Mad Hedge Technology Letter
November 28, 2018
Fiat Lux
Featured Trade:
(TRUMP'S TARIFF THREAT FOR APPLE))
(AAPL), (BABA), (EBAY), (WMT), (FB), (MSFT), (AMZN)
Posts
The administration’s threat of levying 10% on iPhones is a great sign for the technology sector as a whole.
The short-term media sensationalism has flipped this story the other way around crying about this as if it is a major penalty to Apple (AAPL).
Don’t get me wrong, these potential stiff tariffs have the possibility of triggering a $1 billion loss on Apple’s revenue, but this is all about protecting American technology long term.
This is not like taking a sledgehammer and ruining their business model, and it will not strip away this brilliant wealth creation vehicle.
Apple remains a cheap stock to buy for patient long-term holders and is one of the best run companies in the world with an operating maestro executing the roll-out of premium products named Tim Cook, the CEO of Apple.
The administration might not like some of technology firms’ tactics, but in reality, they are a pivotal reason why the economy has been humming along in the longest bull-market ever.
Effectively, the administration has put Apple and its peers up on a pedestal and is defending them from Chinese competition.
What industry wouldn’t want this?
Most of 2018, the current administration presided over a stock market that was going up in a straight line and the bulk of those gains were harvested by the major tech companies, mainly the FANGs.
The administration was quick to take credit for a strengthening stock market and would like to see rates suppressed to engineer more upside.
The FANGs are going through a reversion to the mean after 100% gains and giving back 20% or 30% of profits offer opportune entry point for long-term investors.
The only FANG that needs a structural change is Facebook (FB) and has the funds to do it. The other three plus Microsoft (MSFT) will lead the tech charge when the short-term weakness subsides.
If you think Chinese consumers would bail on Apple products because of the trade war, then you are wrong.
Apple has been grandfathered into Chinese society and it is one of the few iconic American products that can boast this achievement.
Apple is a luxury brand produced by an epochal superpower.
The presence of Apple products reverberates around China’s economic landscape, and even if Chinese people do not like America, they respect its economic prowess and wish to learn from its capitalistic ways.
This is the main reason they send their kids to American universities.
Historically, China was once entirely dependent on Russia to fill in its economic and social vision with the communist party sending its best and brightest to Moscow to study the Soviet Union’s secret sauce.
If you go to Beijing now, most of the second ring road of flats conspicuously remind me of Khrushchyovkas, the unofficial name of a type of low-cost, concrete-paneled or brick three- to five-storied apartment building which was developed in the Soviet Union during the early 1960s.
During this time, its namesake Nikita Khrushchev directed the Soviet government.
Pre-Deng Xiaoping Soviet influences can still be found everywhere in central Beijing.
Once the Chinese communist government realized that the Soviet model impoverished large swaths of society, they went on the open market to find a more optimal method to run their economy that could take advantage of their monstrous man power.
The model they decided on was a fusion of communism and capitalism, and for 30 years, this system fueled Chinese peasants out of poverty and to the promenades of Saint-Tropez.
Because of Chinese laser-like obsession on social status, material possessions are the most important way for them to differentiate against each other.
For Chinese women, the x-factor is skin tone, but for Chinese men, it is the brand, quality, and volume of possessions.
Even if rich Chinese hate Apple and their iPhones, they are permanently married to this product because owning a Chinese smartphone would be a monumental faux pas on the same level as American First Lady Melania Trump shopping for her new clothes at Walmart (WMT).
This is the same reason why every political who’s who in China drives an Audi A6, and every successful Chinese business executive drives a BMW.
Luxury brands are closely associated to the person’s social status in China and these unwritten rules have even more weight than the official rules in China partly because most Chinese over 40 are uneducated, plus China’s lack of public trust.
Apple’s tentacles reaching deep into Chinese society have in fact led to a situation where Apple-related jobs for Chinese citizens add up to over 5 million jobs which is over double the number of jobs Apple supports in America.
