Global Market Comments
May 15, 2019
Fiat Lux
(SPECIAL CHINA ISSUE)
Featured Trade:
(WHY CHINA IS DRIVING UP THE VALUE OF YOUR TECH STOCKS)
(QCOM), (AVGO), (AMD), (MSFT), (GOOGL), (AAPL), (INTC), (LSCC)
Posts
Reduce the supply on any commodity and the price goes up. Such is dictated by the immutable laws of supply and demand.
This logic applies to technology stocks as well as any other asset. And the demand for American tech stocks has gone global.
Who is pursuing American technology more than any other? That would be China.
Ray Dalio, founder and chairman of hedge fund Bridgewater Associates, described the first punch thrown in an escalating trade war as a “tragedy,” although an avoidable one.
Emotions aside, the REAL dispute is not over steel, aluminum, which have a minimal effect of the US economy, but rather about technology, technology, and more technology.
China and the U.S. are the two players in the quest for global tech power and the winner will forge the future of technology to become chieftain of global trade.
Technology also is the means by which China oversees its population and curbs negative human elements such as crime, which increasingly is carried out through online hackers.
China is far more anxious about domestic protest than overseas bickering which is reflected in a 20% higher internal security budget than its entire national security budget.
You guessed it: The cost is predominantly and almost entirely in the form of technology, including CCTVs, security algorithms, tracking devices, voice rendering software, monitoring of social media accounts, facial recognition, and cloud operation and maintenance for its database of 1.3 billion profiles that must be continuously updated.
If all this sounds like George Orwell’s “1984”, you’d be right. The securitization of China will improve with enhanced technology.
Last year, China’s communist party issued AI 2.0. This elaborate blueprint placed technology at the top of the list as strategic to national security. China’s grand ambition, as per China’s ruling State Council, is to cement itself as “the world’s primary AI innovation center” by 2030.
It will gain the first-mover advantage to position its academia, military and civilian areas of life. Centrally planned governments have a knack for pushing through legislation, culminating with Beijing betting the ranch on AI 2.0.
China possesses legions of engineers, however many of them lack common sense.
Silicon Valley has the talent, but a severe shortage of coders and engineers has left even fewer scraps on which China’s big tech can shower money.
Attempting to lure Silicon Valley’s best and brightest also is a moot point considering the distaste of operating within China’s great firewall.
In 2013, former vice president and product spokesperson of Google’s Android division, Hugo Barra, was poached by Xiaomi, China’s most influential mobile phone company.
This audacious move was lauded and showed China’s supreme ability to attract Silicon Valley’s top guns. After 3 years of toiling on the mainland, Barra admitted that living and working in Beijing had “taken a huge toll on my life and started affecting my health.” The experiment promptly halted, and no other Silicon Valley name has tested Chinese waters since.
Back to the drawing board for the Middle Kingdom…
China then turned to lustful shopping sprees of anything tech in any developed country.
Midea Group of China bought Kuka AG, the crown jewel of German robotics, for $3.9 billion in 2016. Midea then cut German staff, extracted the expertise, replaced management with Chinese nationals, then transferred R&D centers and production to China.
The strategy proved effective until Fujian Grand Chip was blocked from buying Aixtron Semiconductors of Germany on the recommendation of CFIUS (Committee on Foreign Investment in the United States).
In 2017, America’s Committee on Foreign Investment and Security (CFIUS), which reviews foreign takeovers of US tech companies, was busy refusing the sale of Lattice Semiconductor, headquartered in Portland, Ore., and since has been a staunch blockade of foreign takeovers.
CFIUS again in 2018 put in its two cents in with Broadcom’s (AVGO) attempted hostile takeover of Qualcomm (QCOM) and questioned its threat to national security.
All these shenanigans confirm America’s new policy of nurturing domestic tech innovation and its valuable leadership status.
Broadcom, a Singapore-based company led by ethnic Chinese Malaysian Hock Tan, plans to move the company to Delaware, once approved by shareholders, as a way to skirt around the regulatory issues.
Microsoft (MSFT) and Alphabet (GOOGL) are firmly against this merger as it will bring Broadcom intimately into Apple’s (APPL) orbit. Broadcom supplies crucial chips for Apple’s iPads and iPhones.
Qualcomm will equip Microsoft’s brand-new Windows 10 laptops with Snapdragon 835 chips. AMD (AMD) and Intel (INTC) lost out on this deal, and Qualcomm and Microsoft could transform into a powerful pair.
ARM, part of the Softbank Vision Fund, is providing the architecture on which Qualcomm’s chips will be based. Naturally, Microsoft and Google view an independent operating Qualcomm as healthier for their businesses.
