Mad Hedge Technology Letter
December 2, 2024
Fiat Lux
Featured Trade:
(STICK WITH ENTERPRISE TECH IN 2025)
(HPE), (DELL), (TSLA), (NVDA)
Although, on the surface, tech stocks might be performing quite well, we need to talk about an imminent issue that could affect them.
I would even say that I am quite surprised by how the year is panning out.
There was so much uncertainty going into this year, and the election was a brutal contest that was bitterly fought.
However, the election gave us a clear winner, triggering a short-term tsunami of capital into tech stocks with the likes of Tesla (TSLA) leading the charge.
Even institutional money from heavyweights like Blackrock and others poured into tech stocks like there was no tomorrow.
TSLA is up today again on more stock upgrades.
If one ever needed a skinny variety of reliable tech stocks, then investing capital in Nvidia, Tesla, and perhaps Netflix or a Meta would be a solid foundation.
It is not only the Midas touch in the tech world, with management at HP and Dell saying the computer and laptop business isn’t all too hot.
Revenue generated by Dell’s (DELL) PC business declined 1% to $12.1 billion in the fiscal third quarter, falling short of estimates. While sales in HP’s (HPE) PC unit rose 2% to $9.59 billion, missing forecasts.
The PC refresh cycle is pushing into next year (2025), said Dell management.
HP Chief Executive Officer Enrique Lores said in an interview that the release of Microsoft’s new edition of Windows software hasn’t fueled PC sales from corporate clients as quickly as in previous releases.
The market had seen a historic decline in recent years after a burst of demand for new laptops in the early months of the pandemic when students and corporate employees were stuck at home. While signs of a rebound began to materialize this year, shipments again dipped in the third quarter.
This type of narrative has been put in motion by the crowd who think a new administration and their immigration stance will cause rampant inflation in wages.
No doubt, a lot of changes will take place in the next 50 days and after, and that type of uncertainty could deliver us a sharp selloff if short-term pain is sensed by the market.
Comments from Best Buy already set a very low bar even lower, as the recession that was supposed to take place in 2018 could be sneaking up on us.
The unemployment rate is forecasted to peak at 4.4% and has been steadily trending higher, highlighting the weakening of the US consumer.
There is a good chance that in 2025, retail tech will be in a recession before enterprise tech and enterprise tech stocks will be the last bastion of a narrowing market growth.
The key signal to focus on is a big Bitcoin sell-off that could trigger a flight to safety.
As long as market action stays orderly, I expect the pain trade to go higher in tech stocks in an uneven way, and I would avoid any tech stocks directly connected to American retail shoppers.
“AI will be the best or worst thing ever for humanity.” – Said Elon Musk
Mad Hedge Technology Letter
November 27, 2024
Fiat Lux
Featured Trade:
(BEST BUY THROWS UP SOME WARNING SIGNALS)
(BBY), (AAPL)
Best Buy (BBY) tanking their earning results is indicative of where we are right now, not only as a society but also in the tech sector.
People just don’t have that extra dollar or 2 to fund that iPhone (AAPL) upgrade, and that is why Best Buy sales are so underwhelming.
It isn’t the end of the world, but we need the consumers to stay healthy for the short-term health of the tech sector.
Sure, it is true that a great deal of spend comes from enterprise sources, but that is not the entire economy.
The U.S. economy is held up by consumers, and that isn’t the case in many other economies like China or India.
Get ready for a lukewarm Christmas season, which should manifest itself in some pretty sweet deals for the individual.
At the aggregate level, it looks quite sluggish in the mid-term as electronic retailer Best Buy ponders about how to reverse the dimming outlook.
Best Buy cut its full-year sales forecast and missed revenue targets.
Best Buy expects full-year comparable sales to decline by between 2.5% and 3.5%, compared with its prior expectations of a 1.5% to 3% drop.
Granted, the holiday season is five days shorter than last, so some of the softness is a one-off.
