(GOOGL) Archives

Posts

Microsoft Knocks It Out of the Park

Armed with the best management and stickiest tech products in the U.S., Microsoft (MSFT) has shown why every tech investor needs to own shares.

We just took profits from deep-in-the-money MSFT bull call spread and I’d be looking to get back into this name on any and every dip.

This tech company is unstoppable and the data underpinning their greatness reaffirms my point of view.

Microsoft said that 2 years of digital transformation has happened in the past 2 months.

The health crisis has shown that consumers cannot function without Microsoft and that will help fend off the regulatory monkey off their back.

Microsoft announced $35 billion in quarterly sales when analysts forecasted just $33.76 billion.

Tech companies have had to reduce their future projections as the health scare has done great damage to consumer demand with many pulling guidance completely.

Overall, tech companies were locked in for a 5% earnings decline which was the best out of any industry, but they are coming in higher than that.

Even more impressive, Microsoft’s management disclosed that COVID-19 had “minimal net impact on the total company revenue.”

That was really all you need to know about Microsoft who possesses services that consumers can never get rid of.

Everything else is just a cherry on top.

To get into the weeds a little, Azure cloud-computing business and Teams collaboration software, have become mainstay products as workers are forced to stay home and their companies need computing power and tools to support them.

Many of those products are bundled with ones that may not fare as well, however — for instance, Microsoft combines revenue from on-premises server sales with its Azure business.

The “Intelligent Cloud” segment that includes Azure rose to $12.28 billion in sales from $9.65 billion a year ago, beating the average analyst prediction of $11.79 billion.

“Productivity & Business Solutions,” which comprises mostly of the cloud software assets, including LinkedIn, grew to $11.74 billion from $11.52 billion a year ago, beating analyst predictions of $11.53 billion.

The most important nugget awaiting the masses was forward guidance.

Microsoft expects continued demand across Windows OEMs, Surface and Gaming to shift to remote work play and learn from home.

The outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease.

Reduced advertising spend levels will impact search and LinkedIn and the commercial business.

A robust position in durable growth markets means Microsoft expect consistent execution on a large annuity base with continued usage and consumption growth.

LinkedIn will suffer from the weak job market and increased volatility in new, longer lead-time-deal closures.

A sign of strength and a pristine balance sheet was when Microsoft signaled that they could absorb higher costs by saying, “a material sequential increase” in capital-expenditure spending in the current quarter will “support growing usage and demand for our cloud services.”

Even best tech companies have mostly been trimming capex and freezing hiring in anticipation of weaker revenue targets.

I knew when Google announced 13% annual sales growth and Facebook saying that ad revenue “stabilized” meant that Microsoft would only do better.

The tech market had priced Microsoft doing quite positively which is why shares did not rocket by 8%.

Microsoft is not a one-trick pony like Google and Facebook either and simply doesn’t need a potential vaccine to boost sales moving forward.

They preside over a vast empire of diversified assets with even a growth lever in streaming platform YouTube.

Even if LinkedIn and the hiring that fuels it will suffer, the rest of its portfolio will keep churning out revenue in literally any type of economic environment.

Lastly, the tech market has been utterly cornered by policymakers who, according to the IMF, have thrown $14 billion of liquidity with a chunk of that following through into big tech shares.

The level of propping up from the Fed cannot be understated and their behavior feels as if there is no way anyone could ever be underweight Microsoft because of the Fed’s unlimited balance sheet.

On top of that, we are getting a steady stream of positive health reports in the form of antiviral medication Remdesivir and who knows when the next positive announcement will come.

To cap it off -they are led by the best CEO in the U.S. Satya Nadella, who is an expert on the cloud, and this company has to either be the best or second-best company in the country along with Amazon.

May 1, 2020/by Mad Hedge Fund Trader

A Note on Assigned Options, or Options Called Away

Diary, Newsletter

With the May 15 options expiration only ten trading days away, there is a heightened probability that your short options position gets called away.

