Tech Letter Archives - Mad Hedge Fund Trader

Buyer Strike Has Legs

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.

May 9, 2022 - Quote of the Day

Tech Letter

“Our industry does not respect tradition – it only respects innovation.” – Said CEO of Microsoft Satya Nadella

May 6, 2022

Tech Letter

Mad Hedge Technology Letter
May 6, 2022
Fiat Lux

Featured Trade:

(ECOMMERCE NOT AS EASY AS IT USED TO BE)
(AMZN), (FED)

Ecommerce Not As Easy as it Used To Be

Tech Letter

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.

May 6, 2022 - Quote of the Day

Tech Letter

“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

May 4, 2022

Tech Letter

Mad Hedge Technology Letter
May 4, 2022
Fiat Lux

Featured Trade:

(RIDE-SHARING NEEDS A FACELIFT)
(UBER), (LYFT)

Ride-Sharing Needs a Facelift

Tech Letter

CEO of Uber (UBER) Dara Khosrowshahi earns 200X the salary of the median Uber employee and for that large sum of money, he lost the company $5.9 billion in just the first quarter.

The company is a perennial cash burner, and they haven’t shown us how they will fix this problem.

The company can dish out as many “positive outlooks” as it wants, but rest assured, they usually just move the goalposts and put some lipstick on a pig to dress up even more astronomical losses coming down the pipeline.

Uber’s management obviously did a bad job messaging their “positive outlook” as the share price opened up down 11% in today’s trading.

The time has come to pay the bill for this company and it’s not pretty.

They didn’t come anywhere close to becoming profitable during generational low-interest rates, and now, their prospects look bleak as we barrel towards a world with vastly higher borrowing costs.

Sure, the revenue doubled, but drivers aren’t making any money with such high gas prices and Uber has had to shell out more for labor and that’s not coming down any time soon.

In fact, if there was one tech company that would perform awful in high inflationary conditions, this is the company.

Not only that, but Uber’s service now is also just way too expensive, take a ride, and they charge consumers way more than its worth.

Unless it's 2 in the morning and there is no means back home, consumers won’t rush to order an Uber unless it’s an emergency.

I expect a shortage of drivers to continue as working for Uber as a driver is really bottom-of-the-barrel type of stuff and why do it during a time where labor rights are on the rise?

Remember they had to present a ballot for voters to get them classified as subcontractors and spent $200 million on it.

Investors must have pondered if this $200 million would have been better invested in the actual business instead of ripping off their own employees.

The intensifying competition for labor is also revealing the different ways in which ride-hailing giants are tackling the issue. Uber said it has been making tweaks to the driver app, like unlocking the ability to see upfront fares before accepting a ride, improving maps, and removing bugs.

Uber management touts Uber Eats as the savior of its business but then this company should be valued as a food delivery company with a lower multiple.

Uber eats is still losing money with no end in sight and one must conclude that it appears as if this “tech” firm has no chance of ever becoming profitable based on this current business model.

I fully expect Uber eats to burn more cash as food inflation goes from bad to awful which will mean demand destruction of its customers.

These customers can easily substitute Uber eats services by ordering supermarket delivery and throwing a frozen pizza in the oven.

Uber eats service is a luxury, not a necessity as many Americans cut back on spending because of major economic policy mistakes by the US Central Bank and the current White House administration.

It’s not a shocker to fin

d out that in the 3 years of Uber’s stock being public, shares have gone down 35% since the IPO in dreamy financial conditions with unlimited investment appetite for inferior tech companies.

The stock currently trades at $26 per share, and I would say this stock would be a good short-term trade at around $17.

Lastly, Uber’s way of saying they are a good tech company is by describing themselves as “not Lyft” and that right there is a massive smokescreen.

May 2, 2022

Tech Letter

Mad Hedge Technology Letter
May 2, 2022
Fiat Lux

Featured Trade:

(ANOTHER TECH SUPPLY SHOCK)
(SOXX)

Another Tech Supply Shock

Tech Letter

Some concerning developments will reveal the dire straights of the semiconductor industry (SOXX) right now.

What I am about to tell you effectively puts semiconductor chips in the doghouse with no end in sight and it’s not a surprise that semiconductor stocks have swan dived the past half-year.

They are quite infamous for the boom-bust cycle, but the new developments have put that thesis on steroids as the ensuing bust seems to be picking up momentum by the second.

What we have is supply-side shock.

The global semiconductor industry is being impacted by a neon shortage.

Neon is a gas that is crucial for making chips. It is used in the lithography step, which involves lasers carving into silicon to develop semiconductors.

Ukrainian neon is a byproduct of Russian steel manufacturing.

Critical Ukrainian companies, Ingas and Cryoin, have halted production unable to operate in this foggy environment of military conflict.

Ukraine is a significant supplier of neon and Ingas and Cryoin accounting for over 60% of the world’s total neon output.

Prices of neon have spiked by up to 500% from December because of the health situation.

In China, prices have also gone up by 400% as well and this can be expected when supply chains are disrupted such as the 600% in the run-up to Russia's 2014 annexation of Crimea from Ukraine.

Ingas produces neon gas out of Mariupol and exports around the world.

This city has more or less been destroyed with 99% of buildings reduced to rubble.

Before the military confrontation, Ingas produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the United States, and Germany, with about 75% going to the chip industry.

Cryoin, which is based in the southern Ukrainian port city of Odessa, says they have three months of inventory if the factory is damaged.

Right now the factory production has been suspended because the company cannot access additional raw materials for purifying neon.

The government of Taiwan noted that Taiwanese firms had made advanced preparations and have reserve stocks of neon for the near term.

China is also a significant producer of neon gas, but prices there have been gapping up because of arbitrary lockdowns lately.

Clearly, there is a paradigm shift towards a brave new world where supply chains in far-flung territories governed by dictators won’t be able to deliver the “just-in-time” globalized module of manufacturing.

This proves the situation is highly likely to deteriorate than ameliorate and at some point if chip companies don’t suck it up and decide to bite the bullet, generations of products could be shelved because of a lack of materials.

Manufacturing of the entire chip manufacturing process must go back to a domestic operation simply because there will be no way to procure the particular inputs to create the end product.

This will destroy the supply for everything from electronics to other products that need chips causing another leg up in inflation.

What does this mean for the chip companies?

The small chip companies who usually rely on one or two big contracts are about to get massacred.

Missing deadlines is a death knell for small companies as they preside over paltry reserves and cannot endure this type of headwind in the manufacturing process.

At a broader level, expect the boom-bust cycles to show deeper busts with a more delayed snapback along with lower margins.

If that is the bottom line, a major de-risking of semiconductor stocks must happen to reflect this new reality.

Sure, there is a chance that inflation moderates in the next year, but it will still be higher than what chip companies have been used to for the past 30 years.

Chip stocks are in the penalty box until they can work out supply-side issues.

May 2, 2022 - Quote of the Day

Tech Letter

“Artists work best alone.” – Said Co-Founder of Apple Steve Wozniak