Management did say shoppers are responding to big deals and sales events. Management said it expects the peak in sales during times like Black Friday and Cyber Monday to be higher but the valleys before and after those to be lower.
Best Buy is waiting for a wave of shoppers to replace old devices and upgrade to new, higher-tech ones after an approximately two-year sales slump in the consumer electronics category.
Management said they anticipate this year to be one that brings “increasing industry stabilization.” They also mentioned specifically about Apple’s fresh collection of iPads, as well as artificial intelligence-enabled laptops from Microsoft, will drive sales.
Tariffs could put Best Buy’s sales at risk, too, if they result in higher costs for the company and for customers. President-elect Donald Trump said he would raise tariffs by an additional 10% on all Chinese goods and impose tariffs of 25% on imports from Mexico and Canada.
Artificial intelligence products are nowhere near the shelves of Best Buy, and nobody knows when they will debut.
A.I. continues to be strictly an enterprise build-out with a future use case, which doesn’t help companies like Best Buy and their bottom line.
Apple and its micro-improvements don’t move the needle enough for shoppers to get off the sidelines and splurge.
This type of transitory environment for consumer tech isn’t what investors like to hear.
I also mentioned earlier about the inflation effect of households redirecting funds to essentials like housing, insurance, and food.
Therefore, it is better for investors to stay out of the tech consumables and target the enterprise side of the equation.
I don’t believe the enterprise part of tech needs a reboot of growth is waning, and I am still executing bullish trades in stocks that are exposed to the A.I. story.
However, the times of the “tide lifts all boats” all long gone in the rearview mirror.
Today, I executed another bullish trade in Dell (DELL) on a monster dip of 12%. Weak guidance is another manifestation of stalling tech growth. I will exit this position before the year is over.
Mad Hedge Technology Letter
November 25, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS COULD ENTER A RENAISSANCE)
(NVDA), (TSLA), ($COMPQ)
The consensus of AI and robotics only taking “blue-collar” jobs is now steadily morphing into a new type of rhetoric.
It was once seen that heavy labor, like Amazon’s robots hauling away heavy items in a warehouse, was the widespread case for robots and AI.
However, I’ve been talking to many industry experts who have privately confided that it could be white-collar jobs that receive the most dramatic cuts.
Think about it, can AI and a robot really do the same job as an HVAC repairman or even a plumber?
If tech is able to solve that level of complexity, then the sky is the limit for tech, but I don’t believe we are anywhere near that yet. It is more likely that people typing simple code into computers will be swapped out for an algorithm, which would be an easy one-to-one switch. Jobs that don’t require a physical presence will always be first in line to be cut.
AI has proven that it operates with limited common sense or street smarts, and in some jobs, these 2 skills are essential to performing well.
By analyzing over 24,000 AI-related patents filed between 2015 and 2022, the researchers were able to identify which occupations might be most affected by emerging AI technologies.
Surprisingly, some of the occupations with the highest scores were white-collar jobs requiring advanced education and specialized skills. Topping the list were cardiovascular technologists and technicians, sound engineering technicians, and nuclear medicine technologists. Other jobs at high risk of automation included air traffic controllers, magnetic resonance imaging (MRI) technologists, and even neurologists.
In the information technology sector, 47% of software developers’ tasks and 40% of computer programmers’ tasks were found to align closely with recent AI patents. These patents focused on automating programming tasks and developing workflows, suggesting that even highly skilled tech jobs may not be immune to AI’s influence.
The least likely to be impacted by AI in the near future tended to be blue-collar jobs requiring physical labor or manual dexterity, such as pile driver operators, dredge operators, and aircraft cargo handling supervisors.
Just looking at the new increases in amount of robots suggests that job replacement is coming thick and fast.
Slightly more than 10% of South Korea's workforce has been replaced with robots.
The country has increased its use of robots by 5% each year since 2018.
China, with 470 robots per 10,000 employees, has overtaken Germany and Japan and landed in third place behind Singapore.
The United States ranked 10th with 295 robots per 10,000 employees.
