Mad Hedge Technology Letter
June 3, 2022
Fiat Lux
Featured Trade:
TECH RECESSION IS COMING)
(GOOGL), (MSFT), (AAPL), (TSLA)
The Nasdaq index isn’t pricing in a recession, but it absolutely should, as economic data streaming in shows cracks beneath the surface.
The Federal government finally went on record to admit the historically epic blunder they committed by categorizing inflation as “transitory,” with Treasury Secretary Janet Yellen acknowledging that she was “wrong.”
It's about time.
The colossal mismanagement of monetary policy by the Federal Reserve has had an extraordinary whiplash on tech shares and many have gotten burnt.
What we are experiencing now is high volatility that used to never exist in the stock market as an overleveraged system flooded by cheap money is now deleveraging.
Strong tech names like Google (GOOGL) and Microsoft (MSFT) have experienced 3% up or down days on just normal trading days with growth stocks like Tesla (TSLA) up or down 10% in just a day.
Retail traders are in over their head if they go at this alone and this is why the Mad Hedge Technology Letter is guiding you to safety.
Taking profits on the spikes and valleys is what we do best.
After months of strong consumer spending and supply-chain improvements, some of the country’s most outspoken corporate leaders have started to freak out.
Tech growth bellwether Tesla (TSLA) and their CEO Elon Musk just announced a 10% staff layoff, and that move could be the canary in the coal mine for the tech economy.
Musk clearly feels something isn’t right, and we could be approaching an economic cliff.
If that wasn’t the canary, then Microsoft's downgraded revenue expectations for next quarter’s earnings has to be as the strongest tech companies downgrade forecasts.
The probability of a recession has lurched higher, to around 50%, and this is all while the government preaches about how great the American consumer is doing.
Like many things about the US Federal government, don’t take what they say at face value because usually, the inverse is true.
The sense of doom has been especially evident in the banking sector, where Dimon told investors this week that they should be preparing for an economic “hurricane.”
State side is getting a little crusty, so then the international picture is a little rosier, right?
Wrong.
Apple is shifting its iPad production to Vietnam from China after China’s dystopian zero covid policy has effectively shut down the supply chain there.
The iPhone maker already produces some of its AirPods in Vietnam. The shift to move some iPad production to Vietnam may help it boost iPad revenue.
Ironically enough, as bad as the United States is doing now, the situation abroad is a lot worse.
Europe has completely capitulated to the military conflict and the German Producer Pricing Index has accelerated to 30%.
To make matters even worse, the European Central Bank still is maintaining a 0% net interest rate policy meaning there are Central Bank’s out there doing a lot worse job than the United States Federal Reserve.
Quite hard to believe this level of policy failure.
In short, this inflation problem hasn’t been solved at all and although it could come down a tick year-over-year, it still does nothing material to change the picture.
Even worse, a tech CEO has to be a complete fool to invest in growing capacity right now unless they have $10 billion of extra cash laying around which few companies have unless you’re Facebook, Google, Apple, Microsoft, or Tesla.
At the smaller and ground level, small tech and their balance sheets have been getting slaughtered and so has the American consumer.
Just because the American consumer goes from eating premium beef to chicken, doesn’t mean the consumer is strong.
Sooner or later, they will run out of things to substitute down from.
Same goes for smartphones, software programs, semiconductor chips, and cloud enterprise contracts.
We are in a substitute down phase and that doesn’t shout economic bullishness to me.
Maybe the American consumer can substitute driving a gas-powered car for riding a leg-powered bicycle, I wouldn’t put it past the current government to recommend this to the country.
In Europe, people have already been fed with the drive slower and dress warmer B.S. to cover up government mistakes.
Next, Europeans will need to endure the “eat less” policy come this summer and fall.
“A founder is not a job, it's a role, an attitude.” – Said Co-Founder and CEO of Twitter Jack Dorsey
Mad Hedge Technology Letter
June 1, 2022
Fiat Lux
Featured Trade:
(FACETIME ON COMPUTER NOT WHAT IT ONCE WAS)
(XOM), (NFLX), (ZM)
Data may be the new oil, but oil is still oil, and the price per barrel of crude oil as we speak is $118.
The high price of energy, amongst other controversial forces, has been the genesis of great pain for tech stocks in 2022 and it was only just 18 months ago Zoom (ZM) had a bigger market cap than Exxon Mobil (XOM).
