“The most terrifying words in the English language are: I'm from the government and I'm here to help.” – Said Former US President Ronald Reagan
Mad Hedge Technology Letter
April 29, 2024
Fiat Lux
Featured Trade:
(JUST GOOD ENOUGH)
(META), (F), (IBM), (MSFT)
This earnings season is chugging along exactly like I thought it would play out.
The haves are covering for the have-nots.
Sadly, the pixie dust isn’t encompassing all tech stocks, but just enough sprinkles so investors don’t start selling.
That is what matters most and sure, investors can knit-pick all they want, but there have been just enough positive numbers to be repackaged as a win for AI and the advancement of tech even if the proverbial goalposts are widening.
Competition has reared its ugly head as tech services fight for the extra consumer and enterprise dollar in a global economy where demand is being squeezed by sticky inflation.
That’s not good news for many of the smaller companies that are unproven and tap debt by delivering a promising story to prospective investors.
Remember that Mr. Market is undefeated and price will always find its natural equilibrium.
The question is how long will it take to find that natural equilibrium?
Since 2020, many would say that the irresponsible monetary policy in many areas of the world has contributed to markets unable to match up buyers and sellers at a reasonable price.
There is some truth to that but let’s see who that benefits.
My belief is that strong tech companies have overly benefited from this type of fiscal backdrop because they can always fall back on a strong balance sheet like in Google’s case where it suddenly issued a dividend.
View it as a rainy day fund if you will where they can wield when need be.
The extra buffer zone of safety has allowed a company like Microsoft to focus on Azure growth, of which 7% was related to AI, up from 6% of impact in the previous quarter.
Microsoft provides cloud services for the ChatGPT chatbot from startup OpenAI, and companies have been increasingly adopting Azure AI services to develop their capabilities for summarizing information and writing documents.
It’s a good problem to have when capacity bottleneck cuts into the AI portion of Azure growth.
Companies tapping that AI story are the only tech companies in 2024 that Mr. Market is keeping safe and that must scare or enthrall you depending on who you are.
Meta (META) materially lifted its full-year capital expenditures guidance and signaled even bigger spending in 2025 — all because of unknown AI projects. Running tech businesses isn’t getting cheaper so imagine how small companies feel about that.
It’s Ford (F) losing lots of money on EVs because of higher-than-expected costs.
Meanwhile, IBM (IBM) CFO Jim Kavanaugh struck a more cautious note when asked about soft sales at its lucrative consulting business blaming the macroeconomic backdrop.
It’s not all smooth sailing in tech land and readers need to be vigilant.
It’s not the time to take some speculative Hail Mary on some far reach.
Don’t draft a 7th-round prospect in the 1st round.
Price action has been unkind to tech firms with poor balance sheets in 2024 and I believe that trend to continue until the Fed can finally tamper inflation back to reasonable levels.
“The future doesn't belong to the fainthearted; it belongs to the brave.” – Said Former US President Ronald Reagan
Mad Hedge Technology Letter
April 26, 2024
Fiat Lux
Featured Trade:
(WHAT STAGFLATION MEANS FOR THE FUTURE OF TECH STOCKS)
(GDP), (PCE), ($COMPQ)
Stagflation has reared its ugly head and yes it’s not here yet, but the risk it will hit us can’t be ignored at this point.
I’ll tell you what this means for tech stocks as well.
I won’t say that I told you so but this could have been seen from a thousand miles away.
The persistent increase in federal debt spent like a drunken sailor doesn’t mean anything until it means a lot this time around.
Remember that all that “job growth” came in the form of mostly government jobs and part-time workers adding more part-time jobs to pay for the cost of life.
Now the numbers finally prove this as inflation stays sticky and growth has curtailed with the U.S. Real gross domestic product (GDP) rising just 1.6% from a year ago in the first quarter, which is a sizeable miss from 3.4% growth seen in the fourth quarter of last year.
Meanwhile, the Federal Reserve’s favorite inflation gauge—the core personal consumption expenditures (PCE) price index, which excludes more volatile food and energy prices—surged from 2% in the fourth quarter of 2023 to 3.7% in the first three months of this year.
I believe we are in the early throes that will usher us down a path of increasing inflation and lower growth which is the summation of stagflation.
Even with stagflation, certain tech companies will still grow, and do well.
Drowning in federal debt - now in the many trillions and skyrocketing each day.
It now also has a landing spot besides Ukraine and that’s in the form of more American inflation.
Prices will go up and adding more government jobs won’t bring down inflation.
Then the big question becomes, does the Fed save the dollar or save the US economy?
When the rubber hits the road, I do believe the Fed will choose to save the economy over the purchasing power of the Americans.
This means that the price of a loaf of bread will give you sticker shock because a dollar in 2024 will be worth a lot less in 2025 and beyond.
But the important thing is to save the economy and the biggest growth element to the US economy is, you guessed it right, tech stocks.
Tech stocks will outperform during a time of stagflation because even if most of the rest of the economy is doing poorly, tech will still navigate around these tougher times.
The Fed has essentially crippled purchasing power with its “transitory inflation” blunder, and I don’t think they have the guts to take down the stock market in an election year.
Therefore, I do expect interest rate cuts to take place later this year, and that will put a floor under tech stocks and marry up that with the AI narrative one must love the end-of-year prospects for Nvidia, Microsoft, Google, and Amazon.
Get ready for the medium term because it’s most likely to involve the “bet on the Fed pivot” rally which will take us to the next up leg in the Nasdaq.
Readers should take solace in the fact that tech stocks will go up in stagflationary environment, but of course, tech stocks have that extra mojo when rates and inflation are low.
"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
