Mad Hedge Technology Letter
August 25, 2023
Fiat Lux
Featured Trade:
(ANOTHER LOW BLOW FOR TECH)
($COMPQ), (NVDA)
Tag Archive for: (NVDA)
The almost four-year “transitory inflation” is a stark reminder that it isn’t smooth sailing yet for tech stocks ($COMPQ) after a glorious first 7 months of the year.
In hindsight, it appears more and more as if the great outperformance of the first 7 months in tech stocks was mainly due to a mean reversion after 2022 another surge helped by Nvidia’s (NVDA) AI hype.
The last 4 months of the year don’t appear as if these two tailwinds will light rocket fuel under tech stocks.
It’ll be harder to make money without those two turbo boosters.
Today tech got even more bad news as Federal Reserve Chair Jay Powell said the central bank is "prepared to raise rates further."
The hurtful part of this for tech stocks is that Powell’s comments absolutely have a knock-on effect to tech products.
Who wants to add that extra layer of anti-viral software protection when the budget is tight?
Powell is narrowing the goalposts for tech companies.
Which Tick-Tock influencer is going to re-up to the better iPhone when they can’t afford it?
According to Reuters, Americans are now paying around $800 per month extra for the same daily necessities they paid for before March 2020.
That is $800 that could possibly go into more tech hardware and software that isn’t.
Powell doubled down on crushing inflation saying it is the “Fed's job to bring inflation down to our 2 percent goal, and we will do so.”
Right away we saw Fed futures expectations adjust to this new information with the “higher for longer” mantra taking hold in reality.
The consensus is now that the first rate cut will be sometime in the summer of 2024 of .25%.
Traders should remember that the first rate cut was priced in at the end of this year just recently.
The Fed has gotten more hawkish lately and that is demonstrably negative for the short-term trajectory of tech stocks.
In 2023, accelerating US economic growth of 2.4% has presented a challenge to the Fed on several levels, with the Fed chair noting the overall economy "may not be cooling as expected."
And the strength of the labor market has been at the center of this challenge.
While monthly job gains have cooled through the summer, Powell said Friday the labor market's rebalancing "remains incomplete."
In turn, wage pressures have moderated.
The Fed really has two problems on its hands as it seeks to induce a recession – full employment and blistering economic growth.
The fact is that the stock market and the economy have handled these itty bitty .25% interest hikes gracefully.
That would hardly be the case if rates were hiked 5% at one time.
Businesses have had time to adjust to the new normal and so has the tech industry by firing a swath of ineffective employees.
The net result of this is bad for technology stocks in the short term, but staving off a recession is also in the interest of the tech sector as well.
I expect tech firms to keep shedding the fat off their business model as we barrel into sink-or-swim times.
There won’t be excess money sloshing around in the system for the foreseeable future and tech bankruptcies should rise.
That doesn’t mean tech stocks will crater, but it does mean many business models need to consolidate before another move up.
The real weak hands will finally get flushed out.
Tapping the debt market because of poor management decisions is now route one to bankruptcy and that hasn’t been the case in technology companies for a long time.
Mad Hedge Technology Letter
August 23, 2023
Fiat Lux
Featured Trade:
(LOSING THE EDGE)
(PTON), (NVDA), (MSFT)
It’s looking like mission impossible for Peloton (PTON) who, if some might remember, was the darling of the lockdowns a few years ago.
This is really a story of making hay while the sun is shining because the sun has decided to tuck itself behind clouds indefinitely to the chagrin of PTON.
I have posted a few negative critiques of PTON because it’s accurate to distill the company down to an iPad on a stationary bike which charges for an expensive subscription.
The fact is once the world opened up, people stopped using PTON products and happily decided to go back to their old routines like visiting fully serviced gyms or exercising outside.
Even the consumers who decided to quit working out altogether are most likely traveling the world spending their PTON subscription money at a pizza joint in Italy.
