Mad Hedge Technology Alerts!
Non-farm payroll matters.
The job numbers have serious consequences for the tech sector - the biggest being there will be no recession in 2023 because everybody has a job.
Not only does everyone have jobs, they are also getting double the wage gains the Fed forecasted at 0.5% annualized to 6% year over year.
The tech sector has gotten rid of many good-paying jobs, many of those jobs were fake jobs that were absorbed to hoard talent when rates were at 0%.
It’s interesting that many of these tech stocks have exploded to the upside upon announcing job cuts, meaning investors don’t view the cuts through the prism of lost revenue but rather increasing productivity and delivering added efficiency.
Now, the entire bond investing complex is waiting on a Fed cut, which is why as of yesterday, 4 quarter percent rate cuts were priced in.
Fast forward 1 day and Fed future pricing is now pricing in 3-quarter percent rate cuts as investors believe we will stay higher for longer.
Higher for longer is bad for tech shares.
This extinguishes any hope of reducing inflation in the medium term.
It could be that we only get 1-2 quarter-point rate cuts in 2023 if the bond market is correct.
The Nasdaq has performed exquisitely in 2023 gaining 15% so far amid a souring backdrop of shrinking margins, increasing interest rates, federal government mismanagement on an epic level, domestic banking contagion from regional banks, and geopolitical strife.
The not so bad – not so good situation in tech stocks has manifested itself in the best tech stock Apple, which reported earnings yesterday.
Apple’s earnings report validated what I am seeing in the data.
The report was nothing special but good enough to believe that tech will narrowly avoid a recession in 2023.
The balance sheet is so ironclad that Apple even initiated a stock buyback of $90 billion.
Not too shabby.
Granted, there are few that can wield a strong balance sheet in the ways CEO Tim Cook can, but that’s not taking anything away from him.
Apple also told us about the 975 million paying subscribers to their services and that’s 150 million more than one year ago.
The takeaway is that Apple has a highly loyal customer base that continues to drive its dollars into the ecosystem.
Customer retention is incredibly high because they deliver products customers want.
Even their flagship product the iPhone and its revenue was up 2% year over year and beat forecast by $2.5 billion coming in at $51.33 billion when overall revenue decreased year over year.
iPhone revenue is just over half of Apple’s revenue.
A recession data point would be one in which to expect negative growth from iPhone revenue, so low single digits are fine.
The bottom line is that the US economy added 253,000 jobs to the overall job market and the unemployment rate is defying gravity.
US consumers keep spending, spending, and spending more.
Tech has turned into a 7 stock market and generous shareholder returns.
I admit that 2% iPhone revenue growth isn’t eye-popping, but that is where we are at this point in a late economic cycle.
Squeeze the juice out of the iPhone before the next big pivot to the next technology.
Similar can be said about the job market, everyone is trying to make their last buck before this whole thing gets a reset with 0% Fed fund interest rates.
Many even wish that 0% rates were already here.
Tech stocks will grind up as investors will bid up tech stocks, because they believe the Fed will cut sooner than initially thought. We’ll go back to that narrative for better or worse.
Mad Hedge Technology Letter
May 3, 2023
Fiat Lux
Featured Trade:
(ALGORITHMS TAKE OUT ED TECH)
(CHGG), (ZM), (NFT), (CHATGPT)
Chegg (CHGG) is toast.
That is what artificial intelligence has done to their business model and we are in the early innings.
The company said to kiss growth goodbye.
Artificial intelligence is already putting a massive dent in some industries.
Education has changed dramatically in the past generation where more than half of Americans say a 4-year degree is not worth the price of admission anymore.
Now, moving forward, the little value extracted in terms of workable knowledge in the classroom is effectively zilch as generative artificial intelligence will do the job of a million university teachers for free.
There simply is no use case for taking geography studies or getting a basket weaving degree from Wesleyan College.
It doesn’t make sense anymore.
The scary thing is this is just the beginning and other industries are about to get t-boned as well.
Only the nimblest will survive.
Workers need to retrain, network, and preserve and expand skill levels.
Shares of virtual language-learning company Duolingo fell 9% while American depositary receipts tied to shares of London-based Pearson fell 12.5%.
Chegg offers subscription-based academic services that help students with writing and math assignments as well as study materials.
Management said the company didn’t see a significant effect on its business from ChatGPT until March, when the company behind the product, OpenAI, launched GPT-4.
Chegg said the popularity of ChatGPT among students is affecting its customer-growth rate.
The red alarm from Chegg and the subsequent selloff are among the most glaring indications that this isn’t some cute niche thing that can be downplayed or diminished.
AI is coming for most white-collar jobs and workers should be scared if not mortified.
Many of the job losses will occur in big corporations and America has some of the biggest and most profitable.
The tailwind for corporate management is that they don’t need to pay benefits or social payments to AI so big cost savings that will fall down to the bottom line.
Wall Street will be applying this technology to the utmost too.
To say this technology is transformative doesn’t do justice to the word transformative.
This isn’t going to be an all tides lift all boats scenario.
Bloomberg news noted that nearly 40% said that children currently in elementary school will be best off with a job in health care if they want to avoid being displaced by artificial intelligence.
What about tech?
There will be serious winners and losers as this shakes out. It’ll be like a slow-motion car crash for workers while tech firms profit in real-time.
Technology stocks will hollow out similar to how we see the behemoths pull ahead lately muscling out smaller companies with their solid balance sheets.
This has essentially become a 7-stock tech sector.
Tech companies will absolutely be chomping at the bit to fire computer engineers whom many command in excess of $150,000 in pre-tax gross salary.
Of course, the lower-level computer engineers will be thrown by the wayside first then slowly the terminations will reach higher up the value chain.
If a computer engineer wants to survive in the future, they will need to dive into generative artificial intelligence themselves which will easily offer the highest salaries in technology.
AI is now the new bitcoin and the best talent will flood that space. It’s easy to see how starting salaries with start with a 3 and end with 5 more numbers.
As for tech investors, this shows that getting into these little micro tech stocks is more and more treacherous as the landscape has dictated a hard future ahead.
That is why I tripled up on a bearish position in Zoom technologies (ZM). All big tech companies have some sort of version of video conferencing tech and it is easy to replicate. Stay with the strongest during this bank crisis.
