Global Market Comments
November 15, 2019
Fiat Lux
Featured Trade:
(NOVEMBER 13 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (TSLA), (FXI), (SPY), (AAPL), (M), (BA), (TLT)
Posts
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader November 13 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: Has the multiyear decline in commodities ended, such as for Freeport McMoRan (FCX)?
A: Yes, for the short term. However, we will almost certainly have another recession scare—or even election scare—sometime next year. That will cause a retest of the recent lows in commodities. The volatility will continue, but the long-term trend is up. The next recession will likely be so short that people will start discounting the recovery now. If you’re only looking for a 2-quarter recession and have a long-term view of your stocks, you probably want to use any kind of dips to buy now. A lot of the recent buying in Tesla (TESLA), by the way, has been of that nature.
Q: Will the US eventually drop all tariffs on Chinese imports (FXI), or do you see the US raising them?
A: I think eventually they will solve the trade war next year, right in front of the election—maybe June/July/August—so that Trump has something to run on. It’s too early to solve it now for political purposes. The whole trade war was essentially designed to depress the economy and then bring in Trump as the savior right before the election, and that has all tariffs disappearing sometime next year. By the way, some of the buying in the market now is discounting the end to the uncertainty of the trade war. So, either that or it ends when Trump leaves office—in either case, that’s 15 months off. Many big institutions think in timeframes much longer than that.
Q: Can the US consumer bring us through the holiday season to have equities (SPY) finish at all-time highs?
A: Yes, they can; I thought we might get a dip to trade off of in Oct/Nov, but we haven't gotten it. It’s looking more and more like a melt-up into year-end, even though it’s a slow-motion melt-up of 50 or 100 points a day.
Q: Will Apple (AAPL) keep going up every day forever?
A: No, don’t forget that Apple can have 40% pullbacks at any time without warning. Usually, they happen with new product launches. I would think we’re getting overextended here. If we somehow get a 10% or 20% pullback in Apple next year, I’d be jumping back into that for the product launch next September when we’ll likely hit $200, which has been my target for Apple for a very long time.
Q: Is it time to make a short term buy of beaten-down retail names like Macy’s (M)?
A: No, I am a person who trades with the long-term trend at all times. Most people are not agile or smart enough to do counter-trend trades and make money, and the risk/reward is also terrible—you make a mistake, you get killed on those. I think this company’s having a going-out-of-business sale, unless we enter a major increase in economic growth in this country, which is nowhere in the cards. If anything, I’m looking for a sharp rally to sell into. Macy’s might want to test that 200-day moving average up there at $20 at some point; that would be a great selling place. But no, we don’t want to touch the retailers right here, and retailers have been very kind to us this year on the short side.
Q: Do you see the United States US Treasury Bond Fund (TLT) as a safe-haven buy at today’s prices, or are bonds overpriced?
A: I think we’re getting the safe-haven bid as a hedge against stocks selling off. Wildly overbought Mad Hedge Market Timing Indexes are also great places to buy bonds because when you finally get the correction in the stock market, money piles into bonds, and you want to be buying the (TLT) before it does that.
Q: Is Boeing (BA) a short for the next 6 months?
A: No, I think the short play on Boeing is over. If we do get another run down to $325, take it as a gift and load the boat. I think the next major move in Boeing is to $400. Buy the dips.
Q: Do you think the Fed will cut one more time before the year is over, or will they hold off?
A: They will hold off—Powell said as much in this morning’s speech. He really said that not only will there be no more cuts this year, but next year as well, because we are essentially eating our seed corn when it comes to the next recession if we do cut rate because that means there will be no tools with which to get out of the recession.
Q: Are you seeing stocks rising to the end of the year, into the first of next year? If so, will there be a pullback during November before a final rise?
A: Yes we are seeing stocks rise to the end of the year; and you would think we will see some kind of pullback, but we have so much liquidity chasing so few stocks now, any pullbacks may be limited.