The result of Apple morphing into a pseudo-Chinese company is that pain for Apple means a loss of Chinese jobs on a large scale at a time when the Chinese economy is becoming more precarious by the day.
The Chinese economy is softening under a massive burden of crippling public and private debt that is putting the cap on growth.
As a result of the trade skirmish, China has temporarily halted its deleveraging effort that was intended to remedy the health of the economy and has reverted back to the China of old, low-quality infrastructure projects and heavily polluted coal production.
China’s rapid ascent to prosperity could also mean the Chinese consumer and economy could go through a reversion to the mean scenario with private and public companies loaded to their eyeballs with debt going bust and a looming economic stimulus in the cards if this plays out.
All this means is that Apple is too big to fail in China and CEO of Apple Tim Cook absolutely knows this.
Theoretically, Chinese consumers absolutely have access to local smartphone substitutes for $200 that would do the same job as a $1,000 iPhone.
I have tested out Huawei and Xiaomi premium smartphones costing $400, and they have more than enough firepower to be a reliable everyday smartphone and some.
The fact is that Chinese consumers intentionally choose not to substitute Apple products.
And I would go deeper than that by saying Steve Jobs is revered in China like a demigod and his passing turned him into a sort of tech martyr with a level of status that not even Alibaba (BABA) originator Jack Ma can touch.
Jack Ma performed miracles by copying eBay’s (EBAY) blueprint of e-commerce from a shabby Hangzhou flat ditching his former job as an English teacher then copying Amazon (AMZN) to juice up growth.
But Jack Ma never created the iPhone, iPod, tablet, or Apple app store from thin air. That he never did.
Making matters even more ironic is that most Chinese communist members actually use an Apple iPhone for the same reasons I mentioned earlier.
Not only that, the children of Chinese communist politicians take lavish vacations to Silicon Valley to take selfie’s in front of Apple’s spaceship headquarters in Cupertino and upload them onto social media.
They then proceed to visit the nearest Apple store right next door at the Apple Park visitor center which is essentially an Apple store on steroids to make bulk purchases of Apple tablets, watches, computers, iPhones for their extended circle of friends and distant relatives because they are “cheaper in America than in China” mainly due to the heavy import duties levied on Apple products in China.
As for tech equities, what this does is blunt short-term positive sentiment for tech stocks and particularly chip stocks that I have told readers to stay away from like the plague.
Apple’s supply chain frenemies don’t have the luxury of selling 80 million luxury phones at $1,000 per quarter and are often the recipient of indiscriminate sell-offs shellacking shares.
Even with the overhanging issue of rising tariffs, tech stocks should produce great earnings next year.
Look at Apple and the consensus EPS outlook for next quarter comes in at $4.73 and that is after EPS increasing 41% sequentially from the quarter before.
Apple will soon become a $300 billion of sales per year company with profitability expanding at a rapid clip.
They are a company that prints money then buys back their own stock profusely. Not many companies can do that.
These negative reports that have been coming fast and furious don’t help the momentum, but the share’s weakness solely means that better entry points are available for investors before Apple launches over $200 again.
There is a high chance that the administration is using Apple as a bargaining chip and nothing will come of it.
Think about it, after all this commotion about the trade war with China, revenue was up almost 20% last quarter in greater China, so what gives?
It means that things aren’t as dire as it seems. A lot of hot steam over nothing is a gift to long-term investors, but short-term traders will feel the pain of the temporarily elevated headline risk.
APPLE PARK VISITOR CENTER – CHINESE TOURIST ATTRACTION
Global Market Comments
July 31, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(THE INSIDER'S VIEW ON THE FUTURE OF TECHNOLOGY),
(AMZN), (GOOG), (DELL), (MSFT), (EBAY),
(MY DATE WITH HITLER'S GIRLFRIEND)
Global Market Comments
June 13, 2018
Fiat Lux
SPECIAL SPACE X ISSUE
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, JUNE 15, 2018, DENVER, CO,
GLOBAL STRATEGY LUNCHEON),
(WILL SPACE X BE YOUR NEXT TEN BAGGER?),
(EBAY), (TSLA), (SCTY), (BA), (LMT)
I am constantly on the lookout for ten baggers, stocks that have the potential to rise tenfold over the long term.
