In a fireside chat with some of Amazon’s (AMZN) key lieutenants, CEO of Amazon Andy Jassy ran out of patience.
It’s the end of the line for many.
Critical members of Amazon are still holding onto the rose-colored fantasies of the lockdown era, where workers made their living wearing pajamas all day and took snoozes whenever they wanted.
Not anymore was the message from Jassy.
Enough is enough.
Employees usually don’t have the 30,000-foot view that executives like Jassy have even if they pretend to sometimes.
The paradigm has shifted to the point where management wields all the bargaining power as tech companies trim the fat off their business model.
This spat epitomizes where we are right now in the tech cycle and the wider US economy as a whole.
Tech ($COMPQ) is in a holding pattern where the biggest and best are utilizing a strong balance sheet, but they aren’t doing something so amazing where we chase the hot money with more hot money.
Ironically enough, the US GDP annualized rate just got revised down from 2.4% to 2.1% as spiking interest rates and high inflation eat into growth.
Although companies like Amazon are still doing ok, it’s not to the point where key members of staff can lounge in their sleeping gowns and work one hour per day.
There is resistance from higher management demanding Amazon workers come back to the office.
The deeper underlying message here is that the US economy is still growing buoyantly enough and that signals strength going into 2024 for tech stocks.
There is a better than 50% chance that the US economy won’t enter a recession next calendar year and the tech sector will benefit as it grinds higher.
An important trend I have noticed is that tech shares can absolutely march higher in lockstep with accelerating bond yields.
Many believed this was counterintuitive and I admit, traditional orthodoxy has taught us to respect this inverse correlation.
However, this time-honored belief has come unstuck this year and fighting the Fed has been the tech trade of the year.
What’s next for Amazon?
This is a stark change from February this year when Jassy said he had "no plan" to force workers back.
But now, Jassy reportedly reiterated a rhetoric that has emerged in more recent months: don't comply with return to office, face the consequences.
In July, Amazon employees would be forced into a "voluntary resignation" if they refused to return unless they were one of the rare few who had obtained permission from the company's leadership—internally named the S-team.
Former Twitter CEO Elon Musk was the first tech executives who started this fad by firing 80% of Twitter’s staff when he acquired the company.
That philosophy has really gutted the bottom of the chain in tech companies and shares of tech firms will benefit from this through 2024.
Instead of paying for expensive workers to sit at home, tech management are summoning up shareholder returns in the form of dividends and share buybacks to extend the tech bull market to the end of 2024.
I am still bullish tech stocks moving forward and algos are still programmed to bet on a Fed pivot. Tech goes up until the Fed pivots.
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Below please find subscribers’ Q&A for the August 16 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: Did you hear that Michael Burry was putting on a big short (the guy who made a fortune shorting housing in 2009)?
A: Yes, I heard that, but I never, ever trade-off of those kinds of comments. First of all, I think he’s wrong; and often, what happens in those situations is you hear about them going into the trade, but you never hear about them getting out, which might be tomorrow or next week. Also, there’s a nasty habit of big hedge fund managers telling you the opposite of what they’re actually doing. We hear big hedge fund traders like Bill Ackman getting super bearish at market bottoms, and then a few months later learn that they were buying with both hands, as was the case with the pandemic bottom. Be careful about other people’s opinions—they can be hazardous to your wealth. Just look at the data and the facts. That’s what I do.
Q: Would you buy Snowflake (SNOW) around current prices?
A: Yes—first of all Snowflake is a Warren Buffet favorite, which I always tend to follow. However, Warren can wait 5 years for a stock to work, and you can’t. So, I would wait for a bigger dip before getting into SNOW. So far, we are down 25% from the recent peak. One thing’s for sure, cybersecurity is a long-term winner, as seen by the ballistic move in Palo Alto Networks (PANW) since we started recommending it about 8 years ago.
Q: Why are US consumers so strong, and will that hold up for the rest of 2023?
A: US consumers are so strong because they banked so much money during 10 years of QE and all the pandemic stimulus, that they have a lot saved. They are now happy to spend to make up for the spending they couldn’t do during the pandemic. They’re basically in spending catch-up mode or revenge spending.
