Mad Hedge Technology Letter
September 22, 2023
Fiat Lux
Featured Trade:
(THE NEW CORRECTION IS THE SIDEWAYS ONE)
($COMPQ), (NVDA), (AAPL), (META), ($TNX)
Thursday wasn’t a great day for technology stocks ($COMPQ).
It’s not always smooth sailing from the bottom left to the top right.
It never is.
Stocks like Amazon (AMZN) were down more than 4% and other lower-tier growth stocks were down a lot more.
The price action in tech was a knee-jerk reaction after Fed Chair Jerome Powell signaled “higher for longer” for US interest rates ($TNX).
Powell was slightly a little bit more hawkish than consensus had it, and I don’t believe that will have any weight in the short or long term.
Funnily enough, Fed Futures are still pricing in no interest rate hike at the next meeting, even though Powell said there is one more hike.
There is still a deep-seated psychology that the Fed will pivot and this concept that the Fed has our back is not going away with itty bitty hikes.
Is there much of a difference between 5.25% and 5.5%?
The answer is no.
I would say that Powell's slow-walking this whole rate situation has done a lot more damage than good.
In more than 3 years since inflation was supposed to be transitory, inflation is still stuck at 3.7%.
Imagine living in a house with severe water damage to the wall and allowing it to fester over 3 years.
Tech continues to do well relative to expectations because Powell’s minuscule rate hikes have been sanitized to the investor audience.
Investors are scared of uncertainty and Powell is full of certainty.
Investors also don’t believe Powell will do anything to scare the tech market as we approach a federal government shutdown yet again.
Powell keeps pedaling this version of economic success, possibly because it is an election year.
Talking up tech stocks isn’t bad and Powell said that a soft landing is not the Fed's baseline expectation; it's merely a "plausible outcome."
Ultimately, tech investors believe Powell will pivot.
The proof is in the pudding.
Let’s look at the short and long end of the treasury curve.
The 10-year US treasury is yielding 4.43% and the 30-year US treasury bond is yielding 4.53%.
This means for an extra 20 years of duration, investors are rewarded an extra measly .10% worth of juice, precisely because investors think Powell will drop the front end of the curve like a hot potato.
Investors are just waiting it out.
Thus, Powell has telegraphed that we are basically at the peak of rates which is highly bullish for tech stocks.
Tech stocks are down just slightly in the past 30 days which I would characterize as a massive victory in relative terms.
In normal financial times, tech stocks would be thrown out with the bath water and we haven’t seen that happen.
Any selloff has been pristinely orderly and that’s a bullish sign in the short-term.
I am not saying that tech stocks have unlimited upside, but I do believe there is a solid bottom under them and they will most likely bounce around in a range-bound fashion.
Remember that for most of this year stocks like Apple (AAPL), Nvidia (NVDA), Meta (META), and so on rose while treasury yields spiked.
I don’t see why this correlation will screech to an immediate stop.
The likely bet is it continues but at a slower pace.
“All money is a matter of belief.” – Said Scottish Economist Adam Smith
Mad Hedge Technology Letter
September 20, 2023
Fiat Lux
Featured Trade:
(THE BOND KING IS WRONG ABOUT TECH STOCKS)
($COMPQ), (UUP), (MSFT)
At the Future Proof conference last week, Bond King Jeffrey Gundlach gave his expert take on some of the variables in the markets today.
It’s hard for to understand how Gundlach made his money with the amount of fear mongering he is promoting.
He is basically scared of everything in todays market including the stock market, the US dollar (UUP), the upcoming recession that still hasn’t hit, high housing prices, and layoffs just the name the start.
First, the unemployment rate is at 3.8% in the US so to say that this is a canary in the coalmine is quite hilarious.
Tech, even drastically over hired, and they had to take a machete to staff numbers just to get back to the 2020 employment levels.
I would even say that they need to go back to 2015 staff levels with artificial intelligence contributing more efficiency.
