Global Market Comments
May 3, 2019
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE LAS VEGAS MAY 9 GLOBAL STRATEGY LUNCHEON)
(APRIL 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (LYFT), (TSLA), (TLT), (XLV), (UBER),
(AAPL), (AMZN), (MSFT), (EDIT), (SGMO), (CLLS)
Mad Hedge Technology Letter
May 1, 2019
Fiat Lux
Featured Trade:
(ALPHABET’S BIG MISS)
(GOOGL), (TSLA), (TWTR)
What comes up must come down, you didn’t expect Alphabet’s stock to explode on this earnings report, did you?
Alphabet shares have gone up in a straight line since the beginning of the year, and only a robust beat on the bottom and top line with raised guidance was going to push this stock to higher highs.
Chances of that were low.
I wouldn’t classify Q1 as an awful quarter, but Alphabet was in need of a reset and culling a few hogs from the litter is not always a bad thing.
Shares retraced more than 8% in trading which could be the beginning of a brief but much-needed mini earnings tech recession.
Tech shares have carried the load this year, every continent on the globe wishes they had a tech sector like America does.
Google still has its digital ad duopoly intact and results were driven by ongoing strength in mobile search along with important contributions from YouTube followed by Google Cloud.
Revenues of $36.3 billion, up 17% YOY did not capture the imaginations of investors and this was graded as a big miss by over $1 billion.
This signals a sharp deceleration from Q1 2018 when Alphabet posted revenue growth of 26% YOY.
Growth of over 20% cut down to the high teens is a big deal in the tech world for growth names, and this puts a cap on the price trajectory for the short-term.
Cost per click on Google properties was down 19% YOY which was extremely disappointing even though paid clicks on Google properties were up 39% YOY which somewhat softens the blow.
Most crucially, there is nothing structurally wrong with Alphabet and investors must galvanize themselves around this salient point.
Execution risk reared its ugly head with CFO of Alphabet Ruth Porat explaining “while YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018 which we believe are overall additive to the user and advertiser experience.”
Alphabet pulled a Twitter (TWTR), forgoing short-term profits to focus on maintaining the reputation of the platform and eradicating lingering problems with the algorithm.
The algorithm facelift will make the platform more attractive to digital advertisers going forward as their brand risk is mitigated by Alphabet optimizing their algorithms.
More specifically, this would mean identifying certain unpalatable content that needs to be flat-out removed, and certain ads that should not be bundled with certain content.
More advertisers will slash YouTube ad budgets if they aren’t satisfied with the overall product experience and cannot accumulate positive user feedback.
Getting into the weeds makes us aware that costs aren’t overly exorbitant this time around.
Total traffic acquisition costs (TAC) were $6.9 billion, 22% of total advertising revenues and up 9% YOY but down from 2% YOY from Q1 2018 reflecting a favorable revenue mix shift from network to sites as well as a decrease in the network TAC rate.
Alphabet’s TAC rate rose from the impact of the ongoing shift to mobile, which manifests with higher TAC, but was offset by the growth in TAC free sites revenue driven by YouTube.
The European Commission (EC) and its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law and the associated €1.5 billion fine with it didn’t help quarterly performance.
The fine, in no shape or form, is a threat to Google’s dominance in Europe.
The Google cloud services 9 of the world's 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications, and software.
Some of the companies that will join the Google Cloud are American Cancer Society and McKesson in health care, media and entertainment companies like USA TODAY and Viacom, consumer packaged goods brands like Unilever, manufacturing and industrial companies like Samsung, logistics company UPS and public sector organizations like Australia Post.
The expansion of 2 new Cloud regions in Seoul and Salt Lake City which will open in 2020 will help build on the footprint of 19 Cloud regions and 58 data centers around the world.
Alphabet missed badly on the top line, but comps from last year because of the strength of YouTube would have been hard to eclipse.
Bask in the glory of the reset in price - now it's time to play Alphabet from the long side.
Moving forward, Alphabet has many levers to pull as CEO of Tesla Elon Musk’s rallying cry for the evolution of self-driving cars means that Waymo would reap the benefits first in automated vehicle technology.
Alphabet also has a few tools left in their toolkit such as monetizing Google Maps through selling digital ads on the Maps interface.
I expect a slow grind up for the rest of the year because Alphabet can brandish many weapons with little resistance in front of them, it’s up to them to execute.
