Global Market Comments
February 9, 2021
(ON EXECUTING MY TRADE ALERTS),
(TEN REASONS WHY STOCKS CAN’T SELL OFF BIG TIME),
(SPY), (INDU), ($COMPQ), (IWM), (TLT), (GME)
Global Market Comments
February 9, 2021
(ON EXECUTING MY TRADE ALERTS),
(TEN REASONS WHY STOCKS CAN’T SELL OFF BIG TIME),
(SPY), (INDU), ($COMPQ), (IWM), (TLT), (GME)
While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood.
Following the advice of another newsletter whose name I won’t mention, he bailed out of all his stocks during the March 2020 meltdown. He was promised that Armageddon was coming, and the Dow would collapse all the way down to 3,000.
With the Federal Reserve now flooding the markets with QE and the government about to unleash untold numbers of stimulus packages, here we are with all the major stock indexes at all-time highs, the (INDU), ($COMPQ), and the (IWM). Higher summits beckon.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped-up Honda weaved into my lane of Interstate 80, cutting me off. My Tesla Model X on autopilot suddenly broke sharply. Then I gave my friend my response, which I summarize below:
1) There is nothing else to buy. Complain all you want, but US equities are now one of the world’s highest-yielding securities, with a lofty 1.8% dividend.
A staggering 50% of S&P 500 stocks now yield more than US Treasury bonds (TLT). That compares to two-thirds of all developed world debt offering negative rates and US Treasuries at a parsimonious 1.51%.
2) Oil remains historically low, and the windfall cost savings are only just being felt around the world. $50 a barrel is a hell of a lot cheaper than $150.
3) Obscured by the GameStop (GME) fiasco was the fact that technology stocks continue to report absolutely blockbuster earnings. This will continue for another decade. Buy them before they go up ten times….again.
4) What follows a collapse in European economic growth? A European recovery. European quantitative easing is working just as well as it is here.
5) What follows a Japanese economic collapse? A recovery there too, as hyper-accelerating QE feeds into the main economy. Japanese stocks are now among the world’s cheapest.
6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&L’s for a very long time. We might see at most two 25 basis point cuts by the end of this cycle, and that probably won’t happen until the second half of 2020. In a deflationary world, there is no room for more.
This will make absolutely no difference to the large number of high growth corporates, like technology firms, that don’t borrow at all because they have enormous cash internal flows. That will be most of the stocks you own if you don’t index. Probably half of all listed stocks have no net borrowing.
7) Technology everywhere is accelerating at an immeasurable pace causing profits to do likewise. You see this in the FANG stocks, where blockbuster earnings reports are becoming as reliable as free upgrades.
Biotech has been on a tear as well.
See the new Alzheimer’s cure? It involves extracting the cells from the brains of alert 95-year old’s, cloning them, and then injecting them into early stage Alzheimer’s patients. I’ve already put myself on the waiting list.
The success rate has been 70%. That one alone could be worth $5 billion a year. I might be a user of this cure myself someday.
8) US companies are still massive buyers of their own stock, some $1 trillion worth this year. Banks are back in the game for the first time in a year, forced to conserve capital during the crash.
This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), Cisco Systems (CSCO), Microsoft (MSFT), IBM (IBM), and Intel (INTC), the top five share repurchasers.
They have nothing else to buy either. (AIG) has mandated the repurchase of an amazing 25% of its outstanding float.
They are jacking up dividend payouts at a frenetic pace as well and are expected to return more than $700 billion in payouts this year.
9) Ignore this at your peril, but China is stimulating their economy like crazy, and it is just a matter of time before that growth spills over to the US. The Coronavirus scare has prompted them to increase their quantitative easing efforts by a multiple. Biden will end the trade wars allowing a resumption of international trade the previous highs.
10) Ditto for the banks, which were dragged down by falling interest rates for most of the last decade. Reverse that trade this year, and you have another major impetus to drive stock indexes higher. Financials are looking like the top performing sector of 2021.
My friend was somewhat set back, dazzled, and non-plussed by my out of consensus comments.
With that, I told my friend I had to hang up, as another kid driving a souped-up Shelby Cobra GT 500, obviously stolen, was weaving back and forth in front of me requiring my attention.
Where is a cop when you need them? Are they ALL afraid to catch Covid-19?
Let me explain how China has created a sudden U.S. tech ($COMPQ) renaissance that will most likely change the face of business and society in the U.S. to a degree we cannot even fathom yet.
To decompress the catalysts and the mechanisms at play in this confusing time in history, it is important to understand how the Middle Kingdom has supercharged American tech being one of the main protagonists.
