($COMPQ) Archives

Put the Kibosh on Tech Stocks?

Whether Russia has actually produced a vaccine or not takes a backseat to the upcoming uncontrollable avalanche of media content about delivering a North American vaccine that news wires will disseminate.

It could be the case that the tide rises all boats in the equity world, but the pathway for a serious rotation into laggards is the more likely case.

Russian President Vladimir Putin claimed Russia has become the first country in the world to grant regulatory approval to a virus vaccine after less than two months of human testing.

Establishing an initial marker for a vaccine being realized is bullish for the overall stock market, but tech stocks might participate less in the rally as the capital is funneled into the catch-up trade.

At the very minimum, tech stocks, short term, are at risk of being slightly discounted to the overall market as the “shelter in place” trade that has benefited the strongest cloud plays has a weaker case than it did before.

Expect a bevy of upcoming announcements from North American and European pharma firms describing their unique pathway to a vaccine.

The European and North American scientific community will not want to be outdone by the Russians.

Don’t forget that the Nasdaq is at market tops and it's normal to have a phase of digestion.

Naturally, the Russian vaccine news has been met with a wave of general skepticism concerning its efficacy.

Putin chose to give a personal anecdote citing his daughter’s involvement with the trials as concrete evidence that she is fully vaccinated from the coronavirus.

The development of the vaccine has been put on an accelerated schedule raising concerns among some experts at the speed of its approval, but the Russian business conglomerate Sistema has said it expects to put it into mass production by the end of the year.

Regulatory approval is the precursor to mass inoculation of the Russian population and the government is desperate to revive the economy after a synchronized health crisis, economic crisis, and oil crisis wrapped into one.

The vaccine will be marketed under the name 'Sputnik V' in foreign markets and is already been offered for sale to other countries.

The jury is still out on this potential vaccine and a larger trial involving thousands of participants, commonly known as a Phase III trial hasn’t started yet meaning the approval is quite premature.

Such trials, which require a certain rate of participants catching the virus to observe the vaccine's effect, are normally considered essential precursors for a vaccine to receive regulatory approval.

“You need a large number of people to be tested before you approve a vaccine,” said Peter Kremsner from the University Hospital in Tübingen, Germany currently testing biopharmaceutical company CureVac's vaccine in clinical trials.

So aside from the uncertainty that this could be a ploy to generate revenue for the Russian state, what does this mean for tech stocks?

A real vaccine that will save people from the dreaded coronavirus would mean the “re-opening trade” is alive and well.

A fake vaccine means rhetoric about finding a vaccine which is also positive for the tech market too.

Capital will rotate into the neglected industries of hospitality, retail, transport, and energy.

It’s been a meteoric rise up in 2020 for cloud, software, and tech’s monopolistic juggernauts.

This was due to happen at some point just like the elevated virus risk will eventually dissipate whether it takes six months, two years or five years.

My base case is that tech will be spared from any major carnage and will be range bound in the short to medium term with few catalysts to take them higher.

Earnings certainly isn’t the force multiplier for tech it once was pre-virus.

This Russian vaccine could be indeed a head fake as well leading to another “buy the dip” moment that is so ingrained in the current psyche.

Portfolio managers have a hard time dumping tech stocks full stop because they are hard to get back into on the next move up.

Not to mention they should already be the cornerstone out of any major portfolio and that the opportunity cost of missing out on tech’s supercharged run-ups will limit any broad-based selling and far outweighs the risk of downside price action.

This wasn’t the greatest news for tech stocks, but it could have been worse.

Ultimately, the secular bull market in tech is as healthy as ever.

June 26, 2020

Tech Letter

Mad Hedge Technology Letter
June 26, 2020
Fiat Lux

Featured Trade:

(GETTING READY FOR THE SECOND WAVE)
(DOCU), (TDOC), (NFLX), ($COMPQ)

Getting Ready for the Second Wave

Tech Letter

The coronavirus is dangerously inching towards knocking out the main street economy which would finally land a heavy blow to the tech sector because of the knock-on effect of a substantial drop in future tech budgets.

