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Where the Action Will Be in Tech

Today’s tech newsletter might be the most important one you will ever read.

It’s my job to pinpoint exactly what is going on in tech and disburse this information in a way that readers can take advantage of.

The tech market is all about striking when the iron is hot.

The five largest stocks in the S&P 500, Microsoft, Amazon, Apple, Google, and Facebook have accrued a combined valuation that surpasses the valuations of the stocks at the bottom 350 of the index.

This means that if you weren’t in tech the past few years, chances are that your portfolio significantly underperformed the broader market.

Even in August 2018, many active managers could have thrown in the towel and said the late economic cycle was way too frothy for their taste and time to take profits.

Little did they know that betting against it would equate to self-firing themselves because to retrieve the same type of performance would have meant staying in tech through the coronavirus scare.

Many in the trading community would even go as far as to say to wait for the bear market, then big tech would get hammered first and deepest because of their lofty valuations.

These tech companies were in for a rude awakening and shares had to consolidate, right?

Well, anyone who doesn’t live under a rock is seeing the exact opposite happen with Amazon, Microsoft, and Apple valuated above $1 trillion and still soaring as we speak.

This goes to show that betting against something because they are “too expensive” or “too cheap” is a fool’s game.

Just take oil that many retail investors bought because they came to the conclusion that oil could never go below zero.

Then playing oil through an ETF with massive contango means that the index is likely to go down even if the price of oil is up.

Not only do investors bear insanely high risk in these trading vehicles, but also a systemic risk of oil ETFs blowing up.

Oil is cheap, and it can get cheaper, while tech is expensive and can get a lot more expensive.

Until there are structural changes, there is no point to bet on a sudden reversal out of thin air.

Betting against things that an individual perceives as unsustainable and secretly hoping that they cannot continue to go on is probably the worst strategy that I have ever heard of in my life.

The reality is that these things are sustainable and tech shares will keep moving higher uninterrupted until they don’t.

Active managers are the ones who set market prices and they help the momentum accelerate in tech with full knowledge that if they miss out, there is likely no other solution to hit yearend targets.

What active manager doesn’t want their year-end bonus?

Even analyze the value investors who in a normal world would not even consider tech companies because they avoid the traditional “growth” profile.

Funnily enough, these “value” investors have Microsoft in their portfolios now even though it is not even close to a value stock.

So what has Microsoft accomplished recently?

CEO of Microsoft Satya Nadella has rebuilt a company Microsoft that is now equal in value to The Financial Times Stock Exchange 100 Index, the share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

That’s right, one American company is just as valuable as the top 100 public companies in England.

An even broader view of tech would give us an even more stunning snapshot of tech showing that the Top 5 tech stocks are now worth more than the entire developed stock market outside the U.S. such as Europe, Canada, Japan, Hong Kong combined.

Then take into consideration that these companies are on the cusp of penetrating high margin industries like medicine and healthcare which will translate into another golden decade of accelerating revenue and elevated profits relative to the rest of the S&P index.

The U.S. is a place where unfettered capitalism is promoted and implemented, and tech’s outperformance manifests itself by underscoring the winner-takes-all mentality.

Americans like winners and the rules are no different in corporate America.

These 5 tech names have contributed 23% of the gains in the past month and until they falter, there will be no tech sell-off.

April 24, 2020/by Mad Hedge Fund Trader

April 22 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 22 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Will Trump louse up the recovery by bringing people back to work too soon?

A: Absolutely, that’s a risk. Georgia is reopening in a couple of days, which is purely a political decision because all of the scientists have advised against it. If that creates a secondary Corona wave, which we will know in a few weeks, then no one else is going to reopen early and the depression instantly goes from a three-month one to a six or nine-month one. Nobody wants tens of thousands of deaths on their hands. If we do reopen early, it could create a secondary spike in cases and deaths that hit around the Fall, right before the election. That is absolutely what the administration does not want to see, but they’re pursuing a course that will almost guarantee that result, so I wouldn’t be traveling to the Midwest anytime soon. Actually, I'm not going to be traveling anywhere because all the planes are grounded. Trump’s strategy is that Corona will magically go away in the summer, and those are his exact words.

Q: What is the Fed's next move?

A: I don't think they will go to negative interest rates. The disruptions to the financial system would be too widespread. Nobody is having a problem borrowing money right now unless they are in the housing market and that is totally gridlocked. Probably, the best thing is to expand QE and keep buying more fixed income instruments. They are essentially buying everything now, including mortgage-backed securities, junk bonds, securitized student loan debt, and everything except stocks. Today, we heard that the FHA is now buying defaulted mortgages which account for 6% of all the home mortgages out there, so that should help a lot in bringing the 30-year mortgage rate back in line with the 10-year, which would put it in the mid twos. So, more QE is the most likely thing there.

Q: What do you think of Remdesivir from Gilead Sciences (GILD)? Is it a buy at current levels?

A: We recommended this six months ago with our Mad Hedge Biotech & Healthcare Letter and got a spectacular result (click here for the link). This is a broad-spectrum antiviral that worked against MERS and SARS. We think it’s one of many possible treatments for the Coronavirus but it is not a vaccine. Buying the stock here is downright scary, up 30% since January. We love biotech for the long term, but this is a terrible entry point for Gilead. If it drops suddenly 10-20% on this selloff, then maybe.

Q: You seem very confident we’re going lower again. I’m reminded of the December selloff of 2018 where we saw a very quick recovery and a lot of people were shut out.

A: The difference then is that we didn’t have a global pandemic which has killed 47,000 Americans and may kill another 47,000 or more before it's all over. And I think it’s going to take a lot longer for the government to reopen the economy than they think. And corporate share buybacks, the main driver of the bull market of the past decade, are now completely absent.

Q: You seem to prefer spreads to LEAPS. Is that the only strategy you use?

A: I’m not putting long term LEAPS (Long Term Equity Participation Securities) in the model portfolio because they have two years to expiration, and I don’t want to tie up our entire trading portfolio in a two-year position. So, we are doing front months in the model trading portfolio, but every week I’m sending out lists of LEAPS for people to buy on the dips. Of course, you should go out to 2022 to minimize your risks and you should only buy them on the down 500 or 800-point days. Put a bid in on the bid side of the market (the low side of the market), and if you get a sudden puke out, a margin call, or an algorithm, you will get hit with these things at really good prices. That is the way to do long term LEAPS.

Q: Why do you think the true vaccine is a year off?

