Tech Letter Archives - Mad Hedge Fund Trader

Ring the Alarm

The backlash has been fierce, and this is just the beginning as Chinese tech companies decouple from the West and hard pivots to Russia.

My good friend, the Founder of Huawei Ren Zhengfei is at the forefront of Chinese tech and can feel this bullwhip effect the most because of his access to critical macroeconomic data at his fingertips.

China isn’t the roaring economic miracle it once was.

This time it's different.

At some point, building ghost cities leading to snazzy accounting tricks ends in a collapse like a house of cards.

Unproductive capital frittered to waste is actually coming back to haunt the Chinese tech sector.

The Chinese tech sector for decades was the bellwether for global economic growth as its tech giants like Alibaba and Tencent went from producing pitiful products to challenging the US for tech supremacy.

When Ren talks, we listen.

In a leaked memo, Ren confided to Huawei staff “the chill will be felt by everyone” and the company must focus on profit over cashflow and expansion if it is to survive the next three years, indicating further job cuts and divestments.

“The next decade will be a very painful historical period, as the global economy continues to decline.”

Instantaneously, revenue targets and margin expectations were pulled back.

The deep-seated panic within the highest levels of Chinese tech is a warning to the rest of the world.

When China sneezes, the rest of the world catches a virus, no sarcasm intended.

Ren’s talking points was rounded out by “we must make survival the most important guideline.”

If I read between the Hangzhou tea leaves, this most likely means massive job cuts in some of the best tech companies.

The likes of Baidu, Huawei, and Tencent have been trigger-happy cutting jobs as if it’s almost fun.

I can also surmise that his comments will lead to raising the price of existing Huawei products and avoiding big investments into new ideas.

Huawei has found the road to riches rocky as hell as nobody outside of China is willing to buy their smartphone now that Google’s array of apps is banned from Huawei’s operating system.

That means Westerners like me will not be able to use Gmail, Google Maps, Google search, Google Chrome, and Google Cloud.

Going from economic juggernaut to panic mode, “survival” is a huge fall from grace for the Chinese and its best company Huawei.

The country might not even be able to fake the annual pageantry of reaching its annual economic growth target which this year is 5.5%.

It’s that bad in the country that Mao and collectivization built.

Ren’s memo went viral on Chinese social media, shared and discussed by more than 100 million users which freaked out the population considering it's almost taboo to lose face in this biggest Asian nation.

China’s government this week announced a further $146bn in stimulus funding to possibly promote the building of more ghost cities that they can report as economic “growth.”

Youth unemployment reached an all-time high of 19.9% in July which could represent a bad omen to the future of Chinese workers.

It’s looking quite bleak in Asia, and this could be the precursor to the recession felt in the West that is on pace to hit sometime in 2023.

A global recession would decrease the aggregate revenue for American tech companies, meaning as the pie shrinks, there is less to eat.

huwaei

August 29, 2022 - Quote of the Day

Tech Letter

“Winners never quit and quitters never win.” – Said American Sports Coach Vincent Lombardi

August 26, 2022

Tech Letter

Mad Hedge Technology Letter
August 26, 2022
Fiat Lux

Featured Trade:

(THE SPEECH HEARD AROUND THE WORLD)
(JACKSON HOLE)

Speech Heard Around The World

Tech Letter

Here you go with some on-demand commentary dissecting the future of tech stocks after the speech was heard around the world.

The morning of August 26th set among a stunning backdrop at the Grand Teton National Park in Jackson Hole, Wyoming, Central Bank Governor Jerome Powell delivered to us, the people, the financial speech of 2022.

I’ve been waiting all week for this blockbuster speech and had my bag of popcorn and glass of wheat grass smoothie waiting for me in front of my flatscreen to watch the one speech that certainly would move the tech market this year.

It didn’t disappoint. It was loaded with highly impactful soundbites.

The speech was exactly 8 minutes and 38 seconds, and I thought what was said had to be said.

My good friend Jerome spent about 2 minutes of that time explaining to us how the Fed is responsible for a job and how it’s not time to get complacent.

The rest, distilling down to 6 minutes and 38 seconds what was supposed to be a 30-minute speech, signaled to listeners: if the tone of the speech isn’t that positive, you might as well make it short and bitter to get it over with.

Remember that Jerome is renowned and lauded for his dovishness which has delivered us many elevated years of performance in the Nasdaq.

What’s my hot take?

Jerome came out with a largely hawkish tone and even used some stronger than usual verbiage, which is why the Nasdaq plummeted.

