Mad Hedge Technology Letter
March 14, 2022
Fiat Lux
Featured Trade:
(RISK RISE IN CUPERTINO)
(AAPL)
It works until it doesn’t, doesn’t it?
That was ex-German Chancellor Angela Merkel who brought Russian energy closely into the orbit of the German economy and made excuses for them time and time again as they deployed an army to pillage in the East.
Then when Russia showed up at the European Union’s doorstep triggering a massive refugee crisis, the sushi hit the fan and the world went bonkers.
The same thing could be happening with Apple’s (AAPL) CEO Tim Cook in China as its Chinese factories were shut down in Shenzhen, the Chinese Silicon Valley, because of a Covid outbreak.
Foxconn is the name of the factory that is responsible for Apple’s outsourced work.
The growing clusters spawned by the highly infectious omicron variant have turned China upside down.
The policy, which kept China virtually virus-free for long periods, is increasingly isolating the country as others open up.
The country still hasn’t seen a virus fatality since January 2021.
This is an ominous sign for the Middle Kingdom because of their abundance of aging citizens who are highly susceptible to succumbing if they do contract the virus.
Then any prudent investors would ask what’s next for Apple?
It’s safe to say that China has done a much better job protecting its citizens against the worst of Covid with their zero Covid policies.
These hard lockdowns prioritize saving lives at all costs and that is extremely hard for businesses to swallow.
Foxconn didn’t specify the length of the suspension. The measures from the Chinese government call for non-essential businesses in Shenzhen to halt until March 20.
As usual, the Chinese communist party has been extremely tight-lipped about when this could end, and even if March 20th is the goal, it could easily spin out of control if zero Covid backfires and cases spread like wildfire.
Foxconn will stop operations at the two Shenzhen campuses and has reallocated production to other sites to reduce impact of the disruption.
Hon Hai, the primary assembler for iPhones, says it expects no “major” impact for now to its finances and business from the temporary shutdown.
Hon Hai’s suspension of iPhone production in Shenzhen due to lockdowns may not affect Apple’s smartphone supply chain.
Its main production hub in Zhengzhou which makes iPhones hasn’t yet been affected by China’s latest virus resurgence and could help offset lost capacity.
Zhengzhou is also geographically distant from Shenzhen, so cases won’t easily spread to that area of the country.
However, Zhengzhou is part of the Henan province which has the largest population in all of China.
Henan being the poorest province in all of China means migrants at the lowest rung of society enter and leave the province more than others mostly looking for work.
Shenzhen is one of the richest cities in China and it appears as if Apple dodged a bullet.
But what if the highly contagious omicron spreads to Zhengzhou and there is a national zero Covid lockdown for months?
Apple would easily become collateral damage and the stock would sell off by 10%.
Also, unfortunately for Apple, there is a real risk that China is dragged into the Russian – Ukraine conflict.
This could set the grounds for the Chinese government to freeze the Apple supply chain in China.
As the business world has completely fractured into democratic versus totalitarian regimes, it could turn out to be a massive liability to extend oneself on enemy grounds.
Apple might find this out the hard way.
Wait for the volatility to calm down before getting back into Apple shares.
“Your time is limited, so don't waste it living someone else's life.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
March 11, 2022
Fiat Lux
Featured Trade:
(AMAZON MEANS BUSINESS)
(AMZN), (AAPL), (TSLA), (GOOGL)
The blockbuster announcement from Amazon (AMZN) regarding their 20:1 stock split is a big deal, and don’t listen to the charlatans who say otherwise.
Sure, on paper, the business model will be thriving just like it has been since its inception, but this piece of financial manipulation is genius.
Just think about it.
The reason for Amazon to need a stock split in the first place is because the stock has gone from the bottom left to the top right over time.
The best and most successful companies frequently execute stock splits and so even if one wants to spin it as a problem, it’s a problem that I wouldn’t mind having myself.
Splits are often a bullish sign since valuations get so high that the stock may be out of reach for smaller investors trying to stay diversified. Investors who own a stock that splits may not make a lot of money immediately, but they shouldn't sell the stock since the split is likely a positive sign.
Nominally cheap stocks have a massive psychological effect on the average investor.
I also don’t buy the BS about fractional shares, it’s like owning half a car.
Nobody wants that.
Investors also clamor for round numbers.
Would you rather own 5 shares of AMZN or 100 after the stock split?
Human psychology can’t be discounted here and, true to form, stock splits have been the precursor to even higher share prices.
Many companies decide to rinse and repeat and AMZN also unearthed a tidy $10 billion stock buyback plan.
So it’s no shock that this will be Amazon's 4th stock split in its history. The last split came in September 1999.
If shareholders approve of the split, it will begin trading on the new basis on June 6.
Big tech behemoths made hay when the sun was shining during the pandemic, and now they want to make it easy for the simple investors to get back into shares.
Bravo to them.
Other companies of its ilk have also partaken in stock splits like Tesla and Alphabet.
So this isn’t out of left field.
It just so happens that at the time of the stock split announcement, big tech has been the most oversold in the past 5 years.
Apple (AAPL) split its stock 4-for-1 in 2020s. Tesla's (TSLA) 5-for-1 stock split also occurred in 2020. Alphabet's (GOOGL) 20-for-1 stock split was announced in February.
Granted, at a fundamental level, things won’t be different at Amazon.
This doesn’t change the innards of the machine that was built for financial engineering from share buybacks to stock splits and the timing of it is also an important lever as every company tries to max out its genetic makeup.
Amazon shares are down about 9% in the past year, but I would attribute that more to too fast too soon.
Then we were hit by the onslaught of higher interest rate expectations and then the Ukrainian war.
Let’s be honest, the first 3 months of this year have been an absolute blood bath for equities, and AMZN doesn’t trade in a vacuum.
The extra kick in the teeth was the supply chain problem for the ecommerce juggernaut.
AMZN will come back as market sentiment starts to heal itself.
War won’t be a ubiquitous event around the Western world and I view the military escalation as an anomaly.
It’s not like AMZN is operating in Russia as well, or China for that matter.
It’s true that the events of the last few weeks have shined a spotlight on non-Democratic countries as a poor environment for business and in absolute disregard of the rule of law.
AMZN needs to operate in places where the law has teeth, otherwise, delivery packages would get stolen half the time with no recourse.
I feel the timing of the stock split is also indicative of a near short-term bottom in tech stocks.
“Don't chase a girl, let the girl chase you.” – Said Founder of Softbank Masayoshi Son
Mad Hedge Technology Letter
March 9, 2022
Fiat Lux
Featured Trade:
(NICKEL MARKET BECOMES HELLISH)
(JJN), (TSLA), (GM), (F)
Nickel (JJN) is essential for EV batteries, and that spells trouble for certain industries as the price of nickel explodes to the upside.
Projections between 2020 and 2037 reveal that global manufacturing of batteries for EVs and other new energy applications will rise tenfold.
That’s not a typo!
Recently, volatility was so high on nickel that London Metal Exchange, prompted a trading halt.
The price of nickel increased by 250% which many traders blamed directly on the war between Russia and Ukraine.
Unintended consequences have put shivers through the global economic system and higher prices of various types of metals will mean consumers will have less discretionary incomes.
Russia is one of the largest producers of nickel in the world, with miner Norilsk Nickel the number one producer of top-grade nickel globally.
If the metal were added to the sanctions list, it could severely shrink volume to Western suppliers and manufacturers.
EV batteries are one of the highest costs in producing an EV.
The price rise in nickel means that it will cost car manufacturers an extra $3,000 to produce the same car.
Costs are going up around the entire process of making an EV and the pain will be felt with a final sticker price substantially higher than today.
It is plausible that in 2 years we could experience a massive shortage which could exacerbate an already dire supply situation as demand continues to rise.
EVs are getting more popular as the quality of EVs produces gets better with each iteration.
No doubt Tesla helped popularize this type of car.
With the next biggest source of nickel being lower-grade Indonesian supply, and new nickel mines years away from getting online, the only logical conclusion is to bake in lower productivity from Western auto companies.
Ford (F) is planning to make 2 million EVs annually by 2026, GM (GM) hopes to sell 1 million EVs by mid-decade and launch 30 new EV models, and Stellantis plans to sell 5 million EVs by the end of the decade, with 25 new EV models on the way.
These companies are all catching up to Tesla (TSLA).
This will poo poo the momentum of the EV car movement temporarily which many believed would go into overdrive this year.
Once the business model supporting the case to make EVs becomes untenable, large car companies could pull back from these models until supply chains moderate.
Car companies aren’t in the business of building cars that lose money and now the unit economics have been thrown into chaos.
Uncontrollable costs to source raw materials for industrial battery makers such as LG Energy Solution, Panasonic, and Contemporary Amperex Technology Co will be passed to the end-user.
It will also make negotiations tougher with EV makers such as Tesla and Volkswagen. And it isn’t just nickel: Prices of cobalt and aluminum, two other key battery metals are grouped into this price surge as well.
U.S. President Joe Biden's solution for lower oil prices was to go out and buy an EV instead of buying gas at the pump. Well, that solution just became more costly and is rising by the day.
This effectively pushes the green movement further back and the high price of oil taking center stage is ruffling a lot of feathers for the American consumer that will have severe implications at the polls this November.
These costs headaches will also be a drag on EV stocks like Tesla in the short term because they simply won’t be able to deliver the volume of cars they planned to produce.
“Bitcoin is probably rat poison squared.” – Said Legendary U.S. Investor Warren Buffett
Mad Hedge Technology Letter
March 7, 2022
Fiat Lux
Featured Trade:
(SHORT TERM PAIN FOR SILICON VALLEY TECH)
(NFLX), (QQQ), (EPAM), (SNAP), (TDOC), (ARKK)