Mad Hedge Technology Letter
April 29, 2019
Fiat Lux
Featured Trade:
(A TESLA ENTRY POINT IS FINALLY OPENING UP)
(TSLA), (LYFT), (UBER)
Global Market Comments
April 29, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, OR ANOTHER LEG UP FOR THE MARKET),
(SPY), (TLT), (DIS), (INTU), (FCX), (MSFT),
(QQQ), (CVX), (XOM), (OXY), (TSLA)
CEO of Tesla Elon Musk touting his company’s ability to deploy robo-taxis in the next 12 months miffed many industry analysts.
Few tech CEOs would have the balls to get on stage and put themselves out there in that type of manner.
But many tech CEOs aren’t Elon Musk.
I believe Musk calling for these bold predictions will help bend the world in his favor, maybe not right away, but before Tesla burns through their horde of cash.
Of course, there is no way in hell he could pull this off today, regulatory hurdles and in-house capability are two severe constraints.
But confidently proclaiming audacious initiatives that become self-fulfilling prophecies is a smart way to align the stars in the way you want.
Musk certainly believes the scent is in the air for the wolves to go in for the killer blow, he just needs a few miracles and a tad bit of luck on his side.
Tesla is now on record hyping up a custom-made robo-taxi capable of running about a million miles using a single battery pack, with all the sensors and computing power for full autonomy, costing less than $38,000 to produce.
They believe this will come out in 2020.
The combination of low vehicle cost, low maintenance cost and an expected powertrain efficiency of 4.5 miles per kWh should make this the lowest cost of ownership and will be the most profitable autonomous taxi on the market.
Using this state of the art robo-taxi to build a ride-sharing service business would effectively mean an Uber or Lyft without drivers.
Tesla would receive 30% of each fare, with the other 70% sent to Tesla owners that would deploy their own cars into the ride-sharing network.
I respect that Musk can feel sentiment behind Tesla's brand slipping away after heavy criticism, personal backlash from a spat with the SEC, and a boatload of competition hoping to smash him in the mouth.
Musk needed to shift the narrative into Tesla’s brand being the most innovative and publicly letting investors know there are more irons in the fire that will entrench Tesla supporters further while giving the Tesla haters more fodder to terrorize Musk.
Tesla is a luxury brand and constructed in the image of Elon Musk - making the impossible possible ethos needed a facelift and Musk gave what his supporters wanted in spades.
His showmanship is not misplaced and is part of who he is. But more importantly, if Tesla makes serious headway in the robo-taxi business in the next 12 months, Musk will be able to stand on the podium to whip up enough support needed to nudge this over the line.
Musk is very much from the mold of build it and they will come, and he has what few other CEOs have – vision.
The vision comes with a pricey premium.
And Musk must nurture this vision and urge believers to keep believing to carry on this act.
I was surprised that one of the most applicable pieces of news in the shareholder letter was something that nobody excavated.
Tesla will build a second-generation Model 3 line in China that projects to be at least 50% cheaper per unit of capacity than the Model 3-related lines in Fremont and at Gigafactory 1.
The cost to produce Model 3's is about to crash all while Tesla is still considered a premium, luxury vehicle.
This will free up space at the Reno Gigafactory and Fremont to focus on the robo-taxi challenge.
The latest news in Shanghai was an explosion at the half-built Gigafactory parking lot, but not much will come of that.
For investors on the sideline, the nadir of Tesla stock is approaching, another more shakeout might give investors the green light for a trade, that is if they aren’t already long-time holders.
Tesla mentioned they had trouble delivering new Teslas to foreign countries because of headwinds putting the logistics in place for the first time.
This one-off write-down will come off the balance sheet in next quarter’s earnings report and more information on the Shanghai Gigafactory will start to filter in aside from its boost to Tesla being able to produce 500,000 cars in 2019 once it comes online.
The Shanghai Gigafactory will unlock substantial value for shareholders once it's fully operational and finishing the construction ahead of time would be a boon.
Part of the plan to go into China results from snapping up more of a battery supply which Musk feels is the Achilles heel right now in Reno.
He continues to fault Panasonic for not delivering enough cells which, in turn, is holding back the power wall business creating a backlog in orders.
