Mad Hedge Technology Letter
October 2, 2024
Fiat Lux
Featured Trade:
(INFLATION COULD AFFECT TECH STOCKS)
($COMPQ)
Either way, accelerating inflation is coming back.
What does that mean for your tech portfolio ($COMPQ)?
It is complicated is the simple answer, and prices threaten to escalate because of the economic disruption ahead caused by the International Longshoremen's Association (ILA) protesting at 14 major ports along the East and Gulf coasts, halting container traffic from Maine to Texas.
This fight is first about pay but more about rejecting automation.
The action marks the first such shutdown in almost 50 years.
On Monday, USMX (United States Maritime Alliance) said it had increased its offer, which would raise wages by almost 50%, triple employers' contributions to pension plans, and strengthen health care options.
USMX has accused the union of refusing to bargain, filing a complaint with labor regulators that asked them to order the union back to the table.
The union wants to see per-hour pay increase by five dollars per year over the life of the six-year deal, which he estimated amounted to about 10% per year.
Imports in the US surged over the summer as many businesses took steps to rush shipments ahead of the strike.
She said more than 100,000 people could find themselves temporarily out of work as the impact of the stoppage spreads.
That would hit consumers and businesses which tend to rely on so-called "just-in-time" supply chains for goods, he added.
In case you are wondering, it takes an estimated 4-8 years to convert a port to full automation and between $500 million to $2B.
For reference, Shanghai’s Yangshan port took about 4-6 years from conception to full operations.
Yangshan’s port barely needs humans to operate, and it mostly down by a handful of IT guys behind computers.
They don’t need 50,000 people to do the job.
Clearly, the amount of job destruction is something that the longshoremen association is aware of and is actively fighting against modernization.
What it does mean is that Americans will pay higher prices.
Higher inflation will result in rising bond yield, which will strengthen the dollar.
Last time, the US dollar skyrocketed, tech prices rose during covid, and the rest of the equity market sank relative to big tech except energy stocks.
The USMX is fighting against any and all automation, shows the gaining power of unions in the United States.
Tech firms have been cutting staff in bunches and automating as fast as possible with AI.
With the possibilities of another covid-style shortage of many everyday goods, price inflation could return instantly, and that is very bad news for the S&P and Dow index.
The tech-heavy Nasdaq has proven that it fights calamities quite well and is durable in times of catastrophe, albeit if the electricity and keyboard are still functioning.
Ultimately, I see chaos happening and, at best, agreed on wage hikes that are not insignificant that will be passed on to the consumer.
From what I can understand, each time chaos rears its ugly head in the United States, tech somehow is unscathed in the aftermath and benefits.
If crazy wage increases are agreed on, get ready for another tech rally, and even if there is a long work stoppage, tech will gain over any other sector.
With interest rates dropping, it is hard not to see tech stocks experiencing a melt-up going into yearend, even if bond yields spike higher because of external events outside the realm of tech.
Automation is coming for all industries, and the longshoremen are trying to kick the can down the road at the expense of the end customer.
I am bullish tech going into Christmas.
Mad Hedge Technology Letter
September 30, 2024
Fiat Lux
Featured Trade:
(CHINESE TECH GLITTERS IN THE SHORT-TERM)
(BABA), (JD), (PDD), (BIDU)
The bazookas have been unloaded, and the results are big.
The aftermath is reverberating through the rest of the world’s equity markets.
The Chinese economy is in the dumps and the Chinese communist party is using every tool in the proverbial toolkit to pull them out of their slump.
Juxtapose that in the face of a demographic time bomb and we could say that it is in the nick of time.
Now that we have decades of data on the issue, the Chinese economy has major structural issues and instead of fixing it, they are throwing liquidity at it.
Chinese purchasing power is about to drop through the toilet pipes, but I believe bellwether stocks like Alibaba (BABA), JD.com (JD), Pinduoduo (PDD), and Baidu (BIDU) will perform quite well.
China is all about ecommerce at the retail level anyway and Alibaba will be able to reverse a years-long slump on the back of Beijing’s sweeping stimulus measures.
Flooding the system with liquidity will paper over the cracks and should get consumers out and about instead of eating instant noodles in their little apartments.
Retail is now moving in the right direction again.
Although, long term this does nothing to address the major structural issues in the system, the short-term transfusion should help putting money in consumer’s pockets and liquidity on Chinese corporates will outperform.
Market-support measures initiated by the People’s Bank of China included mortgage rate cuts and an unprecedented $114 billion stock-buying facility.
The renewed positive market sentiment for Alibaba reflects its resilience after struggling in recent years, owing to Beijing’s 32-month crackdown on Big Tech firms and the mainland’s shaky post-pandemic economic recovery.
BABA lost nearly half their value over the past five years.
China’s largest operator of online shopping platforms and a major domestic artificial intelligence (AI) technology player, Alibaba recently won praise from the State Administration for Market Regulation for complying with rectification measures, ending more than three years of regulatory scrutiny that has hung over the company’s operations.
Alibaba’s cloud computing services unit last week announced at an event in Hangzhou the release of more than 100 large language models – the deep-learning technology underpinning generative AI applications like ChatGPT – to the global open-source community and a new text-to-video model, as the company showed its rapid progress in this field.
Earlier this month, Alibaba founder Jack Ma called on employees of the business empire he created 25 years ago to “believe in the future” and “believe in the market” amid stiff competition.
The Chinese Communist Party and their heavy handed approach has a lot to do with many tech companies fizzling out.
It is impossible to really kick start growth when they are suppressing it.
