“Never spend your money before you have earned it.” – Said Thomas Jefferson
Mad Hedge Technology Letter
June 10, 2024
Fiat Lux
Featured Trade:
(OIL, THE US DOLLAR, AND SILICON VALLEY)
($COMPQ)
The dollar, tech stocks, and Saudi Arabian investment are inextricably linked almost like a web of nodes that shouldn’t be messed with.
The Saudis are a financial heavyweight and I would never dismiss their capital flows as it relates to tech stocks.
It is definitely not a drop in a bucket and we should take notice when Saudi Arabia creates a $100 billion fund this year to invest in AI and other technology.
That is just pocket change for one year.
It is in talks with Andreessen Horowitz, the Silicon Valley venture capital firm, and other investors to put an additional $40 billion into A.I. companies.
In March, the government said it would invest $1 billion in a Silicon Valley-inspired start-up accelerator to lure A.I. entrepreneurs to the kingdom.
Saudi wants to invest in tech and to do that they need dollars. Tech and its value are almost always entirely priced using dollars and not any other currency.
So I will address the conspiracy theory that we are about to go completely off the dollar as the global reserve currency.
The behavior of foreign investors suggests that the dollar’s role in global currencies is increasing and not the other way around.
Some even suggest that the Chinese yuan is about to replace the dollar as the world’s most important currency.
I strongly disagree with that opinion.
A place still using capital controls for trillions worth in tech seems like lunacy.
It flat-out does not happen.
Middle East oil-producing nations have other reasons to stick to the dollar.
A crucial one is that most of their currencies are pegged to the greenback, requiring a constant influx of dollars to support the arrangement. Those savings are held in dollar accounts, so Middle East countries have an interest in keeping the dollar strong.
There is not much traction in practical terms of the much-hyped idea of using the yuan to price oil.
American investor Ray Dalio likes to describe America as a weakening power that is succumbing to China. I strongly disagree with that hot take from Dalio. China is in fact faltering at an accelerating pace and its internal problems are piling up like a stray dog locked in a strangers back yard.
If you believe in conspiracy theories, the introduction of a petroyuan, and the ensuing collapse of the petrodollar, would be a first domino, potentially weakening the whole US financial system.
Redraw the global economic map amid a backdrop of crisis and wars.
Astonishing as it is, the narrative is a mirage.
The appetite among OPEC producers to price oil in yuan using a Chinese exchange is basically zero.
Middle Eastern national oil companies closely watch how Beijing tries to manipulate local commodity prices such as iron ore, cotton, coal, or grains every time prices rise above its pain threshold. Having spent 60 years building a formidable cartel, why would Middle East nations cede pricing power to China using a whacked-out currency?
The Saudis need to put their money somewhere and the anointed place has been technology and many times Silicon Valley technology.
They have already invested in many of the most high-profile tech companies in the US and will continue to do that.
Saudi and other foreign money is another reason why this tech market can’t and won’t get sideswiped.
Any dip is viewed as a prime buying opportunity as other industries give way to the freight train that is the AI narrative.
Anyone would be crazy to short the AI trade with unlimited petro-dollars from the Middle East.
Pump the black gold from the ground and dump the profits into volatile tech stocks.
Wait for them to explode to the moon – rinse and repeat.
I am bullish on tech in the short term.
“The man who reads nothing at all is better educated than the man who reads nothing but the newspapers.” – Thomas Jefferson
Mad Hedge Technology Letter
June 7, 2024
Fiat Lux
Featured Trade:
(HEWLETT PACKARD – REMEMBER THEM?)
(HPE), (SMCI), (NVDA), (ORCL), (DELL)
Artificial intelligence is not always the golden ticket, but some legacy companies, they are using this trend to springboard themselves back to relevancy.
Look at companies like Dell (DELL) or Oracle (ORCL) – they epitomize what I am talking about.
For years, these certain legacy tech firms were crowbarred into this narrow definition of some aging enterprise software company that was from yesteryear.
It was true back then but some have changed.
Hewlett Packard (HPE) is another Silicon Valley brand name that has reinvented itself for artificial intelligence and its stock price has reaped the dividends.
The stock has exploded to the $20 per share range after languishing in the teens for years.
HPE latest report was topped up with its better-than-expected revenue fueled by sales of servers built for artificial intelligence work.
The strong performance was due to the company’s server business, which generated revenue of $3.87 billion.
Sales of AI-oriented systems doubled from the first quarter to more than $900 million.
Increased demand and better availability of high-powered semiconductors from Nvidia (NVDA) led to an increase in AI systems sales.
HPE would be a good way to play the catch-up trade in AI servers compared with its peers in the server space, including Dell Technologies (DELL) and Super Micro Computer (SMCI).
HPE’s current backlog for AI systems is now $3.1 billion.
This is the first quarter HPE has broken out AI server revenue and investors likely welcome the increased disclosure.
The AI-server ramp-up is finally materializing.
