Mad Hedge Technology Letter
October 23, 2018
Fiat Lux
Featured Trade:
(THE CLOUD FOR DUMMIES)
(AMZN), (MSFT), (GOOGL), (AAPL), (CRM), (ZS)
Posts
Mad Hedge Technology Letter
October 22, 2018
Fiat Lux
Featured Trade:
(FACEBOOK’S DARPA DALLIANCE),
(FB), (GOOGL), (AAPL)
How far will society and government allow tech companies to adventure before there is some blowback?
Honestly, it’s hard to say when to put the shackles on these companies that are getting too powerful for their own good.
Tech companies have been pedal to the medal pushing the limitations of what the human world can offer.
The hoard of profits showered on the tech giants is one thing, but should they be held accountable for the unintended consequences that there robot-like profit-making operations dump on society?
Each company has chosen different ways to deploy the capital. Apple decided to reward shareholders by executing a $100 billion share buyback program.
The stock has performed great this year.
Apple (AAPL) and CEO Tim Cook have been keen to show a trustful face among a growing phalanx of data misusers.
Facebook (FB) has used the surplus capital to build a secretive research center modeled after the Defense Advanced Research Projects Agency (DARPA) called Building 8.
DARPA is an agency of the United States Department of Defense responsible for the development of emerging technologies for military use.
The division of the government was launched in 1958 by United States President Dwight D. Eisenhower to counteract the Soviet launching of Sputnik 1 in 1957.
DARPA smartly partnered together with America’s business leaders, academia, and other talents dotted around the government and military branches to develop projects that would broaden the frontiers of technology and science far beyond immediate U.S. military current needs.
Building 8 met the real world for the first time when its first product Portal, a vertically-shaped display screen attached to a smart camera, debuted with befuddlement.
How does a company that just announced a breach of 50 million accounts, after a torrid string of mishaps which made a mockery of Facebook’s use of big data, launch a device that gives Facebook unfettered access into the confines of one’s personal home?
A Facebook spokesman said that Facebook will “use this information to inform the ads we show you across our platforms. Other general usage data, such as aggregate usage of apps, etc., may also feed into the information that we use to serve ads.”
Executives at Facebook know that this product would be a commercial write-off, but the sunk cost associated with this project forced them to throw it on the market with reckless abandon.
And at the end of the day, some data is better than no data at all and that is what the earth’s existence is boiling down to.
So, if you thought that Facebook might finally decide to stop being your effective cyber-stalker, you are wrong.
And this is all just the beginning, it gets a lot worse than this, let me explain.
In fact, Facebook’s Building 8 was led by the former Director of the Defense Advanced Research Projects Agency Regina Dugan.
The more I sniff around, the more I see her pawprints everywhere she went.
Dugan used her elite role at DARPA to score a job at Google’s (GOOGL) Advanced Technology and Projects (ATAP) group before she jumped ship to Facebook’s secretive research center Building 8.
Dugan’s tenure at DARPA from 1996 to 2012 meant she was privy to the LifeLog project which was developed for just one year and subsequently shut down.
This program was cancelled after heavy criticism from activists advocating privacy and rightly so.
But, was this program really shut down?
Lifelog was a program with the mission to effectively record all of an individual’s physical movements, conversations and everything they listened to, ate, read and bought.
Everything!
The premise of this program was to cultivate a permanent searchable record of one’s life.
The daredevil program was light years ahead of its time predating the iPhone, tablet, and the current wave of populism engulfing the free world.
Back then, the weaponizing of consumer technology was largely absent from the world, and the top brass of DARPA surely wasn’t naïve enough to believe that this technology could only be applied to create an epic cyber-diary of one’s life.
In any case, Dugan conveniently was employed by Google and Facebook and her knowledge of Lifelog was fluid, deep and comprehensive.
Unintended consequences are rife and, if I connect the dots, it appears that DARPA’s Lifelog found new spawning grounds in Silicon Valley’s richest companies, or at least two of them.
There is no way to know for sure, but monetizing Lifelog’s cyber-record technology to harness it as a tool to collect personal information for the use of digital ad targeting has rained profits down on these two companies.
Building 8 is serving up round two of its DARPA-esque mission by announcing that they have built a prototype producing an armband that will facilitate the understanding of oral language “through a person’s skin.”
It was in January 2017 when Dugan took the stage in San Jose at a conference to announce this project.
It was mostly dismissed as fantasy and something out of science fiction.
Well, it’s one more step closer to being rolled out in mass market form.