The downdraft all came to a head today when PTON dropped yet another disastrous earnings report and their stock is down 23% at the time of this writing.
They whined about the decline in paying subscribers and said the cost of an equipment recall was denting its profit.
The fitness-equipment company cautioned that it expected to have negative cash flow in each of the next two quarters as it keeps fighting high inventory levels, and another sequential drop in subscribers.
Chief Executive Barry McCarthy played down the crashing stock price by explaining that the stock market isn’t in sync with the actual business and doubled down by emphasizing the company has its best days ahead of itself.
The New York company also said it is back to purchasing more bike and tread inventory, as it is in a more normalized inventory position than a year ago.
Peloton has struggled with its pricing strategy and recently further lowered the prices for its treadmill and rower by about 14% and 6%, respectively.
Peloton had told investors that it was looking to stem losses and start generating cash flow from its operations after slashing jobs and restructuring its business.
In the latest quarter, the company reported a negative cash flow of $74 million, weighed down by a legal settlement.
Peloton expects to end the September quarter with paying connected fitness subscribers of 2.95 million to 2.96 million, down from three million as of the end of the June quarter.
It has already received about 750,000 requests for replacement seat posts, ahead of internal expectations, and has been able to fulfill 340,000 of them.
Revenue for the fiscal fourth quarter ended June 30 fell 5% to $642.1 million.
Peloton’s average monthly connected fitness churn was 1.4% in the quarter, increasing from a 1.1% churn in the prior quarter, as a result of the company’s bike-seat-post recall.
This cautionary tale dovetails accurately with my wider thesis of smaller brand-named tech companies losing the war against the tech behemoths.
One little misstep and the inner problems are magnified and PTON has numerous issues under the hood of the car.
The CEO hyping up the company is a fool’s game because the writing is on the wall for this product.
There is no competitive advantage in their product and I believe subscriptions and hardware will continue to fall off a cliff.
Investors should head to higher water and look at premium names like Nvidia or Microsoft.
These types of companies possess strategic footholds in the leading technologies in the world and I can’t say the same for PTON.
PTON will continue to trend into the dustbin of history and don’t get fooled into this stock reversing any time soon.
Avoid this stock like the plague.
Global Market Comments
August 21, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LEARNING A NEW WORD),
(JPM), (WPM), (FCX), (OXY), (CCI)
(SPY), (TLT), (TSLA), (NVDA), ($WTIC)
CLICK HERE to download today's position sheet.
It’s not often that I learn a new word, at least in English anyway. Anyone who has read all 4,000 pages of John Steinbeck, where you are sent running for your Funk & Wagnalls on every page, shouldn’t be surprised too often. Steinbeck spent two winters house-sitting at Lake Tahoe where he memorized the dictionary cover to cover. But, last week I was.
The word in question is “disinversion.”
Disinversion happens in two ways. When bond yields fall and short yields fall much faster, you get good disinversion and stocks usually rise. This is what I expect to happen in 2024 and is why I am loading the boat with falling interest plays like banks (JPM), precious metals (WPM), commodities (FCX), energy (OXY), and REITS (CCI).
However, stock markets are insecure things, afraid of their own shadows, always shrinking from a fight, and constantly looking for new reasons to worry. Now they are also losing sleep over disinversion.
Disinversion also takes place when short rates are falling but bond yields are rising. When that happens the real estate market gets slaughtered but sky-high mortgage rates, the economy collapses and stocks fall. The good news is that bad disinversion only happens about 10% of the time.
However, a rising number of bond analysts are raising the alarm that we may be in for a dose of the bad kind of disinversion before the good kind kicks in. That could trigger a capitulation in the bond market that could take the ten-year US Treasury bond yield from the current 4.25% yield to 5.0% or even higher, and take the (TLT) down to a low of $90, or even $85. Stocks would drop 10%.
That would be a nightmare for 2024 LEAPS holder, no matter how brief it may be.
