Mad Hedge Technology Letter
November 22, 2023
Fiat Lux
Featured Trade:
(YEN COULD DRAG DOWN TECH STOCKS)
(FXY), ($COMPQ), (WEWKQ), (SOFTBANK)
The Japanese yen has helped boost tech stocks ($COMPQ).
Institutional money is borrowing Japanese yen (FXY) by the bucketful because Japanese interest rates have been anchored at 0% and betting big on tech stocks.
The strategy has worked like clockwork and Japanese stocks have also felt the wind at its sails.
What now?
Lurking in the shadows is a potentially catastrophic problem called Japanese tech company Softbank.
Softbank reported a "shocking" Q2-2 loss, revealing, in particular, how dangerously exposed they are to a Japanese yen devaluation.
Selling in Softbank stock would trigger panic selling in Japanese Banks. The contagion risk here is crystal clear.
JGB yields will spike following the US Treasury yields overnight trend. This will put even further pressure on banks' liquidity with a risk of exacerbating the sell-off.
What's important to understand here is the risk of Softbank triggering a $226 billion (the total amount of Softbank balance sheet liabilities) credit event right now.
To begin with, with a BB rating from S&P, Softbank has a pitiful credit rating tying its hands.
Now Softbank has liabilities mostly in US dollars while on the hook to repay $48 billion in the next 12 months.
Days before WeWork (WEWKQ) filed for bankruptcy, Softbank paid $1.5 billion to WeWork bank lenders.
In total, Softbank had to write off more than $14 billion in US dollars on that terrible WeWork investment while the Japanese yen crashed.
Now here the big problem is that Softbank doesn't disclose the amount of "off-balance-sheet" guarantees they issued either directly or through the Vision Fund.
Lastly, things might turn quite bad for Masayoshi Son personally, because 35% of his personal shares in Softbank are already pledged to financial institutions.
It doesn't take much to figure out what financial institutions will do if Softbank stock starts crashing, right?
The Japanese government will need to bail out not only Softbank but also the Japanese banks.
This tinderbox could explode anytime and the Yen would then become the focus.
If the Japanese government finally does embark on an interest hiking cycle then under this scenario, the Bank of Japan would be forced to raise the cost of capital on investors and households.
The global and Japanese financial system isn’t ready to take away the low-interest carry trade and it’s hard to quantify the unintended consequences.
Large parts of the Japanese system could go under water and the Japanese yen would greatly strengthen.
I specifically am worried about all the adjustable loans taken out by the Japanese consumer.
Loan defaults would surge.
If the Japanese government is forced to save Softbank and the Japanese financial system then expect another tidal wave of inflation as the purchasing power of the Japanese yen is even more devalued.
The string of abysmal tech investments by Softbank is threatening to accelerate the financial death spiral in Japan.
In my view, this would ice the tech rally momentarily, but not derail it long-term.
In all honesty, Softbank did deliver ample liquidity to many poorly run Silicon Valley tech companies and this fortified tech stocks during the bull run.
Now Softbank cannot throw around the cash they used to and tech stocks have concentrated into a group of 7 outperformers.
In the short term, the tech bull run continues in just a few narrow names but 2024 could trigger a broader run in secondary tech names as well.
“When you innovate, you've got to be prepared for everyone telling you you're nuts.” – Said CEO of Oracle Larry Ellison
Mad Hedge Technology Letter
November 20, 2023
Fiat Lux
Featured Trade:
(MICROSOFT HITS A HOME RUN)
(MSFT), (OPENAI)
After the smoke clears, it is obvious to the naked eye that the winner of the Sam Altman firing is Sam Altman and Microsoft.
Sam Altman is the former OpenAI CEO and the face of AI.
The board at OpenAI just gave away the company to Microsoft.
The event is still reverberating around the world and is a shocker for anyone and everyone involved in technology.
It is similar to if Elon Musk is fired by the board of Tesla.
Something of this magnitude has a lot of unintended consequences and from first glance, it appears that the board of directors overplayed their hand.
The only reason why the board got its way is because of the government structure in place that allows the power of management.
The best NFL teams don’t fire their franchise quarterback or lose them for nothing.
In an ironic twist, OpenAI's biggest investor Microsoft said it is hiring Sam Altman to lead a new advanced artificial-intelligence research team, after his bid to return to OpenAI with the board that fired him declining to agree to the proposed terms of his reinstatement.
