Mad Hedge Technology Letter
October 9, 2023
Fiat Lux
Featured Trade:
(GLOBAL WAR THREATENS TECH RALLY)
(GOOGL), (MSFT), (LMT), (EV), (CHINA)
Hot wars play a central role in accelerating inflation and the world’s newest kinetic war in the Middle East could prove toxic to the Fed’s quest to quell high inflation.
First, condolences to the atrocities that have occurred in the past 72 hours, the damage to families, society, and communities are hurtful and long-lasting.
Conflict in the Middle East means higher energy prices because a higher risk premium will be attached to the cost of logistics and production.
The Middle East has some of the highest outputs of oil and natural gas in the world with supply from Qatar, Saudi Arabia, and Iran flooding the world with cheap energy.
What does that mean for technology stocks?
I can tell you nothing good.
Physical wars rotate demand to certain goods that will deliver the consumer the best outcomes and in this case food and shelter. Running a supermarket during the lockdowns was a small gold mine. That means there is a high chance that money rotates out of Google and Microsoft and goes into defense and military stocks like Raytheon and Lockheed Martin (LMT).
Unless products are critical to survival, goods like EVs and Tesla’s (TSLA) are placed on the backburner.
Few will have the money to charge their EVs with another wave of price increases coming down the pipeline. I already hear Norwegians complaining about the cost of fueling EVs after cheap Russian energy was shut off to them.
Forget about an iPhone upgrade cycle.
Kids will just have to deal with the iPhone 14 for longer.
High inflation plays a leading role in wars and conflicts. But that doesn’t mean that economic policy doesn’t matter anymore. Less wars result in bigger tailwinds to deflation.
China also owns the rare metals industry and policy might dictate to hold back supply and earmark it for national and military industries instead of selling to foreigners.
Tesla’s might not be able to be produced anymore because they can’t secure the right materials like cobalt from China.
If a full-fledged regional war intensifies, then the US economy is almost guaranteed to lock in 4% as the new CPI low for this inflationary cycle. The next move would be higher.
The US has already pledge financial and military aid to Israel and that bill will be footed by the US taxpayer.
If this war begins to get expensive and the US starts shipping off $200 billion every few months to the Middle East then this fiscal spending will bring forward more inflation.
Ultimately, if a third war in the shape of Taiwan rears its ugly head, we could experience high 20% inflation like we did in the 1970’s, but this time around, we would do it with close to $34 trillion in US federal debt and those onerous debt interest payments.
The technology sector better hope and pray for a quick resolution to the Middle East conflict in order to stave off the threat of destroying the Santa Claus rally in the Nasdaq.
A third concurrent war in Taiwan would mean instant recession, spiking bond yields, $150 per barrel oil, and technology stocks experiencing a wild pullback.
In the meantime, the newest stresses will guarantee the Eurozone plus UK into a deep recession because they aren’t self-sufficient.
It also adds even more stress to the US economy which is the last man standing at this point because US tech earnings are still in the green.
Certain stocks do very well in times of geopolitics, but these multinational globalized companies have a lot to sacrifice if the world goes pear-shaped.
Mad Hedge Technology Letter
October 6, 2023
Fiat Lux
Featured Trade:
(TESLA GAINS UPPER HAND WITH HELP FROM CHINA)
(TSLA), (LCID), (RIVN), (EV), (CHINA)
The American consumer has been battered.
Declining iPhone sales says it all, but that is nothing compared to the Chinese consumer who are drowning in a cesspool of their own debt.
The Chinese economy is threatening to become the new Japanese economy which is infamous for its run of lost decade after lost decade.
Who cares?
I don’t, but lithium prices do and that’s why we need to focus on as the lust for EVs in the western world picks up pace.
The Chinese have cornered the lithium market and supply has expanded.
This should allow EV makers like Elon Musk to lower the price of Tesla’s further effectively winning the price war. The inverse of Bidenomics sometimes happens, but usually takes the Chinese to flood the market with extra product and in this case lithium.
Every small EV stock should be ignored. There is Tesla and nobody else.
Lithium prices are crashing around the world.
After a buying frenzy sent global prices soaring though last year, they’ve since plunged as electric vehicle demand crashes and supplies are expected to remain strong.
