October 2017 Newsletter


Dear Subscriber,

Well we got most of you onto the new Web site with new user names and 8+ character passwords...yea!

I'll get to AMD valuation and Micron too (as it hit 16 year high today).

But what really matters in the short term to the market is 

A) What does the "Tax Reform" Frankenstein mean for stocks in Q4

B) What the blowout earnings say about Big Tech and $1K Stock Prices

C) This earnings season is exploding up/down like a game of Russian Roulette with multiple bullets

D) We got the melt-up we expected; now EVERYTHING is overbought BIGLY

For instance, with news that Intel's AI chip is, for the first time, competitive with some of Nvidia and AMD GPUs (and news Intel is getting more communication silicon into Apple at the expense of Qualcomm, I raised my valuation of INTC $50-$55 over the next 12 months (which meets our threshold of 30%+ gain potential.

THEN BOOM...they surprised and guided upside a look at THIS 92 RSI chart for INTEL!!! FYI "Overbought" Relative Strength is 70---INTC looks like an Internet stock in 1999.

The IXT S&P 500 Tech Index looks almost as much overbought.

To show you how much the mega cap tech stocks are leading the S&P 500, look at the EQUAL WEIGHT S&P 500 Index chart...it looks plain vanilla by relative strength to the market-cap weighted SP 500 no?

Action to Take: We are looking at ALL transformational sectors including Space Race 2.0--the new reusable rockets from Space X plus a huge ramp in low space flight satellites for satellite broadband and satellite WiFi for air travel is hear and ramping. The Merrill Lynch analyst I follow in this space has the inflection point in growth hitting soon.

How to play? Well we don't have a lot of pubco plays...but we looked hard at Intelsat and their deal with Intel for using Intelsat's global spectrum with Intel. Stock ran up and then SPLAT...which is why we NEVER EVER chase stocks but particularly small cap/low volume stocks. I'll revisit this story in a few weeks when its washed out--it has abut $14 of cash per share coming from sale/JV of its satellite spectrum!

ON "Tax Reform"

 I use the quotations simply because the farther we get down the road here the more this plan is shuffling deductions and using caps and perhaps phase-in on tax cuts  to keep 50 votes in the Senate alive.

But to keep Tax Reform alive in the Senate the Tax Reform bill has to stay within $1.5 trillion of deficit spending over the next 10 years. Bear in mind the nonpartisan Tax Policy Center figures Republicans’ tax cut promises would cost some $5.5 trillion, meaning lawmakers need to come up with a whopping $4 trillion in savings to meet Senate reconciliation rules (i..e, to be able to pass a bill with just 50-yes votes)..

Behavior follows incentives, and the very real self-immolation that GOP House and Senate members running for office in 2018 would be subject to continues to sharpen "the mind."

The Kabuki theatre going on is rich...and useless unitl we get the actual GOP tax bill on Friday. 

But I stand by my analysis; the GOP rank-and-file AND leadership are more scared of going home without a Tax Reform bill and facing their constituents empty handed again than their fear of passing a lousy bill. But IF their math is 100% dependent on "dynamic scoring" and assuming corporate rate cut to 20% will ignite a trickle down capital spending orgy which unleashes a hiring frenzy (and therefor NOT exceed $135 billion in annual borrowing over the 10 year window) we should expect Friday's CBOT scoring of the tax bill to be the talk of the day.

I can just hear ultra-conservative Mike Meadows, the leader of the Freedom Caucus who shut down the Federal Government over "too much deficit spending"  saying "If we have to take on more painful debt to spark the next leg of this expansion, I'm willing."

NOTE: It's funny how staring into an existential political pit will change the "battle hardened" conservative fiscal spending principles..

Micron/Applied Materials/ASML/LRCX/OLED and Acceleris

Shares of Micron Technology (MU) are up $2.55, or 6%, at $44.20, after competitor Samsung Electronics reported Q3 results that indicated tight supply of DRAM and 3D NAND flash chips will continue into next year, bolstering the prospect of high prices and profits for them and Micron.

But this is also right in our sweet spot for 3D NAND capex and that means AMAT ACLS ASML and LRCX. Samsung's ramp of OLED capacity continues...which is LRCX and OLED and Coherent (COHR) which we don't own but are trying to

Key Point: I LOVE owning the high margin IP beneficiaries of the sweet spot of secular transformation!!!!

