Mad Hedge Technology Letter
August 28, 2023
Fiat Lux
Featured Trade:
(ALL SYSTEMS GO FOR INSTACART)
(IPO)
I wasn’t surprised to see grocery tech platform Instacart announce that they are going public soon.
That seems very much the right strategy for them at this point of time in their growth cycle.
I highly doubt that this will kick start the IPO market because high-interest rates are prohibitive to young tech companies growing.
Funnily enough, Instacart is nothing new so it won’t mesmerize the incremental investor with a flashy business model they’ve never seen.
They were founded in 2012 and experienced a pandemic bump in sales as citizens were arbitrarily locked in their apartments.
Naturally, the dynamics behind the living situations meant that online grocers rode a lucky streak to profits and Instacart had some gaudy growth numbers for the a few years.
Fast forward to today, and people aren’t in lockdown again even though with U.S. elections coming up next year…things could get interesting.
Conditions today dictate that Instacart can kiss the massive growth numbers goodbye, and goodbye forever as management basically translated that to potential shareholders during the IPO roadshow.
The San Francisco-based company also revealed it turned a profit in the first half of the year which should be the high water market forever for this digital grocer.
Behind them are dozens of startups whose IPO aspirations have been stymied by the slowest year at this point for new listings since the depths of the financial crisis in 2009.
What kind of bad news am I talking about?
The company cut its internal valuation three times last year to about $13 billion by last October.
A half-dozen acquisitions have contributed to Instacart’s growth. Its largest was the $350 million purchase in 2021 of Caper AI, which offers retailers “smart” shopping carts that eliminate the need for customers to individually scan groceries or to line up at checkout.
The consumer-facing Marketplace is powered by more than 600,000 independent contractors — known as shoppers — who pick up items for consumers at more than 1,400 retailers including Kroger, Publix, and Walmart, across more than 80,000 stores in North America.
But growth in this core part of Instacart’s business has slowed to a snail's pace. Orders remained relatively consistent from 132.3 million for the six months ended June 30 2022 to 132.9 million for the same period in 2023. Gross transaction value increased 4% to $14.9 billion for the first half of this year, according to the filing.
Net income grew as a percent of gross transaction value from a loss of 0.3% in 2021 to a profit of 1.5% in 2022.
In conclusion, this reminds me of a liquidity grab for the Silicon Valley venture capitalists who own this company.
The company’s stock price will most likely grind lower as expenses explode.
The VCs rather liquidate this holding rather than tap the expensive debt markets.
Don’t forget that Instacart sub-contracts people to fetch the groceries and hard to see keeping a lid on those types of expenses.
Going public could result in around $2 billion in liquid cash infusion for the venture capitalists which is a godsend in today’s world.
They could just park the capital in 6% yielding fixed income instead of holding a sinking valuation in a company that likely will never do better than it did in 2021.
Retail traders should wait for any spike in this stock, and then sell this name to moon because I don’t see any sustainable growth on the horizon as their gross transaction volume has already topped out at a paltry 4%.
“A diploma is a dunce hat in disguise.” – Said German-American Tech Investor Peter Thiel
Global Market Comments
August 28, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE FAILED RALLY)
(SPY), (TLT), (FCX), (TSLA), (AAPL), (UPS)
CLICK HERE to download today's position sheet.
Market’s tried to rally last week….and failed.
The reason, of course, is Fed governor Jay Powell’s comments that interest rates may have to stay higher for longer. He seems hell-bent on reaching his 2.0% inflation target, down from the current 3.2% and well off the 9.0% high.
That puts off any rally in the interest rate-sensitive sectors, which is almost everything, by three to six months. But then, markets discount fundamentals by six to nine months in advance.
You do the math.
That means a monster rally in all financial assets should ensue sometime in September or October that could last a decade.
What a surprise!
The possibility that the next rally will be explosive is bereft of doubt. A record $5.6 trillion is now sitting on the sidelines ready to dive into risk assets on the slightest pretense. We might be in for another January 4 repeat. That includes funds in money market funds, overnight bank deposits, 90-day T-bills, IRAs, 401Ks, and cash under the mattress.
It's all very reminiscent of 1982 when we enjoyed the exact demographic tailwind as we are enjoying now. An 18-year rally followed and took the Dow Average up 20-fold.
