Mad Hedge Technology Letter
August 17, 2020
Fiat Lux
Featured Trade:
(U.S. STYMIES THE ADVANCEMENT OF FOREIGN BAD ACTORS)
(BABA), (AAPL), (IQ), (NFLX), (FB), (GOOGL), (AMZN)
Stay away from Chinese tech companies listed on the U.S. exchanges. I wouldn’t touch them with a 10-foot pole.
Not only are these firms unscrupulous, but the U.S. administration is specifically attacking them as a cornerstone campaign strategy as we close in on the November election.
The blitzkrieg has been increasing at a rapid clip with U.S. President Donald Trump banning social media asset TikTok and chat app WeChat.
Just in the last few hours, the U.S. administration has said they are also “looking at” going after Chinese eCommerce firm Alibaba (BABA) who is the Chinese Amazon.
If the trends continue, there could be no Chinese tech companies freely extracting American revenue by this November.
Things will only get worse.
No doubt the coronavirus fiasco has exacerbated tensions between the countries with both sides dealing with a plunging economy.
The only reason we do not hear about the depths of despair going on in the Chinese economy is because the media is suppressed there.
Chinese media is tightly controlled disabling any negative news that shines an unfavorable light on the Chinese communist party.
Then there is the immoral fraud aspect of Chinese tech companies as every mainland Chinese firm wishes to go public in New York because company financials are never audited, and they are immune from any criminal liability.
This is a recipe to enable reckless Chinese management who state opaque numbers in their financials in the hope that American investors will take the bait.
Another cheater has been unearthed by Wolfpack Research who along with Muddy Waters have made it their mission to root out the bad actors.
The supposed “Netflix (NFLX) of China” Chinese streaming service iQiyi (IQ) plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission (SEC) has launched a probe into the company.
The case revolves around iQiyi falsifying their subscription numbers which everyone knows is the key to exhibiting growth in the company.
iQiyi said the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.”
Wolfpack Research has accused iQiyi of inflating 2019 revenue by around 44%.
Wolfpack also said iQiyi artificially overexaggerated expenses among other data.
The SEC probe into iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee debacle in which they committed the same act of falsifying numbers.
This copycat crime is clearly seen as a big winner in Mainland China encouraging a slew of companies to decide on the same strategy.
The Coffee company admitted to fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June.
China and its tech firms are one of the few bipartisan issues with strong support from both sides of the aisle and I can only see the temperature in the kitchen getting hotter.
The side effect of purging the Chinese tech out of the U.S. is that it bolsters the investor case for American tech.
Not that they needed help in the first place.
If the government won’t allow foreign companies to compete with Silicon Valley, then the monopolies built by the likes of Apple (AAPL), Facebook (FB), Google (GOOGL), and Amazon (AMZN) will feel protected because of the government effectively widening their moats.
One might argue that the crimes these American companies have committed are just as bad as the Chinese firms, but they get a free pass for being American.
Remember this is the age of de-globalization with national governments protecting national companies and not the other way around.
Silicon Valley companies have tried to pervert the U.S. employment situation by maneuvering around U.S. nationals by applying for the foreign HB-1 visas in droves and underpaying mostly Chinese and Indian nationals to work for the likes of Google and Facebook.
We can’t say these Silicon Valley companies are saints. They certainly are not, but that doesn’t matter in today’s climate when government, billionaires, and tech moguls are assumed as scum from the get-go.
Then there is the personal data issue that can’t be said to be much better than what the Chinese companies are doing.
The double standard is not surprising, and a heavy dose of politics has been injected into the global tech ecosphere to the detriment of cross border trade.
In the fog of war, this is why I have largely focused on U.S. software companies with subscription revenue because it offers more visibility than an unstable revenue model like Uber or Lyft.
In any case, nobody can blame the U.S. government for going this route since, after all, Facebook, Google, Amazon, and Netflix are all banned in China as well.
You don’t see U.S. tech companies trading on the Shenzhen tech index for a reason and after this monster run-up from the March nadir, it’s obvious why Chinese tech firms want to keep that funnel to U.S. investor capital clear.
This series of events that effectively coddles American big tech will insulate them from any real share weakness. The trend is your friend and I am bullish on American big tech.
“I don't think of Apple as a stock. I think of it as our third business.” – Said Legendary U.S. Investor Warren Buffet
Mad Hedge Technology Letter
August 14, 2020
Fiat Lux
Featured Trade:
(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)
The genie is out of the bottle and things will never go back to how they once were. Sorry to burst your bubble if you thought the economy, society, and travel rules would just revert to the pre-coronavirus status quo.
They certainly will not.
One trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
Tech giants will apply their huge relative gains to gut different industries.
Once a shark smells blood, they go in for the kill; and nothing else will suffice until these revenue machines get their way in every other adjacent industry.
Recently, we got clarity on big box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
Then I realized that another bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon, Walmart, or Target eCommerce fulfillment centers starting this fall, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Garcia returned home to Vallejo, California where he expected to finish his classes and hang out with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Garcia, a marketing and communications major, applied and was hired right away to work in the fulfillment center near Vallejo that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This is just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes have exploded. Even college students desperate for the cash might quit academics to focus on starting from the bottom in Amazon.
Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.
Chronic unemployment will be around for a while and jobs will be in short supply.
When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and, more often than not, doesn’t live up to the hype it sells.
Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delays household formation.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?
The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.
America will be saddled with scores of colleges and universities shutting down because they can’t meet their debt obligations.