Stifel Nicolaus’s semiconductor equipment analyst in Korea, Patrick Ho, notes that out of $26.2 billion Samsung is planning to spend on production for the semiconductor division, 70% to 75% is to be spent on memory chips.

Writes Ho, "While there may be investor concern over the significant capex targeting memory, we believe that at this time and into at least 1H18, both memory segments (NAND and DRAM) will remain in short supply versus demand trends."

Reality: "Despite the new 3D NAND capacity that is likely coming on board in 2017 and 2018, demand will continue to outweigh supply through all of 2018 and possibly through 2019 as well. Management noted that 3D NAND capacity continues to be added in its Pyeongtaek campus."

Ho thinks your best bet, by the way, in equipment, is Applied Materials (AMAT): “We believe Applied Materials has the best exposure to both Samsung’s semi and display capex trends. We believe that Applied has strong exposure in Samsung’s 3D NAND build out and is a key supplier to its flexible OLED build out too!

Action to Take: SO DO I: the AMAT Story is $5.25 of Earnings in 2020...New Target $75 Buy Under $56

These slides from AMAT Investor Day in October describe almost our entire investment thesis for the next 6 months: The AI 2.0 Revolution is THE driver of hardware, Auto 2.0, software, semiconductors (3D NAND, GPUs and iOT), and long with the hypercloud service providers converting to 100G-200G-400G laser networking (aka Amazon AWS, Microsoft Azure, Alibaba and Google Cloud and AAOI) and Apple/Android conversion to OLED (OLED and LRCX), AI Facial Recognition/Artificial Reality run by laser VCSEL arrays sensors (LITE/FNSR) and 5G Wireless Broadband (Cavium) for the 3-5 years years.

LOOK at these secular growth rates!!!

MU/AMD/AMAT/LRCX/ASML/ACLS/INTC/NVDA  and KLAC All dominate pieces of this AI secular growth revolution, but AMAT MU LRCX NVDA AMD are growing the fastest.

IN the transformation to OLED, its AMAT LRCX and OLED leading the way with Coherent not far behind. 

.PS--I am at war with Coherent...we missed its first big ramp and then it got murdered in a quarterly miss after big run. Sometimes there is a stock that you have love/hate relationship with...that is COHR for me (on and NVDA of course). If it can break above old high...the OLED spend in 2018-2019 will give it one more run.

Apple $200 Is Coming --Our next opening in AFTER their earnings this week. 

  • Apple now has the lead in 3D sensing for facial recognition.
  • Apple is likely a year ahead of competitors in this area.

Apple (AAPL) is not the first company to develop 3D sensing technology. Google (GOOG), Intel (INTC), and Microsoft all developed 3D sensors for various mobile devices, including smartphones. However, Apple is the first to develop a reliable 3D sensor based platform for facial recognition and secure unlocking of a mobile devices--and that is just the start.

All mobile and home consumer digital devices are moving to cloud AI based Alexa like voice recognition and Artificial Reality/Facial Sensor interfaces. The X (10) phone is showing us the near future...and that consumers will pay >$1000 for a mobile device like they used to pay for a laptop (and still do with Macbooks). 

The Power of The Virtuous Cycle of Network Effects is here in Facebook, Amazon, Apple, Google and Microsoft (which we will play again with the 2x leveraged TQQQ) shortly

Wall Street last week marveled at the power of empire, as Apple’s iPhone X went on sale and quickly sold out, despite prices that start at $999 and run as high as $1,149.The moment was not only a thrilling turn in the tech landscape—phones now cost more than personal computers—it was also a testimony to the power of tech titans who continue to find more ways to milk a very loyal customer base.

My guess is that many people are trading up from an iPhone 6 or 7 to a pricier model ( I do have data from the research firm I founded ChangeWave Research to confirm this) showing that you can shake more shekels from the same people when they not only like you, but love and depend on you, as many iPhone addicts clearly do.

Apple will report earnings this Thursday after the market close, and Wall Street’s estimates and price targets have been on the rise of late. 

Action to Take : I'm going to go with a  "sell the news" event and wait to add a long OPTIONS..fingers cross.