Q: How far do you see the iShares 20 Plus Year Treasury Bond ETF (TLT) go?
A: My worst-case scenario has it going to $90 down from $94—that’s a yield of about 4.50%. And that's where a lot of bond investors see fair value, and will start piling in. But as long as the momentum is against it, I’m not touching it. As soon as I am convinced there is a real bottom in the (TLT), I’m going to jump in with both hands and buy long-term LEAPS, where you can get a 100% or 200% return pretty quickly.
Q: Time to buy the Tesla (TSLA) dip?
A: We’re getting close. My guess is you might get a spike down to $200 from the recent $300 high. That’s also going to be LEAPS territory for us because the long-term outlook for this company is spectacular.
Q: What do you think of Freeport McMoRan (FCX), Silver (WPM), and United States Natural Gas Fund (UNG)?
A: I think they are all strong buys; I have LEAPS out on all of them. I think we start to get a big move in the 4th quarter of this year that’ll go well into next year—so big money just sitting on the table begging for you to take it.
Q: What are we to make of the crash of the Chinese Yuan?
A: The Chinese economy is weak and looks like it’s getting weaker. They still have a pandemic hangover. We don’t know what their real pandemic numbers are—they adopted our pandemic policy 2 years after we did, and they’re suffering as a result. They also insist on using their own vaccine, Sinovac, for nationalist reasons which is only 30% effective. But, when the Chinese economy does come back on stream, that’ll be the gasoline on the fire for the global economy, and that’s why we like commodities, industrials, energy, and so on.
Q: What does an 8% mortgage rate mean for the housing sector?
A: It is a disaster. I don’t think prices will drop very much—it’ll just cease all new buying because nobody qualifies for an 8% mortgage. They are going to either be only cash buyers out there or people waiting for the next drop in interest rates, and we’re already seeing that with the mortgage rate at 7.24%. If we do get a move up to 8%, it’ll just be a short-term spike that won’t last very long.
A: Yes, absolutely. Since people can’t afford to buy houses, they are renting until they can, which pushes rental prices up and adds to the inflation numbers.
Q: When do you think the tech sector will rebound? It’s had a really bad three weeks.
A: End of August or sometime in September. I think. When people come back from the beach, they’re going to look at the long-term future of these companies and think “holy smokes,” why don’t I own more of these?” And we may even be doing LEAPS at high prices, which I almost never do, but the growth rate in tech next year is looking to be spectacular, and I think if we do a conservative at-the-money, we should at least double our money in a few months, similar to how US Steel (X) LEAPS did.
Q: Is Amazon (AMZN) a buy? They’re starting to develop their pharmacy rather well.
A: Yes, Amazon is on the buy list—it’s already up 50% this year. Jassy, the new CEO, is doing a great job. They also have a massive investment in AI which they can monetize anytime they want, and online pharmacies are a great place to start. They’ve been talking about doing that for at least 10 years.
Q: Are gold (GLD), wheat (WEAT), and precious metals a buy?
A: Yes, those are all strong buys on the dip.
Q: What about Tesla (TSLA) LEAPS?
A: Yes Tesla is definitely a LEAPS candidate $30 down from where it is now.
Q: What about Crown Castle International (CCI)?
A: CCI took a major hit from Verizon, canceling a contract with them (which is their biggest customer), so I want to wait for that to digest before I do anything yet. However, we are definitely approaching “BUY” territory; I think the yield is up to about 6.5% now.
Q: Should I take profits on the next jump up in United States Steel Corporation (X)?
A: Yes, it’s not worth hanging on 16 more months to maturity when there’s only 30% of the profit left. And, if all the takeover bids fail for some reason, the stock goes back to $20, and then your LEAPS becomes worthless. So, I would take profits; 100% profit in 2 months is nothing to turn up your nose at.
Q: How confident are you in (TLT) going to $110 by the end of the year?
A: Very confident; by then we will start seeing more hints of Fed interest rate cuts, inflation should be lower, and Goldman Sachs is in fact forecasting that the first rate cut will happen in March. So you’ll certainly start discounting that in the (TLT) by December. We could see the high in yields and the low in prices at the central bankers conference in Jackson Hole next week.