Look at the great long-term track records compiled by the most outstanding money managers, and they always have a handful of these that account for the bulk of their outperformance, or alpha, as it is known in the industry.
I've found another live one for you.
Elon Musk's Space X is so forcefully pushing forward rocket technology that he is setting up one of the great investment opportunities of the century.
In the past decade his start-up has accomplished more breakthroughs in advanced rocket technology than seen in the last half century, since the golden age of the Apollo space program.
As a result, we are now on the threshold of another great leap forward into space. Musk's ultimate goal is to make mankind an "interplanetary species."
There is only one catch.
Space X is not yet a public company, being owned by a handful of fortunate insiders and venture capital firms. But you should get a shot at the brass ring someday.
The rocket launch and satellite industry is the biggest business you have never heard of, accounting for $200 billion a year in sales globally. This is probably because there are no pure stock market plays.
Only two major companies are public, Boeing (BA) and Lockheed Martin (LMT), and their rocket businesses are overwhelmed by other aerospace lines.
The high value-added product here is satellite design and construction, with rocket launches completing the job.
Once dominated by the U.S., the market for launches has long since been ceded to foreign competitors. The business is now captured by Europe (the Ariane 5), China (the Long March 5), and Russia (the Angara A5).
Until recently, American rocket makers were unable to compete because decades of generous government contracts enabled costs to spiral wildly out of control.
Whenever I move from the private to the governmental sphere, I am always horrified by the gross indifference to costs. This is the world of the $10,000 coffee maker and the $20,000 toilet seat.
Until 2010, there was only a single U.S. company building rockets, the United Launch Alliance (ULA), a joint venture of Boeing and Lockheed Martin. ULA builds the aging Delta IV and Atlas V rockets.
The vehicles are launched from Cape Canaveral, Florida, and Vandenberg Air Force Base in California, one of which I had the privilege to witness. They look like huge roman candles that just keep on going, until they disappear into the blackness of space.
Enter Space X.
Extreme entrepreneur Elon Musk has shown a keen interest in space travel throughout his life. The sale of his interest in PayPal, his invention, to Ebay (EBAY) in 2002 for $165 million, gave him the means to do something about it.
He then discovered Tom Mueller, a childhood rocket genius from remote Idaho who built the largest-ever amateur liquid fueled vehicle, with 13,000 pounds of thrust. Musk teamed up with Mueller to found Space X in 2002.
A decade of grinding hard work, bold experimentation, and heartrending testing ensued, made vastly more difficult by the 2008 Great Recession.
Space X's Falcon 9 first flew in June 2010, and successfully orbited earth. In December 2010, it launched the Dragon space capsule and recovered it at sea. It was the first private company ever to accomplish this feat.
Dragon successfully docked with the International Space Station (ISS) in May 2012. NASA has since provided $440 million to Space X for further Dragon development.
The result was the launch of the Dragon V2 (no doubt another historical reference) in May 2014, large enough to carry seven astronauts.
Space X conducted the first successful flight test of the new Dragon capsule on May 6 of this year.
Then Musk really upped his game by successfully pulling off the first ever landing of a booster rocket on a platform at sea in April 2016. This is crucial for his plan to dramatically cut the cost of space travel.
Commit all these names to memory. You are going to hear a lot about them.
Musk's spectacular success with Space X can be traced to several different innovations.
He has taken the Silicon Valley hyper-competitive ethos and financial model and applied it to the aerospace industry, the home of the bloated bureaucracy, the no-bid contract, and the agonizingly long-time frame.
For example, his initial avionics budget for the early Falcon 1 rocket was $10,000 and was spent on off-the-shelf consumer electronics. It turns out that their quality had improved so much in recent years that they met military standards.
But no one ever bothered to test them. The $10,000 wouldn't have covered the food at the design meetings at Boeing or Lockheed-Martin, which would have stretched over years.