The demand for Qualcomm products does not stop there. Qualcomm is famous for spending heavily on R&D — higher than industry peers by a substantial margin. The R&D effort reappears in Qualcomm products, and Qualcomm charges a premium for its patent royalties in 3G and 4G devices.
The steep pricing has been a point of friction leading to numerous lawsuits such as the $975 million charged in 2015 by China’s National Development and Reform Commission (NDRC) which found that Qualcomm violated anti-trust laws.
Hock Tan has an infamous reputation as a strongman who strips company overhead to the bare bones and runs an ultra-lean ship benefitting shareholders in the short term.
CFIUS regulators have concerns with this typical private equity strategy that would strip capabilities in developing 5G technology from Qualcomm long term. 5G is the technology that will tie AI and chip companies together in the next leg up in tech growth.
Robotic and autonomous vehicle growth is dependent on this next generation of technology. Hollowing out CAPEX and crushing the R&D budget is seriously damaging to Qualcomm’s vision and hampers America’s crusade to be the undisputed torchbearer in revolutionary technology.
CFIUS’s review of Broadcom and Qualcomm is a warning shot to China. Since Lattice Semiconductor (LSCC) and Moneygram (MGI) were out of the hands of foreign buyers, China now must find a new way to acquire the expertise to compete with America.
Only China has the cash hoard to take a stand against American competition. Europe has been overrun by American FANGs and is solidified by the first mover advantage.
Shielding Qualcomm from competition empowers the chip industry and enriches Qualcomm’s profile. Chips are crucial to the hyper-accelerating growth needed to stay at the top of the food chain.
Implicitly sheltering Qualcomm as too important to the system is an ink-drenched stamp of approval from the American government. Chip companies now have obtained insulation along with the mighty FANGs. This comes on the heels of Goldman Sachs (GS) reporting a lack of industry supply for DRAM chips, causing exorbitant pricing and pushing up semiconductor companies’ shares.
All the defensive posturing has forced the White House to reveal its cards to Beijing. The unmitigated support displayed by CFIUS is extremely bullish for semiconductor companies and has been entrenched under the stock price.
It is likely the hostile takeover will flounder, and Hock Tan will attempt another round of showmanship after Broadcom relocates to Delaware as an official American company paying American corporate tax. After all, Tan did graduate from MIT and is an American citizen.
The chip companies are going through another intense round of consolidation as AMD (AMD) was the subject of another takeover rumor which lifted the stock. AMD is the only major competitor with NVIDIA (NVDA) in the GPU segment.
The cash repatriation has created liquid buyers with a limited amount of quality chip companies. Qualcomm is a firm buy, and investors can thank Broadcom for showing the world the supreme value of Qualcomm and how integral this chip stalwart is to America’s economic system.
Mad Hedge Technology Letter
April 24, 2019
Fiat Lux
Featured Trade:
(WHO BEAT WHOM IN THE APPLE/QUALCOMM BATTLE)
(QCOM), (INTC), (AAPL)
The 5G bonanza is slithering towards us in a slow yet predictable motion – that was the takeaway from Apple finally conceding that its bargaining positioning was weaker than initially thought.
Apple made amends with chipmaker Qualcomm (QCOM) in the nick of time, let me explain.
Qualcomm is the leader of 5G chip technology, and the two firms decided on a six-year pact that will allow Qualcomm to sell patent licensing to Apple while becoming a crucial supplier of 5G modems to the new iPhone that will roll-out to consumers in the back half of 2020.
Envisioning this 2 for 1 special a few weeks ago was impossible as the brouhaha spilled over into the national media with top executives exchanging barbs.
Qualcomm, to its credit, stayed steadfast on its position and was the bigger winner of the spat.
The rapid reaction in the stock price has vindicated Qualcomm’s initial reluctance to make a cut-price deal with Apple.
The new contract locks in Apple at around $9 per phone in licensing fees, almost double what many analysts were predicting.
Apple also paid a one-time fee of the backlog of patent usage from the past two years that many specialists estimate to be in the $6 billion range.
Qualcomm has previously stated that Apple owes them $7 billion from the kerfuffle and Apple’s refusal to pay stemmed from their belief that Qualcomm was “double dipping” – a claim based on Qualcomm charging a fee for each iPhone using its patents as well as a fee for the technology itself which Apple felt extortionate.
Ultimately, the jousting wasn’t worth the trouble as the best-case scenario of Apple saving $1 billion in patent fees was overshadowed by the opportunity cost which was significantly higher.
