“Greatness does not come from intelligence. Greatness comes from character, and character isn't formed out of smart people: it's formed out of people who have suffered.” – Said Nvidia CEO Jensen Huang
Mad Hedge Technology Letter
June 17, 2024
Fiat Lux
Featured Trade:
(INNOVATION IS THE SAVIOR)
(TTDKY), ($COMPOQ)
The only way out of the mountain of US Federal debt black hole is to innovate out of it via the tech sector ($COMPQ).
That is the only way.
A savior can only come in one form and that is it.
Nothing will forgive these trillions of debt and the pile is growing by the day.
The close to $35 trillion and counting will increasingly be a pain in the side of US businesses and that includes tech companies listed on the stock exchange.
Innovation leads to surging productivity manifesting in revenue gains that make it possible to dig ourselves out of this situation where interest expense drags us further down the rabbit hole.
Innovation has happened before to the US economy in the past like the gas-powered car and the creation of the internet.
It’s likely to happen again as well.
Instead of one big idea, it could come in the form of many solid yet meaningful gains.
One just came in that could truly improve the productivity of American tech and that is from Japan’s TDK (TTDKY) which boasted a breakthrough in materials used in its small solid-state batteries.
The batteries set to be produced will be made of an all-ceramic material, with oxide-based solid electrolyte and lithium alloy anodes.
The high capability of the battery to store electrical charge, TDK said, would allow for smaller device sizes and longer operating times, while the oxide offered a high degree of stability and thus safety.
The breakthrough is the latest step forward for a technology industry experts think can revolutionize energy storage, but which faces significant obstacles on the path to mass production, particularly at larger battery sizes.
Solid-state batteries are safer, lighter, and potentially cheaper and offer longer performance and faster charging than current batteries relying on liquid electrolytes. Breakthroughs in consumer electronics have filtered through to electric vehicles, although the dominant battery chemistries for the two categories now differ substantially.
The most significant use case for solid-state batteries could be in electric cars by enabling greater driving range.
TDK, which was founded in 1935 and became a household name as a top cassette tape brand in the 1960s and 1970s, has lengthy experience in battery materials and technology.
The US federal debt is annualizing at a loss of $2 trillion at a time of full employment.
Imagine the devastation if we need to do quantitative easing again while already burning $2 trillion per year.
The number needed to pull us out of a recession could be $8-$15 trillion and that will come with a nasty set of inflationary outbursts.
The number of full-time jobs has fallen off a cliff and tech firms have cut the bloat.
It will be the ingenuity of tech companies like Japan’s TDK that will infuse the US economy will much-needed productivity.
I believe if the tech sector can keep peppering us with these breakthroughs in productivity, progress can supersede the out-of-control fiscal spending that has launched an uncontrollable bout of inflation in the US.
Remember that the top tech stocks in the world have been shielded from inflation only because they have hopped on the generative AI train.
For the rest of tech, inflation is hitting them like a sledgehammer between the eyes.
The biggest beneficiaries of cutting-edge innovation would be the share prices of the best tech stocks.
As it stands, tech will keep grinding higher in the current conditions, but better-than-expected innovation would shoot tech stocks to the moon and include a wide breadth of participation while putting a cap on inflation.
“Recession is when a neighbor loses his job. Depression is when you lose yours.” – Said Former US President Ronald Reagan
Mad Hedge Technology Letter
June 14, 2024
Fiat Lux
Featured Trade:
(ON BOARD THE AI TRAIN TO UNCERTAINTY)
(AAPL), (MSFT)
Apple (AAPL) has been on a one-way street to nowhere lately with their China business falling into the backstreet dumpster.
They had to do something before desperation took hold in the Cupertino headquarters.
It’s not like they could turn to Steve Jobs to figure this all out.
Tim Cook is an operations manager masquerading as the CEO and has little vision if any.
Announcing something AI was not a shocker as even legacy firms like Oracle and Dell had done the same with great success. But this isn’t data center stuff, the AI here will affect the Apple iPhone software.
Out the window goes privacy on your little iPhones – do people still even care about that?
Privacy was handed over to Sam Altman’s OpenAI.
Doing a deal like this opens up Pandora’s box and ensures that the Apple of the future will look a lot different than the one today.
Not everyone will like it, but that is tough. It is business.
The CEO of Apple, Tim Cook announced an unexpected and deep cooperation with the company OpenAI, which develops the chatbot ChatGPT, and the biggest loser has to be Microsoft.
MSFT usually doesn’t lose at its own game so this one is a bit of a surprise.
Apple has so far only flirted with the idea of its integration. The company surprised and took many people's breath away.
It is a paradox that the biggest investor in OpenAI is its rival Microsoft. The cooperation agreement took place behind closed doors to the dismay of Microsoft CEO Satya Nadella.
