Mad Hedge Technology Letter
August 23, 2018
Fiat Lux
Featured Trade:
(THE RACE TO ZERO FOR BROKERAGE COMMISSIONS)
(JPM), (WFC), (ETFC), (SCHW), (AMTD)
Posts
The other shoe has dropped.
No more waiting for it as it was only a matter of time, but it was going to happen soon enough.
The acceleration of the race down to zero for brokerage commissions has moved into full throttle.
In a bid to engage new customers, especially millennials, J.P. Morgan (JPM) will offer its customers 100 free stock or ETF trades for one year.
The new service will be available on Chase’s mobile banking app called “You Invest” and also does not require a minimum balance as do so many of the competitors.
Last year, J.P. Morgan was still charging customers a horrific $24.95 per trade, a ridiculous sum in an age of brokerages slashing fees left and right.
Recently, I chronicled the start-up fin-tech brokerage Robinhood, which rolled out the zero-commission model to the chagrin of the traditional brokerages on the verge of major disruption.
Well, Wall Street has stood up and taken notice. There is no way back from this new normal.
The catalyst for J.P. Morgan to change direction was its lack of competitiveness in the digital brokerage space and a free model of luring in business is seen as a quick recipe to correct its ills.
J.P. Morgan has pumped in $300 million in the past two years into digital initiatives but still lacks the volume it was hoping for. This could help capture fresh accounts that could eventually turn into a meaningful business.
Freemium models made popular in Silicon Valley are catching fire in other parts of the economy as potential customers can dabble with the service first before committing their hard-earned money.
This is dreadful news for the fin-tech brokerage industry as it indicates a whole new level of acute pressure on margins and revenue.
The brokerage business has been under fire the past few years after regulators discovered Wells Fargo (WFC) was cunningly ushering clients into higher fee trading vehicles, taking a larger cut of commissions.
Wells Fargo did everything it could to rack up costs for high net worth clients. The atrocious behavior was a huge black eye for the entire industry.
Technology has forced down the cost of executing a trade and each additional trade is almost nil after fixed costs because of software and hardware carrying out these functions.
E-brokerages are set for a rude awakening and their cash cows are about to be disrupted big time.
Charles Schwab (SCHW) has 11.2 million brokerage accounts, and no doubt clients will get on the ringer and ask why Schwab charges an arm and a leg to execute trades.
Schwab might as well start charging clients for emails, too.
The cut in commissions has already started to affect margins with Schwab revenue per trade sliding from $7.96 in 2017 to $7.30 in the most recent quarter.
TD Ameritrade (AMTD) is experiencing the same issues with revenue per trade of $7.83 last year dropping to $7.30 last quarter.
The beginning of the year provided e-brokers with respite after euphoric trading sentiment pushed many first-time equity buyers into the markets, making up for the deceleration in revenue per trade.
However, that one-off spike in volume will vanish and margins are about to get punctured by fin-tech start-ups such as Robinhood.
J.P. Morgan’s move to initiate free trades is a huge vote of confidence for upstart Robinhood, which charges zero commission for ETFs, option trades, and equities.
I recently wrote a story on the phenomenon of Robinhood, and the new developments mean the shakeout will happen a lot faster than first anticipated.
TD Ameritrade, E-Trade (ETFC), Fidelity, and Charles Schwab could face a deeply disturbing future if Silicon Valley penetrates under the skin of this industry and flushes it out just like Uber did to the global taxi business.
E-Trade shares have experienced a healthy uptrend and it is now time to pull the rip cord with the rest of these brokerages.
It will only get worse from here.
Investors should be spooked and avoiding this industry would be the right move at least for the short term.
The golden age of trading commissions is officially over.
Turning this industry into a dollar store variety is not what investors want to hear or hope for.
The decimation of commission fees has coincided with the rise of passive investing.
Only 10% of trades now are performed by active traders.
