Global Market Comments
September 21, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE’S THE BLACK SWAN FOR 2020),
(SPY), (INDU), (TSLA), (JPM), (TLT), (C),
(V), (GLD), (AAPL), (AMZN), (UUP)
Posts
Global Market Comments
September 8, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY CASH IS STILL TRASH),
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
Global Market Comments
June 23, 2020
Fiat Lux
Featured Trade:
(HERE ARE THE FOUR BEST PANDEMIC-INSPIRED TECHNOLOGY TRENDS),
(AMZN), (CHWY), (EBAY), NFLX), (SPOT), (TMUS), (ATVI), (V), (PYPL), (AAPL), (MA), (TDOC), (ISRG), (TMDI)
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)
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now, and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allows plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright. I expect the list below to rise by 50% or more over the next two years.
Enjoy.
Microsoft (MSFT) - March 18 2022 $180-$190 bull call spread at $2.67 delivers a 274% gain with the stock at $190, up 16% from the current level. As the global move online vastly accelerates the world is clamoring for more computers and laptops, 90% of which run Microsoft’s Windows operating system. The company’s new cloud present with Azure will also be a big beneficiary.
Apple (AAPL) – June 17 2022 $210-$220 bull call spread at $6.47 delivers a 55% gain with the stock at $226, up 14% from the current level. With most of the world’s Apple stores now closed, sales are cratering. That will translate into an explosion of new sales in the second half when they reopen. The company’s online services business is also exploding.
Alphabet (GOOGL) – January 21 2022 $1,500-$1,520 bull call spread at $7.80 delivers a 28% gain with the stock at $226, up 14% from the current level. Global online searches are up 30% to 300%, depending on the country. While advertising revenues are flagging now, they will come roaring back
QUALCOMM (QCOM) – January 21 2022 $90-$95 bull call spread at $1.55 delivers a 222% gain with the stock at $95, up 23% from the current level. We are on the cusp of a global 5G rollout and almost every cell phone in the world is going to have to use one of QUALCOMM’s proprietary chips.
Amazon (AMZN) – January 21 2022 $2,100-$2,150 bull call spread at $17.92 delivers a 179% gain with the stock at $2,150, up 15% from the current level. If you thought Amazon was taking over the world before, they have just been given a turbocharger. Much of the new online business is never going back to brick and mortar.
Visa (V) – June 17 2022 $205-$215 bull call spread at $3.75 delivers a 166% gain with the stock at $215, up 16% from the current level. Sales are down for the short term but will benefit enormously from the mass online migration of new business only. They are one of a monopoly of three.
American Express (AXP) – June 17 2022 $130-$135 bull call spread at $1.87 delivers a 167% gain with the stock at $135, up 28% from the current level. This is another one of the three credit card processors in the monopoly, except they get to charge much higher fees.
NVIDIA (NVDA) – September 16 2022 $290-$310 bull call spread at $6.90 delivers a 189% gain with the stock at $310, up 19% from the current level. They are the world’s leader in graphics card design and manufacturing used on high-end PCs, artificial intelligence, and gaining. They befit from the soaring demand for new computers and the coming shortage of chips everywhere.
Walt Disney (DIS) – January 21 2022 $140-$150 bull call spread at $2.55 delivers a 55% gain with the stock at $116, up 31% from the current level. How would you like to be in the theme park, hotel, and cruise line business right now? It’s in the price. Its growing Disney Plus streaming service will make (DIS) the next Netflix.
Target (TGT) – June 17 2022 $125-$130 bull call spread at $1.40 delivers a 257% gain with the stock at $130, up 16% from the current level. Some store sales are up 50% month on month and lines are running around the block. Their recent online growth is also saving their bacon.
Looks Like a “BUY” signal to Me
Last year was the year of Fintech and 2020 is the year when this industry goes into overdrive.
Let’s take a look at one of my top choices, PayPal (PYPL).
Millennials are the primary customer demographics to the main platform, but the attractiveness of peer-to-peer payment system Venmo is gaining momentum.
PayPal should be on a short list of fintech stocks for investors and there is certainly more room to run for the share price.
