Mad Hedge Technology Letter
May 29, 2024
Fiat Lux
Featured Trade:
(THE GRIND HIGHER)
(FED FUNDS RATE), ($COMPQ)
Rates will stay higher for longer and the higher income bracket will carry the US economy through any conflict with short-term inflation.
What does that mean for tech stocks?
It will trend higher for longer.
Sure, US rates will stay elevated, but tech stocks have proven they are tough to keep down with elevated inflation.
Most who buy tech stocks have done very well financially in the past 18 months.
There is a high likelihood that higher rates won’t affect their purchasing power to buy more tech stocks.
I do admit a big chunk of Americans are missing out on buying tech stocks at these current prices – I don’t diminish that.
The big spenders have utilized their 3% fixed mortgage to hunker down and continue to spend on devices, software, EVs, and other tech.
This clearly means that 5% isn’t the real neutral rate that the Fed is looking for and I view this rate as a relatively loose fiscal policy that is allowing high-income Americans to splurge on more tech products.
Don’t forget that these are the same stockholders that are reaping increasing tech dividends, higher-tech stocks, and generous shareholder returns.
Further evidence is that the $2 trillion in quantitative tightening along with a 5% Fed Funds rate has resulted in the S&P index rising 37%.
That’s not supposed to happen if rates are high above the neutral rate.
What the Fed gets wrong is that the neutral rate has moved significantly higher when we consider the trillions that were printed for the pandemic programs and stimulus checks.
The additional amount of fiat paper floating around chasing a limited amount of goods results in the neutral rate being somewhere closer to 8-10% and that development gets missed by the Fed.
Therefore, 5% Fed Funds rates are “high” and a lot higher than 0%, but the wealthy have now used this rate as a tailwind to progress their financial goals.
Wealthy households right now can earn upwards of 4.5% in a high-yield savings account, see their tech portfolios go up 20% in a year, and are watching the value of their real estate holdings surge higher.
Given the amount of wealth concentrated among a handful of US households and the skew on the income distribution in the US, just about any change in monetary policy will be regressive, advantaging those with more at the expense of those with less.
Tuesday's consumer confidence reading — while registering a three-month high — was far from a clear-cut judgment from Americans that things are looking up, economically speaking.
If the Fed holds at 5% and fails to erect rates closer to 8%, tech stocks will grind higher.
Rates would need to be at a nominal number that would give pain to higher-income buyers.
My personal view is that the Fed will stand pat at 5% interest rates and the Nasdaq should perform well in this scenario.
If we get talk of 6 or 7%, tech stocks will produce a minor pullback delivering another fabulous opportunity to buy.
The other piece here is Nvidia delivering stellar earnings and that should keep the shine on high-quality tech stocks when the market sets up to make the next move.
My bet is any dip will be bought ferociously and any “dip” could turn out to be more of a sideways time correction before we rip higher.
This is also why Nvidia is close to 81% above its 200-day moving average and boasts a current $2.7T valuation.
Mad Hedge Technology Letter
May 24, 2024
Fiat Lux
Featured Trade:
(CBDC BANNED BY THE HOUSE)
(CBDC), ($COMPQ)
The US House of Representatives passed a bill effectively banning the Federal Reserve from creating a digital version of the dollar.
Even though this action doesn’t specifically target the tech sector, the tech sector ($COMPQ) has a lot at stake in this bill.
First, the irony here is how polarized the US Central Bank has become in Washington to the point the Federal government wants to ban something from them.
It’s like taking away a dangerous toy from a baby.
It signals there has been a massive failure at the Fed with its blown “transitory inflation” call that has lasted over 4 years.
The Fed could equally screw up the onboarding of the digital dollar, if it ever happens, the U.S. financial system might never recover.
The vote passed but it still would need approval from the Senate and then signed by the President for it to become US law.