Part of it is healthcare’s role in the events, and part of it is tech’s strategic position waiting for a broad-based pivot in how humans internalize and execute business.
The supercharger has been the algorithms.
To explain in the best way I can, I will reference the Founder and CEO of Tesla (TSLA) and Space X Elon Musk who had a wide-ranging and insightful interview with popular podcast personality Joe Rogan.
The much-viewed interview preceded Musk’s threats to leave Fremont, California for greener pastures and transfer operations to the Gigafactory near Reno, Nevada and Texas.
To check out an article about Musk’s dare this weekend to migrate Tesla’s operations to the “Battle Born State” of Nevada, please click here.
In the interview, he delves into the U.S. healthcare system’s conflicting incentive to label anything remotely close to Covid-19 as symptoms associated with Covid-19 (which there is a long list of) that doesn’t differentiate between deaths attributed to Covid-19.
This line of thought is to widen the Covid-19 healthcare footprint to the point where each hospital can request more government funding based on the high volume of Covid-19 activity and required help to fight it.
We all love extra funding, right?
Musk also disagreed on every procedure not related to Covid-19 labeled as “elective” because it equates a pulled hamstring to a triple bypass heart surgery which can truly be life-threatening.
The point that I would like to expand on is that the attempts at widening the net of Covid-19 cases in order to curry favor for more government aid are effectively widening the digital footprint of Covid-19 internet content that is feeding back into the algorithms that are responsible for the majority of stock trades.
What we have here are vicious feedback loops that can’t be broken out of because of the misallocated tagging of Covid-19 that filters into algorithmic trading.
That is why we open up the newspaper, social media platforms, and any content provider and we are swamped by Covid-19 content and everything “associated” with Covid-19 content meaning all content has become Covid-19 content!
The net has been cast wide with homelessness caused by Covid-19, tax revenue shortfalls associated to Covid-19, professional sports seasons cancelled by Covid-19, and even a story about the King of Thailand King Maha Vajiralongkorn holed up in Switzerland with his wife and a harem of 20 other women to “quarantine” because of, yes – Covid-19. To read this story, click here.
Basically, all content is Covid-19 content until it isn’t.
This indelible influence on global governance has been deep with every politician feeling the pressure of continuing the lockdown because of a massive dislocation between the real footprint of Covid-19 and the digital footprint of Covid-19.
Healthcare pros as well have been duped by the wrong data and supporting lockdown policies because of the risk of looking bad due to perceived optics not meshing well with the current digital content being published.
The truth is that the real data is probably 1.5 standard deviations from what is believed to be consensus – a far cry from the gross data politicians and healthcare experts are using to make important decisions with.
Naturally, protecting a tenure as a politician is human nature and the unintended consequences to guarding one’s political career are causing longer lockdown periods.
Nobody wants to put their neck out and appear out of line.
Musk argued the case that the virus’s fatality rate is in fact “5-10X” lower than it actually is because of the concept of too many deaths being falsely attributed to Covid-19 symptoms and the lack of tests meaning many people are living with it but have not been accounted for in the data.
The tech market has taken wind of the discrepancy and the fierce rally calling the data’s bluff working with another set of data.
Then add to the casserole that tech companies successfully missed the “big one.”
The “big one” is defined by a virus that actually kills healthy bodies between 20 and 30 years old with no pre-existing conditions at a high rate.
And in economic terms, the “big one” means not being a hospitality, retail, or transport business.
The strength of the tech V-shaped recovery stems from the notion that this pandemic is not nearly as bad as we think it is.
There is definitely a level of truth in this.
Another unavoidable unintended consequence is the hastening of decoupling between the Chinese and U.S. economy as the blame game accelerates.
As a result, corporate manufacturing will be shipped back to the U.S. and this isn’t your father’s manufacturing either.
We are talking about manufacturing in the vein of Tesla, that will sprout up across the U.S. as artificial intelligence is finally good enough to make manufacturing profitable stateside as more automation takes hold.
Many of these new industrial A.I. manufacturing headquarters, factories, and complexes will be set up in tax-friendly states like Nevada and Texas taking a cue from Tesla.
There have been many analysts in the China camp prophesizing that the Chinese Communist Party (CCP) will apply the virus as a vehicle to push their narrow agenda.
However, Liu Chenjie, chief economist at fund manager Upright Asset has estimated job losses in China resulting from the pandemic of up to 205 million workers.
Click here to read about the devastating job losses in China.