A: If you took Epidemiology 101, which I did in college, you'll learn that when you have a very large number of cases, the mutation rate vastly accelerates. My doctor here in Incline Village tested blood samples he took in northern Nevada in December and found that there were two Coronavirus variants, two different mutations. So, if there are only two, we would be really lucky. The problem is that these diseases mutate very quickly, and by the time you get a vaccine working, the DNA of the virus has moved on and last year’s vaccine doesn’t work anymore. That’s why when you get a flu shot, it includes flu variants from five different outbreaks around the world every year, and I’ve been getting those for 40 years, so I already have the antibodies for 200 different flu variations floating around my system as antibodies. Maybe that’s why I never get sick. They have been trying to get an AIDS vaccine for 40 years, and a cancer vaccine for 100 years, with no success, and it would be a real stretch for us to get a real working vaccine in a year. The best we can hope for is antivirals to treat the symptoms and make the disease more survivable.

Q: Long tail risk for long term portfolios?

A: The time to buy your long-term tail risk hedges, or the ledges of long term extremely unlikely events, was in January. That’s when they were all incredibly cheap and they were being thrown away with the trash. Now you have to pay enormous amounts for any long-term portfolio hedges. It's kind of like closing the barn door after the horses have bolted, so nice idea, but maybe we’ll try it again in another ten years.

Q: Should I buy gold options two months out or through gold LEAPS?

A: I would do both. Buying gold two months out will probably make more money faster, but for LEAPS—let’s say you bought a $2,000-$2,100 LEAPS two years out—the return on that could be 500-1000%, so it just depends on how much risk you were willing to take. I would bet that the LEAPS selling just above the all-time highs at $1,927 are probably going really cheaply because people will assume we won't get to new all-time highs for a while and they’ll sell short against that, so that may be your play. You can get even better returns on buying LEAPS on the individual gold stocks like Newmont Mining (NEM) and Barrick Gold (GOLD).

Q: How soon until we take a profit on a LEAPS spread?

A: Usually if you have 80% of the maximum potential profit, that’s a good idea. You typically have to hang out for a whole year to capture the last 20% and you’re better off buying something else unless you have an idea on how to spend the money first—then you can sell it whenever you have a profit that you are happy with. I know a lot of you who bought the 2-year LEAPS in March on our advice already have enormous profits where you’ve made 500% or more in four weeks. If you bought the 2021 LEAPS, I would roll out of those here and then buy the two-year LEAPs on the next selloff to protect yourself against a second Corona wave. Take some good profits, roll that money into longer two-year LEAPS.

Q: There seems to be a real consensus we will retest the lows. Is it possible that the low we recently had was actually a retest of the 2018 lows?

A: We actually got well below the 2018 lows, and with all of the stimulus out there now, I don’t see us going back to 18,000 in the Dow (INDU), 2,200 in the SPY, unless things get worse— dramatically worse, like a sudden spike in cases coming out of the Midwest (that’s almost a certainty) and the south. They opened their beaches and essentially created a breeding ground for the virus to then return to all the states from the visiting beachgoers. So, everyone’s got their eyes on this combined $14 trillion of QE and stimulus and they don’t want to sell their stocks now, so I don’t see a retest of the lows in that situation. I would love it if we did, then that would be like LEAPS heaven, loading up on tech LEAPS at the bottom. But even if we go retest the lows, the tech stocks aren’t going back to the lows—too many buyers are under the market.

Q: Are you using the 200-day moving average as a top?

A: That’s just one of several indicators; it’s almost a coincidence that the 200-day is right around 300 in the (SPY)’s, but also we have earnings multiples at 100-year highs—that’s another good one. And margin requirements have been greatly increasing. Any kind of leverage has been stripped out of the system, you can’t get leverage (even if you’re a well-known hedge fund) because all lenders are gun-shy after the meltdown last month, so you’re not going to be able to get that kind of leverage for a long time. And you can also bet all the money in the world that companies are not buying their stocks back, and that was essentially the largest net buyer of stocks for the last decade in the market, some $7 trillion worth. So, without companies buying back stocks, especially in the airlines, $300 in the (SPY) could be our top for the next month, or for the next six months.

Q: With Goldman Sachs forecasting four times the worst case of the 2008 great recession, will stocks not retest the market?

A: No. Remember, the total stimulus in 2009 was only $787 billion. We’re already at $6 trillion and $8 trillion in QE so we have more than ten times the stimulus that we had in 2009; so that should offset Goldman’s worst-case scenario. And they’re probably right.

Q: Why are you not shorting oil here?

A: The (USO) was at $50 three months ago, it’s now at $2. I don’t short things that have just gone from $50 to $2. And even though there’s no storage at this price, you want to be building storage like crazy, and it doesn’t take very long to build a big oil storage tank. Another outlier out there is that the US government could step in and buy 20 million barrels to top up the strategic petroleum reserve (SPR). Buying it for free is probably not a bad idea and then sell it next time we go to $20, $30, or $40 a barrel. The other big thing is that the government is mad not to impose punitive import duties on all foreign oil. Any other administration would have already done that long ago because oil prices are destroying the oil industry. But a certain president seems to have an interest in building hotels in the Middle East, and I think that’s why we don’t have import duties on Saudi oil—pure conflict of interest.

Q: Will Coronaviruses be weaker or stronger?

A: We just don’t know. This is a virus that has been in existence for less than a year; most diseases have been around for hundreds of years and we’ve been researching them forever, this one we know essentially nothing. Best case is that it goes the route of the Spanish Flu, which mutated into a less virulent form and just went away. The Black Plague from the Middle Ages did the same thing.

Q: Thoughts on food inflation going forward?

A: Food prices are collapsing and that’s because all of the distribution chains for food are broken. Farmers are having to plow food under in the field, like corn (CORN), soybeans (SOYB), and fruit, because there is no way to get it to the end-user or to the food bank. Food banks are struggling to get a hold of some of this food before it’s destroyed. I know the one in Alameda County, CA is calling farmers all over the west, trying to get truckloads of just raw food sent into the food banks. But those food banks are very poorly funded operations and don't have a lot of money to spend. In California, we have the national guard handing out food at the food banks but there is not enough—they are running out of food. Long term, agriculture is a big user of energy. They should benefit from low oil prices, but it doesn’t do any good if they can’t get their product to the market. Look at any food price and you can see it’s in free fall right now caused by the global deflation and the depression. By the way, the same thing happened in the Great Depression in the 1930s.

Q: Would you short Shopify (SHOP)?

A: No. Shopify is essentially the mini Amazon (AMZN) and has a great future; they are basically having a Black Friday every day. It’s also too late to buy it unless we have a big dip.

Q: Would you include Palladium (PALL) in your precious metals call?

A: No. Palladium especially went into this very expensive, and they are dependent on the car industry for catalytic converters, which has just fallen from a 16 million unit per month to 5 million on the way to zero. Don’t go with the alternative white metals at this time.