The updated terms see a substantial improvement for Qualcomm over the $7.50 per phone that Apple was paying before.
The end of the saga smells of desperation on CEO of Apple Tim Cook’s behalf, realizing that time was ticking down and competitors such as Huawei have already launched 5G-supported phones.
Apple is, in fact, late to the party and one of the main root causes was the logjam with Qualcomm.
If Apple didn’t come to terms with Qualcomm, suppliers and designers wouldn’t have enough time or supply to prepare to meet the fall 2020 deadline causing Apple to delay the new iPhone.
The worst-case scenario that became a realistic threat was that the new iPhone wouldn’t have been ready until 2021 – Apple shares would have dropped 20% in a heartbeat if this played out.
Avoiding this doomsday scenario is a massive bullish signal for Apple shares and brings forward revenue demand into 2020.
The new iPhone with ironically Qualcomm’s 5G modem technology is also the selling point for iPhone lovers to upgrade to a newer and faster iPhone iteration.
It’s a headscratcher that Tim Cook played his cards in the way that he did, another misstep in a long record of fumbles in the red zone.
Inevitably, scrunching up the production schedule heaps loads of pressure on the existing engineering teams to produce a flawless iPhone.
Apple simply couldn’t wait any longer and CEO of Qualcomm Steven Mollenkopf understood that, leading me to solely blame Tim Cook for this calculated error.
Where do the chips lie after this recent shakeout?
First, this piece of news is demonstrably bullish for Qualcomm and its business model while backloading around $6 billion or so in revenue onto its balance sheet.
In short, Qualcomm hit it out of the park and set itself up for the upcoming insatiable demand for 5G chips while publicly demonstrating they are best in show for 5G infrastructure equipment.
It might turn out to be Qualcomm’s best day in the history of the company and one that employees will never forget inside its headquarters.
This will embolden Qualcomm in the future to fight for the revenue that is rightfully theirs and they won’t be frightened by bigger sharks attempting to persuade them that they should receive a lesser share of the pie.
For Mollenkopf, this is his crowning moment and a pathway to another big-time job, the one day grabbing of the spoils has elevated his reputation.
Apple is a minor winner because of the adequate supply of chips that Qualcomm will provide that guarantees Apple’s engineers clarity instead of dragging itself deeper into a courtroom battle with a company that supplies an integral component to their iPhone.
Hours after the news hit the press, Intel (INTC) waived the white flag issuing a short response admitting they are exiting the 5G smartphone business, a bitter pill to swallow for a legacy company finding it difficult to stay with the big boys.
And if you remember, Intel was initially thought to be the one to provide memory to the 5G smartphone but now that notion is dead as a doornail.
Intel will hope they can capture a fair share of the 5G PC business to make up for the lost opportunity, but as consumers migrate away from PCs, shareholders could sense Intel could be left holding the bag.
Qualcomm has strengthened its stranglehold on the 5G smartphone modem market in an industry that will morph into a worldwide addressable market of $20 billion by 2025.
Even though Huawei just announced they would be willing to sell their 5G chips to Apple, Huawei and South Korea’s Samsung mainly produce chips for their in-house branded smartphones and shun feeding competitors like Apple who require the same chips.
Apple hoped to create some leveraging power to get a better 5G chip deal and loosen the jaws that gave Qualcomm a powerful position over Apple, but Intel quitting this segment left Apple with a series of bad choices and they chose the lesser of the evils.
What does this boil down to?
Qualcomm outmuscled Intel producing faster and better performing chips that supported longer battery life.
Qualcomm simply has better engineering talent.
Intel had an uphill battle in the first place, but it is clear they cut their losses because the writing was on the wall leaving Qualcomm to reap all the benefits.
Mad Hedge Technology Letter
March 13, 2019
Fiat Lux
Featured Trade:
(NVIDIA STEPS UP ITS GAME),
(NVDA), (INTC), (MSFT), (ANET), (CSCO), (MCHP), (XLNX)
Nvidia (NVDA) was right to pull the trigger – that was my first reaction when I first learned that they had aggressively acquired Israeli chip company Mellanox for $6.9 billion.
The fight to seize these assets were fierce triggering a bidding war -American heavyweights Intel and Microsoft were also in the mix but lost out.
CEO of Nvidia Jensen Huang touted the importance of the deal by explaining that “the emergence of AI and data science as well as billions of simultaneous computer users, is fueling skyrocketing demand on the world's data centers."
Therefore, satisfying this demand will require holistic architectures that connect massive numbers of fast computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.
