“A diploma is a dunce hat in disguise.” – Said German-American Tech Investor Peter Thiel
Mad Hedge Technology Letter
August 25, 2023
Fiat Lux
Featured Trade:
(ANOTHER LOW BLOW FOR TECH)
($COMPQ), (NVDA)
The almost four-year “transitory inflation” is a stark reminder that it isn’t smooth sailing yet for tech stocks ($COMPQ) after a glorious first 7 months of the year.
In hindsight, it appears more and more as if the great outperformance of the first 7 months in tech stocks was mainly due to a mean reversion after 2022 another surge helped by Nvidia’s (NVDA) AI hype.
The last 4 months of the year don’t appear as if these two tailwinds will light rocket fuel under tech stocks.
It’ll be harder to make money without those two turbo boosters.
Today tech got even more bad news as Federal Reserve Chair Jay Powell said the central bank is "prepared to raise rates further."
The hurtful part of this for tech stocks is that Powell’s comments absolutely have a knock-on effect to tech products.
Who wants to add that extra layer of anti-viral software protection when the budget is tight?
Powell is narrowing the goalposts for tech companies.
Which Tick-Tock influencer is going to re-up to the better iPhone when they can’t afford it?
According to Reuters, Americans are now paying around $800 per month extra for the same daily necessities they paid for before March 2020.
That is $800 that could possibly go into more tech hardware and software that isn’t.
Powell doubled down on crushing inflation saying it is the “Fed's job to bring inflation down to our 2 percent goal, and we will do so.”
Right away we saw Fed futures expectations adjust to this new information with the “higher for longer” mantra taking hold in reality.
The consensus is now that the first rate cut will be sometime in the summer of 2024 of .25%.
Traders should remember that the first rate cut was priced in at the end of this year just recently.
The Fed has gotten more hawkish lately and that is demonstrably negative for the short-term trajectory of tech stocks.
In 2023, accelerating US economic growth of 2.4% has presented a challenge to the Fed on several levels, with the Fed chair noting the overall economy "may not be cooling as expected."
And the strength of the labor market has been at the center of this challenge.
While monthly job gains have cooled through the summer, Powell said Friday the labor market's rebalancing "remains incomplete."
In turn, wage pressures have moderated.
The Fed really has two problems on its hands as it seeks to induce a recession – full employment and blistering economic growth.
The fact is that the stock market and the economy have handled these itty bitty .25% interest hikes gracefully.
That would hardly be the case if rates were hiked 5% at one time.
Businesses have had time to adjust to the new normal and so has the tech industry by firing a swath of ineffective employees.
The net result of this is bad for technology stocks in the short term, but staving off a recession is also in the interest of the tech sector as well.
I expect tech firms to keep shedding the fat off their business model as we barrel into sink-or-swim times.
There won’t be excess money sloshing around in the system for the foreseeable future and tech bankruptcies should rise.
That doesn’t mean tech stocks will crater, but it does mean many business models need to consolidate before another move up.
The real weak hands will finally get flushed out.
Tapping the debt market because of poor management decisions is now route one to bankruptcy and that hasn’t been the case in technology companies for a long time.
Mad Hedge Technology Letter
August 23, 2023
Fiat Lux
Featured Trade:
(LOSING THE EDGE)
(PTON), (NVDA), (MSFT)
It’s looking like mission impossible for Peloton (PTON) who, if some might remember, was the darling of the lockdowns a few years ago.
This is really a story of making hay while the sun is shining because the sun has decided to tuck itself behind clouds indefinitely to the chagrin of PTON.
I have posted a few negative critiques of PTON because it’s accurate to distill the company down to an iPad on a stationary bike which charges for an expensive subscription.
The fact is once the world opened up, people stopped using PTON products and happily decided to go back to their old routines like visiting fully serviced gyms or exercising outside.
Even the consumers who decided to quit working out altogether are most likely traveling the world spending their PTON subscription money at a pizza joint in Italy.
The downdraft all came to a head today when PTON dropped yet another disastrous earnings report and their stock is down 23% at the time of this writing.
They whined about the decline in paying subscribers and said the cost of an equipment recall was denting its profit.
The fitness-equipment company cautioned that it expected to have negative cash flow in each of the next two quarters as it keeps fighting high inventory levels, and another sequential drop in subscribers.
Chief Executive Barry McCarthy played down the crashing stock price by explaining that the stock market isn’t in sync with the actual business and doubled down by emphasizing the company has its best days ahead of itself.
The New York company also said it is back to purchasing more bike and tread inventory, as it is in a more normalized inventory position than a year ago.
Peloton has struggled with its pricing strategy and recently further lowered the prices for its treadmill and rower by about 14% and 6%, respectively.