Q: What’s your favorite 10 times return stock?

A: Tesla, if you can get it at $500. It’s already delivered me two ten-time returns, and I’m going to go for another tenfold return on a five-year view.

Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

April 24, 2020/by Mad Hedge Fund Trader

The Coming Ad Hit for Google and Facebook

Tech Letter

Expect lower revenues from Facebook (FB) and Google (GOOGL) because ad revenue has taken a hit.

It makes no sense to spend ad money on Facebook and Google ads for restaurants and hotels during times like this and that’s if they even still exist today.

The accumulative effect of the bankruptcies in other parts of the economy will shrink Google and Facebook’s ad dollar coffers.

The two internet giants together could see more than $44 billion in worldwide ad revenue evaporate in 2020, but that doesn’t mean these companies won’t be profitable.

For 2020, Google's total net revenue is now projected to be about $127.5 billion, down $28.6 billion for the year.

Facebook’s management said there was “a weakening in the ads business in countries taking aggressive actions to reduce the spread of COVID-19.”

Facebook’s overall usage has increased during the pandemic, with data up more than 50% over the last month in countries hit hardest by the virus, but the spike in volume isn’t in a form in which they can monetize it.

In 2021, Facebook’s advertising business is projected to recover growing 23% year-over-year to $83 billion.

I now expect Google to generate $54.3 billion in operating income (43% adjusted EBITDA margin) and Facebook will make $33.7 billion (49% margin), in 2020.

Digital platforms have felt the abrupt halt in spending, given the relative ease of stopping ad spend.

Secondary ad companies are also performing worse than expected with forecasted revenue for Twitter (TWTR) down by 18% (to expected revenue of $3.2 billion) while Snap (SNAP) ad revenue is expected at $1.66 billion, 30% lower.

Amazon’s ad business boasts a fortified moat because their revenue comes from product searches and those have experienced a surge in demand because of the coronavirus.

Facebook-owned WhatsApp has increased by 50% and that number is up 70% in Italy as the Italians go through a severe outbreak and lockdown.

Another side effect from the virus is the reduction of video streaming quality to ease the strain on internet networks, as YouTube and Netflix (NFLX) have also done.

Facebook is monitoring usage patterns in order to make the system more efficient, and add further capacity as required.

To help ameliorate potential network congestion, they temporarily reduced bit rates for videos on Facebook and Instagram in certain regions.

Facebook is conducting tests and further preparing to respond to any problems that might arise with network services.

Facebook and Google’s weakness proves that even the largest of Silicon Valley tech companies are battling with revenue restructuring while waiting for the U.S. economy to open up.

Although this is terrible news for Facebook and Google, the Nasdaq index is in the process of bottoming out.

The 3.28 million U.S. jobless claims were unprecedented but could very well represent a flushing out of the horrible news as the Nasdaq index spiked by 4% intraday.

Tech shares have had this job claim number baked into the share price for quite a while and we knew it was going to drop like an atomic bomb.

Some estimates had 4 million unemployed and the pain on main street is real, just search on Twitter – hashtag #lostmyjob.

The anecdotes stream down about individuals coming to grips with a sudden sacking and new reality of zero income.

This is just the first phase of job removals and the silver lining is that tech companies largely avoided the worst of the firings partly because many tech jobs can be moved remotely unlike many hospitality jobs.

The other silver lining is that the health scare is supercharging the digital ecosystem as society has effectively been moved online.

Any short-term weakness in tech companies will only be brief as tech stock will lead the recovery as the economy starts to open up again and the record amount of fiscal stimulus breathes life into hobbled companies.

Tech investors should prepare to pull the trigger.

March 27, 2020/by Mad Hedge Fund Trader

Why the Government is Gunning for Google and Facebook

Tech Letter

Google (GOOGL) and Facebook (FB) are dominant to the extent that the U.S. administration is hoping to dismantle them.

The two companies enjoy a flourishing duopoly and guzzle up digital ad dollars.

Governments around the world are scratching their heads attempting to figure out how to put a dent in these fortresses and so far, have been unsuccessful.

Big tech has made governments look bad, to say the least, and their response has been even more shambolic.

Alphabet installed Google CEO Sundar Pichai as the top decision-maker for all Alphabet assets preparing for the onslaught of digital privacy headwinds and regulation that the E.U., U.S., and everyone else will throw at them.

Luckily, they do not need to deal with the Chinese communist party as big tech minus Apple was effectively banned years ago.

What’s on Google and Facebook’s plate right now?

Attorney General William Barr has pointed the finger at these two platforms for hiding behind a clause that gives them immunity from lawsuits while their platforms carry material promoting illicit and immoral conduct and suppressing opinions.

Barr is currently looking into potential changes to Section 230 of the Communications Decency Act, which was passed in 1996 and has been also referred to as the supercharger to tech riches.

What could eventually come of this?

Barr could decide for the Justice Department to explore ways to limit the provision, which protects internet companies from liability for user-generated content.

This could open up Google and Facebook to higher costs of managing content on their platforms and lawsuits related to malcontent in which they fail to remove.

Even though platforms love to market that they actively thwart bad actors, at the end of the day, they aren’t on the hook for what happens.

Massive alterations could fundamentally weaken their business models and force them to review each word and photo that is thrown upon their platform.

They have already hired an army of hourly paid contractors, but at their massive scale, content is simply impossible to smother.

Content generators understand how to sidestep machine learning algorithms which are based on backdated data, meaning they would not be able to catch a new iteration of past content.

Absolving themselves of any responsibility for policing their platforms has been an important catalyst in the outperformance in shares for both Facebook and Google.

The social side of this has cringeworthy unintended consequences.

The Computer & Communications Industry Association, a tech trade group that counts Google and Facebook as members want the government to stay out of it as they believe they are overreaching.

Government has been slowly making inroads in combatting the strength of these digital platforms, and the first successful foray was when Congress eliminated the liability protection for companies that knowingly facilitate online sex trafficking.

Big tech won’t go with a whimper and they will propose a range of changes to avoid direct damage to their business model such as raising the bar a smidgeon on which companies can have the shield, to carving out other laws negating attempt to weaken their platforms, to delaying the repealing of Section 230.

There is too much shareholder value on the line and as the coronavirus rears its ugly head, it’s ironic that investors perceive safety in not only the U.S. dollar but in the vaunted FANG tech group.

Ultimately, the math wins out and these companies with gargantuan earnings can weather any storm with a moat as wide as ever.

It’s to the point that a $10 billion fine is a massive victory, and what other group of companies can boast about that?