However, now is the time when the government has realized they are overdoing it and have unleashed the animal spirits.
Ultimately, the Chiense government is the arbiter of who gets to do business and how well in China.
In the short-term, Chinese tech stocks will outperform American tech stocks.
Chinese tech stocks are cheap by almost every metric – buy the dip in Chinese tech.
Mad Hedge Technology Letter
September 27, 2024
Fiat Lux
Featured Trade:
(CHIPS SHINE THROUGH AGAIN)
(MU), (NVDA)
I have been pounding on the table urging my readers to buy chip stocks.
Why?
Because chip stocks will carry the Nasdaq to higher highs.
Jump on the bandwagon while you can.
My thesis was validated when Micron stock (MU) jumped over 17% yesterday and is up over 20% for the week.
That type of stock appreciation isn’t as widely found in the tech sector anymore now that much of the tech sector is deadweight.
The sub-sector that isn’t dead weight is chips and specifically the AI chips which Micron is part of.
So when we talk about growth, you won’t hear stuff like earnings or revenue growing in the single digits.
We hear numbers more similar to revenue growing at 90% or 100% or even 300% in some cases.
The outperformance in growth is helping these stocks reach greater heights and this is just the beginning.
The commentary has been widespread that AI data spend on chips is going through the roof.
Micron’s management told us they raised guidance because of a more favorable pricing environment as well as robust demand for Micron's memory chips used in data centers to power artificial intelligence.
Executives now expect the market for high-bandwidth memory (HBM) chips used in AI data centers to increase to $25 billion in 2025, up from $5 billion this year — and heightened demand for its HBM chips to bring in multiple billions of dollars next year.
Micron is the first chipmaker to report quarterly results this earnings season and their stellar earnings bode well for the rest of its peers.
The company reported revenue of $7.75 billion — 93% higher than last year.
Micron distinguishes itself by partnering with, rather than competing against, industry superpower Nvidia (NVDA). Micron supplies memory chips for Nvidia’s hotly demanded GPUs.
The company is also set to benefit from a bill awaiting signature from President Joe Biden that would loosen environmental requirements for microchip projects funded by the CHIPS and Science Act. Micron is one of the biggest beneficiaries of CHIPS Act funding, and the Building Chips in America Act passed by the US House of Representatives Monday would allow it to access funding for its projects in Idaho and New York faster.
It is quite transparent that these companies cannot make enough chips in the short term and tech companies are throwing money at them to try to produce the supply that is required for the AI build-out.
Whatever you think of how many AI chips will be needed to deploy AI in full capacity - the real number will dwarf that.
The energy generation needed to power this new technology is so immense that it could even raise the temperature of the earth a few degrees from the sheer energy it will emit.
We are at the beginning of the AI revolution and the chips are currently the best way to play it.
I am bullish chip companies who produces AI chips.
“Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” – Said American investor Warren Buffett
Mad Hedge Technology Letter
September 25, 2024
Fiat Lux
Featured Trade:
(FROM 85 to 2,000 AI DATA CENTERS)
(ORCL), (NVDA)
Oracle plans to increase their amount of AI data centers from its current 85 to 2,000.
That is the most important number to take away from an analysts meeting with Oracle management.
Readers should ride on the coattails of this AI data center firm as throw billions upon billion at increasing the amount of AI infrastructure.
Readers absolutely need to know that a great swath of tech is dead and not innovating - growth rates collapsing faster than the U.S. birth rate.
It is important to position yourself at the cutting edge of innovation and growth and that is precisely companies who are knee deep in AI data center infrastructure investments that includes chip companies that produce GPUs like Nvidia.
In fact, Nvidia supplies Oracle and most other tech companies with data center chips called graphics processing units (GPU).
Nvidia has experienced an eye-popping surge in its revenue over the past year, and GPU demand continues to outstrip supply.
Oracle's data centers are unique because they are automated. Each one is operationally identical regardless of its size, and since they don't require human workers, it allows the company to build them quickly. Plus, Oracle's RDMA (random direct memory access) GPU networking technology allows data to flow from one point to another more quickly than traditional Ethernet networks.
Oracle has 85 data centers up and running with 77 more under construction as of the end of August.
Next year, Oracle intends to offer a cluster of 131,072 GPUs, which is a big step up from its largest clusters now, at around 32,000 GPUs. But there's another difference:
The new cluster will use Nvidia's latest Blackwell chips, which can perform AI inference at 30 times the pace of its flagship H100, which Oracle currently uses. Theoretically, it's going to allow developers to build the largest AI models in history.
In fact, Oracle spent $6.9 billion on data center infrastructure in 2024.
Oracle is going after the best technology in Nvidia’s Blackwell chip which is a solid reason to get interested in Oracle stock.
I don’t believe AI infrastructure spend will dissipate anytime soon and as the rest of the tech sub-sector growth falters, this one little area of AI will hold up the rest of tech.
This is why we are seeing extreme concentration of outperformance in just a handful of tech names and I don’t believe we will experience a scenario of spreading the wealth around to the less growth oriented subsectors.
In fact, I think the concentration will become even more outsized in a handful of names as a winner takes all mentality wins out in the tech sector.
We are just scratching the surface in what will become a massive explosion of AI data centers everywhere to satisfy the extreme demand of computing that it will require to pull this off.
Nothing indicates that this would be the wrong trend to follow and that assumption follows through to the astronomically high stock prices of the companies involved.
Oracle is one of these companies that readers should not dismiss.
It is at the heart of the AI infrastructure story that has legs.
"The only way to get ahead is to find errors in conventional wisdom." – Said Larry Ellison