OpenAI has been relegated to second-tier status and Altman has been promoted to the big show.
Microsoft Chief Executive Satya Nadella posted on X late Sunday that Altman and Greg Brockman, OpenAI’s president and cofounder who resigned Friday in protest over Altman’s ouster, will lead its team alongside unspecified colleagues.
Altman was blindsided by the firing which shows there was something horribly wrong with the relationship between the board and Altman. It sure smells like a power struggle.
Altman was the key to the company’s close relationship with Microsoft, which became highly dependent on its technology and remains OpenAI’s largest investor with a 49% stake.
Ultimately, Altman’s insistence that the current board resigns was rebuffed.
It would have made no sense for him to go back for anything less than that plus a big salary hike.
Among all the investors, Microsoft might be the most deeply intertwined in the fate of OpenAI, and the startup’s turmoil has been a liability.
Beyond being OpenAI’s largest backer, Microsoft has reoriented its business around the startup’s AI software.
The first takeaway is that this is great for Microsoft’s stock because of the boost it will deliver to its AI business.
MSFT shares would have sold off by 10% if Altman left completely.
MSFT now has the best of breed working directly for them after becoming frustrated by the lack of insight into OpenAI.
A lack of a board seat made the transparency even blurrier.
Opportunistically, expect a mass exodus of OpenAI’s best to join Microsoft’s new AI division.
Most of the employees are already demanding for the board to resign and this situation is on the verge of erupting into a toxic mess.
Poaching is the oldest game in town and MSFT will aggressively look to add to its staff. OpenAI will be a shell of its former self soon because MSFT has the resources to pull it off. Everyone jumping ship will be granted a massive pay rise and restricted stock.
Even if MSFT needs to write down its initial AI investment into OpenAI, it pales in comparison to the potential and bottom-line boost that Altman could muster for the Washington company.
Free agents of this caliber don’t usually jump ship for free and this is a major coup for Microsoft, Altman, and anyone else that follows him to MSFT.
Half the value of OpenAI is wrapped up in Altman himself.
He is now tasked to bring what he did from OpenAI and then develop it, and this time around he has unlimited resources to deploy.
This is another win for the Magnificent 7.
I am highly bullish on MSFT.
MSFT HITS A HOME RUN WITH ALTMAN
“In our business, things look like a failure until they're not.” – Said Microsoft CEO Satya Nadella
Mad Hedge Technology Letter
November 17, 2023
Fiat Lux
Featured Trade:
(CATCHING OPTIMAL ENTRY POINTS IN TECH)
(AMAT), (SMIC)
Buy Applied Materials (AMAT) on the dip.
That was my conclusion after hearing this chip-making stock nose-diving by the most in almost a year.
Rarely do traders get such a good entry point into such a high-quality name.
AMAT has been around forever and it is a tried and tested chip brand that produces high-quality equipment.
It’s noteworthy that a report showed that AMAT faces a US criminal investigation for allegedly violating export restrictions to China, but it’s a storm in a teacup.
It’s not such a big deal, because the bad news will get discounted quickly and the US will probably give AMAT a light slap on the wrist.
It makes no sense to destroy a company that is critical to national security infrastructure.
Maybe a few executives will get laid off and then we move on.
After this issue is swept under the carpet, it’s all systems go for AMAT.
The company is being probed by the Justice Department over dealings with China’s biggest chipmaker, Semiconductor Manufacturing International Corp.
The department is considering whether Applied Materials sold hundreds of millions of dollars of equipment without the proper licenses.
Chip companies are operating under increasingly strict rules imposed by Washington on exports of chip technology to China.
Acquiring licenses to send certain types of machines to Asia is a sign of the times and how national governments are desperate to keep technological know-how in the state.
Applied Materials produced chipmaking gear in Gloucester, Massachusetts, and then shipped it to a subsidiary in South Korea.
It then went to China’s SMIC, the people familiar with the investigation said.
SMIC was placed on a so-called entity list in December 2020 by the Department of Commerce, which cited alleged links between the chipmaker and China’s military.
Semiconductor manufacturers order machinery from Applied Materials and its peers well ahead of opening new factories, which can take more than a year to build and equip.