The United States has by far the strongest major economy in the world for a reason. A 3.5% Headline Unemployment Rate, 5.25% overnight interest rates, and a 3.2% inflation rate are supposed to be mathematically impossible, yet here we are.
Did I mention that 2024 is an election year? That's when the economic data magically improve, as they have during every election over the past 200 years. Stock investors notice this.
As I spent all day every day and well into the night conducting research, I noticed a curious development. All the bears seem to live on the East Coast, while those in Silicon Valley are the most bullish I’ve ever seen.
That’s because we here in California see the hyper-accelerating technology in every meeting, with every human contact, and right on our own doorsteps. We are the beta testers for the technology that the rest of the country and the world won’t see for a few years.
While the nation is debating climate change, there is a “Robot War” taking place in San Francisco over how rapidly to permit the expansion of the self-driving taxi fleet, now capped at 1,000.
The fact that their accident rate has been near zero, far lower than human-driven vehicles, is a major point in their favor. I’m getting used to seeing no driver in the car next to me.
Walked into a McDonald's or a Taco Bell lately? It’s all computers. My theory as to why UPS agreed to such a generous 40% pay increase over five years for 340,000 workers is that when the next contract comes up for negation, they will have gone all robotic by then.
Autonomous driving, artificial intelligence, quantum computers are all still in their infancy and are in no way reflected in share prices.
In the meantime, keep massaging those 5.25% 90-day T-bill rates and enjoy your summer vacation. But the time to go all in with risk is approaching.
So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
The Oracle Speaks! Fed Governor Jay Powell might as well have been reading me the New York telephone book when he indicated that “Interest rates may have to stay higher for longer” during his Jackson Hole speech. The Fed only knows two speeds: too slow and too fast. The bears are coming out of the woodwork once again. Look for lower lows to buy into for all asset classes. Start positioning yourself for a monster yearend rally.
Markets Will Snore Until September 1 Jobs Report. The August Nonfarm Payroll report is expected to come in at a weak 175,000. Enjoy the last week of summer.
The US Budget Deficit is Climbing Once Again, after a super spike in 2020. Recent environmental spending has added another trillion dollars to the bill. That will seem a bargain if we can’t slow down exploding global temperatures….quickly. It was 120 degrees in Italy this summer. Mama Mia!
Has Apple (AAPL) Topped Out? With no new products on the horizon and interest rates rising, the bull market in Apple shares may have called it a day at last month’s 200 peak. As with the rest of the “Magnificent Seven,” there was a giant pull forward of performance into the first half of this year. All of the stock’s gains have been through multiple expansions, regaining much of what was lost in 2022.
Existing Home Sales Drop Again, demolished by record-high mortgage rates. July saw sales decline by 2.2% to a six-month low on sales of 4.15 million units. Home resales, which account for a big chunk of U.S. housing sales, fell 16.6% on a year-on-year basis in July.
Ten-Year Treasuries Hit New 16-year High, at 4.32%. We could be approaching a bond-selling climax around Jay Powell’s Jackson Hole Speech on Friday and the buying opportunity of the decade.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, August 28 at 8:00 AM EST, the Dallas Fed Manufacturing Index is out.
On Tuesday, August 29 at 8:30 AM, the US JOLTS Job Openings Report is released.
On Wednesday, August 30 at 2:30 PM, the ADP Employment Change is published.
On Thursday, August 31 at 8:30 AM, the Weekly Jobless Claims are announced. Personal Income & Spending are also announced.
On Friday, September 1 at 2:30 PM, the Nonfarm Payroll Report for August is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, The Diary of a Mad Hedge Fund Trader is now celebrating its 15th year of publication.
During this time, I have religiously pumped out 3,000 words a day, or 18 newsletters a week, of original, independent-minded, hard-hitting, and often wickedly funny research.
I spent my life as a war correspondent, Marine Corps combat pilot, Wall Street trader, and hedge fund manager, and if you can’t laugh after that, something is wrong with you.
I’ve been covering stocks, bonds, commodities, foreign exchange, energy, precious metals, real estate, and even agricultural products.
You’ve been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.
I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration's economic and trade policies. There is no profit in taking a side.
The site now contains over 20 million words, or 30 times the length of Tolstoy’s epic War and Peace.
Unfortunately, it feels like I have written on every possible topic at least 100 times over.
So, I am reaching out to you, the reader, to suggest new areas of research that I may have missed until now which you believe justify further investigation.