This leads me to believe that tech stocks are overvalued in the short-term and are due for consolidation.

Daily coronavirus cases have more than doubled from 18,000 to 45,000 as of June 24^rd as Americans reclaim the streets and the summer heatwaves kick into gear.

Florida, California, Arizona, and Texas appear to be the new ground zero of the coronavirus and 26 states are experiencing an explosion in cases compared to the prior week.

The blatant disregard for human safety after the reopening means that deaths are likely to spiral out of control in the short-term boding ill for the Nasdaq index but great for shelter-in-place tech stocks.

DocuSign (DOCU), Netflix (NFLX), and Teladoc Health (TDOC) could be in for another run-up.

The jolt in death levels is not baked into tech shares yet, and if things get out of hand, Americans could voluntarily resort back to a shelter-in-place existence.

From March until today, the Nasdaq index has done nothing but sprint upwards due to the eclectic mix of the “re-opening” trade and copious amounts of fiscal stimulus.

If the re-opening trade is killed, the tech market will then go through another contentious referendum to test whether Jay Powell and the Fed are willing to save the equity market yet again.

Propping up the markets ultimately means propping up the tech markets.

If U.S. coronavirus cases re-accelerate from 45,000 to 70,000 then 100,000 per day, the streets could empty out in 1-day.

The risks are certainly to the downside now and the mushrooming of U.S. coronavirus cases could be the catalyst for mass profit-taking in tech names.

Saying the Nasdaq is a little frothy does not mean that tech shares can’t still go higher from here.

They certainly can and there is a legitimate base case surrounding the enormous amount of liquidity sloshing around in the system, meaning that every dip will be bought up.

Then we look forward to the next earnings and news like Apple re-closing 18 stores in coronavirus hot spots doesn’t help.

However, even in the throes of the pandemic, Apple is as innovative as ever - announcing plans to cut ties with Intel during its virtual Worldwide Developers Conference on Monday, saying that it will phase out the use of Intel’s chips in its Mac line of computers over the next two years to use its own in-house chips.

That’s a big deal.

Big tech has so many levers at its disposal.

This goes a long way in a pandemic when specific revenue avenues are blocked off.

Tech is nimble as ever.

Another prime example, after the success of video conferencing software Zoom Communications (ZM), Facebook, Google, and Microsoft posted replica software in a matter of weeks.

Even if their video communication replicas do not catch on, it shows you the vast resources they can muster to harness in whichever direction they please in a blink of an eye.

Many firms are confronting some harsh realities, but investors aren’t penalizing tech firms by selling.

Facebook has seen an ad boycott because of not doing enough against extremism and racism on their platform.

Their algorithms often pit two opposite opinions against each other stoking engagement and more hatred.

Companies including REI, The North Face, Magnolia Pictures, and Upwork have said they won't buy ads on Facebook at least through July as part of a boycott.

The boycott is mostly all bark and no bite and earnings won’t change in a meaningful way.

Uber is a less robust tech firm in the regulatory crosshairs with the state of California about to file court documents that could force Uber and Lyft to reclassify drivers as employees in less than a month.

This could wipe out a small tech company like Uber which is only a $53 billion company.

If the courts rule against Uber, the law would require them to grant drivers employment status while they await the outcome of a pending lawsuit over the issue which would crush the bottom line.

They are having a tough time figuring out how to become profitable.

Investors are doing their best to analyze what the tech industry will look like post-Covid-19 and the assumption is that tech and big tech will dominate which is why any sell-off is temporary.

Every big tech name will survive the pandemic with its business models intact.

Throw in that news of a vaccine and treatment inching forward to fruition and there is a solid bottom for any temporary dip.

It is irrelevant if big tech loses 10% or 20% of revenue this year just as long as they don’t structurally break.

June 5, 2020

Tech Letter

Mad Hedge Technology Letter
June 5, 2020
Fiat Lux

Featured Trade:

(EUROPE’S BIG TECH TAX GRAB),
(COMPQ), (NFLX), (APPL), (AMZN), (GOOGL), (MSFT)

Europe's Big Tech Tax Grab

Tech Letter

Big Tech regulation gets the protection of the U.S. government.

