Global Market Comments
September 16, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or CHOPPY WEATHER AHEAD),
(SPY), (TLT), (FB), (GOOGL), (M), (C),
(XOM), (NFLX), (DIS), (FXE), (FXI)
Posts
When commercial pilots fly across the US, they often give each other a heads up about dangerous conditions so other can avoid them. “Chop” is a common one, clear air turbulence that appears on no instruments. Usually, a simple altitude change of a few thousand feet is enough to deal with the problem.
“Chop” is what we traders have had to deal with in the stock market a lot for the past 18 months ever since the trade war with China started. Look at the S&P 500 (SPY) and you see that we have been covering the same ground over and over again, much like trench warfare in WWI. Since April 2018, we have crossed the $270-$290 space no less than six times.
We are just now kissing the upper edge of that band. What happens next depends on your beliefs. If you think the trade war will end in the next month and we don’t go into recession, then the markets will break out to new all-time highs, blasting all the way up to $320. If you don’t, you want to be fading this move, unloading risk, and entertaining short plays.
I’ll let you decide.
As for me, I have been suspicious of this rally since it started the third week of August. It has been led by banks, energy, retailers, and all the other garbage with terrible fundamentals that have been falling for years. In other words, it is pure short covering. There is no net money coming into the market. In the meantime, technology has not fallen, it has ground to a halt awaiting the next flood of capital.
It was Apple (AAPL) day in Silicon Valley, with the world’s largest company rolling out a host of new services and upgrades. The new Apple TV Plus streaming service was the focus, coming out with a $5 a month price, easily undercutting Disney Plus (DIS) at $10 and Netflix (NFLX) at $15.
It is an in-between generation year, so we didn’t get anything big. But with 200 million iPhones needing replacement in coming years (AAPL) is still a good long-term hold. All eyes will be on the share buy backs.
The next antitrust assault on big tech arrived, with Facebook (FB) and Google (GOOGL) now in the sights of 49 US states. This will go nowhere as technology has been leading to lower prices, not higher ones. What is the monopoly value of a service that is given away for free? The choice is very simple: let the US continue to dominate tech, or let China take it over.
Job growth is slowing, and the belief that it has peaked for this cycle is growing. Job openings fell 31,000 in August to 7.2 million according to the Department of Labor. The big loss was in wholesale trade, the big gain in information technology. The economy is moving from old to new.
The John Bolton firing, the national security advisor, crushed oil as the chance of a major Middle Eastern war decline, knocking $1.50 off of Texas Tea. That negotiation with the Taliban didn’t go so well, with them blowing up our people while talking with Mike Pompeo. The risk is that Trump’s next national security advisor could be worse. That’s been the trend. The last national security advisor took money from the Russians.
Europe pulled out all the stops (FXE), renewing a stimulus program with massive quantitative easing. Euro interest rates also to be cut. Eventually, a lot of that money will end up back in the US, the only place in the world with decent investment returns. That's why our stocks are now a few pennies short of a new all-time high.
We saw more of Trump talking up the market ahead of trade talks, with the administration considering half a deal on trade tariffs, while throwing technology under the bus with an intellectual property walkaway. Good for the Midwest, terrible for the west coast.
The bond market meltdown continued, with one of the sharpest collapses in history, down 11 points in a week, The ten-year US Treasury bond yield (TLT) has spiked from 1.44% to 1.90% in a week. Hope you got the rate lock on your refi last Friday. Long bonds had become the most overcrowded trade in a decade. Give it a month to digest, then take another run at the highs in prices, lows in yields.
China (FXI) bought ten shiploads of soybeans (SOYB), hoping for a positive outcome in the October trade talks. Or did they make the purchase to start the trade talks in the first place? Who knows? Price spikes 5%, at last! It's why stocks are pushing to new all-time highs.
The budget deficit toped $1 trillion in the first 11 months of fiscal 2019, the highest since the financial crisis. Running deficits this big during peace time with 2% economic growth will leave us with no way to get out of the next recession. It’s setting up the most predictable financial crisis in history, the next one. It’s just a matter of time before the chickens come home to roost. By the time Trump leaves office, the national debt will have increased by $4 trillion, or 20%.
