Mad Hedge Technology Letter
August 27, 2021
Fiat Lux
Featured Trade:
(THE NEW NORMAL)
(QQQ)
So now it’s gonna be 2 years — that’s right — the work from home world is here to stay!
And I’m not talking about just Asia being in the early innings of a disastrous delta variant explosion.
Many managers had 1 year baked into the pie, but have we come to terms with the expectations that this work from home thing is here to stay?
Ostensibly, companies will never be able to get workers to come back to the office, then after 2 years, we will be too far down this road to make a U-turn.
Then as the delta variant breathes down our neck, will this turn into year three or four and so on with all the different variants down the pipeline.
Just in the last few years, several European offices allow heat days in the summer which offer workers remote working possibilities when cities sound off official heat warnings.
Some European cities usually deliver excess heat warnings if the mercury surpasses 95 degrees which is usually in June and July and the amount of these days are rising.
Japan might have to start giving mudslide, typhoon, or torrential flooding remote work days if we really want to go deeper in the weeds.
This is just where nature stands today versus how we work from a computer.
Many tech companies might see a 99% attrition rate if the managers move boldly and recall staff for in-person 5 days per week toiling and sharing the same oxygen within the same four walls as their coworkers.
One of the biggest takeaways from the pandemic after the initial uncertainty is the handoff of power back to labor which hasn’t happened in American capitalism for 50 years.
American capitalism has been crushing labor laws as long as I can remember from lacking of maternity and paternity leave to destroying unions and the list goes on.
If you’re a simple worker, you know you finally have options!
That is raising concerns among executives who have historically ruled with an iron fist and aren’t used to workers acquiring negotiating clout.
Remember in Europe, many companies require a 3-month resignation notice after 5 years of work instead of the quick 2 weeks in the U.S.
In France, it’s almost impossible to get yourself fired.
Return dates have been postponed repeatedly. Tech companies such as Amazon and Facebook have pushed them to early next year.
Lyft said it would call employees back to its San Francisco headquarters in February, about 23 months after the ride-sharing company first closed its offices.
Already, many employees are “bombarded” with messages from recruiters and friends, attempting to lure them elsewhere, and there are jobs galore!
10 million to be precise.
Managers want workers back in the office because they say there is a broader sense of connection and familiarity to the platform, to the culture of the organization—to me, this means they love controlling workers, period.
Many surveys have shown that productivity of working remotely is significantly higher than working in the office where introverted workers are bombarded with uncomfortable office politics and extroverted colleagues’ bravado. Not to mention that many companies like to have meetings to plan the next meeting and the hours of commuting that exhaust workers.
Even if 40% of workers are introverted, it would make sense to rollout a full remote workforce because the totality of the remote work is a net benefit over in-person work for the entire staff.
Perceptions of remote work have shifted as the pandemic spiraled out of control.
When professional services giant PricewaterhouseCoopers LLP surveyed employers across the U.S. in June 2020, 73% of respondents said they deemed remote work successful. By January 2021, when PwC released updated data, that figure rose to 83%. Now, more workers also say they want to stay at home full time. In new data released by PwC on Thursday, 41% of workers said they wished to remain fully remote, up from 29% in the January survey.
That doesn’t mean offices can’t have a once per quarter team bonding activity, but the verdict is clear, workers like waking up never to leave their house and get paid for that lifestyle.
The bigger deal now is workers are busy brainstorming how to upgrade or upsize their remote offices to become even more efficient.
They are even thinking how to upgrade their coffee and tea game, personally, I love my Made in Italy Bialetti stovetop espresso maker.
It hits the spot with high quality Arabica coffee beans.
On a personal level, if a company does commit to the in-person faux pas, I am in favor of only in-person every other month and the in-person portion should only be a maximum of 2 days per week that aren’t Monday or Friday.
That’s how little negotiating leverage managers and bosses have these days — I just don’t see how they can push the narrative more than that.
Also, if they want 5 days per week of in-person work, they will have to pay extra to get what they want and that’s not including the hike in salaries that have happened because of the recent inflationary pressures.
Ultimately, there is possibly no way to justify full in-person work in 2021 for a company that can function without it.
