The one sound bite that really jumped out at me on Amazon’s earnings calls that sums up the zeitgeist right now in the tech sector is when CEO Andy Jassy said “customers are looking for ways to save money however they can right now.”
Savings money is foreign to growth tech, but investors should get used to the new Silicon Valley.
When the success of a tech firm is utterly reliant on mass volume of sales, this isn’t the type of trend that will drive earnings higher in the future.
I am not blaming Amazon for customers pinching pennies.
It has more to do with the generally macro malaise that US consumers are facing with the explosive price rises of the last few years.
There is no point to rehash about inflation, but the net effect is that there is less opportunity for these ecommerce companies to flog products.
The US consumer is even more reliant on debt to finance purchases than before and smart companies like Apple (APPL) have rolled out savings accounts because they are aware that the fight for deposits is up for grabs after the banking contagion.
Even though AMZN delivered us a great quarter in terms of profitability and top line growth, the larger takeaway was the uncertain path going forward.
Amazon CFO Brian Olsavsky told investors on the company's earnings call AWS customers are continuing "optimizations" in their spending.
The CFO described the first quarter as “tough economic conditions.
Revenue in Amazon's AWS unit grew 16% during the first quarter, down from an annual growth rate of 37% seen in the same quarter last year.
Disclosure that sales growth at AWS had slowed further in April sets the stage for AWS’s weakest growth rate since Amazon began breaking out the unit’s sales.
Amazon’s advertising business continues to deliver robust growth, largely due to ongoing machine learning investments that help customers see relevant information when they engage.
US customers are moderating spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty.
A little bit of a mixed bag, but disappointing guidance in AWS really sticks out like a sore thumb.
As we exit the bulk of big tech earnings, it is clear there is quite a bit of runway left for big tech shares to go higher.
I can’t say the same for every tech stock, because growth stocks have a different set of challenges that they haven’t been able to overcome.
Amazon still posted great earnings and investors should absolutely look to buy shares on the dip.
Even at less than 100%, AMZN is still worth owning over a lot of SPACs, growth tech, or emerging tech.
What we are seeing now are these behemoth tech companies leveraging their balance sheet in an interest rate matters world which is why small companies can’t compete anymore.
Although not technically monopolies, some of these tech firms are getting darn close with their closed “ecosystems.”
Buy AMZN on the next dip.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-28 14:02:142023-05-02 00:49:49Buy Amazon on the Dip
Below please find subscribers’ Q&A for the April 26 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Las Vegas, NV.
Q: Would you start adding to The Russell 2000 (IWM) around here?
A: No, the Russell 2000 is the most sensitive to market action and the most sensitive to an economic downturn, which it seems we have already entered. And you don’t add positions one week into the downturn, you do it like 3-6 months into the downturn. So, I would not touch (IWM) right around here.
Q: Are you buying more First Republic Bank (FRC) down here?
A: No, at this point the stock is a no-go. It is a ripe takeover target for someone, and the risk is, the takeover price is lower than your cost. I don’t understand why First Republic is down this far—like 97% — and when I don't understand things, I stay away. I had never seen a bank go under before that didn’t have bad loans, nor has anyone else. A lot of people were asking if they should double up, we went from $16 to $6 in a day, and the firm answer is that I just don’t know. The fundamentals of the company by no means justify that discount, it must be discounting something terrible that we haven’t heard yet. So I’m going to stay away and look for better trades to do.
Q: I missed the Tesla (TSLA) trade on Friday, should I be looking to buy the dips down here?
A: Yes, I would. I put out a May $110-$120 vertical bull call debit spread on Tesla, which is now only 3 weeks to expiration. Remember, at Tesla’s growth rate, the company is now 12% larger than it was when it hit the $104 bottom in January. I should point out that once our trade alert went out, it literally triggered billions of dollars worth of market action and crushed volatility. It took the implied volatility on Tesla options down 10% on that one day. So, with implied volatility this low, I’m not sure you can get Tesla done at any price that makes sense—but if you can, I’m all for it. As for the short, we’re almost in max profit on our Tesla short position. It’s cratered about $35 since we put it on, so I wouldn’t be chasing that one.
Q: Is there a reason why Freeport McMoRan (FCX) is not progressing upwards?