Fast forward to today, Exxon Mobil is 10x bigger than Zoom.
This is just a sign of the times.
That was then and this is now, and past pricing won't dictate future price and markets can remain irrational much longer than you can stay solvent, but this oil pricing will remain fluid for the foreseeable future.
The cure for higher prices is often said to be higher prices to the further detriment of tech shares.
As we step back for a second and analyze this new world order with new rules, the ‘Facetime on computer’ company ZM SHOULD be worth less than a global oil giant powering civilization.
10 to 1 seems like a mockery of the situation in which the ratio should probably be more like 1000x to 1.
The current price is a reflection of the “good times” in the energy space and tech has by and large been sent to the graveyard.
Concerns that the Fed's rate hikes may induce a recession are keeping investors guessing about the outlook for the economy as rising food and energy costs squeeze consumers, and volatility has picked up.
Therefore, how do we predict the short-term future?
It will clearly be defined by dramatic and volatile stock swings in each direction of the pendulum.
Tech markets, and by default, global markets, since tech is the driving force of the US markets will still indulge in fear of missing out (FOMO) portfolio managers that got whacked the first 6 months of the year, only to try to play catch up to achieve performance targets.
Don’t tell me these people don’t exist, they’ve just been licking their wounds in a more than brutal market setup.
This bear market rally is taking place on the heels of US President Joe Biden using a rare meeting with Federal Reserve Chair Jerome Powell to literally paint Powell as the scapegoat.
These meetings usually take place before a selloff because more often than not, people in certain places know horrible inflation numbers are coming down the pipeline hence the scapegoat meeting.
Even if inflation stays stubbornly high, but comes down to 6%, it will still hurt the American consumer which many economists have referred to as the last peg holding up the US stock market and economy.
The momentum we are seeing in this bear market rally won’t be able to hold much longer as American consumers are priced out of housing and credit card delinquency inches up.
Tech earnings won’t be what saves us either as the prospect of downward revisions to earnings estimates is the latest headwind to face stock investors.
We must rejoice around this Nasdaq bear market rally that has seen tech come back to life.
The dominant ecommerce company Amazon has seen a 15% resurgence and left-wing biased streaming company Netflix (NFLX) has recovered 15% from their lows too.
But we need to remember that since February 2022, this is a new world with a new set of rules.
Oil is more important than seeing your coworkers on a video chat, yet the inverse was true before February.
In this new world, tech and its share prices simply don’t stack up like they used to compared to other asset classes.
That being said, tech won’t go up in a straight line from this bear market rally, and that’s certainly better than the kamikaze-esque price action we saw the first half of the year.
The Mad Hedge Technology Letter will pick our spots, but I am not convinced in going completely bullish or 100% bearish at this point in the deleveraging cycle.
Mad Hedge Technology Letter
May 27, 2022
Fiat Lux
Featured Trade:
(ECOMMERCE PLATEAUS)
(AMZN)
Amazon’s decision to look for subletters of 10 million square feet of warehouse space means they don’t believe ecommerce growth will migrate into the extra space they planned for.
This is a big deal because it takes a long time to acquire the extra footage to expand capacity.
It doesn’t happen in one day.
It’s almost a surrender of sorts that this short-term pandemic ecommerce bump had no legs.
It’s over like it almost never existed, sort of like the health crisis.
So why is this a problem?
Amazon’s ecommerce investors' main reason for investing in Amazon is to earn money through appreciating shares.
This only comes about if their businesses are growing and behind their cloud division called Amazon Web Services (AWS), ecommerce is the second most important.
This is why Amazon has seen such as epic selloff in the first half of the year.
I do believe the negativity has somewhat overshot which is why I executed a deep-in-the money bull call option spread on this stock.
It’s not the death of Amazon, hardly so, but it’s been really painful for shareholders.
It was just in 2020 when Amazon added warehouse space faster than it ultimately needed in response to the challenges of the pandemic, outpacing consumer sales and resulting in an extra $2 billion in costs in the first quarter.
However, given the extraordinary demand and uncertainty Amazon was seeing at the time, there’s not much else the company could have done.
This is not what management describes as “right sizing capacity” and in fact is an error in capacity expectations.
Companies don’t spend an extra $2 billion in capacity when they don’t need to.
It would cripple many small ecommerce companies.