And think about it, any company searching to expand a workforce with 100% in-person work will be viewed as a company that has more red flags than a Chinese communist parade.
And I haven’t even talked about the disgust for people ditching their business casual clothing to work in their pajamas, then forcing them to clothe up again.
What a kick in the teeth!
There’s a whole host of reasons we haven’t even mentioned yet like young mothers who must consider a young child and proper child’s care or a worker who is tending to an elderly relative daily.
We can’t just sweep all this under the rug like we used to — these are real issues we must grapple with.
What does this mean for the Nasdaq index that the Mad Hedge Technology Letter predominately follows?
It goes higher.
It means we are fully reliant on tech for longer and this will seep into the share prices.
A broad swath of companies will benefit from this, and the bigger will get bigger because of the network effect.
Another year of this will solidify tech ecosystems and digital infrastructure will become better and stickier.
Companies like Google, Apple, Microsoft will bask in the glory of being highly desirable companies with earning accelerated revenues while stationed at the avant-garde of the U.S. economy.
And in the winner-takes-all tech economy, everyone else is second.
THIS IS THE NEW NORMAL!
“When something is important enough, you do it even if the odds are not in your favor.” – Said Founder and CEO of Tesla and Neuralink Elon Musk
Mad Hedge Technology Letter
August 25, 2021
Fiat Lux
Featured Trade:
(THE BEST WAY TO ALPHA YOUR TECH PORTFOLIO)
(MU), (PLTR), (AMD), (AMZN), (SQ), (PYPL)
Overperformance is mainly about the art of taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.
I hit the nail on the head and many of you have prospered from my early calls on AMD, Micron to growth stocks like Square, PayPal, and Roku. I’ve hit on many of the cutting-edge themes.
Well, if you STILL thought every tech letter until now has been useless, this is the one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, instead of scouring the grains of sand to find a diamond, I have a quick fix for you and your friends.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.
The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot since March 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry.
Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup maintenance and installation.
Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
Easily Scalable – deployment via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can easily expand into international markets.
Business Model Advantages
High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue stream making it easy for CFOs to solve long-term financial solutions.
High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to higher margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD component are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 100% from the nadir we saw in March 2020 and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a pure play on cloud computing software, because they do have other hybrid-sort of businesses, but the elements of its cloud business are nothing short of brilliant.
ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So, you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more chutzpah because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger precisely because they take advantage of the law of small numbers.
One stock that has the chance for a legitimate ten-bagger is my call on Palantir (PLTR).
Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations.
This is one of the no-brainers that procure revenue from Democrat and Republican administrations.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner, and don’t forget about PLTR while you’re at it.
“When we launch a product, we're already working on the next one. And possibly even the next, next one.” – Said Current CEO of Apple Tim Cook
Mad Hedge Technology Letter
August 23, 2021
Fiat Lux
Featured Trade:
(THE FUTURE OF AI PATENTS AND LAW)
(ARTIFICIAL INTELLIGENCE)
The world is rapidly shifting into a new paradigm where not only do people invent, but people also build artificial intelligence that can invent.
This will have massive ramifications for the business world and the tech industry which is the avant-garde of the business world.
Recent decisions from South Africa and Australia that an artificial intelligence machine can be listed as inventor on a patent could spur these two locales into being one of the most competitive tech scenes in the world.
The U.S. and Europe will need to figure out what it means to be an inventor.
Registering A.I. as an inventor could potentially mean that multinational corporations won’t shoulder the blame if some sort of insidious experiment with A.I. goes horribly wrong crushing half of mankind.
It also opens up the possibility of some “A.I. invented” app triggering 1000X growth delivering prosperity to half of mankind.
The wide range of possibilities is enough to keep one up at night, and the deeper knock-on effect is that A.I. is now prime for game time.
It’s true that the past interactions of A.I. have been bush league, and simply, the technology wasn’t enough along to make a dent in the universe.
However, the rapid acceleration of not only the quantity of A.I., but the increasing quality of A.I. means that countries will need to make some high stakes business decisions on where A.I. fits into the law and patent system.
