Mad Hedge Technology Letter
May 11, 2022
Fiat Lux
Featured Trade:
TECH DESERVES WHAT IT DESERVES)
(RBLX), (ARKK), (ROKU), (TDOC), (ZM), (TSLA), (GM)
A bear market rally in tech would be an overwhelmingly healthy signal that the financial system is working in an orderly fashion.
Yet, as I say that, a looming recession inches closer.
How do I know that?
That was my first reaction when my eyes were stung by the headline of 8.3% inflation.
Sure, not a 10, but it is emblematic of the ongoing inflation concerns with items such as airplane tickets up 18% year over year in price.
Remember the consensus was that inflation pressures are trending towards peaking, potentially setting up for a nice bear market rally.
That narrative hit another catch-22, not as bad as it could have been, but clearly not great and prices biting at the backs of consumers.
The hope that inflation will be crammed back into the genie bottle is not going to happen until later this year and not for the right reasons.
Simply because comparables become easier to beat year over year.
Like I have mentioned in past tech letters, high-growth tech stocks are most sensitive to the fluctuation in rates and investors should be nowhere near growth funds like Cathy Wood’s ARK Innovation ETF (ARKK).
Another head-scratching move was ARK’s Cathy Wood selling Tesla (TSLA) shares and rolling them into GM (GM).
This is for the lady who likes to tell us that we aren’t “doing the research.”
Betting against Elon Musk is a fool’s game.
When it comes to EVs, I would put money on Musk to defy any odds.
Tesla will outperform GM, especially amid a backdrop of lithium prices spiking and supply chain issues going haywire.
Musk is simply the anointed guy that knows how to work miracles.
He only developed the EV industry as he saw fit, invented reusable space rockets, cut the price of space exploration by 10, and reimagined tunneling construction technology.
And by the way, his Neuralink brain interface company is working on implanting chips in human brains so we don’t need to use our fingers on keyboard anymore.
I wouldn’t want to compete with this man and to believe that GM will be able to nimbly outmaneuver Musk who has the audacity to aggressively solve anything no matter how many people he pisses off is not an incremental bet on “innovation” that Wood likes to tout she is participating in.
Neither is the purchase of Roku (ROKU), Zoom (ZM), or Roblox (RBLX) which have all tanked since she put new money to work in them in late April.
Inflation at 8.3% means that the real rate of inflation is still -7.55% and until that’s addressed, any bear market rally will be viciously sold breaching further levels down below.
The carnage in the tech world is indicative at the dregs of the barrel.
Tech IPOs are toxic.
Market for new issues has been bereft throughout the first four-plus months of this year, and nothing that would move the needle is on the tech IPO radar for the duration of the second quarter.
Companies that were aiming to go out in the first half of 2022 have no appetite to continue down that path because there simply won’t be a bid.
Going public today would require a complete revaluation of their business and leave many late-stage investors and employees with out-of-money stock.
Grocery deliverer Instacart is the only company in that class that’s been forthright with its slowing valuation. In March, the company said it cut its valuation by about 40% to $24 billion.
That’s how bad it is out there at the bush league end of the tech sector and many of these stocks that are public such as Teladoc are down 80%.
I do believe that many of these loss-making growth techs are rightfully down 80%.
They had time to show a profit and they failed in the allotted amount of time they were given.
Every window closes and the market moves forward with or without them.
In the near term, I am bearish on the market but I do believe we are oversold which could feed into a dead cat bounce to sell on.
“My relationship with the government is: Be in love with the governments, but do not marry them.” – Said Founder of Alibaba Jack Ma
Mad Hedge Technology Letter
May 9, 2022
Fiat Lux
Featured Trade:
(BUYER STRIKE HAS LEGS)
($COMPQ), (AMZN), (FB)
The buyer strike roars ahead as the 10-year U.S. treasure accelerates its rate of decline touching 3.2%.
We are dealing with a major deleveraging of the tech sector as a massive rotation flood into commodity-linked assets, the US dollar, and shorting bonds.
Sadly, we got another kick up the rear side when US Central Bank governor Jerome Powell committed yet another policy mistake by attempting to save the stock market.
Things could get ugly from here.
Many investors believed the Fed would self-correct after the “transitory” inflation nonsense.
It’s not so much the actual 3.2% rate today, but the velocity of the move which is creating many air pockets that are not being filled.
Why?
Investors are betting that Powell will most likely make a third policy mistake which could create another suicidal spiral downwards.
Investors have no incentive to buy stocks when the Fed has not only lost credibility but appears to not understand what is going on with real inflation tearing apart economic health.
This looks a lot like the 1970s just before former US Fed Chair Paul Volcker was brought in to slam the economy and raise interest rates to 18%.
Powell doesn’t seem like he has the guts to do that which is why the prolonging of this failed interest rate policy will mean a longer and more painful economic recession in the future.
I see many pundits going on record saying that the “risk reward has improved.”
Besides stating the obvious, this analysis doesn’t take into consideration that yields could go higher which would cause tech stocks to plummet further.
So yes, the risk reward has improved, but it can improve even more from here.
That doesn’t tell us much about anything.
All signs are now pointing to a souring paradigm shift among tech firms and dramatic changes under the hood.
Facebook (FB) is pausing hiring, a previously unthinkable prospect.