The CCP is more worried about cleaning up the mess at home.
I would argue that the post-virus tech economy is setting up for a quicker than expected recovery.
As fast as the virus hit, the algorithms pushing this pandemic into the arteries of all digital channels will disappear in days, almost as if Covid-19 never happened.
Covid-19 has been the direct catalyst to a myriad of firings at digital newspapers all over the U.S., for example, Vice Media cut 10% of company’s employees — resulting in the elimination of 250 jobs.
As one door shuts – another one opens.
As tech companies have withstood semi-apocalyptical conditions, imagine how well they will do on the other side when consumers finally get their incomes flowing again.
U.S. tech is a shining example of the future being limitless, and complicit or not – China, algorithms, and healthcare experts gave a great assist.
The sushi has hit the fan – supply chains are broken.
Let’s gaze East to the inner workings of the tech world and it is clear that the supply chain has been under pressure since the onset of the trade war but the coronavirus is now making operations untenable.
China was the first to lockdown, but now the rest of Asia has followed suit smothering the rest of the region which is economic suicide.
Feeling out the situation, I picked up the blower to get a better understanding of what was going on in the center of the tech manufacturing world and the outlook appears bleak.
The electronic manufacturing sector in South East Asia is hit hardest by the coronavirus as many of the test equipment and chip producers face an imminent drastic shortage of raw materials, an unprecedented situation that has disrupted production.
One manager whose company produces 5G radio frequency (RF) chips have bottlenecked due to the disruption in the supply chain.
They use raw materials from the United States but also import from China and although they have 85% of materials to make the RF chips, they still have to put operations on ice because the suppliers in China can’t ship the essential 15% of material needed to complete manufacturing.
This batch of shipments is supposed to be the largest quantity of 5G chips from South East Asia in the first quarter and has now been officially delayed until logistic problems can be solved.
The company can still fulfill its quota for 3G and 4G RF chips, but it’s really hit or miss at this point.
And for manufacturing the older chips, they have sufficient stock of raw materials lasting three to four months, and by then they hope to solve the logistic headwinds from China.
In general, if the virus coerces South East Asian societies to shutdown their economy for another 5 months, the entire Southeast Asian electronic manufacturing sector will be decimated as bills and debt payments come due.
In fact, a current shortage of components is forcing prices to surge 10%-20% for active and passive electronic components.
Another prominent manufacturer who produces about 30% of the RF chips for the worldwide market told me that this is the “biggest disaster to ever hit the local electronic manufacturing sector.”
He continued to say that his supply chain has been hit between “30%-40%.”
About 50% of their raw materials come from Japan, and the rest from the United States and China, and because of an ensuing lockdown in Japan, shipment delays will happen for customers in Singapore, China, and the United States.
To make matters worse, testing engineers cannot travel abroad to install test equipment for customers because of international border closures.
This manufacturer projected revenue annual growth of -5% after initially forecasting for +10% in January.
Another executive at a semiconductor test equipment company told me that he fully expects sales to dissipate by 15% in the first quarter compared to last year.
Customers around the world, not only in the U.S., are delaying orders because they aren’t sure whether there will be new equipment to test because of the delay in the production and shipment of electronic components manufactured in China.
The executive sees a turnaround in June if shipping lanes and borders open, which is still a big IF.
How does this affect the end electronic device market like your iPhone or Amazon Echo?
Smartphone manufacturers need to come out with new products by mid-2020 to sneak in that yearly iteration before that window shuts and that timeline will certainly be pushed back.
Building a smartphone is usually done on a razor-tight deadline, but this puts off anything until they can finally get their hands on the parts needed to build out the phone.
If you think the 3rd quarter would be the time that these new phones could hit the market, then think again. It is likely that the coronavirus domino effect will force smartphone makers to sell these devices next year instead of pushing back a whole refresh cycle of revenue.
Apple is coming to the same conclusion with their 5G phone as well.
The tech world is dangerously close to missing one full year of refresh products and the scarring effects could last much longer.
Then there is the issue of demand and the lack of it moving forward for these products.
We must ask ourselves how scarred are tech consumers?
How scarred are tech companies?
What regulations should shape how businesses should be working as we enter into a new tech world and U.S. economy?
The first order of the day after the coronavirus passes is businesses and consumers will need to restock cash reserves for a rainy day.
The first reaction we will see are small tech companies decline quite dramatically in the second quarter because of the nature of high yields not being able to receive financing because of their low credit grades which could result in an initial barrage of defaults.
It will be just a small blip for the behemoth as they can take the financing if they truly need it and many don’t.