Brokerages earn demonstrably less with passive investing as the volume of trading commission dries up with this buy-and-hold-forever strategy.
Index funds have been all the rage and quite successful as the market has returned 400% during the nine-year bull market.
When the market stops going up, the situation could get dicey.
The real litmus test is when a sustained bear market vies to implode these ETFs and what will happen with a massive unwinding of these positions.
A prolonged bear market would also scare off retail investors from executing trades on these e-brokerages.
Many will take profits at the speed of light not to be seen or heard again until the next sustained bull market.
Moreover, it is certain the global trade war is scaring off retail investors from their trading platforms as the uncertainty weighing on the markets has thrown a spanner into the works.
Tech has been the savior to the overall market with the top dogs dragging up the rest, but for how long can this continue?
Other industries are experiencing minimal earnings growth and tech cannot go up forever.
Regulations are starting to bite back at the once infallible tech narrative.
Chinese tech is also having its own headaches where Tencent has been perpetually stymied by local regulators blocking access to gaming licenses needed to monetize blockbuster video games.
Tencent missed badly on its earnings report and there is no end in sight to the delay.
Social media has been torn apart as of late and the weaponization of its platforms is accelerating with government operations moving onto them to fight against each other.
Interest rate revenues are the saving grace for these brokerages that account for 50% or more of revenue.
As interest rates rise, there will be a bump in interest rate revenues. However, as competition heats up and commission falls to zero, will these clients stick around for the e-brokers to reap the interest rate revenues or not?
Millennials are hard-charging into Silicon Valley start-ups such as Robinhood, and the traditional brokers’ clientele are mainly directed on the lucrative middle-age cohort.
The next development for e-brokers is who can best harness artificial intelligence to best enhance their customer experience and products.
If the Charles Schwab’s of the world must compete with nimble Silicon Valley start-ups in technology, then they will find a hard slog of it.
One of these big e-brokers is likely to implode setting off another round of consolidation.
The race down to zero is fierce, and I would avoid this whole industry for now.
There are better secular stories in technology such as the e-gaming phenomenon capturing the hearts and minds of global youth.
________________________________________________________________________________________________
Quote of the Day
“Expect the unexpected. And whenever possible, be the unexpected,” – said Twitter and Square cofounder and CEO Jack Dorsey.
Global Market Comments
August 14, 2018
Fiat Lux
Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)
I went to the local branch of Wells Fargo Bank (WFC) yesterday, and I was appalled. The bank occupied the most expensive corner in town. It was staffed by a dozen people, all of whom spoke English as a second language.
Ask even the simplest question and they had to call a support center and wait 10 minutes on hold for the answer. It took an hour for me to open a checking account for one of my kids. The branch was in effect a glorified call center.
I thought, "This can't last." And it won't.
Banks were supposed to be the sector to own this year. They had everything going for them. The economy was booming, interest rates were rising, and regulations were falling like leaves in the fall.
Despite all these gale force fundamental tailwinds the banks have utterly failed to deliver. The gold standard J.P. Morgan is up only 8.46% on the year, while bad boy Citibank (C) is down 5.47%, and the vampire squid Goldman Sachs (GS) is off a gut-punching 10.27%. Where did the bull market go? Why have bank shares performed so miserably?
The obvious reason could be that the improved 2018 business environment was entirely discounted by the big moves we saw in 2017. Last year, banks were the shares to own with (JPM) shares up a robust 24.5%, while (C) catapulted by 29.3%.
It is possible that bank shares are acting like a very early canary in the coal mine, tweeting about an approaching recession. Loan growth has been near zero this year. That is not typical for a booming economy. It IS typical going into a recession.
When the fundamentals arrive as predicted but the stock fails to perform it can only mean one thing. The industry is undergoing a long-term structural change from which it may not recover. Yes, the bank industry may be the modern-day equivalent of the proverbial buggy whip maker just before Detroit took over the transportation business.