Amazon’s online sales fell 3% for the quarter to $51 billion, as shoppers relied less on the company for critical purchases.
Amazon’s recent announcement of a “Buy with Prime” program, serving ecommerce sites other than Amazon.com, takes the company further down the path of using its fulfillment and delivery network to offer shipping as a service, generating additional revenue and potentially competing with UPS and FedEx.
It’s similar to what Amazon did with Amazon Web Services, using its online expertise and cloud infrastructure as a starting point for a business that generated $18.4 billion in revenue in the first quarter.
The company has spent the past few years creating its own last-mile delivery network, known as “AMZL,” leveraging a network of dedicated Amazon Delivery Service Partners and reducing its dependence on third-party delivery companies such as UPS and the U.S. Postal Service.
The 45% selloff in Amazon has been quite overdone bringing the PE ratio all the way down to around 50.
If energy prices and inflation can moderate somewhat in the back half of the year, AMZN would be the first candidate to extend this dead cat bounce into a real bounce back to $3,000 per share.
AMZN is one of the beneficiaries of lower inflation because of its high reliance on fuel to deliver products the last mile.
That cannot be substituted at all so the stock market is reflecting the short-term pain.
The energy having such a stronghold over the tech market is quite unprecedented and don’t expect AMZN to start their oil refiner business.
However, I do expect choppy trading as rising rates and lower purchasing power for Americans do a dirty job on the AMZN bottom line.
“I couldn't imagine a more incompetent politician than myself.” – Said Founder and Co-CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
May 25, 2022
Fiat Lux
Featured Trade:
(AD MARKETING CRATERS)
(SNAP), (TWTR), (GOOGL), (FB)
This could be the proverbial canary in the coal mine for the consumer falling off a cliff.
There have been soft signals showing that credit card debt is piling up, but the truth is that Americans are spending more money on things they need and not on luxuries.
Snap (SNAP) recording a disastrous earnings report is showing us rapidly slowing growth and digital ad spend is usually first to go in the broader economy.
This leading indicator is essential to understanding the economy because companies don’t and won’t advertise when they understand the incremental marketing spend won’t result in meaningful sales.
Companies are just losing money at that point.
What happens is just a complete freeze of ad spend only to hibernate until the next cycle picks up again and demand returns.
The same dynamics apply to the other digital ad players like Google (GOOGL), Facebook (FB), and Twitter (TWTR) which is why we are seeing 10% selloffs in Google.
The benefit to being such a big and strong company is that Google sells off by 10% while Snap drops by 45%.
Not exactly fair but long-term holders won’t dump Google right away unless there are real structural problems.
To break it down even further, the recession is quickly approaching and the economy is now going into reverse.
Next will be job layoffs and laid-off workers won’t buy much if marketed to.
Snaps’ macroeconomic environment has deteriorated further and faster than anticipated since its last earnings update just a month ago.
Digital ad spend goes quicker than local TV and radio following shortly after.
National TV was much later, and ad agency spend was also later than cycle media buying.
Roku and FuboTV will be hardest hit initially. The length and depth of the recessionary slowdown will determine whether or not pain makes its way to the longer cycle areas of the ad market.
In its first-quarter earnings disclosure in April, Snapchat’s daily active users hit 332 million, an increase from 319 million at the end of 2021.
Snap accounts for only a small low-single digit percentage of total digital advertising, but the macro factors cited should be relevant for all companies.
I believe the read-through is most negative for Twitter, which is 75% dependent on brand ad revenue and has 15-20% exposure to Europe.
Facebook also has significant European exposure (25% of its ad revenue), though its brand advertising exposure is likely well under 25%.
The Nasdaq continues to be a sell the rally type of market because there are no dip buyers.
For years, the dip buyers would save the Nasdaq.
Not only that, but the widespread destruction of tech has also forced many big whales to sit on the sidelines.
Why buy now when the risk reward isn’t favorable?
So now we are headed to a recession and traders are waiting for the recessionary data to flow to confirm these Snap earnings.
If this occurs, don’t be surprised to see a negative feedback loop that triggers algorithms to sell.
The Fed still hasn’t nearly been aggressive enough as well and is selling this false belief that there won’t be a recession and the consumer is strong.
That is yet to be priced into technology shares.
The upcoming data will reflect that the opposite is happening which means the buyer strike continues.
Avoid the dip and sell the rip.