Mellanox and its capabilities cover all the bases for Nvidia and will nicely slot into its portfolio offering, an added bonus of cross-selling and upselling opportunities to existing clients.
The strategic motives behind the deal are plentiful with increased importance of connectivity and bandwidth enhancing Nvidia's ability to provide datacenter-scale computing across the full stack for next-generation high-performance computing and AI workloads.
The agreement is the result of the company's shift toward next-gen technology as adoption of cloud, AI, and robotics ramps up and Nvidia will be at the forefront of this massive migration.
As the fourth industrial revolution advances, Nvidia is best of breed of semiconductor companies and the imminent adoption of 5G will aid the likes of Microchip Technology (MCHP) and Xilinx (XLNX).
Technology is rapidly changing, and the data center is the segment that is accelerating at a faster clip than in previous years translating into de-emphasizing current revenues of gaming and autonomous on a relative growth basis.
These segments will be secondary to the addressable opportunity in data center and signing up Mellanox is a key strategic initiative to exploit this growth opportunity.
Missing the boat on this compelling opportunity could have dragged Nvidia into an existential crisis down the road as the missed opportunity costs of lucrative data center revenues would begin to bite, and with no quick fix on the horizon, Nvidia’s growth drivers would be potentially disarmed.
Investors need to remember that Nvidia derives half of its revenue from China and up until this point, gaming had been a huge tailwind to its total revenue, however, the Chinese communist party has identified gaming addiction in young adults as a national crisis and have been refusing to deliver new gaming licenses to gaming creators.
As the data center via the cloud begins its next ramp-up of insatiable demand, Nvidia was acutely aware they could not miss the boat and to grab a foot hole against larger player Intel.
Almost overpaying to have more skin in the game does not do justice to what the ramifications would have been if Intel or even Microsoft were able to hijack this deal.
The two-fold victory will in turn boost sales of Nvidia's data center products long term while depriving Intel of extending the lead in data center.
And after the lack of recent underperformance in the prior quarter, Nvidia needed a gamechanger to cauterize the blood flow.
Nvidia's total revenue plunged more than 24% YOY in Q4 of 2018, and shareholders have been looking for remedies, especially after the once mythical cryptocurrency business blew up and the company was stuck with a glut of inventory.
The purchase of Mellanox will help Nvidia start competing with other dominant players like Cisco Systems (CSCO) and Arista Networks (ANET).
Mellanox is one of a handful of firms selling hardware that connects devices in the data center through network cards, switches, and cables.
The deal still needs regulatory approval and could be a stumbling block if Chinese authorities drag this into the orbit of the trade war and make it a bullet point in negotiations.
The net result is positive to the overall business model, and this move will breathe oxygen into Nvidia’s long-term narrative with a flow of revenue set to come online once the 5,000 Mellanox employees are integrated into Nvidia’s levers of operation.
Shares should be the recipient of short-term strength and after getting smushed by a poor last quarter, there is substantial room to the upside.
A dip back to $150 would serve as a good entry point to strap on a short-term bullish trade in Nvidia shares.
Corporate earnings are up big! Great!
Buy!
No, wait!
The economy is going down the toilet!
Sell!
Buy! Sell! Buy! Sell!
Help!
Anyone would be forgiven for thinking that the stock market has become bipolar.
According to the Commerce Department’s Bureau of Economic Analysis, the answer is that corporate profits account for only a small part of the economy.
Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly or are too small to have much of an impact.
Wages and salaries are in a three-decade-long decline. Interest and investment income are falling because of the ultra-low level of interest rates. Farm incomes are at a decade low, thanks to the China trade war, but are a tiny proportion of the total, and agricultural prices have been in a seven-year bear market.
Income from non-farm unincorporated business, mostly small business, is unimpressive.
It gets more complicated than that.
A disproportionate share of corporate profits is being earned overseas.
So, multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes.
They really get to have their cake and eat it too. Many of their business activities are contributing to foreign GDPs, like China’s, far more than they are here.
Those with large domestic businesses, like retailers, earn less but pay more in tax as they lack the offshore entities in which to park them.
The message here is to not put all your faith in the headlines but to look at the numbers behind the numbers.
Caveat emptor. Buyer beware.
What’s In the S&P 500?
S&P Top 10 Holdings 3-4-2019
S&P Top 10 Holdings 3-4-2019
Has the Market Become Bipolar?
Mad Hedge Technology Letter
February 21, 2019
Fiat Lux
Featured Trade:
(BUY AMD ON THE DIP),
(AMD), (NVDA), (INTC),
I am bullish Advanced Micro Devices (AMD).
The company is doing backflips and edging around other fertile pastures to the dismay of competitors.