Q: (TLT) is called the iShares Barclay 20+ year bond fund. In your trade alerts, you talk about 10-year yields. How are the 10-year yields linked to the (TLT)?
A: There isn't a liquid 10-year bond ETF. There are ETFs but they’re fairly illiquid, so I put everyone into the 20-year (TLT) purely for liquidity reasons.
Q: What about going outright long on the (TLT)?
A: That’s not a bad option; the only problem with outright longs is you make no money if we grind sideways for a while, whereas with the options trade, you get in all the time decay. And we only did the December's, which have about 27 days left in them in trading time.
Q: Tesla just announced it will open a Berlin factory—what does this mean for Tesla and the share providers?
A: Well, it creates the means by which Tesla can increase its production from 400,000 cars this year to 5,000,000 cars a year in 10 years. And it’s just one other factory; expect more to come. Interestingly, their first choice was actually Great Britain, but Brexit scared them out of there.
Q: Do you think Silicon Valley should be a judge on political advertising?
A: I think Silicon Valley should not allow publication of obviously false content which they do now. That’s something the mainstream media are not allowed to do or they will get fined by the Federal Communications Commission. That ban does not apply to social media companies like Facebook (FB) and Twitter (TWTR) but should be as they are vastly more powerful than conventional media. Without it, you'll continue to see massive amounts of false information put out on the Internet. I can see the fake info clearly, but most can’t. I saw a statistic yesterday saying that roughly 50% of all information you read on the internet is false.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 21, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE FORK IN THE ROAD),
(SPY), (TLT), (WMT), (GM), (FXI), (NFLX)
I usually don’t pay attention to technical analysis. It is the last refuge of the inexperienced and the uneducated.
However, I don’t ignore it either.
And that sets of a quandary for investors today. For on the one hand, the economic data couldn’t be worse, pointing to a certain trade war-induced recession sometime in 2020.
On the other hand, look at the chart for the S&P 500 (SPY) below and you can see that stocks have been in a clear uptrend for 2 ½ months. Another few weeks, and we might see a breakout to new all-time highs. Or, we might get a false breakout driven by algorithms only and then collapse to new 2019 lows.
Welcome to my world.
While my recent track record may say otherwise, I actually don’t know what markets are going to do every day of every week. And when I don’t know what to do, I do nothing. That’s especially easy to do now with my Mad Hedge Market Timing Index at a dead on neutral position of 50.
Of course, the elevated level of share prices could be the result of ultra-low interest rates and a complete lack of viable alternatives. At 11.9% dividend yield, US stock are among the highest yielding financial instruments in the world. At this year’s 15% capital gain and they are especially compelling, particularly to the many foreigners earning negative interest rates.
In the meantime, I wait for the markets to tell me what to do. I’m basically looking for a higher high to sell into, or a lower low to buy.
The IMF Downgraded Global Growth, from 3.2% to 3% and trade gets the blame. At 2.5% growth, many major economies will be in recessions. Risks are to the downside. More than 90% of the Global Economy is Slowing. It's the worst forecast since 2008.
Bank earnings were mixed, with JP Morgan taking the lead with record revenues and credit card revenues the big winners. Goldman Sachs (GS) looks awful due to failing mergers and acquisitions. Wells Fargo is worse. Trading revenues are the drag.
Retail Sales dove off a surprising 0.3% in September when a 0.3% jump was expected. The individual shopper has been the sole support of the economy this year and when they bail the stock market will hate it.
A Brexit deal is finally on the table, but will Parliament vote for it? I doubt it. If they do, it will be a huge “RISK ON” development. This just could be like Trump announcing another China trade deal. If Brexit lives, Scotland will almost certainly vote to leave the United Kingdom and join Europe.
US Housing Starts fell in September from a 12-year high, down 9.4% to 1.256 million units. The mid-Atlantic gets the blame. Land and labor shortages are a problem.