The Mad Hedge Trader Alert Service is treading water in this wildly unpredictable month.
My Global Trading Dispatch stands near an all-time high of 334.99% and my year-to-date remains level at +34.85%. My ten-year average annualized profit bobbed up to +34.35%.
I’ll be running my 40% long in technology stocks into the September 20 options expiration because there is nothing else to do. After watching the bond market crater by 11 points, I could no longer restrain myself and stuck my toe in the water with a small long with yields at 1.90%. I may have to sweat a move to a 2.00% yield, but no more. I break even at 2.10%.
The coming week will be one of the biggest of the year, thanks to the Fed.
On Monday, September 16 at 8:30 AM, the New York Empire State Manufacturing Index is out.
On Tuesday, September 17 at 9:15 AM, the US Industrial Production is published.
On Wednesday, September 18, at 8:30 AM, August Building Permits are released. At 2:30 PM, the Federal Reserve announces its interest rate decision. If they don’t cut look out below?
On Thursday, September 19 at 8:30 AM, the Weekly Jobless Claims are printed. At 10:00 AM, Existing Home Sales are printed.
On Friday, September 20 at 8:30 AM, the Baker Hughes Rig Count is released at 2:00 PM.
As for me, my entire weekend is committed to the Boy Scouts, doing assorted public services projects with the kids, timing a mile run for the Physical Fitness merit badge, and cleaning up San Francisco Bay. Hopefully, I will get some time to review my charts. I usually look at 200 a weekend.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 22, 2019
Fiat Lux
Featured Trade:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
Mad Hedge Technology Letter
August 7, 2019
Fiat Lux
Featured Trade:
(CORD-CUTTING IS ACCELERATING)
(DIS), (T), (NFLX), (CMCSA)
Cord-cutting is picking up steam – that is the last thing traditional media want to hear.
There are several foundational themes that this newsletter has glued onto readers' foreheads.
The generational pivot to cloud-based media is one of them.
It’s easy to denominate this phenomenon down to Netflix (NFLX) but in 2019, this trend is so much more than Netflix.
E-marketer published a survey showing that cord-cutters will surpass 20% of all U.S. adults by the end of 2019.
The rapid demise of traditional television has been equally as mind-numbing with the 100.5 million subscribers in 2014 turning into 86.5 million subscribers today.
Comcast (CMCSA) has tried to buck the trend by homing in on fast broadband internet, but that strategy can only go so far.
Disney (DIS), WarnerMedia, and NBCUniversal Disney have really gotten their ducks in a row and are on the verge of launching their own unique streaming services.
Disney's service entails a 3-segment strategy bringing in Hulu and ESPN Plus to the Disney fold.
The Disney service will revolve around family content at its core so don’t expect Game of Thrones lookalikes.
WarnerMedia's hopes to cash in on its HBO brand while peppering it with original series and programming from Warner Bros. and DC.
Disney will be able to lean on family brands of Marvel, Star Wars, and Pixar, and newly acquired National Geographic.
Marvel Cinematic Universe is a growth asset pumping out more than $22 billion at the box office across 23 movies.
Disney Plus will also have a solid collection of Disney films to play with, which could make it indispensable to parents and comes with no ads making it even more appealing to kids.
Disney will also deploy some mix of bundles to diversify its offerings and personalize services for viewers who do not want its entire lineup of content.
The soon-to-be HBO Max will implement HBO original content along with WarnerMedia brands like Warner Bros., DC Entertainment, TBS, TNT, and CNN.
HBO Max will have a treasure trove of old Warner Bros. movies and TV shows, like "Friends" and "The Fresh Prince of Bel Air," that has played extremely well on Netflix.
HBO will get those titles back at the end of 2019.
HBO has also tied up with BBC Studios to stream "Doctor Who."
"You should assume that HBO Max will have live elements," said Randall Stephenson, chairman and CEO of AT&T, on the company's second quarter conference call.
