make a high-quality film product that wedges in annoying commercials and equally as obnoxious, dictate the window of time in which they should watch the content.
Optionality is value and Netflix has this spot on.
I know many Millennial consumers that would rather jump off a building than subject themselves to commercials.
These factors erode the quality of the product just as if an employer would dictate to one of his or her employees that wanted to take a vacation to Africa.
But the vacation to Africa would have some strings attached.
He or she would only be able to visit at the height of summer in 120-degree Fahrenheit weather while every activity he or she chose to do, would be pre-empted by numerous advertisements that he or she must be shown.
Consumers don’t need these sideshows anymore; the world has developed away from these models and corporates have lost this control.
The loss of corporate control of the consumers is because the internet gives consumers millions of different options at the tip of their fingers.
Tapping into the optionality and the habits that revolve around it is paramount to corporate America.
This is the same reason why big box food companies like Kraft Heinz (KHC) is getting smacked around, consumers have better options and are more aware of them because of technology.
Another example of corporate miscalculation comes in the form of supply chains being redirected from China to South East Asia.
It was clear as day that during my time in China that companies were making a terrible mistake going into China in the first place.
This shows how many corporates are dragged down by a lack of vision and do an awful job of anticipating paradigm shifts that are becoming more common because of the accelerating rate of change of the corporate climate, weather, technology, rule of law, and human migration.
Netflix is effectively blocked from China and China has its own Netflix called iQIYI (IQ), they had no chance from the beginning like Google, Amazon, Facebook, and the many other American tech firms.
Netflix’s business model now has scale working for them and growth numbers will be the main recipients going forward if they focus on high quality content.
That means expect high pay packages to the best media talent in the world.
They can afford to pay a tier 1 actor $50 million per movie because the data buttresses this strategy.
At the same time, Netflix is crushing competition by hoarding the talent with extraordinary pay packages while allowing these highly paid specialists 100% creative control over what they do.
Who would want to work for a company that paid more than double and whose management gave them free reign on creative decisions?
Sounds like an artist’s dream and it’s exactly that for actors like Will Smith who have signed onto Netflix’s project.
I would even suggest that Netflix needs to overpay actors just for the reason of taking them off the market for competitors.
This truly is the lucrative golden age for actors, producers, and directors who are the top 1% of their craft, but for everyone else, it’s a hard slog.
This usually means becoming a tier 1 actor before the migration to online streaming happened.
The picture I am painting is that Netflix’s success and future prospects aren’t about Disney or other competitors, but entirely about them.
He who has the most chips at the table with the best cards is in best position to win and the same goes for Netflix.
The rest of the bunch like Apple (AAPL) and Disney who are late to the party will be feeding off the rest of what Netflix cannot exploit and that’s the best-case scenario.
Disney should be able to have moderate success with its array of great movie, television, and sports content.
I’d be surprised if Disney failed because they possess the ingredients to concoct a delicious cocktail.
Apple has a harder proposition because of the lack of entertainment value in their content. They are still tied to the hardware sales and much of the service sales come from their app store and servicing the hardware.
But Apple does have money, and a lot of it to throw at the problem, but I don’t believe CEO of Apple Tim Cook is the right man to navigate through the travails of the online content world. He’s an operations guy and has never proved anything more than that.
Netflix still has substantial opportunity to grow its brand and the runway is long.
The demand for watching great original movies and television programs without commercials whenever consumers want is still in the first innings.
Even though Disney will remove some non-original content from Netflix’s platform, the content spend on a massive pipeline of new projects will more than fill the void left by Disney’s content.
In fact, Netflix should thank Disney for all those years that Disney allowed them to build their brand through 3rd party premium content like the television program Friends.
I believe Netflix does not need 3rd party content anymore, that is how much Netflix has bolted ahead in the past few years.
The company has introduced price hikes with its 4K premium package going from $14 to $16 per month.
But Netflix is still underpricing itself to the consumer to grab market share, and there is still pricing headway in the future if the company wants it.
In the coming months, Netflix plans to offer more detailed reporting on its metrics and the transparency will give investors even more insight into why this company is brilliant.
I believe the numbers will show that Netflix is absolutely killing it.
As for the trading, Netflix has settled in a range of $320 to $380 and any dips to the $340 range should be quite appetizing.
Add incrementally and use any large dip to drop your cost basis.
Stand aside if you cannot handle heightened volatility.
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
Global Market Comments
May 6, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR HERE’S ANOTHER BOMBSHELL),
(DIS), (QQQ), (AAPL), (INTU), (GOOGL), (LYFT), (UBER), (FCX))
Global Market Comments
April 29, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR ANOTHER LEG UP FOR THE MARKET),
(SPY), (TLT), (DIS), (INTU), (FCX), (MSFT),
(QQQ), (CVX), (XOM), (OXY), (TSLA)
This is one of those markets where you should have followed your mother’s advice and become a doctor.
I was shocked, amazed, and gobsmacked when the Q1 GDP came in at a red hot 3.2%. The economy had every reason to slow down during the first three months of 2019 with the government shutdown, trade war, and terrible winter. Many estimates were below 1%.