Courts in the U.S. and U.K. are expected to issue rulings later this year, and policymakers are gathering information on how to deal with the rising use of AI.
Another piece to the puzzle is how China will treat A.I. and the knock-on effects on American consumers and American businesses.
This sub-sector has been identified as one of the “must-win technologies of the future” by the U.S. administration.
China also leads in A.I. as it relates to facial recognition and has a database of 1.3 billion citizens to pull data from.
China is pursuing a centrally controlled strategy with hyperlocal implementation. Values and goals are set from above, and resources are made available.
At the local level of municipalities, cities and provinces, regional administrations compete for the new AI clusters.
The result is a national and regional administrative state that works closely with research, investors, and industry to build a successful AI ecosystem.
The implementation of the national strategy varies greatly from region to region. While cities such as Tianjin and Shanghai have already launched multi-billion-dollar AI city Venture Capital funds and had entire districts and islands built for new AI companies. Other provinces are still in the process of learning and development.
As it stands now, American corporations are acutely aware of incorporating AI into their business models and the risks associated with it.
In either case, American companies need a verdict and the initial framework of how to treat A.I. in terms of who owns the patents and what that means, or they risk falling behind places like China who are hellbent on being the first A.I. superpower.
Just look at social media companies that otherwise would be on the hook for the costs associated with negative content on their platforms if it weren’t for cheeky legislation better known as Section 230.
Section 230 is a section of title 47 of the U.S. Code enacted as part of the United States Communications Decency Act which generally provides immunity for website platforms from third-party content.
Imagine if all companies were protected from anything negative that A.I. manufactured and not only with social media.
One could extrapolate that this could be horrendous for the health of many social communities, but one could also understand how investors could win out big time if a flood of capital nosedived into controversial projects that became money generators.
Tech companies, especially the big 6, have the capital and connections in Washington to advance the initiative.
Drug discoveries for diseases like cancer have been of massive interest for AI researchers with scientists hoping to leverage the technology to discover cures for complex diseases.
It’s not surprising to see companies like Apple, Google, Microsoft, and so on get in on the health game with the revenue potential for these future health solutions and medicines in the 10s of trillions of dollars.
Another project that comes to mind that would benefit from AI law is Elon Musk-supported Neuralink.
Elon Musk wants everyone to get brain surgery. Specifically, he wants everyone to get a brain implant — the brain-machine interface created by his company, Neuralink. He says it will be able to solve any number of medical conditions — including paralysis, anxiety, and addiction.
A project like this is high risk — a lot could go wrong with it.
But what if the law was set up to just allow investors to write off the externalities and fiscal costs of a failed project?
U.S. District Judge Leonie Brinkema has ruled that this type of legislation faces an “uphill battle” in overturning a rejection by the U.S. Patent and Trademark Office.
A U.K. court heard arguments in July on the same question. The European Patent Office has scheduled a hearing in December.
These rulings also have massive consequences in where the new Silicon Valley migrates to and if the rules are favorable in South Africa, what’s stopping Facebook from exploring an opening of a Cape Town subsidiary?
Not much is the answer.
Artificial intelligence uses a machine to perform steps that mimic the work of a human mind but at exponential speed and performance.
AI computers can identify new drug molecules or new uses for old drugs, but it still takes human researchers to develop those results into a new medicine.
Many bigwigs in Silicon Valley have already clearly stated that the U.S. “lacks the comprehensive IP policies it needs for the AI era and is hindered by legal uncertainties in current U.S. patent eligibility and patentability doctrine.”
The issue of inventorship is just a small part of the dilemma over how to deal with AI, such as what types of AI software are eligible for a patent and who owns the massive amounts of data required to “teach” the machines.
A decision clarifying which AI inventions are eligible for patenting would be impactful.
Ultimately, AI is a high-stake game that gets more important by the day.
“Failure is not an option here. If things are failing, you are not innovating enough.”- Said Founder and CEO of Tesla Elon Musk
Mad Hedge Technology Letter
August 20, 2021
Fiat Lux
Featured Trade:
(IS NVIDIA WORTH A LONG-TERM INVESTMENT?)
(NVDA), (AMZN), (VMW)