Still, as one of the chief opponents of the Bill, Rep. Maxine Waters, put it, "In fact, if this bill becomes law, we would be the only country in the world to ban a CBDC." Prohibiting "innovation" on the central bank digital currency front seems like a policy miss at first sight.
Waters has this backward.
The U.S. adopting a digital dollar would stifle tech innovation.
Money earmarked for innovation would likely go into capital that isn’t tightly controlled and tracked.
Innovation usually happens when big risk-takers deliver big ideas and the implementation of CBDCs would mean that tracking technology could shut down any “big idea” from the top.
China has tried the e-Yuan which has been a massive disaster with little uptake in the project.
Innovation thrives in an environment that offers freedom for the big picture thinkers, and a 3rd party tracking and monitoring apparatus isn’t good enough.
In fact, if CBDC were implemented, it would be the end of US-led tech innovation in modern history.
Few would take risks because it wouldn’t be worth innovating in this type of currency when there are others that would step over the line of privacy.
Scamming would be off the charts as well in this scenario.
Inserting unparalleled surveillance and individualized control would choke off free business and ideas become sterilized.
Anything new laid out would face a gauntlet of obstacles before getting anywhere near a consumer.
Think about all the middlemen on the way nickel and diming you the death as well. We already have that with the blown transitory inflation call by the Fed.
I am a believer that the less government, the better for tech business.
Europe is the poster boy for government-led innovation stifling.
There are no competitive tech companies in Europe that can compete with Silicon Valley because a tech innovator would be crazy to start and grow a company in Europe.
Europe is hostile to free business and tech innovation. They know how to tax and do it highly.
I could easily see how an integration of digital currency could end up in a dystopian situation if carried out by the wrong government.
Of course, the banning of CBDCs at the House level is a good sign that America is open for business, but it will need to become enshrined in law to have some bite.
If CBDCs are implemented by the Fed in the future, 90% of the Nasdaq market would fail leaving just 7 tech stocks.
It would in fact amplify the lack of competition that we are facing these days in the US tech sector.
I am bullish on the tech sector if integration of CBDCs by the Fed and Congress are banned.
“Someone's sitting in the shade today because someone planted a tree a long time ago.” – Said Legendary American Investor Warren Buffett
Mad Hedge Technology Letter
May 22, 2024
Fiat Lux
Featured Trade:
(THE AI DATA CENTER COOLING STOCK)
(VRT), (NVDA), (AI)
Not every winner from the artificial intelligence revolution will be in Nvidia (NVDA).
Let me be clear about that.
Others will wriggle their way into the group that can admire their success over time.
Here is one for you.
Readers need to look at a company that is literally collaborating with Nvidia to position themselves closest to Nvidia’s business model.
Aligning themselves with the hottest stock in the best sub-sector in the industry that grows the fastest isn’t a bad idea.
That’s why readers should take a peek at Vertiv (VRT) shares which have gone absolutely ballistic over the past year.
VRT is a provider of coolant distribution infrastructure for data centers.
IT cooling challenges continue escalating as new server-accelerated compute technologies, machine learning, artificial intelligence, and high-performance computing drive higher heat densities in the data center environment. Liquid cooling is rapidly emerging as the technology for efficiently handling power-dense hot spots.
These massive data centers require significantly more electricity to operate.
That offers an upside to industrials, utilities, and commodities, according to the firm.
GPUs need 2-2.5x more power than CPUs, and expected power usage for US data centers under construction is equivalent to more than 50% of the power currently used by US data centers.
Here is how Vertiv aids the technological revolution:
High-Density Power and Cooling Solutions: The ever-growing processing power of AI requires robust power and cooling infrastructure.
Vertiv's data center solutions are designed to handle the intense heat generated by AI workloads, ensuring optimal performance and preventing overheating.
Technical Partnerships: Vertiv actively collaborates with leading AI chipmakers like Nvidia. These partnerships ensure their solutions are specifically tailored to meet the unique power and cooling demands of cutting-edge AI hardware.
