Mad Hedge Technology Letter
February 28, 2022
Fiat Lux
Featured Trade:
(MIXED BAG FOR RIDE-SHARING PLATFORMS)
(UBER), (LYFT)
The raging war in Ukraine and Russia will have repercussions for the American tech sector.
Many of these unintended consequences are lurking in the shadows and don’t fully appear until we are further down the road, but one glaring consequence we can expect imminently is higher inflation.
The higher inflation input first revolves around rising energy prices and big moves in the price of crude indicate that prices at the pump will surge throughout the duration of this Eastern European war.
Russia is one of the world's largest exporters of oil and gas. If US, European sanctions and Russia's responses drive up oil and gas prices, Russia's export revenues will rise and help pay the sanctions' costs. In contrast, rising oil and gas prices will feed US inflation.
The more the war is prolonged, the higher likelihood that oil will stay above $100 per barrel and the psychological effect of high gas prices will stay with the consumer for longer.
Even more ironic, the Russian Ruble crashing more than 30% this morning also means that Russia can reduce its energy offerings to the outside world by 25% yet still make a positive 5% nominal return on the energy exports.
Russia could pull back supply as the next chess move on the board and a barrel of oil could launch to upwards of $140 a barrel meaning that Americans could be paying $7 or $8 per gallon in California and Nevada.
People forget that Ukraine is sitting tight and defending while being supplied by Europe from the West.
This includes arms from the US brought down from Latvia, gas from Slovakia, and a smorgasbord of supplies and aid from other European countries.
Logistically, Russia needs to ship everything from mainland Russia including weapons, food, energy, and equipment.
Distances are far in Russia and this will quickly add up to an expensive war for Russia with reports showing that Russia is spending around $20 billion per day to finance this war.
Along with navigating higher energy prices at the pump, ride-sharing platform Uber (UBER) and Lyft (LYFT) are testing a new driver earnings algorithm in 24 U.S. cities that allows drivers to see pay and destinations before accepting a trip, and raises the incentives for drivers to take short rides in an effort to attract more drivers.
Labor supply has been a major problem for Uber and Lyft who can’t convince drivers to work for them.
The unit economics simply don’t make sense when inflation has meant expenses have spiked to the detriment of gig economy driver supply.
The changes, which are currently in pilot programs, mark the most wide-ranging updates to Uber's driver pay algorithm in years and come at a time when the company is still trying to win back drivers who left at the start of the pandemic.
Fortunately for Uber, even with headwinds of high energy prices and labor bottlenecks, the post-Omicron economic tailwind should keep Uber shares rangebound in the short-term with a slant towards the upside.
The setup to Uber and Lyft’s next earnings report is also ominous with projections looking hard to beat with the exogenous forces piling up.
Lyft and Uber continue to be a buy the dip and then sell the rally stock on high volatility.
Their lack of quality really suffers in tougher tech market conditions.
It’s true that the painfully delayed response not only to Russia’s offensive in Ukraine will cause higher prices, but the cost will certainly be high as the Western world could have snuffed this out years ago when Russia took over parts of Georgia or annexed Crimea.
The bill is now due, and Germany will initially pay 100 billion euros to liven up their military and this is most likely the beginning of the West finally stopping its policy of turning a blind eye to Eastern European dictators.
More expensive Uber and Lyft rides, higher driving expenses, surging fuel costs will keep the stock in check.
However, considering the stock is way oversold at this level, the tailwinds blowing at their sails means shares will grind up slowly as the Fed raises rates slower than expected.
“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai
Mad Hedge Technology Letter
February 25, 2022
Fiat Lux
Featured Trade:
(BULLISH TAILWINDS DEFEND THE NASDAQ)
($COMPQ)
The 6.5% reversal in the Nasdaq has been as V-shaped as can be.
Let me remind readers that this Ukraine war is just only one external factor the market is trying to stomach.
It’s not the only show in town.
As we zero in on the March Fed Meeting that comes into focus, I would argue unless new developments rear their ugly head, the Ukraine-Russia hot war is what it is which is mostly quantified.
The Nasdaq index was cheering the light sanctions as the West chose to avoid the nuclear option of removing Russia from accessing the SWIFT system of global bank payments.
Germany refuses to support this option as it would make it harder to pay the Russians for their oil and natural gas.
America also doesn’t support this because we have concerns that it would undermine the status of the U.S. dollar as the global reserve currency.
On more of a micro level, the Ukraine-Russia situation mostly affects energy and food prices which is a relative win for the Nasdaq index that is comprised of technology.
The Nasdaq has outperformed the Dow and S&P in this short quick spike to the upside contributing to my thesis of investors feeling more comfortable dollar-cost averaging into the best breed of tech than reaching for something more inferior.
And yes, I am saying the best companies currently listed in America are tech companies.
The geopolitical turmoil overshooting means that the Nasdaq index is now pricing in a 25-basis point cut instead of a 50-basis point cut.
Either case is still highly stimulatory, and the Fed is way behind the curve on inflation, and this does mean that inflation will stick around a lot longer than first anticipated.
According to the Federal Reserve Economic Data (FRED), the US Central Bank has actually been increasing asset purchases to their balance sheet most likely because they are becoming nervous about the transition from dovish to hawkish policy.