The way the language process works is that vibrations allow for the roots of words to be transformed into silent speech.
If scientists manage to do this, it would give deaf people a new lifeline giving them the capability to understand what people are saying without the need for lip reading.
However, on the other side of the coin, the technology could be modified to aid spies in eavesdropping if the range of the vibrations allows them to.
The second project announced by Dugan that same night in San Jose was Facebook’s bold attempt of a noninvasive brain sensor designed to turn thoughts into text.
This would require brain surgery to install a sensor, and the plan for this technology is for people to access devices from their brain without the need to physically or orally communicate with it.
I suspect that Facebook would collect the data from this brain sensor and the sensor would be in contact with the Facebook infrastructure sharing the performance and state of operations.
If the sushi hits the fan and a person dies from the sensor, Facebook would need to analyze the specific details in the malfunction.
What a scary thought.
Facebook adopting the DARPA blueprint from its halted project of Lifelog to respawn similar technology that painstakingly retrieves as much data about our lives as possible is the first step to something substantially bigger.
However, the digital ad business has made Facebook and Google insanely rich and they want an encore.
I am surprised that other Silicon Valley cash-rich companies avoid tapping up the offspring of other military-grade technology to join the profit parade.
Apparently, there has been zero backlash from it.
If Facebook somehow manages to roll-out a commercialized brain sensor giving Mark Zuckerberg access to our minds, I wonder what on earth could round three entail for Zuckerberg…
Nothing is impossible.
Facebook’s Building 8 - First Product
Mad Hedge Technology Letter
October 18, 2018
Fiat Lux
Featured Trade:
(UNDERSTANDING THE REAL COMPETITION),
(SPOT), (AAPL), (GOOGL), (MSFT), (HUAWEI)
Microsoft sells computers?
That was the bizarre look I got after telling my friend that Microsoft (MSFT) is in the business of selling laptops, desktop computers, and tablets that convert into laptops from a product line called Microsoft Surface.
This is not your father’s Microsoft.
Things are different now.
Everything changed once they got rid of Steve Ballmer whose inertia prevented Microsoft from taking advantage of the huge influence they culled in the tech sector from being the universal operating system for PCs.
Ballmer’s lack of technical expertise was his own downfall stemming from his terrible decision to buy Nokia’s handset business for $7.6 billion.
The board of directors forced him out and was a blessing in disguise.
Thousands were laid off in the Nokia handset division and a massive write-down was taken.
As big tech spread out their wings and branch off into various businesses they never imagined before, they have reinvented the former images of themselves.
This goes for Microsoft who’s taking their legacy business of Microsoft Office and Windows and leveraging it with the cloud to create a stellar product.
And with the cash hoard, not only are they creating new products by fusing together old products with new technologies, they are overlapping into other big tech companies’ turf.
The overlapping products can be seen in hardware products made by this software behemoth and their neighbors.
The Microsoft Surface division is up 25% YOY speaking volumes to the quality hardware Microsoft produce now even if you didn’t know about it.
Apple (AAPL) has attracted most of the conversation in the "smart" headphones space because of the AirPods.
The sleek white earbuds are becoming ubiquitous with the headphone space trending to a smaller and "true" wireless.
A schism has formed as the AirPods don’t satisfy the entire spectrum of smart headphone fans.
The retro ear-muff shaped headphone with more immersive sound is what I am talking about, and I do recognize that Beats has been in the market for a decade.
Microsoft chose to go this route with their smart headphones and this is their answer to the iconic AirPods and the Google (GOOGL) Pixel Buds.
This smart headphone comes with an embedded digital assistant and integrates noise cancellation.
I tried out the Microsoft's Surface Headphones before they came on the market, and I only had positive things to say about the quality and experience.
They sound impressive, the controls are easy to use, and the modern design is definitely a plus.
The color could use a little reimagination but all in all, I was pleased.
Microsoft Cortana, Microsoft’s digital assistant, for all who don’t know, is also slipped into the experience and a tap on the right earcup will summon Cortana.
It seems that Microsoft still needs a few kinks to work out with Cortana, but voice activation and smart assistants like Siri and Google Assistant can be found in almost every hardware and software product now.
Headphones are city workers’ second most important smart device because of its functionality.
Have you ever been on the New York metro and seen how many people are wearing smart headphones?
Quality headphones shut off the outside world and warm up the insides with the user’s favorites on Spotify (SPOT) or Apple Music.
Stressing out on the commute into work in an Uber is common and calming the frayed nerves before workers enter into the office of dungeons and dragons has a type of value that can never be replicated.