Last quarter’s numbers of 9.8 million net new actives mean that PayPal now has 295 million active accounts across all platforms.
Engagement continues to be a bright spot growing by 9% to almost 40 transactions per active account.
Mobile is a major contributor to success with 172 million consumers and 13.8 million merchants.
Venmo processed more than $27 billion in volume for the quarter, growing 64%.
They are doing $300 million in payments per day and an annual run rate that now exceeds $100 billion.
The Venmo team recently inked a deal with Synchrony to provide a Venmo credit card.
Credit products continue to be another gateway to more success with new consumer installment plans in the United States and Germany which allow PayPal customers to pay with streamlined monthly payments.
This capability is already leading to incremental sales and led to signing a long-term strategic partnership agreement with Citi Australia to develop consumer credit products for PayPal's customers in Australia.
Additional relationships were further expanded with Walmart launching PayPal Checkout as the sole payment instrument for its online grocery business in Mexico.
In Japan, PayPal is one of the official partners for the Japanese government's plan to promote cashless payments throughout the country.
PayPal now offers account linking through mobile devices with Capital One and PNC Bank in the United States.
If you thought their international strategy stopped there, there are other irons in the fire.
PayPal became the first non-Chinese payments company to be licensed to provide online payment services in China.
They announced in September that the People's Bank of China has approved a 70% equity interest in GoPay, a license provider of online payment services.
China is a tricky revenue proposition and it’s not guaranteed to flourish on the mainland, but this shows the pro-active way that PayPal seeks to expand its total addressable market and long-term growth prospects.
The license enables PayPal to expand upon relationships with existing partners like China Union Pay and AliExpress and forge fresh partnerships with China's financial institutions and technology platforms.
PayPal’s success has so far depended on innovation and acquisitions - I fully expect this trend to continue in 2020.
PayPal announced it was buying shopping and rewards platform Honey Science Corporation for $4 billion.
This year is the beginning of another compelling one-year bull case aided in part by higher expectations from those diverse set of partnerships, such as with MercadoLibre Inc. and Uber Technologies Inc., along with PayPal’s pricing, Honey online coupon transaction, and Venmo monetization.
I anticipate further sustained overperformance in margin expansion as well.
I expect an overall payments industry-wide volume growth of 11% in 2020 and PayPal will grow into its position in a still healthy broader economy.
Payment sector operating metrics, from credit card volume growth, to enterprise IT budget growth, to U.S. employment growth, are robust supporting the bull case for PayPal in 2020.
Aside from PayPal, my alternative favorites in the payments space that could see anywhere from 7%-20% share appreciation in 2020 are Square (SQ), Mastercard Inc. (MA), and Visa Inc. (V)
It is likely that 2020 will signal a new decade of super growth for the digital payments market.
And I expect PayPal to increase its solid footprint in web, in mobile app platforms, and in retail stores globally through organic growth, acquisitions, and partnerships.
PayPal’s profitable business model and pro-active management will help the share price reach new highs.
However, not only for fintech stocks, but the overall market is ripe for some profit-taking in the short-term because of the recent melt-up.
First, Apple (APPL) collaborates with Goldman Sachs’ (GS) offering of a credit card even giving credit access to subprime borrowers.
And now Google (GOOGL) has its eyes on the banking industry — specifically, it’ll soon offer checking accounts.
In a copycat league where anything and everything is fair game, we are seeing a huge influx of big tech companies vie for the digital wallets of Americans.
The project is aptly named Cache and accounts will be handled by Citibank (C) and a credit union at Stanford.
Google’s spokesman shared with us admitting that Google hopes to “partner deeply with banks and the financial system,” and further added, “If we can help more people do more stuff in a digital way online, it’s good for the internet and good for us.”
I would disagree with the marginal statement that it would be good for us.
Facebook (FB) is now offering a Pay option and how long will it be until Amazon (AMZN), Microsoft (MSFT), and others throw their name into the banking mix.
I believe there will be some monumental failures because it appears that these tech companies won’t offer anything that current bank intuitions aren’t offering already.
Moving forward, the odd that digital banking products will become saturated quickly is high.
Let’s cut to the chase, this is a pure data grab, and not in the vein of offering innovative services that force the consumer down a revolutionary product experience.
