“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)
The chip maker Micron Technology (MU) fell 5% yesterday, but the stock is amazingly up 4% today.
The see-saw moves are a feature of this strategically important stock to the tech ecosystem and not just a symptom of it.
The stock is highly volatile which is emblematic of a stock that needs to constantly navigate around unstable geopolitics.
The stock's latest whipsaw action stems from the company predicting a steeper loss than anticipated in the current quarter, indicating that an industry slowdown is still weighing on the largest US maker of memory
For chip companies (SOXX), Samsung Electronics Co., and SK Hynix Inc., 2023 has been a crushing time after the glory period of the healthcare lockdown years.
September has been a month where we are experiencing weakening fundamentals as the US consumer is truly stretched.
Customers in big US markets for personal computers and smartphones have slashed orders as they cope with lackluster demand and stockpiles of excess parts.
Many are continuing to dive deeper into debt to make ends meet and that trend will not go away as the US middle class shrinks further as they grapple with soaring inflation.
The lack of consumer strength will mean it will take longer for Micron to return to profits.
Prices for Micron’s products are going up, and the rate of the price jump is increasing and we can probably say that about prices in most industries.
Sales have fallen for five straight quarters. In the three months ended in August, Micron’s revenue declined 40% to $4.01 billion.
The forecast suggests sales will begin to grow again in the fiscal first quarter, which runs through November.
Beijing has proved a thorn in Micron’s side.
This negative headwind has already cut into the US company’s revenue in China — the largest market for semiconductors — in what management has previously called a “significant headwind.”
The outlook remains mixed in the short term. In traditional servers — the computers that are still the mainstay of most data centers — demand remains tepid at best.
Both personal computers and smartphones will return to growth next year, with units increasing by a percentage in the low- to mid-single digits.
To cope with the slowdown, Micron and its peers reined in production, severely reducing supply and helping prices bottom out.
Micron will be demonstrably below peak 2022 output for the foreseeable future. The company plans to continue to run factories at less than full capacity well into calendar 2024. Micron also will further reduce spending on new equipment next year.
These are bad signs in the short term, but the strategic importance of MU puts a solid bid under the stock price.
I wholeheartedly expect the industry outlook to brighten considerably by 2025 — especially as artificial intelligence systems demand new types of more expensive memory chips.
Therefore, every big dip is a buying opportunity in Micron because this stock is resilient.
Luckily, big dips are common in MU and readers should be patient to wait for optimal entry points.
This is a good one to buy and hold for the long term.
“It’s OK to have your eggs in one basket as long as you control what happens to that basket.” – Said Owner of X Elon Musk
Mad Hedge Technology Letter
September 27, 2023
Fiat Lux
Featured Trade:
(REIMAGINING TECH AND THE WORKFORCE)
(AI), (AMZN), (UBER)
Students hoping to become bankers shouldn’t study finance, they should dive into programming.
This is the big takeaway from how investment banks are run these days.
Gone are the moments when finance degrees were the hottest commodity, now it is all about generative AI.
Artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI in not only the United States but in a way that will ultimately drive productivity gains across the global economy.
AI will complement the way bankers work, not disrupting it - making finance jobs better, rather than taking them away.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.
Journalists will therefore face more competition, which would drive down wages unless we see a very significant increase in the demand for such work.
Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.
The result was lower wages, not fewer drivers.
Over the next few years, generative AI is likely to have similar effects on a broader set of creative tasks.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
Nobody understands how the technology will evolve or how firms will integrate it into how they work.
Lower wages and higher output are a perfect recipe for higher technology share prices and that is exactly what we will get.
Currently, we are experiencing a mild pullback from the AI mania, but that is simply because it got too far ahead of its skis.
I am quite disappointed in the price action in a stock like Amazon (AMZN) which announced a major investment in an AI startup, but the stock sold off the next day.
The AI pixie dust has leveled off in the short term, and the broader tech market is being dragged down by spiking interest rates.
I do believe in the AI hype, but these trends don’t go up in a straight line and need time to digest which often results in short-term pullbacks.