Q: What do you think about cruise lines and hotels right now?
A: The business is great, they’re all packed. However, during the pandemic, these sectors had to take on massive amounts of debt to keep from going under when their ships were tied up with zero revenue for two years; same with the hotels. So, the balance sheets are terrible in all of these areas including airlines. That’s why I’ve been avoiding them, too many better plays. Don’t go away from your core trades looking for trouble.
Q: When do we finally start seeing the Fed stop raising rates?
A: I think they already have; I think the most recent rate rise was the last one. If I’m wrong, they’ll do one more quarter—it’s totally dependent on the numbers.
Q: Won’t falling rates be bullish for bonds and gold?
A: Yes, that's why we’re buying them; but I’m waiting on the bond LEAPS—I want to see a firm bottom before getting back in there. 2024 will be all about falling interest rates plays.
Q: What’s causing the volatility in the United States Natural Gas Fund (UNG)?
A: A Strike in Australia, collapsing supplies in Europe (where prices are up 40%), and expectation of a global economic recovery in China. Ultimately, it’ll be China that takes this thing up to $10, $12, or $14 for the UNG, but you need them to recover first. That’ll probably happen next year, which is why we have the two-year LEAPS on there.
Q: With junk (JNK), have we seen the high rates?
A: Yes. If not, we’re very close, so it’s worth starting to scale in here.
Q: Should I short Home Depot (HD), as US consumers are holding back on home upgrades?
A: No, you should not short anything because you’re going against a long-term bull market trend that probably continues for another 10 years. So, any shorts should be measured in days and not weeks.
Q: Should I start chasing oil, because it’s been on quite a run, and should I buy Exxon (XOM)?
A: Yes, if we get an economic recovery next year, oil goes over 100 easily and will take all the oil companies up with it.
Q: Is (UNG) a domestic or foreign gas ETF?
A: It’s mostly domestic, and it’s a mix of the top natural gas producers in the US.
Q: Are the BRIC countries going to bring down the dollar?
A: You’ve got to be out of your mind. Would you rather store your money in China and Indonesia or the US? That’s your choice. I know there’s a lot of internet conspiracy theories out there—I get about a question a day on this. It’s Never going to happen; not in my lifetime. But it does attract internet traffic, which is the purpose of putting out these ridiculous stories like a BRIC-engineered digital currency replacing the dollar as a reserve currency. It’s just clickbait.
Q: Why is there a short squeeze in copper?
A: EV production is going from 2 million to 10 million a year in 2030, and every EV needs 200 pounds of copper. By the way, there are now 527 EV models on the market, but only one company makes money doing this, and that’s Tesla (TSLA).
Q: We’ve been waiting for a recession in the US for years, and US consumers are still going strong. What gives? I want rates to drop so I can invest in real estate again.
A: Well, yes. This recession has been predicted for 2 years. The problem is we have a certain political party telling us every day that the economy is the worst it’s ever been when, in actuality, the health of the economy is amazingly strong, and certainly the strongest economy in the world. So, I don't think we get a real recession until well into the 2030s because of massive technological development and a huge demographic tailwind—that’s an absolute winning combination, last seen in the 1990s. Plus, now we have AI accelerating everything. So, look at the numbers; don’t listen to opinions. Opinions can be fatal to your wealth.
Q: Does the use of an adjustable-rate loan make sense for the purchase of a second home?
A: Yes, it does. During the great interest rate spike of the 1980s, I bought my home in New York with an adjustable-rate loan. The initial interest rate was 18%, but when rates dropped to 11%, the value of the home tripled. Not a bad trade—and I bet the same kind of opportunity is out there now, provided you can get another adjustable-rate loan. By the way, in Europe, they only have adjustable-rate loans. The 30-year fixed anomaly only exists in the US and Canada because you have the US government as the unlimited buyer of last resort for 30-year fixed mortgages.
Q: Thoughts on other steel companies and aluminum?
A: I like them all. The country needs 200,000 miles of new long-distance transmission lines to accommodate the electrification of the economy, and those are all made out of aluminum except for the last mile—most people don’t know that. Buy Alcoa (AA).
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, 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
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Cord-cutting is going into overdrive as linear TV viewership has just fallen below 50% nationally in July for the first time.