We can only trade the market we have in front of us and not the one we want.

I pulled the trigger on a Google call spread and I believe this narrow group of power tech players and their partners in crime cloud stocks of the likes of Twitter (TWTR), eBay (EBAY), Fortinet (FTNT), Adobe (ADBE), and a few others will hoist the market on its back like I predicted it would at the beginning of the trading year.

February 21, 2020/by Mad Hedge Fund Trader

Finding a New FANG

Diary, Newsletter

We all love our FANGS.

Not only have Facebook (FB), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) been at the core of our investment performance for the past decade years, we also gobble up their products and services like kids eating their candy stash the day after Halloween.

Three of the FANGs have already won the race to become the first $1 trillion in history, Apple, Amazon, and Microsoft.

In fact, the FANGs are so popular that we need more of them, a lot more. So how do we find a new FANG?

Here is where it gets complicated. None of the four have perfect business models. All excel in many things but are deficient at others.

So, there are at least four different answers as to what makes a FANG. A more accurate answer would probably be 4 squared, or four to the tenth power.

I will list the eight crucial elements that make a FANG.

1) Product Differentiation

In medieval times, location was the most important determinant of business success. If you owned Ye Olde Shoppe at the foot of London Bridge, you prospered.

Then, great distribution was crucial. This occurred during the 19^th century when the railroads ran the economy.

Products followed with the automobile boom of the 20^th century, when those who dreamed up 18-inch tailfins dominated. This strategy was applied to all consumer products.

The Financial age came next, when cheap money was used to assemble massive conglomerates that was the primary determinant of success.

The eighties and nineties spawned the era of global brands, be it Coca Cola, MacDonald’s, Lexus, or Gucci.

Today, the global economy is ruled by those who can provide the best services. Facebook offers you personal access to a network of 1.5 billion. Apple will sell you a phone that can perform a magical array of tricks.

Netflix will stream any video content imaginable with lightning speed. Alphabet will deliver you any piece of information you want as fast as you can type, but charges advertisers hundreds of billions of dollars to get in your way.

This has created what I call an “Apple” effect. It stampedes buyers to pay the highest premiums for the best products, assuring global dominance.

While Apple accounts for less than 10% of the smart phone market, it captures a stunning 92% of the net profits. Everyone else is just an “also ran.”

Instead of driving my car into a dingy dealership every few months to get ripped off for a tune up, Tesla (TSLA) does it remotely, online, while I sleep, for free.

Unlike battling for a smelly New York taxi cab in a snow storm, a smiling Uber driver will show up instantly, know where to go, automatically bill me at a discount price, and even give me restaurant recommendations in Kabul.

And you all know what Amazon can do. It beats the hell out of looking for a parking space at a mall these days, only to be told they don’t have your size (48 XLT).

2. Visionary Capital

If you have a great vision, you can get unlimited financing free from investors anywhere. That puts those who must pay for expensive external financing for growth at a huge disadvantage.

Have a great vision, and the world is your oyster.

Elon Musk figured this out early with Tesla. By promising a “carbon-free economy,” he has been able to raise tens of billions of equity capital even though his firm has never made a real profit.

Alphabet is “organizing the world’s information”, while Facebook is “connecting the world.”

Chinese Internet giant Alibaba (BABA) invented a holiday from scratch, “Singles Day,” November 11, which has quickly become the most feverish shopping day in history. In 2019, they booked an unbelievable $30.8 billion in sales in a single 24 hours period, up 27% from the previous year.

And you know the great thing about visions? Not only do venture capitalists and consumers love them, so do stock investors.

3) Global Reach

You have to go global or be gone. A company with 7 billion customers will beat one with only 330 million all day long.

Go global, and economies of scale kick in enormously. This is only possible if you digitize everything from the point of sale to the senior management. Some two-thirds of Facebook users are outside the US, although half its profits are homegrown.

By the way, the Mad Hedge Fund Trader is global, with readers in 135 countries. Our marginal cost of production is zero, and the entire firm is run off my American Express card. It’s a great business model. And boy, do I get a ton of frequent flier points! Whenever I board Virgin Atlantic’s nonstop from San Francisco to London, the entire crew stands up to salute.

4) Likeability

Who doesn’t like Mark Zuckerberg, with his ever-present hoodies, skinny jeans, and self-effacing demeanor. And who did Facebook send to Washington to testify about internet regulation but the attractive, razor-sharp, and witty Sheryl Sandberg? The senators ate out of her hand.

Bill Gates and Steve Ballmer? Not so likable. Their arrogance invited a ten-year antitrust suit against Microsoft (MSFT) from the Justice Department which half the legal profession made a living off of.

And here’s the thing. If people like you, so will consumers, regulators, and yes, even equity investors. It makes a big difference to the bottom line and your investment performance.

5) Vertical Integration

Crucial to the success of the FANGs is their complete control of the customer experience through vertical integration.

When FANGs don’t manufacture their own products, as Apple does, they source them, rebrand them, and sell them as their own, like Amazon.

The return on investment for advertising is plummeting. Just ask the National Football League. So, it has become essential for companies to keep a death grip on the customer the second they enter your site.

Some, like Amazon again, will keep chasing you long after you have left their sites with special offers and alternative products. Even if you change computers they will hunt you down.

One of my teenaged daughters used my computer to buy a swimsuit last summer, and let me tell you, booting up in the morning has been a real joy ever since.

This was the genius of the Apple store network. Buy one Apple product and they own you for life, like an indentured servant. They all integrate and talk to each other, a huge advantage for a small business owner. And they are cool.

No pimple-faced geeks wearing horn-rimmed glasses here. Get your iPhone fixed and you don’t talk to a technician, but a “genius.” It’s all about control.

Expect other strong brands to open their own store chains soon.

6) Artificial Intelligence

There is probably no more commonly known but least understood term in technology today. It’s like counting the number of people who have finished Dr. Stephen Hawking’s “A Brief History of Time” (I have).

A trillion-dollar company absolutely must be able to learn from human data input and then use algorithms to analyze it. Data has become the oxygen of the modern economy.

The company then use other algos to predict what you’re most likely buying next and then thrust it in front of your face screaming at the top of its lungs.

This has been evolving for decades.

First, there was demographic targeting. White suburban middle-class guys have all got to like Budweiser, right?

This turned into social targeting. If two friends “liked” the same brand, regardless of their demographics, they should be targeted by same advertisers.

Now we live in the age of behavioral targeting. There is no better predictor of future purchases than current activities. So, if I buy a plane ticket to Paris, offerings of Paris guidebooks, tours, French cookbooks, French dating services, and even seller of discount black berets suddenly start coming out of the woodwork.