The GM Strike (GM) is settled and the union probably will vote for it. The strike has definitely been a drag on the US economy. Part of the deal involved closing three old high cost US plants. It’s tough to vote against economic reality.
China’s Economy (FXI) slowed to a 6% growth rate as the trade war drags on business there. That’s a 30-year low. Export demand for US products is plunging. Almost every economic indicator is in decline. Not only is China one of America’s largest customers, it is also Europe’s. The data definitely put the kibosh on the week’s rally.
Netflix soared on an earnings beat, soaring 9%. It looks like it is too early to write off the inventor of movie streaming. I guess a 20-year head start still counts for something. But I am staying away anyway.
I hate to be boring, but my Mad Hedge Trader Alert Service has scored yet another new all-time high. In fact, I have hit new highs almost every day for the last three months. Worse yet, my thesaurus is running out of metaphors for “new high.”
My Global Trading Dispatch reached new pinnacle of +349.64% for the past ten years and my 2019 year-to-date accelerated to +49.50%. The notoriously volatile month of October stands at a blockbuster +12.08%. My ten-year average annualized profit clawed its way up to +35.56%. If I make any more than this, no one will believe it, a frequent problem during my hedge fund days.
Some 28 out of the last 29 trade alerts have made money, a success rate of a stunning 96.55%! Under promise and over deliver, that is the business I have been in all my life. It works. This is rapidly turning into the best year of the decade for me. It is all the result of me writing three newsletters a day, and doing research for 12.
With my Mad Hedge Market Timing Index sitting around the neutral 50 level, there was very little to do this week but take profits on existing positions. Nothing like watching the money roll in. It’s like having a rich uncle write you a check once a month.
All I am left with after the October 18 option expiration is 80% cash and short positions in Wal-Mart (WMT) and the S&P 500 (SPY).
The coming week is pretty non-eventful of the data front. Maybe the stock market will be non-eventful as well.
On Monday, October 21 at 2:00 PM, the US monthly Budget Statement for September comes out, most likely showing a horrific $200 billion deficit.
On Tuesday, October 22 at 10:00 AM, Existing Home Sales are out for September.
On Wednesday, October 23 at 10:30 AM, EIA Energy Stocks are published.
On Thursday, October 24 at 8:30 AM, US Durable Goods are out. Weekly jobless claims are out at the same time.
On Friday, October 25 at 10:00 AM, the University of Michigan Consumer Sentiment is announced. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I'll be driving up to Lake Tahoe to start organizing my October 25-26 conference, briefly stopping at Vacaville for breakfast at Mel’s Drive In and a top up charge for my Tesla Model X to make the climb over Donner Pass. First on the list is to unload there my five cases of vintage wine so it can adjust to the altitude.
Oh, and I haven’t had time for a haircut since I left for Australia four months ago. My kids are starting to call me a hippie.
The Mad Hedge Lake Tahoe Conference begins that night. Tickets are available by clicking here.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 4, 2019
Fiat Lux
Featured Trade:
(LAST CHANCE TO BUY THE NEW MAD HEDGE BIOTECH AND HEALTH CARE LETTER AT THE FOUNDERS PRICE)
(SEPTEMBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (VIX), (USO), (ROKU), (TLT), (BA), (INDU),
(GM), (FXI), (FB), (SCHW), (IWM), (AMTD)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader October 2 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: Would you do the S&P 500 (SPY) bull call spread if you didn’t have time to enter the short leg yesterday?
A: I would, because once again, once the Volatility Index (VIX) gets over $20, picking these call spreads is like shooting fish in a barrel. I think the long position I put on the (SPY) this morning is so far in the money that you will be sufficiently safe on a 12-day and really a 2-week view. There is just too much cash on the sidelines and interest rates are too low to see a major December 2018 type crash from here.
Q: I could not come out of the United States Oil Fund (USO) short position—should I keep it to expiration?
