Mad Hedge Technology Letter
July 13, 2022
Fiat Lux
Featured Trade:
(HOT INFLATION NUMBER BODES POORLY FOR TECH STOCKS)
(LYFT), (UBER), (AMZN), (SHOP), (GOOGL), (SNAP), (META), (TWTR), (MELI), (EXPE), (TRIP)
Tag Archive for: (META)
Fed swaps now fully price in 150 basis points of hikes over the next two meetings after awful inflation numbers came in showing inflation heading in the wrong direction.
The 9.1% inflation print was an acceleration of the 8.6% which was what we got last time.
I don’t want to beat a dead horse, but inflation accelerating and beating the expectations of 8.8%, is paramount to the trajectory of tech shares.
The awful number also underscores the magnitude of policy mistakes that the U.S. Fed Central Bank has overseen.
This is the only thing that matters because macro liquidity drives the trajectory of equities in the short term.
These clowns aren’t serious about tackling inflation, as I said a few times already and this proves it!
Itty bitty rate rises won’t stamp out 9.1% inflation and in fact, encourages it.
The Fed would need to raise the Fed Funds rate by 7.35% to 9.1% immediately from the current 1.75% for the real inflation rate to be non-inflationary.
According to the official Fed website, the Fed targets 2% inflation because they call this level “healthy.”
By their own measure, to achieve this 2% inflation, they would still need to raise rates by 5.35% immediately, but they absolutely won’t because Powell simply has no interest in doing his job, period.
These core expenses skyrocketing is why I keep and kept mentioning that Americans have less money to splurge on tech gadgets and software and again, this inflation report validates my thesis.
Think about pitiful tech stocks that didn’t work in bull markets like ride chauffeurs Lyft (LYFT) and Uber (UBER), I fully expect these companies to perform terribly over the next 6 months amid a rising rate backdrop.
Not only are they growth tech, but their business is directly tied to energy prices.
They are the poster boys for the pain tech companies will feel from hyperinflation.
The outlook is quite poor for technology in the short term, and we are still waiting to form a bottom. It will come back but we need a capitulation.
The accelerated rate of inflation means that we push back the big recovery in tech stocks.
Ecommerce stocks will suffer like Amazon (AMZN), Shopify (SHOP), and MercadoLibre (MELI) because of the decline in discretional spending for the consumer.
Digital ad giants like Google (GOOGL), Snap (SNAP), Meta (META), and Twitter (TWTR) will need to reckon with smaller ad budgets from 3rd party ad purchasers as companies cut back on marketing spend.
Don’t need to increase marketing spend when people have no money to spend on products.
Travel tech stocks like Expedia (EXPE) and Tripadvisor (TRIP) can expect summer to mark peak travel as Americans get more concerned about food and oil budgets after the summer of travel revenge from the arbitrary lockdowns.
It also means there will be a meaningful next leg down for tech stocks as many CFOs are now furiously crunching the new revenue and margin downgrades to reflect this heightened risk.
The new re-rating isn’t reflected yet in tech shares.
It’s already been a few months on the trot where many analysts say this is the top, they have been inaccurate every time.
Even if it is the top, inflation will stay higher for longer and stagflation is the consensus for 2023.
The clowns at the Fed not doing their job means that economic cycles will be shorter and a great deal more volatile because the smoothing effect of moderated inflation is now stripped out of calculations. This effectively means a contracted boom-bust trajectory for tech stocks which is unequivocally what we are seeing in market behavior.
Mad Hedge Biotech and Healthcare Letter
July 5, 2022
Fiat Lux
Featured Trade:
(AN AAA-RATED STOCK POISED TO DELIVER MARKET-BEATING RETURNS)
(JNJ), (AAPL), (GOOGL), (AMZN), (MSFT), (TSLA), (META), (BRK.A)
More than six months after what appeared to be a never-ending assault on the biotechnology and healthcare industries, the sector seems to be slowly reviving.
While it is still too early to declare the pullback over, there are a few companies that provide a ray of hope for investors.
In the US, only four stocks have recorded a market capitalization of $1 trillion or higher: Apple (APPL), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT). This year's market crash saw Tesla (TSLA) and Meta Platforms (META) departure from this elite group.
The market-wide selloff also made it more difficult for stocks to reach the $1 trillion mark. However, this does not necessarily preclude them from achieving this goal in the future.
Companies are rapidly expanding and equipped with the right tools and strategies to capitalize on growth opportunities, making them prime candidates to make the $1 trillion cut in a couple of years.
One of them is Johnson & Johnson (JNJ).
Almost everyone is familiar with JNJ's century-old brands, such as Band-Aids and Listerine. What many people probably do not realize is that the company's med-tech and pharmaceutical segments account for the vast majority of its total revenue.
In 2021, its pharmaceuticals segment alone comprised 55% of JNJ sales, while its medical devices unit contributed 29% to the company’s top line.
So far, the most promising drug in JNJ’s pharmaceutical segment is Tremfya. First-quarter sales for this psoriasis treatment jumped to a whopping 41% year over year to record an annualized $2.4 billion.
Meanwhile, JNJ's med-tech segment is poised for massive growth as a result of the strong demand for its electrophysiology products. These devices, used to keep hearts beating normally, have been identified as lucrative revenue streams and growth drivers in the long run.
