Tech Letter Archives

A Poor Omen

The U.S. 10-year Treasury bond ($TNX) has surged past the October 2022 high so what does that mean for tech stocks ($COMPQ)?

In short term, tech shares will be held back.

Tech stocks are the most exposed to collateral damage from surging interest rates because of the growth nature of the sector.

Funnily enough, much of this 2023 rally has been fueled by the notion of a Fed “pivot” coming down the pipeline.

It still hasn’t come, but now the pendulum has swung the other way and tech shares, even the biggest and best, and getting brutalized.

The people short tech stocks in 2023 couldn’t have been more wrong even if betting against the Fed doesn’t usually work.

Now, the inverse of the Fed pivot is taking place as the U.S. 10-year Treasury bond has hit highs of 4.32% demolishing last years’ peak.

Technically, once recent highs shatter, it is common for set algorithms to motion another wave of money to continue the trend.

The trend for yields is now higher.

It’s highly plausible that this bull market in bond yields picks up and pushes to 5%.

Why is this happening?

The surprisingly resilient US economy has meant the job market is on fire. Tech companies have become leaner, but have abstained from mass firings.

Also, Americans are spending like there is no tomorrow which has kept stocks going up for most of the year and the latest earnings season reinforces this trend.

The result will mean that inflation could remain stubbornly above the Fed’s target, leaving room for long-term yields to push even higher.

There is a remarkable repricing higher in longer-term rates and many traders have been caught off guard.

The market is coming more to the view that there is going to be long-term inflation pressures despite recent progress.

Macro uncertainty is going to remain the story for the next few years, and that requires greater compensation to own long-dated bonds.

But many now expect a soft landing that would leave inflation the dominant risk.

For much of the year, the market worked its way towards a hard landing/Fed pivot scenario which factors in lower inflation. Now the opposite is happening.

Broader economic shifts are also driving speculation that the low rates — and inflation — of the post-crisis period were an anomaly. Among them: surging wage costs, deglobalization, and corporates padding their net margins.

The U.S. is drowning in its own federal debt but must issue more to service the interest on this debt meaning the purchasing power in the United States is crashing.

The net net of this is very negative for technology stocks and it’s a tough pill to swallow after benefiting from the AI bubble and Fed pivot narrative for the first 7 months of the year.

It’s difficult to see another burst of hot money pouring into tech stocks for the rest of 2023.

If we are stuck with the soft landing and the higher for longer narrative, then markets will bid up higher inflation which will suppress tech stocks.

That is what the 4.33% in the 10-year is telling us and tech stocks in the near term will be negatively correlated with this yield moving into the last 3 months of the year.

August 16, 2023

Tech Letter

Mad Hedge Technology Letter
August 16, 2023
Fiat Lux

Featured Trade:

(CORD CUTTING IS TAKING OVER)
(NFLX), (GOOGL), (AMZN), (CMCSA), (DIS)

Cord-Cutting is Taking Over

Tech Letter

Cord-cutting is going into overdrive as linear TV viewership has just fallen below 50% nationally in July for the first time.

Big changes are about to happen.

This has major ramifications for not only the tech sector but for the broader economy, society, and geopolitics.

We are here to talk about the tech and the sinking of linear TV does mean relative gains for online streamers.

Broadcast and cable each hit a new low of 20% and 29.6% of total TV usage, respectively, to combine for a linear television total of 49.6%.

Has the quality of linear TV channels soured in quality or what is the deal?

It could be a functional reason, as Baby Boomers are watching linear tv because they haven’t figured out the streaming thing yet.

The ease of flipping on the tv with a remote cannot be understated.

In the future, the result is that linear tv penetration will be down to 20% level in around 20 years.

The players that will begin advancing further center stage into the national consciousness are YouTube (GOOGL), Netflix (NFLX), and Amazon Prime Video (AMZN).

They saw month-over-month viewership increases of 5.6%, 4.2%, and 5%, respectively, in July.

Don’t expect a rebound, because linear tv is bleeding viewers reflecting how bad TV channels have become.

Ad revenue across our media network coverage fell 13% on average in Q2, down from -8% in 1Q, which included the Super Bowl.