They jumped all over Intel’s (INTC) CPU lead promising more cores and adding on more features to lure in a new audience.
In terms of computer graphics, Nvidia (NVDA) still wields more clout in the higher-grade GPU space and AMD has been playing second fiddle with cheaper, value-oriented GPU cards that can be best described as mid-range.
That is about to change.
AMD is at it again acing its attempt to pull down Goliath with its new Radeon VII.
This $700 GPU card is the first 7 nanometer (nm) GPU on the market and is a warning shot to Nvidia who they plan to surgically invade in order to snatch market share.
This new AMD GPU is a direct threat to Nvidia’s set of RTX 2080 graphics cards and is set at the same price point with comparable performance.
The Radeon VII is the next iteration to AMD’s Vega 64 and possesses similar architecture with specific enhancements in clock speeds and VRAM.
Gamers are still on the fence to whether this new product can eclipse the heavily entrenched Nvidia graphics cards that are time-honored, tested and stamped with the industries seal of approval.
It is still uncertain whether AMD can introduce the necessary supply and if you still remember when the prior iteration Vega 64 debuted in 2017, it was a threat to Nvidia’s top-tier GTX 1080, but ran out of inventory quickly.
The new Radeon VII card is one of the best on the market for professional work and still does well in the gaming realm, albeit with a lack of ray tracing.
Few video games support ray tracing currently but new game studios plan to adopt this cutting edge technology later this year.
I commend AMD’s first foray into this part of the niche market and when AMD upgrades its architecture and improves on the next iteration, Nvidia will be squarely in their crosshairs.
The number of new products that drive top-line growth is another reason to be positive on this stock.
Looking at the CPU market – momentum would be the key word to describe AMD’s current trajectory.
For generations, Intel has had a secure stranglehold on this rapidly expanding market, but the fringes of the industry have been hijacked by AMD and they seek to spread its tentacles deeper into foreign CPU waters.
By the end of the year, I believe that AMD will carve out a nice high single digit market share of global CPU sales.
Intel has been bogged down by production setbacks in the deployment of the 10-nm server chip giving AMD a chance to take advantage of this gaping pothole to jack up sales with its EPYC chip.
Not only that, AMD is motoring ahead with a superior 7-nm chip which is a faster processor and is more energy-friendly than Intel’s 10-nm version.
I can conclude that AMD is blowing past Intel in chip technology, and has its third generation of CPUs earmarked for the market in the summer ready to stretch the lead.
CEO of AMD Dr. Lisa Su is compounding the misery for Intel, offering a physical glimpse of plans to roll out its third generation Ryzen CPUs for PCs by the middle of the year at the Consumer Electronics Show in January.
Another catalyst that could drive the stock higher is a favorable earnings outlook in 2019.
After meeting expectations last quarter, expansion is expected in the high single digits in a tough chip environment that has wrought its fair share of carnage.
I wouldn’t pigeonhole the new product line as mere hype, it’s clear they are meaningfully enhanced and improved with each successive iteration.
I estimate that these new products will give AMD solid traction to close in on the competition in the CPU and GPU markets.
Clearly, this isn’t a 1-quarter venture, but visibly aware that AMD is making inroads into other markets are a demonstrably net negative to weight on Intel and Nvidia shares.
This part of tech is not without its headaches and is fraught with China risk.
Chinese gaming regulators have put the kibosh on new gaming licenses and AMD’s scaling back of forecasts should reflect this development.
Intel cited falling spend on server chips and Nvidia came out with a dreadful earnings report to forget lately.
However, when there is blood in the streets, the status quo is ripe for some change and I am confident that AMD can execute this aggressive ramp up after digesting some of the excessive inventory in the first quarter.
As AMD trades at $24, I can’t help but believe this name will end the year higher.
Investors must remember that in the near term, the Fed has hit the pause button aiding the equity market, and China has reportedly been keen on some massive chip purchases to help soothe the nerves of the administration.
If the market can marry this up with favorable reviews of AMD’s latest products, I don’t see why AMD can’t be trading at $30 by the end of the year.
At the Mad Hedge Lake Tahoe Conference, I proclaimed that AMD was one of my favorites going into 2019 and exploded upwards from $17 in October 2018.
AMD truly has not disappointed.
Mad Hedge Technology Letter
January 29, 2019
Fiat Lux
Featured Trade:
(WHATS BEHIND THE NVIDIA MELTDOWN),
(QRVO), (MU), (SWKS), (NVDA), (AMD), (INTC), (AAPL), (AMZN), (GOOGL), (MSFT), (FB)