The full-year forecast is underwhelming given the increased AI business, suggesting other business lines, such as networking, are dragging down the results.
I am not saying that HPE is the finished article right now and is a pure AI play. I am not. They have a lot to work on and that might be a generous statement to even say that.
There is still plenty to dislike about HPE who are saddled with legacy businesses that barely move the needle.
However, if HPE smartly harnesses resources right, I do believe they could eventually turn into an above-average AI play.
At this point, many tech companies view the participation of AI or not as an existential matter.
Many companies will get left behind and swept into the dustbin of history.
When the biggest tech companies in the world talk about AI constantly on their earnings call, it is not a head fake. This is the real deal so get with the program.
There are many different types of semiconductors with different levels of sophistication, from simple chips in kitchen appliances to cutting-edge graphics processing units (GPUs) used in artificial intelligence (AI) applications, as well as cryptocurrency mining.
In many of these use cases, semiconductor chips will need an AI server to act as storage for the data or some other similar function.
The data produced is substantially greater than analog chips and of higher quality.
We are still in the early innings of the AI revolution, so it is important to know which stocks possess an upward trajectory in terms of business models and sub-sectors.
In 2024, semiconductor chips and AI server stocks have made their stamp in the tech world and aren’t going away.
Remember that the trend is your friend and I wouldn’t fight this one. It’s a massive trend to fight and be on the wrong end.
Moving forward, I believe HPE will make meaningful optimization decisions to amplify its AI server business while minimizing its legacy divisions to the benefit of the future share price.
If they can somewhat achieve these results, the stock should easily rise by 3X.
“Life is fragile. We're not guaranteed a tomorrow so give it everything you've got.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
June 5, 2024
Fiat Lux
Featured Trade:
(A HIGH RISK STRATEGY)
(NVDA), (AAPL)
“Heavy losses” is something that any investor would not want to hear but over time, it has become synonymous with short sellers.
Tech stocks are unusually volatile so it has been fashionable in the past to start a fund proclaiming that great performance can be secured by finding the most likely tech stocks to drop.
It’s like shooting fish in a barrel? Right?
Not even close.
In reality, it is hard to predict a big drop and identify the perfect timing in which tech stocks will blow up.
Even if a short seller guesses right, the timing could be off by years and to hold a position forever eats at the profitability.
If anyone knows a successful trader that has made a nice living shorting Nvidia (NVDA) in the last year then I would like to meet that person.
Likewise goes for Apple over their massive bull run.
Shorting the best tech stocks in the world usually meant financial underperformance.
Just in recent memory, the whole Gamestop spike up when a bunch of hedge funds had massive short positions.
Short sellers were the ones run over by the GameStop phenomenon.
Retail traders have flexed their muscles again in the past two months, with shares of several meme-stock favorites including GameStop surging anew.
Meme-stock dramas demonstrate a “gamification” of the market that has undermined the whole short-selling industry.
And remember that GME is a garbage company with paltry revenue that surges for alternative reasoning.
Practitioners say it’s getting increasingly difficult to attract new cash for a risky bearish approach (the downside of short selling is theoretically limitless), whether for an activist firm or simply a short-biased fund.
Assets in his RC Global Fund, which wagered against tech companies both in China and the US, had dropped to $200 million from about $1.7 billion six years earlier. The Asia positions had paid off, but going against mighty American megacaps hammered performance.
The longer the cycles go, the more short selling seems to be simply a bad investment strategy and out of favor.
The idea is that a relentlessly rising market not only creates the kind of overvalued companies short sellers will ultimately feast on, it also masks badly run and sometimes fraudulent businesses.
That may be especially true when short selling is at such a low ebb since bearish activity has been shown to act as a brake on bad corporate behavior and keep the prices of companies with questionable financial statements in check.
Yet even as central bankers around the world have lifted interest rates back to levels not seen in decades — usually a handbrake on equity markets — stocks have generally churned higher, making it difficult to sustain bearish bets for any length of time.
In an era of 5% interest rates, it is not viable to borrow that capital to bet against skyrocketing AI stocks like Nvidia.
Why not ride the elevator up with Nvidia?
The absence of short sellers has meant “all systems go” for tech stocks and they have been off to the races with almost no pushback.
The bullishness has been so intense that the faster rate hike cycle in the modern financial history has done little to dissuade investors from pouring into tech stocks.
As interest rates lower from 5% to 2 or 3, tech stocks are likely preparing to lift off into another stratosphere.
If lowering rates catalyzes tech stocks to the upside, imagine how demoralizing for the few if any short sellers left shorting tech.
I am bullish on tech stocks in the short-term with the Central Bank telegraphing a drop in Fed Funds rates.
Mad Hedge Technology Letter
June 3, 2024
Fiat Lux
Featured Trade:
(RAISING SUBCRIPTION PRICES MEANS PROFITS FOR SPOTIFY)
(SPOT), (NFLX)