I hardly believe it’s time to ring to alarm on tech unemployment.
Look across the Atlantic where Spanish youth unemployment is 30% and Italians, on average, live with their parents until 45 years old because they can’t afford to move out of the house.
The United States is not that and will not become like that.
The Nasdaq Composite ($COMPQ) has surged 31% respectively this year, as investors price in the potential boost to companies from artificial intelligence and future cuts to interest rates.
However, they're overlooking "demons on the horizon," Gundlach cautioned.
We are nearing the top of the interest rate cycle and no other OECD economy has been able to push rates to 5.25% while keeping the economy churning.
Therefore, it might be plausible to say that the demons aren’t on the horizon, but in the rearview mirror.
Japan is still at 0% which has resulted in a massive invisible tax to the Japanese middle class which is basically the whole country.
He also noted the chilling effect of higher mortgage rates on the housing market, and the challenge for small businesses of having to refinance their debts at much higher interest rates.
It’s true that 7% mortgage rates has extraordinarily hit left wing coastal cities.
Combine high mortgage rates with work from home, and Silicon Valley has now moved everywhere with everyone becoming a digital nomad.
This has actually transferred new tech wealth to many other new areas such as Nashville, Austin, and of all places Boise, Idaho.
This trend can’t be understated and is now a growing contributor to the overall economy.
"The economy is definitely weakening" is something I definitely agree with Gundlach, but that doesn’t reveal the whole story.
The internals are slowing down from a very high peak which he failed to mention.
Instead of Microsoft (MSFT) cloud division Azure growing at 40% year over year, we are only getting about 18% these days.
Coming off of Himalayan highs is a tough pill to swallow when many tech investors often expect growth metrics of over 30% year over year, but that’s hard to achieve in 2023.
The strong dollar has also exerted a fierce deflation affect across many tech products making computers and so on cheap. Tech products in Europe and abroad are higher priced even though these places have incomes that a many times lower.
Relatively speaking, US tech companies and US consumers are better placed than any other comparable city or country in the world in the post-covid world.
Fear mongering never got anybody rich. US tech will continue to be the best of breed and in no plausible scenario will a foreign company or country knock any of the top 7 Silicon Valley tech firms off their perch in the next 30 years. I would even argue that as rates peak and interest rates expectation ratchet lower, tech stocks will become the safety trade again like it did in March.
Mad Hedge Technology Letter
September 18, 2023
Fiat Lux
Featured Trade:
(WILL THE TECH IPO MARKET THAW?)
(ARM), (AAPL), (NVDA)
I wouldn’t say that the IPO market is back - hardly not.
There is still a long way to go before the floodgates open, but the ARM IPO is a good start and its successful debut is a good example for others that are sitting off the fence.
British chipmaker Arm (ARM) debuted on the public markets jumping 25% in trading.
The chipmaker's go-public is the most high-profile IPO that the Nasdaq has seen since 2021's IPO boom, which cycled into a bust in 2022.
However, just because these IPOs are moving doesn't mean their valuations are not a sticking point. In Arm's case, the company reportedly sought a valuation of between $60 billion and $70 billion.
Likewise, Instacart — valued at $39 billion at the close of its 2021 funding round — is reportedly now seeking a $9.3 billion valuation.
Arm is a unique company, especially among tech companies. As a chip designer, Arm's customers include some of the biggest names in tech, including Apple (AAPL).
The company has been through a number of transitions over the last several years. In 2016, SoftBank acquired Arm, taking it private for around $30 billion. In 2021, Nvidia (NVDA) attempted to acquire Arm in a deal that failed after regulatory tussling for almost a year and a half.
Recently, Arm has sought to shift its revenue model, altering pricing and rolling out a changed customer licensing strategy.
In short, Arm's return to the public markets was a pivotal moment.
The positive response to this IPO won’t thaw the IPO market completely but will set the stage for 2024 such as payment processor Stripe and computer software provider Databricks.
