"As government expands, liberty contracts." – Said Former US President Ronald Reagan
Mad Hedge Technology Letter
April 24, 2024
Fiat Lux
Featured Trade:
(RUNNING ON FUMES)
(ARKK), (NVDA), (ROKU), (TSLA)
This is a story of how important it is to accurately time the tech business cycle and to unload winners when they run dry.
I am talking about Cathy Wood’s ARKK (ARKK) fund and how it has suddenly gone south with no savior in sight.
The beginning of every tech innovation cycle is usually the best time to invest in “innovation” partly because this point in time also coincides with low interest rates.
Rates were historically low for a long time and ARKK did well.
Many of these tailwinds have now gone in complete reverse and Wood’s biggest position Tesla (TSLA) is feeling the brunt of it.
Tesla issued a poor earnings report yesterday, but CEO Elon Musk turned around the price action by chronicling how Tesla is about to roll out cheaper cars.
Cheaper EVs play into the hands of the Chinese who can do it a lot cheaper for better quality.
Fighting the Chinese at its own game is a fool’s errand.
I believe the 12% pop today is largely due to algorithmic buying and when traders see through this empty strategy, it will usher in the next down leg for Tesla and one of its largest positions.
One of ARKK’s other large positions is in ROKU (ROKU) which navigates the streaming sub-sector.
Streaming, aside from Netflix (NFLX), has gone nowhere lately as prices for consumers have skyrocketed but services haven’t improved.
Growth has saturated is the end result.
It’s gone from bad to worse.
It’s a far cry when investors rushed into her funds and it won big during the pandemic when the star fund manager became a social-media sensation by making bold bets on disruptive technology stocks such as Tesla, Zoom Video Communications, and Roku.
Investors have pulled a net $2.2 billion from ARK Investment Management this year, a withdrawal that dwarfs the outflows in all of 2023. Total assets in those funds have dropped 30% in less than four months to $11.1 billion—after peaking at $59 billion in early 2021, when ARK was the world’s largest active ETF manager.
Loyal shareholders have become disillusioned and this should be a better year for the ARK style of investing in growth and disruptive technology, but they are concentrated in companies that have underperformed.
By the end of last year, ARK funds had destroyed more wealth than any other asset manager over the previous decade, losing investors a collective $14.3 billion.
Nvidia’s absence in ARK’s flagship fund has been a particular pain point. The innovation fund sold off its position in January 2023, just before the stock’s monster run began. The graphics chip maker’s shares have roughly quadrupled since.
Wood, a longtime proponent of cryptocurrency, has done better standing by her bet on crypto exchange Coinbase Global, whose shares have quadrupled over the past year. The stock is still down 47% from its peak in 2021.
The ARKK ETF has lost 75% of its value since 2021 which has infuriated investors who thought they could chase innovation to sky-high valuations.
The ETF languishing in the doldrums represents Wood’s inability to innovate her trading philosophy and grapple with the reality that we are in a very late cycle in tech and blowing one’s wad on some pie-in-the-sky dream isn’t going to cut it in 2024.
Still with the robust business models that can weather high interest rates and high inflation.
“If you're trying to create a company, it's like baking a cake. You have to have all the ingredients in the right proportion.” – Said CEO of Tesla Elon Musk
Mad Hedge Technology Letter
April 22, 2024
Fiat Lux
Featured Trade:
(TIK TOK IN HOT WATER)
(SMCI), (NVDA), (TIKTOK), (META), (MSFT), (GOOGL), (AMZN)
Tech is getting real political and that’s a problem for tech valuations.
On one side, there are foreign companies hoping to make a buck stateside and they are finding out it is not always smooth sailing.
The cradle of capitalism isn’t unfettered access to unlimited Benjamin’s.
The difficulties and examples are sprinkled through the sub-sectors of tech.
For example, to secure the EV battery plant subsidies from the US federal government, Korean companies have to produce the battery inside the United States.
Being a Korean company, Hyundai and Kia, pulling this off delivered painful financial expenses related to the companies.
Another Asian company grappling with additional political fallout is the social media app TikTok.
The most recent House bill easily passed meaning that if Senate approved the bill, TikTok might need to divest or be banned from the US.
TikTok told employees it will fight in the courts if a US bill forcing a ban or divestiture of the Chinese-owned app is signed into law.
US President Joe Biden has said he will sign the legislation promptly if it reaches his desk.
TikTok’s 170 million American users and 7 million small businesses would need to find a different platform.