Urban dwellers need high-quality smart headphones and these big tech companies are acutely aware of this.
Google has made an audacious attempt to integrate real-time foreign translation into the Pixel Buds. It only works with Google’s Pixel phones, is hard to operate, and needs the Google Translate app on the phone.
It’s a good first step but the applications using smart headphones are endless.
Smart assistants are the key.
As they become more adept at processing the real world, they streamline and better a human’s life.
Microsoft’s smart headphones have embedded Skype, one of Ballmer’s positive acquisitions during his tenure. And with Cortana integration, it could morph into a natural extension of the Windows 10 experience.
Microsoft’s smart headphones morph into a point of conversion for more of Microsoft’s hardware products as they start to construct an expanding moat.
Headphones used to be more or less the same.
Plug it into the jack and you’re on your merry way.
The headphones of today are looking more different from each other with every iteration.
This was glaringly evident when Apple chose to no longer sell any phones with a 3.5mm headphone jack.
Ironically enough, Google dumped the headphone jack with its Pixel 2 phones a year later even though they bashed Apple for it a few months earlier.
The reason was mainly functional as Google said, “We want the display to go closer and closer to the edge.”
Gradually, smartphones will get rid of everything except a razor-thin screen. All the other clunky business in and around it needs to go. This is the first step and home buttons have been chopped off smartphones as well.
It is fine to get consumed in the battle of smart products between Silicon Valley companies, but there is a larger threat.
Chinese smart products are rapidly catching up to what American companies can produce.
The Middle Kingdom hasn’t surpassed American tech expertise yet but they are debuting devices relative to the competition that could only be dreamed about a few years ago.
Huawei's flagship smartphone Mate 20 and Mate 20 Pro pack a lot of punch and this must be frightening to the FANGs.
The timing of the phone debut is a big victory for American smartphone companies because this phone is good enough to grab market share from existing American companies but aren’t allowed to sell inside America.
Congress putting the kibosh on any sliver of a chance to partner with an American carrier means that there will be no chance of Chinese phones gutting the American smartphone market.
What it does mean is that they will invade and dominate other markets such as South East Asia, Eastern Europe, and Russia.
The same will go for any Chinese smart device.
Huawei has given up trying to circumvent the government blockade.
The Huawei Mate 20 is priced around $800 and the Mate 20 Pro at $1140. They are probably two of the best smartphones ever made and are a direct threat to any American company’s revenue that manufactures smartphones and smart devices.
Mad Hedge Technology Letter
October 16, 2018
Fiat Lux
Featured Trade:
(IS IT REALLY ESSENTIAL OR NOT?),
(AAPL), (GOOGL), (MSFT), (AMZN)
He is at it again.
No, not Elon Musk, but Andy Rubin – the Godfather of the Android operating system could create another ground-breaking shift in the world of technology.
Apple’s (AAPL) iOS system was the leader of the pack until Rubin’s timely intervention.
When Apple debuted the iPhone and, shortly after, the Apple app store, there was nothing remotely comparable at the time.
The roaring success of the iPhone and its app store could have been so much more to the global smartphone audience if it consumed everybody.
You could smell broad-based world domination, but it never materialized.
Android now has 85% of the global smartphone market share, and Apple has carved out the last 15% albeit in the high-income markets.
You can thank Microsoft (MSFT) for all of this – let me explain.
Android was hands down the best purchase ever made by Google for a paltry sum of just $50 million.
It was in 2005 when Android was bought by Google and Rubin’s work commenced overseeing the construction of a platform that could avoid licensing restrictions dragging down the industry.
Android was initially commissioned by Google to build a platform to stymie another potential Microsoft monopoly, but this time, in the mobile space.
Google didn’t want to be blown away by Microsoft as the pivot to mobile was picking up steam.
Google assumed that Microsoft had the best chance to execute the shift to mobile because of the universal acceptance of the Windows operating system.
And little did they know that Steve Jobs had a game changer up his sleeve when he rolled out the iPhone.
The premise was very simple for Android - offer supreme customer value, massively scale a global platform, and catalyze explosive growth.
Easier said than done.
In the end, Rubin was able to generate a blanketed adoption of the Android operating system in smartphones.
Apple has been, by and large, the victor of hardware because even though the Android system is more popular, the manufacturer of Android-based phones cuts across a broad swath of different international companies from Google itself to Samsung, LG, and the various Chinese makers.
