“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)
The American tech sector has largely been overshadowed by the events across the world.
Many would question why that would even matter.
What does that even have to do with an American smartphone or devices that permeate our society?
We deal with American tech stocks for this newsletter, and not with moral outrage or foreign policy matters.
So we stay in our lane and deal with various exogenous stocks that come our way as it relates to the Nasdaq (QQQ).
I don’t get to pick these shocks – they come in fits and starts and in different sizes.
The end of omicron was almost to the point of visualization, but we roll into yet another macro crisis of many groups’ makings.
Tech doesn’t operate in a vacuum, and politics, more often than I would like to admit, sometimes do overlap a great deal.
The world has changed dramatically in the past 14 days and the knock-on effects mean that American tech companies and their trillion dollars business models are pulling out of Russia, a country with a population close to 150 million, in droves.
It is what it is, and life moves on.
Netflix (NFLX) has been in operation in Russia since 2016 and the decision to vacate Russian business means they will lose around 1 million subscribers.
Most likely the worst tech company to work for right now in the world must be EPAM Systems (EPAM).
The internal chaos going on mainly stems from the 58,000 employees, with 14,000 of them in Ukraine and more than 18,000 staff in Belarus and Russia, according to company filings with the U.S. Securities and Exchange Commission.
EPAM’s stock is down 74% YTD in 2022 and is a stock that epitomizes the situation in Eastern Europe right now.
When workers refuse to work with each other, it’s hard to imagine that much gets done at all.
And this is just the tip of the iceberg.
The American tech withdrawals encompass all shapes and sizes.
Apple and Microsoft both said no bueno to selling products in Russia.
Game maker EA pulled the plug as well.
Google and Twitter have suspended advertising in Russia.
It’s a terrible time to monetize a YouTube channel in Russia because Google won’t pay you for it.
Likewise, Snap (SNAP) has pulled its marketing dollars from Russia too.
Another sonic boom hit Russian tech when Airbnb room-rental service suspended all operations in Russia and Belarus and has said its nonprofit subsidiary will offer free temporary housing to 100,000 Ukrainian refugees.
It's also waived host and guest fees for bookings in Ukraine, as people worldwide use Airbnb as a way to provide income directly to Ukrainians.
Adobe is halting sales of new Adobe products and services in Russia. In addition to making sure its products and services are not being used by sanctioned entities, Adobe is also cutting Russian government-controlled media outlets off from its cloud services.
What is emerging as quite black and white is that American technology companies hoping to apply their business model in autocratic states doesn’t integrate as well as first thought.
The weak rule of law along with all-powerful demagogue leaders make it hard to sustain any sort of business carve-out for the long term.
Eventually, many American companies are forced to abandon their ambitions in these marginal states.
The next question a tech investor must ask is will the American tech sector follow the lead from Russia and pull out from China.
Obviously, this has major implications for companies like Apple, Micron, and a handful of American tech companies that are entrenched in the Chinese economy and society.
Many people think this will blow over and tech will come back front and center, but short-term, this is highly negative for American tech stocks.
The more this situation drags out, the higher risk American tech is more involved in this mess from a different gateway.
The tech portfolio has been outright short recently and it was the perfect call to sell the dead cat bounce in growth tech like Teladoc (TDOC) and ARKK funds (ARKK).
“It's simple science: exercising creates endorphins and endorphins make us happy. On the most basic level, Peloton sells happiness.” – Said Former CEO of Peloton John Foley
Mad Hedge Technology Letter
March 4, 2022
Fiat Lux
Featured Trade:
(RUSSIA BRINGS DOWN CHINESE TECH)
(BABA), (DIDI)
Don’t buy Chinese tech stocks.
I’m not saying to avoid them because of Chinese Xi Jinping’s “common prosperity” campaign, although that isn’t ideal.
The Eastern European war has meant draconian sanctions levied on the Russian economy and these sanctions also have a tech angle to them, particularly a Chinese tech angle.
Chinese companies could find themselves subject to regulatory fines and other penalties for breach of sanctions if they continue to work with targeted Russian entities.
In effect, we could see a sudden exodus of Chinese tech companies from Russia if they determine that the juice isn’t worth the squeeze.
The same avoidance is happening with ships circling America with Russian oil, are buyers of these commodities certain they won’t face sanctions if they buy Russian oil?
Policy becomes quite muddled when a band of politicians shouts new proposals for harsh sanctions and it affects the middleman as much as the end buyer.
If Chinese companies bolt Russia, many Chinese companies would need to take a revenue haircut and guide down.
Under US export sanctions imposed on Russia, any technology goods made in foreign countries using US machinery, software or blueprints will be banned from being exported to Russia. So you see how this applies directly to Chinese tech firms in Russia. Companies in Taiwan, South Korea, and Japan have quickly said they will comply.
Chinese laptop maker Lenovo has already shut down manufacturing and sales in Russia.
The Chinese are mercantilist and their much-publicized friendship with Russia doesn’t mean it will stay strong forever.
I don’t want to wade into politics but if Russia becomes too much of a pariah, Chinese tech firms might also reconsider the reputational risk at stake.