I will say that the bar has risen significantly for tech firms who want to go public.
Before, many could go public with just hope and dreams with promises of a pot of gold at the end of the rainbow.
This usually meant paltry revenue and massive cash burn at the time of IPO.
Moving forward, it’s obvious that tech companies will need to be more mature to go public and there will be more emphasis on quality management than any time before.
This is because interest rates are still highly elevated and management teams won’t be able to tap the debt markets so easily for a bailout.
Artificial intelligence-related IPOs will also be in an advantageous position to do well post-IPO because that is where the hot money is targeting.
Instead of a slew of capital chasing the new IPOs, I do believe we default back into a rotation of big tech being the safety trade.
Higher bond yield and accelerating tech stocks is an odd couple that appears to be working like clockwork in 2023.
The next spike up in yield could happen soon with the catalyst being the price of a barrel of oil hitting that $100 per barrel mark.
As for ARM, it’s sitting at $56 per share which is down from the $65 per share.
Once the euphoria subsides, wait for a dip in the $40s to buy into ARM, at that price, ARM would be valued at around $50 billion and I would call that a steal for the long-term buy-and-hold readers.
“Take risks now. Do something bold. You won’t regret it.” – Said X Owner Elon Musk
Mad Hedge Technology Letter
September 15, 2023
Fiat Lux
(GEN Z AND TECH)
($COMPQ)
America is changing as we know it.
That’s not always bad, but readers need to understand the major ramifications to the tech sector ($COMPQ) and the US consumer.
By 2030, Generation Z will account for nearly one-third of the U.S. workforce, scary isn’t it?
While a sizable percentage still has yet to penetrate the talent market, they’re already taking a far more radical approach to career growth than their predecessors.
That's due, in part, to the fact that Gen Z, much of whom is still under age 18, is accumulating debt at higher rates than any other generation.
The cohort is least likely to think they will ever be able to retire and is generally concerned that climate change will prevent them from any chance at a normal life or career.
I am particularly referring to the concept that hard work, determination, and loyalty to one’s company will score financial success.
These young bucks are making a full 180-degree turn.
This is devastating for certain industries like housing where Gen Z rather rent and cruise the globe to beautify social media profiles.
I won’t say that Gen Z has their priorities wrong, I will just say that they have interesting priorities.
For various reasons true and somewhat true, Gen Z is taking the microphone back and saying they wish to do something else.
Many of the Gen Z don’t want to grow up and bear the responsibilities of scary life events that are remotely connected to settling down.
It terrifies them.
It would behoove employers to pay keen attention to Gen Z’s expectations or alternative desires.
Understanding Gen Z as the up-and-coming, entry-level positions at these companies is valuable. We cannot just discard them.
I expect the bulk of Gen Z to target companies like Google, Apple, Amazon, Meta, Tesla, Snapchat, and TikTok as corporate America tries to appease this upcoming generation. I say those specific companies because they are the most accepting of social media activists.
Another key takeaway here is that Gen Z are hooked more on tech devices, hardware, software and products more than other generations before them.
Not only did they grow up with tech, but they are described as the first generation to be “tech natives.”
During a 3-year stint in the most formative years, they were forced to lock down in their parents’ house and make do with technology as their only friend.
Many data surveys show that Gen Z uses technology devices more than any other generation with some ages registering 10 hours of use per day.
These trends are highly bullish for tech companies because it means more hours logged watching Netflix, more screen time on Apple iPhones, and more pizza orders on Uber Eats.
It’s my belief that in the next 10 years, the US economy will experience a 50% increase in the average use of tech devices per day thanks to the additive Gen Z tailwind and the Baby Boomer generation dropping off.
More often than not, surveys have shown that high users of products often handpick the same stocks to purchase for the long term because anecdotal experience seals the deal.
Gen Z will also be the generation fully utilizing generative artificial intelligence to supercharge Silicon Valley business.
These trends are highly bullish for tech stocks.
