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.
“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)
