"We are unicorn hunters." - Said Founder and CEO of SoftBank’s Masayoshi Son
Mad Hedge Technology Letter
July 22, 2020
Fiat Lux
Featured Trade:
(THE FUTURE IS HERE)
(USHIO)
Transistor capacity has always put the kibosh on semiconductor chip performance.
Chipmakers have for decades drained investment into a revolutionary Japanese technique to stretch the limits of physics and cram more transistors onto pieces of silicon.
A secretive Japanese company that mastered the skill of manipulating light for applications is about to go mainstream with cutting edge technology.
Ushio Inc. achieved the once thought impossible task of refining powerful, ultra-precise lights needed to test chip designs based on extreme ultraviolet lithography (EUV), a process through which the next generation of semiconductors will be made.
The milestone means that the Japanese company will become a prominent player in future chipmaking and the technology that harnesses it.
“The infrastructure is now mostly ready,” said CEO Koji Naito in an interview.
Testing equipment was primarily holding back extreme ultraviolet lithography (EUV), but with that hold-up dealt with, production efficiency and yields can finally go up setting the stage for electronic manufacturers with the possibilities of producing substantially better consumer products.
The Tokyo-based company developed a light source for equipment used to test what are known as masks: glass squares slightly bigger than a CD case that act as a stencil for chip designs. These templates must be picture-perfect, even an iota of error in one of them can render every chip in a large batch unfit.
That’s where Ushio seamlessly slots in.
Its technology operates lasers to vaporize liquid tin into plasma and produce light closer in wavelength to X-rays than the spectrum visible to the human eye.
That light aids chipmakers in detecting errors in the product.
This process takes a room-sized machine that looks like a sci-fi death ray and requires a phalanx of workers to operate.
After 15 years of industrious development, the EUV business will generate profits next year.
Only Intel Corp. (INTC), Samsung Electronics Co., and Taiwan Semiconductor Manufacturing Co. (TSM) desire to go smaller than the 7-nanometer processes that are the current status quo of central processing unit (CPU) design.
The focus on niche areas and creating things that others can’t is set to pay dividends for Ushio.
Ushio is poised to seize control of the market for light sources used in the testing of patterned EUV masks, there are several boutique tech companies in the Tokyo area that are incessantly focused on high-precision manufacturing.
Ushio dominates lithography lamps used to make liquid crystal displays with 80% market share and controls 95% of the supply of excimer lamps used in silicon wafer cleaning.
Their secret sauce is balancing mass production with craftsmanship.
Materials like quartz glass are arduous to work with and possess peculiar thermal expansion properties from metals like the molybdenum in which they are housed.
I know this stuff seems like out of the realm of science fiction, but Japanese-specialized firms have always been at the vanguard of the semiconductor technology and that is still the same today.
Ushio was established in 1964, and it was the first Japanese company to develop and produce halogen lamps.
Starting from 1973, fishermen used its lights to catch squid in Tokyo Bay.
The firm has succeeded in more than tripling its sales over the past 25 years.
The company is now venturing into the use of sodium lamps to nurture plants and using ultraviolet light calibrated to such a precise wavelength to kill bacteria without damaging human skin.
“If you can't make it good, at least make it look good.” – Said Founder of Microsoft Bill Gates
Mad Hedge Technology Letter
July 20, 2020
Fiat Lux
Featured Trade:
(THE RACE TO THE BOTTOM),
(SCHW), (FB), (SQ), (WMT), (AMZN), (FFIDX), (BOX)
Gone are the days of brokers shouting from the trading pits, a bygone era where pimple-faced traders cut their teeth rubbing shoulders with the journeymen of yore.
The stock brokerage industry is at an inflection point, with the revolutionary online stock brokerage Robinhood shaking up an industry that has needed shaking up for years.
A common thread revisited by this newsletter is the phenomenon of broker apps being low-quality tech.
A broker ultimately serves little or no value to the real players among the deal, usually extracting huge commissions.
Technology and now blockchain technology vie to completely remove this exorbitant layer from the business process.
Well, for the stock brokerage industry, that time is now.
Robinhood is an online stock brokerage company based in Menlo Park, Calif., trading an assortment of asset classes including equities, options, and cryptocurrencies.
So, what's the catch?
Robinhood does not charge commission and they single-handedly broke the internet broker model with this move.
That's right, you can invest up until the $500,000 threshold protected by the Securities Investor Protection Corporation (SIPC) and you can go along with your merry day trading for free.
The online brokerage industry has been getting away with murder for years.
They got comfortable and stopped innovating - the death knell of any company in 2020 and even more so because of the global health crisis.
Effectively, high execution costs reaping massive profits were the norm for brokers, and nobody questioned this philosophy until Robinhood exposed the ugly truth - unreasonably high rates.
Peeking at a monthly chart of brokerage costs will make your stomach churn.
For instance, a trader frequently executing trades with an account of $100,000 would hand over $1836 in commission in 2017 if their account was with Fidelity.
On the cheaper side, Interactive Brokers would charge $854 for its brokerage services to habitual traders per month.
These two internet brokers have finally bitten the bullet and slashed fees on equities and ETFs down to 0.
The outlier was Tradier, a start-up brokerage founded in 2014 using the powerful tool of an Application Programming Interface (API) which charged $213 per month to trade frequently.
An API is described as a software intermediary allowing two applications to communicate with each other.
This model helped cut costs for the online brokerage because Tradier did not have to focus its funds on the trading platform that was delegated to various third-party platforms.
Tradier is largely responsible for the aggregation of data and charts thus employing an army of developers to meet their end of the business.
This model is truly the democratization of the online brokerage industry, which has been coming for years.
Costs were cut to a minimum with equity trades at Tradier costing investors $3.49 per order and options contracts costing $0.35 per contract with a $9 options assignment and exercise fee.