This roughly translates into HBO Max snapping up live sports and music events to complement scripted content.
This is something that Netflix has shied away from and live events are best monetized through live ads.
The last big label service to go into effect is NBC’s yet to be named streaming service.
NBCUniversal will have the luxury of offering their cable subscribers a chance to pivot to an in-house online streaming service making the move seamless.
At first, the 21 million US cable-TV subscribers will receive the streaming content for free.
Some of the assets that will trot out on the NBC platform are "The Office," because NBC is removing it from Netflix for 2021.
As cord-cutters hasten their move to streaming, this trio of loaded content-creating firms will benefit as long as they maintain a high quality of content and the pipeline to please fidgety consumers.
Mad Hedge Technology Letter
July 26, 2019
Fiat Lux
Featured Trade:
(WHY 3D PRINTING WILL BOOST THE AIRPLANE INDUSTRY),
(SSYS), (ETSY), (MSFT), (BA), (NFLX), (GE), (LMT)
If you need a new investment idea – here’s one.
3D printing.
Yes, the same 3D printing that was once considered a raging but hopeless fad.
A lot has changed since then.
Early adopters were largely cut down at the knees as they tried to traverse the rocky terrain from a niche market to going full out mainstream.
The teething pains echo bitcoin which was the fad of 2017, on the contrary, this technology it is built on is rock solid, yet the path to sustainability is littered with corpses.
Production complications and the lack of specialists in the industry meant that problems were rampant and nurturing an industry from scratch is harder than you think.
It is time to stand up and take notice of 3D printing, this time it is here to stay.
Certain tech companies love this technology.
Etsy (ETSY) e-commerce participants gravitate towards 3D printing because it gets firms from paper to the real world in a fraction of the time.
The cost of production doesn’t change whether you’re producing one item or a million because of the economies of scale.
The previous 3D printing bonanza was a frenzy and this corner of tech became known for the use of buzzwords representing the potential to reinvent the world.
With lofty expectations, there was a natural disappointment when outsiders understood growing pains were part of the critical evolution instead of a direct route to profits.
The initial goal was to democratize production which sounds eerily similar to bitcoins mantra of democratizing money.
The way to do this was to make it simple to produce whatever one wishes.
That would assume that the general public could pick up professional production 3D printing skills on arrival.
That was wishful thinking.
The truth was that applying 3D printers was time-draining and aggravating.
Issues cropped up like faulty first-generation hardware or software -problems that overwhelmed newbies.
Then if everything was going smoothly on that front, there was the larger issue of realizing it’s just a lot harder to design specific things than initially thought without a deep working knowledge of computer-aided software (CAD) design.
Most people know how to throw a football, but that doesn’t mean that most people can wake up one day in their pajamas and convince themselves they will be the next starting quarterback to lead an NFL team to the Super Bowl.
The high-quality 3D printing designs were reserved for authentic professionals that could put together complicated designs.
The move to compiling a comprehensive library will help spur on the 3D printing revolution while upping the foundational skill base.
Then there is the fact that 3D printing technology is a lot better now than it once was, and the printing technology has come down in price making it more affordable for the masses.
These trends will propel broad-based adoption and as the printing process standardizes, more products can rely on this technology from scratch.
The holy grail of 3D printing would be 3D printing on demand like Netflix (NFLX), but imagine this on-demand 3D printing would function to personalize a physical product on the spot.
Think of a hungry customer walking into a restaurant and not even looking at a menu because one sentence would be enough to trigger specific models in the database that could conjure up the design for the meal.
This would involve integrating artificial intelligence into 3D printing and the production process would quicken to minutes, even seconds.
At some point, crafting the perfect meal or designing a personalized Tuscan villa could take minutes.
The 3D printing industry is reaching an inflection point where the advancement of the technology, expertise, and an updated production process are brewing together at the perfect time.
The company at the forefront of this phenomenon is Stratasys (SSYS).
Stratasys produces in-office prototypes and direct digital manufacturing systems for automotive, aerospace, industrial, recreational, electronic, medical and consumer products.
