Mad Hedge Technology Letter
April 2, 2018
Fiat Lux
Featured Trade:
(WHY THERE WILL NEVER BE AN ANTITRUST CASE AGAINST AMAZON)
(AMZN), (WMT), (MSFT), (FB), (DBX), (NFLX)
Posts
POTUS's Amazon tweet of March 29 has given investors the best entry point into Amazon (AMZN) since the January 2016 sell-off. Since then, the stock has essentially gone up every day.
Entry points have been few and far between as every small pullback has been followed by aggressive buying by big institutional money.
The 200-point nosedive was a function of the White House's dissatisfaction of leaked stories that would find their way into the Washington Post owned by Amazon CEO Jeff Bezos, my former colleague and good friend.
Although there are concerns about Amazon's business model, notably its lack of actual profits, there is no impending regulatory action. And, if there is one company that's in hotter water now, it's Facebook (FB), which inadvertently sells every little detail about your personal life to third-party Eastern European hackers.
Amazon's e-commerce business does not violate the Federal Trade Commission Act of 1914 of "deceptive" or "unfair practices."
The American economy has rapidly evolved thanks to hyper-accelerating technology, and the jobs required to support the modern economy have changed beyond all recognition.
The Clayton Antitrust Act of 1914 addressing harmful mergers that destroy competition hasn't been breached either since Amazon has grown organically.
Analyzing the most comprehensive law, the Sherman Antitrust Act of 1890, which was originally passed to control unions, espouses economic freedom aimed at "preserving free and unfettered competition as the rule of trade."
And, in a way, Amazon could be susceptible, but it would be awfully difficult to persuade the U.S. Department of Justice (DOJ) Antitrust Division and would take a decade.
Amazon's business model will change many times over by the time any antitrust decision can be delivered, or even entertained.
Helping Amazon's case even more is the DOJ interpretation of the three antitrust rules. It is the company's duty to first and foremost protect the consumer and ensure business is operating efficiently, which keeps prices low and quality high. Antitrust laws are, in effect, consumer protection laws.
Amazon's e-commerce segment epitomizes the DOJ's perception of these 100-year-old laws.
The controversial part of Amazon's business model is funneling profits from its Amazon Web Services (AWS) division as a way to offer the lowest prices in America for its e-commerce products.
This strategy has the same effect as dumping since it is selling products for a loss, but it is not officially dumping.
POTUS has usually delivered more bark than bite. The steel and aluminum tariffs went from no exceptions to exceptions galore in less than a week. Policies and employees change in a blink of an eye in the White House.
The backlash is a case of the White House not being a huge admirer of Amazon, but individual government workers probably have Amazon boxes stacked to the heavens on their doorsteps.
It is true that Amazon has negatively affected retail business. It is doing even more damage to traditional shopping malls, which it turns out are owned by close friends of the president. The mom-and-pop stores have disappeared long ago. But Amazon could argue this trend is occurring with or without Amazon.
In addition, Walmart (WMT) was the original retail killer, and it currently is morphing into another Amazon by investing aggressively into its e-commerce division. Does the White House go after (WMT) next?
Unlikely.
Amazon didn't create e-commerce.
Amazon also didn't create the Internet.
Amazon also does pay state and local taxes, some $970 million worth last year.
Technology has been a growth play for years.
Investors and venture capitalists are willing to fork over their hard-earned cash for the chance to own the next Google (GOOGL) or Apple (AAPL).
Many investors do lose money searching for the next unicorn. A good portion of these unicorns lose boatloads of money, too.
Spotify, slated to go public soon, is a huge loss-maker and investors will pay up anyway.
Investors went gaga for Dropbox (DBX), already up 40% from its IPO, and it lost $112 million in 2017.
The risk-appetite is hearty for these burgeoning tech companies if they can scale appropriately.
Should investors be prosecuted for gambling on these cash-losing businesses?
Definitely not. Caveat emptor. Buyer beware.
It is true that Amazon pumps an extraordinary percentage of revenues back into product development and enhancement.
But that is exactly what makes Amazon great. It not only is focused on making money but also on making a terrific product.
The bulk of its enhancement is allocated in warehouse and data center expansion. Splurging on more original entertainment content is another segment warranting heavy investment, too, a la Netflix (NFLX). Did you spot Jeff Bezos at the last Oscar ceremony?
Contrary to popular belief, Amazon is in the black.
It has posted gains for 11 straight quarters and expects a 12th straight profitable quarter for Q1 2018.
The one highly negative aspect is profit margins. It is absolutely slaughtered under the current existing model.
However, investors continually ignore the damage-to-profit margins and have a laser-like focus on the AWS cloud revenue.