The weakness has been especially pronounced there as battery makers tap stockpiles built up during the boom, while demand concerns are being exacerbated by wider fears about the country’s economy.
Chinese sentiment is being hurt by weak consumer and business confidence and an ongoing property crisis.
The nation’s EV sales growth slowed to 37% in the second quarter from a year earlier, versus a global average of 50%.
That’s helped push most-active Chinese lithium carbonate futures down about 37% since they started trading in July. They’re at a level that works out to a roughly 35% discount to lithium hydroxide futures in the US, according to traders.
The price decline has further to go. Lithium carbonate and hydroxide could drop another 30% in the near term on the back of weaker demand, high inventories and improved supply.
Tesla can lower the price of EVs as it seeks to capitalize on US consumer’s lack of discretionary budget as inflation takes a bite out of their daily budgets.
Today, the carmaker marked down the starting price of the base Model 3 by $1,250 to $38,990.
Tesla also lopped $2,250 off the price of the performance version of the Model 3, which now starts at $50,990, and $2,000 off the long-range and performance versions of the Model Y sport utility vehicle, which now cost $48,490 and $52,490, respectively.
The biggest factor contributing to Tesla’s price cuts has been the lifting of production constraints that held the company back for years.
Tesla still maintains a dominant position in the US electric-vehicle market, though it’s increasingly relied on discounting to preserve its position. Fresh product could help buoy pricing in the coming months, with the carmaker recently debuting an updated version of the Model 3.
Tesla has already identified the race to the bottom for the price of EVs and this should crush the rest of the competition as EVs turn from luxury goods to commodities.
Just take a look at rivals like Rivian (RIVN) who lose $33,000 for each vehicle they sell. EV maker Lucid’s $338,000 loss per car Is turning investors off
I wouldn’t put a cent into any other EV stock aside from Tesla.
They will be the future iPad on wheels that Steve Jobs dreamed about and now they can lower prices even more aggressively now that the price of lithium has crashed.
Musk was smart to start the price war earlier to crush competition.
“You can't connect the dots looking forward; you can only connect them looking backwards.” – Said Apple Co-Founder Steve Jobs
Mad Hedge Technology Letter
October 4, 2023
Fiat Lux
Featured Trade:
(HARD LANDING RISK BLOWS UP SMALL TECH)
($COMPQ), (AAPL), (ZM), (CPI), (ABNB)
Today’s price action in technology stocks ($COMPQ) offers us one oversized takeaway – an increased recession scare and a lower chance of the mythical “soft landing.”
Remember, for so long, trading models priced in almost no recession in 2024 and that has quickly changed recently with souring fundamentals.
That’s why Airbnb (ABNB) was down 7% yesterday, not because more people will travel in 6 months, but less.
Whether a recession will hit or not is a big deal, because consumers and corporations tighten up purse strings and contracts don’t get done.
That means a reduced budget for cyber security, cloud space, semiconductor chips, and less money to buy iPhones.
What are some of the warning signs I am talking about?
An entrenched inflation problem which many would agree has been incredibly sticky.
Price inflation soared to a four-decade high in the summer of 2022. While it has cooled in recent months, the CPI began creeping up again in July and continued to rise in August.
The second canary in the coal mine is an inverted yield curve.
This happens when longer-term bonds offer higher yields than short-term bonds.
A 10-year US Treasury generally features a lower yield than a 30-year.
When this reverses and short-term bonds start yielding more than long-term bonds, it’s called a yield curve inversion.
Traders still expect the front end of the curve to drop which will result in the Fed cutting rates to save the day.
Until then, there is no reason to borrow at 30-year durations when investors aren’t rewarded and capital projects are harder to finance when 30-year rates are artificially expensive.
The US Federal Reserve has hiked rates by more than 5% in just 18 months, but it hasn’t had the desired effect because fiscal spending is out of control.
The economy is built on a foundation of cheap money. It’s not just the economy; it’s every facet of it.
The government, the deficits, and the government budget are built on cheap money. And it’s not just the federal government that’s been gorging on this cheap money.
Tech stocks have every reason to want a soft landing to happen or an orderly, short, and shallow recession.