The U.S. government has announced that it is looking into aggressive regulation originating from foreign countries that would die to have a FANG themselves.

This is just another salient data point to which tech will lead us through the maze of complexity that the world now finds itself in.

Many jumped on the bandwagon saying it was a matter of time before regulation destroys big tech, but I will argue that big tech has become too big to fail and the value generated from stock appreciation and tax revenue has become even more important.

Tech has been the only industry to not get pummeled by the coronavirus and the ramifications of social unrest.

The U.S. government doesn’t want to tip over the last remaining pillar the U.S. economy is clinging to, they are desperate to allow the U.S. tech models to stay intact.

The Federal and State budgets have massive holes in them and crushing tech’s contribution to the revenue coffers would be political suicide.

Understanding how the administration cherishes big tech means viewing them through the prism of how other countries treat U.S. tech companies hoping to take a piece of the pie themselves through clever “regulation.”

The European Union, the Czech Republic, and the U.K. plan to siphon off tax revenue from big tech even though confronted by possible trade sanctions from the U.S.

The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey because they are all looking to skim some cash off of big tech’s cash cow.

To read more about the tax fiasco, please click here.

Europe and the emerging economies have been hit harder than the U.S., not in terms of deaths, but in relative economic terms because they don’t possess the rolodex of Fortune 500 companies that can just issue more corporate debt or a Fed central bank that is delivering trillions in liquidity that has saved the stock market.

Washington has specifically been eying up France for a section 301 investigation after it became the first country to fully implement a digital sales tax in July 2019.

France has been quite aggressive in calling out big tech for undermining and exploiting their economy by not paying tax due.

French Finance Minister Bruno Le Maire has been sharp-tongued criticizing America’s big tech companies for running wild in European markets.

A 3% digital sales tax was in the cards before the U.S. slapped on a counter tariff to French goods which delayed the frosty confrontation.

Europe’s vast network of splintered resources and unbalanced innovation combined with Europe’s infamous avalanche of bureaucracy meant that developing a famous tech company fell through the cracks.

Nothing even remotely close to Silicon Valley was ever conjured up inside the confines of the European Union.

The consequences have been costly with most Europeans relying on Apple cell phones, Google software, Netflix subscriptions, and Microsoft enterprise products to get them through the day just like most Americans.

The tax grab is out of desperation as the EU confronts a post-coronavirus world where they are increasingly controlled by decisions from the Communist Chinese and subject to a graying population that delivers a reduced tax revenue base.

The European Union is one of the biggest losers from the coronavirus.

The hands-off warning by the U.S. government on its own big tech companies puts a premium on their existence to the U.S. economy.

Instead of twisting their arm to squeeze every extra tax dollar out of them, they will most likely get more access to deliver the services most Americans are hooked on.

It’s not a secret that current U.S. President Donald Trump is hellbent on destroying big tech but there is no way to do it without destroying the U.S. economy and the U.S. stock market.

At this point, just a handful of tech companies comprises over 22% of the S&P and this will most likely continue as other industries are still licking their wounds with some analysts believing it will take 10 years to get back to late 2019 economic levels.

The most likely scenario for big tech is that the array of crises has delayed real regulation indefinitely and the U.S. will protect big tech from a tax grab abroad.

The best-case scenario is zero regulation leading to zero extra costs.

Either way, stock appreciation is in the cards for tech’s future.

The end result is that big tech could eventually comprise up to 30% of the S&P in the next 3 years which dovetails nicely with a recent analyst call that Microsoft will hit over $2 trillion in market capitalization in the next 2 years.

June 3, 2020

Tech Letter

Mad Hedge Technology Letter
June 3, 2020
Fiat Lux

Featured Trade:

(ABOUT YOUR RIOT-PROOF PORTFOLIO),
(COMPQ), (WMT), (APPL), (AMZN), (TGT), (JWN), (EQIX), (GOOGL), (MSFT)

About Your Protest-Proof Portfolio

Tech Letter

Social unrest will have NO material effect on tech shares moving forward.