Tech balance sheets also need healing after this bout of craziness.
Not getting caught off guard will now be the new normal.
Even if tech dips into the $2 trillion relief package – it has a long-term cost associated with it that tech businesses must absorb.
How that impacts economic growth is tough to decipher now but it most likely will punish tech growth companies whose mantra is growth at any cost.
There will be a massive rebalancing and redefinition of what outperformance means because the government inherently will be playing an outsized role in our lives for years to come and what that means to lower tech profits and worsening stock multiples will play out in the tech markets.
Don’t underestimate trading algorithms.
The “Buy the Dip” psychology is broken and computerized trading has completely flooded the market with its personality.
That is exactly the dynamic of the current tech market, and it will mountain of generous offerings to reverse the trend in the form of monstrous stimulus and cash handouts.
As we entered 2020, the sentiment was sky-high, geopolitical tensions relatively calmed and three recent interest-rate cuts from the Federal Reserve drove tech stocks to record levels.
For 10 years, traders and the algorithms they harnessed were handsomely rewarded by aggressively betting against elevated volatility.
Cogent chart trends are the algorithms’ lustful partner in bed and now that every single short-term model is flashing sell, sell, sell – there isn’t much bulls can do to fight back.
Many tech hedge funds have settled on similar conclusions – the best defense right now is unwinding portfolios to return to cash.
Incessant margin calls roiling any logical strategy has struck fear into many traders who levered up 10X.
What you could possibly see is the Minsky moment: That stability ultimately breeds instability because the only input in which becomes the difference make is volatility producing massive violence on upside and downside moves.
The ones who can absorb elevated risk are nibbling and unleveraged hoping to time the turn when stocks finally react positively to good data.
The current battle in the fog of war is that of two different economic scenarios that have direct influence in which ways the algorithms flip – either shutdown the country ala Wuhan, China for an extended period of time or send the troops back to work.
Hedge fund billionaire Bill Ackman gave his 2-cents restating his passionate plea for a 30-day-shutdown to fight the coronavirus pandemic.
Former Goldman Sachs CEO Lloyd Blankfein is in favor of sending back the asymptomatic younger generation workers sooner than later.
Initially, Blankfein gave his backing for “extreme measures” in order to flatten the curve, but promoted healthy workers returning “within a very few weeks.”
Blankfein’s argument rests on that if people don’t go back to work, the economy might become too damaged to recover from inciting another crash.
This contrasts starkly with Ackman’s idea of “testing, testing, testing”, which would theoretically dismantle the potency of the virus but take longer for the economy to restart.
U.S. President Donald Trump has relayed his desire to open up business by Easter Sunday.
So as mostly professional politicians hash out a towering aid package of over $2 trillion, firms will get more of an indicator of how and when the business world opens up again.
Trading algorithms are on a knives edge because of the uncertainty – until they are illegal – it is something we are stuck with.
These trading formulas are preset based on biases that start with a series of inputs and the most critical input is volatility or better known as the fear index.
If the lockdowns are extended, the flood of negative news will force algorithms to sell on the extra volatility.
When things go bonkers, many of these preset formulas sell which exacerbates the down move further simply because more than enough people have the same preset algorithm.
Cutting position size when market volatility explodes is not a farfetched theory and is quite a common trading nostrum.
Even if many of these trades would be good long-term bets, many trading algorithms are focused on short-term trades and by this, I mean milliseconds and not days.
Another input into trading algorithms are Twitter feeds.
The platform is scraped for keywords from mass media news sources and synthesized into a specific output that is fed into a computer algorithm.
These headlines offer insight into what the sentiment is for the trading day – negative, positive, or neutral.
This scraping of data is especially relevant in today’s chaotic trading world where 10% moves up or down in one day is the new normal.
Because of Dodd-Frank Wall Street reform, many of the big banks have shuttered trading operations hurting the market’s liquidity situation causing spreads to widen and down moves to accelerate.
But now that the Fed has landed the Sikorsky UH-60 Black Hawk on the helipad and the money is waiting to helicopter down as they have announced “unlimited” asset buying and guaranteeing of corporate bonds to aid financial markets.
How does computerized trading roil markets?
Here is an example. A recent trading day included more than $100 billion of selling, the worst week since the financial crisis and was triggered by a hedging strategy called “vol targeting”—using volatility as a central input in trading decisions—and other systematic tactics.
Funds making decisions based on volatility, including some with names such as volatility-targeting funds and risk-parity funds, have risen in popularity.
Risk-parity funds manage an estimated $300 billion.