That being said, certain streamers haven’t exactly cracked the code either, as Peacock, Disney+, Hulu, ESPN+, Paramount+, Max and Discovery+ were down by about 500,000 combined.

However, on the whole, subscriber growth was 8.5% year-over-year with highlights like Netflix adding 5.9 million subscribers in the second quarter.

Comcast's Peacock (CMCSA) was able to grow its subscriber base 84% year-over-year to 24 million, up from the prior 13 million, as the streamer works to catch up to its peers amid a significant lag.

Direct-to-consumer advertising (DTC) grew 27% on average across media companies including Disney (DIS), Comcast, Warner Bros. Discovery (WBD), and Paramount (PARA). That's double from the 13% growth posted in the first quarter.

Comcast is the farthest behind, as only 14% of its estimated revenues are expected to come from DTC in 2024 with the other 85% stemming from its linear networks. Disney is the farthest along, with DTC revenue expected to surpass linear network revenue for the first time in 2024.

As linear tv is headed to the dustbin of history, streaming is also getting more expensive.

Personally, that is what I have seen as many platforms are starting to push the $100 plus per month level.

Many might remember when streaming was $20-$40 per month.

Therefore, I am not surprised to see single-digit growth for streaming as high prices crimps demand.

It’s true that mass media is fracturing into different niches and communities and that isn’t so fantastic for big media corporations as it could mean higher costs and a smaller total addressable audience.

I still do believe there is growth in streaming but not at the elevated levels like the 20% or 30% range.

Customer acquisition will also become more difficult and expensive as people really need to be convinced to move platforms or online channels.

The golden age of streaming growth is over and now each inch will be fought tooth and nail by more competition.

In the short term, I believe a dip in CMCSA should be bought, as they are still driving users to the Peacock platform. NFLX is still worth a trade on the dip as well, but I would avoid DIS until they structurally upgrade the company.

Quote of the Day - August 16, 2023

Tech Letter

“Success in creating AI would be the biggest event in human history. Unfortunately, it might also be the last, unless we learn how to avoid the risks.” – Said English theoretical physicist Stephen Hawking

August 14, 2023

Tech Letter

Mad Hedge Technology Letter
August 14, 2023
Fiat Lux

Featured Trade:

(MACRO RISKS CLOUD THE PICTURE)
(AAPL), (NVDA), ($COMPQ)

Macro Risks Cloud the Picture

Tech Letter

The momentum signals that tech shares ($COMPQ) are still working themselves out and need more time to stomach Fitch’s debt downgrade.

Unfortunately, it hasn’t been a one-day dip buying opportunity and this month has been quite abysmal for the tech sector.

Just look at Apple which lost about 10% in value. That’s almost unheard of in today’s day and age.

Many investors are still recalibrating what it means to be on the end of a stunning sudden downgrade for the biggest economy in the world.

Making matters worse, the empirical data is starting to really show that China is teetering on the edge.

Centrally planned economies can have their time in the sun, but eventually, that system blows up as inefficiencies become a doom loop with no end.

There is a good chance at this point in his leadership that Chinese Communist Party Chairman Xi cannot get the right information about what is going on in China because the ranks have been solidified by cadres that leech off the system.

China could mean another leg down to close off the year instead of the relief rally that is poised to lift us back from the short-term weakness.

The Nasdaq index has dropped 4.2% this month, with top tech companies like Nvidia on the brink of 10% decreases.

Even Microsoft, despite its advancements in AI and partnership with OpenAI, has seen a 4% drop in August. Google has also shed 2.1%.

However, one tech giant that has been able to maintain a positive trajectory is Amazon, with its stock up 4% for the month.

This may be due to the company closely monitoring the productivity of employees returning to the office, as increased productivity can lead to higher profits.

The decrease in tech stocks coincides with the 10-year Treasury yield rising from approximately 3.95% in late July to above 4.1% currently.

Some signals suggest that yields may still go up and Fed futures reflect this with around a 35% chance the Fed will hike another .25% to 5.50%.