A: Yes, at this point we’re so close to expiration and so far in the money that you’d need a 30% move in oil to lose money on this. So, run it into expiration and avoid the execution costs.
Q: How do you see TD Ameritrade (AMTD) short term?
A: Well, it was down approximately 25% yesterday, so I would buy some cheap calls and go way out of the money so as not to risk much capital—on the assumption that maybe next week into the China trade talks, we get some kind of rally in the market and see a dramatic rise. 25% does seem extreme for a one-day move just because one broker was cutting his commissions to zero. By the way, I have been predicting that rates would go to zero for something like 30 years; that’s one of the reasons I got out of the business in 1989.
Q: Would you consider buying Roku (ROKU) at the present level?
A: Down 1/3 from the top is very tempting; however, I’m not in a rush to buy anything here that doesn’t have a large hedge on it. What you might consider doing on Roku is something like a $60-$70 or $70-$80 long-dated call spread. That is hedged, and it’s also lower risk. Sure, it won’t make as much money as an outright call option but at least you won’t be catching a falling knife.
Q: Will we see a yearend rally in the stocks?
A: Probably, yes. I think this quarter will clear out all the nervous money for the short term, and once we find a true bottom, we might find a 5-10% rally by yearend—and I’m going to try to be positioned to catch just that.
Q: At which price level do you go 100% long position?
A: If we somehow get to last December lows, that’s where you add the 100% long position. And there is a chance, while unlikely, that we get down to about 22,000 in the Dow Average (INDU), and that’s where you bet the ranch. Coming down from 29,000 to 22,000, you’re essentially discounting an entire recession with that kind of pullback. But we’re going to try to trade this thing shorter term; the market has so far been rewarding us to do so.
Q: The United States Treasury Bond Fund (TLT) looks like it’s about to break out. How do you see buying for the November $145 calls targeting $148?
A: We are actually somewhat in the middle of the range for the (TLT), so it’s a bit late to chase. We did play from the long side from the high $130s and took a quick profit on that, but now is a little bit late to play on the long side. We go for the low-risk, high-return trades, and $145 is a bit of a high-risk trade at this point. I would look to sell the next spike in the (TLT) rather than buy the middle where we are now.
Q: Will Boeing (BA) get recertified this year?
A: Probably, yes—now that we have an actual pilot as the head of the FAA—and that will be a great play. But if the entire economy is falling into a recession, nothing is a good play and you want to go into cash if you can’t do shorts. That would give us a chance to buy Boeing back closer to the $320 level, which was the great entry point in August.
Q: Do you expect General Motors (GM) shares to bounce if they settle with the union on their strike?
A: Maybe for a day or two, but that’s it. The whole car industry is in recession already. The union picked the worst time to strike because GM has a very high 45-day inventory of unsold cars which they would love to get rid of.
Q: What are the chances of a deal with China (FXI)?
A: Zero. How hard do the Chinese really want to work to get Trump reelected? My guess is not at all. We may get the announcement of a fake deal that resumes Chinese agricultural purchases, but no actual substance on intellectual property theft or changing any Chinese laws.
Q: Will they impeach Trump?
A: Impeach yes, convict no; and it’s going to take about 6 months, which will be a cloud hanging over the market. The market’s dropped about 1,000 points since the impeachment inquiry has started.
Q: What about the dollar?
A: I'm staying out of the dollar due to too many conflicting indicators and too much contra-historical action going on. The dollar seems high to me, but I’ve been wrong all year.
Q: E*Trade (ETFC) just announced free stock trading—what are your thoughts?
A: All online brokers now pretty much have to announce free trading in order to stay in business, otherwise you end up with the dumbest customers. It’s bad for the industry, but it’s good for you. The fact that all of these companies are moving to zero shows how meaningless your commissions became to them because so much more money was being made on selling your order flow to high frequency traders or selling your data to people like Facebook (FB).
Q: What’s your take on the Canadian dollar (FXC)?