And when I talk about real pros who have the intellectual property to whip out a complex CAD-based 3D design, I am specifically talking about Stratasys who have been in this business since the industry was in infancy.
And if you add in the integration of cloud software, 3D printing would dovetail nicely with it.
All the elements are in place to fuel this industry into the mainstream.
Take for example airplanes made by Boeing (BA) and Airbus, 3D printer-designed parts comprise only 0.1% of the actual plane now.
It is estimated that 3D printed design parts could consist up to 20% of the overall plane.
These massive airline manufacturers like Boeing (BA) have profit margins of around 15% to 20%, and carving out more 3D printer-designed parts to integrate into the main design will boost profit margins to up to 50%.
The development of the 3D printing process into aerospace technology is happening fast with Boeing inking a five-year collaboration agreement with Swiss technology and engineering group Oerlikon to develop standard processes and materials for metal 3D printing.
Any combat pilot knows who Oerlikon is because they are famed for building ultra-highspeed machines to shoot down, you guessed it, airplanes and missiles.
They will collaborate to use the data resulting from their agreement to support the creation of a standard titanium 3D printing processes.
Only last November, GE announced that GE’s Aviation’s GEnx-2B aircraft engine for the Boeing 747-8 will apply a 3D printed bracket approved by the Federal Aviation Administration (FAA) for the engine, replacing a traditionally manufactured power door opening system (PDOS) bracket.
With the positive revelations that the (FAA) is supporting the adoption of 3D printing-based designs, GE is preparing to begin imminent mass production of the 3D printed brackets at its Auburn, Alabama facility.
Eric Gatlin, general manager of GE Aviation’s additive integrated product team gushed that “It’s the first project we took from design to production in less than ten months.”
Defense companies are also dipping their toe into the water with aerospace company Lockheed Martin (LMT), the world’s largest defense contractor, winning a $5.8 million contract with the Office of Naval Research to help further develop 3D printing for the aerospace industry.
They will partner up to investigate the use of artificial intelligence in training robots to independently oversee the 3D printing of complex aerospace components.
3D printed designs have the potential to crash the cost of making big-ticket items from cars to nuclear plants while substantially shortening the manufacturing process.
Further emphasis on cornering the North America aerospace market could cement this stock as a no-brainer buy of 2019 as the (FAA) embraces more of the technology opening up the addressable market for the active participants.
As it stands, Stratasys is the industry leader in this field, and placing best of breed tech companies into your portfolio will put you in better position to weather the squalls of the capricious tech sector.
The company is still relatively unknown even though it has been around for ages.
Stratasys is a company to put on your radar and remember this space as the 3D printing market blossoms.
It’s nonetheless still a speculative punt but a compelling part of the tech industry.
Mad Hedge Technology Letter
July 5, 2019
Fiat Lux
Featured Trade:
(THE BALL IS IN NETFLIX’S COURT)
(NFLX), (DIS), (AAPL), (IQ), (KHC)
Being as volatile as it is, investors are afforded ample opportunity to get into one of the premium tech stocks in the land Netflix (NFLX).
Chasing this one higher is a dangerous thought, as habitual 30% dips is part and parcel of being attached to this supreme online streaming stock.
December of 2018 gave you that sinking feeling when Netflix dropped off a cliff dipping to $260 but spiking after the turn of the year as the Fed swiveled on a dime to save the equity market from implosion.
Let’s make no bones about it, the long-term narrative for Netflix is intact as it’s ever been.
The company simply makes a great product, period, and systematically taps endless demand.
What many cable companies don’t understand is that you cannot make a high-quality film product that wedges in annoying commercials and equally as obnoxious, dictate the window of time in which they should watch the content.
Optionality is value and Netflix has this spot on.
I know many Millennial consumers that would rather jump off a building than subject themselves to commercials.
These factors erode the quality of the product just as if an employer would dictate to one of his or her employees that wanted to take a vacation to Africa.
But the vacation to Africa would have some strings attached.
He or she would only be able to visit at the height of summer in 120-degree Fahrenheit weather while every activity he or she chose to do, would be pre-empted by numerous advertisements that he or she must be shown.