A: Recession fears—the long-term case for copper is spectacular— I’m looking for $100 in (FCX) a couple years down the road. With the short term, all they see is recession and US government debt default, and as long as those two things are overhanging the market, all of the economically sensitive plays are going to go down. You’re not going to get gains, you’re going to get losses. If you want to know how the debt default is working out, you can write a letter to Kevin McCarthy in Washington DC and ask him what he’s going to do. The stock market doesn’t like it for sure, so I’m inclined to go back to 100% cash and duck that whole cluster.
Q: Can China survive without foreign investment?
A: Yes, with a much lower standard of living, and technology that is greatly lagging behind the US. The Chinese use all the foreign investment going on to upgrade their own technology—it's very common for a Chinese worker to work for an American company for a year and then walk across the street and work for their main Chinese competitor. That is a major means of technology transfer. Without that, they fall way behind, and they know it. You can’t copy your way to leadership, as Japan found out to their great expense in the 1990s. You can add that to the long list of reasons why China will never invade Taiwan. Not only have they cut off their food and energy supply, but also their technology supply.
Q: Would it be safe to deposit my money with Apple (APPL) who’s offering a 4.15% interest rate?
A: Yes, Apple has about $150 billion in cash on the balance sheet to back up any deposit runs. I imagine Apple financially is probably far safer than any small regional bank in the US. But, there are better things to do than Apple, and that’s the good old 90-day US T-bill. That bill never defaults; it’s offering 5.2% — it may even be a little bit higher after May 3 when the Federal Reserve raises interest rates by 25 basis points.
Q: Aren’t earnings coming in better than expected?
A: Yes they are, however, the earnings season was frontloaded with the best-performing sector in the market—i.e. the banks—which you were 100% long of until last week, and the weaker performers are next. That seems to be what the stock market is telling us with the selloff, and of course, the weaker performers are technology stocks. So that's why I piled on the shorts (especially in the Invesco QQQ Trust), that’s why I cut back position sizes, it’s time to take the money and run.
Q: How much longer do you plan to do this?
A: Well Warren Buffet is 92 and he seems to be doing just fine. Joe Biden plans to be President of the United States until he is 86. Work for these men is their lives and they will never quit. The same is true for me. If they can do that, I can certainly run Mad Hedge Fund Trader until I am 92, or for 21 more years. Besides, what else would I do? I’m terrible at golf, I hate pickleball, Bingo is boring and is usually rigged, and all the other stuff that people my age do doesn’t appeal in the least.
Q: Are there ETFs that mirror the rates of 90-day T-bills, or is it better just to buy direct through my broker?
A: It’s always better to buy T-bills directly because your ETF does not work for free. They’re taking out fees somewhere, even if you can’t see them, even if they’re not in the marketing material—nobody works for free; except the US government, it would seem. So buy directly from the US government. If you own the T-bills and your institution goes bankrupt, you can always get your T-bills back in a couple of days. If you own their ETF that mirrors the T-bill, that can become a complete loss and you’ll get tied up in bankruptcy proceedings that last three years (and you may or may not get your money back.) So T-bills directly are the gold standard, I would buy those if you’re looking for a cash alternative.
Q: What about Rivian (RIVN)?
A: It’s red meat in this kind of market—don’t touch it. If the entire car industry is rolling over, including Tesla, don’t expect Rivian to outperform in that situation. As for Amazon (AMZN), like all tech stocks, I’m going to wait for the current selloff to work its way for its system, but then it’s probably a great long term buy and a two-year LEAPS.
Q: What’s your estimate for S&P earnings?
A: I’m at $220 a share which today gives us a multiple of 18.73, which is the middle of the recent range. We may drop a point or two from there, but that’s close enough for the cigar.
Q: Won’t wider credit spreads hurt iShares iBoxx $ High Yield Corporate Bond ETF (HYG)?
A: Yes, for the short term, but you’re being compensated for that by the 8% yield; and you’re buying junk bonds not for where they are for the next month or two, but where they are for the end of the year, which would be at least 10$-15% higher than they are now, so your total “all in” return might be as much as 25%. Not bad.
Q: What’s your thought on the Salesforce (CRM) drop?
A: I’ll buy it in about 3 months, once the next tech washout is finished and they’re throwing these things out with the bathwater.
Q: Do you think iShares 20 Plus Year Treasury Bond ETF (TLT) will trade higher if the market collapses?