End-to-End Expertise: Vertiv doesn't just provide individual components. They offer comprehensive solutions that manage power delivery and heat rejection from the power grid all the way to the individual chip. This holistic approach streamlines AI infrastructure deployment and optimizes performance.
Their scalable solutions can adapt to the ever-increasing power and cooling needs of AI applications.
Organic orders increased by 60% compared to the same period last year and net sales reached $6.82 billion.
Operating profit for the quarter was $203 million, while adjusted operating profit stood at $249 million, reflecting a significant year-over-year growth of 42%.
The company also began returning cash to shareholders, repurchasing approximately 9.1 million shares at an average price of $66 per share.
Its strong performance is due to robust demand, particularly in AI-driven deployments and liquid cooling technologies, positioning VRT for continued growth and operational improvement in the evolving digital infrastructure landscape.
The necessity of power usage also makes these GPUs considerably hotter, putting pressure on firms such as VRT to improve cooling systems in data centers.
VRT shares have essentially gone up in a straight line in the past 1.5 years from $12 per share to $100.
That type of return has been entirely justified.
Moving forward, I believe the stock will behave in a similar fashion as the demand for its products grows strongly.
Under no scenario do I find a way that its cooling technology will go by the wayside.
In fact, they could have such a great product that it might fuel speculation of getting acquired which would fuel an even higher share price.
I am bullish VRT.
Mad Hedge Technology Letter
May 20, 2024
Fiat Lux
Featured Trade:
(AI GETS INTO MILITARY CONFLICT)
(PLTR), (AI)
Palantir (PLTR) sold off on its earnings report, but that doesn’t mean it’s a bad stock.
Sometimes stocks can’t live up to their potential in the short-term, but long-term they should have no problem.
Growth slowed down a little and there is worry that revenue is too reliant on sources from America.
It’s positioned as an American-first company and the CEO Alex Karp doesn’t shy away from that fact.
The company is positioned perfectly as the best-in-class AI war stock and that label goes quite far in 2024.
The business model does well when an explosion of conflict breaks out around the globe and one could argue that has been the case since 2022.
So it’s not a shocker to find out that the stock has done quite well since 2022 after tanking before that.
As the wars pile up, the company shares intel with agencies that pay for their knowledge through software and AI modeling.
They also offer companies a chance to use Palantir software to optimize their commercial business models.
If you haven’t heard, the Pentagon has failed audits for 6 years on the trot with trillions of bucks unaccounted for.
Even if PLTR investments are accounted for, the point is that money is pouring into the defense side of the equation.
This stock is certainly a “recession-proof” tech stock, and I would not say that PLTRs relatively short history brings uncertainty with it.
In the first quarter of 2024, Palantir's revenue of $634 million increased by 21%. While that is a considerable increase, it does not compare to a stock like Nvidia, which has experienced triple-digit revenue growth in recent quarters.
Additionally, the full-year 2024 revenue forecast calls for just under $2.7 billion. That would mean a 20% annual revenue growth rate, which may seem a little light when compared to other growth stocks.
PLTR’s U.S. commercial customer account rose 69% compared to year-ago levels.
Furthermore, when talking about its latest artificial intelligence platform (AIP), the company has reported eye-popping productivity gains. Palantir stated on its quarter-one earnings call that Lowe's utilized AI in its customer service department and reduced overdue tasks by 75%. Also, Cleveland Clinic was impressed enough to commit to a 10-year plan to deploy AIP across a network of hospitals.
In total, I do believe that PLTR will make major headway on the commercial side of revenue while profiting from the stable government revenue.
In a new era of AI, companies want to reduce tasks and optimize operations translating into bountiful revenue growth for PLTR.
Granted, the 20% revenue growth isn’t stuff of legends, but I do see a roadmap to double the company’s valuation from $50 billion to $100 billion if they execute well and keep improving the product.
That being said, buy incrementally on big dips of over 10% and that should be an effective strategy if a reader holds this stock long term.