Some investors expected the Nasdaq (COMPQ) index to roll over big time, throttled by a national insurrection. Anti-police-violence protests, some becoming riots, have broken out in more than 60 cities.

However, it appears to be another false negative for the Nasdaq as it motors upwards acting on the momentum of outperformance during the coronavirus.

One thing that the coronavirus pandemic, as well as protests, have taught investors is the unwavering faith in technology’s strength will continue powering the overall market rebound.

Any social unrest will not stop tech shares because they simply don’t subtract from their revenue models.

This will perpetuate into the rest of 2020 and beyond.

Much of the public reaction from big tech has been paying some form of lip service about the national situation being untenable followed up with a small donation.

Apple (AAPL) says it's making donations to various groups including the Equal Justice Initiative, a non-profit organization based in Montgomery, Alabama that provides legal representation to marginalized communities.

To read more about big tech’s donations, click here.

Aside from some PR formalities, it will be business as usual after things settle down.

Apple might suffer some slight inconveniences of having some stores looted, but that doesn’t mean consumers can’t buy products online.

Tech companies simply contort to fit the new paradigm and that is what they are best at doing.

Apple has charged hard into the digital service as a subscription world that has served Amazon, Apple, Google (GOOGL), and Microsoft (MSFT) so well.

To read more about the robust performance of software stocks, please click here.

Many of these tech companies don’t need a physical presence to drive forward earnings, revenue models, and widen their competitive advantages.

That’s the beauty of it and their brands are so entrenched that it doesn’t matter what happens in the outside world at this point.

It’s true that a few tech companies might have to scale back or modify operations until the storm subsides but not at a great scale that will worry investors.

Amazon is reducing deliveries and changing delivery routes in some areas affected by the protests.

Big tech dodged a bullet with the majority of the financial burden falling on the shoulders of big-box retailers like Walmart (WMT) and Target (TGT) and city center-located businesses.

Walmart closed hundreds of stores one hour early on Sunday, but most are slated to reopen. Nordstrom (JWN) temporarily closed all its stores on Sunday.

Amazon (AMZN)-owned Whole Foods are often located in neighborhoods that are perceived likely to escape the bulk of the turmoil.

The events of the last few days will have significant side effects on the normalcy of society or the new normal of it.

Combined with the pandemic, consumers will opt for more spacious housing options in less concentrated areas of the U.S.

The social unrest once again delivers the goodies into the hands of e-commerce as people will be less inclined to leave their house to consume.

A stock that really sticks out during all of this is the leader in interconnected data centers Equinix (EQIX) because of the explosion of data being consumed from the stay-at-home revolution.

Sadly, the price of tech share does not account for life quality which is part of the reason we see stocks lurching higher.

By the time all the different crises, including coronavirus and protests, are snuffed out, we could be in a world where the only strong companies left are technology, "big tech".

They have an insurmountable lead at this point with guns still blazing.

When you add the windfall of trillions in cash the Fed has pumped out and unwittingly diverted into tech shares recently, it is hard to envision ANY scenario in which the Nasdaq will be down a year from now.

I am bullish on the Nasdaq index and even more bullish on big tech.

Even the supposed “rotation” to value has only meant that tech shares haven’t gone down.

A dip now in tech shares means shares dip for two hours before resurging.

Why would anyone want to sell the best and highest growth industry in the public markets with unlimited revenue-generating potential?

May 11, 2020

Tech Letter

Mad Hedge Technology Letter
May 11, 2020
Fiat Lux

Featured Trade:

(HOW ALGORITHMS ARE TAKING OVER THE WORLD)
($COMPQ), (TSLA)

How Algorithms are Taking Over the World

Tech Letter

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.

April 1, 2020

Tech Letter

Mad Hedge Technology Letter
April 1, 2020
Fiat Lux

Featured Trade:

(BROKEN GLOBAL SUPPLY CHAINS AND YOUR PORTFOLIO)
($COMPQ)

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