Risk parity is an approach focused on allocation of risk, usually defined as volatility, rather than allocation of capital.
That is what we have now – a cesspool of risk parity hedge funds layered by high frequency funds layered by short/long vol funds layered by arbitrage funds all levered 15X.
The take into consideration that they are supercharged by massive volume-based computer algorithms and trying to head for the exit door at the same time.
Ironically, this could be one of catalysts for shares to recalibrate and head back up north as traders start to front-run the peak of the health crisis.
Let’s hope that it happens sooner than later and that the government doesn’t manage to screw up delivering the helicopter money.
One man’s heaven is another man’s hell.
Zoom Video Communications (ZM) is the hero of video conferencing software.
Few companies are navigating the coronavirus situation better than Zoom. Their better-than-expected fourth-quarter earnings and forecast is a great omen for the coronavirus driving future demand for the company’s remote-work tools.
Even without the coronavirus, the company is doing spectacularly.
(ZM) delivers best in show teleconferencing services including video meetings, voice, webinars and chat across desktop and mobile devices, and has been the beneficiary of the dreaded coronavirus that has quarantined workers forcing them to rely on Zoom’s video app tools.
The virus has bolted by the 100,000 customer mark with at least 3,500 Corona deaths.
The panic has been overblown, and the same hysteria has seeped into the broader tech market triggering deep selloffs in almost every tech company.
The elevated awareness and adoption of the company’s video conferencing platform will allow the company to post an even better performance next quarter.
The migration into the company’s free app remains robust and it is unclear whether those users can be converted to paying ones. However, paid growth is still hitting on all cylinders.
Revenue crushed it at 78% to $188.3 million from $105.8 million a year ago.
In total, sales in 2019 were $622.7 million, up 88% year-over-year.
Zoom Communications is attracting more influential customers with 81,900 accounts with at least 10 employees, a 61% uptrend from the past year.
VMware Inc. (VMW) and Johnson & Johnson (JNJ) are two of Zoom’s largest accounts.
Zoom’s first-quarter revenue guidance was strong as well predicting between $199 million and $201 million.
Another growth lever will be the mobile segment which has signed up more than 2,900 accounts with more than 10 employees in its first year after launch and will shortly be available in 18 countries.
Total operating margins surpassed expectation of 10%, by more than doubling, to 20.4%.
Ultimately, Zoom’s robust Q4 results and guidance underline the company’s smooth pathway to elevated revenue drivers as the world goes into pandemic mode because of Covid-19.
It was somewhat underwhelming that management cited a limited revenue benefit from the situation with a go-forward increase in costs as usage increases.
That could have been sorted out more delicately and keeping costs down is one of management’s responsibilities.
The positives still outweigh any minor negatives as the company has been able to capitalize by seizing mind share and expanding the funnel.
Zoom Communications has not been able to escape the recent volatility in shares as the 12% boost from a positive earnings report was met with a 13% haircut the following day as the broader Nasdaq was pummeled.
The Covid-19 virus is delivering agony to investors as the swings are simply hard to trade in and out of.
Making it even more difficult is fogging clarity breeding uncertainty stoking wild risk-off moves even when the central bank announced an emergency half-point rate cut.
The current issue is that short term, markets can behave as irrational as ever and trading algorithms are programmed to digest headlines by not only the volume but the potency and relevancy as well.
If every news wire sent out a story that free money was dropping from the sky, the market would be up 10% irrespective of whether it is true or not.
That is the world we live in where over 85% of the trading decisions and volume are executed by automated software and the exaggeration doesn’t discriminate in which direction it trends in.
So, we are stuck in this negative feedback loop where national headlines are almost entirely concentrated on the coronavirus and that is mainly the data that is fed into short-term trading algorithms.
Unfortunately, the tech market weakness is becoming a self-fulfilling prophecy and new headlines of Northern Italy being quarantined and New York announcing a state of emergency is poised to be the next catalyst for a volatile upcoming trading week ahead.
Short-term traders need to understand that this isn’t just a “buy the dip” event and the deep in the money call spreads that had cushions of 8-10% were blown out in just a few days.
Long term investors should be using every dramatic selloff to add slightly to their positions incrementally lowering their cost basis.
It is hard to know when the coronavirus phenomenon will pass by but at the speed in which we are trending, U.S. school cancelations and further cities and states announcing highly negative events are in the pipeline for next week.
The bottoming event could eventually come in the form of US Corona cases topping 10,000 or cancelling the Olympics in Tokyo, but until then, the negative health headlines appear to be the new normal for the short-term and until we are fully washed out.