Many of the talking heads appearing on major networks were too trigger-happy in tearing Musk to shreds because of the way he speaks in hyperbole.
Musk even came out with another zinger that could pick up traction - an insurance product to marry up with Tesla vehicle purchases because Tesla believed Tesla owners are being price gouged by insurance companies.
As the impact of higher deliveries and cost reduction take full effect, Tesla expects to return to profitability in Q3 and significantly reduce losses in Q2.
Most of the bad news is baked into the stock and there could be another leg-down before this stock starts to look compelling.
Whether you love them or hate them, visionary tech CEOs get a lot of slack because the upside is so lucrative for shareholders.
That is part of why it is excruciating trading the stock led by a moody visionary with a larger-than-life persona, better to buy and hold if you are a Tesla believer.
This is one of those markets where you should have followed your mother’s advice and become a doctor.
I was shocked, amazed, and gobsmacked when the Q1 GDP came in at a red hot 3.2%. The economy had every reason to slow down during the first three months of 2019 with the government shutdown, trade war, and terrible winter. Many estimates were below 1%.
I took solace in the news by doing what I do best: I shot out four Trade Alerts within the hour.
Of course, the stock market knew this already, rising almost every day this year. Both the S&P 500 and the NASDAQ (QQQ) ground up to new all-time highs last week. The Dow Average will be the last to fall.
Did stock really just get another leg up, or this the greatest “Sell the news” of all time. Nevertheless, we have to trade the market we have, not the one we want or expect, so I quickly dove back in with new positions in both my portfolios.
One has to ask the question of how strong the economy really would have been without the above self-induced drags. 4%, 5%, yikes!
However, digging into the numbers, there is far less than meets the eye with the 3.2% figure. Exports accounted for a full 1% of this. That is unlikely to continue with Europe in free fall. A sharp growth in inventories generated another 0.7%, meaning companies making stuff that no one is buying. This is growth that has been pulled forward from future quarters.
Strip out these one-off anomalies and you get a core GDP that is growing at only 1.5%, lower than the previous quarter.
What is driving the recent rally is that corporate earnings are coming in stronger than expected. Back in December, analysts panicked and excessively cut forecasts.
With half of the companies already reporting, it now looks like the quarter will come in a couple of points higher than lower. That may be worth a rally of a few more percentage points higher for a few more weeks, but not much more than that.
So will the Fed raise rates now? A normal Fed certainly would in the face of such a hot GDP number. But nothing is normal anymore. The Fed canceled all four rate hikes for 2019 because the stock market was crashing. Now it’s booming. Does that put autumn rate hikes back on the table, or sooner?
Microsoft (MSFT) knocked it out of the park with great earnings and a massive 47% increase in cloud growth. The stock looks hell-bent to hit $140, and Mad Hedge followers who bought the stock close to $100 are making a killing. (MSFT) is now the third company to join the $1 trillion club.
And it’s not that the economy is without major weak spots. US Existing Home Sales dove in March by 5.9%, to an annualized 5.41 million units. Where is the falling mortgage rate boost here? Keep avoiding the sick man of the US economy. Car sales are also rolling over like the Bismarck, unless they’re electric.
Trump ended all Iran oil export waivers and the oil industry absolutely loved it with Texas tea soaring to new 2019 highs at $67 a barrel. Previously, the administration had been exempting eight major countries from the Iran sanctions. More disruption all the time. The US absolutely DOES NOT need an oil shock right now, unless you’re Exxon (XOM), Chevron (CVX), or Occidental Petroleum (OXY).
NASDAQ hit a new all-time high. Unfortunately, it’s all short covering and company share buybacks with no new money actually entering the market. How high is high? Tech would have to quadruple from here to hit the 2000 Dotcom Bubble top in valuation terms.
Tesla lost $700 million in Q1, and the stock collapsed to a new two-year low. It’s all because the EV subsidy dropped by half since January. Look for a profit rebound in quarters two and three. Capital raise anyone? Tesla junk bonds now yielding 8.51% if you’re looking for an income play. After a very long wait, a decent entry point is finally opening up on the long side.
The Mad Hedge Fund Trader blasted through to a new all-time high, up 16.02% year to date, as we took profits on the last of our technology long positions. I then added new long positions in (DIS), (FCX), and (INTU) on the hot GDP print, but only on a three-week view.