But the big picture of last weeks melt-up of the giants theme is this: Exploiting a ready audience aka leveraging the value of network effects ("as the network grows linearly its value grows exponentially) was on full display in the earnings in ALL the megacap tech peers last week, particularly Amazon.com (AMZN), Alphabet (GOOGL), and Microsoft(MSFT) . Amazon’s revenue, reported on Thursday evening, came in about $2 billion above the high end of its own forecast, while its profit of 53 cents crushed estimates of about seven cents. The upside was enough to vault the stock 13% higher, to a new all-time high close of $1,100.95, the first time the stock had ever crossed over $1,100.

At the heart of the report was a speedup in Amazon’s online sales, which rose 22% versus 20% a year earlier. That speedup was at least in part a result of Amazon offering more goods to customers in its loyalty program, Amazon Prime, which features free shipping and other benefits, such as free music and video downloads.

The company’s amount of goods sold that are eligible for benefits under Prime has been on the rise, sharply. In a note to clients on Friday, analyst James Lee of Mizuho Securities USA, a bull on the stock, wrote that by his estimate, such goods have risen nearly 60% since the beginning of 2016. He noted that since Amazon introduced the service in China late last year, Prime is also lifting Amazon’s international sales, which rose 28%—very good for a still-young market for Amazon—compared with its 35% sales growth in North America.

THE MORE THEY SHOP in the Amazon world, the more people make it a habit of shopping there--duh!  There’s more room for Prime to work its magic, writes Lee. Such Prime-eligible products are only 13% of all the items that Amazon carries worldwide, by his estimate. But Prime members are 25% of Amazon’s customer base.

Key Point: Amazon will of COURSE do everything they can to pump up Prime selections to accommodate that expanding membership--think lower cost pharmaceuticals on PRIME!!!!

Something similar is happening with Alphabet’s Google unit, whose results also beat expectations on Thursday. Its cost to bring in advertisers— “traffic acquisition cost,” or TAC—keeps rising faster than its revenue. But the amount of advertising revenue that Google brings in—$24 billion last quarter—is still so large that it ended up delivering profit that was easily above what Wall Street expected.

This is just another example of an entrenched franchise with tremendous dominance continuing to pull in new business. Google’s sale of advertisements on desktop computers—now a nearly 20-year-old business—continues to grow, and runs at about $40 billion annually, Nowak noted, as Google continues to refine its technology to make keyword searches more and more relevant to advertisers.

If Google can do that with a musty old business,  just think “how long its innovation focus will enable it to grow its ‘younger’ businesses,” such as paid search on mobile phones and advertising on YouTube.

Last but not least, Microsoft chief Satya Nadella explained on Thursday that his company had hit a promised milestone early: Its cloud-computing business hit a $20 billion “run rate,” the amount it will generate annually in revenue if it keeps going at its current rate of growth. The Street sees in that the ability to add more products to its Azure cloud-computing service and to Office 365, its online productivity suite, to wring more dollars from the faithful.

Amazon, Google, and Microsoft are all examples of what we called in the internet age, network effects—the ability of a business to exploit its position in a kind of virtuous cycle. The payoff continues to astound Wall Street. To continue to build these virtuous cycle businesses they HAVE to spend $100 billion over the next few years on EVERYTHING we are invested in.

That includes AMD chips too!

ALL these new products AMD has launched has obviously been a wee chaotic for AMD and its customers. We have had a few head fakes with AMD..and made money on all of them.

AMD Action to Take: LET"S wait for the AMD bullish analysts to come to the rescue here...the valuation DID get ahead of itself because all the new products did not get out the door as some expected. 

But its November...if you own AMD in a taxable account I would take some long term capital gains especially if you can wash them with other losses. BUT...I have not lost faith in the AMD GPU markets. And the crypto currency markets have exploded again with CME futures coming soon so owners can hedge their $billions in crypto currency profits. I am hold onto my small amount of Bitcoin--if you own some I would too. Am I bitter I did not believe the story in 2010-11-12? Oh yea. 

The AMD chart is a complete disaster here...but as we know ONCE it jumps back above it's 200-day the algo black boxes fall in love with the stock again. AMD needs some love here for sure...but they are in too many of our secular growth spaces to NOT rebound IMHO.

Cheers...we are off the grid this week moving to our winter home up in Reno/Truckee...its time to trade my road bike for skis!

- Toby

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