We could find us swiveling from the soft landing is complete to a “higher (yields) for longer” pivot which is effectively negative for short-term positive price action in tech stocks.

It’s entirely plausible that yields could retest the highs from 2022, based on the chart and recent trends.

This could spell bad news for tech investors, as tech stocks typically do not perform well in an environment of elevated yields. Higher borrowing costs, more attractive returns on cash, and increased scrutiny of future growth are among the challenges that tech companies face when interest rates rise.

However, the tech story is still intact albeit it a substantial amount more fragile than in early 2023.

The pain trade will be higher, but the fragility exposes itself to quicker external risks than before that could topple the market swiftly.

The United States has nobody but themselves to blame after issuing a mountain of debt and it’s largely true that when China sneezes, the world catches a cold.

Tech shares will be confronted with these two rising risks for the foreseeable future.

Best case scenario will see tech grinding higher into year-end, and don’t expect any gaps up. The low-hanging fruit has already been plucked from the vine this year.

yields

Quote of the Day - August 14, 2023

Tech Letter

“What all of us have to do is to make sure we are using AI in a way that is for the benefit of humanity, not to the detriment of humanity.” – Said CEO of Apple Tim Cook

August 11, 2023

Tech Letter

Mad Hedge Technology Letter
August 11, 2023
Fiat Lux

Featured Trade:

(SHORT-TERM STUMBLES)
(AAPL), (NVDA)

Short-Term Stumbles

Tech Letter

When Apple and Nvidia go, so does the Nasdaq.

That’s why tech shares have been relatively impotent the past few weeks as Apple, again, revealed they don’t have much more than the iPhone.

This has spooked tech shares.

Combine the lack of innovation from Apple with the scares of Nvidia not being able to sell their chips in China as Washington clamps down on China’s ability to procure semiconductor products, and there you have it.

Growth fears from the biggest and best tech companies mean that as a sector, the Nasdaq shares pull back and investors are feeling the pain.

Apple is experiencing a slowdown in the smartphone market, but will the presumed iPhone 15 release in September change that for Apple?

NVDA shares surged by over 200% year-to-date in 2023 and replicating that for the back half of the year is almost impossible.

A continued drop in Apple’s overall revenue suggests that investors demand Apple to pull another cat out of the hat and at some point find something new.

A bout of inertia from management could force investors to look elsewhere with their capital allocation strategy.

Services did have a good quarter, but moving forward, what is their grand plan?

What does that mean then for this quarter as well as the next quarter, when we get the presumed iPhone 15?

It's something that Apple is going to have to answer once those phones are revealed in September.

They're going to have to have stellar features and not just the same groundhog day with a different color lock screen.

New cameras, new processor, basically looks the same. So can Apple really push the envelope enough to get people back into stores, back online, and picking up their products?

Take what I just said about the iPhone and apply it to the iPad and the Mac businesses too.

It is an industry-wide trend where people bought their PCs or laptops during the government-mandated lockdowns.

Now they just don't need another new one. And so we're seeing that from manufacturers to chip makers as well.

Beyond Apple, what about Nvidia?

There was a massive run-up on NVDA shares throughout the year. And now the question is, can they keep it rolling?

NVIDIA is a unique company when it comes to the AI space. They produce chips that nobody else can. They've perfected this over decades. They made the bet several years ago, and now it's really paying off for them.

Also, what happens when companies, this kind of hyperscaler companies, go out and begin putting their own chips into their own servers?

We know that Microsoft is working on it, Google is working on it, Amazon's working on it; Tesla has their own supercomputer that they're building with their own chips.

They already use NVIDIA as well and Elon Musk had said, look, we'll order as many as we can.

I don’t believe that will bite Nvidia in the short term, but it’s definitely a long-term risk.

As long as Nvidia produces the quality required to stay ahead of the competition, the stock market will pick back up after it has time to digest the rally in the first half of the year.

Ultimately, these are great companies, but faster than we know it, solutions are demanded for structural problems.

Quote of the Day - August 11, 2023

Tech Letter

“When something is important enough, you do it even if the odds aren't in your favor.” – Said Tesla CEO Elon Musk