I had cut both Global Trading Dispatch and the Mad Hedge Technology Letter services down to 100% cash positions and waited for markets to tell us what to do next. And so they did.
I dove in with an extremely rare and opportunistic long in the bond market (TLT) and grabbed a quickie 14.61% profit on only three days.
April is now positive +0.60%. My 2019 year to date return gained to +16.02%, boosting my trailing one-year to +21.17%.
My nine and a half year shot up to +316.16%. The average annualized return appreciated to +33.87%. I am now 80% in cash with Global Trading Dispatch and 90% cash in the Mad Hedge Tech Letter.
The coming week will see another jobs trifecta.
On Monday, April 29 at 10:00 AM, we get March Consumer Spending. Alphabet (GOOGL) and Western Digital (WDC) report.
On Tuesday, April 30, 10:00 AM EST, we obtain a new Case Shiller CoreLogic National Home Price Index. Apple (AAPL), MacDonald’s (MCD), and General Electric (GE) report.
On Wednesday, May 1 at 2:00 PM, we get an FOMC statement.
QUALCOMM (QCOM) and Square (SQ) report. The ADP Private Employment Report is released at 8:15 AM.
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are produced. Gilead Sciences (GILD) and Dow Chemical (DOW) report.
On Friday, May 3 at 8:30 AM, we get the April Nonfarm Payroll Report. Adidas reports, and Berkshire Hathaway (BRK/A) reports on Saturday.
As for me, to show you how low my life has sunk, I spent my only free time this weekend watching Avengers: Endgame. It has already become the top movie opening in history which is why I sent out another Trade Alert last week to buy Walt Disney (DIS).
I supposed that now we have all become the dumb extension to our computers, the only entertainment we should expect is computer-generated graphics with only human voice-overs.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 23, 2019
Fiat Lux
Featured Trade:
(LAS VEGAS MAY 9 GLOBAL STRAGEGY LUNCHEON)
(APRIL 17 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (RWM), (IWM), (VXXB), (VIX), (QCOM), (AAPL), (GM), (TSLA), (FCX), (COPX), (GLD), (NFLX), (AMZN), (DIS)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 17 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What will the market do after the Muller report is out?
A: Absolutely nothing—this has been a total nonmarket event from the very beginning. Even if Trump gets impeached, Pence will continue with the same kinds of policies.
Q: If we are so close to the peak, when do we go short?
A: It’s simple: markets can remain irrational longer than you can remain liquid. Those shorts are expensive. As long as global excess liquidity continues pouring into the U.S., you’ll not want to short anything. I think what we’ll see is a market that slowly grinds upward until it’s extremely overbought.
Q: China (FXI) is showing some economic strength. Will this last?
A: Probably, yes. China was first to stimulate their economy and to stimulate it the most. The delayed effect is kicking in now. If we do get a resolution of the trade war, you want to buy China, not the U.S.
Q: Are commodities expected to be strong?
A: Yes, China stimulating their economy and they are the world’s largest consumer commodities.
Q: When is the ProShares Short Russell 2000 ETF (RWM) actionable?
A: Probably very soon. You really do see the double top forming in the Russell 2000 (IWM), and if we don’t get any movement in the next day or two, it will also start to roll over. The Russell 2000 is the canary in the coal mine for the main market. Even if the main market continues to grind up on small volume the (IWM) will go nowhere.
Q: Why do you recommend buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXXB) instead of the Volatility Index (VIX)?
A: The VIX doesn’t have an actual ETF behind it, so you have to buy either options on the futures or a derivative ETF. The (VXXB), which has recently been renamed, is an actual ETF which does have a huge amount of time decay built into it, so it’s easier for people to trade. You don’t need an option for futures qualification on your brokerage account to buy the (VXXB) which most people don’t have—it’s just a straight ETF.
Q: So much of the market cap is based on revenues outside the U.S., or GDP making things look more expensive than they actually are. What are your thoughts on this?
A: That is true; the U.S. GDP is somewhat out of date and we as stock traders don’t buy the GDP, we buy individual stocks. Mad Hedge Fund Trader in particular only focuses on the 5% or so—stocks that are absolutely leading the market—and the rest of the 95% is absolutely irrelevant. That 95% is what makes up most of the GDP. A lot of people have actually been caught in the GDP trap this year, expecting a terrible GDP number in Q1 and staying out of the market because of that when, in fact, their individual stocks have been going up 50%. So, that’s something to be careful of.