Now Tradier has done the full monty by going to $0 commissions on stock and ETF executions
Technology has defeated the traditionalist again.
More than 80% of Robinhood's accounts are owned by millennials – as expected.
Trading cryptocurrencies acts as a gateway asset to springboard into other asset classes such as equities and derivative contracts.
Vlad Tenev, co-CEO of Robinhood, indicated that Robinhood will have to modify its radical business model to monetize more of the business in the future, but he is comfortable with the current business model for the time being.
But Tenev has already seen fruit borne with the likes of Robinhood applying fierce pressure to the legacy brokerages' pricing models.
The traditionalists are locked in a vicious pricing war with each other slashing their commission rates to stay competitive.
It was only in 2018 when Charles Schwab (SCHW) felt it necessary to charge $4.95, down from the January 2017 cost of $8.95, and now they have gone down to zero in 2020 along with the rest of the pack.
Charles Schwab has more than 10 million accounts, only double the number of Robinhood, after being founded in 1971.
The 42-year head start over Robinhood has not produced the desired effect, and it is ill-prepared to battle these tech companies that enter the fray.
Robinhood has been able to add a million new accounts per year. If Charles Schwab relatively performed at the same rate, it would have 60 million accounts open today.
It doesn't and that is a problem because the company can be caught up to.
The age of specialization is upon us with full force, and customer demand requires care and diligence that never existed before which will set up a massive wave of consolidation in the industry.
It’s never been better to be a trader.
Sign me up!
"When something is important enough, you do it even if the odds are not in your favor." - said Tesla founder and CEO Elon Musk
Mad Hedge Technology Letter
July 17, 2020
Fiat Lux
Featured Trade:
(THE ROAD OUT OF SILICON VALLEY),
(AAPL), (CRM), (MSFT), (FB), (AMZN), (GOOGL)
In a study last year, 44% of Millennials planned to move out of the Bay Area in the “next few years.”
In the same study, 8% of Millennials indicated that they would move out of the Bay Area within the next 365 days.
Then Covid-19 hit.
The pandemic has accelerated this trend of Millennials ditching big-ticket cities and rental prices in San Francisco have experienced 30% drops with many owners offering free two months upon move in to salvage a souring situation.
The U.S. has also moved to ban foreign HB-1 visas citing the 40 million unemployed American citizens that are now looking for a job.
The knock-on effect is a wave of Indian and Chinese tech workers, who are usually the recipients of the HB-1 visas, that won’t be renting Silicon Valley apartments at inflated market prices.
The migratory trends sum it all up and the Bay Area has finally hit that inflection point where it is no longer the most desirable place to live anymore.
On a social level, the area has also become squalid like some third world countries due to a ravaging homeless problem that is growing faster than any software company.
The pandemic forced the local city government to create a tent encampment in front of San Francisco city hall.
The ones that weren’t gifted a spot in front of city hall were temporarily put up in five-star hotels in Russian Hill and paid by for the city because of the absence of any travelers.
Salesforce Founder and CEO Marc Benioff has lamented that San Francisco, where ironically he is from, is a diabolical “train wreck” and urged fellow tech CEOs to “walk down the street” and see it with their own eyes to observe the corrosion of society.
The leader of Salesforce doesn’t mince his words when he talks and beelines to the heart of the issues.
Sadly, the pandemic will put more pressure on the lower end of society and force more Americans into homelessness adding to the surge.
How many homeless can San Francisco absorb?
It’s scary to think about what will happen when the eviction moratorium ends and extended unemployment benefits stop.
It’s just another factor in a long list of why San Francisco is losing talent.
The environment has really turned from day to night in Silicon Valley where just a half a year ago, Silicon Valley was overflowing with tech jobs and now start-ups are shedding jobs faster than ever.
Uber, Lyft, and Google are just some that have rescinded job offers to new graduates, frozen salaries, slashed annual bonuses, and straight-up laid-off employees.
The trend of outsourcing tech jobs from California was already well underway before the pandemic.
That was exactly what Apple’s $1 billion investment into a new tech campus in Austin, Texas and Amazon adding 500 employees in Nashville, Tennessee is all about.
Apple also added numbers in San Diego, Atlanta, Culver City, and Boulder just to name a few.
Apple currently employs 90,000 people in 50 states and is in the works to create 20,000 more jobs in the US by 2023.
Most of these new jobs won’t be in Silicon Valley but is it possible that the pace of new hires will get bogged down because of the health crisis.
Millennials are reaching that age of family formation and they are fleeing to places that are affordable and possible to take the first step onto the property ladder.
The health crisis has crushed many of their dreams to become a first-time homebuyer, meaning they could become lifelong renters.
Millennials came of age during 9-11, graduated into the Great Recession of 2008, and have now been dealt a cruel and devastating blow of navigating through Covid-19 during many of their best years of income earning.
No wonder why Silicon real estate has dropped, people and their paychecks are on the way out.
In a perfect storm of a health crisis, economic crisis, and the desire to live in more physical space as most jobs become remote, San Francisco has never been less attractive at any point in time.
It will no longer be the economic juggernaut that was so vital to tech companies.
Silicon Valley simply doesn’t share the wealth with all of its participants and the place is now feeling the side effects.
The last time San Francisco was this unattractive, you would have to go back to before the California Gold Rush of 1848 when San Francisco was just a backwater village of 10,000 people.
When hiring comes back, look for many of the second-tier cities like Nashville to recover fast taking off from what Silicon Valley built.
Just as harrowing as the health crisis, the start of wildfire season has just commenced in the state of California.
It used to be such a great place to live.
“I strongly believe the business of a business is to improve the world.” – Said Founder and Co-CEO of Salesforce Marc Benioff