As the consumer starts to smarten up, will they happily reveal every single data point possible to these tech companies?
Big tech continues to be adamant that personal data is secure with them, but their track records are pitiful.
Even if Google doesn’t sell “individual data”, there are easy workarounds by just slapping number tags on aggregated data, then aggregated data can be reverse-engineered by extracting specific data with number tags.
The cracks have already started to surface, Co-Founder of Apple Steve Wozniak has already claimed that the credit algorithm for Apple’s Goldman Sach’s credit card is sexist and flawed.
Time is ticking until the first mass data theft as well and let me add that the result of this is usually a slap on the wrist incentivizing bad behavior.
I believe big tech companies should be banned from issuing banking products.
Only 4% of consumers switched banks last year, and a 2017 survey by Bankrate shows that the average American adult keeps the same checking account for around 16 years.
As anti-trust regulation starts to gather more steam, I envision lawmakers snuffing out any and every attempt for big tech to diversify into fintech.
It’s fair to say that Google should have done this 10 years ago when the regulatory issues were nonexistent.
Now they have regulators breathing down their necks.
Let me remind readers that the reason why Facebook abandoned their digital currency Libra was because of the pressure lawmakers applied to every company interesting in working with Facebook’s Libra.
Lawmakers threatened Visa and Mastercard that they would investigate every part of their business, including the parts that have nothing to do with Facebook’s Libra, if they went ahead with the Libra project.
The most telling insight comes from the best tech company Microsoft who has raised the bar in terms of protecting their reputation on data and trust.
They decided to stay away from financial products like the black plague.
Better to stay in their lane than take wild shots that incur unneeded high risks.
When U.S. Senator Mark Warner, a Democrat on the Senate panel that oversees banking, was asked about Google and banking, he quipped, “There ought to be very strict scrutiny.”
Big tech is now on the verge of getting ferociously regulated and that could turn out positive for the big American banks, PayPal (PYPL), Visa (V), Mastercard (MA) and Square (SQ).
I heavily doubt that Google will turn Cache into a meaningful business unless Google offers some jaw-dropping interest rates or elevated points to move the needle.
Google has canceled weekly all-hands meetings because of the tension between staff members and Facebook is also just as dysfunctional at the employee level.
Whoever said it's easy to manage a high-stake, too-big-to-fail tech firm?
Even with all the negativity, Google is still a cash cow and if regulatory headwinds are 2-3 years off, they are a buy and hold until they are not.
The recent tech rally, after the rotation to value, has seen investors flood into Apple, Microsoft, and Google as de-facto safe haven tech plays.
Mad Hedge Technology Letter
January 2, 2019
Fiat Lux
Featured Trade:
(THE FANGS' PATH TO ONLINE BANKING),
(SQ), (V), (MA), (AXP), (JPM)
Yu'e Bao or "leftover treasure" in English has caught the attention of more than 400 million Chinese investors.
This money market fund has exponentially grown into a $250 billion fund by the end of 2017, and is now the largest money market fund in the world!
This product isn't offered by Bank of China or another giant state-owned bank or financial enterprise, but Alibaba's (BABA) Ant Financial (gotta love those Chinese names).
Assets under management are up 100% YOY and it now accounts for a quarter of China's money-market mutual fund industry in just one fund.
These inflows coincide with the sudden migration into mobile payments. Common folks are comfortable with investing their life savings in these short-term instruments with a too-big-to-fail, larger-than-life firm such as Alibaba.
Yu'e Bao derives its funds from Alipay users, Alibaba's digital third-party platform, that allows consumers to pay for everything in life from theater tickets to utility bills.
Service is unified on a holistic graphic interface. Users can easily divert cash into this fund with a few screen taps on their app. Yu'e Bao's ROI offers a seven-day annualized yield of 4.02%, down from the introductory annualized rate of 6.9% around the launch in 2013.
Yu'e Bao's short-term yield outmuscles the 1.5% interest rate on one-year Chinese bank deposits and the 3.6% yield on 10-year Chinese government debt.