Though the chip industry has been contending with a slowdown in personal computers and smartphones, Applied Materials Chief Executive Officer Gary Dickerson has argued that artificial intelligence computing will fuel a new surge in demand.
Semiconductor equipment companies have been hurt by weak demand from memory chip makers, which are enduring an industry glut.
Luckily, the savior is AI and its insatiable demand for high-end processors.
China has been one of the fastest-growing markets for chip equipment. But the US restrictions have put a wet towel on the business relationship.
Uncertainty is the keyword here, but if AMAT keeps producing world-class equipment, it will accrue value in almost any financial market.
I am comfortable recommending AMAT now and the discount certainly makes it look more attractive.
Once AMAT acquires a license to sell to the Chinese, this will be forgotten.
The demand for conventional chips and AI chips is leading the charge and even though there is a glut of non-AI chips, AI chips will lead the charge in the short term before consumer demand comes back.
This is the forefront of technology and readers should grab a piece of it.
Mad Hedge Technology Letter
November 15, 2023
Fiat Lux
Featured Trade:
(CONSIDERING AT INVESTMENT IN FISKER THEN READ THIS)
(FSR), (TSLA)
Removing the Chief Accounting Officer and delaying earnings on the day of earnings is a massive red flag for EV start-up Fisker (FSR).
Fisker said in a filing that it “determined that it has material weaknesses in the company’s internal control over financial reporting.”
Hiring the wrong person for one of the most important jobs at the company only to realize on the day of an earnings report is more than bad optics, and it certainly means there is probably a lot worse going on under the hood.
The blood bath in FSR shares continues today with the stock cratering over 2% which is on the heels of a 21% drop on Tuesday.
Fisker CFO Geeta Gupta-Fisker said the company is cutting its 2023 production guidance to a range of 13,000-17,000 units to enable the company’s “global delivery and logistics platform to scale” and not sit on inventory. Fisker’s challenges with delivery resulted in 4,725 vehicles produced, but only 1,097 delivered.
FSR has continued to over-promise and deliver which creates a toxic recipe for lower stock prices.
After peaking at over $28 per share in the summer of 2021, the stock has done nothing but slide into the abyss.
CEO Henrik Fisker said customers were waiting a long time for their vehicles and were getting “annoyed.”
Fisker’s production forecast stood at 20,000-23,000 units, which itself was reduced from a prior forecast of 32,000-36,000 in May, and again from 42,400 earlier this year.
It’s only time until the EV company starts reducing its forecasts even more and this constant expectation of changing expectations is due to bad management.
FSR lost $91 million in the past quarter and only has a tick above half a billion in cash.
Doing some basic math, it means that FSR will burn through their existing cash in 5 quarters if they lose around the same amount of cash each quarter moving forward. If this happens, they will need to tap the corporate debt market and pay extortionate rates of something between 17% and 20% considering they have a high chance of filing for bankruptcy.
Readers should keep in mind that FSR doesn’t sell a cheap car.
It’s quite expensive which will make it even harder to scale.
That’s bad news for a start-up that only delivers about 1,000 cars per quarter.
Performance and management seem like they aren’t up to snuff and on paper, the company isn’t hitting the metrics it needs to be taken seriously by investors.
From a pricing point of view, Fisker made pricing adjustments for its lone Ocean SUV, cutting its top trim Ocean Extreme by $7,500 to $61,499.
Ultimately, I see FSR’s competitive position, or lack thereof exacerbating as we move forward.
I don’t see how they catch up with the heavyweights as it relates to many critical factors in running a successful EV firm.
Low-interest rates or something similar to them will not be back for a long time and perhaps never.
This new rate environment doesn’t favor the start-ups the ones that already “made it” in a low-rate environment of the past.
FSR makes a good car, but not to the point where buyers will pass up other cheaper options.
If FSR is struggling to deliver more than 1,000 cars per quarter, it bodes ill for repeat purchases after so many buyers are waiting for cars that should have already been delivered.
Management not understanding the logistics of the situation is hard to fathom in 2023.
They might want to pick up the phone and call around to see what is going on.
If a buyer spends more than $70,000 for an EV from an untested brand like FSR, better get the car there on time.
There is a reason why Tesla (TSLA) just caught a bid and shares went up 18% and the stock has doubled this year and it’s not because they have trouble delivering 1,000 cars.
I’ll take a hard pass on FSR for right now.