Please send any and all ideas directly to me at support@madhedgefundtrader.com/, and put “RESEARCH IDEA” in the subject line.
The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.
Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product’s quality, to your benefit. Notice how rapidly my trade alert performance is going up, now annualizing at +47% a year.
This originally started out as a daily email to my hedge fund investors giving them an update on fast market-moving events. That was at a time when the financial markets were in free fall, and the end of the world seemed near.
Here’s a good trading rule of thumb: Usually, the world doesn’t end. History doesn’t repeat itself, but it certainly rhymes.
The daily emails gave me the scalability that I so desperately needed. Today’s global mega enterprise grew from there.
Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch is read in over 140 countries by 30,000 followers. The Mad Hedge Technology Letter, the Mad Hedge Biotech & Health Care Letter, Mad Hedge AI, and Jacquie’s Post also have their own substantial followings. And the daily Mad Hedge Hot Tips is one of the most widely read publications in the financial industry.
I’m weak in distribution in North Korea and Mali, in both cases due to the lack of electricity. But that may change.
One can only hope.
If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post.
It urged readers to buy gold at $950 (it soared to $2,200), and buy the Euro at $1.50 (it went to $1.60).
Now you know why this letter has become so outrageously popular.
Unfortunately, I also recommended that they sell bonds short. I wasn’t wrong on that one, just early, about eight years too early.
I always get asked how long will I keep doing this?
I am already collecting Social Security, so that deadline came and went. My old friend and early Mad Hedge subscriber, Warren Buffet is still working at 92, so that seems like a realistic goal. And my old friend, Henry Kissinger, is still hard at it at 100 years old.
Hiking ten miles a day with a 50-pound pack, my doctor tells me I should live forever. He says he spends all day trying to convince his other patients to be like me, and the only one who actually does it is me.
The harsh truth is that I don’t know how to NOT work. Never tried it, never will.
The fact is that thousands of subscribers love me for what I do, pay for me to travel around the world first class to the most exotic destinations, eat in the best restaurants, fly the rarest historical aircraft, then say thank you. I even get presents (keep those pounds of fudge and bottles of bourbon coming!).
Given the absolute blast I have doing this job; I would be Mad to actually retire.
Take a look at the testimonials I get only on an almost daily basis and you’ll see why this business is so hard to walk away from (click here for those).
In the end, you are going to have to pry my cold dead fingers off of this keyboard to get me to give up.
Fiat Lux (let there be light).
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“The most dangerous word in the English language is “cheap”” said a
hedge fund manager friend of mine.
(FOR HIS 18TH BIRTHDAY MY SON WANTS A *%$#&?)
August 25, 2023
Hello everyone,
My son, Alex, turns 18 next month and so is officially classed as an adult. So, I asked him what he wanted for his significant birthday.
I expected the most common requests: money, new iPhone, clothes, etc.
But he responded: a trading account in his name (which I will fund together with his savings)
I said, ok, that’s easy. Did anyone here ask for that from their parents when they turned 18?
But after we open that account, the real education starts. How many parents have tried to advise their adult teenagers how to manage their finances only to be met with offhand remarks, ridicule, rebukes, or sometimes even just plain disinterest? I imagine many parents have been blindsided by this old comment from young adults: “You invested in this stock/investment, and lost money, so why should I listen to you.”
Thankfully, my son and I have come to an understanding, whereby he will liaise with me before he invests/places a trade. This ensures that we, as a family, are moving in the same direction and are not at odds with one another, which can make achieving an end goal very difficult.
There are dozens of books in the world on finance and how to manage your money. But if you wanted one for young adults, I would recommend you look at the following: I Want More Pizza: Real World Money Skills for High School, College, and Beyond by Steve Burkholder.
Primary topics discussed include saving, spending, prioritization, goal setting, compound growth, investing, debt, credit cards, student loans, mental blocks, and taking real-world action.
Teaching young adults about anything, especially financial education, should be done in small chunks of time. Focus for about 20 minutes on a topic and then break. This ensures what is shared is taken in and processed. After all, does an 18-year-old want to hear your well-meaning advice for extended periods? Most young adults are easily distracted by other things going on in their lives.
The important things a teenager turning 18 can do/should know:
1) Open a bank account.
2) Open a credit card.
3) Understand their expenses.
4) Avoid debt at all costs.