The Fed is on record for saying how strong the job market is and how the economy is so great, but they finally acknowledged that the job market will likely “weaken” which is a massive about-face confession.

We’ve seen about 100,000 job losses so far in Silicon Valley tech companies and even Facebook is using an algorithm to fire selected employees and high-pressuring leftover employees to increase production or face a similar cut.

Expect a tsunami of tech job losses in 2023.

Jerome also acknowledged that businesses and consumers will face upcoming “pain” which is a word I’ve never even heard him say in private let alone to the world.

He then later said that he expects a “sustained period of below trend growth” which is the “unfortunate cost of reducing inflation.”

What does this mean for tech stocks?

Inflation continues as the largest and most outsized risk to Nasdaq performance for longer and more serious than first expected.

Rates will go higher interest rates and this scenario clobbers tech companies by reducing the profits of future cash flows.

You can bet that every CFO is biting their nails now, updating their models to reflect the new reality of higher rate expectations, shrinking margins, higher expenses, and lower profits.

The driving forces behind the unrivaled inflation still exist such as the foreign military conflicts in Asia and Europe, supply chain snarls, or even China’s dystopian lockdowns. Many companies like Apple have decided to buy back stock or execute stock splits instead of investing in new businesses. EVs are having a tough time achieving production goals. Just a lot of no bueno all around.

Sadly, these external forces will continue to persist until there is some sort of solution to one or any of them.

Up until now, there hasn’t been any breakthrough, and the clock is still ticking.

Ultimately, inflation can become entrenched and it’s the Fed's job to break the back of those expectations because like how in low inflationary environments, businesses and customers set prices based on expectations of low inflation, the same rings true for high inflation and the prices set based on out-of-control inflation.

Naturally, tech companies will also feel the pain, sadly, this was a highly negative speech for tech stocks, but if the CPI can continue its downtrend, we will see a Nasdaq snapback.

speech

August 26, 2022 - Quote of the Day

Tech Letter

“It has become appallingly obvious that our technology has exceeded our humanity.” – Said German-born Theoretical Physicist Albert Einstein.

August 24, 2022

Tech Letter

Mad Hedge Technology Letter
August 24, 2022
Fiat Lux

Featured Trade:

(ZOOMING TO FAILURE)
(ZM), (MSFT), (TDOC)

Zooming To Failure

Tech Letter

Let’s call it what it is – a one-hit wonder.

Zoom Video Technologies (ZM) was the darling of 2020 as we idled in our homes and succumbed to digital use if we liked it or not.

ZM became the hot item because they had an edge in the video conferencing product and their stock price boomed as we were all hooked on their software.

Fast forward to today and ZM CEO Eric Yuan wishes conditions were similar to 2020 so he can somehow combat the growth of Microsoft Teams which is essentially the same product as ZM but offered for free from competitor Microsoft (MSFT).

Teams keeps adding new features and when the inflationary monster disrupts the balance sheet too much, enterprises stop paying for ZM.

ZM is having a tough time battling it out with free software.

The company also cut its annual revenue forecast, saying it’s losing sales from consumers and small business faster than anticipated.

Zoom’s breakneck growth during the pandemic has cooled considerably as offices reopen and other software copycats take shape.

Online sales to consumers and small businesses are expected to decline 7% to 8% this year, Chief Financial Officer Kelly Steckelberg said on a conference call.

Zoom has responded by intensifying its focus on larger enterprise clients and pitching an expanded line of products such as software for customer contact centers.

In June, the company unveiled a new service bundle, Zoom One, to highlight offerings like internet-connected phones and physical conference rooms.

I’m not positive on these secondary offerings, particularly Zoom Phone, and see few use cases for it moving forward.

Sales to enterprise customers are expected to grow by more than 20% this year.

The company also reduced its annual sales forecast to about $4.4 billion from its May projection of as much as $4.55 billion. About $115 million of the cut is due to the “broader economic environment” and $35 million is due to the stronger US dollar.

ZM has effectively glamorized Facetime on the computer and the bad news is that there is no moat around this proprietary technology.

Zoom Phone is literally Facetime with no computer.

Good luck finding the incremental client.

This is the reason for big tech catching up to ZM so quickly and after relinquishing their first mover advantage, there has been no second act or even 1.5 act. It’s a quickly eroding wasteland for the ZM brain trust.

Then the company referenced the “broader economic environment” as to reasons for a lower forecast confirming what many people already know that we are barreling straight into a 2023 recession and ZM will be a discretionary service that gets cut with ease.

