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)
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)