Mad Hedge Technology Letter
August 23, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS LAUNCHED INTO ORBIT BY JEROME)
($COMPQ), ($TNX)
The job is done – The Fed won against inflation.
When is the parade?
That was largely the message that was delivered to us this morning by U.S. Federal Reserve Chairman Jerome Powell.
Migrating into rate-cutting mode means that tech stocks ($COMPQ) are about to explode into orbit.
We will only know how much higher tech stocks will go when we can understand how much Powell’s Fed will cut.
If he cuts the Fed Funds rate from 5.25% to 2% then tech stocks will be up at least another 50% from these levels.
What is bizarre is that Powell is cutting rates ($TNX) with housing prices, grocery costs, stock market, and a price for one ounce of gold at all-time highs.
Things are about to get more expensive – that is guaranteed.
Ironically, the Fed is planting the seeds for the next rip-roaring wave of inflation, because 3% inflation levels will be the new floor and not the ceiling.
Once the CPI hit 2.9% just a few days ago, the Fed went into the “the job is done” mode which is extremely dangerous.
Either way, tech stocks are in for a spectacular monster rally heading into the year's close and we just added a big position in chip stock Micron (MU).
There should be two to three .25% cuts by the end of the year which is highly bullish for equities.
"The direction of travel is clear," Powell added.
Powell acknowledged recent softness in the labor market in his speech and said the Fed does not "seek or welcome further cooling in labor market conditions."
The July jobs report rattled markets earlier this month, revealing that there were just 114,000 jobs added to the economy last month while the unemployment rate rose to 4.3%, the highest since October 2021.
Data earlier this week also showed that 818,000 fewer people were employed in the US economy as of March, suggesting reports have been overstating the strength of the job market over the last year.
Powell's remarks on Friday were reminiscent of those he delivered at Jackson Hole in 2022, in which the Fed chair offered a direct assessment of the economic outlook and, at the time, the need for additional rate increases.
The similar part of the speech was his call to action to change the direction of policy and he did just that.
We are about short-term trading and trade alerts here in what moves the market with tech trades.
I do believe long-term, what Fed chair Jerome Powell did, will turn out to be a policy mistake that will result in a lot higher bond yields.
The Fed's slow walking the rate hikes on the way up and then now slow walking the rate cuts on the way down is a recipe for disaster and the wrong way to approach this problem.
The ironic thing here is that tech stocks are the only equities, apart from energy and supermarket stocks, to do well in a higher inflation backdrop and part of that has to do with their monopolistic power which continues unabated.
Not that tech needed any help, but help is arriving in terms of lower rates and I do believe tech stocks will do well as we move closer to year-end.
Buckle up, put on your cowboy hat, and enjoy the tech rally!
“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.” – Said CEO and Founder of Amazon Jeff Bezos
Mad Hedge Technology Letter
August 21, 2024
Fiat Lux
Featured Trade:
(SPEND UNTIL REVENUE COMES)
(NVDA), (SMCI), (AVGO)
Spend, spend, and spend some more.
That is the current zeitgeist in the tech community about the direction of generative artificial intelligence.
Companies are trying to outdo each other to see how much cash they can splurge to build out the AI infrastructure.
This is no joke.
Remember that there have been no meaningful explanations about how much revenue will directly come from AI, but my belief is that we are still in the “honeymoon phase” of the AI movement.
Eventually, and gradually, real questions will be asked and results will need to be provided instead of “building” nonstop with no accountability.
We are still in the phase of giving AI a pass which is why many have suggested stocks like Nvidia are turning into a bubble similar to 2001.
How do I know that AI is back?
Look at the chips stocks who were leading the tech rally for most of the year.
They sold off violently because of the unwinding of the Japanese yen carry trade, but the dip was bought because the discounts were too good to pass up for investors and because the AI trade isn’t over yet.
The snapback in chip stocks was v-shaped and set the stage for the rest of the year to power into the close.
I do believe the tech sector will receive better-than-expected news from the wider economy that shows the consumer is in better shape than initially thought.
The bar is extremely low for tech stocks to jump over and I do believe the ones with great balance sheets will use shareholder returns to convince shareholders to stick with their stocks.
AI hardware and chip companies have led the bounce in the Nasdaq from its August low, with Nvidia the index’s top performer, up almost 30% and just 6.1% short of the all-time high, as of its last close. Similar stocks like Micron, Marvell Technology, Super Micro Computer, and Broadcom have all participated in the snapback.
Strong monthly sales from Taiwan Semiconductor Manufacturing similarly pointed to robust AI demand.
The build-out of AI infrastructure is expected to be both enormous and long-lasting and investment in data center infrastructure needed to support GenAI could reach $6 trillion.
Capex from big tech could potentially increase by as much as 25% in 2025, well above the consensus expectation for 10-15% growth. This is especially positive for AI enablers in the semiconductors field.
Nvidia’s expensive valuation is completely justified when you understand that they carry the entire tech sector which is carrying the entire market on their back.
Shorting NVDA has probably been one of the worst trades you could have made in the past few years.
Mad Hedge Technology Letter
August 19, 2024
Fiat Lux
Featured Trade:
(WHAT WILL PALANTIR STOCK DO FOR THE REST OF 2024?)
(PLTR)
Not all tech stocks are created equal.
Some have the power of connections from the beginning and that goes a long way to understand if a company can do what it takes to survive.
Very rarely do tech companies come out of nowhere and it is true that recognized venture capitalists help like rocket fuel.
Palantir (PLTR) was supported initially by tech insider billionaire Peter Thiel.
It’s not surprising that this is a company sitting deep at the intersection of strategic national intelligence and artificial intelligence.
The stock hit a low of $5 per share and now trades north of $32 per share.