Around half of Americans are proud to be an iPhone owner and Apple was able to ensure they were the only manufacturer of their proprietary iOS system harvesting all the profits.
Onlookers aren’t giving Android the credit it duly deserves in the global scheme of things.
Fortunately for Google and Rubin, Microsoft CEO Steve Ballmer fudged his opportunity while Palm, Symbian, and BlackBerry never stuck around either for recorded posterity. It could of easily have gone the other way.
Android has become so entrenched in non-iPhone smartphones that Google was fined $5 billion for being too dominant in Europe or for what regulators tout as illegally cementing their position. The battle is still going on in court with a final verdict coming shortly.
What does Rubin have on the menu this time?
After establishing his own private company to battle the tech Goliaths, he built an initial smartphone that was an unmitigated flop.
The Essential PH-1 smartphone offered a stock Android experience meant to appeal to the medium-tiered smartphone market.
The phone had solid hardware, enough juice in it to be competitive, a poor camera, and it did little to stand out from the crowd. There are many other cheaper substitutes with better brand recognition selling similar enough devices.
In general, it is a passable smartphone, but the initial price point was a reach in this ultra-competitive climate.
Sales were an outsized bust barely able to penetrate the American smartphone market.
Sprint offered the phone for $699 and registered 5,000 sales in the first month.
To put it into perspective, Apple routinely sells 40 or 50 million smartphones per quarter.
The Essential phone was discounted down to $499 in an attempt to salvage revenue. That didn’t work either.
You can now buy the phone on Amazon.com (AMZN) for $378.
All told, the phone did about 150,000 in sales and Rubin needed to rethink his vision.
Even as recently as this spring, takeover rumors swirled because of Essential’s stable of engineering firepower.
The vultures never swooped and Essential is back with a vengeance building their second phone - Essential Phone PH-2
To stem the tide and make their mark in the smartphone industry, Rubin decided Essential needed a fresh strategy requiring immense chutzpah.
Smartphones have essentially become commoditized in the mid-tier range and consumers look for the best specs at the lowest price point. Samsung has made a living picking off this type of buyer.
Rubin decided to align his future product with the technology that will change the world – artificial intelligence.
Artificial intelligence will be incorporated into the design for the phone to work for the user without him using it.
Yes, that’s right, the user will not have to even have his paws on the phone. The artificial intelligence will mimic the user’s behavior and carry out its functions and tasks alone.
Rubin said, “You can be off enjoying your life, having that dinner without touching your phone and you can trust your phone to do things on your behalf.”
This audacious strategy is a risky bet that consumers will be comfortable enough with artificial intelligence to allow them to venture out alone into this complicated world with no checks and balances from the user themselves.
Imagine some catastrophic scenario if the artificial intelligence taps into a user’s bank account and begins deploying hard-earned capital to exotic locations all over the world.
Smartphone competition has effectively made smartphones widely available for most of the world, but cultivating a smartphone company from scratch requires a dose of creative intuition.
Betting on the development of artificial intelligence is one of the few weapons in Rubin’s toolkit.
This could be Rubin’s last attempt at a smartphone and moving further out onto the risk curve means this could be a whale of a failure or a spectacular success. I can’t imagine his investors allowing him to produce another failed smartphone.
My bet is that consumers aren’t ready to absorb the type of levels of artificial intelligence that Rubin hopes to infuse into his new phone.
Even if he lays an egg, he will be back on another project in no time. That is the sort of slack you get by being the godfather of the Android operating system. Funding is as lush as a tropical forest.
Secretly, I want him to succeed because the world needs positive disruption to the Silicon Valley cohort of megacompanies from independent sources.
My bet is that a smartphone will not be the revolutionary new product the world is clamoring for. It’ll be something we have never seen before.
Please click here to visit Essential’s website.
A GOOD PHONE BUT TOO SIMILAR TO THE REST
Global Market Comments
October 11, 2018
Fiat Lux
Featured Trade:
(REACHING PEAK TECHNOLOGY STOCKS),
(GOOGL), (MSFT), (NFLX), (FB), (AAPL),
(LOCKHEED MARTIN’S SECRET FUSION BREAKTHROUGH),
(LMT), (NOC), (BA)
I drove into San Francisco for a client dinner last night and had to wait an hour at the Bay Bridge toll gate. When I finally got into town, the parking attendant demanded $50. Dinner for two at Morton’s steakhouse? How about $400.
Which all underlines the fact that we have reached “Peak” San Francisco. San Francisco just isn’t fun anymore.