Mass layoffs are on the horizon, thanks to the tech market slowdown sapping vitality for risk in the IPO market, and the widening contagion stemming from the coronavirus.
At a moment in Silicon Valley’s history where the market is rethinking its appetite for risk, it is customary for the loftiest and hottest growth names to drop the most in times like this.
For instance, Tesla (TSLA) was rocked by 32% and ride-hailing app Uber (UBER) gave up 25% in an epic downturn.
In general, tech that isn’t integral to the intricate global supply chain will also be penalized because of cratering overall business demand.
The vacuum of demand isn’t applied to only digital products but most others, as the world literally becomes a walled garden of self-quarantine areas.
The odds are still high that this global phenomenon squeaks by, but the far reach of the virus worries even experts and making crucial decisions on how to cut losses is becoming a pressing and imminent issue.
Airlines have been first to announce a potential readjustment to staff numbers such as Finland’s flagship airline Finn Air, but mass layoffs will start to trickle in from Silicon Valley.
Front-running the layoff parade was online travel tech company Expedia (EXPE) who expects to say adiós to 3,000 employees and network infrastructure company Cisco (CSCO) who announced restructuring plans because they expect revenue to fall between 1.5%-3.5% in Fiscal 2020.
I have been unwavering in my core thesis that tech procuring revenue from Mainland China is nothing more than a short-term Faustian bargain, and now the downsides of that bargain are finally appearing and frankly uncontainable.
The viral coronavirus is escalating on the heels of a new round of layoffs from Silicon Valley’s startups who just don’t know how to make money such as robot pizza startup Zume and car-sharing company Getaround who slashed more than 500 jobs.
Online DNA testing company 23andMe, logistics startup Flexport, Firefox internet browser Mozilla and social platform Quora restructured staff as well.
The “disruptors” are finally getting disrupted out of existence because of a sudden referendum on the health of balance sheets.
The situation turned ugly just before the coronavirus and this health crisis just adds fuel on the fire.
In total, more than 30 startups have cut over 8,000 jobs over the past four months with aggressive venture capital investments pulling back significantly.
The latest to flop at the starting line was Casper Sleep (CSPR) who marketed themselves as the “Nike of sleep” only because they sell online mattresses.
Mr. Market is purging these marginal businesses that over-promise, over-hype, and under-deliver.
The IPO pricing was underwhelming with Casper taking down the price range to the point where it went public at over $13.
The stock is now at $8.
No doubt that some of this negative sentiment was stoked by office-sharing company WeWork, who had an epic fall from grace and cut its valuation by 80% late last year while permanently shelving an IPO.
Now the coronavirus is on the verge of scoring the empty net goal as companies go into full-blown crisis mode.
SoftBank bet two ranches on Uber and WeWork, then poured money into Colombian delivery startup Rappi and Indian hotel startup Oyo.
All have sputtered with mass firings recently.
Poor investment decisions led SoftBank to report a $2 billion operating loss in the last quarter of 2019 from their venture capitalist arm named the Vision Fund.
After Nasdaq flourished in a memorable 10-year run post the financial crisis, flip the parabola upside down and markets are tanking with many experts already contrasting the coronavirus sell-off to the dot-com bust of 2001.
Irrational optimism is part of the DNA of San Francisco.
Entrepreneurs are quietly preparing to change the world, but the climate has soured so quickly that many investors believe many of these current entrepreneurs are unlucky.
The rules of the game deem unprofitable models temporarily obsolete in the current market environment.
In the land where spending money in uneconomic ways is a time-honored tradition, turning to more “responsible” models is gut-check time.
Talent is forgoing chances to enter the start-up world too, instead opting for big box corporates who provide a lower ceiling but higher salary and benefits.
Café X, which operated robot coffee shops and raised $14.5 million in venture funding, fired its own robots and closed three stores in San Francisco recently.
The brightest stars of the IPO pipelines might be able to go public this year, but at a cut-rate price which is a tough pill to swallow for Airbnb and online delivery platform DoorDash.
With no new blood going live on the public tech markets, we focus on the ones already there and recent news is alarming.
Apple whose 42 stores in China have been closed since January and Foxconn, which produces Apple products, are running at around 30%-40% capacity, then it’s ring-the-alarm time.
The most likely scenario is that big tech will need to write off this quarter until the public health crisis improves setting up a bullish second half of 2020.
Even that could get stopped in its tracks.