It doesn’t help that the government is borrowing now at a record pace, some $109 billion last week alone. That is why the (TLT) is probing one-year lows.
But whether bonds are inverting, disinverting, converting, or perverting, I’ll be buying two-year bond (LEAPS) if that happens. A 100% return in two years on a government bond risk sounds like a petty good deal to me, even if they are now rated only AA+, thanks to you know who. However you look at it, there is one heck of a bond trade setting up.
We may get our answer at 10:05 AM EST on Friday, August 25.
That’s when Jay Powell, the governor of the Federal Reserve, is due to be the keynote speaker at the meeting of global central bankers at Jackson Hole. Will this mark the bottom in bond prices and the top in yields?
Last year, Jay’s mumblings lasted only eight minutes and warned of “pain to come.” Pain we got, but for only two months. After that, it was nine months of pleasure in the form of straight-up stock prices.
Will Jay Powell Drop a Bomb Next Week?
Only Jay Powell knows for sure.
In the meantime, stocks will remain as dead as a doorknob and moribund, if not catatonic. Volatility ($VIX) will hug the $15 level, the “A” Team traders will remain at the Hamptons, and the number of new trades alerts emanating from me will remain precisely at zero.
There never is a profit trading when the Mad Hedge AI Market Timing Index vacillates around 50, as it is doing now. Sometimes you just get paid to wait, especially when 90-day T-bills are paying a healthy 5.25%.
So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, another new high, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, August 21, BHP (BHP) and Zoom (ZM) announce earnings.
On Tuesday, August 22 at 7:00 AM EST, Existing Homes Sales for July are released.
On Wednesday, August 23 at 2:30 PM EST, the New Homes Sales are published.
On Thursday, August 24 at 8:30 AM EST, the Weekly Jobless Claims are announced. So are US Durable Goods.
On Friday, August 25 at 7:00 AM, Fed Governor Jay Powell gives his keynote speech at the Jackson Hole Central Bankers Conference. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I am often told that I am the most interesting man people ever met, sometimes daily. I had the good fortune to know someone far more interesting than myself.
When I was 14, I decided to start earning merit badges if I was ever going to become an Eagle Scout. I decided to begin with an easy one, Reading Merit Badge, where you only had to read four books and write one review. I loved reading, so “Piece of cake,” I thought.
I was directed to Kent Cullers, a high school kid who had been blind since birth. During the late 1940s, the medical community thought it would be a great idea to give newborns pure oxygen. It was months before it was discovered that the procedure caused the clouding of corneas and total blindness in infants.
Kent was one of these kids.
It turned out that everyone in the troop already had Reading Merit Badge and that Kent had exhausted our supply of readers. Fresh meat was needed.
So, I rode my bicycle over to Kent’s house and started reading. It was all science fiction. America’s Space Program had ignited a science fiction boom and writers like Isaac Asimov, Jules Verne, Arthur C. Clark, and H.G. Welles were in huge demand. Star Trek came out the following year, in 1966. That was the year I became an Eagle Scout.
It only took a week for me to blow through the first four books. In the end, I read hundreds to Kent. Kent didn’t just listen to me read. He explained the implications of what I was reading (got to watch out for those non-carbon-based life forms).
Having listened to thousands of books on the subject, Kent gave me a first-class education and I credit him with moving me towards a career in science. Kent is also the reason why I got an 800 SAT score in Math.
When we got tired of reading, we played around with Kent’s radio. His dad was a physicist and had bought him a state-of-the-art high-powered short-wave radio. I always found Kent’s house from the 50-foot-tall radio antenna.
That led to another merit badge, one for Radio, where I had to transmit in Morse Code at five words a minute. Kent could do 50. On the badge below, the Morse Code says “BSA.” In those days, when you made a new contact, you traded addresses and sent each other postcards.