The company blamed macroeconomic challenges and Apple’s privacy changes for its slowest revenue growth in 10 years last quarter.
Almost 12 months after Apple launched App Tracking Transparency, a new analysis predicts its second year will still see big losses to advertisers on FB and YouTube and more collectively losing around $16 billion.
In total, FB will sink $10 billion into its new business with no revenue in 2022.
In February, Amazon (AMZN) announced it would raise its base pay cap from a maximum of $160,000 for most roles to $350,000.
The news comes after employees listed insufficient base pay as the second-most common reason they're looking to leave Amazon in an internal survey conducted last year.
I don’t have an issue with raising salaries, but AMZN had to boost it by far more than double showing readers the intense pressures on current expenses.
Even more problematic now is that new recruits won’t want to accept restricted stock options because of the tech selloff making their stock options less valuable.
Nobody wants to catch a falling knife, me included.
This will put more cash flow pressure on tech companies as new employees will reject stock options and demand a higher net cash salary.
The incremental micro negatives are causing tech companies to miss earnings and guide lower adding yet another negative layer to the grim outlook.
I would argue that even with earnings beats and positive guidance, the tech sector losses would be less.
However, we are experiencing a perfect storm of poor macro events and bad operational data.
Even though the risk reward has improved, it could improve more as the Fed will be forced to ratchet up rates more than expected to compensate for the latest policy mistake.
The market has sniffed this out and is unwilling to buy the dip until the Fed does what is necessary to seriously fight inflation.
The nonsense needs to stop.
“Our industry does not respect tradition – it only respects innovation.” – Said CEO of Microsoft Satya Nadella
Mad Hedge Technology Letter
May 6, 2022
Fiat Lux
Featured Trade:
(ECOMMERCE NOT AS EASY AS IT USED TO BE)
(AMZN), (FED)
The Nasdaq reversing all its previous gains and then some has more to do with the bond market disagreeing with US Fed Chair Jerome Powell.
How do I know that?
After the one-day reversal which materialized because Powell took a 75-basis point cut off the table, the 10-year US treasury bond ripped past the psychological mark of 3% and surged past 3.1%.
As many have taken note, expensive tech stocks crater the deepest with uncontrollable interest rate rises and the pace of the move has been quite rattling for many investors.
In addition, the price action sure smells like a massive hedge fund blowing up and a force unwinding as well to add insult to injury.
Unfortunately for the American consumers, Powell taking 75 basis point cuts off the table does nothing to tame inflation even though I would like to point out that in normal times when the Fed is actually doing its job, a 50-basis point rise would usually be suitable.
However, the Fed is so late to the game, basically ignoring a compounding inflation catastrophe for over a year, that to believe that a 50-basis point rate increase will tame 8.5% inflation is nonsensical.
Without a reasonable plan to fight inflation, Wall Street has sniffed this out and understands that tech firms will suffocate under the pressure of more inflation which is why we are getting these larger-than-life selloffs after Powell tried to package his speech as dovish as possible.
The Fed absolutely neglecting their work duties has real knock-on effects on the tech industry.
It has absolutely poo-pooed the trajectory of Amazon’s (AMZN) stock because Amazon is a comprehensive bet on the rich Western world buying more stuff in volume and the median Amazon prime buyer is bewildered by these aggressive price increases we are seeing all around the economic spectrum.
In short, people aren’t buying more stuff and that hurts Amazon’s ecommerce business.
If oil goes to $150 per barrel, that means more cutting back for Amazon prime customers because filling up at the pump is a necessity and not a luxury like an incremental bottle of perfume on Amazon prime.
In the past 6 months, AMZN’s share price has dropped 35% and that was just a ramp up to the actual rate rises that have barely happened yet.
The market is completely disagreeing with the Fed and instead of aggressive raises, we are stuck with the incremental raises in which the bond market shrugs off and yields are off to the races.
The Fed’s missteps translate into a longer than necessary negative price momentum for tech stocks and it’s the Fed’s fault.
Amazon has been posting weaker-than-usual earnings for a few quarters because not only are their customers dealing with high inflation, but there have been various operational headwinds from unionization, higher expenses, and supply chain problems.
Amazon has almost doubled its fulfillment network since the start of the pandemic, and there is a lot that can go wrong with that in this day and age.
Essentially, the health situation of 2020, brought forward revenue and now we are seeing a major drop off in that rate of growth.
It doesn’t mean that Amazon is dead, but they will need to battle these headwinds for at least the next 12 months if not longer and much of this is not up to them.
That’s because firms have been suffering from the world's deglobalizing and Amazon is hurt more than others.
Amazon Web Services (AWS) is a bright spot.
The business posted a 57% increase in operating income and a 37% gain in sales in the most recent quarter.
For all that think this is the bottom for Amazon, you were also wrong in March as well.
The trading climate couldn’t be worse for Amazon and even though the secular bull case is still intact for Amazon long term, the rest of the year looks harsh.
Being a bet that Americans will buy more stuff isn’t the greatest bet right now.
“If the Starbucks secret is a smile when you get your latte... ours is that the Web site adapts to the individual's taste.” – Said Founder and CEO of Netflix Reed Hastings
Mad Hedge Technology Letter
May 4, 2022
Fiat Lux
Featured Trade:
(RIDE-SHARING NEEDS A FACELIFT)
(UBER), (LYFT)
