Mad Hedge Technology Letter
July 15, 2022
Fiat Lux
Featured Trade:
(THE HUNT FOR RAW MATERIALS)
(TSLA), (F), (GM), (CATL)
Tesla (TSLA) CEO Elon Musk has been in the headlines a lot lately, and I don’t write about him because I idolize the guy.
He is simply the richest man in the world and straddles the vanguard of space technology and EV technology, all while failing to purchase one of the biggest social media platforms in the world.
Naturally, his point of contact in the business world is immense, the man moves markets and we need to acknowledge it.
His latest quip has to do with natural resources - particularly lithium.
He defined the term energy independence for a world full of electric cars: You simply need the batteries.
His tweet of “lithium batteries are the new oil” is an updated variation of “data is the new oil.”
It doesn’t mean lithium is the new data but in a conceptual future when lithium batteries power the potential iPhone on wheels product, it gets close to or at the very minimum, it is complicit in accelerating data generation.
Batteries may be the future. But for now, oil is still the new oil.
About 20 million barrels of oil are consumed in the US every day. (About eight million barrels are imported.)
About two-thirds of oil ends up in gas tanks, according to the US Department of Energy.
Outrageous oil prices is why the American consumers want to buy an EV, there is a massive backlog of orders.
The American Automobile Association reported that 25% of new car buyers surveyed are considering an EV as their next car.
But, as Musk said, EVs can't completely solve the energy independence problem. Because the oil problem is simply replaced by the problem with lithium-ion batteries.
OPEC countries don't produce many lithium-ion batteries.
They are mainly produced in Asia. The Chinese company Contemporary Amperex Technology, better known as CATL, manufactures about 30% of the electric car batteries produced worldwide, according to Ford CEO Jim Farley.
CATL has grown into the 800-pound gorilla in the room with a market capitalization of $200 billion, it competes with Toyota and competes well.
Most automakers, including General Motors (GM) and Ford (F), predict that by 2030 around 50% of new cars sold will be battery-powered. That corresponds to up to ten million EVs per year in America alone.
Manufacturing batteries in the US is part of a strategy to become independent in the lithium-ion battery space.
Another factor is the raw materials required for the batteries. Lithium is mainly mined in South America and Australia and mostly processed in China.
Other raw materials such as nickel and cobalt come from many other countries like the Congo.
Automakers, including Tesla, may be considering investing early in the battery value chain. This could protect them from commodity price shocks like those experienced by US consumers in 2022.
Musk hopes to front-run the situation and that means investing in Lithium-ion solutions instead of one day held hostage by Chinese price gouging.
The communist Chinese are the ones who hope to corner the market with state subsidies.
There are many things I envy about Musk, but I particularly appreciate his knack for pre-emptively looking for unique solutions before problems get out of hand.
That can’t be said for most American corporations that are held hostage by the short-termism of quarterly earnings reports.
Musk has a longer leash, and he certainly uses it to abandon which is why he can handle a higher risk tolerance.
Tesla shares were only recently at $1,200 and at $700, this represents immense value for long-term buy and hold investors.
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)
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.
“Raising corporate taxes is fine to discuss. Taming inflation is critical to discuss. Mushing them together is just misdirection.” – Said Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
July 11, 2022
Fiat Lux
Featured Trade:
(TOYING WITH BAD MANAGEMENT)
(TWTR), (TSLA)
Musk has pulled out of the Twitter deal.
By the time Twitter (TWTR) gets this acquisition through the courts which is now estimated as much as 5 years, Twitter will be bankrupt.
There will naturally be some movement before then.
Regardless of timing, Twitter shares are set to plunge. And you can't then blame Elon Musk for Twitter's demise and poor management.
In fact, Twitter is quite infamous in Silicon Valley for one of the worst management teams and this open secret has come back to hurt them in the wallet.
This is highly bullish for Tesla’s (TSLA) stock because it avoids Musk’s capital getting tied up in an overpriced Twitter deal.
TSLA stock bounced on this news and even if he does reverse course and buy Twitter for a discount as it drops fast, it will be seen as a great bargain for Musk and TSLA shares.
Tesla’s CEO announced his plans to buy social networking site Twitter in April for $44 billion and many thought this wasn’t a serious offer to begin with.
The contract says that Musk is required to pay a $1 billion breakup penalty and he has indicated that he is also trying to get out of that.
I believe Twitter was foolish in setting such a low break-up fee for the richest man in the world.
For most people, a $1 billion fee would be astronomical, but not when one can just liquidate a few odd Tesla shares with a snap of the fingers.