A: It will go nowhere to weak, as long as the US is on a very slow interest rate-cutting program. The second Canada starts raising rates or we start cutting more aggressively is when you want to buy the Loonie.
Q: Fast fashion retailer Forever 21 went bankrupt—is it too late to short the mall stocks?
A: No but be very disciplined; only short the rallies. Last week would have been a good chance to get shorts off in malls and retailers. You really need to sell into rallies because the further these things go down, the more volatility increases as the prices go low. Obviously, a $1 move on a $30 stock is only 3% but a $1 move on a $10 stock is 10%. If you’re the wrong way on that, it can cost you a lot of money, even though the thing’s going to zero.
Q: Comments on defense stocks such as Raytheon (RTN)?
A: This is a highly political sector. If Trump gets reelected, expect an expansion of defense spending and overseas sales to Saudi Arabia, which would be good for defense. If he doesn’t get reelected, that would be bad for defense because it would get cut, and sales to places like Saudi Arabia would get cut off. I stay out of them myself because it’s essentially a political play and we’re very late in the cycle.
Q: Mark Zuckerberg says presidential candidate Elizabeth Warren’s proposal is an existential threat. Do you agree with him and her policies? Will they crash the economy?
A: They would be bad for the economy; however, I think it’s highly unlikely Warren gets elected. The country’s looking for a moderate president, not a radical one, and she does not fit that description. If you did break up the Tech companies, they’d be worth more individually than they are in these great monolithic companies.
Q: Does the Russell 2000 (IWM) call spread look in danger to you?
A: It’s a higher risk trade, however we are hedged with that short S&P 500, so we can hang onto the long (IWM) position hedging it with your short S&P 500 (SPY) trade reducing your risk.
Q: What do you have to say about shrinking buybacks?
A: It’s another recession indicator, for one thing. Corporate buybacks have been driving the stock market for the last 2 years at around a trillion dollars a year. They have suddenly started to decline. Why is that happening? Because companies think they can buy their stocks back at lower levels. If companies don't want to buy their stocks, you shouldn’t either.
Q: When is the time for Long Term Equity Anticipation Securities (LEAPS)?
A: We are not in LEAPS territory yet. Those are long term, more than one-year option plays. You really want to get those at the once-a-year horrendous selloffs like the ones in December and February. We’re not at that point yet, but when we get there, we’ll start pumping out trade alerts for LEAPS for tech stocks like crazy. Start doing your research and picking your names, start playing around with strikes, and then one day, the prices will be so out of whack it will be the perfect opportunity to go in and buy your LEAPS.
Q: Was it a Black Monday for brokerages when Charles Schwab (SCHW) cut their commission to zero?
A: Yes, but it’s been one of the most predicted Black Mondays in history.
Q: Will the Fed save the market?
A: I would think they have no ability to save the market because they really can’t cut interest rates any more than they already have. There really are no companies that need to borrow money right now, and any that does you don’t want to touch with a ten-foot pole. The economy is not starved for cash right now—we have a cash glut all over the world—therefore, lowering interest rates will have zero impact on the economy, but it does eliminate the most important tool in dealing with future recessions. You go into a recession with interest rates at zero, then you’re really looking at a great depression because there’s no way to get out of it. It’s the situation Europe and Japan have been in for years.
Good Luck and Good Trading
John Thomas
CEO $ Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 16, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or CHOPPY WEATHER AHEAD),
(SPY), (TLT), (FB), (GOOGL), (M), (C),
(XOM), (NFLX), (DIS), (FXE), (FXI)
When commercial pilots fly across the US, they often give each other a heads up about dangerous conditions so other can avoid them. “Chop” is a common one, clear air turbulence that appears on no instruments. Usually, a simple altitude change of a few thousand feet is enough to deal with the problem.
“Chop” is what we traders have had to deal with in the stock market a lot for the past 18 months ever since the trade war with China started. Look at the S&P 500 (SPY) and you see that we have been covering the same ground over and over again, much like trench warfare in WWI. Since April 2018, we have crossed the $270-$290 space no less than six times.