Weak banking regulation has spawned a mammoth FinTech (financial technology) industry in the Middle Kingdom. Only one yuan (16 cents) is enough to create an account and considerable retail flow has rushed in.
China has catapulted ahead of the rest of the world emerging as the leader of global FinTech innovation. The pace, sophistication, and scale of development of China's FinTech have surpassed the level in any other of the developed countries.
The country's digital metamorphosis has enhanced e-commerce, payment systems, and connected logistical services. The Chinese discretionary spender for the past decade has been the deepest and most reliable lever of global growth.
Mobile third-party payments in China, 90% cornered by Tencent's WeChat and Alibaba's Alipay, are estimated to reach a lofty $6 trillion in revenue by 2019, more than 50 times that of the U.S.
These omnipresent payment systems are now deeply embedded into the fabric of Chinese society. It's common to witness homeless people on Shanghai subways waving around a scannable image for WeChat or Alipay money transfers instead of asking for physical cash.
Even in rural farmlands, shabby convenience stores prioritize digital currency and sometimes don't accept paper currency at all. Yes, China is beating the U.S. to a cashless society.
Digitization is changing the competitive balance, and global banks must embrace large-scale disruption caused by big tech platforms.
Banks in China regard these companies as potential collaborators resulting in a net positive long-term infusion of enhanced products and services.
Agreements have been forged between the Bank of China and Tencent, and the China Construction Bank has linked up with Alibaba.
China has incorporated the technical power of A.I. (artificial intelligence) and machine learning into its FinTech platforms at every opportunity. Robo-advisors are also making inroads creating a bespoke financial program for the individual.
This trend has so far failed to go viral in America where individuals still prefer plastic cards or even paper cash. E-commerce clocked in a paltry 9.1% of total U.S. retail sales in the third quarter of 2017.
Even though most of us have our heads buried deep in our smartphone virtual world, Americans are still programmed to whip out debit or credit cards at every opportunity.
Chinese who visit America carp endlessly about America's archaic payment system.
Ultimately, American payment systems are ripe for digital disruption.
The American consumer will ultimately cause severe damage to MasterCard (MA), Visa (V), and American Express (AXP) which are happy with the current status quo.
The lack of innovation in the US FinTech sector is a failure in the otherwise fabulous technological leadership of the US. American smartphones should already be a fertile digital wallet, not just a niche market.
Savvy Jack Dorsey even invented a firm based on this inefficiency exploiting the lack of proficiency in domestic FinTech with Square (SQ).
And a vital reason the stock has gone parabolic this year is because of the brisk execution and the long runway ahead in this industry.
American big tech will gradually utilize China's FinTech model and extrapolate it with "American personality." It is much more of a two-way street now than before with cutting-edge ideas flowing both ways.
The next leg up after digital wallet penetration of FinTech is money market funds on tech platforms. In effect, the Chinese innovation of this industry has allowed more variations of potential financing for the ambitious Chinese, and the same trends will gradually appear on Yankee shores.
Ironically enough, Amazon's (AMZN) land grab strategy is more prevalent in China as artificially low financing and juicier scale justify this strategy.
The scaling premium also explains why corporate China's early adopter advantage is so effective because not many countries boast a 1.3-billion-person consumer market.
Soon, Americans will wake up to the reality that American FinTech must advance or foreign firms will rush in.
Mediocrity is not good enough.
iPhones and Android consumers could direct savings into tech money market funds with compounding yield all on a single digital platform.
Tech companies could deploy some of the repatriated cash to invest in some fledgling FinTech expertise to smoothly execute this new endeavor.
Consequently, a successfully created money market fund on a tech platform would enlarge the already substantial cash hoard these firms possess. Not only will the large tech companies flourish, but the big will get absolutely massive.
The determining factor is financial regulation. Capitol Hill has drawn a large swath of mighty Silicon Valley tech titans to testify because they are stepping on too many toes lately.
A scheme to hijack the digital payments market and dominate the mutual fund industry will cause unyielding push back in Washington especially when the Amazon death star continues pillaging select industries of their choosing and eliminating brick-and-mortar jobs by the millions.
J.P. Morgan (JPM) which has the largest institutional money market fund in the country and retail stalwarts such as BlackRock and Vanguard will be sweating profusely too if mega tech starts probing around its turf.