5) Understand that there are dozens of ways to make money.
6) Get a job.
7) Be Careful Who You Trust.
8) You Don’t Have to Have It all Figured Out.
9) Take responsibility for Your mistakes.
10) Be kind to others and yourself.
I will also encourage Alex to keep a trading journal so that he can see where his profits and losses occurred. And he can also make notes on each trade he does. It’s a good habit to start and keep.
Beside the Thames in Twickenham, U.K. this past summer
The Fed remarks at the Jackson Hole Symposium on Friday could cause some volatility in the markets. Hang on!
Wishing you all a wonderful weekend.
Cheers,
Jacquie
(MSFT), (AAPL), (GOOGL), (AMZN), (CRM)
In the span of just nine months, the world of artificial intelligence (AI) has seen significant shifts. From the initial excitement of innovations like ChatGPT to more recent controversies, AI’s journey has been nothing short of captivating.
While early missteps, such as Bing’s ex-chatbot Sydney’s quirky declarations, raised eyebrows, the broader implications of AI have caught the attention of industry and government alike.
With all the conversations about potential regulations and concerns about AI affecting job markets, one might think that the enthusiasm for the technology would slow down. On the contrary, the adoption of AI in software and daily applications is advancing at an astonishing pace.
One sector emerging as the epicenter of this evolution is the workplace, and surprisingly, Microsoft (MSFT) is leading the charge.
A few years back, many would not have predicted Microsoft's dominance in the AI space. Yet, with a strategic investment of $13 billion, Microsoft's partnership with OpenAI has redefined its trajectory. This alliance has enhanced platforms like GitHub and Azure, giving Microsoft a competitive edge against giants like Amazon and Google.
Microsoft’s ascent in the AI sphere isn’t a sudden leap; it’s the result of deliberate strategizing and innovation.
Their journey feels like an endurance race, with the company accelerating dramatically in recent months. While the dream of AI traces back to a 1956 Dartmouth College workshop, Microsoft was already exploring AI's potential by 1991 through its innovation hub, Microsoft Research.
Despite a somewhat muted impact in the early days, Microsoft's rejuvenated strategy focused on humility, daring, and innovative leaps into areas like cloud computing.
Strategic acquisitions, such as LinkedIn and GitHub, further positioned Microsoft as a formidable player. The result? A growth from a $300 billion market value to an impressive $2.5 trillion.
Generative AI might hold the key for Microsoft to surpass even the $3 trillion mark, a threshold currently only achieved by Apple (AAPL). McKinsey's projections suggest that such technology could boost the global economy by $2.6 trillion to $4.4 trillion annually by enhancing everyday operations.
While tech stalwarts like Amazon (AMZN), Google (GOOGL), and Salesforce (CRM) are quickly integrating this technology, Microsoft's diverse tech offerings place it in a dominant position.
Healthcare, a sector urgently seeking the benefits of AI, sees a promising partnership between Microsoft and Epic. Their combined strategy utilizes Microsoft’s robust cloud and AI capabilities and Epic’s comprehensive knowledge of healthcare systems. Their collaborative aim is to embed conversational, ambient, and generative AI into Epic’s electronic health records. This initiative aims to transform patient care, streamline operations, enhance healthcare experiences, and solidify the financial foundation of healthcare institutions.
In their joint venture, Epic and Microsoft have unveiled tools like the advanced Note Summarization tool built on the AI-enhanced Epic In Basket, tailored to enhance physician and nurse productivity. By facilitating quicker documentation and offering AI-powered text suggestions, this tool promises to revolutionize healthcare documentation.
Furthermore, an improved version of Nuance's Dragon Ambient eXperience (DAX) tech is now integrated with Epic’s platforms, ensuring a more fluid workflow experience. On the administrative side, the partnership promises transformative shifts in revenue cycle management.
Through the elimination of manual processes, Epic's new AI solution introduces smart medical coding suggestions, streamlining and heightening the precision of billing procedures.
With Azure OpenAI taking the lead, Epic is also delving deep into clinical research, striving to bridge clinical evidence gaps and provide insights into rare diseases.
This integration of Azure OpenAI and Nuance's technologies within Epic underscores the transformative potential when tech behemoths collaborate. Such partnerships hold the promise of innovative AI solutions that can reinvent industries for the betterment of society.
However, it's crucial for investors to look beyond just the promise and understand the landscape.