We are just now kissing the upper edge of that band. What happens next depends on your beliefs. If you think the trade war will end in the next month and we don’t go into recession, then the markets will break out to new all-time highs, blasting all the way up to $320. If you don’t, you want to be fading this move, unloading risk, and entertaining short plays.
I’ll let you decide.
As for me, I have been suspicious of this rally since it started the third week of August. It has been led by banks, energy, retailers, and all the other garbage with terrible fundamentals that have been falling for years. In other words, it is pure short covering. There is no net money coming into the market. In the meantime, technology has not fallen, it has ground to a halt awaiting the next flood of capital.
It was Apple (AAPL) day in Silicon Valley, with the world’s largest company rolling out a host of new services and upgrades. The new Apple TV Plus streaming service was the focus, coming out with a $5 a month price, easily undercutting Disney Plus (DIS) at $10 and Netflix (NFLX) at $15.
It is an in-between generation year, so we didn’t get anything big. But with 200 million iPhones needing replacement in coming years (AAPL) is still a good long-term hold. All eyes will be on the share buy backs.
The next antitrust assault on big tech arrived, with Facebook (FB) and Google (GOOGL) now in the sights of 49 US states. This will go nowhere as technology has been leading to lower prices, not higher ones. What is the monopoly value of a service that is given away for free? The choice is very simple: let the US continue to dominate tech, or let China take it over.
Job growth is slowing, and the belief that it has peaked for this cycle is growing. Job openings fell 31,000 in August to 7.2 million according to the Department of Labor. The big loss was in wholesale trade, the big gain in information technology. The economy is moving from old to new.
The John Bolton firing, the national security advisor, crushed oil as the chance of a major Middle Eastern war decline, knocking $1.50 off of Texas Tea. That negotiation with the Taliban didn’t go so well, with them blowing up our people while talking with Mike Pompeo. The risk is that Trump’s next national security advisor could be worse. That’s been the trend. The last national security advisor took money from the Russians.
Europe pulled out all the stops (FXE), renewing a stimulus program with massive quantitative easing. Euro interest rates also to be cut. Eventually, a lot of that money will end up back in the US, the only place in the world with decent investment returns. That's why our stocks are now a few pennies short of a new all-time high.
We saw more of Trump talking up the market ahead of trade talks, with the administration considering half a deal on trade tariffs, while throwing technology under the bus with an intellectual property walkaway. Good for the Midwest, terrible for the west coast.
The bond market meltdown continued, with one of the sharpest collapses in history, down 11 points in a week, The ten-year US Treasury bond yield (TLT) has spiked from 1.44% to 1.90% in a week. Hope you got the rate lock on your refi last Friday. Long bonds had become the most overcrowded trade in a decade. Give it a month to digest, then take another run at the highs in prices, lows in yields.
China (FXI) bought ten shiploads of soybeans (SOYB), hoping for a positive outcome in the October trade talks. Or did they make the purchase to start the trade talks in the first place? Who knows? Price spikes 5%, at last! It's why stocks are pushing to new all-time highs.
The budget deficit toped $1 trillion in the first 11 months of fiscal 2019, the highest since the financial crisis. Running deficits this big during peace time with 2% economic growth will leave us with no way to get out of the next recession. It’s setting up the most predictable financial crisis in history, the next one. It’s just a matter of time before the chickens come home to roost. By the time Trump leaves office, the national debt will have increased by $4 trillion, or 20%.
The Mad Hedge Trader Alert Service is treading water in this wildly unpredictable month.
My Global Trading Dispatch stands near an all-time high of 334.99% and my year-to-date remains level at +34.85%. My ten-year average annualized profit bobbed up to +34.35%.
I’ll be running my 40% long in technology stocks into the September 20 options expiration because there is nothing else to do. After watching the bond market crater by 11 points, I could no longer restrain myself and stuck my toe in the water with a small long with yields at 1.90%. I may have to sweat a move to a 2.00% yield, but no more. I break even at 2.10%.