Managing a research service such as the Mad Hedge Technology Letter, it is easy to see how this is happening. Financial services are being disrupted on a hundred fronts, and the cumulative effect may be that it will no long exist.
This explains why this is the first bull market in history where there has been no new hiring by Wall Street. What happens when we go into a bear market? Employment will drop by half and those expensive national branch networks will disappear.
Financial services are still rife with endless fees, poor service, and uncompetitive returns. Online brokers such as Robin Hood (click here) will execute stock and option transactions for free. Now that overnight deposits actually pay a return they make their money on margin loans. They have no branch network but are still SIPC insured.
Legacy brokers such as Fidelity and Charles Schwab (SCHW) used to charge $25 a share to execute and are still charging $7.00 for full-service clients. And it's not as if their research has been so great to justify these high prices either. In a world that is getting Amazoned by the day, these high prices can't stand.
Regular online banking service also pay interest and are about to eat the big banks' lunch. Many now pay 1.75% overnight interest rates and offer free debit and credit cards, and checking accounts. Of course, none of these are household names yet, but they will be.
To win the long-term investment game you have to identify the industries of the future and run from the industries of the past. The legacy financial industry is increasingly looking like a story from the past.
Are Big Banks Ready for the Future?
Mad Hedge Technology Letter
July 13, 2018
Fiat Lux
Featured Trade:
(THE FANGS' PATH TO ONLINE BANKING),
(SQ), (V), (MA), (AXP), (JPM)
Global Market Comments
June 21, 2018
Fiat Lux
SPECIAL BIOTECH ISSUE
Featured Trade:
(HERE COMES THE NEXT REVOLUTION),
(CVS), (AET), (BRK.A), (AMZN), (JPM), (CI),
(BIIB), (CELG), (REGN)
Technology and biotechnology are the two seminal investment themes of this century.
And while many tech companies have seen share prices rise 100-fold or more since the millennium, biotech and its parent big pharma have barely moved the needle.
That is about to change.
You can thank the convergence of big data, supercomputing, and the sequencing of the human genome, which overnight, have revolutionized how new drugs are created and brought to market.
So far, only a handful of scientists and industry insiders are in on the new game. Now it's your turn to get in on the ground floor.
The first shot was fired in December 2017 when CVS (CVS) bought Aetna (AET) for an eye-popping $69 billion, puzzling analysts. A flurry of similar health care deals followed, with Berkshire Hathaway (BRK.A), Amazon (AMZN) with its Verily start-up, and J.P. Morgan (JPM) joining the fray.
March followed up with a Cigna (CI) bid for Express Scripts, a pharmacy benefits manager. Apple (AAPL) has suddenly launched a bunch of health care-based apps designed to accumulate its own health data pool.
What's it all about? Or better yet, is there a trade here?
No, it's not a naked bid for market share, or an attempt to front run the next change in health care legislation. It's much deeper than that.
In short, it's all about you, or your data to be more precise.
We have all seen those clever TV ads about IBM's (IBM) Watson mainframe computer knowing what you want before you do. In reality we are now on the third generation of Watson, known as Summit, now the world's fastest super computer.
Summit can process a mind-numbing 4 quadrillion calculations per second. This is computing muscle power that once was associated with a Star Trek episode.
Financed by the Department of Defense to test virtual nuclear explosions and predict the weather, Summit has a few other tricks up its sleeve. It can, for example, store every human genome and medical record of all 330 million people in the United States, process that data instantly, and spit out miracle drugs almost at whim.
You know all those lab tests, X-rays, MRI scans, and other tests you've been accumulating over the years? They add up to some 30% of the world daily data creation, or some 4 petabytes (or 4,000 gigabytes) a day. That's a lot of zeroes and ones.
Up until a couple of years ago, this data just sat there. It was like having a copy of the Manhattan telephone book (if it still exists) but not knowing anyone there. Thanks to Summit we now not only have a few friends in Manhattan, we know everyone's most intimate details.