Big changes are about to happen.
This has major ramifications for not only the tech sector but for the broader economy, society, and geopolitics.
We are here to talk about the tech and the sinking of linear TV does mean relative gains for online streamers.
Broadcast and cable each hit a new low of 20% and 29.6% of total TV usage, respectively, to combine for a linear television total of 49.6%.
Has the quality of linear TV channels soured in quality or what is the deal?
It could be a functional reason, as Baby Boomers are watching linear tv because they haven’t figured out the streaming thing yet.
The ease of flipping on the tv with a remote cannot be understated.
In the future, the result is that linear tv penetration will be down to 20% level in around 20 years.
The players that will begin advancing further center stage into the national consciousness are YouTube (GOOGL), Netflix (NFLX), and Amazon Prime Video (AMZN).
They saw month-over-month viewership increases of 5.6%, 4.2%, and 5%, respectively, in July.
Don’t expect a rebound, because linear tv is bleeding viewers reflecting how bad TV channels have become.
Ad revenue across our media network coverage fell 13% on average in Q2, down from -8% in 1Q, which included the Super Bowl.
That being said, certain streamers haven’t exactly cracked the code either, as Peacock, Disney+, Hulu, ESPN+, Paramount+, Max and Discovery+ were down by about 500,000 combined.
However, on the whole, subscriber growth was 8.5% year-over-year with highlights like Netflix adding 5.9 million subscribers in the second quarter.
Comcast's Peacock (CMCSA) was able to grow its subscriber base 84% year-over-year to 24 million, up from the prior 13 million, as the streamer works to catch up to its peers amid a significant lag.
Direct-to-consumer advertising (DTC) grew 27% on average across media companies including Disney (DIS), Comcast, Warner Bros. Discovery (WBD), and Paramount (PARA). That's double from the 13% growth posted in the first quarter.
Comcast is the farthest behind, as only 14% of its estimated revenues are expected to come from DTC in 2024 with the other 85% stemming from its linear networks. Disney is the farthest along, with DTC revenue expected to surpass linear network revenue for the first time in 2024.
As linear tv is headed to the dustbin of history, streaming is also getting more expensive.
Personally, that is what I have seen as many platforms are starting to push the $100 plus per month level.
Many might remember when streaming was $20-$40 per month.
Therefore, I am not surprised to see single-digit growth for streaming as high prices crimps demand.
It’s true that mass media is fracturing into different niches and communities and that isn’t so fantastic for big media corporations as it could mean higher costs and a smaller total addressable audience.
I still do believe there is growth in streaming but not at the elevated levels like the 20% or 30% range.
Customer acquisition will also become more difficult and expensive as people really need to be convinced to move platforms or online channels.
The golden age of streaming growth is over and now each inch will be fought tooth and nail by more competition.
In the short term, I believe a dip in CMCSA should be bought, as they are still driving users to the Peacock platform. NFLX is still worth a trade on the dip as well, but I would avoid DIS until they structurally upgrade the company.
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Many industries have experienced consolidation in the last few years and music streaming has been no exception.
The strong emergence of a few companies running the show has resulted in these same companies wielding extraordinary pricing power.
Spotify (SPOT) has been one of the leading music streaming platforms for years, and when companies harness pricing power, they can raise prices to compensate for higher expenses.
That is exactly what Spotify did recently as their stock sold off on a wider-than-expected loss for the second quarter, even though subscribers surged.
The streaming service posted a net loss of 302 million euros.
Monthly active users (MUAs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.
Premium subscribers also surpassed expectations of 217 million, jumping another 17% year over year to hit 220 million.
In its first-quarter report, the company said it expected to add 15 million new monthly active users in Q2, bringing its total to 530 million. It also expected revenue of 3.2 billion euros and to report 217 million paid subscribers in the quarter.
Spotify is continuing to invest in advertising, and its ad-supported revenue grew 12% year over year. The company said podcast advertising revenue growth reaccelerated to more than 30% year over year.
Spotify will increase the price of its Premium subscription offerings by as much as $2, which translates to a 20% rise for some plans.