Similarly, Musk sent out the specs for a third-party valve actuator no more complicated than a garage door opener, and a $120,000, one-year bid came back. He ended up building it in-house for $3,000. Musk now tries to build as many parts in-house as possible, giving it additional design and competitive advantages.
This tightwad, full speed ahead and damn the torpedoes philosophy overrides every part that goes into Space X rockets.
Amazingly, the company is using 3-D printers to make rocket parts instead of having each one custom made.
Machines guided by computers carve rocket engines out of a single block of Inconel nickel-chromium super alloy, foregoing the need for conventional welding, a frequent cause of engine failures.
Space X is using every launch to simultaneously test dozens of new parts on every flight, a huge cost saver that involves extra risks that NASA would never take. It also uses parts that are interchangeable of all its rocket types, another substantial cost saver.
Space X has effectively combined three nine-engine Falcon 9 rockets to create the 27 engine Falcon Heavy, the world's largest operational rocket. It has a load capacity of a staggering 53 metric tons, the same as a fully loaded Boeing 737 can carry. It has half the thrust of the gargantuan Saturn V moon rocket that last flew in 1973.
Musk is able to capture synergies among his three companies not available to any competitor. Space X gets the manufacturing efficiencies of a mass production carmaker.
Tesla Motors has access to the futuristic space age technology of a rocket maker. Solar City (SCTY) provides cheap solar energy to all of the above.
And herein lies the play.
As a result of all these efforts, Space X today can deliver what ULA does for 76% less money with vastly superior technology and capability. Specifically, its Falcon Heavy can deliver a 116,600-pound payload into low earth orbit for only $90 million, compared to the $380 million price tag for a ULA Delta IV 57, 156-pound launch.
In other words, Space X can deliver cargo to space for $772 a pound, compared to the $7,515 a pound UAL charges the U.S. government. That's a hell of a price advantage.
You would wonder when the free enterprise system is going to kick in and why Space X doesn't already own this market.
But selling rockets is not the same as shifting iPhones, laptops, watches, or cars. There is a large overlap with the national defense of every country involved.
Many of the satellite launches are military in nature and top secret. As the cargoes are so valuable, costing tens of millions of dollars each, reliability and long track records are big issues.
Enter the wonderful world of Washington, DC politics. UAL constructs its Delta IV rocket in Decatur, Alabama, the home state of Senator Richard Shelby, the powerful head of the Banking, Finance, and Urban Affairs Committee.
The first Delta rocket was launched in 1960, and much of its original ancient designs persist in the modern variants. It is a major job creator in the state.
Shelby has criticized President Obama's attempt to privatize and modernize the rocket business as "a faith-based initiative." ULA is a major contributor to Shelby's campaigns.
ULA has no rocket engine of its own. So, it buys engines from Russia, complete with blueprints, hardly a reliable supplier. Magically, the engines have so far been exempted from the economic and trade sanctions enforced by the U.S. against Russia for its invasion of the Ukraine.
ULA has since signed a contract with Amazon's Jeff Bezos-owned Blue Origin, which is also attempting to develop a private rocket business but is miles behind Space X.
Musk testified in front of Congress in 2014 about the viability of Space X rockets as a financially attractive, cost-saving option. His goal is to break the ULA monopoly and get the U.S. government to buy American. You wouldn't think this is such a tough job, but it is.
Musk has since sued the U.S. Air Force to open up the bidding.
He became a U.S. citizen in 2002 primarily to qualify for bidding on government rocket contracts, addressing national security concerns.
NASA did hold open bidding to build a space capsule to ferry astronauts to the International Space Station. Boeing won a $4.2 billion contract, while Space X received only $2.6 billion, despite superior technology and a lower price.
It is all part of a 50-year plan that Musk confidently outlined to a venture capital friend of mine two decades ago. So far, everything has played out as predicted.
The Holy Grail for the space industry has long been the building of reusable rockets, thought by many industry veterans to be impossible.