I have been telling readers for years that if you can last only 10 more years you might be able to live forever, as all major human diseases will be cured during this time. Summit finally gives us the tools to achieve this.
Imagine the investment implications!
The U.S. currently spends more than $3 trillion on health care, or about 15% of GDP, and costs are expected to rise another 6% this year. To modernize this market, you will need to create from scratch four more Apples or six more Facebooks (FB) in terms of market capitalization. You can imagine what getting in early is potentially worth.
Crucial to all of this was Craig Venter's decoding of his own DNA in 2000 for the first time, which cost about $1 billion. Today, you and I can get 23andMe, Ancestry.com or Family Tree DNA to do it for $100, with most of the work done in China.
Of course, key to all of this is getting the medical data for every U.S. citizen on line as fast as possible. The Obama administration began this effort seven years ago. Remember those gigantic overstuffed records rooms at your doctor's office? You don't see them anymore.
But we have a long way to go, and 20% of the U.S. population who don't HAVE any medical records, including all of the uninsured, will be a challenge.
To give you some idea of the potential and convince that I have not gone totally MAD let me tell you about Amgen's (AMGN) sudden interest in Iceland. Yes, Iceland.
There, a struggling, young start-up named deCode sequenced the DNA of the entire population of the country, about 160,000 individuals. It tried to monetize its findings but it was early and lost money hand over fist. So, the company sold out to Amgen in 2012 for $415 million.
Until then targeting molecules for development was based on a hope and a prayer, and only a hugely uneconomic 5% of drugs made it to market. Using artificial intelligence (yes, those NVIDIA graphics processors again) to pretest against the deCode DNA data based it was able to increase that hit rate to 75%.
It's not a stretch to assume that a 15-fold increase in success rates leads to a 15-fold improvement in profitability, or thereabouts.
Word leaked out setting off a gold rush for equivalent data pools that led to the takeover boom described above. And what happens when the pool of data explodes from 160,000 individuals to 330 million? It boggles the mind.
As a result, the health care industry is now benefiting from a "golden age" of oncology. Average life expectancy for chemotherapies is increasing by months at a time for specific cancers.
All of this is happening at a particularly fortuitous time for drug, health care, and biotech companies, which are only just now coming out of a long funk.
Traders seemed to have picked up on this new trend in May, which is why I slapped on a long position in the iShares Nasdaq Biotechnology ETF (IBB) (click here for a full description).
Like many companies in the sector it is coming off of a very solid one-year double bottom and is going ballistic today.
The area is ripe for rotation. Other names you might look at include Biogen (BIIB), Celgene (CELG), and Regeneron (REGN).
If you have grown weary of buying big cap technology stocks at new all-time highs, try adding a few biotech and pharmaceutical stocks to spice this up. The results may surprise you.
As for living forever, that will be the subject of a future research piece. The far future.
Global Market Comments
April 23, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE COMES THE FOUR HORSEMEN OF THE APOCALYPSE),
(SPY), (GOOGL), (TLT), (GLD), (AAPL), (VIX), (VXX), (C), (JPM),
(HOW TO AVOID PONZI SCHEMES),
(TESTIMONIAL)
Have you liked 2018 so far?
Good.
Because if you are an index player, you get to do it all over again. For the major stock indexes are now unchanged on the year. In effect, it is January 1 once more.
Unless of course you are a follower of the Mad Hedge Fund Trader. In that case, you are up an eye-popping 19.75% so far in 2018. But more on that later.
Last week we caught the first glimpse in this cycle of the investment Four Housemen of the Apocalypse. Interest rates are rising, the yield on the 10-year Treasury bond (TLT) reaching a four-year high at 2.96%. When we hit 3.00%, expect all hell to break loose.
The economic data is rolling over bit by bit, although it is more like a death by a thousand cuts than a major swoon. The heavy hand of major tariff increases for steel and aluminum is making itself felt. Chinese investment in the US is falling like a rock.