The only silver lining is that the run-up in shares in January means that the best of tech has only returned one month of share appreciation, but for the weaker companies, they aren’t afforded those types of luxuries in malicious trading conditions and have returned 4-6 months of share appreciation already.
Tech shares are hoping to stage a rebound after the coronavirus-fueled rout that saw the Nasdaq’s 2-day drop by 6.38%, which is its worst since June 2016.
Readers can now pencil in a fresh readjustment to growth expectations of zero to low single digits in tech shares for fiscal year of 2020.
That is why Thursday morning was greeted by another 3% drop at the open – proceed with caution to not get trapped in the proverbial dead cat bounce vortex in the short-term.
A major tech consolidation could take place because let’s get real, the unpredictability is having a major impact on technology companies and uncertainty is a substantial input in heightened risk.
What are the realistic scenarios that are still left on the table?
Firms trading on the Nasdaq will slash price targets and profit estimates that could uncoil another leg down in the Nasdaq index.
In fact, it has already happened as PayPal (PYPL), Microsoft (MSFT), and Apple (AAPL) issued revenue warnings saying they do not expect to meet their revenue goals because of the coronavirus.
On an operational level, softness is what I see when delving into the semantics of Amazon (AMZN) whose ranking algorithm demotes product sellers who go out of stock.
The coronavirus has crippled supply chains, and to avoid a lack of stock, sellers are raising prices to slow sales, while planning to move production to other countries.
This is on top of the backbreaking supply problems that companies face because of the ill-effects of the trade war.
If the Amazon algorithm punishes the seller, once stock is replenished, they must overspend on advertising to climb back to the top of product searches.
The surveys I have taken out with Amazon sellers in the last few days show a precarious situation where sellers are stretched to the limit relying on numerous uncertain variables that are completely out of their control,
Even if the local government allows Chinese factories to restart, it will be understaffed while workers from other provinces self-quarantine.
The third-party marketplace accounts for more than half of Amazon’s retail sales with a robust base of manufacturers and sellers in China.
Google (GOOGL) and Microsoft are accelerating efforts to shift hardware production to Southeast Asia amid the worsening coronavirus outbreak, opening factories in Vietnam and Thailand as well.
Google is set to begin production of the Pixel 4A smartphone and also plans to manufacture its next-generation flagship smartphone called the Pixel 5 in Vietnam.
Google is also on the verge of building factories in Thailand for “smart home” related products, including voice-activated smart speakers like the Nest Mini.
Google and Microsoft’s plans are a giant shift away from their prior generation-long China manufacturing strategy and the coronavirus has only supported a strategy to remove China as a core manufacturing hub.
It is getting so bad in China that they are evaluating the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam, literally packing up and taking their show on the road.
The have already initiated the process by asking a key sourcing contact to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones.
Data center server production was also rerouted to Taiwan last year.
The coronavirus threat is only speeding up the move into South East Asia and Google and Microsoft hope to avoid the geopolitical risk in the region.
Remember that all of this rejigging of production will add costs and only the biggest can absorb mega hits to the balance sheets.
As for the coronavirus, business is becoming more complicated as the ban on Chinese nationals and flights from China could build barriers to business, and now South Korea has joined the list.
Korea’s Samsung Electronics, the world’s largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China.
While there are many moving parts, the average investor needs to wait on optimal entry points.
Japan announced school shutdowns for a month and tech shares have only priced in the coronavirus eventually entering the U.S., but if there are mass shutdowns of American cities and schools, then tech shares will see another stinging sell-off.
The contagion could eventually lead to the Olympics in Tokyo being canceled, high-profile corporate management getting infected, and the Chinese economy being sidelined for most of 2020.
All of these events are highly negative to the global economy which is why potential risks have exploded through the roof in such a short time.
Slinging mud at the wall will not work in times like this, but this does have the makings of a once-in-a-year entry point into tech shares.
Tech shares are on a knife’s edge.
The world finally cared about the coronavirus and this meant the spreading of it from Chinese soil to other regions of the world with meaningful foreign death tolls.
Tech shares, for a time, became the de facto safe haven for coronavirus investors to hide out until Iran and South Korea reported an explosion of cases on the same day.
Tech shares bore the brunt of the carnage in the markets and have experienced one of the worst 2-day performances in the history of the technology-dominated Nasdaq index.
Global supply chains are in a state of paralysis as the Middle Kingdom has turned into 1.4 billion homesitters.
Even worse, the rapid spread of the virus hits home the fact that other parts of the world could enter an imminent lockdown on business.
This is bearish for not only the standard tech multinational, but all global operations and economy.
