"We are unicorn hunters." - Said Founder and CEO of SoftBank Masayoshi Son
Mad Hedge Technology Letter
July 6, 2022
Fiat Lux
Featured Trade:
(GOOD NEWS IS BAD NEWS)
(ARKK), (TSLA), (APPL), (ASML)
As the bear market rally picked up steam Tuesday with even Cathy Wood’s growth ETF (ARKK) gaining 9%, it’s clearly a reaction to the Nasdaq repricing its biggest underlying risk.
The market is now pricing in a global recession and that has replaced inflation as the number one worry for investors.
This new development has led to the Nasdaq sniffing out the return to the bad news is good news effect.
That is why the U.S. 10-year treasury yield cratered from 3.5% to 2.8% which reflects the future expectation of a pulled-forward global recession.
This would trigger a fresh interest rate lowering cycle by global central banks.
Lowering rates is good for Nasdaq stocks and tech stocks will be a big beneficiary of lowered rates as they have overshot to the downside on this rate rise cycle.
That doesn’t mean it’s all rosy in the land of the Nasdaq, hardly so.
We are still in the fog of war and amid improving technical data like lower oil prices, worsening economic relations between the large nuclear-equipped countries are not only moving the world towards a soft technological decoupling but a hard fracturing of general relations.
My first thought was will China finally strike back against the United States in the form of destroying Tesla’s (TSLA) Gigafactory in Shanghai or blacklist Apple (AAPL) iPhones in China.
These two events would be the point of no return for the two countries’ economic cooperation and anything beyond that, relations could spiral out of control rapidly and even be the impetus for a Taiwan takeover.
Clearly, Silicon Valley does much better when the world is getting along, and everyone is paying for their stuff.
That can’t happen as smoothly with the world rapidly balkanizing which is a big reason for massive selloffs in Netflix whose international audience has soured.
On the production side of things, Chinese-produced stuff won’t be able to get sold back to Americans using Guangdong factory production as semiconductor chips and equipment have become the focal point of national security efforts.
The US has placed export controls against Chinese technology firms from purchasing chips and equipment.
Now Biden is blackmailing the Netherlands to ban one of its top chipmakers from selling semiconductor equipment to Chinese companies.
The Biden administration is pushing hard for Dutch chip equipment maker ASML Holding NV (ASML) to halt selling some of its older deep ultraviolet lithography, or DUV, systems.
Even though these machines are one generation behind cutting-edge, they offer high-tech chips for automobiles and consumer electronics.
Washington has also pressured Japan to stop shipping semiconductor machines to China.
Since the Trump tariffs, China has been the biggest buyer of chipmaking gear for the last two years.
On the European front, regulation is hitting home hard as the U.K. has initiated investigations on Amazon’s selling practice by in-house brands and is looking into Microsoft’s anti-competitive acquisition of Activision.
If American tech companies have nowhere to produce, nobody to acquire for instant growth, and nobody to sell to then it becomes a massive issue for shareholders.
Even though the equity mojo boost of good news is bad news is a nice reprieve, a global recession where many companies fire staff and can’t sell their product because lack of parts is worse.
Therefore, we are still issuing a sell the rallies in tech type of recommendation to our readers while acknowledging there has been a small wave of dip buyers entering back into the game.
“I fear the day when technology overlaps with our humanity. The world will only have a generation of idiots.” – Said German-born Theoretical Physicist Albert Einstein
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.
“I fear the day when the technology overlaps with our humanity. The world will only have a generation of idiots.” - Said Theoretical Physicist Albert Einstein
Mad Hedge Technology Letter
June 29, 2022
Fiat Lux
Featured Trade:
(CHINESE TECH ROTATION)
(NIO)
When stocks capitulate, the initial reversion to the mean often is a lucrative bounce.
Chinese tech stocks are going through that honeymoon process right now.
After being targeted systematically, the Chinese communist party changed its tune.
A clearer and more defined regulatory framework around these internet businesses is a definite positive.
There is a growing consensus that the “worst is behind us” for Chinese tech stocks and investment banks have been shooting out stock upgrades.
However, I would recommend readers to never touch Chinese tech stocks like your life depends on it.
Having traveled and lived in the country numerous times, I can say that the foundations are rotten to the core there causing buildings literally to fall over and balance sheets even more rotten than the felled buildings.
Even more damning is that locals assume that everyone else is being shady as well which they feel justifies themselves to participate in less than stellar business practices.
So when I read a report of Chinese EV maker NIO (NIO) denying a report published by short-seller Grizzly Research claiming the company is exaggerating revenue and profit margins, I am not surprised.
Grizzly Research said that NIO is playing “accounting games to inflate revenue and boost net income margins to meet targets.”
The report examined the company’s creation of Wuhan Weineng Battery Assets Company.
The company was created in 2020 and includes NIO, EV battery giant Contemporary Amperex Technology.
The business owns the batteries that NIO drivers can, essentially, pay a monthly fee for in what NIO calls BaaS, short for battery as a service.
NIO pioneered separating the car purchase from the battery purchase. A NIO buyer can choose to buy an EV for a lower price and then pay for the battery on a monthly basis. It’s a way to lower the cost of an EV and make it more comparable to buying and filling up a gasoline-powered car.
NIO recognizes sales when it sells batteries to Weineng. That’s the issue Grizzly has with the company.
Plastering fake sales on the balance sheet that are in effect a sale to oneself and clocking that as gross income is not a shocker.
In fact, I would be surprised if that is all they are doing behind the scenes. Usually, it’s a million times worse in China.
At least there is a product and it’s not a Potemkin product!
Chinese tech companies are not beholden to the same accounting standards as United States registered companies.
They are not GAAP-stamped companies and more or less just fill out their balance sheet as they see fit.
They then register on America’s public exchanges as an American Depositary Receipt (ADR) which doesn’t stringently check the financial health to the same degree as if an American company went public in New York.
Even more bonkers, Chinese management isn’t exposed to any criminal or civil liability which emboldens Chinese tech firms listed as ADRs to lie and cheat as much as possible to boost the share price.
It is now fashionable to say investors are rotating back into China after a year of heavy selling that wiped out almost $2 trillion.
Just be aware that your money could experience a covid zero reaction from the Chinese government and these companies are all dealing in fake numbers to a substantial degree.
That is why I can never recommend buying any Chinese tech stock.
There are so many better opportunities in America.
“A founder is not a job, it's a role, an attitude.” – Said Founder and CEO of Twitter and Square Jack Dorsey