The duty on newsprint imports from Canada is about to put what's left of the newspaper business out of business. Gee, how did this industry get targeted above all others?
The dollar is weak (UUP), thanks to endless talk about trade wars.
Anecdotal evidence of inflation is everywhere. By this I mean that the price is rising for everything you have to buy, like your home, health care, college education, and website upgrades, while everything you want to sell, such as your own labor, is seeing the price fall.
We're not in a recession yet. Call this a pre-recession, which is a long-leading indicator of a stock market top. The real thing shouldn't show until late 2019 or 2020.
There was a kerfuffle over the outlook for Apple (AAPL) last week, which temporarily demolished the entire technology sector. iPhone sales estimates have been cut, and the parts pipeline has been drying up.
If you're a short-term trader, you should have sold your position in April 13 when I did. If you are a long-term investor, ignore it. You always get this kind of price action in between product cycles. I still see $200 a share in 2018. This too will pass.
This month, I have been busier than a one-armed paper hanger, sending out Trade Alerts across all asset classes almost every day.
Last week, I bought the Volatility Index (VXX) at the low, took profits in longs in gold (GLD), JP Morgan (JPM), Alphabet (GOOGL), and shorts in the US Treasury bond market (TLT), the S&P 500 (SPY), and the Volatility Index (VXX).
It is amazing how well that "buy low, sell high" thing works when you actually execute it. As a result, profits have been raining on the heads of Mad Hedge Trade Alert followers.
That brings April up to an amazing +12.99% profit, my 2018 year-to-date to +19.75%, my trailing one-year return to +56.09%, and my eight-year performance to a new all-time high of 296.22%. This brings my annualized return up to 35.55% since inception.
The last 14 consecutive Trade Alerts have been profitable. As for next week, I am going in with a net short position, with my stock longs in Alphabet (GOOGL) and Citigroup (C) fully hedged up.
And the best is yet to come!
I couldn't help but laugh when I heard that Republican House Speaker Paul Ryan announced his retirement in order to spend more time with his family. He must have the world's most unusual teenagers.
When I take my own teens out to lunch to visit with their friends, I have to sit on the opposite side of the restaurant, hide behind a newspaper, wear an oversized hat, and pretend I don't know them, even though the bill always mysteriously shows up on my table.
This will be FANG week on the earnings front, the most important of the quarter.
On Monday, April 23, at 10:00 AM, we get March Existing-Home Sales. Expect the Sohn Investment Conference in New York to suck up a lot of airtime. Alphabet (GOOGL) reports.
On Tuesday, April 24, at 8:30 AM EST, we receive the February S&P CoreLogic Case-Shiller Home Price Index, which may see prices accelerate from the last 6.3% annual rate. Caterpillar (CAT) and Coca Cola (KO) report.
On Wednesday, April 25, at 2:00 PM, the weekly EIA Petroleum Statistics are out. Facebook (FB), Advanced Micro Devices (AMD), and Boeing (BA) report.
Thursday, April 26, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 9,000 last week. At the same time, we get March Durable Goods Orders. American Airlines (AAL), Raytheon (RTN), and KB Homes (KBH) report.
On Friday, April 27, at 8:30 AM EST, we get an early read on US Q1 GDP.
We get the Baker Hughes Rig Count at 1:00 PM EST. Last week brought an increase of 8. Chevron (CVX) reports.
As for me, I am going to take advantage of good weather in San Francisco and bike my way across the San Francisco-Oakland Bay Bridge to Treasure Island.
Good Luck and Good Trading.
Global Market Comments
April 16, 2018
Fiat Lux
Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT NOTHING HAPPENED),
(TLT), (GLD), (SPY), (QQQ), (USO), (UUP),
(VXX), (GOOGL), (JPM), (AAPL),
(HOW TO HANDLE THE FRIDAY, APRIL 20 OPTIONS EXPIRATION), (TLT), (VXX), (GOOGL), (JPM)