A: Yes it will; that is your classic flight to safety out of stocks into bonds. We haven’t seen it in quite a while because both of them have been moving up and down together.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Playing the Penny Slots in Las Vegas is Definitely NOT my Retirement
https://www.madhedgefundtrader.com/wp-content/uploads/2023/04/john-thomas-penny-slots.jpg212260Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-28 13:02:442023-04-28 14:27:44April 26 Biweekly Strategy Webinar Q&A
This is a seven-stock tech market and there is no point to getting exotic and buying something aside from these 7.
That is what the price action is telling us.
Four of the seven are no other than tech overlords Alphabet (GOOGL), Amazon, (AMZN), Microsoft (MSFT), and Meta Platforms (META). These four Big Tech stocks alone account for 41% of the S&P 500's 2023 gain.
The other three are Apple (AAPL), which reports next week, Nvidia (NVDA), and Tesla (TSLA) stock.
These seven account for 86% of the S&P 500's 2023 gain.
These seven Big Tech stocks have essentially made the market this year and everybody else is dragging behind kicking and screaming.
Part of the great performance has to do with the market's oversold nature in 2022.
Rarely does a market operate at the extremes for so long.
These seven have done more than bounce back.
The January Effect is a seasonal increase in stock prices throughout the month of January. The increase in demand for stocks in January is often preceded by a decrease in prices during the month of December, in part due to tax-loss harvesting.
Second, many of these tech companies have been aggressively cutting costs.
I would even say again that Facebook cutting 25% of staff since 2022 is not enough.
Get rid of 80% like Twitter did.
Even more important, the world's most advanced AI models are coming together with the world's most universal user interface - natural language - to create a new era of computing.
Microsoft helped kick off Big Tech's AI obsession with its multi-year, multi-billion dollar investment in ChatGPT developer OpenAI.
MSFT has since implemented versions of OpenAI's technology in its Edge browser, Bing search engine, Microsoft 365 productivity software, and cybersecurity offerings.
Microsoft leading the AI means that rival Alphabet's Google (GOOGL) is playing catch up. Amazon (AMZN), meanwhile, is working to bring generative AI to its services, while Facebook parent Meta (META) is piecing together teams to kick-start its own efforts.
And while Microsoft’s stock has seemingly benefited from both the AI hype and overall market rebound after a rough 2022, the company's main growth driver continues to be its cloud computing efforts in its Azure unit.
But that growth has drastically cratered over the last year. In Q3 2022, Microsoft reported Azure growth of 46% year-over-year. But that's since fallen each quarter, landing at 27% in Q3 2023.
Part of the reason for this decline was large customers pulling back on spending as higher interest rates challenged global growth. Microsoft is also contending with scarce PC sales, as demand from consumers and business customers falls from pandemic-era highs.
It’s easy to say that tech has fared quite well this year.
However, peel back the layers and the lack of participation in this tech rally is highly worrisome.
In a winner take all economy, we have never been reliant on a small group of stocks to save us from collapse.
Interest rates as high as they mean that without a strong balance sheet, it is tough sledding out there for the growth companies.
In the short term, I fully expect tech companies with poor fundamentals to struggle and show minimal price appreciation as recession risks pile up.
These 7 should be a fortress for investors looking to protect their wealth.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-26 16:02:142023-05-02 00:40:32The Fortress
As I glance up at my trading screen this morning and I see First Republic Bank (FRC) shares scoring hot, I know it means only one thing for tech stocks ($COMPQ) and that’s nothing positive.
Tech was trusted as the safety ground for investors during the global bank contagion that wreaked havoc on the supposed jewels of western banking like Credit Suisse in Switzerland.
It wasn’t supposed to happen like this.
Instead, investors coalesced around tech shares and precious metals.
They benefited as they caught a serious bid up in price.
That’s all unwinding as FRC prepares for its earnings report which most likely will signal that the worst of the storm has passed.
That’s on the heels of “too big to fail” banks like JP Morgan, Bank of America, and Wells Fargo reporting better than expected.
April will most likely turn into quite a dud for tech shares which is why I have cooled it on issuing trade alerts.
To prevent panic from spreading, governments and central banks stepped in literally overnight and offered a lifeline to financial institutions delivering historic rescue packages and emergency deals.
Western taxpayers bailing out the institutions has been a common theme since 2001.
Eventually, UBS, Switzerland’s biggest bank, was required by the government to buy its long-time rival Credit Suisse for three billion Swiss francs ($3.25 billion).
Clearly, failure is not an option. The impact would be devastating not only for Switzerland but for the global financial system. It should not be forgotten that 15 years ago, UBS itself needed rescuing by the Swiss government and central bank.