It would be a vast understatement to say that behavioral targeting is the most successful marketing strategy ever invented. So, guess what? We’re going to get a lot more of it.

As depressing as this may sound, the number one goal of almost all new technological advancements these days is to get you to buy more stuff.

Better to use the public computer at the library to buy your copy of “50 Shades of Gray.”

7) Accelerant

If you want to throw gasoline on the growth of a company, you absolutely have to have the best people to do it. The companies with the smartest staff can suck in free capital, invent faster, develop speedier services, and always be ahead of the curve when compared to the competition.

This has led to enormous disparities in income. Companies will pay anything for winners, but virtually nothing for losers.

I’ll never forget the first day I walked on to the trading floor at Morgan Stanley (MS). I am 6’4” and am used to towering over those around me. But at Morgan, almost all the salesmen were my height or a few inches shorter.

The company specifically selected these people because they delivered better sales records. Height is intimidating, especially to short customers.

And that’s what the FANGs have, the programming equivalents of a crack all-6’4” sales team.

A few years ago, my son got a job as the head of International SEO at Google. He was rare in that he spoke fluent Japanese and carried three passports, US, British, and Japanese (born in London with a Japanese mom and American dad).

However, when he met his team, they all spoke multiple languages, were binational, and were valedictorians, National Merit Scholars, and Eagle Scouts to boot!

This is why immigration is such a hot button issue in Silicon Valley these days. If you can’t get a work visa for a graduating PhD in Computer Science from Stanford, he’ll just go back to China or India to start a local competitor that may someday eat your lunch.

By the way, if you get a FANG on your resume, even for a short period, you are set for life. Oh, and by the way, Apple gets 100,000 resumes a month!

8) Geography

It all about location, location, location. It’s no accident that Silicon Valley took root near two world class universities, the University of California at Berkeley (my alma mater), and the godless heathens at Stanford across the bay.

When the pioneers moved west in covered wagons in 1849, they came to a fork in the road. The god fearing families went right to the verdant farmland of Oregon, while young men cashing in on the latest get-rich-quick scheme chose left for the gold fields of California. Nothing has changed since.

Cal in particular was the recipient of massive government funding for the Manhattan Project that built the first atomic bomb during WWII. The tailwind lingers to this day. The world’s first cyclotron still occupies a local roundabout.

Universities provide the raw materials essential to create hot house local economies like the San Francisco Bay Area. And as much as every region in the US or country in the world would like to do this, none have been able to.

There is only one place in the world were a company can hire 1,000 engineers from scratch on short notice, and that is the Bay Area.

Also, innovation is city centered. Some two-thirds of future GDP growth will emanate from cities.

So, if you want to move your career forward, you better count on spending some serious time in Silicon Valley, New York, London, and Tokyo.

I’ve done all four and it paid handsomely.

So there you have it. Now we know what makes a FANG. I’ll be addressing who the most likely FANG candidates are in a future letter.

I want to thank my friend, Scott Galloway of New York University’s Stern School of Business for some of the concepts in this piece. His book, “The Four” is a must read for the serious tech investor.

So Where is the Next FANG?

February 20, 2020/by Arthur Henry

Data Tells the Whole Story

Tech Letter

Behavioral trends have a sizable say in which tech companies will outperform the next and a recent report from SimilarWeb offers insight into how much users navigate around the monstrosity known as the internet.

The optimal way to comprehend the trends are from a top-down method by absorbing the divergence between desktop traffic and mobile traffic.

It’s no secret that the last decade delivered consumers a massive leap in mobile phone performance in which tech companies were able to neatly package applications that acted as monetization platforms by offering software and services to the end-user.

Thus, it probably won’t shock you to find out that desktop traffic is down 3.3% since 2017 as users have migrated towards mobile and the trend has only been exaggerated by the younger generations as some have become entirely mobile-only users.

All told, the 30.6% expansion in mobile traffic has penalized tech firms who have neglected mobile-first strategies and one example would be Facebook (FB), who even though has a failing flagship product in Facebook.com, are compensated by Instagram, who is showing wild growth numbers.

The fact that mobile screens are smaller than desktop screens means that users are staying on web pages not as long as they used to – precisely 49 seconds to be exact.

This trend means that content generators are heavily incentivized to frontload content and scrunch it up at the top of the page. This also means that sellers who don’t populate on Google’s first page of search results are practically invisible.

The high stakes of internet commerce are not for the faint of heart and numerous companies have complained about algorithm changes toppling their algorithm-sensitive businesses.

Even using a brute force analysis and investing in companies that are in the top 15 of internet traffic, then the companies that scream undervalued are Twitter (TWTR) and eBay (EBAY).

Twitter is a company I have liked for quite a while and is definitely a buy on the dip candidate.

The asset is the 7^th most visited property on the internet behind the likes of Instagram, Google, Baidu, Wikipedia, Amazon, and Facebook.

This position puts them just ahead of Pornhub.com, Netflix, and Yahoo.

And if you take one step back and analyze traffic from the top 100 sites, traffic is up 8% since 2018 and 11.8% since 2017 averaging 223 billion visits per month.

Rounding out the top 15 is eBay who I believe is undervalued along with Twitter - these two are legitimate buy and holds.

Ebay was the recipient of poor management for many years and they are now addressing these sore points.

Certain content is suitable for mobile such as adult sites, gambling sites, food & drink, pets & animals, health, community & society, sports, and lifestyle.

And just over the last year or two, other categories are gaining traction in mobile that once was dominated by desktop such as news and media, vehicle sites, travel, reference, finance, and others.

Many consumers are becoming more comfortable at doing more on mobile and spending more to the point where people are making large purchases on their iPhones.

The biggest loser by far was news - they are losing traffic in droves.

Traffic at the top 100 media publications was down 5.3% year-over-year from 2018 to 2019, a loss of 4 billion visits, and down by 7% since 2017.

Personally, I believe the state of the digital news industry is in shambles, and Twitter has moved into this space becoming the de facto news source while pushing the relevancy of news sites down the rankings.

Facebook and Twitter are essentially undercutting the news by forcing news companies to insert them between the reader and the news company because they have strategized a position so close to the user’s fingertips.

The negative sentiment in news is broad based on popular news, entertainment news and local news all showing decreases of more than 25%.

Finance and women’s interest news categories are the only ones showing positive traffic growth.

The state of internet traffic growth supports my underlying thesis of the big getting bigger and the subsequent network effect stimulating further synergies that drop straight down to the bottom line.

The top 10 biggest sites racked up a total of 167.5 billion monthly visits in 2019, up 10.7% over 2018 and the remaining 90 largest sites out of the top 100 only increased 2.3%.