To add an inflationary pillow to the interest rate dilemma is irresponsible, but it shows investors how much pressure is on the Fed to get this right after waiting way too long to raise rates.
Ultimately, I believe the Fed is also concerned about the recent selloff and these asset purchases will ensure the market does not dip to painful levels.
Traders got wind of the green lighting of saving the stock market and piled into risk-on assets and this reversal does a lot to draw a line in the sand as to what level of volatility the Fed is able or willing to tolerate.
Boosting the balance sheet to new all-time highs means that the Fed will need to be careful because nobody really knows how much they can push the hawkishness with a $9 trillion debt load.
It seems counterintuitive to initiate new asset purchases at these levels, and this behavior implicitly admits that the Fed cares more about saving the stock market by reducing volatility than putting a kibosh on hyperinflation.
Basically, high inflation is here to stay.
The $9 trillion Central Bank balance sheet is 43% of the United States’ GDP and it appears that the Fed is taking the Japan approach to their balance sheet.
Of course, there is nothing illegal about government asset purchases, just look at Japan whose Central Bank owns about 15% of the Japanese stock market and the US Fed is using their playbook as they look to future decisions on monetary policy.
Will it get to that point of a Japanese monetary policy?
Desperate times call for desperate measures.
If the Fed governor Jerome Powell does go insane with liberal infusions of asset purchases, then readers can bet that tech stocks will be the first to benefit from fresh liquidity.
Does it appear that the U.S. Central Bank is trigger happy when any crisis comes along?
There are elements of truth to that, but we aren’t the ones making the decisions, and on the next mini dip, I would use that as a new entry point into the best American tech stocks on the planet such as the likes of Alphabet (GOOLG), Adobe (ADBE), Microsoft (MSFT), and Apple (AAPL).
Lastly, we are exploding from the embers of the omicron virus and that hasn’t gotten much play because of the war reports.
Once these pandemic headwinds are thrown to the side, the U.S. economy and technology companies will accelerate into the summer.
“The development of full artificial intelligence could spell the end of the human race.” – Said British Physicist Stephen Hawking
Mad Hedge Technology Letter
February 23, 2022
Fiat Lux
Featured Trade:
(5 TIPS TO HELP NAVIGATE THE TECH MARKET CORRECTION)
($COMPQ)
The Nasdaq technology index has been on a bull run for the ages.
You didn’t think it was going to last forever, did you?
In the past 10 years, we’ve only had three little blips, one in 2019 from the temper tantrum, then the 2020 pandemic selloff, and now the 2022 inflation problem.
It’s more or less been strong performance aside from those quick corrections where the Nasdaq bounced back even stronger.
The truth is that meaningful corrections don’t happen that often and every time one has occurred, it’s been a great buying opportunity.
I know it sounds scary in the face of red drowning out your screen, but the silver lining is that this will give readers a chance to grab high quality stocks that are rarely, if at all, on sale.
Here are a few tips on how to navigate a tech market correction.
- Put Market Corrections in Context
Since 1928, a correction of at least 10% has happened about once every 19 months – not that often. Of the 27 corrections since World War II, the index has experienced an average decline of 13.7%.
This highlights the simple truth that investing is not a contest of who can dump stocks as fast as possible.
If you’re convinced a sell-off is on the horizon, consider making the following changes.
- Take Profits
Sell stocks in your portfolio that you think have peaked.
Alternatively, you may want to establish a selling strategy that dictates when you sell stocks and remove any emotion from the decision.
This type of strategy is a method of managing stress and you will avoid misusing that fat finger to get rid of your best assets.
- Focus on Asset Allocation
Preside over a healthy mix of different types of investments that will hold their value until you can jump back into tech stocks.
Don’t put all your money into Facebook (FB) and feel wounded after it drops 25% after their business model collapses (which is essentially what just happened.)
Rarely will everything go down all at once.
The tech sector usually experiences more downside in a correction than others due to their high growth nature.
This is when dividend-paying stocks start to outperform and a huge rotation rapidly takes place.
- Smarten Up by Placing Limit Orders
It is essential to always place limit orders and not market orders. With a limit order, you specify the price you want to buy or sell at, and the trade is only executed at that price or better.
Meanwhile, opting for a market order means your trade is at the whim of the market. The final filled order could be a few percentage points of where you expected it.
This nasty surprise is easy to avoid.
- Don’t Lose Sight of Your Ultimate Goal
Even if you’re a buy-and-hold investor, you’ll eventually want to sell some of your investments.
Minimizing risks is the name of the game and most investors have a number in mind at the end of the day.
This number is complemented by a timeline; don’t lose sight of the path towards that, and the process needed to achieve that final number.
Markets almost never sell off by 20% and many of these market corrections are great chances to get into the best of tech.
Let’s be honest, tech has been very expensive the last few years and to get a great company like Google, Apple, or Microsoft on discount is something that people pray for.
The tech market has always recovered from its short- and longer-term market dips and this correction won’t be any different.
“AI doesn’t have to be evil to destroy humanity – if AI has a goal and humanity just happens to come in the way, it will destroy humanity as a matter of course without even thinking about it, no hard feelings.” – Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
February 18, 2022
Fiat Lux
Featured Trade:
(AVOID ARKK)
(ARKK), (ARKG), (ARKX)