Kent had postcards with colorful call signs from more than 100 countries plastered all over his wall. One of our regular correspondents was the president of the Palo Alto High School Radio Club, Steve Wozniak, who later went on to co-found Apple (AAPL) with Steve Jobs.
It was a sad day in 1999 when the US Navy retired Morse Code and replaced it with satellites and digital communication far faster than any human could send. However, it is still used as beacon identifiers at US airfields.
Kent’s great ambition was to become an astronomer. I asked how he would become an astronomer when he couldn’t see anything. He responded that Galileo, the inventor of the telescope, was blind in his later years.
I replied, “Good point.”
Kent went on to get a PhD in Physics from UC Berkeley, no mean accomplishment. He lobbied heavily for the creation of SETI, or the Search for Extra-Terrestrial Intelligence, once an arm of NASA. He became its first director in 1985 and worked there for 20 years.
In the 1987 movie Contact, written by Carl Sagan and starring Jodie Foster, Kent’s character is played by Matthew McConaughey. The movie was filmed at the Very Large Array in western New Mexico. The algorithms Kent developed there are still in widespread use today.
Out here in the West, aliens are a big deal, ever since that weather balloon crashed in Roswell, New Mexico in 1947. In fact, it was a spy balloon meant to overfly and photograph Russia, but it blew back on the US, thus its top secret status.
When people learn I used to work at Area 51, I am constantly asked if I have seen any spaceships. The road there, Nevada State Route 375, is called the Extra Terrestrial Highway. Who says we don’t have a sense of humor in Nevada?
After devoting his entire life to searching, Kent gave me the inside story on searching for aliens. We will never meet them but we will talk to them. That’s because the acceleration needed to get to a high enough speed to reach outer space would tear apart a human body. On the other hand, radio waves travel effortlessly at the speed of light.
Sadly, Kent passed away in 2021 at the age of 72. Kent, ever the optimist, had his body cryogenically frozen in Hawaii where he will remain until the technology evolves to wake him up. Minor planet 35056 Cullers is named in his honor.
There are no movies being made about my life…. yet. But there are a couple of scripts out there under development.
Watch this space.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Dr. Kent Cullers
New Mexico Very Large Array
Reading Merit Badge
Radio Merit Badge
Here Comes the Heat-Induced Recession.
Large parts of the UK economy are shutting down today, including the entire rail system, due to extreme heat. The temperature in London today is expected to top a record 107 degrees. Much of Britain’s infrastructure is simply not designed to operate at these temperatures.
France is worse, with temperatures there reaching 113 degrees. It will not be the last time that temps get this high. As for Southern Italy, it has become uninhabitable by humans at 116 degrees.
That brings the prospect that weather forecasts may become a much more important aspect of stock market predictions than they have in the past. Just like we have to now include new covid cases and deaths as part of our daily calculation, so might the high temperature of this day.
The temperature has in effect become a new economic indicator.
As for me, I am high in the Alps at 7,000 feet where it is a much more comfortable 80 degrees. The rivers are roaring below me with record glacier melts, tar on the roads is melting, and it is too hot to hike. With ice disappearing, there is talk of the Matterhorn breaking apart.
But at least I can catch up on my paperwork. The trouble is, so is everyone else and my Internet speed has slowed from 45 megabytes per second to an unusable 10.
Below is an email I received from British Rail which I rode only last week.
Dear Customer,
You may be aware that Network Rail has urged people across the country to only travel if absolutely necessary on Monday 18 and Tuesday 19 July. This comes as a result of the extreme heat forecast for these two days.
On Monday and Tuesday, temperatures are expected to reach up to 42°C in London and the surrounding area, and the mid-30s in the western parts of our network. As rail temperatures can be up to 20°C higher than the air around them, there is a risk of them buckling in the extreme heat.
As a result, Network Rail will introduce speed restrictions across the network to minimize the force on the tracks and reduce the chance of buckling. These speed restrictions will, in turn, make journeys longer and we will introduce a reduced service on Monday and Tuesday in a bid to give our customers certainty on what will run.
