Mad Hedge Technology Letter
April 24, 2020
Fiat Lux
Featured Trade:
(WHERE THE ACTION WILL BE IN TECH)
(MSFT), (AMZN), (APPL), (GOOGL), (FB)
Posts
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.
Mad Hedge Technology Letter
April 20, 2020
Fiat Lux
Featured Trade:
(THE HYPER-ACCELERATION OF 5G)
(AMZN), (5G), (CCI), (MSFT), (NFLX), (APPL)
I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.
Market valuations reflect the state of expected future cash flows in a company.
Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.
No brainers would include a list of Microsoft, Amazon, Apple, and Netflix.
The health scare and the carnage associated with it have brought forward the tech industry as a whole to the forefront of the global economy.
When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.
It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.
The change took place in a blistering 4 weeks.
The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.
Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.
For every Amazon or Microsoft, there is also a Macy’s or JC Pennys showing that this is really a stock pickers market.
We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.
The relative gains to tech stemming from the coronavirus is equal or greater than an innovation of a game-changing product and will double the effect of 5G.
We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.
One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.
I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again, cannot be emphasized enough.
Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.
When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.
Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?
The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.
They are also another big investor in nursing homes.
A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”
Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for most every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.
Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.
The coronavirus has proven Barrack was spot-on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.
Other companies have taken a direct hit like 24-Hour Fitness who are pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.
Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.
Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.
I don’t agree with the glass half empty crowd who believes Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.
The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.
Big tech is becoming like a mini-government in its own right.
Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.
Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.
Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.
Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.
They are the largest owner of cell towers owning over 40,000 in the U.S.
Global Market Comments
April 15, 2020
Fiat Lux
Featured Trade:
(GOODBYE TO THE OLD WORLD, HELLO TO THE NEW)
(TGT), (WMT), (ZM), (NFLX), (PYPL), (SQ), (AMZN), (MSFT)
With the ongoing impacts of coronavirus, our world is suddenly changing beyond all recognition.
The WWII comparisons here are valid. Just as technological innovation accelerated tenfold from 1941-1945, bringing us computers, penicillin, jet engines, and the atomic bomb, the same kind of great leaps forward are happening now.
The end result will be a faster rate of innovation and economic growth, greater corporate profits in the right industries, and a hugely performing stock market. It perfectly sets up my coming Golden Age and the next Roaring Twenties.
Living in Silicon Valley for the last 25 years, I have gotten pretty used to change. But what is happening now is mind-boggling.
The bottom line for the impacts of the coronavirus pandemic has been to greatly accelerate all existing trends. The biggest one of these has been the movement of the economy online, which has been taking place since the eighties. Except that it is now happening lightning fast. Business models are hyper-evolving.
Legacy brick and mortar companies must move online or perish, as much of the restaurant business is now doing. Target (TGT) and Walmart (WMT) have accomplished this. Those with feet in both worlds are closing down their physical presence and going entirely digital. Pure digital companies, like Zoom (ZM), Netflix (NFLX), PayPal (PYPL), and Square (SQ) are booming.
The side effect of the virus may be to move an even greater share of America’s business activity to the San Francisco Bay area and Seattle. Almost all tech companies here are hiring like crazy. Amazon has announced plans for hiring a staggering 175,000 since the epidemic started, as millions shift to home delivery of everything.
The productivity of tech is also growing by leaps and bounds. Since everyone is working at home, no one wastes two hours a day commuting. Meetings in person are a thing of the past. Everything now happens on Zoom.
The whole mental health industry is now conducted on Zoom. So is much of non-Corona related medicine. And I haven’t seen my accountant in years. I think he died, replaced by a younger, cheaper clone.
Even my own Boy Scout troop has gone virtual. The National Council is offering 58 online merit badges, including Railroading, Stamp Collecting, and Genealogy (click here for the full list).
The stock market has noticed and several tech companies like Microsoft (MSFT) and Amazon are showing positive gains for 2020. Many legacy companies see share prices still down 80% or more. Sector selection for portfolio mangers has essentially shrunk from 100 to only 2: tech/biotech and healthcare.
Business models are evolving at an astonishing rate. Who knew the yoga instructor in Chicago was much better than the one down the street, thanks to Skype.
Education is now entirely online and much of it may never go back to school. My kids are totally comfortable in this new world. They have been social distancing since I bought them their own iPhones five years ago.