Amazon's AWS segment could be a company in itself. Cloud revenue last quarter was $5.11 billion, which handily beat estimates at $4.97 billion.
Amazon's cloud revenue is five times bigger than Dropbox's.
The biggest threat to Amazon is not the administration, but Microsoft (MSFT), which announced amazing cloud revenue numbers up 98% QOQ, and has grown into the second-largest cloud player.
(MSFT) is equipped with its array of mainstay software programs and other hybrid cloud solutions that lure in new enterprise business.
(MSFT) has the chance to break Amazon's stranglehold if it can outmuscle its cloud segment. However, any degradation to Amazon's business model will not kill off AWS, considering Amazon also is heavily investing in its cloud segment, too.
Lost in the tweet frenzy is this behemoth cloud war fighting for storage of data that is somewhat lost in all the political noise.
This is truly the year of the cloud, and dismantling Amazon is only possible by blowing up its AWS segment. The more likely scenario is that AWS and MSFT Azure continue their nonstop growth trajectory for the benefit of shareholders.
Antitrust won't affect Amazon, and after every dip investors should pile into the best two cloud plays - Amazon and Microsoft.
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Quote of the Day
After ignoring the constant chaos in Washington for 17 months, it finally mattered to the stock market.
Guess what was at the top of the list of retaliatory Chinese import duties announced last week?
California wine!
The great irony here is that half of the Napa Valley wineries are now owned by Chinese investors looking for a bolt-hole from their own government. Billionaires in China have been known to disappear into thin air.
And after years of trying, we were just getting Chinese consumers interested in tasting our fine chardonnays, merlots, and cabernet sauvignons.
It will be a slap in the face for our impoverished farmworkers who actually pick the grapes, who have just been getting back on their feet after last fall's hellacious fires.
Do you suppose they will call the homeless housing camps "Trumpvilles?"
California is on the front line of the new trade war with China.
Not only is the Middle Kingdom the largest foreign buyer of the Golden State's grapes, almonds, raisins, and nuts, it also is the biggest foreign investor, plowing some $16 billion in investments back here in 2016.
Down 1,700 Dow points on the week and a breathtaking 1,400 points in two days. It was the worst week for the markets in two years. And the technology and financial stocks suffered the worst spanking - the two market leaders. The most widely owned stocks are seeing the worst declines.
We certainly are paying the piper for our easy money made last year. The Dow Average is now a loser in 2018, off 4.1% and back to November levels.
The Dow 600 point "flash crash" we saw in the final two hours of trading on Friday was almost an exact repeat of the February 9 swoon that took us to the exact same levels.
There was no institutional selling. It was simply a matter of algorithms gone wild. The news flow that day was actually quite good.
Our favorite stock, Micron Technology (MU) announced blockbuster earnings and high target (for more depth, please read the Mad Hedge Technology Letter).
Dropbox (DBX) went public, and immediately saw its shares soar by 50% in the aftermarket. The president signed an emergency funding bill to keep the government open, despite repeated threats not to do so.
Which means the market fell not because of a fundamental change in the US economy. It is a market event, pure and simple.
I therefore expect a similar outcome. Only this time, we don't have an $8 billion unwind of the short volatility trade ($VIX) to deal with, as we did in February. That's why I thought markets would bottom at higher levels this time around.
There is only one problem with this theory.
The chaos, turmoil, and uncertainty in Washington is finally starting to exact a steep price on shareholders. Uncertain markets commend lower price earnings multiples than safer ones.
As a result, multiples are now 15% lower than the January high at 19.5X, and much more for individual stocks. And multiples have been falling even though earnings have been rising, quite substantially so. Such is the price of chaos.
Will markets bottom out here on a valuation basis as they did last time? Or will the continued destruction of our democracy command a higher price? We will find out soon.
Clearly the S&P 500 200-day moving average at $255.95 is crying out for a revisit, which we probably will see first thing Monday morning. Allow more shorts to get sucked in, and then you probably have a decent entry point to buy stocks for the rest of 2018.
Indeed, it was a week when the black swans alighted every day. First, the twin hits from Facebook (FB), followed by the worst trade war in eight decades. Then came the Chinese retaliation.
While the damage suffered so far has been limited, investors are worried about what is coming next.
One of the last supervising adults left the White House, my friend and comrade in arms, National Security Advisor H.R. McMaster. His replacement is Fox News talk show host John Bolton, who is openly advocating that the US launch a pre-emptive nuclear strike against North Korea.
Bolton has quite a track record. He is the guy who talked President Bush into invading Iraq. Now, that would trigger a new bear market in the extreme!