By 2025, the U.S. could face a shortage of nearly 90,000 physicians. Additionally, the rising trend of clinician burnout is concerning.
On the operational front, almost 25% of national health expenditure is directed toward administrative costs—a significant portion that AI could optimize.
Recent discussions, like those between the UPMC Center for Connected Medicine and KLAS Research, underscore the healthcare industry's pressing need for AI. From enhancing diagnostic imaging to patient engagement, AI's potential is being eagerly explored, with clinical research taking center stage.
Microsoft and Epic’s collaboration is noteworthy here. For instance, their recent integration of Azure OpenAI into Epic's EHR introduces automatic message drafting, a futuristic leap for healthcare communication. The inclusion of natural language capabilities in Epic’s SlicerDicer and collaboration with Nuance further emphasize their commitment to advancing healthcare with AI.
But while AI offers a myriad of opportunities, it's essential to approach with caution. AI's potential risks, from propagating misinformation to its impact on employment, cannot be ignored. The balance between leveraging AI's benefits and ensuring responsible development is paramount for a future where technology serves humanity sustainably.
Overall, the nexus of AI, healthcare, and corporate collaborations presents a captivating narrative for investors. As Microsoft and its peers navigate this evolving landscape, staying informed will be critical for those looking to invest in the future of healthcare and technology.
Mad Hedge Technology Letter
August 25, 2023
Fiat Lux
Featured Trade:
(ANOTHER LOW BLOW FOR TECH)
($COMPQ), (NVDA)
The almost four-year “transitory inflation” is a stark reminder that it isn’t smooth sailing yet for tech stocks ($COMPQ) after a glorious first 7 months of the year.
In hindsight, it appears more and more as if the great outperformance of the first 7 months in tech stocks was mainly due to a mean reversion after 2022 another surge helped by Nvidia’s (NVDA) AI hype.
The last 4 months of the year don’t appear as if these two tailwinds will light rocket fuel under tech stocks.
It’ll be harder to make money without those two turbo boosters.
Today tech got even more bad news as Federal Reserve Chair Jay Powell said the central bank is "prepared to raise rates further."
The hurtful part of this for tech stocks is that Powell’s comments absolutely have a knock-on effect to tech products.
Who wants to add that extra layer of anti-viral software protection when the budget is tight?
Powell is narrowing the goalposts for tech companies.
Which Tick-Tock influencer is going to re-up to the better iPhone when they can’t afford it?
According to Reuters, Americans are now paying around $800 per month extra for the same daily necessities they paid for before March 2020.
That is $800 that could possibly go into more tech hardware and software that isn’t.
Powell doubled down on crushing inflation saying it is the “Fed's job to bring inflation down to our 2 percent goal, and we will do so.”
Right away we saw Fed futures expectations adjust to this new information with the “higher for longer” mantra taking hold in reality.
The consensus is now that the first rate cut will be sometime in the summer of 2024 of .25%.
Traders should remember that the first rate cut was priced in at the end of this year just recently.
The Fed has gotten more hawkish lately and that is demonstrably negative for the short-term trajectory of tech stocks.
In 2023, accelerating US economic growth of 2.4% has presented a challenge to the Fed on several levels, with the Fed chair noting the overall economy "may not be cooling as expected."
And the strength of the labor market has been at the center of this challenge.
While monthly job gains have cooled through the summer, Powell said Friday the labor market's rebalancing "remains incomplete."
In turn, wage pressures have moderated.
The Fed really has two problems on its hands as it seeks to induce a recession – full employment and blistering economic growth.
The fact is that the stock market and the economy have handled these itty bitty .25% interest hikes gracefully.
That would hardly be the case if rates were hiked 5% at one time.
Businesses have had time to adjust to the new normal and so has the tech industry by firing a swath of ineffective employees.
The net result of this is bad for technology stocks in the short term, but staving off a recession is also in the interest of the tech sector as well.
I expect tech firms to keep shedding the fat off their business model as we barrel into sink-or-swim times.
There won’t be excess money sloshing around in the system for the foreseeable future and tech bankruptcies should rise.
That doesn’t mean tech stocks will crater, but it does mean many business models need to consolidate before another move up.
The real weak hands will finally get flushed out.
Tapping the debt market because of poor management decisions is now route one to bankruptcy and that hasn’t been the case in technology companies for a long time.