Many tech traders were wiped out unable to sell in the frantic sell-off.
We will get the lowdown on how some tech-based hedge funds went bust shortly because more than a few bet on a quick coronavirus solution.
Well, this is not a 1-day fix and Mr. Market is always correct.
The truth is that this virus is sowing economic uncertainty across the globe and there are really 2 ways from here, will it get worse or better?
If further meaningful contagion is prevented in the next few days, there could be a massive rally in many of the best in show that tech has to offer.
However, that seems implausible.
If new cases vanish from the headlines for a few days, a relief rally will be on our hands, but there are reports as we speak from Austria, Spain, and Romania.
Investors are waiting for bullish crumbs like a Central Bank announcement or vaccine development to help, but that likely won’t stem the negative momentum or come in time.
The virus also destroys any potential tech IPOs this year such as Airbnb, and they will most likely shelve their IPO and wait for the virus and its fallout to dissipate.
The debt market will also be hesitant to give the benefit of the doubt to major loss-makers like Lyft and Uber who have poor unit economics.
Apple, Facebook, Amazon, Microsoft and Google-parent Alphabet comprise over 20% of the S&P and lost a combined $250 billion in one trading day then backed that up with an even worse loss.
Then there is the pending situation of if the Chinese economy isn’t up and running soon, “millions” of local businesses could go bust in the second biggest economy.
So even if a consensus thesis of stock markets usually powering through pandemics is still valid, the economic damage could be too hideous to ignore sending markets even lower.
One of the ironic winners of this horrid virus has been Bitcoin which has seen a price rise 15% in the last one month.
A global pandemic strengthens the use case for this “digital gold” almost signaling that the current governing status quo and monetary system are unfit for operation.
Now is not the time to dive in and bet the ranch.
The likelihood of the coronavirus halting tech’s ability to operate grows higher by the hour.
Risks are currently skewed to the downside with the market pricing into tech shares that the coronavirus will spread inside the U.S. and affect tech firms’ profitability for the rest of 2020 and even perhaps bring forward a global tech recession.
A tech recession is not yet off the table, and the policy response will be vital if the contagion spirals out of control.
The Mad Hedge Technology Letter is 100% in cash and readers should wait for the dip to bottom out.
I spoke to the best traders I know in the market Thursday night, and to a man they said the market looked terrible. Although prices were high, the momentum was totally gone and volume was shrinking.
Worse, these conditions prevail as we head into May, the onset of the traditional ?RISK OFF? season (click here for ?The Hard Numbers Behind Selling in May?).
Best case, it continues to grind sideways in a narrow range. Worst case, our long awaited 10% correction is finally here.
The big ?tell? would be how stocks responded to the Friday nonfarm payroll. If it turned into a ?buy the rumor, sell the news,? or made a marginal new high and then sells off hard, then it would herald the onset of a new correction.
That was exactly what we got.
You knew immediately that things were heading south, even though the Dow opened up $44. The big momentum like Tesla (TSLA), Facebook (FB), Netflix (NFLX), and Amazon (AMZN) rolled over like the Bismarck right out of the gate. Bonds (TLT) also took off like a bat out of hell, not exactly what you want to see when you own stocks.
I spent Thursday night writing up Trade Alerts to sell short the (IWM), the (SPY), and the (QQQ). You only had about 30 minutes when the market waffled indecisively to get these off. As it turned out, I could only get the first two done before the market fell away like a house of cards.
I have already received ecstatic emails from nimble traders who got into the (IWM) August, 2014 $113 puts as low as $3.65 and then saw them soar to $5.25, an instant profit of 44%. This also boosts my year to date performance back to double digits, a welcome development
I have a number of cross hedges going on now in my model portfolio which I should explain, just to show you there is a method to my Madness. The May (SPY) $193-$196 put spread is a short volatility trade that balances out the long volatility and time decay in the (IWM) August $113 puts.
I am long the higher beta (IWM) puts and short the lower beta (SPY) puts. The 35% ?RISK OFF? position I have in the (SPY), (IWM), and the (VXX) will also offset lost profits in my one 10% ?RISK ON? position in the Japanese yen (FXY) put spread. This balancing of multiple risks is what a real live hedge fund trading book looks like.
Fasten your seat belts. This could be the big one.
Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.
These cookies are strictly necessary to provide you with services available through our website and to use some of its features.
We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.
These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.
If you do not want that we track your visist to our site you can disable tracking in your browser here:
We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.
Google Webfont Settings:
Google Map Settings:
Vimeo and Youtube video embeds: