Mad Hedge Technology Letter
March 16, 2022
Fiat Lux
Featured Trade:
(THE GENIUS AT SOFTBANK GETS EXPOSED)
(SFTBY), (ARKK), (DIDI), (BABA), (CPNG)
Softbank’s (SFTBY) Masayoshi Son has been heralded as the consensus aficionado on all things artificial intelligence and a venture capitalist who has effectively bet the ranch on transformational technology.
It also sounds like a page out of the Cathy Woods ARK funds (ARKK) fiasco to be honest with you.
Leveraging a portfolio with borrowed money works well during good times, but Son is finding out that it isn’t all rosy on the downside.
His vast fortune has crumbled along with the performance of the Nasdaq index, and it’s Son who owns many of the low-quality tech names.
His wealth has cratered, going from $25 billion last year to around $14 billion today.
Body bags are starting to pile up, such as the fiascos at German’s Wirecard AG and Greensill Capital.
Investments that go to zero aren’t the hallmark of a stock market picking genius.
Then what about Son’s China bet, Alibaba (BABA), that, has been taken back behind the woodshed and beaten to a pulp.
Then the Russia/Ukraine conflict happened, giving the flight to safety bid more life and inflation hedged assets even more time in the sun.
This has been the worse environment to invest in technology companies since the dot com bust of 2001.
Softbank’s parent stock in Japan is also down 60% and questions have arisen whether at some point soon there will be margin calls.
At the very minimum, Son is lurching towards a liquidity crisis of epic proportions.
If Son thought somebody will come in to swoop him out of his troubles, then I would love to hear the escape plan.
There just isn’t that much bright news ahead if we consider that the international conflict has brought forward a chance of recession at the same time the Fed plans to hike rates.
These 2 macro events are highly negative for tech valuations.
Son has also presided over more disasters like Chinese ride sharer DiDi (DIDI) which sold off 44% in just one day last week and South Korean ecommerce company Coupang (CPNG) whose stock has more than halved since its IPO.
The Japanese firm depends on financing to maintain its investment pace and support its share buyback program. It will need as much as $45 billion in cash this year.
The onerous funding is now a problem when the sails aren’t with Softbank’s back and he will need to cut losses just to pay off debt.
Serious red flags of Son overextending could eventually take the whole company down.
Son also has personal loans tied to company stock after pledging shares worth $5.7 billion to 18 lenders including Bank Julius Baer & Co., Mizuho Bank Ltd., and Daiwa Securities Group Inc.
More importantly, the IPO market is now morbid making it impossible for Softbank to capitalize on exciting new offerings because there are none.
I hiatus of new IPOs makes Son’s high growth strategy null and void.
There simply is no appetite now for high-growth stocks amid this poor macro backdrop.
Whispers of stagflation are cropping up all over the place and it could easily become a self-fulfilling prophecy.
Son’s image has also taken a massive hit as his poor investment decisions make him look like a novice investor.
It’s plausible to believe he won’t get that sort of leash to lock and load in the future with other people’s money.
The Saudis have already soured on a second $100 billion vision fund, and one might question why Son didn’t take profits in an Alibaba position when he could have.
Son might be so stubborn that he believes all his investments will become successful through hell or high water.
I don’t believe investors want that type of defiant attitude with their hard-earned money.
The Mad Hedge Technology Letter saw this upcoming weakness a mile away, and the fact that Son has buried his head in the sand makes us question who his trusted advisors are.
Volatile markets need more tacticians to get out of potential catastrophes.
The sad takeaway is that while Masayoshi Son might believe he is always the smartest guy in the room, he is just surrounded by "yes men" who provide a unique echo chamber that helps him execute disastrous investment decisions.
Low-quality tech is being penalized by the bucket load and Son is the poster child for owning overhyped tech that sometimes isn’t even tech--like the office sharing company, WeWork.
Avoid Son’s investment monologues because the proof is in the pudding at the point; and when it comes down to it, he doesn’t know more than the next guy.
“A squirrel dying in front of your house may be more relevant to your interests right now than people dying in Africa.” – Said CEO of Facebook Mark Zuckerberg
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)