This has set the stage for just five gargantuan tech firms to become worth more than $5 trillion or 15.7% of the S&P 500’s market value and 19.7% of the total U.S. stock market’s value.

Now we have real data backing up my iron-clad thesis and these cornerstone beliefs underpins my trading philosophy.

Many of the biggest wield a two-headed monster like Google who has Google.com and YouTube video streaming and Facebook, who have Facebook.com and Instagram.

It doesn’t matter that Facebook has lost 8.6% of traffic over the past year because Instagram compensates for Facebook being a poor product.

And if you are searching for another Facebook growth driver under their umbrella of assets then let’s pinpoint chat app WhatsApp who experienced 74% year-over-year traffic.

Beside the news sites, other outsized losers were Yahoo’s web traffic shrinking by 33.6% and Tumblr, which banned adult sites in 2018, leading to a 33% loss in traffic.

If I can sum up the data, buy the shares of companies who are in the top 15 of internet traffic and be on the lookout for any dip in eBay or Twitter because they are relatively undervalued.

February 14, 2020/by Mad Hedge Fund Trader

February 12 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 12 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What do you think about Facebook (FB) here? We’ve just had a big dip.

A: We got the dip because of a double downgrade in the stock from a couple of brokers, and people are kind of nervous that some sort of antitrust action may be taken against Facebook as we go into the election. I still like the stock long term. You can’t beat the FANGs!

Q: If Bernie Sanders gets the nomination, will that be negative for the market?

A: Absolutely, yes. It seems like after 3 years of a radical president, voters want a radical response. That said, I don't think Bernie will get the nomination. He is not as popular in California, where we have a primary in a couple of weeks and account for 20% of total delegates. I think more of the moderate candidates will come through in California. That's where we see if any of the new billionaire outliers like Michael Bloom or Tom Steyer have any traction. My attitude in all of this is to wait for the last guy to get voted off the island—then ask me what's going to happen in October.

Q: When should we come back in on Tesla (TSLA)?

A: It’s tough with Tesla because although my long-term target is $2,500, watching it go up 500% in seven months on just a small increase in earnings is pretty scary. It’s really more of a cult stock than anything else and I want to wait for a bigger pullback, maybe down to $500, before I get in again. That said, the volatility on the stock is now so high that—with the short interest going from 36% down to 20%—if we get the last of the bears to really give up, then we lose that whole 20% because it all turns into buying; and that could get us easily over $1,000. The announcement of a new $2 billion share offering is a huge positive because it means they can pay off debt and operate with free capital as they don’t pay a dividend.

Q: Is Square (SQ) a good buy on the next 5% drop?

A: I would really wait 10%—you don't want to chase trades with the market at an all-time high. I would wait for a bigger drop in the main market before I go aggressive on anything.

Q: What about CRISPR Technology (CRSP) after the 120% move?

A: We’ve had a modest pullback—really more of a sideways move— since it peaked a couple of months ago; and again, I think the stock either goes much higher or gets taken over by somebody. That makes it a no-lose trade. The long sideways move we’re having is actually a very bullish indication for the stock.

Q: If Bernie is the candidate and gets elected, would that be negative for the market?

A: It would be extremely negative for the market. Worth at least a 20% downturn. That said, according to all the polling I have seen, Bernie Sanders is the only candidate that could not win against Donald Trump—the other 15 candidates would all beat Trump in a 1 to 1 contest. He's also had one heart attack and might not even be alive in 6 months, so who knows?

Q: I just closed the Boeing (BA) trade to avoid the dividend hit tomorrow. What do you think?

A: I’m probably going to do the same, that way you can avoid the random assignments that will stick you with the dividend and eat up your entire profit on the trade.

Q: When do you update the long-term portfolio?

A: Every six months; and the reason for that is to show you how to rebalance your portfolio. Rebalancing is one of the best free lunches out there. Everyone should be doing it after big moves like we’ve seen. It’s just a question of whether you rebalance every six months or every year. With stocks up so much a big rebalancing is due.

Q: I have held onto Gilead Sciences (GILD) for a long time and am hoping they’ll spend their big cash hoard. What do you think?

A: It’s true, they haven’t been spending their cash hoard. The trouble with these biotech stocks, and why it's so hard to send out trade alerts on them, is that you’ll get essentially no movement on them for years and then they rise 30% in one day. Gilead actually does have some drugs that may work on the coronavirus but until they make another acquisition, don’t expect much movement in the stock. It’s a question of how long you are willing to wait until that movement.

Q: Is it time to get back into the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?

A: No, you need to maintain discipline here, not chase the last trade that worked. It’s crucial to only buy the bottoms and sell the tops when trading volatility. Otherwise, time decay and contango will kill you. We’re actually close to the middle of the range in the (VXX) so if we see another revisit to the lows, which we could get in the next week, then you want to buy it. No middle-of-range trades in this kind of market, you’re either trading at one extreme or the other.

Q: Could you please explain how the Fed involvement in the overnight repo market affects the general market?

A: The overnight repo market intervention was a form of backdoor quantitative easing, and as we all know quantitative easing makes stocks go up hugely. So even though the Fed said this wasn't quantitative easing, they were in fact expanding their balance sheet to facilitate liquidity in the bond market because government borrowing has gotten so extreme that the public markets weren’t big enough to handle all the debt; that's why they stepped into the repo market. But the market said this is simply more QE and took stocks up 10% since they said it wasn't QE.

Q: What about Cisco Systems (CSCO)?

A: It’s probably a decent buy down here, very tempting. And it hasn't participated in the FANG rally, so yes, I would give that one a really hard look. The current dip on earnings is probably a good entry point.

Q: Should we buy the Volatility Index (VIX) on dips?

A: Yes. At bottoms would be better, like the $12 handle.

Q: When is the best time to exit Boeing?

A: In the next 15 minutes. They go ex-dividend tomorrow and if you get assigned on those short calls then you are liable for the dividend—that will eat up your whole profit on the trade.

Q: Do you like Fire Eye (FEYE)?

A: Yes. Hacking is one of the few permanent growth industries out there and there are only a half dozen listed companies that are cutting edge on security software.

Q: What are your thoughts on the timing of the next recession?

A: Clearly the recession has been pushed back a year by the 2019 round of QE, and stock prices are getting so high now that even the Fed has to be concerned. Moreover, economic growth is slowing. In fact, the economy has been growing at a substantially slower rate since Trump became president, and 100% of all the economic growth we have now is borrowed. If the government were running a balanced budget now, our growth would be zero. So, certainly QE has pushed off the recession—whether it's a one-year event or a 2-year event, we’ll see. The answer, however, is that it will come out of nowhere and hit you when you least expect it, as recessions tend to do.

Q: Would you buy gold (GLD) rather than staying in cash?

A: I would buy some gold here, and I would do deep in the money call spreads like I have been doing. I’ve been running the numbers every day waiting for a good entry point. We’re now at a sort of in between point here on call spreads because it’s 7 days to the next February expiration and about 27 days to the March one after that, so it's not a good entry point this week. Next week will look more interesting because you’ll start getting accelerated time decay for March working for you.

Q: When are you going to have lunch in Texas or Oklahoma?

A: Nothing planned currently. Because of my long-term energy views (USO), I have to bring a bodyguard whenever I visit these states. Or I hold the events at a Marine Corps Club, which is the same thing.

Q: Would you use the dip here to buy Lyft (LYFT)? It’s down 10%.

A: No, it’s a horrible business. It’s one of those companies masquerading as a tech stock but it isn’t. They’re dependent on ultra-low wages for the drivers who are essentially netting $5 an hour driving after they cover all their car costs. Moreover, treating them as part-time temporary workers has just been made illegal in California, so it’s very bad news for the stocks—stay away from (LYFT) and (UBER) too.

Q: Is the Fed going to cut interest rates based on the coronavirus?

A: No, interest rates are low enough—too low given the rising levels of the stock market. Even at the current rate, low-interest rates are creating a bubble which will come back to bite us one day.

Q: Household debt exceeded $14 trillion for the first time—is this a warning sign?

A: It is absolutely a warning sign because it means the consumer is closer to running out of money. Consumers make up 70% of the economy, so when 70% of the economy runs out of money, it leads to a certain recession. We saw it happen in ‘08 and we’ll see it happen again.

Good Luck and Good Trading

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

February 14, 2020/by Mad Hedge Fund Trader

Uber's Dark Future

Tech Letter

Autonomous or bankrupt; that is the ultimate fate of Uber (UBER).

In the short-term, Uber is a master at moving the goalposts in order to breathe life in the stock.

CEO of Uber Dara Khosrowshahi can only pray that the Fed will continue to pump cheap money into the market because without artificially low-interest loans, tech firms like Uber would implode.

Is it really time to give Uber the benefit of the doubt?

No more hype, just profits? Is the calculus to profits legitimate?

That's what we call a bubble. Bubbles always burst. Here's the scary part.

Many people are counting on the continued existence of Uber and Lyft to provide "cheap transportation."

Commuters will have to get suddenly unused to it.

There are many companies today that are running the same scheme as Uber in the “gig economy.”

It’s true that management loves to use a lot of flowery language to disguise a lack of profitability.

But as the conditions are ripe for a leg up in tech, the tide rises, and even Uber’s boat rises with it.

I have yet to see even one realistic analysis of how Uber or Lyft is going to become profitable - not even basic math!

I have met a plethora of drivers for both companies, and hope they do well, but there is only so long that one can put lipstick on a pig.

So here we are, Uber in the green everyday because they moved the goalposts yet again and promise us earlier than expected profitability but still losing billions of dollars.

Lyft and Uber have apparently increased revenues somewhat by reducing promotional discounts to riders, but that does not project to even a breakeven point and the unit economics tell me no even if my heart says yes.

The only trick up their sleeve seems to be fare increases, but where is the roadmap detailing this treacherous path?

Once we get to the point in time when Uber is supposed to be profitable, I bet that management will call in another trick play and move the goal posts yet again.

It is quite laughable when so called “tech experts” want Uber to join the ranks of Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc.’s Google (GOOGL) as part of a FANGU acronym.

Reasons for this new bundle is thought to be because of the ability to take advantage of its massive scale while working toward profitability.

Uber is the global ridesharing leader and is becoming the global food delivery leader, but do they really add value?

What if the local government finally got their finger out and built a proper transport system?

They are merely taking advantage of a broken system and passing on the costs of paying drivers to the drivers themselves by designating them as hourly workers.

Are we supposed to celebrate when Uber becomes more “rational?”

Meaning that players have limited their attempts to undercut one another with the sorts of pricing and big discounts that had at one time suggested the business might be a race to the bottom.

Uber projected a lower loss than analysts were expecting for 2020, does less loss mean profits in 2020?

And I do agree that it is encouraging that the company is finally disclosing more data, but shouldn’t they be doing that in the first place?

Love it or hate it, there is a “war” going on between profitability and growth at Uber as the company manages the trade-offs.

Uber had previously talked up that it would become Ebitda profitability by the end of 2021, but Khosrowshahi now forecasts profitability for the fourth quarter of this year.

He says it is possible because Uber initiated a “belt-tightening program” in the last half of 2019, exiting unprofitable ventures and laying off about 1,000 employees.

For instance, Uber sold its food-delivery business in India to a local startup, Zomato, in return for a 9.9% stake in that company.

I do believe that they haven’t done enough to build credibility with investors and the stock’s price action is behaving as we should trust Uber’s management with whatever comes out of their mouths.

The lack of visibility and uncertainty around trends in ridesharing and Eats outside the U.S. continue to be hard to quantify.

So that sounds great! Uber is more serious than ever about becoming profitable and investors have backed them up with the stock flying to the moon.

The trend is your friend and I would suggest readers to get out of the way of this one because you could get trampled on just like the Tesla bears.

And I do support Uber in making steps in the right direction and it also can be said that stocks appreciate the fastest when they transform from a horrible company to a less horrible company.

But there is no way that I am giving Khosrowshahi a pass for Uber’s current situation and no chance I am praising him to the hills.

It is what it is, and Uber is less bad than before, and if they don’t meet their targets, I don’t think investors will believe Khosrowshahi version of a spin doctor forecast anymore.

Uber will rise in the foreseeable future and if they fail to become profitable by 4^th quarter, expect a massive drawdown.

If they succeed, expect a vigorous wave of new players to buy into Uber shares.

The stakes have never been higher for Uber and Khosrowshahi.

February 12, 2020/by Mad Hedge Fund Trader

The Trade Alert Drought Explained

Tech Letter

Why has there been a dearth of Mad Hedge Tech trade alerts to start the year?

Let me explain.

Love it or hate it – earnings' season is about to kick off.

And now, this is the part where it starts to get ugly with consensus of a 2% year-over-year decline in fourth-quarter S&P 500 earnings.

Banks are expected to be a rare bright spot and JPMorgan (JPM) delivered us stable results as one of the first to report.

The unfortunate part of the equation is that a lot has to go right for tech shares to go unimpeded for the rest of the year.

What we have seen in the first 2 weeks of the year is a FOMO (fear-of-missing-out) environment in which valuations have lurched forward to 20 times forward earnings.

Tech is overwhelmingly carrying the load and I have banged on the drums about this thread advising readers to be acutely aware of a heavy positive bias towards the FANGs in 2020.

Well, that is already panning out in the first two weeks.

Examples are widespread with Facebook (FB) up over 8% and Apple (AAPL) already topping 6% to start the year.

It would be farfetched to believe that the tech sector can keep pilfering itself higher in the face of negative earnings growth.

However, behind the scenes, relations between China and America are improving, the threat of war with Iran is subsiding, and the Fed continues strong support tempering down risk to tech shares.

The situation we find ourselves in is that of an expensive tech sector that will again guide down on upcoming earnings’ reports telegraphing softness moving into the middle part of the year.

The ensuing post-earnings sell-off in specific software stocks will offer optimal short-term entry points.

The current risk-reward of chasing FANGs at these levels is unfavorable.

Another glaring example of the FANG outperformance is Alphabet who rose 26% last year.

They are on the brink of joining the $1 trillion club that Apple and Microsoft (MSFT) have joined.

Its market value currently sits idling at $985 billion and its surge towards the vaunted trillion-dollar mark is more of a case of when than if.

Alphabet (GOOGL), more or less, still expands at the same rate of low-20% annually that it did 10 years ago.

Sales have ballooned to $160 billion annually and they sit at the forefront of every cutting-edge sub-sector in technology from artificial intelligence, autonomous driving, and augmented reality.

The engine that drives Google is still its core advertising business and strategic premium acquisitions like YouTube and penetration into other fast-growing areas such as cloud computing.

It has rounded out into a broad-based revenue accumulator.

Apple was the first public company to surpass a $1 trillion market cap and ended the year up 86% in 2019, and it has only gone up since then currently checking in at a $1.36 trillion market cap.

Microsoft followed Apple, hitting the $1 trillion mark during the first half of 2019, and it is now worth $1.23 trillion.

Amazon fell back after surging past the $1 trillion mark but inevitably will achieve it on the next heave up.

Amazon shares have been quickly heating up since its capitulation from $2,000 in July 2019 and round out the group of overperforming tech behemoths.

Although the rush into big-cap tech stocks in the first two weeks has been a bullish signal, it still doesn’t marry up with the lack of earnings growth in the overall tech sector.

Companies beating meager expectations will experience strong share appreciation although not at the pace of last year and will still serve investors pockets of overperformance.

We will find our spots to trade shortly, but better to keep our gunpowder dry at the moment.

January 15, 2020/by Mad Hedge Fund Trader

The Top Is Not In For Tech Stocks

Tech Letter

Tech shares are pricey, but that doesn’t mean they can’t get more expensive.

Strength often begets strength.

Let’s take for instance Apple (AAPL) – it delivered investors 86% in 2019 and that was their best performance in the past 10 years.

This was on the heels of a tumultuous 2018 where Apple sank 6%.

Many of the best of brightest of the tech industry beat the S&P last year, which itself gained 29%.

And as Apple leapfrogged into the software as a service business, they find themselves shunning China hardware revenue that got themselves into the 2018 mess.

Apple is betting that the confines of stateside consumer culture will offer greener pastures.

Overall, the market is pricing in a lukewarm 2020 for tech earnings boding well for the elite tech stocks that celebrated touchdown after touchdown in 2019.

Surpassing low expectations could be another rewind back to Q4 2019 which was a time that offered tech shares a platform to surge to all-time highs.

The worrying development for 2020 is that poorer-rated tech corporations won’t have the same access to cheap debt as they did in 2018 or even 2019.

The chapter of loose credit is about to close stymying loss-making tech companies who thought they could use subsidies to achieve success.

The prices of CCC-rated European bonds have declined immensely in the past year showing investors' lack of appetite for the riskier part of the corporate debt market.

Venture capitalists aren’t going to foot the bill for the next big thing in Silicon Valley at this point in the economic cycle unless the unit economics are too good to be true.

The story of 2020 will be the intensification between the haves and have nots in tech.

This is the case of the market putting a premium on time-honored tech brands and bulletproof balance sheets that they have cultivated.

On a broader level, the Fed who has presided over a $600 billion expansion in their balance sheet in the last four months offers yet another tailwind to tech shares in the short-term.

The Fed’s decision in the last few months to re-start large-scale asset purchases will help keep a foot under tech shares in early 2020 and responds like a de facto QE.

If you thought 2019 was a bad year for Uber and Lyft, then wait until this year plays itself out.

The gig economy stocks are in the direct firing line with nowhere to run and other non-sensical profit models will find it costly to search for debt alternatives in which to service their visions.

If the tech sector does become a war of attrition between the FANGs staving off one another by acquiring inorganic growth, then marginal tech players will get squeezed because they don’t have the capital bazookas to compete with the likes of Facebook (FB) and Google (GOOGL).

This is the year that we could see a slew of fringe tech companies go bust as debt markets sour on false narratives of future profits and equity markets turn against them.

The feast versus famine theme is also aligned with 5G, with many of the same cast of characters such as Apple, Alphabet posed to usurp revenue when this new technology finally becomes pervasive in consumer culture.

The Apple refresh cycle will dust off its playbook for another blockbuster rollout later this year when Apple debuts its much-awaited 5G phone.

Much of the share appreciate in Apple of late can be attributed to the anticipation of the new iPhone and the fresh infusion of revenue that branches off from it.

The applications that result from the new 5G Apple phone is seen as a luscious force multiplier to many 3^rd party companies as well.

Chip stocks will be counted on as the ones lifting the tech foundations and just looking at shares in China, demonstrations of frothiness are running wild throughout their markets.

The Chinese government, to counteract the trade war, has been on a mission to flood its tech sector with unlimited capital as a catchup mechanism to overcome its inferior domestic chip industry.

Will Semiconductor, a supplier of integrated circuit products for telecommunications and electronics for cars, delivered a 390% performance in 2019 ranking it as the best performer in the Chinese stock market.

Luxshare Precision Industry and GoerTek, suppliers of consumer electronics products supplying Apple, and GigaDevice Semiconductor, producing flash chips, weren’t too shabby either each eclipsing at least 193% last year.

Even though 5G construction isn’t fully operational, I can attest that revenue creation for the companies involved are in full swing.

Investors must narrow their pickings to the biggest and financially resilient; this is not the time to expose oneself to the ugly trepidations of the mood-sensitive tech market.

For investors who can balance the delicate relationship of risk and surgical maneuvering, this year will end positive.

January 8, 2020/by Mad Hedge Fund Trader

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So Where is the Next FANG?

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