“I do not fear computers. I fear a lack of them.” - Said American writer and former professor of biochemistry at Boston University Isaac Asimov
Mad Hedge Technology Letter
June 15, 2022
Fiat Lux
Featured Trade:
(HIGH STAKES)
(LCID), (RIVN), (TSLA)
CEO of Tesla (TSLA) Elon Musk commented in an interview that he thought EV makers Rivian (RIVN) and Lucid (LCID) would go bankrupt.
Musk can’t seem to avoid media scrutiny.
Yet while there are indeed elements of truth in his words, we should take it with a grain of salt.
Tesla was once in the same position as RIVN and LCID.
Out of everyone in the world, Musk knows how it feels to be in their position now, and it most likely feels like the world caving in on you.
The pressure from shareholders can be intense, and defying gravity by creating new industries can be incredibly tedious.
What are my thoughts?
Give it some time, even though there isn’t much of it.
Musk’s timing for a sucker punch couldn’t be more cruel as we head into the Fed meeting where there is a 95% chance of a 75-basis point.
In an industry where to become profitable takes many years of losses, it hurts to hear that borrowing money will be at least .75% higher tomorrow.
This matters for Rivian and Lucid because they most likely will need to tap the debt market to keep existing.
The debt markets can either be your friend or foe as a startup.
Musk quipped that raising prices will reduce customers.
Talk about stating the obvious and yes, he is technically accurate, but I think that the comments need some color that wasn’t offered during the interview.
Rivian bled $1.5 billion last quarter, and it has significant negative gross margins and so do many unproven tech firms.
If it keeps hemorrhaging on electric vehicles it sells and delivers, it will go bankrupt unless it can raise more money, which is getting more expensive literally by the day.
Lucid is in a similar situation.
They can also sell a stake and release control over the operation which isn’t great either.
However, this is where you’d expect Rivian and Lucid to be at this stage in their evolution and Tesla was in a very similar situation around the same time.
Tesla was losing money and relied on raising more capital for a long time before it got its costs under control.
Costs are out of control because the global supply chain is in chaos, and Musk shouldn’t make it seem like he’s not dealing with the same external forces as Rivian and Lucid.
Tesla has also been raising the prices of their vehicles too so it’s not only Rivian.
Musk also can’t afford to piss off the Chinese communist party so I would say that each company has rather outsized idiosyncratic risk but in different shapes and forms.
Rivian has $16 billion in cash and even if that pile dwindles, it most likely will be enough gunpowder to get them where they need in the short run.
It’s easy for Musk to lash out from his ivory tower and he has every incentive for RIVN and Lucid to fail because every one of their customers potentially converts to Tesla.
Perhaps, he would also buy these bankrupt car companies for a discount if they did happen to topple.
Both Lucid and Rivian have good products that are sleek and what you would imagine from a new EV car.
Getting through the short-term to enjoy economies of scale is where they are trying to go and just like Tesla, it’s a hard slog with many infrastructure problems building new gigafactories along the way.
Oh, and don’t forget that not everybody is still in love with Tesla either.
There are still haters like vaccine entrepreneur Bill Gates who wagered $1 billion in put options against Tesla.
Many aren’t sold on Tesla the business yet even though the car is great.
In the short-term, I believe it’s a rate story and rising rates induced by Central Bank negligence doesn’t invite higher stock prices, nor if a recession hits next year.
On the other side, high oil prices are driving customers to EV purchases and once rate hikes are priced in later this year, EV stocks have a chance to rebound.
Mad Hedge Technology Letter
June 13, 2022
Fiat Lux
Featured Trade:
(INNOVATION IS MISSING)
(AAPL)
There is a big difference in being led by Steve Jobs, and now Apple is showing how much they miss him.
Current Apple CEO Tim Cook was never the innovative genius Jobs became.
Cook was just good at getting Chinese factory workers to finish the latest iPhones and nothing more.
The company hasn’t revealed a “killer app” or a new earth-shattering technology since the Jobs’ iPhone came out.
Cook has used his tenure at Apple to milk profits from the Apple store, iterate on the iPhone, and make sure nothing breaks inside the company.
I would consider there's nothing he has done in a different direction and he has just taken what was already built and then optimized it for profits.
That’s great until it’s not.
It’s mid-way through 2022 and next month will mark exactly 15 years since the first iPhone came out, and the most exciting update from the latest Apple developers conference to the next iPhone is a customizable lock screen.
That’s where we are at with Tim Cook – diminishing returns from technological innovation.
The lack of innovation will start to turn into a massive cancer for Apple because they won’t be able to justify charging $1,000 for a smartphone with no improvements.
Might as well just stick with the one you have and update the battery or downgrade to something similar.
The lack of innovation also allows Android phones to encroach on Apple’s moat.
That inflection point isn’t far off.