Alibaba is also coming for its bacon with the failed purchase of payment transfer service MoneyGram International (MGI) temporarily shutting out Jack Ma from a foothold in the American payment system industry.
And if the Chinese aren't let in, there will be others sniffing around for the bacon, too.
The momentum for these financial instruments is robust as FinTech integrates deeper into consumer life. The global cash glut from a decade of cheap financing is causing profit-hungry investors to starve for high-yield vehicles.
The stability and clean balance sheets of tech giants give them ample chance to successfully execute. So, why can't they also become banks? Would you buy an Apple, Amazon, or Google money market fund if they offered a 4% to 7% annualized yield?
I believe most Americans would.
I remember that the highlight of my 1968 trip to Europe was always my visit to the nearest American Express (AXP) office to pick up my mail.
In those pre Internet and email days, it was the only way that a fresh faced 16 year old could stay in touch with a hand wringing family while traveling around the world.
They just wrote ?John Thomas, c/o American Express, Paris, France,? and the letters never failed to get through to me.
It was also a great place to meet other vagabonding Americans my age--of the female persuasion. At least they spoke English. Almost.
That was a very long time ago.
So I got to know well the American Express locations off the Spanish Steps in Rome, Saint Mark?s Square in Venice, Berlin?s Kurfurstendamm, and the Champs-Elysees in Paris.
I have a feeling that American Express is about to give me a warm and fuzzy feeling once again.
After being taken out to the woodshed and getting beaten senseless in the wake of getting fired by Costco, one of the biggest customers, the shares appear poised for a comeback.
We have a rare occasion where the highest quality stock in a sector with the best business model is selling cheaper than its cohorts for a series of temporary reasons.
Take a look at the charts for (AXP) and Visa (V) below, and one of the greatest pairs trades of all time may be setting up, whereby you want to buy for the former and sell short the latter against it.
At the very least, you should be taking your monster profits on Visa and rolling the money into American Express.
Since its inception in 1958, that flashy green (or platinum) piece of plastic has long been a status symbol, and owned the premium end of the credit card market.
As a result, it earns more fees and extends fewer loans than its competitors. The loans it does have enjoy a far lower default rate. There are now 107 million Amex cards in circulation, compared to only 55 million in 2001. Thank you 1%!
American Express cardholders run balances three times larger than the average Master Card holder. That?s what happens when you buy a Ferrari on your Amex card, as I once did (to get the frequent flier points).
Merchants pay very high fees, usually 5% of the purchase. That?s why many shun the card. (AXP) is currently running a credit card balance of $940 billion, versus $3.1 trillion for Visa (V).
Fees accounted for an impressive 57% of the company?s revenues, a far higher ratio than other credit card companies. Better yet, (AXP)?s fees are rising, while those of others are falling. Interest on balances brings in 15% and cardholder fees 8%.
(AXP) is expected to earn $5.8 billion in net income on $33.9 billion in revenues this year, up 9.4%. With the US economy recovering, growing by 2.6% this year and 3.0% plus in 2015, the company is in the sweet spot for capturing more profits.
Morgan Stanley estimates that cardholder spending grows at 4.5 times the US GDP growth rate. That should cause (AXP)?s earnings to double, and the stock as well. An extra tailwind will be the company?s new strategy of moving down market to expand market share.
Despite all this good news, (AXP) shares are selling at a 13.4X multiple, a discount to its industry (21X), and the main market (18X). An ambitious share buy back program should put a floor under the stock.
Part of the discount can be explained by a Justice Department suit claiming that the company overcharges merchants. Amex correctly argues that, as the smallest of the major credit card companies, it has nowhere near monopoly pricing power.
It will be interesting to see how aggressively the government pursues its action, now that attorney general Eric Holder, has moved on to retirement.
You all know by now that I think financials are the place to be for years going forward because of imminently rising interest rates. But I?ll hold back on pulling the trigger on single name long side stocks plays until the carnage in the markets abate.
When I?m ready to shoot out a Trade Alert, you?ll be the first to know.
When I do, don't even think about putting it on your credit card.