They aren’t the only ones to stop sales to Russia.
Rival Dell and chip supplier Intel have also closed up shop.
This has all led to a great de-risking of Chinese tech and I believe readers need to abstain from reading Wall Street research urging you to buy the Chinese tech dip.
Owning Chinese tech stocks, in general, is a terrible idea even though Berkshire’s Charlie Munger has doubled down on Alibaba (BABA) shares.
He has lost a lot of money from that trade and I find it ironic that Munger complains a lot about how bad America is and plays the fearmongering card yet his own money is in Alibaba shares.
The pain hasn’t been confined just to Alibaba, food delivery giant Meituan sold off again after Beijing on Friday ordered it to cut fees.
Tencent is facing new scrutiny of its core businesses.
The Hong Kong Hang Seng Index has more than halved from last year’s February peak with Beijing’s anti-monopoly campaign far from over.
Earnings will drop significantly as higher costs from increasing social responsibility incrementally handcuff Chinese tech companies from making decisions best for their shareholders.
The technology sector’s bullish run had lasted for decades before the “common prosperity” push brought it to an abrupt halt. The clampdown that began in late 2020 has hit almost every corner in the industry, from data security, digital business to online games and overseas listings.
The impact on tech earnings will be on show again on Thursday when Alibaba is due to report an estimated 60% drop in quarterly profit.
All told, this has been a highly negative past 7 days for autocratic regimes in the East as the West finally did an about-face to the status quo of turning a blind eye to corrupt money and deployment of power that lassoed crony capitalists.
Avoid all Chinese stocks and don’t follow Mr. Munger into Alibaba (BABA).
“There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.” – Said CEO and Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
March 2, 2022
Fiat Lux
Featured Trade:
(WHEN IT RAINS – IT POURS)
(TDOC), (ARKK)
Don’t get gaslighted by believing that growth companies now are at a discount and primed to shoot higher.
This couldn’t be further from the truth.
Honestly, this is just the beginning of a hard slog to prove to investors they are worth their time of day.
Once investors get a sniff of top-line growth capitulating, investors cash out in droves and try to not be the last one holding the bag.
In many cases, the latest rout in tech stocks has been far more crippling to investor portfolios than what we saw during the stock market collapse of February and March 2020, just after Covid was hyped around the world.
Fintech has been a sub-sector of tech that has been blinded by the light.
The collapse in PayPal shares has been swift and bloody.
From its March 2020 low, shares more than tripled over the next 15 months as usage and revenues soared. And then, just as quickly, the shares collapsed as fintech competition became crowded.
The digital payments specialist has now lost two-thirds of its value since its mid-summer 2021 all-time high. The extraordinary loss has been stark, but it epitomizes the current environment for growth tech.
If investors learned anything from the dot-com sell-off a generation ago, everybody rushes for the exit at the same time to rotate into more attractive companies.
Simply, "can’t miss innovation" are bid up like no other on the way up in a bull market with low rates. Conversely, they overshoot to the downside in a bear market with rising rates.
Growth tech is going to have to shake off this stereotype if they want to perform in this new normal environment.
That’s not to say these are worth nothing, but there is always a time to shine and a time to rain.
Unfortunately for remote medical services company Teladoc (TDOC), it is time for the latter, which is why I strapped on a bear put spread with a 16-day horizon that TDOC will not rise above $79.
If anything, the case for best of breed is getting stronger, such as the likes of Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL).
On the trading front, we took profits on a bear put spread last month on TDOC with a February expiration after the omicron virus peaked in the short-term, meaning that no incremental investor would be interested in buying TDOC in the short term.
TDOC is part of a bigger tech growth portfolio helmed by Cathie Wood's ARKK Invest, and that portfolio has gotten slaughtered this year as Woods has no concept of market timing and indiscriminately buys tech at any price based on a zillion year time horizon.
She also said that she is seeing deflation two weeks ago in this market which is an outright breach of fiduciary duty to investors. Since her interview, Russia has invaded Ukraine and oil has spiked to $110 per barrel of crude.
Any novice investors should just wait for Wood to speak and then do the opposite, and there is in fact an ETF built for that very purpose.
TDOC is ARKK fund’s biggest holding, and they just underwent a relief rally as the market is betting that Jerome Powell will become more dovish. The latest rally is most likely a dead cat bounce.
This is a GOLDEN OPPORTUNITY to sell the hell out of TDOC, and ARKK funds for a no-brainer short-term trade of 16 days as the fresh inflation forecasts should start to trickle in and suppress growth tech again.
This is just the beginning of elevated inflation brought on by another foreign war, and the pockets of Americans are about to be hit by a wave of higher food and energy prices.
That spells trouble for underperforming growth tech and TDOC is the poster child for that.
Don’t buy this stock – if anything, sell the rallies like we are doing here. Growth tech is dead for the foreseeable future.
“Microsoft isn't evil, they just make really crappy operating systems.” – Said Finnish-American software engineer Linus Benedict Torvalds who is the creator Linux, Android, and Chrome OS