In the U.S., Spotify’s Premium Individual offering now costs $10.99, up from $9.99, and the price of its Premium Duo plan changed to $14.99, up from $12.99. The company’s Premium Family plan is now priced at $16.99, up from $15.99, and the Student offering costs $5.99, up from $4.99.
Spotify doesn’t expect a drawdown in product demand from the price increase, and let’s face it, most people can handle paying an extra 2 bucks for something they use every day.
Music streaming is definitely close to becoming an industry participated in by just a few for as long as it’s a viable business.
That means Spotify will also have the opportunity to raise subscription prices again in the future.
The licensing issues alone are too much of a hurdle for most companies to get to launch so to really compete takes a high amount of upfront funds and in the world of high interest rates, tech firms can’t fund this type of retread business again.
Spotify isn’t a pure monopoly.
The others involved are Apple Music, Amazon, Tidal, Deezer, and Pandora.
SPOT’s stock has increased by over 85% after the earnings pullback, and at one point they were up over 100%.
Growing subscriptions at 27% is still considered something that a growth company does at a time when growth companies are hard to find.
It doesn’t matter that they aren’t profitable yet, as long as they add more subscribers, which they have strongly indicated they will.
The stock has pulled back from $175 and once the negative shakeout fades away, traders should get into SPOT while they still can.
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Is it worth it to invest in the “next Tesla” or is it way too optimistic there could even be a next Tesla?
This upstart challenger to Tesla, Lucid (LCID) is more or less what I thought about Tesla a few years ago – buy the car and not the stock.
Like many businesses in the world – it comes down to time and place.
Tesla benefited from generous federal subsidies, first mover advantage and LCID is just a little late to the action.
Why does that matter?
Tesla had its knife and fork at the table by itself when nobody else wanted to join them.
The problem with legacy automakers is that it took them too long to realize that EVs were a tsunami instead of a splash in a pond.
I know with conviction that EV makers like LCID are slogging through because of the numbers that materialize in their earnings reports.
The numbers are a manifestation of the time and place phenomenon that I just mentioned.
LCID continues to face major cash flow issues and will be lucky to exist in a few years.
A high burn rate is a hallmark of smaller EV companies and even Tesla had to be saved at the last second it its early days.
LCID simply doesn’t have the expertise and economies of scale to bring down the unit economics where it delivers a profit.
This achievement is also pushed out far into the future.
We are also seeing a widening gap in its production and deliveries, with approximately 4.76K units undelivered, with a growing inventory value of $1.01B.
LCID's resale value appears to be drastically impacted, with one recently auctioned for $85K, compared to the base model of $110,000.
The intense capital burn has forced LCID management to issue more common stock which dilutes current shareholders and suppresses the stock price.
While LCID may have won the battery competition through its longest driving range and market-leading design, the management's choice to go premium has clearly undermined the mass market.
This is a segment that fellow automakers such as Tesla (TSLA) and BYD (OTCPK:BYDDF) have invested great efforts while improving their supply chain and pricing strategies.
This alone suggests LCID's highly niche market segment based on the hefty price tag of $150K per unit, compared to TSLA at $40K and BYD between $20K to $30K (in China), effectively will stoke higher cash burn levels.
For now, LCID has not achieved break-even, selling every EV at a loss.
This signals weak consumer demand for LCID.
This automaker's expanded annualized production capacity of up to 90K vehicles in the AMP-1 facility and up to 155K in the Saudi Arabia facility.
Production is still miles behind Tesla at a time when supply chains and material costs are squeezing EV makers even more.
When we consider that the stock was trading at $20 per share just 1 year ago, the stock languishing at $7.50 today represents quite a pitiful performance.
I do acknowledge they make quite a nice EV.
However, it’s still highly debatable whether its business model is sustainable.
I do believe that around $4 per share is a good entry point for this EV maker.
Any pop from $4 should be sold.
There is no reason to overpay for LCID right now in a market that values accelerating and positive free cash flow.
Better the stock come to you than to go fishing for it.
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Mad Hedge Technology Letter
July 14, 2023 Fiat Lux
Featured Trade:
(BAD TECH EARNINGS ARE PRICED IN)
(AAPL), (TSLA), (AMZN), (FB)
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