Tech Letter Archives

Russia Brings Down Chinese Tech

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).

russia

March 4, 2022 - Quote of the Day

Tech Letter

“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

March 2, 2022

Tech Letter

Mad Hedge Technology Letter
March 2, 2022
Fiat Lux

Featured Trade:

(WHEN IT RAINS – IT POURS)
(TDOC), (ARKK)

When It Rains - It Pours

Tech Letter

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.

March 2, 2022 - Quote of the Day

Tech Letter

“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

February 28, 2022

Tech Letter

Mad Hedge Technology Letter
February 28, 2022
Fiat Lux

Featured Trade:

(MIXED BAG FOR RIDE-SHARING PLATFORMS)
(UBER), (LYFT)

Mixed Bag for Ride-Sharing Platforms

Tech Letter

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.

February 28, 2022 - Quote of the Day

Tech Letter

“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai

February 25, 2022

Tech Letter

Mad Hedge Technology Letter
February 25, 2022
Fiat Lux

Featured Trade:

(BULLISH TAILWINDS DEFEND THE NASDAQ)
($COMPQ)

Bullish Tailwinds Defend the Nasdaq

Tech Letter

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.