Thanks to artificial intelligence, Siri will be able to access all data stored in the user's phone and cloud through a secure channel.
Siri will no longer have a problem understanding the wider context of your question, connecting the answer with previous questions, or deciphering what you wanted to say if you accidentally mixed up the words.
CEO of OpenAI Altman now has fulfilled a longtime dream by striking a deal with Apple to use OpenAI’s conversational artificial intelligence in its products.
MSFT thought it had a big lead in AI over its peers and apparently, OpenAI, being the newest hottest thing in tech, has decided to sleep with everyone in bed instead of just picking one. MSFT has a right to be angry when they handed over $13 billion to OpenAI and that perceived lead in AI has evaporated.
It will be quite funny to see the software and the algorithms in these firms slowly merge into one product backed by the same AI company.
It screams of too many mouths to feed with just one nipple.
OpenAI has taken full advantage to entrench itself as the preeminent force at the forefront of technological modernity. They are the biggest winner here.
Right away, I wouldn’t say that Apple hit a home run even though the price action in their share price suggests so.
They are simply just boarding a train to uncertainty with the rest of big tech, and this maneuver looks highly defensive in nature.
Since Apple has stated they committing no money to the deal then it has to be coined as a win. It's $13 billion less spent and at a risk the software could turn clunky and unusable.
At that point, they could just terminate the relationship. This move was highly controversial inside of Apple headquarters, but management thought it was worth the risk.
Apple stock has most likely reached a short-term peak.
Lastly, I found it interesting that the Former head of the National Security Agency, retired Gen. Paul Nakasone has joined OpenAI which could mean that OpenAI will also be integrated into the Armed Forces. Apple won’t have much of a say in OpenAI going forward so we will see how it pans out.
Mad Hedge Technology Letter
June 12, 2024
Fiat Lux
Featured Trade:
(WHAT WILL DROPPING INFLATION DO TO TECH STOCKS?)
($COMPQ), ($TNX), (CPI)
It’s “all systems go” for tech stocks ($COMPQ) as the latest inflation report offers us juicy morsels of data laying out a more attractive backdrop for tech companies in the short term.
The Mad Hedge Tech portfolio has benefited from this “bet on the Fed pivot” trend to great effect and I took profits on my Micron June bull call spread.
Remember that short-term rates ($TNX) are the most important variable to whether certain stocks go up and down in the short term.
Long term, the story could be very much different.
A higher-than-consensus report would have resulted in a red day for tech stocks, a pullback of commodities, bond yields spiking, and the dollar launching into the orbit.
We got the inverse of that and this is a strong signal that tech stocks will be like a stallion bolting out the back of the stable because tech stocks are the biggest winners of a lower rate environment.
The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices.
Inflation has remained stubbornly above the Federal Reserve's 2% target on an annual basis.
Fed officials have categorized the path down to 2% as "bumpy," while other recent economic data has fueled the Fed's higher-for-longer narrative on the path of interest rates.
On Friday, the Bureau of Labor Statistics showed the labor market added 272,000 nonfarm payroll jobs last month, significantly more additions than the 180,000 expected by economists. Wages also came in ahead of estimates at 4.1%, although the unemployment rate rose slightly to 4% from 3.9%.
Notably, the Fed's preferred inflation gauge, the so-called core PCE price index, has remained particularly high. The year-over-year change in core PCE, closely watched by the Fed, held steady at 2.8% for the month of April, matching March.
The Fed has been unbelievably late in controlling inflation, but that market doesn’t care and tech stocks care less as the AI narrative has been able to supersede anything and everything.
The market is controlled and dictated to by a bunch of algorithms.
Food up 2% after a double is in fact a “victory” to the algorithms even if the middle class in the United States has felt the heavy brunt of it.
It is probably accurate to say that tech stocks are in a world of their own and the price action certainly behaves as if this is the case.
What does this all mean?
Get ready for higher-tech share prices.
Lower rates will help emerging tech companies tap the debt market to fund operations.
Many smaller tech firms don’t have the privilege to tap a multi-trillion dollar balance sheet for cash whenever they want.
In the short-term, except the AI stocks to gap up yet another leg as the market prices at lower rates for companies that hardly need it.
Talk about having your cake and eating it too – this would be it!
For the best of the rest, it helps but won’t move the needle in terms of catching up to big tech, but this should stimulate the investors on the sidelines nudging them to handpick certain stocks that have been ignored during the time of high rates.
Either way, the Fed has really put itself in a box here and without even killing inflation to the 2% mandate.
The markets fully expect the Fed to cut once or twice by the end of the year.
Whether this decision is political or not, the new developments have put a floor under many high-quality tech names.
Consequently, the second half of the year should see some ample returns in tech stocks that preside over good business models.
“Never spend your money before you have earned it.” – Said Thomas Jefferson