Investors might easily understand this company as the war tech stock and co-founder and CEO Alex Karp is in no mood to apologize or be politically correct for its military, police, and U.S. Immigration and Customs Enforcement services despite facing massive backlash.
Karp acknowledged the company’s consistent pro-Western view despite polarizing views regarding the appeasement of Iran, Russia, and China.
Karp refused to apologize for defending the U.S. government on any issue and he has never wavered behind their principle of powering the U.S. government.
Karp stood out for his fierce criticism of Former US President Donald Trump, but he has said that he will work with both administrations.
Karp also maintained his pro-artificial intelligence stance, indispensable to preventing AI abuse.
In August, Palantir reported second-quarter revenue of $678.13 million, up 27% year-over-year, topping the analyst consensus of $652.1 million.
Palantir has been selling AI software for much longer than most of its competitors, which gives it a leg up on its competition. It started off as a software program intended for government use, with the simple concept of data in and insights out. This helped guide real-time decision-making by ensuring the people making the choices had the best possible information in front of them.
Still, government revenue makes up more than half of Palantir's total and rose at a 23% pace. It was powered by U.S. government revenue, which saw the highest demand since 2022.
No matter how you dice it up, Palantir's Q2 results were phenomenal. However, management thinks its growth may slow in Q3. Third-quarter revenue is expected to be about $699 million, indicating growth of 25%. While that's less than Q2's growth rate, management has consistently beaten its guidance.
My opinion about where the PLTR’s stock is going might surprise some people.
On one hand, the United States has the biggest military in the world and will covet and utilize PLTR’s software to continue to make real-time decisions in a national security sense.
On the other hand, the issue I have with PLTR is not with the quality of the business, but the price of their stock.
The stock has risen too fast too furiously in a short-amount of time.
The move from $5 per share to $32 took place over a 2.5-year time frame obviously boosted by global events in Eastern Europe and the Middle East.
For the rest of the year, I do think PLTR has a chance to blow past $40 per share and at that point, we will most likely reach the short-term high water mark of the stock.
The stock is due for a big sell-off once the AI frenzy cools down a little and that could be later this year.
Remember that the AI narrative has reignited in the short-term so it is smooth saying until the next road bump.
This is a complex company and with many of those, the trajectory of the stock can be many times more complicated.
“The superior man understands what is right; the inferior man understands what will sell.” – Said Chinese Philosopher Confucius
Mad Hedge Technology Letter
August 16, 2024
Fiat Lux
Featured Trade:
(BIG RISKS TO TECH DISSIPATE)
($COMPQ), ($TNX), (FXY)
I don’t believe the tech sector is toast and it isn’t true to say that the burnt crust is the only part left over.
There is still vitality in it at the core of the tech sector ($COMPQ).
Granted, the trajectory left isn’t enough to propel tech stocks to a meteoric rise, but tech stocks should perform quite robustly in the run-up to the next earnings report.
So for all that are waiting for the bubble to burst – wait a little longer my friends.
In the meantime, let’s take a quick barometer of some of the outsized risks to big tech and ponder about the idea that outside or indirect events could possibly takedown tech shares.
China bailed the world out of the last three recessions and now they are a risk to drag down the rest of the world.
In each case, China's high growth and massive issuance of stimulus kick-started global expansion, and now that is gone with the wind.
China's model of economic development which worked so brilliantly in the boost phase, is now out of potency.
If American tech shares are sideswiped by global contagion, don’t bet on China to come bail out the radical overlords of Silicon Valley. China has its own problems and is entirely focused on that.
The era of zero-interest rates and unlimited government borrowing has ended. As Japan has shown, even at insane low rates ($TNX) of 1%, interest payments on skyrocketing government debt eventually consume virtually all tax revenues.
Japan was the black swan that could have cratered the tech market. Instead, it was a mild selloff yet manageable selloff creating a beautiful entry point for most of tech stocks.
Money is coming off the sideline to join in on a sharp rally into the U.S. presidential election so in the end the Japanese currency (FXY) risk was basically much-a-do-about-nothing.
At the start of the cycle, global debt levels (government and private sector) were low. Now they are high. The boost phase of debt expansion and debt-funded spending is over, and we're in the stagnation-decline phase where adding debt generates diminishing returns.
The era of low inflation has also ended for multiple reasons, but the tech shares have proven they can unequivocally march higher in an era of high inflation.
This is ironically due to tech being better positioned than other industries on a relative basis, because of their strong moats and iron-clad balance sheets.
The resilience in tech also echoes the idea that every company has become a tech company by integrating its products and revenue streams into daily business operations.
Tech productivity boom is hardly a one-off so as readers fret, please don’t think shares will magically drop to zero.
Dips are being bought and prices will go higher in the short term.
Economists were in awe in the early 1990s by the productivity stemming from the tremendous investments made in personal and corporate computers, a boom launched in the mid-1980s with Apple's (AAPL) Macintosh and desktop publishing, and Microsoft's Mac-clone Windows operating system.
By the mid-1990s, productivity continued to rise and the emergence of the Internet triggered the adoption of most of the population to get online and do business.
All the doomsday prophets who said high debt and high interest rates were the cocktails to finally stop tech stocks in their tracks got it completely wrong.
I am not saying debt and high interest rates are positive for equities, but tech has been able to skillfully navigate the headwinds with their excellent management skills and pivot towards leanness.
The buzz around AI holds still has a lot to prove, but the market is still celebrating its deflection of the Japanese yen carry trade.
I am not saying that tech shares will never have to confront anything that can drag them down meaningfully, but many of the high risks have either been postponed or dealt with.
We are in a position where tech should steamroll into the end of the year barring some type of crazy event.