Not to mention the financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids to college.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back after observing how America basically shunned the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.
The college campuses will be carcasses with mammoth buildings ideal to be transformed into eCommerce inventory centers.
The perfect storm is hitting on every side for Mr. Jeff Bezos to go in and pick up a bunch of empty college campuses for pennies on the dollar as the new Amazon fulfillment centers.
This will happen as the school year starts and schools realize they have no pathway forward and look to liquidate their assets.
Defaults will happen by the handful in the fall, while some won’t even open at all because too many students have quit.
Then the next question we should ask is: will a student want to pay $50,000 in tuition to attend online Zoom classes for a year?
My guess is another resounding no.
By next spring, there will be a meaningful level of these college campuses that are repurposed, as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white collar jobs the best.
The coronavirus has exposed the American college system, b as university administrators assumed that tuition would never go down.
Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
It’s common for colleges to have too many administrators and many on multimillion-dollar packages.
These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.
Like many precarious industries such as college football, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.
Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.
Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.
Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like college system.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue is health care and education.
We are seeing this play out quickly, and once tech gets a foothold literally on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds.
It’s scary, isn’t it?
This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s iteration. Imagine that!
AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!
Mad Hedge Technology Letter
August 12, 2020
Fiat Lux
Featured Trade:
(PUT THE KIBOSH ON TECH STOCKS?)
($COMPQ)
Whether Russia has actually produced a vaccine or not takes a backseat to the upcoming uncontrollable avalanche of media content about delivering a North American vaccine that news wires will disseminate.
It could be the case that the tide rises all boats in the equity world, but the pathway for a serious rotation into laggards is the more likely case.
Russian President Vladimir Putin claimed Russia has become the first country in the world to grant regulatory approval to a virus vaccine after less than two months of human testing.
Establishing an initial marker for a vaccine being realized is bullish for the overall stock market, but tech stocks might participate less in the rally as the capital is funneled into the catch-up trade.
At the very minimum, tech stocks, short term, are at risk of being slightly discounted to the overall market as the “shelter in place” trade that has benefited the strongest cloud plays has a weaker case than it did before.
Expect a bevy of upcoming announcements from North American and European pharma firms describing their unique pathway to a vaccine.
The European and North American scientific community will not want to be outdone by the Russians.
Don’t forget that the Nasdaq is at market tops and it's normal to have a phase of digestion.
Naturally, the Russian vaccine news has been met with a wave of general skepticism concerning its efficacy.
Putin chose to give a personal anecdote citing his daughter’s involvement with the trials as concrete evidence that she is fully vaccinated from the coronavirus.
The development of the vaccine has been put on an accelerated schedule raising concerns among some experts at the speed of its approval, but the Russian business conglomerate Sistema has said it expects to put it into mass production by the end of the year.
Regulatory approval is the precursor to mass inoculation of the Russian population and the government is desperate to revive the economy after a synchronized health crisis, economic crisis, and oil crisis wrapped into one.
The vaccine will be marketed under the name 'Sputnik V' in foreign markets and is already been offered for sale to other countries.
The jury is still out on this potential vaccine and a larger trial involving thousands of participants, commonly known as a Phase III trial hasn’t started yet meaning the approval is quite premature.
Such trials, which require a certain rate of participants catching the virus to observe the vaccine's effect, are normally considered essential precursors for a vaccine to receive regulatory approval.
“You need a large number of people to be tested before you approve a vaccine,” said Peter Kremsner from the University Hospital in Tübingen, Germany currently testing biopharmaceutical company CureVac's vaccine in clinical trials.
So aside from the uncertainty that this could be a ploy to generate revenue for the Russian state, what does this mean for tech stocks?
A real vaccine that will save people from the dreaded coronavirus would mean the “re-opening trade” is alive and well.
A fake vaccine means rhetoric about finding a vaccine which is also positive for the tech market too.
Capital will rotate into the neglected industries of hospitality, retail, transport, and energy.
It’s been a meteoric rise up in 2020 for cloud, software, and tech’s monopolistic juggernauts.
This was due to happen at some point just like the elevated virus risk will eventually dissipate whether it takes six months, two years or five years.
My base case is that tech will be spared from any major carnage and will be range bound in the short to medium term with few catalysts to take them higher.
Earnings certainly isn’t the force multiplier for tech it once was pre-virus.
This Russian vaccine could be indeed a head fake as well leading to another “buy the dip” moment that is so ingrained in the current psyche.
Portfolio managers have a hard time dumping tech stocks full stop because they are hard to get back into on the next move up.
Not to mention they should already be the cornerstone out of any major portfolio and that the opportunity cost of missing out on tech’s supercharged run-ups will limit any broad-based selling and far outweighs the risk of downside price action.
This wasn’t the greatest news for tech stocks, but it could have been worse.
Ultimately, the secular bull market in tech is as healthy as ever.
“Most Americans agree that technology is going to eliminate many more jobs than it is going to create.” – Said American entrepreneur and former presidential candidate Andrew Yang
Mad Hedge Technology Letter
August 10, 2020
Fiat Lux
Featured Trade:
(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)
The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.
Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.
The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.
One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.
The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.
Uber needs all the help they can get, and shares are still trading 20% below the IPO price.
Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.
Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.
No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.
Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.
Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.
The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.
Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.
Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.
The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.
CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.
Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.
He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.
If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.
That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.
Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.
This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.
I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.
Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”
With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.
Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.
