“If you must break the law, do it to seize power: in all other cases observe it.” – Said Roman Leader Gaius Julius Caesar
Mad Hedge Technology Letter
August 30, 2023
Fiat Lux
Featured Trade:
(BULLISH SIGNS FOR 2024)
(AMZN), (GDP), ($COMPQ)
In a fireside chat with some of Amazon’s (AMZN) key lieutenants, CEO of Amazon Andy Jassy ran out of patience.
It’s the end of the line for many.
Critical members of Amazon are still holding onto the rose-colored fantasies of the lockdown era, where workers made their living wearing pajamas all day and took snoozes whenever they wanted.
Not anymore was the message from Jassy.
Enough is enough.
Employees usually don’t have the 30,000-foot view that executives like Jassy have even if they pretend to sometimes.
The paradigm has shifted to the point where management wields all the bargaining power as tech companies trim the fat off their business model.
This spat epitomizes where we are right now in the tech cycle and the wider US economy as a whole.
Tech ($COMPQ) is in a holding pattern where the biggest and best are utilizing a strong balance sheet, but they aren’t doing something so amazing where we chase the hot money with more hot money.
Ironically enough, the US GDP annualized rate just got revised down from 2.4% to 2.1% as spiking interest rates and high inflation eat into growth.
Although companies like Amazon are still doing ok, it’s not to the point where key members of staff can lounge in their sleeping gowns and work one hour per day.
There is resistance from higher management demanding Amazon workers come back to the office.
The deeper underlying message here is that the US economy is still growing buoyantly enough and that signals strength going into 2024 for tech stocks.
There is a better than 50% chance that the US economy won’t enter a recession next calendar year and the tech sector will benefit as it grinds higher.
An important trend I have noticed is that tech shares can absolutely march higher in lockstep with accelerating bond yields.
Many believed this was counterintuitive and I admit, traditional orthodoxy has taught us to respect this inverse correlation.
However, this time-honored belief has come unstuck this year and fighting the Fed has been the tech trade of the year.
What’s next for Amazon?
This is a stark change from February this year when Jassy said he had "no plan" to force workers back.
But now, Jassy reportedly reiterated a rhetoric that has emerged in more recent months: don't comply with return to office, face the consequences.
In July, Amazon employees would be forced into a "voluntary resignation" if they refused to return unless they were one of the rare few who had obtained permission from the company's leadership—internally named the S-team.
Former Twitter CEO Elon Musk was the first tech executives who started this fad by firing 80% of Twitter’s staff when he acquired the company.
That philosophy has really gutted the bottom of the chain in tech companies and shares of tech firms will benefit from this through 2024.
Instead of paying for expensive workers to sit at home, tech management are summoning up shareholder returns in the form of dividends and share buybacks to extend the tech bull market to the end of 2024.
I am still bullish tech stocks moving forward and algos are still programmed to bet on a Fed pivot. Tech goes up until the Fed pivots.
"The rich invest in time, the poor invest in money." – Warren Buffett
Mad Hedge Technology Letter
August 28, 2023
Fiat Lux
Featured Trade:
(ALL SYSTEMS GO FOR INSTACART)
(IPO)
I wasn’t surprised to see grocery tech platform Instacart announce that they are going public soon.
That seems very much the right strategy for them at this point of time in their growth cycle.
I highly doubt that this will kick start the IPO market because high-interest rates are prohibitive to young tech companies growing.
Funnily enough, Instacart is nothing new so it won’t mesmerize the incremental investor with a flashy business model they’ve never seen.
They were founded in 2012 and experienced a pandemic bump in sales as citizens were arbitrarily locked in their apartments.
Naturally, the dynamics behind the living situations meant that online grocers rode a lucky streak to profits and Instacart had some gaudy growth numbers for the a few years.
Fast forward to today, and people aren’t in lockdown again even though with U.S. elections coming up next year…things could get interesting.
Conditions today dictate that Instacart can kiss the massive growth numbers goodbye, and goodbye forever as management basically translated that to potential shareholders during the IPO roadshow.
The San Francisco-based company also revealed it turned a profit in the first half of the year which should be the high water market forever for this digital grocer.
Behind them are dozens of startups whose IPO aspirations have been stymied by the slowest year at this point for new listings since the depths of the financial crisis in 2009.
What kind of bad news am I talking about?
The company cut its internal valuation three times last year to about $13 billion by last October.
A half-dozen acquisitions have contributed to Instacart’s growth. Its largest was the $350 million purchase in 2021 of Caper AI, which offers retailers “smart” shopping carts that eliminate the need for customers to individually scan groceries or to line up at checkout.
The consumer-facing Marketplace is powered by more than 600,000 independent contractors — known as shoppers — who pick up items for consumers at more than 1,400 retailers including Kroger, Publix, and Walmart, across more than 80,000 stores in North America.
But growth in this core part of Instacart’s business has slowed to a snail's pace. Orders remained relatively consistent from 132.3 million for the six months ended June 30 2022 to 132.9 million for the same period in 2023. Gross transaction value increased 4% to $14.9 billion for the first half of this year, according to the filing.
Net income grew as a percent of gross transaction value from a loss of 0.3% in 2021 to a profit of 1.5% in 2022.
In conclusion, this reminds me of a liquidity grab for the Silicon Valley venture capitalists who own this company.
The company’s stock price will most likely grind lower as expenses explode.
The VCs rather liquidate this holding rather than tap the expensive debt markets.
Don’t forget that Instacart sub-contracts people to fetch the groceries and hard to see keeping a lid on those types of expenses.
Going public could result in around $2 billion in liquid cash infusion for the venture capitalists which is a godsend in today’s world.
They could just park the capital in 6% yielding fixed income instead of holding a sinking valuation in a company that likely will never do better than it did in 2021.
Retail traders should wait for any spike in this stock, and then sell this name to moon because I don’t see any sustainable growth on the horizon as their gross transaction volume has already topped out at a paltry 4%.
“A diploma is a dunce hat in disguise.” – Said German-American Tech Investor Peter Thiel
Mad Hedge Technology Letter
August 25, 2023
Fiat Lux
Featured Trade:
(ANOTHER LOW BLOW FOR TECH)
($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)