As I did not predict five black swans in five days, the Mad Hedge Trade Alert Service took a hit this week, backing off of fresh all-time highs.
The trailing 12-month return fell to 46.49%, the 8-year return to 284.01%, bringing the annualized average return down to only 34.08%.
Given all of the above, economic data points for the coming holiday shorted trading week seem almost quaintly irrelevant. But I'll give them to you anyway.
On Monday, March 26, at 10:30 AM, we get the February Dallas Fed Manufacturing Survey.
On Tuesday, March 27, at 9:00 AM, we receive an update on the all-important CoreLogic Case-Shiller National Home Price NSA Index for January. A 3-month lagging housing indicator.
On Wednesday, March 28, at 8:30 AM EST, the second read of Q1 GDP comes out.
Thursday, March 29, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000. At 9:45 AM, we get the February Chicago Purchasing Managers Index. At 1:00 PM, we receive the Baker-Hughes Rig Count, which saw a small rise of three last week.
On Friday, March 30, the markets are closed for Good Friday.
As for me, I'll be doing my Christmas shopping early this year before the new Chinese import tariffs jack up the price for everything by 15% to 25%.
I'll be doing all of this courtesy of Amazon (AMZN), of course. Since I arrived here at Lake Tahoe, it has snowed 6 feet in two days in a storm of truly biblical proportions. We got a total of 18 feet of snow in March. By the time I dig out, it will be time to go home.
Good luck and good trading.
John Thomas
Global Market Comments
March 22, 2018
Fiat Lux
Featured Trade:
(THE FED SIGNALS HALF SPEED AHEAD),
(TLT), (UUP), (FXE), (FXY), (FB),
(WHY YOU WILL LOSE YOUR JOB IN THE NEXT FIVE YEARS, AND WHAT TO DO ABOUT IT)
Global Market Comments
March 21, 2018
Fiat Lux
Featured Trade:
(THE VALUE CASE FOR FACEBOOK), (FB), (AAPL),
(WHAT ALMONDS SAY ABOUT THE GLOBAL ECONOMY)
?The Solar Road Revisited?. Somehow this modernized version of Bob Dylan?s epic folk album doesn?t quite ring true when couched in terms of our hyper accelerating 21st century technology. Perhaps a Millennial bard will improve on this in the future on iTunes, Pandora, and Beats, of course?
Yet, such a futuristic invention has already been created, is raising money through crowdfunding, and even landed a small Federal Highway Administration grant.
We live in an age of exploding technologies. So, when I find some that are especially interesting, offer a potential long term impact on the global economy, or present immediate investment opportunities, I am going to update you in this newsletter.
One common complaint I hear during my road shows is that we are moving into the future so fast, that it is getting increasingly hard to keep up. That is, unless you live within sight of Apple (AAPL), Google (GOOG), Twitter (TWTR), and Facebook (FB) headquarters, which I do. These companies all have venture capital arms, which fund many of these things.
Sandpoint, Idaho based engineers Julie and Scott Brusaw are the founders of Solar Roadways, a tiny engineering company that seeks to convert the American highway system from old fashioned asphalt and concrete to tempered glass and LED?s.
They have raised $2 million through the crowdsourcing website Indiegogo, which saw its amazing videos on the project go viral and attract 15 million views (https://www.indiegogo.com/projects/solar-roadways ).
Caution: conservatives may want to avert their eyes during all of the global warming, anti gasoline, and tree hugging references. But this stuff raises big bucks in California.
What can solar roads do? Obviously, the green hexagonal panels they are made of convert sunlight into electricity, heating roads so they can remain free of ice and snow all year. I could really use that up at Lake Tahoe.
Surplus power can be sold to local utilities to pay for it. Electric cars, like my Tesla Model S-1 (TSLA), can recharge their batteries just by parking on it, as my toothbrush already does in my bathroom.
You can program the LED?s to embed changeable road signs, borders, parking lots, and crosswalks. They can highlight crossing animals (200 deaths a year now in the US), or impending road obstructions.
They can even display layouts for every kind of sport (basketball, tennis, etc). The glass can be cast to give it a better grip than contemporary roads. Highway deaths would plunge, as would insurance costs.
Driving trucks on glass? The material is so strong that it can support the heaviest, or some 62 tons. My question, can handle steel caterpillar tractor treads used in road repair equipment?
Of course, it always comes down to cost with these new technologies, many of which remain pie in the sky forever. Estimates are that these roads cost 50%-300% more than existing ones. Large-scale construction would bring that down through economies of scale via mass production. The design is really quite simple.