The other groundbreaking update is the ability to unsend iMessages.
This unimpressive update really is yesteryears technology, and the question should be asked to as why this wasn’t already available.
The next update is the function of scheduling emails for the future.
This is hardly an innovative feature, and this technology has been around for quite a long time.
The biggest headscratcher Cook delivered to Apple investors was Apple’s foray into short-term loans in Apple Wallet.
This year, Apple introduced a buy now, pay later feature called Apple Pay Later.
Apple has been adamant about how it plans to stay above the low-level businesses.
They don’t want to go into the scummy type of cash flow projects like selling data and so on or pawnbroker (or do they?)
Well, this is almost the same level.
Buy now, pay later is akin to payday loans, but interest isn’t charged on these loans unless payments are late.
The exorbitant interest rates kick in and consumers will find themselves in big debts to Cook’s company.
They are now a de facto debt collector.
I never thought Apple would sink this low, which reflects the dearth of new revenue drivers.
The other updates also smack of desperation, like different ways to control notifications and “use your iPhone as a webcam.”
More surveillance technology and nitpicking in controls are not what I define as top-level innovation.
Investors must question what Cook is really doing wrong.
Cook has essentially had 15 years to bring to market the next killer product and surely, he’s had teams in the office to figure something out.
Perhaps he didn’t want to spend the CAPEX.
Nothing has materialized and Apple consumers get new lock screens and updated notification control.
I would encourage consumers to take advantage of the diversity and superior price points of PCs and Android smartphones.
The stock is down almost 30% from its high and if oil is elevated which exerts pressure on high interest rate expectations, I can’t imagine there is a ton of upside in the stock short-term.
“Things don't have to change the world to be important.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
June 10, 2022
Fiat Lux
Featured Trade:
(STOCKBROKERS SIGNALING BIG CHANGES AHEAD)
(VIRT), (HOOD), (CITADEL)
Virtu Financial, Inc. (VIRT), Robinhood Markets, Inc. (HOOD), and Citadel Securities will need to change business models after the SEC plans unprecedented market changes so that high-frequency trading companies cannot front-run retail orders anymore.
Citadel is the only one of these 3 that is not public and for the other 2, heavy short interest will attract these stock names.
It’s about time.
The regulation revolves around retail investors finally getting a fair order for their market stock orders.
Market orders aren’t specified at a certain price and because of that, companies front-run these orders and skim a few pennies off their orders, before finally selling them to the end retail investor.
Crazily enough, this has been legal for many years, which is why the CEO of Citadel Ken Griffin can buy a new $100 million property every year.
Under current rules, brokers must perform “reasonable diligence” to determine the likely best market for executing a trade.
Robinhood Markets essentially sell historical retail trade data to Citadel and Virtu, better known as Payment for order flow (PFOF).
This is the juice that these HFT firms use to front-run the retail traders by deploying their professional algorithms.
Nobody in the trading community thought the SEC would get their heads around and do something about this egregious loophole in trading.
I need to give credit where credit is due, and diverting market trades into an auction where the actual best price is procured for the retail trader finally gives power back to the little man after getting fleeced for so many years.
CEO of Virtu Douglas Cifu and Ken Griffin must now expose their capital to risk if they wish to make money in markets.
What a thought!
The zero-risk era of front-running trading is coming to a close meaning companies like Robinhood are worth zero since their profits come from PFOF.
HOOD is worth zero because they don’t charge traders for trading fees because they package all revenue in the form of PFOF.
If that is now worth zero, then do the math: the company is also worth nothing.
This would also take down one of the biggest crypto-based companies whose claim to fame was being the rock-solid broker for the crypto traders.
Well, it’s hard to make money when your customer goes bankrupt, which is exactly what happened to crypto traders since November 2021.
Now, imagine charging for trades and competing with real brokers in the vanilla game of stock broking and the future looks quite daunting.
On the plus side, VIRT and Citadel can roll their mass profits into risk-based trading strategies. However, that could lose money, which they aren’t used to.
This is still only a proposal and not legislation yet, so the dust has yet to settle.
However, if this does come to pass, expect trading commissions to come back in full and no more free trading, because stockbrokers need some way to make money if they can’t sell your trading data.
The gamification of trading by HOOD has alerted the SEC to tighten down the hatches; and this has been coming for quite a time.
The SEC has proven in the past that when there is a red target on one’s back, they usually don’t just give a pass.
As a response to the SEC proposal, HFT brokers are pedal to the metal with lobbyists and government pressure to block this proposal.
If this proposal goes through in some potent form, expect HOOD and VIRT to be down big and for Ken Griffin to purchase less $100 million mansions.
“The only constant in the technology industry is change.” – Said Founder and CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
June 8, 2022
Fiat Lux
Featured Trade:
(THE ULTIMATUM)
(TSLA), (TWTR)