Now, if I can only figure out how to do my own haircut, the third most searched term on Google. It’s longer than at any time since the summer of love in 1967.
These are just a few of the practical impacts of coronavirus. The social changes are equally eye-popping.
While death rates are soaring, crime has fallen by up to 75%. So have deaths from car accidents. Alcohol and domestic abuse have gone through the roof. Drug addiction is plummeting because dealers are afraid to go out on the street.
There are many lessons to be learned from this crash. Too many companies drank the Kool-Aid and assumed business conditions would remain perfect forever.
Let's call a spade a spade. The year 2019 and the first two months of 2020 were the bubble top. All the growth in stock prices then were pure fluff.
That means you didn’t need costly reserves ran on thin margins, borrowed like crazy at artificially low-interest rates, and kept endlessly buying back your own stock and paying generous dividends.
Manufacturers didn’t need inventories, counting on a seamless, global supply chain to keep assembly lines running. “Just in time” has switched to “just-in-case.” Companies are going to have to keep enough inventories in the warehouse to guard against future disease-driven disruptions. This will raise costs and shrink profits.
It’s really hard to see how entire industries are going to come back. Cruise ships were packing guests onboard like sardines in a can to make money. I bet it will be a while before you sit at a crowded casino blackjack table. Want to stand in line at a popular chain restaurant?
Airlines have become the poster boy for the evils of bubblicious management. They flew full most of the time, seating their customers shoulder to shoulder, yet their net profit per fight depended on selling that last economy class seat.
The industry spent $50 billion in dividends and the buyback of shares that are now largely worthless, while senior management laughed all the way to the bank. They were the only industry to actually list a global pandemic as a major risk to their business in their SEC filings.
Now they want a government bailout at your expense.
As for me, I am looking forward to this brave new world. Until then, I’ll be spending my afternoons getting in shape hiking in the High Sierras, long hair and all. I’m the only one up here. Maybe it will scare the mountain lions away.
Global Market Comments
April 14, 2020
Fiat Lux
Featured Trade:
(APRIL 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (SPY), (SDS), (BA), (VIX), (VXX), (GLD), (GDX),
(GOLD), (NEM), (QCOM), (HYG), (JNK)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Global Market Comments
April 13, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE BEAR MARKET RALLY IS OVER),
(INDU), (SPX), (TLT), (VIX, (VXX), (GLD), (JPM), (AMZN), (MSFT)
The Bear market rally is over, or at least that’s what Asian stock futures are screaming at us, and the shorts are piling back on….again.
For the first time in 16 years, I did not have to get up at 6:00 AM to hide Easter eggs. It’s not because my kids don’t believe in the Easter Bunny anymore. They’ll believe in anything that delivers them a free chocolate bunny. It’s because I couldn’t get any eggs. Much of the country’s egg production is being diverted into vaccine production for testing, of which, along with antivirals, there are more than 300 worldwide.
Enough of the happy talk.
It was a classic bear market rally we saw over the past two weeks in every way, retracing 50% of the loss this year. Junk stocks, like hotels, airlines, and cruise lines led, while quality big tech lagged. That’s the exact opposite of what you want to see for a new bull market.
At the Friday high, the Dow (IND) was down only 17% from the February all-time high at a two-decade 20X valuation high.
The US is now losing 2,000 citizens a day to the Coronavirus. That’s how many we lost at the peak of the Vietnam War in a month. We are suffering another 9/11 every day of the week.
More than 16.8 million have lost jobs in three weeks, more than all those gained in six years. Of all American companies with fewer than 500 employees, 54% have closed! JP Morgan (JPM) has just cut its forecast for Q2 GDP from a 25% loss to an end of world 40% decline on an annualized bases.
New York is losing 800 people a day and is burying many of them in mass graves. Bread lines have formed in countless major cities. And you think 17% is enough for a discount for stocks, given that a near-total shutdown will continue for another five weeks?
Are you out of your freaking mind?
Which leads me to believe that another retest in the lows is in the work, no matter how much government money is headed our way.
For a start, it will be three months before the Fed handouts show any meaningful impact on the economy. Second, we are due for a second wave of the virus in the fall, once the initial shelter-in-place ends. Markets will likely behave the same.
In the meantime, long term analysts of the global economic structure are going dizzy with possible permanent changes. I am in the process of writing a couple of pieces on this if I can only get away from the market long enough to do so.
It seems like half the country has lost their jobs, while the other half are now working double time without pay, like myself.