We have the good fortune of having a large number of deep in-the-money call and put options spreads about to expire at their maximum profit points, five to be precise.

If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position with less risk. You just won the lottery, literally.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money put option spread, it contains two elements: a long put and a short put. The long put you own, but the short put can get assigned, or called away at any time and delivered to its rightful owner.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.

All you have to do was call your broker and instruct him to exercise your long position in your May puts to close out your short position in the May puts.

Puts are a right to sell shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

Sounds like a good trade to me.

Weird stuff like this happens in the run-up to options expirations.

A put owner may need to sell a long stock position right at the close, and exercising his long Put is the only way to execute it.

Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.

There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.

And yes, puts even get exercised by accident. There are still a few humans left in this market to blow it.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

May 1, 2020/by MHFTR

Where the Action Will Be in Tech

Tech Letter

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

April 9, 2020

Diary, Newsletter, Summary

Global Market Comments
April 9, 2020
Fiat Lux

Featured Trade:

(TEN LONG TERM LEAPS TO BUY AT THE BOTTOM)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)

April 9, 2020/by Mad Hedge Fund Trader

Ten Long Term LEAPS to Buy at the Bottom

Diary, Newsletter

I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.

The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.

Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.

You just put them away and forget about them. Wake me up when it is 2022.

I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.

You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.

If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.

That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.

There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.

You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.

Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.

If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.

Enjoy.

Microsoft (MSFT) - March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.

Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.

Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back

QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.

Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.

Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.

American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.

NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.

Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.

Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.

Looks Like a “BUY” signal to Me

April 9, 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

A Note on Assigned Options, or Options Called Away

Diary, Newsletter

I almost got to take a shower today.

However, whenever I got close to the bathroom, I'd get an urgent call from a concierge member, Marine buddy, Morgan Stanley retiree, fraternity brother from 50 years ago, or one of my kids asking me which stocks to buy at the bottom.

It’s been that kind of market.

I refer them to the research piece I sent out last week, “Ten Long Term LEAPs to Buy at the Bottom” for a quick and dirty way to get into the best names in a hurry (click here for the link).

I have been doing the same, and as a result, I have one of the largest trading portfolios in recent memory. When the Volatility Index is above $50, it is almost impossible to lose money as long as you remember to buy the 1,000 dips and sell the 1,000 point rallies.

In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.

If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.

The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position. Whenever you have sold short an option, you run an assignment risk.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.

Let’s say you get an email from your broker saying that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) December 2019 $134-$137 in-the-money vertical BULL CALL spread.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 days before the December 20 expiration date. In other words, what you bought for $4.50 last week is now with $5.00!

All have to do is call your broker and instruct them to exercise your long position in your (MSFT) December 134 calls to close out your short position in the (MSFT) December $137 calls.

This is a perfectly hedged position, with both options having the same expiration date, the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.

Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.

To say it another way, you bought the (MSFT) at $134 and sold it at $137, paid $2.60 for the right to do so, so your profit is 40 cents, or ($0.40 X 100 shares X 38 contracts) = $1,520. Not bad for an 18-day limited risk play.

Sounds like a good trade to me.

Weird stuff like this happens in the run-up to options expirations like we have coming.

A call owner may need to buy a long (MSFT) position after the close, and exercising his long December $134 call is the only way to execute it.

Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.

There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.

And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.

Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a ton of commission for the brokers but impoverishes you.

There may not even be and evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train.

Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.

Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

Professionals do these things all day long and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

Calling All Options

March 11, 2020/by MHFTR

The True Cost of the Coronavirus

Tech Letter

Tech shares are hoping to stage a rebound after the coronavirus-fueled rout that saw the Nasdaq’s 2-day drop by 6.38%, which is its worst since June 2016.

Readers can now pencil in a fresh readjustment to growth expectations of zero to low single digits in tech shares for fiscal year of 2020.