The speed restrictions will particularly affect our mainline services, with long-distance services to Exeter, Salisbury, Bournemouth, Weymouth, Southampton, and Portsmouth most likely to be impacted.
Service changes are likely to appear in journey planners at short notice, so anyone who chooses to travel despite the warnings on Monday or Tuesday is urged to check their journey before setting off and to expect last-minute delays and cancellations.
If you have no choice but to travel, you are urged to carry water with you, cover up, and wear sunscreen when traveling. Find out more about traveling in hot weather here.
If you choose to delay your travel, please note that the original ticket restrictions will still apply. If you are using an Advance Purchase ticket, please travel as close to the original departure time as possible or make use of Book With Confidence.
Thank you for your patience and understanding.
Yours sincerely,
South Western Railway
Mad Hedge Technology Letter
August 14, 2023
Fiat Lux
Featured Trade:
(MACRO RISKS CLOUD THE PICTURE)
(AAPL), (NVDA), ($COMPQ)
The momentum signals that tech shares ($COMPQ) are still working themselves out and need more time to stomach Fitch’s debt downgrade.
Unfortunately, it hasn’t been a one-day dip buying opportunity and this month has been quite abysmal for the tech sector.
Just look at Apple which lost about 10% in value. That’s almost unheard of in today’s day and age.
Many investors are still recalibrating what it means to be on the end of a stunning sudden downgrade for the biggest economy in the world.
Making matters worse, the empirical data is starting to really show that China is teetering on the edge.
Centrally planned economies can have their time in the sun, but eventually, that system blows up as inefficiencies become a doom loop with no end.
There is a good chance at this point in his leadership that Chinese Communist Party Chairman Xi cannot get the right information about what is going on in China because the ranks have been solidified by cadres that leech off the system.
China could mean another leg down to close off the year instead of the relief rally that is poised to lift us back from the short-term weakness.
The Nasdaq index has dropped 4.2% this month, with top tech companies like Nvidia on the brink of 10% decreases.
Even Microsoft, despite its advancements in AI and partnership with OpenAI, has seen a 4% drop in August. Google has also shed 2.1%.
However, one tech giant that has been able to maintain a positive trajectory is Amazon, with its stock up 4% for the month.
This may be due to the company closely monitoring the productivity of employees returning to the office, as increased productivity can lead to higher profits.
The decrease in tech stocks coincides with the 10-year Treasury yield rising from approximately 3.95% in late July to above 4.1% currently.
Some signals suggest that yields may still go up and Fed futures reflect this with around a 35% chance the Fed will hike another .25% to 5.50%.
We could find us swiveling from the soft landing is complete to a “higher (yields) for longer” pivot which is effectively negative for short-term positive price action in tech stocks.
It’s entirely plausible that yields could retest the highs from 2022, based on the chart and recent trends.
This could spell bad news for tech investors, as tech stocks typically do not perform well in an environment of elevated yields. Higher borrowing costs, more attractive returns on cash, and increased scrutiny of future growth are among the challenges that tech companies face when interest rates rise.
However, the tech story is still intact albeit it a substantial amount more fragile than in early 2023.
The pain trade will be higher, but the fragility exposes itself to quicker external risks than before that could topple the market swiftly.
The United States has nobody but themselves to blame after issuing a mountain of debt and it’s largely true that when China sneezes, the world catches a cold.
Tech shares will be confronted with these two rising risks for the foreseeable future.
Best case scenario will see tech grinding higher into year-end, and don’t expect any gaps up. The low-hanging fruit has already been plucked from the vine this year.
Global Market Comments
August 14, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GREAT ROTATION OF 2023 IS ON)
(AAPL), (TSLA), (NVDA), (GOOGL), (OXY), (QQQ),
(TSLA), (WPM), (UNG), (BRK/B), (RIVN), (TLT)
CLICK HERE to download today's position sheet.