The problem for you is that if the City by the Bay has peaked, have its much-loved big cap technology stocks, like Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) peaked as well?
To quote the late manager of the New York Yankees baseball team, Yogi Berra, “Nobody goes there anymore because it’s too crowded.”
What city was the number one creator of technology jobs in 2017?
If you picked San Francisco, you would have missed by a mile. Anyone would be nuts to start up a new business here as rents and labor are through the roof.
Competition against the tech giants for senior staff is fierce. What, no fussball table, free cafeteria, or on-call masseuses? You must be joking!
You would be much better off launching your new startup in Detroit, Michigan. Better yet, hyper-connected low-waged Estonia where the entire government has gone digital.
In fact, Toronto, Canada is the top job creator in tech now, creating an impressive 50,000 jobs last year. Miami, FL and Austin, TX followed. Silicon Valley was at the bottom of the heap.
It’s been a long time since peach orchards dominated the Valley.
Signs that the Bay Area economy is peaking are everywhere. Residential real estate is rolling over now that the harsh reality of no more local tax deductions on federal tax returns is sinking in.
To qualify for a home loan to buy the $1.2 million median home in San Francisco, you have to be a member of the 1%, earning $360,000 a year or better.
Two-bedroom one bath ramshackle turn of the century fixer uppers are going for $1 million in the rapidly gentrifying nearby city of Oakland, only one BART stop from Frisco.
Most school districts have frozen inter-district transfers because they are all chock-a-block with students. And good luck getting your kid into a private school like University or Branson. There are five applicants for every place at $40,000 a year each.
The freeways have become so crowded that no one goes out anymore. It’s rush hour from 6:00 AM to 8:00 PM every day.
When you do drive it’s dangerous. The packed roads have turned drivers into hyper-aggressive predators, constantly weaving in and out of traffic, attempting to cut seconds off their commutes. And there is no drivers ed in China.
I took my kids to the city the other day for a Halloween “Ghost Tour” of posh Pacific Heights. It was lovely spending the evening strolling the neighborhood’s imposing Victorian mansions.
The ornate gingerbread and stained-glass buildings are stacked right against each other to keep from falling down in earthquakes. It works. The former abodes of gold and silver barons are now occupied by hoody-wearing tech titans driving new Teslas.
We learned of the young girl forced into a loveless marriage with an older wealthy stock broker in 1888. She bolted at the wedding and was never seen again.
However, the ghost of a young woman wearing a white wedding address has been seen ever since around the corner of Bush Street and Octavia Avenue. Doors slam, windows shut themselves, and buildings make weird creaking noises.
Then I came to a realization walking around Fisherman’s Wharf as I was nearly poked in the eye by a selfie stick-wielding visitor. The tourist areas on weekdays are just as crowded as they were on summer weekends 30 years ago, except that now the number of languages spoken has risen tenfold, as has the cost.
It started out to be a great year for technology stocks. Amazon (AMZN) alone managed to double off its February mini crash bottom, while others like Apple (AAPL) rocketed by 56%. But traders may have visited the trough once too often
The truth is that technology stocks have not performed since June, right when the Mad Hedge Fund Trader dumped its entire portfolio. Only Microsoft (MSFT) and Amazon (AMZN) have managed to eke out new all-time highs since then, and only just.
The rest of tech has been moving either sideways in the most desultory way possible, or suffered cataclysmic declines like Facebook (FB) and Micron Technology (MU).
Of course, the trade wars haven’t helped. It’s amazing that big tech hasn’t already been hit harder given their intensely global business models.
Nor has rising interest rates. Big cap tech companies have such enormous cash balances that they are all net creditors to the financial system and actually benefit from higher interest rates. But dear money does slow the US economy and that DOES hurt their earnings prospects.
No, I’m not worried about tech for the long term. There is no analog company that can compete with a digital company anywhere in the world.
Accounting for 26% of the stock market capitalization and 50% of its profits, it’s only a question of when we get a major new up leg in share prices, not if.
The only unknown now is whether this next leg will take place before or after the next recession. Given the rate at which interest rates and oil prices are rising in the face of a slowing global economy, it’s looking like the recession may win the race.
As our tour ended, who did we see having dinner in the front window of one of the city’s leading restaurants? A young woman wearing a white wedding dress.
Yikes! Maybe the recession is sooner than I thought.
Mad Hedge Technology Letter
October 10, 2018
Fiat Lux
Featured Trade:
(DON’T BUY SURVEYMONKEY ON THE DIP),
(SVMK), (GOOGL), (CRM)