Q: Is it time to jump into Qualcomm (QCOM)?
A: Probably, yes, on the dip. It’s already had a nice 46% pop so it’s a little late now. The battle with Apple (AAPL) was overhanging that stock for years.
Q: Will Trump next slap tariffs on German autos and what will that do to American shares? Should I buy General Motors (GM)?
A: Absolutely not; if we do slap tariffs on German autos, Europe will retaliate against every U.S. carmaker and that would be disastrous for us. We already know that trade wars are bad news for stocks. Industry-specific trade wars are pure poison. So, you don't want to buy the U.S. car industry on a European trade war. In fact, you don’t want to buy anything. The European trade war might be the cause of the summer correction. Destroying the economies of your largest customers is always bad for business.
Q: How much debt can the global economy keep taking on before a crash?
A: Apparently, it’s a lot more with interest rates at these ridiculously low levels. We’re in uncharted territory now. We really don't know how much more it can take, but we know it’s more because interest rates are so low. With every new borrowing, the global economy is making itself increasingly sensitive to any interest rate increases. This is a policy you should enact only at bear market bottoms, not bull market tops. It is borrowing economic growth from futures year which we may not have.
Q: Is the worst over for Tesla (TSLA) or do you think car sales will get worse?
A: I think car sales will get better, but it may take several months to see the actual production numbers. In the meantime, the burden of proof is on Tesla. Any other surprises on that stock could see us break to a new 2 year low—that's why I don’t want to touch it. They’ve lately been adopting policies that one normally associates with imminent recessions, like closing most of their store and getting rid of customer support staff.
Q: Is 2019 a “sell in May and go away” type year?
A: It’s really looking like a great “Sell in May” is setting up. What’s helping is that we’ve gone up in a straight line practically every day this year. Also, in the first 4 months of the year, your allocations for equities are done. We have about 6 months of dead territory to cover from May onward— narrow trading ranges or severe drops. That, by the way, is also the perfect environment for deep-in-the-money put spreads, which we plan to be setting up soon.
Q: Is it time to buy Freeport McMoRan (FCX) in to play both oil and copper?
A: Yes. They’re both being driven by the same thing: China demand. China is the world’s largest new buyer of both of these resources. But you’re late in the cycle, so use dips and choose your entry points cautiously. (FCX) is not an oil play. It is only a copper (COPX) and gold (GLD) play.
Q: Are you still against Bitcoin?
A: There are simply too many better trading and investment options to focus on than Bitcoin. Bitcoin is like buying a lottery ticket—you’re 10 times more likely to get struck by lightning than you are to win.
Q: Are there any LEAPS put to buy right now?
A: You never buy a Long-Term Equity Appreciation Securities (LEAPS) at market tops. You only buy these long-term bull option plays at really severe market selloffs like we had in November/December. Otherwise, you’ll get your head handed to you.
Q: What is your outlook on U.S. dollar and gold?
A: U.S. dollar should be decreasing on its lower interest rates but everyone else is lowering their rates faster than us, so that's why it’s staying high. Eventually, I expect it to go down but not yet. Gold will be weak as long as we’re on a global “RISK ON” environment, which could last another month.
Q: Is Netflix (NFLX) a buy here, after the earnings report?
A: Yes, but don't buy on the pop, buy on the dip. They have a huge head start over rivals Amazon (AMZN) and Walt Disney (DIS) and the overall market is growing fast enough to accommodate everyone.
Q: Will wages keep going up in 2019?
A: Yes, but technology is destroying jobs faster than inflation can raise wages so they won’t increase much—pennies rather than dollars.
Q: How about buying a big pullback?
A: If we get one, it would be in the spring or summer. I would buy a big pullback as long as the U.S. is hyper-stimulating its economy and flooding the world with excess liquidity. You wouldn't want to bet against that. We may not see the beginning of the true bear market for another year. Any pullbacks before that will just be corrections in a broader bull market.
Good Luck and Good Trading
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader
Global Market Comments
April 16, 2019
Fiat Lux
Featured Trade:
(WHY YOU WILL LOSE YOU JOB IN THE NEXT FIVE YEARS,
AND WHAT TO DO ABOUT IT),
(BLK)