That is why Thursday morning was greeted by another 3% drop at the open - proceed with caution to not get trapped in the proverbial dead cat bounce vortex in the short-term.

A major tech consolidation could take place because let’s get real, the unpredictability is having a major impact on technology companies and uncertainty is a substantial input in heightened risk.

What are the realistic scenarios that are still left on the table?

Tech firms could slash prices, a deflationary element that promotes deteriorating profit margins seen as a net negative to revenue causing companies to miss revenue targets.
Unsold inventory could lead to working capital issues crushing balance sheets for the smaller tech firms.
Loss-making enterprise confront solvency issues if debt repayment hardship ripples through finance departments and could be a serious threat to credit markets as a whole.

Firms trading on the Nasdaq will slash price targets and profit estimates that could uncoil another leg down in the Nasdaq index.

In fact, it has already happened as PayPal (PYPL), Microsoft (MSFT), and Apple (AAPL) issued revenue warnings saying they do not expect to meet their revenue goals because of the coronavirus.

On an operational level, softness is what I see when delving into the semantics of Amazon (AMZN) whose ranking algorithm demotes product sellers who go out of stock.

The coronavirus has crippled supply chains, and to avoid a lack of stock, sellers are raising prices to slow sales, while planning to move production to other countries.

This is on top of the backbreaking supply problems that companies face because of the ill-effects of the trade war.

If the Amazon algorithm punishes the seller, once stock is replenished, they must overspend on advertising to climb back to the top of product searches.

The surveys I have taken out with Amazon sellers in the last few days show a precarious situation where sellers are stretched to the limit relying on numerous uncertain variables that are completely out of their control,

Even if the local government allows Chinese factories to restart, it will be understaffed while workers from other provinces self-quarantine.

The third-party marketplace accounts for more than half of Amazon’s retail sales with a robust base of manufacturers and sellers in China.

Google (GOOGL) and Microsoft are accelerating efforts to shift hardware production to Southeast Asia amid the worsening coronavirus outbreak, opening factories in Vietnam and Thailand as well.

Google is set to begin production of the Pixel 4A smartphone and also plans to manufacture its next-generation flagship smartphone called the Pixel 5 in Vietnam.

Google is also on the verge of building factories in Thailand for "smart home" related products, including voice-activated smart speakers like the Nest Mini.

Google and Microsoft’s plans are a giant shift away from their prior generation-long China manufacturing strategy and the coronavirus has only supported a strategy to remove China as a core manufacturing hub.

It is getting so bad in China that they are evaluating the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam, literally packing up and taking their show on the road.

The have already initiated the process by asking a key sourcing contact to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones.

Data center server production was also rerouted to Taiwan last year.

The coronavirus threat is only speeding up the move into South East Asia and Google and Microsoft hope to avoid the geopolitical risk in the region.

Remember that all of this rejigging of production will add costs and only the biggest can absorb mega hits to the balance sheets.

As for the coronavirus, business is becoming more complicated as the ban on Chinese nationals and flights from China could build barriers to business, and now South Korea has joined the list.

Korea’s Samsung Electronics, the world's largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China.

While there are many moving parts, the average investor needs to wait on optimal entry points.

Japan announced school shutdowns for a month and tech shares have only priced in the coronavirus eventually entering the U.S., but if there are mass shutdowns of American cities and schools, then tech shares will see another stinging sell-off.

The contagion could eventually lead to the Olympics in Tokyo being canceled, high-profile corporate management getting infected, and the Chinese economy being sidelined for most of 2020.

All of these events are highly negative to the global economy which is why potential risks have exploded through the roof in such a short time.

Slinging mud at the wall will not work in times like this, but this does have the makings of a once-in-a-year entry point into tech shares.

February 28, 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

Posts

Looks Like a “BUY” signal to Me

Calling All Options

Cookie and Privacy Settings