“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai
Mad Hedge Technology Letter
May 23, 2022
Fiat Lux
Featured Trade:
(ONSHORING GETS CLOSER)
(AAPL), (AMZN)
The end of globalization is accelerating as the iPhone company, Apple (AAPL), has indicated to close sources that they no longer wish to manufacture products in mainland China.
If many might remember, it was Apple CEO Tim Cook who often visited China for a victory lap while simultaneously keeping his mouth shut about the atrocities occurring in the Muslim region of China.
Not only that, zero covid policy in China has served as a political stage for something that appears much more insidious brewing in the Middle Kingdom.
Cook and many other multinational CEOs, selling out their own country, might have finally realized that doing business in totalitarian countries is a bad idea.
Starbucks even shut down in Russia.
There are network costs and brand damage that are hard to recover from.
Truth be told, Apple laughed all the way to the bank with this China arrangement, and their stock price is an indication the strategy worked like clockwork.
Well, it works until it doesn’t.
China was also a great place to live, until it’s not.
Also, China was a great place to manufacture cheap products, until it’s not.
That’s what happens in a country that presides over arbitrary laws which in fact means that the country has no laws.
Now Chinese residents are locked up with robot police dogs barking out orders to stay inside from the street.
What does this mean for Apple’s stock?
Short-term lower if interest rates continue to rise, but very positive long term.
Also, Apple’s equipment might not secure a proper “exit visa.” We also left our military equipment in Afghanistan too.
At least Tim Cook wasn’t locked inside an Apple factory in China like some American CEOs in the past.
At a product level, Apple phones will become more expensive because Apple won’t be able to ignore worker rights and pay them peanuts in producing these shiny gadgets.
Materials will also be harder to source in large quantities.
Remember, China has access to nickel and cobalt.
If they are able to produce in a poorer country like Cambodia, there are transitional costs along with slippage costs.
China’s Foxconn and Pegatron facilities will suffer the fate of many other trade war pawns and I believe this is the end of offshoring for America inc.
Here's another idea, get Foxconn to build an Apple factory in Phoenix and deliver work visas to the best Chinese workers.
Tell them they don’t even need to sleep on the factory floor and don’t need to work 14-hour shifts too. They would take the next plane to the desert.
Apple production partners like Foxconn have already established facilities in India to help produce iPhones for the domestic market there. A further expansion would see iPhones made in India and then exported for global sale.
However, is India sustainable as well? They banned wheat exports to the chagrin of the American government and even worse, they refused to ban Russian energy.
India’s behavior suggests they are working for themselves and not for Ukraine which can be perceived in many coastal American cities as undemocratic.
Either way, Apple’s stock is around 22% from its highs and that’s a victory when we consider stocks like Amazon (AMZN) are down around 45%.
Even if Apple’s stock sustains 30% losses at the time the US Fed starts to lower rates, possibly in 2023, then I would also consider that a resounding success.
Long term, manufacturing in America makes sense not only politically, but economically.
Automation is getting that good too which will soften the blow.
Apple does $365 billion in sales and the natural growth rates suggest it will break half a trillion in sales in 3 years.
However, if Apple wants to do $1 trillion of annual sales, they are going to have to produce the literal iPad on wheels, the Apple EV.
If Apple can pull off an Apple EV while maintaining the high level of quality they are known for, they are guaranteed to clock $1 trillion per year in sales no questions asked meaning the stock should go to $300 per share.
“I love museums but I don't want to live in one.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
May 20, 2022
Fiat Lux
Featured Trade:
(STUDENTS POISED TO DUMP ON TECH STOCKS)
($COMPQ)
The straw that breaks the camel's back for not only the broader market, but tech stocks, could be the $2 trillion in student debt loans that could be canceled by U.S. President Joe Biden’s current administration.
About $1.6 trillion of the $2 trillion in loans that's owed to the U.S. federal government, as opposed to private loans, went into forbearance at the beginning of the pandemic.
The U.S. government already owes over $30 trillion in debt with another handout of $40 billion going to Ukraine yesterday and today another $100 million planned in weapons earmarked for Ukraine.
If we do a basic calculation, $2 trillion of possible forgiven student debt represents around 7% of total federal debt; and this will add additional pressure to the federal government, as they will absorb the debt and gaudy interest payments that will make their debt repayments even more arduous.
To be more precise, the federal government is about to give up $25 billion per year in interest payments from these loans, and that is $25 billion they won’t have to pay back of their own interest-based debt repayments.
These current pro-inflation policies are on borrowed time for not only the people on the ground dealing with them, but some of these politicians.
Senator Mitt Romney and four Republican senators introduced the Student Loan Accountability Act, which would: prohibit the Biden administration from enacting wide-scale student loan cancellation to forgive all, or some, student loans for borrowers; and include exemptions for existing targeted federal student loan forgiveness, student loan cancellation, or student loan repayment programs, such as public service loan forgiveness and teacher loan forgiveness.
Desperate times make for desperate measures.
What does this mean for technology stocks?
In general, it means lower price per share.
Another explosion of high inflation would force the Fed to become even more hawkish about raising interest rates.
Although I don’t want to beat a dead horse, the macro elements have completely consumed everything and anything going on in risk markets.
It’s almost not about the tech stocks anymore, even though they are guiding weakly.
Much of the fallout stems from the extremity of the exogenous events as the world barrels towards a food shortage in 2023 because many countries have banned food exports and Ukrainian ports shut down.
Much like the price of Bitcoin, technology stocks don’t perform well in a hyperinflationary environment.
Money is allocated to other needs, which is why we saw BlackRock's $10 billion momentum ETF dumping technology for energy starting next week.