Consumers don’t need these sideshows anymore; the world has developed away from these models and corporates have lost this control.
The loss of corporate control of the consumers is because the internet gives consumers millions of different options at the tip of their fingers.
Tapping into the optionality and the habits that revolve around it is paramount to corporate America.
This is the same reason why big box food companies like Kraft Heinz (KHC) is getting smacked around, consumers have better options and are more aware of them because of technology.
Another example of corporate miscalculation comes in the form of supply chains being redirected from China to South East Asia.
It was clear as day that during my time in China that companies were making a terrible mistake going into China in the first place.
This shows how many corporates are dragged down by a lack of vision and do an awful job of anticipating paradigm shifts that are becoming more common because of the accelerating rate of change of the corporate climate, weather, technology, rule of law, and human migration.
Netflix is effectively blocked from China and China has its own Netflix called iQIYI (IQ), they had no chance from the beginning like Google, Amazon, Facebook, and the many other American tech firms.
Netflix’s business model now has scale working for them and growth numbers will be the main recipients going forward if they focus on high quality content.
That means expect high pay packages to the best media talent in the world.
They can afford to pay a tier 1 actor $50 million per movie because the data buttresses this strategy.
At the same time, Netflix is crushing competition by hoarding the talent with extraordinary pay packages while allowing these highly paid specialists 100% creative control over what they do.
Who would want to work for a company that paid more than double and whose management gave them free reign on creative decisions?
Sounds like an artist’s dream and it’s exactly that for actors like Will Smith who have signed onto Netflix’s project.
I would even suggest that Netflix needs to overpay actors just for the reason of taking them off the market for competitors.
This truly is the lucrative golden age for actors, producers, and directors who are the top 1% of their craft, but for everyone else, it’s a hard slog.
This usually means becoming a tier 1 actor before the migration to online streaming happened.
The picture I am painting is that Netflix’s success and future prospects aren’t about Disney or other competitors, but entirely about them.
He who has the most chips at the table with the best cards is in best position to win and the same goes for Netflix.
The rest of the bunch like Apple (AAPL) and Disney who are late to the party will be feeding off the rest of what Netflix cannot exploit and that’s the best-case scenario.
Disney should be able to have moderate success with its array of great movie, television, and sports content.
I’d be surprised if Disney failed because they possess the ingredients to concoct a delicious cocktail.
Apple has a harder proposition because of the lack of entertainment value in their content. They are still tied to the hardware sales and much of the service sales come from their app store and servicing the hardware.
But Apple does have money, and a lot of it to throw at the problem, but I don’t believe CEO of Apple Tim Cook is the right man to navigate through the travails of the online content world. He’s an operations guy and has never proved anything more than that.
Netflix still has substantial opportunity to grow its brand and the runway is long.
The demand for watching great original movies and television programs without commercials whenever consumers want is still in the first innings.
Even though Disney will remove some non-original content from Netflix’s platform, the content spend on a massive pipeline of new projects will more than fill the void left by Disney’s content.
In fact, Netflix should thank Disney for all those years that Disney allowed them to build their brand through 3rd party premium content like the television program Friends.
I believe Netflix does not need 3rd party content anymore, that is how much Netflix has bolted ahead in the past few years.
The company has introduced price hikes with its 4K premium package going from $14 to $16 per month.
But Netflix is still underpricing itself to the consumer to grab market share, and there is still pricing headway in the future if the company wants it.
In the coming months, Netflix plans to offer more detailed reporting on its metrics and the transparency will give investors even more insight into why this company is brilliant.
I believe the numbers will show that Netflix is absolutely killing it.
As for the trading, Netflix has settled in a range of $320 to $380 and any dips to the $340 range should be quite appetizing.
Add incrementally and use any large dip to drop your cost basis.
Stand aside if you cannot handle heightened volatility.
Mad Hedge Technology Letter
July 1, 2019
Fiat Lux
Featured Trade:
(THE DEATH OF HARDWARE)
(AAPL), (CRM), (NFLX), (HUAWEI)