Peloton had told investors that it was looking to stem losses and start generating cash flow from its operations after slashing jobs and restructuring its business.
In the latest quarter, the company reported a negative cash flow of $74 million, weighed down by a legal settlement.
Peloton expects to end the September quarter with paying connected fitness subscribers of 2.95 million to 2.96 million, down from three million as of the end of the June quarter.
It has already received about 750,000 requests for replacement seat posts, ahead of internal expectations, and has been able to fulfill 340,000 of them.
Revenue for the fiscal fourth quarter ended June 30 fell 5% to $642.1 million.
Peloton’s average monthly connected fitness churn was 1.4% in the quarter, increasing from a 1.1% churn in the prior quarter, as a result of the company’s bike-seat-post recall.
This cautionary tale dovetails accurately with my wider thesis of smaller brand-named tech companies losing the war against the tech behemoths.
One little misstep and the inner problems are magnified and PTON has numerous issues under the hood of the car.
The CEO hyping up the company is a fool’s game because the writing is on the wall for this product.
There is no competitive advantage in their product and I believe subscriptions and hardware will continue to fall off a cliff.
Investors should head to higher water and look at premium names like Nvidia or Microsoft.
These types of companies possess strategic footholds in the leading technologies in the world and I can’t say the same for PTON.
PTON will continue to trend into the dustbin of history and don’t get fooled into this stock reversing any time soon.
Avoid this stock like the plague.
"The rich invest in time, the poor invest in money." – Said American Investor Warren Buffett
Mad Hedge Technology Letter
August 21, 2023
Fiat Lux
Featured Trade:
(ANOTHER RED FLAG FROM DIGITAL GOLD)
($BTC), ($COMPQ), (TLT)
When good times roll then the digital gold does too.
More often than not, these good times occur when liquidity gates widen.
Simply put, there’s more cash for alternative assets like Bitcoin ($BTC) to speculate on and that’s what people do.
Bitcoin as a standalone asset possesses no intrinsic value and delivers investors zero cash flow which are serious drawbacks in times of pain.
I wouldn’t go so far as to say this is a time of pain right now, but we are inching closer to it as the US 10-year treasury (TLT) hits 4.35%.
Sometimes, investors need that extra little bit of cash flow from that 50-year-old studio tucked away deep inside their portfolio to survive.
Call it a rainy day fund if you will.
The drawdown in Bitcoin is an ominous sign for tech shares ($COMPQ) because the logic goes that if Bitcoin goes up, so does tech.
The narrative for some time has been that Bitcoin is akin to something like crappy tech so if crappy tech shares deliver, then the good tech companies that offer cash flow and software products will do even better.
Bitcoin has just been jolted by some negative price action as we find ourselves lower than last week, at around $26,000 per BTC.
Longer-term US Treasury yields are around multi-year highs, part of a global bond selloff that reflects the risk of a prolonged period of restrictive monetary settings to bring down inflation.
Such a backdrop portends constrained liquidity that would pose a challenge for riskier assets like tech stocks and crypto.
Higher interest rates mean that assets like Bitcoin don’t look so attractive on a relative basis.
Some of the technical signals followed by chart analysts paint a mixed picture. A gauge of momentum known as the 14-day relative strength index suggests Bitcoin is close to the most oversold level since mid-2022.
Other metrics point to a reluctance among retail and institutional investors to engage with crypto following last year’s rout, blowups like FTX, and an ever-shifting regulatory landscape.
For instance, average daily spot volumes on centralized digital-asset exchanges over the past four months were the lowest since October 2020 — when Bitcoin was at about $10,000.
The last 30 days have been brutal for the Nasdaq index and narrowing the goalposts means that BTC will be one of the first casualties to get heaved into the dumpster.
The price action for tech stocks has been highly disappointing lately and there is a strong chance that we could revert to sell the rallies in the short term.
Numerous times the Nasdaq has started the morning hot out of the gate only to suffer sharp sell-offs as the afternoons rolled around.
Shares trending lower to end the trading day have epitomized tech shares lately.
Momentum is lackluster.
The reason I believe that tech shares will endure a harsher period of consolidation is because the added kick in the nuts is China weakness.
Growth forecasts are starting to get ratcheted back as it appears that China has entered the Japan-style lost decade type of slowdown that is a symbol of economic stagnation.
The Nasdaq is really searching hard under each stone to find some type of tailwind to propel us into year-end, but the window is closing quickly. Let’s hope we find that rocket fuel to get us over the line.
“As a rule, men worry more about what they can't see than about what they can.” – Said Roman Leader Julius Caesar
Mad Hedge Technology Letter
August 18, 2023
Fiat Lux
Featured Trade:
(A POOR OMEN)
($TNX), ($COMPQ)