The company has been working on spinning off its consumer segment into a separate publicly traded entity in the following months. This means that investors with JNJ stock will eventually end up owning shares of two different companies by 2023.
The decision to spin off its consumer health segment is part of the company's effort to shed a cyclical segment and become a health pure play focused on pharmaceuticals and medical devices.
Hence, now is an excellent time to buy JNJ shares.
While JNJ isn’t known as a high-growth stock, the company’s strategies have the potential to spur exponential growth and send shares soaring.
The next decade will be crucial for the company's success as it transforms. If the company executes its plans successfully, its current market capitalization of $467 billion could slowly but steadily increase to approximately $1 trillion.
J&J will be able to invest and concentrate its resources on segments with high sales and margins, which should increase the company's income and cash flows at a faster rate than at present.
Furthermore, JNJ's plan is expected to increase shareholder returns through higher dividends and share repurchases because of its growing cash flow. With these factors combined, JNJ's stock price will undoubtedly rise, as will its market cap.
On top of these, JNJ offers a 2.6% dividend yield. Admittedly, this isn’t remarkably high. However, investors can rely on its steady rise. Moreover, JNJ is a Dividend King. In fact, it recently raised its payout for the 60th year in a row.
If these aren’t enough to cement the company’s reputation as a solid investment, consider the fact that JNJ is one of the largest holdings in Warren Buffett’s (BRK.A) portfolio.
It’s also one of the only two publicly traded companies with the coveted AAA credit rating from S&P. For context, the US government only has an AA rating. Needless to say, this makes JNJ one of the safest—if not the safest—income stock to date.
Overall, JNJ has been diligent in getting all of its ducks in a row and is poised to provide market-beating returns to patient investors.
Mad Hedge Technology Letter
July 1, 2022
Fiat Lux
Featured Trade:
(WHO’S BEING HONEST?)
(META), ($COMPQ)
It’s fair to take a look at the Nasdaq index and predict there’s a substantially strong chance for the Nasdaq ($COMPQ) to hit 9,310 which is around 12% from here.
The people in charge have been sounding out how great the US economy is with Federal Reserve Chair Jerome Powell saying the US economy is in “strong shape” and the central bank can reduce inflation to 2% while maintaining a solid labor market.
I believe Powell is overplaying his hand and the economy isn’t as strong as he says it is.
Energy stocks were up 29% in the first half of 2022 and their outperformance contributed to pushing other sectors down like technology.
The re-rating of the economy to worse than first thought will translate into worse than expected earnings projections and take us down closer to 9,310 on the technology-heavy Nasdaq index.
That’s only about 12% from today.
The US central bank is still fighting an uphill battle to contain inflation.
Let’s do some simple math.
The Fed Fund’s rate is currently sitting at 1.75%.
Considering that inflation is at 8.65%, the Fed would need to raise rates another 6.85% for real inflation to be zero.
The Fed said they hope to get to 4% by the end of 2023 which would still represent relative inflation of 4.65%.
That’s also 17 months away and worse unintended consequences could manifest along the way which is why raising it all at one time would probably be better than not at this point.
Powell’s comments came at a panel discussion at the European Central Bank’s annual policy forum in Sintra, Portugal.
Ironically, peel back a layer and the environment is starting to unravel in Silicon Valley.
One bellwether to take note of is Meta (META) or Facebook which announced they will cut plans to hire engineers by at least 30% this year, CEO Mark Zuckerberg told employees on Thursday, as he warned them to brace for a deep economic downturn.
“If I had to bet, I'd say that this might be one of the worst downturns that we've seen in recent history,” Zuckerberg told workers in a weekly employee Q&A session.
Zuckerberg confirmed that layoffs are also coming saying the company was “turning up the heat” on performance management to filter out staffers unable to meet more aggressive goals.
“Realistically, there are probably a bunch of people at the company who shouldn't be here,” Zuckerberg said.
Chief Product Officer Chris Cox said that the company must “prioritize more ruthlessly” and that the economy is in “serious times here and the headwinds are fierce.”
Powell’s comments are diametrically opposed to what Zuckerberg and Cox are revealing to their staff and these Facebook executives have access to much more detailed data on the state of the consumer than Powell.
Who should we believe?
Powell just got re-elected to another 4-year term which in fact was a reason why he said he was late to raise rates.
Zuckerberg and Cox can’t afford to wait to get “re-elected” because in the game of public businesses there are only the ones who are left behind and the ones who do the leaving behind.
Powell can slow play the rate situation and pedal out false narratives because he is guaranteed a 4-year term which will most likely be his last before retiring to a nice benefits package and pension.
Zuckerberg is presiding over a failing Facebook business where Meta is sucking up lots of capital expenditure to develop an uncertain metaverse.
My bet is that we will see many tech companies reinforce what Zuckerberg and Cox laid out.
Companies will need to tighten up shops and shave off the fat.
The incremental eyeball is much harder to secure and monetize in July 2022 than it was during the great bull market of 2018 and 2019.
Tesla CEO Elon Musk has also reiterated similar talking points and the odd man out appears to be Powell.
9,310 could be here sooner than we think.