The vision is big. It would probably cost over $1 trillion just to pave over the existing 48,000 miles of the interstate highway system. Tens of thousands of blue-collar jobs would be created. It all sounds like a massive public works project would be required, of Rooseveltian, CCC magnitude.
This just gives you a flavor of the incredibly interesting things going on here in the San Francisco Bay area, which I learn about on a daily basis. Check out the site, if only to see the future of start up funding.
You can contribute $5, or just buy a tote bag.
Somehow, It?s Just Not the Same
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Let me give you my thinking here. I am a long-term bull, expecting the S&P 500 to be up 10% or more to over 2,000 by yearend, and possibly 20,000 by 2030. But yearend is a long time off (even though every year seems to go by faster). We have just had a massive 11 point pop in the (SPY) during my two week trip to Australia. So a period of digestion is called for.
My (BAC) $15-$16 bull call spread is now naked long, so a little bit of downside protection is justified. Keep in mind that this is only a partial hedge, not a full one. But the additional potential profit from this SPDR S&P 500 March, 2014 $189-$192 bear put spread does lower the breakeven price of the (BAC) position by a respectable 46 cents.
The present dynamics of the market favor this trade. All of the action is now in speculative, momentum driven names like Tesla (TSLA), Netflix (NFLX), Facebook (FB), Priceline (PCLN), and Yelp (YELP), which are not even in the (SPY) index. The big leadership names, like financials (XLF) and energy (XLE) are pretty much dead in the water. As long as this is the case, don?t expect any big moves in the (SPY).
And with a short dated March 21 expiration, we only have 15 trading days where we need to be right on this.
As a rule of thumb, don?t chase this spread trade if the price has already moved more than 2% by the time you get the Trade Alert. Just put in a limit order and if it gets done, great. If not, wait for the next Trade Alert. There will be plenty of fish in the sea.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the trade to come to you. The middle market is the halfway point between the bid and the offered prices that you see on your screen with your online broker.
The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit. Keep in mind that these are ballpark prices only. Spread pricing can be very volatile especially on expiration months farther out.
This had to be one of the greatest change of life weekends in human history, endured by one Mark Zuckerberg. On Friday, he earned $9.2 billion with the flawed Facebook (FB) flotation. On Saturday, he married a Chinese doctor and longtime girlfriend, Pricilla Chan. Then on Monday, oops honey, I lost $1.2 billion. Talk about a rocky start! Never mind that the precise timing was intended to undercut any future divorce claims, hence no prenuptial. Her cost basis is $38 a share, his is zero.
I knew that when the stock closed pennies above the $38 syndicate bid on Friday that there would be a Monday MORNING massacre. I warned away people from this issue at every opportunity. When Wall Street starts drinking its own Kool-Aid you, can count on a mass murder to follow.
Brokers we urging clients to apply for 100 times the shares they really wanted in the expectation that that would get only 1% of their request. That paved the way for the ugliest broker confirm of the year, that you received the entire allocation that of Facebook shares that you applied for, and they were now down 13%.
By Monday, some hapless investors still had not received notice of the allocation. At least they are faring better than the suckers lured into the aftermarket to buy stock at $43, now down 30%. Think of the entire flotation as a full employment act for the legal profession.
There was enough mud on lead underwriter, Morgan Stanley?s face to fill Yankee Stadium. It is sad to see how low the standards and competence have fallen at this once great firm.? I am now seriously thinking of taking this sullied name off of my resume, even though it is an ancient entry. Don?t worry, they?ll get their just punishment. The losses on their Facebook Stabilization fund is thought to be as high as $100 million, wiping out any underwriting fees earned. Expect investors to defriend (MS) post haste. What was expected to be the biggest payday of the year for Wall Street turned out to become the largest bill due.
I made a killing on Facebook, not through any direct participation, but from the market timing it clarified. When the (FB) was down $5, the Dow should have been off 300. They fact that it wasn?t flashed a huge ?BUY? signal to me, enough to cause me to rush to cover all of my profitable shorts and flip my model trading portfolio from a big ?RISK OFF? stance to a moderate ?RISK ON?. So far, it?s working, with Apple (AAPL) up $25 since my call, and (IWM) rocketing two full points.
Global Trading Dispatch, my highly innovative and successful trade mentoring program, earned a net return for readers of 40.17% in 2011. The average annualized return since inception is 25%. That would rank it as the 35th most profitable hedge fund in the industry according to a recent Barron?s survey.
The service includes my Trade Alert Service, daily newsletter, real time trading portfolio, an enormous trading idea data base, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com , find the Global Trading Dispatch box on the right, and click on the lime green ?SUBSCRIBE NOW? button.