This doesn’t necessarily stop what was happening before meaning high indebtedness, excessive risk-taking, unreasonable exposure to liquidity risk, mismatch between assets and liabilities, poor investment performance, mismanagement.
Customer trust eroded for one sector means that often another sector wins in the short-term with capital flight hitting tech shares.
Some days it's important to notice that Apple shares could act as a second bank account.
APPL also rolled out a new savings account delivering Apple customers 4.15% of interest on their money. That was a smart move by CEO Tim Cook.
Now an unhealthy mix of soaring inflation, rising interest rates, and weaker economic growth could leave banks facing new problems, ranging from steep losses in bond value to higher funding costs and lower loan demand.
After the acute banking stress of the past weeks, a credit crunch could be looming. To adjust to an increasingly unfavorable macroeconomic context, banks have already substantially tightened their credit standards for all loan categories. But that is an additional blow to recession-stricken economies.
If there is another banking crisis following the last one we just experienced, expect big tech to get another avalanche of investors looking for a safe haven.
Although I am not one hoping for another disaster, the savvy investor must do what is right to preserve capital.
These are choppy water we see ourselves in and I do believe the sideways action in tech shares in April has been a big victory for tech.
April was the month investors were planning to dump shares and run for the hills, and that didn’t manifest itself.
The little volatility means that there was very little action taking place.
I understand that as a wildly bullish setup for tech earnings because much of the “bad” tech earnings have been priced into the news.
Conditions favor a mild bullish push in tech shares in May after they report better than first thought earnings.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-24 15:02:212023-05-02 00:34:33Great Setup for May
We’ve held up quite well in April largely experiencing a sideways correction.
That - after a great January and March.
I quietly predicted that April would be an underwhelming month for tech shares and it appears that I am spot on with that call.
It’s true with poor earnings looming, the path of easiest resistance is to the downside, but like we saw with last week’s sideways correction, bad earnings are already priced into the Nasdaq.
Margin compression is widely consensus at this point.
But the real thing going in the markets is that banks have delivered pretty strong earnings debunking the narrative that a recession is coming sooner than first thought.
That means it will take a longer time to reach that rate-cut cycle that all investors are clamoring for.
Then at today’s open we had Alphabet (GOOGL) in the red by 3.5% and growth metaverse stock Roblox (RBLX) down over 12%.
Even if one might surmise that blue chip tech stocks can muscle through the short-term headwinds, the growth stocks are likely to get whacked as investors avoid stocks that have bad balance sheets in times of stress and are most reliant on a rate-easing pivot.
Then if one might believe that the retail trader might bail out the pros, then think again.
Retail traders are usually the ones to pile in at the end delivering that one last magical surge at the end of the bull market.
Well, they won’t be rescuing the Nasdaq anytime soon as retail traders are currently underwater.
The average retail investor portfolio is down by about 27% since November 2021.
Since then, stocks have staged four double-digit bear market rallies. Tech stocks in particular rallied more than 20% — twice.
Retail investors will remain hesitant to raise their risk exposure as they got burned multiple times last year.
Timing is everything with traders and retail traders usually time it wrong without the help of John Thomas.
Wall Street had a turbulent 2022, clocking in its worst year since the 2008 financial crisis while ending a three-year streak of gains. Inflation, rate hikes, and authoritarian lockdowns in China plagued all financial assets last year.
As earnings season gets underway the S&P 500 is projected to post about a 7% decline in first-quarter earnings from a year ago.
Tech forecasts are also predicting lower revenue and growth.
Still, the outperformance coalesces around the usual suspects such as high-profile stocks like Apple (APPL), and Tesla (TSLA), which account for about 30% of the average retail investor’s portfolio while Nvidia (NVDA), and Advanced Micro Devices, Inc. (AMD) account for 10% of their portfolio.
From these stock picks, NVDA has had a gangbuster rally, up 84% this year given the excitement around ChatGPT and AI engulfing the market.
The Nasdaq pricing in a generative artificial intelligence revolution does not have legs and some of this hot money is bound to escape, setting the stage for some reversion to the mean.
In whole, I’m quite impressed with a sideways correction substituting a selloff and that type of price action is only positive moving forward.
Ultimately, conditions in tech are setting up for yet another possible short-squeeze in the following months.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-17 17:02:192023-05-01 16:23:40Sideways Correction in the Short Term
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