ByteDance, the Chinese communist party-sponsored owner of TikTok, intends to fight the US ban in court and exhaust all legal actions before it considers any kind of divestiture, people familiar with the matter have said.
Beijing, in the meanwhile, will have to green light any TikTok deal on the tech-export ground, and it has reiterated it opposes a forced sale.
The environment for trading tech stocks has nudged into this ferocious backdrop of trading barbs and its increasingly disturbing tech companies from carrying out their duty to serve the end customer.
Tech customers don’t like that and it doesn’t matter if it’s waiting on an iPhone or software product that can’t be delivered in full, the product gets watered down or withheld.
Irreparable harm is being caused if customers don’t have full faith that tomorrow they will wake up and see an app not disappear from the app store or a device become obsolete because of regulation or government saber-rattling.
Part of this is the angst in which traders are seeing the market now as highly fraught, and tech stocks have run into a logjam at these higher levels because profit-taking is the best recipe of the day.
There needs to be a great reason for incremental investors to jump in, because let’s not kid ourselves, tech stocks are expensive at this point.
We pile into them because there are more or less 5 stocks growing robust earnings while many zombie companies don’t punch above their weight.
This is why traders are piling into Nivida, Meta, Microsoft, Amazon, and Google. I would put Super Micro Computers (SMCI) on that list too as a volatile super growth stock.
Tech still is the place to be, but the geopolitical strife is exacerbating the short-term consolidation of tech and we are experiencing larger selloffs than would be otherwise.
Tech readers must be patient as expectations for this earning season must be scaled back and we wait to unload on the next move up.
“The first rule is not to lose. The second rule is not to forget the first rule.” – Said American Investor Warren Buffett
Mad Hedge Technology Letter
April 19, 2024
Fiat Lux
Featured Trade:
(TECH EARNINGS IS THE NEXT CATALYST)
(SMCI), (NVDA), (MSFT)
It’s been a slap in the face lately in the tech market as the market has realized that rate cuts are not imminent.
The party is over in the short term until a catalyst re-ignites the bull market rally.
The softness has put a real dent into the momentum and trajectory of tech stocks.
Now we are confronted with the sad reality that inflation is here to stay because hot report after hot report is confirming tech investors' greatest fear, that inflation is not transitory like the Fed once said.
In fact, inflation has been a serious problem now for over 4 years and the same Fed that botched the transitory inflation issue is still in charge.
My bet is that they won’t ease prematurely with all the heat they received from the failed transitory inflation call.
Yet here we are with the tech market selling off in the short-term and healthily pulling back.
Even AI chip stock Super Micro Computer (SMCI) is back around $750 per share after skyrocketing past $1,200 per share.
The froth for now is ebbing.
Readers had to expect that a consolidation of some kind was in the cards and that is what we are going through right now.
In the near term, earnings are our best hope for a positive catalyst to offset all the negativity about inflation and interest rates.
There is a good chance we don’t even get one rate cut this year with all the hot job numbers, because the data is just too good to ignore.
In the recent stretch of the bull run, investors looked past higher rates, based in part on their belief that policy cuts were around the corner.
With wage growth starting to cool and excess savings draining, asset markets have seemingly stepped in to help sustain US consumption, adding more than $10 trillion to household net worth in the past year.
Companies need to show that they’re capitalizing on economic strength to expand earnings.
The tech market needs to show in the upcoming earnings season that the artificial intelligence optimism that started with the launch of ChaptGPT is more than hype.
Not all earnings outlooks are created equal, of course, and one can imagine a scenario in which AI darlings Nvidia and Microsoft fan optimism.
Consensus is that we will experience about 5% earnings growth for the S&P 500 from the same period last year excluding the volatile energy sector.
Meanwhile, the economy probably grew about 2.9% in the first quarter, according to the Atlanta Fed’s GDP Now tracker, and that should translate into encouraging earnings and outlooks.
I am of the opinion that all the heavy lifting will be done by several tech behemoths that also double-dip in the AI narrative.
This has also created a massive vacuum of weakness after the likes of MSFT and NVDA.
The narrowness of leadership is a result of a winner takes all of the economy and just several corporations consolidating at the top.
Competition is so fierce that it has left Apple and Tesla by the wayside.
We will reach that 5% earnings growth, but strip out a few tech stocks, and that number is likely to be flat or minus.
I believe the narrowness of leadership will be a hallmark of the future bull market and not just some one-off exception.
Some readers have no idea how ultra-competitive it is at the top of the stock market pyramid with companies fighting for the incremental investment dollar.
“I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” – Said Warren Buffett