The market was stunned by 6.1 million in Weekly Jobless Claims, taking the implied Unemployment Rate to over 14%, more than seen during the 2008-2009 Great Recession. One out of four Americans will lose their jobs or suffer a serious pay cut in the next two months. At this rate, we will top the Great Depression peak of 25 million in two weeks.
The Fed launched a second $2.3 trillion rescue program, this time lending to states, local municipalities, and buying oil industry junk bonds. More money was made available to small businesses. Jay Powell is redefining what it means to be a central bank, but no one is complaining. It was worth one 500-point rally in the Dow Average, which we have already given back. At this point, almost the entire country is living on welfare.
Stocks soared firefly on falling death rates. Chinese cases are falling after the border closed, Italy and Madrid are going flat, and San Francisco is looking good. There is still a massive, but extremely nervous bid under the market. I’m selling into this rally. We will continue to chop in a (SPX) $2180-$2800 range for the foreseeable future.
Trump says there’s a light at the end of the tunnel, but he doesn’t tell you that the light is an oncoming express train. At the very least, the number of deaths will rise at least tenfold from here. That’s how many we lost in the Korean War. It hasn’t even hit the unsheltered states in the Midwest yet.
Gold (GLD) is making a run another all-time highs, topping $1,700. Expect everyone’s favorite hedge to go ballistic. QE infinity and zero interest rates will eventually bring hyperinflation and render the US dollar worthless. Gold production is falling due to the virus. Anything else you need to know?
Mortgage defaults are up 18-fold. People can’t even get through to their banks to tell them they are not going to pay. This is the next financial crisis. Fannie Mae and Freddie Mac are going to go broke….again.
Can the US government spend money fast enough, given that it has been shrinking for three years? I’m not getting my check until September. It’s not easy to spend $2 trillion in a hurry. I can’t even spend a billion in a hurry. It’s darn hard and I’ve tried. It suggests any recovery will be slower and lasts longer.
Here’s the bearish view on the economy, with Barclay’s Bank looking for an “L” shaped recovery, which means no recovery at all. I’m looking more for a square root type recovery, which means a sharp bounce back to a lower rate of growth. And there may be two “square roots” back to back.
Bond giant PIMCO predicts 30% GDP loss in Q2 on an annualized basis. Everyone staying home doing jigsaw puzzles isn’t doing much for our economic growth. This may end up becoming the most positive forecast out there.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had a tough week, destroying my performance back to positive numbers for the year. That is thanks to my piling on the shorts in a steadily rising market. This brings short term pain, but medium-term ecstasy.
We are now down -3.99% in April, taking my 2020 YTD return down to -12.41%. That compares to an incredible loss for the Dow Average of -17% from the February top. My trailing one-year return sank to 30.02%. My ten-year average annualized profit was pared back to +33.51%.
My short volatility positions (VXX) were hammered even in a rising market, which means no one believes the rally, including me.
I took nice profits on two very deep in-the-money, very short dated call spreads in Amazon (AMZN) and Microsoft (MSFT), the two safest companies in the entire market, betting that we don’t go to new lows in the next nine trading days. As the market rose, I continued to add to my short position with the 2X ProShares Ultra Short S&P 500 (SDS).
This week, we get the first look at Q1 earnings. All economic data points will be out of date and utterly meaningless this week. The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, April 13 Citigroup (C) and JP Morgan (JPM) report earnings.
On Tuesday, April 14 at 11:30 AM, the API Crude Oil Stocks are announced.
On Wednesday, April 15, at 2:00 PM, the New York State Manufacturing Index is released.
On Thursday, April 16 at 8:30 AM, Weekly Jobless Claims are announced. The number could top 6,000,000 again. At 7:30 AM, US Housing Starts for March are published.
On Friday, April 17 at 7:30 AM, the Baker Hughes Rig Count is released at 2:00 PM. Expect these figures to crash as well.
As for me, before the market carnage of the coming week ensues, I shall be sitting down with my kids and touring the National Gallery of Art in Washington DC. Many art museums have now opened up their collections online, for free. There is a special exhibition of “Degas at the Opera.” Please enjoy by clicking here.
Next to come will be the Louvre in Paris (click here), and the National Museum of the Marine Corps in Triangle, VA (click here). I have them tracing the dog tags I brought back from Guadalcanal. I bet some of my old weapons are in there.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Still Sheltering in Place
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)