Imagine what the economics of the airline business would be if you threw away the airplane after every flight? It would cost $1 million for one person to fly from San Francisco to Los Angeles.
This is how the launch business has been conducted since the inception of the industry in the 1950s.
Space X is on the verge of accomplishing exactly that. It will do so by using its SuperDraco engines and thrusters to land rockets at a platform at sea. Then you just reload propellant and relaunch.
The concept has so far been successfully tested to an altitude of 1,000 meters (click here for the YouTube video.
Attempts to do this from a live launch have so far failed (click here for that video where they almost made it at and here), but Musk predicts a 50% chance of success in the next test this coming December.
Pull this off, and launch costs will plummet to pennies on the dollar. If Space X can chop payload costs to under $100, compared to ULA's $7,515, that is a savings that even Richard Shelby can't cover up.
Talk about disruptive innovation with a turbocharger!
The company is building its own spaceport in Brownsville, Texas, that will be able to launch multiple rockets a day.
The Hawthorne, CA, factory (where I charge my own Tesla S-1 when in LA) now has the capacity to build 20 rockets a year. This will eventually be ramped up to hundreds.
Space X is the only organization that offers a launch price list on its website, much as Amazon sells its books (click here for that link). The Falcon 9 will carry 28,930 pounds of cargo into low earth orbit for only $60.2 million. Sounds like a bargain to me.
Space X currently has $5 billion in contracts to fly over 50 missions for a variety of private and governmental entities, making the company cash flow positive. This includes a $1.6 billion NASA contract to supply the (ISS).
This no doubt includes an assortment of tax breaks, which Musk has proved adept at harvesting. Elon has been a quick learner with the ways of Washington.
Customers have included the Thai telecommunications firm, Rupert Murdock's Sky News Japan, an Israeli telecommunications group, and the U.S. Air Force.
So when do we mere mortals get to buy the stock? Musk estimates at 12 flights a year the company will earn a 10% return on capital, making it worth $4 billion to $5 billion.
The current exponential growth in broadband will lead to a similar growth in satellite orders, and therefore rocket launches. So, the commercial future of the company looks especially bright.
However, Musk is in no rush to go public. A permanent, viable, and sustainable colony on Mars has always been a fundamental goal of Space X. It would be a huge distraction for a publicly managed company. That makes it a tough sell to investors in the public markets.
You can well imagine that the next recession would bring cries from shareholders for cost cutting that would put the Mars program at the top of any list of projects to go on the chopping block. So, Musk prefers to wait until the Mars project is well established before entertaining an IPO.
Musk expects to launch a trip to Mars by 2025 and establish a colony that will eventually grow to 80,000. Tickets will be sold for $500,000.
There are other considerations. Many employee and early venture capital investors wish to realize their gains and move on. Public ownership would also give the company extra ammunition for cutting through Washington red tape. These factors point to an IPO that is earlier than later.
On the other hand, Musk may not care. The last net worth estimate I saw for him was $13 billion. If his three companies increase in value by 10 times over the next decade, as I expect, that would increase his wealth to $130 billion, making him the richest person in the world.
If an IPO does come, investors should jump in with both boots. While the value of the firm may already have increased tenfold by then, there may be another tenfold gain to come. Get on the Elon Musk train before it leaves the station.
To describe Musk as a larger than life figure would be something of an understatement. Musk is the person on which the fictional playboy/industrialist/technology genius, Tony Stark, in the Iron Man movies has been based.
In the recently released Tomorrowland Disney movie, a Tesla supercharging station features prominently. Elon takes all this in good humor, lending a Tesla roadster to the film producers.
Musk has said he wishes to die on Mars, but not on impact. Perhaps it would be the ideal retirement for him, say around 2045, when he will be 75.
To visit the Space X website, please click here. It offers very cool videos of rocket launches and a discussion with Elon Musk on the need for a Mars mission.
Catching a Dragon by the Tail
This Could Be the Stock Performance
Is Mars the Next Hot Retirement Spot?
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?