The coming week will be one of the biggest of the year, thanks to the Fed.
On Monday, September 16 at 8:30 AM, the New York Empire State Manufacturing Index is out.
On Tuesday, September 17 at 9:15 AM, the US Industrial Production is published.
On Wednesday, September 18, at 8:30 AM, August Building Permits are released. At 2:30 PM, the Federal Reserve announces its interest rate decision. If they don’t cut look out below?
On Thursday, September 19 at 8:30 AM, the Weekly Jobless Claims are printed. At 10:00 AM, Existing Home Sales are printed.
On Friday, September 20 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM.
As for me, my entire weekend is committed to the Boy Scouts, doing assorted public services projects with the kids, timing a mile run for the Physical Fitness merit badge, and cleaning up San Francisco Bay. Hopefully, I will get some time to review my charts. I usually look at 200 a weekend.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
August 16, 2019
Fiat Lux
Featured Trade:
(CISCO’S CHINA HIT)
(WEWORK), (CSCO), (FXI)
If you believe that the trade war developments have had a negligible effect on the tech companies that operate in mainland China, then you are dead wrong.
Cisco is a cautionary tale highlighting that things aren’t running smoothly with its decrease of 25% in annualized revenue from operations in mainland China.
Many of the profit models in China have been swallowed up by the friction between the two governments at the highest level.
The Cisco employee count was sacrificed stateside with the San Jose, California branch implementing a second round of layoffs that will sweep aside 500 more Cisco engineers.
The most damming set of words that epitomized the dire situation that Cisco face is when management said, “we’re being uninvited to bid …We’re not being allowed to even participate anymore.”
The Chinese government has disengaged Cisco from competing in China and that means a whole channel of revenue will be effectively offline for the foreseeable future unless there is substantial rapprochement from the two governments.
Perusing the files of venture capitalist heartthrob WeWork that plans to go public proved that relations with China and doing business is a financial high-wire act.
I will explain.
WeWork’s 350-plus-page IPO prospectus offered insight into the treacherous nature of business exposure in the Middle Kingdom.
Any investor who rummaged through the prospectus has to be dreading the worse because the boobytraps are plentiful.
A cynical take of WeWork’s business tells me they are doomed in China.
Property is in control of a huge swath of Chinese wealth vehicles and commercial property is part of that equation.
According to the filing, WeWork is contracted to 115 buildings across 12 cities in Greater China, about 15% of its total number of facilities.
I envision property law skirmishes of the foreign WeWork against local property landlords and by historical standards, the court system has not been kind to non-Chinese who seek justice in the Chinese court system against Chinese national interests.
WeWork’s management references “higher tariffs, capital controls, new adverse trade policies or other barriers to entry” as possible counterpunches to an already delicate working environment.
The pressure cooker could explode at any point with the higher-ups making heads roll at the corporate level to prove a point at a macrolevel.
Foreign companies are easy targets and WeWork is an American company – a double whammy that could make it a convenient target for the Chinese communist party.
Summing it up, this is not an advantageous time to lever up on the Chinese economy.
Risk control is needed and this smells like a ticking time bomb.
It really shows how the tech landscape has disintegrated for American companies in China.
They were once welcomed with grandeur and hospitality plus the forced technology transfers.
CEOs bit their tongue because the revenue growth surpassed the cons of cyberespionage and outright theft.
With the accumulation of generations of free knowhow, China is now locked and loaded with a tech industry that rivals anyone in the world.
The last item left on the menu are high-grade semi chips which the Chinese have not mastered yet and that might be the last stand for the Americans if they hope to salvage a stunning comeback victory.
If WeWork does manage to go public without the equity market raining down on its parade, it’s an outright sell and stay away.
It’s nothing but a glorified property manager and its interests in China could open up pandora box.