Not even the newly crowned federal student loan forgiveness group will spend their new bonuses on this unneeded software.

To be fair, it hasn’t only been ZM that has been body slammed, the other lockdown darling Teladoc (TDOC) which specializes in remote health consultations is trading at 5-year lows.

The stock is almost 10X lower than at its point in February 2021.
Even if there’s an apocalypse, users won’t gravitate to ZM highlighting the outsized risks of a one-trick pony with no competitive advantage.

Stay away from this stock.

zoom

August 24, 2022 - Quote of the Day

Tech Letter

“Formal education will make you a living; self-education will make you a fortune.” – Said American entrepreneur Jim Rohn

August 22, 2022

Tech Letter

Mad Hedge Technology Letter
August 22, 2022
Fiat Lux

Featured Trade:

(SELF-DRIVE TO HIGHER PRICES)
(TSLA), (FSD)

Self-Drive to Higher Prices

Tech Letter

If you thought prices couldn’t go any higher and a reversion to the mean is in store, you are painfully wrong.

Sure, maybe you might catch the low inventory 10% sale on the old model, but I can guarantee you that the next iteration will be aggressively pricing itself higher.

If you think your next iPhone will be cheaper than the last, then please give me a call, I would love to debate.

Let me just lay down this one caveat by saying even if inflation falls to 5-7% and the administration calls it deflation or what-not, the aggregate inflation over the past few years will be felt at the individual level, but at the algorithmic stock market trading level, 5-7% is better than 9.1% meaning the stock market will slingshot higher.

Remember that trading is controlled by the algos, it’s around 87% of trading in 2022.

Pulsating price increases are on the menu at EV bellwether Tesla (TSLA) and my best friend Elon Musk’s company.

Elon announced just over the weekend that the price of Tesla’s Full Self-Driving system (FSD) will increase by $3,000 next month, the second time it has risen in price this year.

I can almost guarantee you there will be a 3^rd increase by Christmas and 4^th increase early in 2023.

That’s just the word out there on the streets.

Tesla began rolling out its FSD Beta software update release version 10.69. Consumers will see the price rise as of Sept. 5.

Every new Tesla vehicle comes with a driver assistance package called Autopilot, which the company says aims to reduce the driver’s overall workload.

That package contains features such as “Traffic-Aware Cruise Control” through which Tesla vehicles can automatically detect stop signs and traffic lights and automatically slow the vehicle down, as well as “Autosteer.”

These rely on eight external cameras fitted in the vehicle along with “powerful vision processing,” sensors, and various software to ensure the vehicle remains within a clearly marked lane and at the same speed as surrounding traffic.

Currently, Tesla’s FSD software costs $12,000 or consumers can purchase a subscription of $199 per month.

Since Tesla’s FSD system began rolling out in 2019 at a price of $5,000, Musk has regularly increased the price. In 2020 it jumped to $10,000 and in September 2021, it rose again to $12,000.

The strategic gambit sees no end.

Very much like the price of a dozen eggs at the grocery store, prices aren’t going down anytime soon.

Any short price reduction is met with a huge price increase in the future.

Technology is feeling many of the same headwinds such as supply chain headwinds, wage spirals for tech developers, stock compensation not logically based on lower stock prices, diminishing returns of technology, cash crunch on balance sheet, and explosive interest rates.

What does this all mean?

Technology, again like current Manhattan rental prices, becomes a luxury.

Your monthly broadband price will become more expensive upon signing the next contract.

Your iPhone and MacBook will get more expensive by the tune of 30%.

Your streaming subscriptions will become more expensive like Disney Plus and Hulu’s $4 per month price hike.

US tech companies producing these must-have items will pass 100% of cost increases to the end consumers knowing the end user cannot progress career and life without critical technologies.

Tech has checkmated us and more importantly, they bask in their strategic position.

Long-term they will still be very successful with much higher stock prices even if Google’s ad revenue tanks in the upcoming recession.

Tech will come back because it always does, and the US economy will not be in a never-ending recession once rates go back to 0.

Naturally, if this scenario plays out, only the Goliaths prosper, and everybody gets wiped out which is why we are seeing tech start-ups going to hell in a handbasket.

When observing the cream of the crop venture capitalist Marc Andreesen deliver $350 million to fantasist Adam Neumann to become a property manager, it’s clear that there are not enough good ideas in tech now and that interest rates are still way too low.

PREMIUM SOFTWARE FOR A PREMIUM CAR