I took solace in the news by doing what I do best: I shot out four Trade Alerts within the hour.
Of course, the stock market knew this already, rising almost every day this year. Both the S&P 500 and the NASDAQ (QQQ) ground up to new all-time highs last week. The Dow Average will be the last to fall.
Did stock really just get another leg up, or this the greatest “Sell the news” of all time. Nevertheless, we have to trade the market we have, not the one we want or expect, so I quickly dove back in with new positions in both my portfolios.
One has to ask the question of how strong the economy really would have been without the above self-induced drags. 4%, 5%, yikes!
However, digging into the numbers, there is far less than meets the eye with the 3.2% figure. Exports accounted for a full 1% of this. That is unlikely to continue with Europe in free fall. A sharp growth in inventories generated another 0.7%, meaning companies making stuff that no one is buying. This is growth that has been pulled forward from future quarters.
Strip out these one-off anomalies and you get a core GDP that is growing at only 1.5%, lower than the previous quarter.
What is driving the recent rally is that corporate earnings are coming in stronger than expected. Back in December, analysts panicked and excessively cut forecasts.
With half of the companies already reporting, it now looks like the quarter will come in a couple of points higher than lower. That may be worth a rally of a few more percentage points higher for a few more weeks, but not much more than that.
So will the Fed raise rates now? A normal Fed certainly would in the face of such a hot GDP number. But nothing is normal anymore. The Fed canceled all four rate hikes for 2019 because the stock market was crashing. Now it’s booming. Does that put autumn rate hikes back on the table, or sooner?
Microsoft (MSFT) knocked it out of the park with great earnings and a massive 47% increase in cloud growth. The stock looks hell-bent to hit $140, and Mad Hedge followers who bought the stock close to $100 are making a killing. (MSFT) is now the third company to join the $1 trillion club.
And it’s not that the economy is without major weak spots. US Existing Home Sales dove in March by 5.9%, to an annualized 5.41 million units. Where is the falling mortgage rate boost here? Keep avoiding the sick man of the US economy. Car sales are also rolling over like the Bismarck, unless they’re electric.
Trump ended all Iran oil export waivers and the oil industry absolutely loved it with Texas tea soaring to new 2019 highs at $67 a barrel. Previously, the administration had been exempting eight major countries from the Iran sanctions. More disruption all the time. The US absolutely DOES NOT need an oil shock right now, unless you’re Exxon (XOM), Chevron (CVX), or Occidental Petroleum (OXY).
NASDAQ hit a new all-time high. Unfortunately, it’s all short covering and company share buybacks with no new money actually entering the market. How high is high? Tech would have to quadruple from here to hit the 2000 Dotcom Bubble top in valuation terms.
Tesla lost $700 million in Q1, and the stock collapsed to a new two-year low. It’s all because the EV subsidy dropped by half since January. Look for a profit rebound in quarters two and three. Capital raise anyone? Tesla junk bonds now yielding 8.51% if you’re looking for an income play. After a very long wait, a decent entry point is finally opening up on the long side.
The Mad Hedge Fund Trader blasted through to a new all-time high, up 16.02% year to date, as we took profits on the last of our technology long positions. I then added new long positions in (DIS), (FCX), and (INTU) on the hot GDP print, but only on a three-week view.
I had cut both Global Trading Dispatch and the Mad Hedge Technology Letter services down to 100% cash positions and waited for markets to tell us what to do next. And so they did.
I dove in with an extremely rare and opportunistic long in the bond market (TLT) and grabbed a quickie 14.61% profit on only three days.
April is now positive +0.60%. My 2019 year to date return gained to +16.02%, boosting my trailing one-year to +21.17%.
My nine and a half year shot up to +316.16%. The average annualized return appreciated to +33.87%. I am now 80% in cash with Global Trading Dispatch and 90% cash in the Mad Hedge Tech Letter.
The coming week will see another jobs trifecta.
On Monday, April 29 at 10:00 AM, we get March Consumer Spending. Alphabet (GOOGL) and Western Digital (WDC) report.
On Tuesday, April 30, 10:00 AM EST, we obtain a new Case Shiller CoreLogic National Home Price Index. Apple (AAPL), MacDonald’s (MCD), and General Electric (GE) report.
On Wednesday, May 1 at 2:00 PM, we get an FOMC statement.
QUALCOMM (QCOM) and Square (SQ) report. The ADP Private Employment Report is released at 8:15 AM.
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are produced. Gilead Sciences (GILD) and Dow Chemical (DOW) report.
On Friday, May 3 at 8:30 AM, we get the April Nonfarm Payroll Report. Adidas reports, and Berkshire Hathaway (BRK/A) reports on Saturday.
As for me, to show you how low my life has sunk, I spent my only free time this weekend watching Avengers: Endgame. It has already become the top movie opening in history which is why I sent out another Trade Alert last week to buy Walt Disney (DIS).
I supposed that now we have all become the dumb extension to our computers, the only entertainment we should expect is computer-generated graphics with only human voice-overs.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 23, 2019
Fiat Lux
Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)