Energy stocks are not in a bubble compared to non-profit tech companies in a high inflation environment. You have to ask yourself: what companies benefit more from higher inflation prices? Definitely the energy sector.
Russia’s current account surplus more than tripled in the first four months of the year to $95.8 billion.
Last week, the International Energy Agency said Russian oil export revenue is up 50% since the start of 2022 with the Kremlin generating close to $20 billion per month in sales.
Additional incremental capital allocation pouring into energy sets the stage once the student debt gets canceled, this money will be used to pay for even higher energy prices which in turn be used to return to shareholders via buybacks and dividends.
Energy prices will certainly be higher since the current administration enacted price controls by The U.S. House passing a bill on Thursday that allows the U.S. president to issue an energy emergency declaration, making it unlawful for companies to excessively increase gasoline and home fuel prices.
This will destroy more supply as smaller gas companies shudder in fear of being prosecuted, leaving only the big players and decreased capacity.
The money saved on not paying student loans will not go into technology stocks in the short-term, especially since the rising rates put a cap on price appreciation.
We are in the midst of extreme shareholder capitalism in the United States, anyone who can double or triple prices can and will.
This means that every industry needs to package itself the shiniest to get a sliver of the incremental capital.
Technology stocks are failing at this, and it was only just recently they were considered the darlings of the economy.
The shelter-at-home economy is long gone and same for the revenue that was pulled forward with it.
Revenue is now being pushed further back and the tech industry is panicking under the new rules of the global economy.
“Algorithms know everything about price but nothing about value,” said my old investor and mentor Leon Cooperman of Omega Advisors.
Mad Hedge Technology Letter
May 18, 2022
Fiat Lux
Featured Trade:
(REDEMPTION WATERFALL)
($COMPQ)
What’s around the pipeline for all these super leveraged tech hedge funds?
I’ll tell you what will happen, and it’s not pretty.
This has direct consequences for your fragile portfolio, so be sure to listen up.
Top quartile tech hedge fund managers wind up becoming liquidity providers due to bottom quartile managers agreeing to redemptions.
Yep, I just said it, we are about to enter a period of extreme redemptions brought on by the massive underperformance of tech stocks by tech growth hedge fund managers.
Apply the same logic to top-performing stocks vs. bottom-performing stocks and people’s penchants for selling winners and keeping losers.
These capital redemptions are about to hit us and don’t think that hedge fund managers have trillions lying around just to return.
Most of their liquidity is already tied up in the market or better saying already lost in the market!
Many of these funds have been laser-like focused on tech growth stocks, just do the research, there are no gold-based hedge funds because they don’t sell well.
Tech has been outperforming the market for this entire bull market cycle and the way that manifests itself inside the hedge fund ecosystem is with more copy-paste tech growth funds.
When the Nasdaq drops 30% nominally like it did in the past 6 months and a fund is laden with the garden variety of growth stocks, these funds are in the queue for returns, and some possibly even shut down completely.
That’s exactly what’s been going on as we come back to reality.
These funds are proving that they aren’t living up to the hype of being nimble and flowing in and out of trades.
Their behavior suggests they are the opposite and just another ETF copycat, repackaged with the hedge fund marketing lingo.
So what’s the deal now?
Buy and hold in the face of accelerating rate rise expectations is hardly ideal, but that’s what these Harvard MBA-supported private hedge funds are doing.
I can’t make this stuff up.
Then even in this case, they overperform relative to a 30% drop in the Nasdaq of let’s say -10%.
Do we believe the incremental capital allocator will jump at a chance to lose 10% because it’s not losing 30%?
Maybe in U.S. President Joe Biden’s world, but not in the world of real people investing where they fight tooth and nail to preserve capital.
Take for instance some of these infamous guys like Tiger Capital which specializes in tech growth.
Back-of-the-envelope calculations based on the reported $35 billion size of Tiger’s overall public equities booked at the end of last year indicate that it has probably suffered a nominal loss of at least $15 billion in 2022.
To put that into perspective, Citadel lost 55% for an estimated $8 billion loss in the 2008 financial crisis.
Given that there were 82 trading days in January-April, this works out to be a loss of roughly $183 million every day that markets were open this year. Or $28.1 million every hour that US markets were open.
That’s what you’re overpaying for - these smart guys to lose your money.
Billionaire investor Steve Cohen’s Point72 Asset Management also removed the $750 million it invested in Melvin Capital Management.
Melvin Capital, the hedge fund at the center of the GameStop trading frenzy, lost 49% on its investments during the first three months of 2021.
Hedge fund managers Cohen and Kenneth Griffin had stepped in to aid Melvin Capital in January last year with Griffin’s Citadel and Cohen’s Point72 adding $2.75 billion to the firm.
What’s the fallout here?
The best employees, if they do exist, leave these cratering tech funds to either get another job at another tech hedge fund or start new tech funds themselves by raising new money.
Soon these funds, if they still exist, must fold because of the brain drain encouraging 100% redemptions; and as I talk to many friends today, this trend is accelerating.
To get redeemed out of existence looks bad on the resume.
Required liquidity due to losses in other funds is where we are now in this economic cycle.
Ironically, this could lead to several Bernie Madoff type Ponzi’s in the worst case, but the best case is after this bear market rally, there will be a sharp sell-off that will take us a leg lower in the Nasdaq.
This could be sped up by the US Central Bank talking up inflation even more frequently, and the market will need to fight through this to keep its levels.
“Well, if you can buy 1,000 of anything, it doesn't belong on Etsy” – Said CEO of Etsy Josh Silverman