This low fee has been exploited and leveraged to get what he wants because he doesn’t care if he has to pay it.
In hindsight, management should have set Twitter’s breakup fee at a level which would have hurt the richest man in the world meaningfully and created a massive windfall for Twitter.
They didn’t and now the circus begins and who knows when, who, and how much will be the payout if any.
My guess is a termination fee of something around $10 billion would have been quite painful and cost-prohibitive for Musk.
Readers should remember that Musk offloaded $4 billion of Tesla shares around April to pay for Twitter. He sold out at all-time highs and so even if he paid back the $1 billion, the penalty is largely blunted by shifting around his resources.
My guess is that Musk exploits this situation to drain Twitter of its financial resources while buying its stock on the way down.
After he beats the company into submission, there will likely be a huge discount.
If the stock goes to $25, he’ll get a 60% discount on what at first would have been a $44 billion price tag.
Twitter has been fooled big time, made to look incompetent which exactly was the working assumption taken into this deal, which management has totally botched.
TWTR is trading at $34 today which is a far cry from the $54.20 he agreed to buy Twitter at.
This isn’t about Musk because everyone with half a brain would pull out of this deal with a deleveraging tech bubble.
My bet is Twitter slowly grinds lower and Musk finds a way to get Twitter on the cheap then fires the whole management team.
“I would like to die on Mars. Just not on impact.” – Said Tesla Founder Elon Musk
Mad Hedge Technology Letter
July 8, 2022
Fiat Lux
Featured Trade:
(THE END OF SAMSUNG)
(SAMSUNG), (QCOM), (MU), (AAPL)
Samsung, Korea’s stalwart chaebol, is toast.
Remember the past two years when lockdowns were in vogue?
Digital products were the hottest item in the world as everybody was stuck in their homes.
Growth brought forward is never a bad thing for a company, especially tech companies.
However, it sets the stage for hard comps to topple and a reversion back to the mean which can look messy.
The world needed chips and phones back then, the world is now traveling, getting on planes, and taking cruise ships to the Caribbean.
This is why video game growth is quite subdued this year.
Samsung internally has also been taking a machete to its forward-looking estimates multiple times in order to front-run collapsing demand.
The boom bust nature of chips and devices is an inherent beast in the industry that is hard to tame.
Samsung was able to hit watered-down targets in the second quarter, but that was mainly due to a 7% currency tailwind of the Korean won sliding fast just like many Asian currencies.
Take a look at the Japanese yen, it’s gone off a cliff all the way to 136 per $1.
I remember when I took a vacation to Tokyo in 2011, Japan felt awfully expensive at 77 yen to $1.
The currency tailwinds are a transitory elixir yet under the hood, these economies are weakening fast.
The aging population and cost of living crisis are also crushing sales.
Internal data reveals deeper damage than initially thought.
Operating profit missed by a wider margin than revenue beat and prices for its premium products isn’t fetching the prices they once did.
For example, Samsung markets its Exynos 2200 chips as on-par rivals to the Snapdragon 8 Gen 1 and Apple’s (AAPL) A15 Bionic chip found in smartphones.
However, the Exynos fails to compete with its supposed flagship chip comps, performing at levels lagging almost a generation behind in speed and functionality.
It’s clear that devices made with Exynos chips simply won’t be able to sell for as much as flagship Android phones with Snapdragon 8 Gen 1 or Apple iPhones with A15 Bionic chips.
I fully expect the operation profit to go from 6% to 3% for Samsung.
US rival Micron (MU) has already rung the alarm. While the world’s third-largest maker of DRAM posted revenue and operating profit for the quarter in line with estimates, its forecast for the coming three months was 20% lower than expectations.
It now sees the PC and smartphone markets much weaker than previously thought.
Tech has experienced a massive downgrade in terms of sentiment and sales while massive pressure on the supply side costs.
Cloud computing and streaming services which all need chips have been the poster boys of underperformance.
Growth stocks have also gotten killed.
I do believe this is more a signal of deeper individual malaise at Samsung and an indication they are getting trounced by Chinese firms who just do it better for cheaper.
Margins won’t ever come back up for Samsung as they lack the nimbleness of the Chinese and brute power of the American tech.
They are essentially stuck between a rock and a hard place where products will become less competitive, face rapidly shrinking margins, and participate in a Korean economy that lacks vibrancy.
Once chip stocks bottom, avoid Samsung, and get into Qualcomm (QCOM) and Micron (MU).