North America's robot density is 197 units per 10,000 employees – up 4.2%.
America has lost around half a million jobs to robots so far, but I believe this concept isn’t linear, and we won’t be able to just extrapolate our current trends into the future.
Once it rains, it will really pour.
It is no coincidence that software companies are firing software engineers in large groups. Silicon Valley has really trimmed the fat off the boat, taking the cue from Elon Musk firing 80% of Twitter and functioning meaningfully better.
I come back to this concept of tech companies operating with algorithms powered by AI with a few “managers” and executives.
We aren’t a few days or months from this coming to fruition, but we are years.
The complete overhaul in staff numbers would mean that tech stocks would enjoy a renaissance and rise 5X to 10X from today’s levels to the joy of shareholders.
American society has never held such a high portion of its wealth in tech stocks, and that will continue as tech stocks get bid up and tech companies doing anything under the sun to massage the stock higher.
The top groups of tech companies ($COMPQ) are still growing around 4X more than the other listed companies, but that doesn’t mean they are sure-fire buy-and-hold stocks today.
In fact, there is a legitimate case that the gap between tech and the rest will narrow as we roll into 2025, making tech stocks marginally unattractive if a full-fledged rotation occurs.
I am not downplaying tech, but sometimes the sector needs a little breather or sideways correction.
Much of the over performance in 2024 has been breathtaking with the gem of the group Nvidia (NVDA).
I am not saying that there will be a non-tech Nvidia-like firm sprouting up from nothing in 2025, but the rate of stock acceleration could face some resistance in the tech sector.
That is why it is important not to chase big gains and wait for stocks to come to you as investors book profits to close the year.
There will be moments where you wish you waited.
Remember, much of tech’s success has already been priced into the stock, and looking out, they will need to deliver another bounty of alpha for shareholders to bid up the price even more.
That is certainly what Nvidia is doing as they impress and then reestablish a new higher goal.
The rally isn’t over, but readers will need to pick their spots.
Since peaking on July 10, big tech stocks have fallen 2%. That lags every major sector in the S&P 500, with the utilities, real estate, financial, and industrial groups jumping more than 10% and the broader index gaining 3.1% over the same span.
Microsoft faces concerns about its prospects in AI. Apple has seen early signs of tepid demand for its newest iPhones, although long-term optimism helped send the stock to a record last week. Amazon investors are worried about heavy capital spending eating into profits. And Alphabet has regulatory uncertainty as the US Justice Department investigates it for monopoly practices.
In the third quarter, Microsoft, Alphabet, Amazon, and Meta Platforms are projected to have poured $56 billion into capital expenditures, up 52% from the same period a year ago.
This is getting expensive, and investors want to know if the expenses are becoming too burdensome to the point that it doesn’t make economic sense.
Raising concerns about future profit margins was never a concern, but it suddenly is for tech investors looking down the road.
Top-line gains are starting to get offset by surging AI-related capital spending.
The reason for the optimism is fairly simple. For all the concerns, they continue to offer above-average profit growth, exposure to AI, strong capital returns, and less risk than other stock market sectors.
They are still attractive businesses with established business models, but at what price?
This earnings season will finally be the acid test to whether investors co-sign management’s vision to grow earnings in 2025.
The path is certainly much harder than in years past, and the goalpost continues to shrink.
Opportunities will present themselves as many companies might need a short-term haircut after earnings.
I still like the tech sector, but I would like it more if the expensive prices were reigned in.
For companies like Nvidia or Tesla, I don’t believe that will be possible, but the tier after that should offer optimal chances to pocket some high-quality names at better prices.
Mad Hedge Technology Letter
November 22, 2024
Fiat Lux
Featured Trade:
(PICK YOUR SPOTS)
(NVDA), (TSLA), ($COMPQ)
Mad Hedge Technology Letter
November 20, 2024
Fiat Lux
Featured Trade:
(THE FUTURE IS HERE)
(NO CODE)