Panic and chaotic unwinding can result in scaring away the dip buyers and after that, it’s free fall.
As volatility creeps up, tech investors need to be on red alert to observe whether fear and panic manifest inside the price action of tech stocks.
If Apple (AAPL) could pull itself out of the short-term doldrums, that would go a long way to delaying the 2024 recession since it comprises a big chunk of tech indices.
Right now, I believe the consensus is a short recession at the end of 2024 and what occurs in the next 2 months will tell investors whether that is moved up or moved back.
If a hard landing rears its ugly head, smaller tech stocks will get hammered.
I have no doubt that these smaller balance sheets won’t be able to endure the roughness of market mayhem.
It could all lead to smaller tech firms selling themselves at fire sale prices to tech behemoths for pennies on the dollar making big tech even bigger.
In the short term, sell any rip in small tech like Zoom Technologies (ZM) and buy and buy large dips in big tech.
Mad Hedge Technology Letter
October 2, 2023
Fiat Lux
Featured Trade:
(THE CUPERTINO CLUNKER)
(AAPL)
Apple (AAPL) iPhones overheat and this could mean lower quality phones in the future.
Spend the amount of an expensive laptop for a handheld device and the customer becomes bitter – that’s a pretty crappy business model.
The old Apple wouldn’t have slipped up like this – the one helmed by Steve Jobs.
Even more ironic, Apple is specifically renowned for its software expertise, but all signs point to their engineering team botching the latest iteration of the products that Steve Jobs built.
The latest black eye for the company in Cupertino is heaped onto the already large set of problems like China banning their products and declining iPhone sales.
Apart from a titanium finish, the iPhone doesn’t really give much of a reason to upgrade to the new version and why would someone go the extra mile when there is a high chance of battery heating problems.
Apple will issue a software update that would address customer complaints about the latest iPhone 15 models.
Apple said that the new iPhone models were running hot because of a combination of bugs in iOS 17, bugs in apps, and a temporary set-up period.
Apple is preparing to release a new iOS 17 update to address "a few conditions" it has "identified" that can cause the new iPhone 15 models with a titanium frame to run warmer than expected.
Days after the new iPhone release on Sept. 22, customers who stood in line at Apple stores complained their new phones were overheating to the point of being too hot to hold and even shutting down on their own, with some folks recording temperatures above 120 degrees.
The complaints are mainly about the iPhone 15 Pro and Pro Max.
The 15 Pro Max did become noticeably hot after using a MacBook Pro's 140W power adapter to charge it.
Negative press about the new iPhone could dampen sales as the company has experienced an overall year-over-year sales slump in the last three quarters.
Apple is trying to sell the iPhone 15 Pro Max (1TB storage) for as much as a high-end laptop, around $1,600 (before taxes).
Apple’s new high-end models, the $999 iPhone 15 Pro and $1,199 iPhone 15 Pro Max have a redesigned titanium enclosure with an aluminum frame to make them easier to repair.
Apple’s problems with their new iPhones epitomize the current state of tech companies.
Many firms like Google, Facebook, and so on try to sell the same product with no noticeable upgrades.
The bulk of people won’t see much difference between using an iPhone 14 and iPhone 15.
Tim Cook was never a visionary and now that iPhones are declining, his response appears to double down as an expert operations specialist.
This won’t cut it when the company needs more spice.
Running the company more efficiently and streamlined won’t solve the issue of the flagship products losing sales.
A transformative shift in the management is needed to reimagine what the future could be something more akin to his predecessor Steve Jobs.
Many years on, Cook is still living off of Steve’s ideas, but the issue now is the diminishing returns is now resulting in negative growth.
The diminishing returns happen because Cook is holding onto ideas that have grown stale.
That never happened before and shareholders hate it.
In fact, Apple has been previously lauded for its aggressive creativity, and by and large, that has vanished from their current staff.
Apple needs a kick in the butt and it’s highly possible that all the great talent that used to be in Apple has been chased out because the company became too comfortable and too corporate.
Mad Hedge Technology Letter
September 29, 2023
Fiat Lux
Featured Trade:
(WHAT TO DO ABOUT MICRON)
(MU), (SAMSUNG), (SK HYNIX), (SOXX)