Mad Hedge Technology Letter
July 10, 2023
Fiat Lux
Featured Trade:
(THE YEN TAILWIND TO TECH STOCKS)
(JPY), ($COMPQ), (META), (ZM)
In the trader's guidebook of how to trade, it’s quite common to cement the nostrum "don’t fight the Fed" into one’s brain.
Many know this.
In 2022, this nostrum served traders quite well as interest rate increases left the tech market in the dust.
Major tech stocks ($COMPQ) from Meta (META) to small-cap Zoom Video Communications (ZM) fell flat on their face.
That was when "don’t fight the Fed" was the smart thing to do.
Fast forward to 2023 and the Fed is still marching towards more interest rate tightening, but astonishingly the opposite has happened, it has paid to fight the Fed this year.
Not only that, the tech-based Nasdaq has gone parabolic, delivering gains of already over 30% in just the first 7 months.
Anyone that hasn’t fought the Fed has been left bloody in the streets like a standard Parisian riot.
One piece of the puzzle that often gets overlooked is one major catalyst to this trade which is the Japanese yen carry trade.
This is how the trade has worked for many hedge funds this year.
Borrow in Japanese yen because the cost of borrowing is still puny compared to yields in Western countries.
Take that yen back over to the Western equity markets and pour them into stocks like Nvidia, Meta, Apple, Tesla, Microsoft, and Amazon.
The strategy has worked like clockwork and I know many traders that have made second and third fortunes off of the back of this trade so far this year.
Traders have boosted short positions on the yen as the currency moved steadily lower this year amid widening divergence between the Bank of Japan’s easy policy and aggressive hiking cycles for other central banks, notably in the US and Europe.
Talking about the Yen is timely as reports of lower US job numbers and increased Japanese wage gains triggered a one-day selloff in the dollar.
We won’t see a complete unwind of the yen carry trade just yet but the carry trade had gotten a little too long in the tooth, so this is profit-taking to readjust positioning.
If volatility stays high then it will continue to unwind, but if volatility stabilizes then the Japanese yen carry trade parade will continue unabashed.
The yen is one of the worst-performing Group-of-10 this year, reaching 145 per dollar last month, a level unseen since November.
What’s next?
Nothing has fundamentally changed.
The US isn’t going into a recession this year and even if credit card delinquencies are up and household net worth is struggling in America, it’s not enough to move the needle to deter the Japanese yen carry trade.
The mild pullback against the US dollar is in fact a golden opportunity for traders to pour back into the short Japanese yen trade.
As long as the Japanese yen remains weak, tech stocks won’t crack because this liquidity is the lifeblood to many tech stocks.
We have been crowbarred into this goldilocks environment of higher equities, higher bond yields, and now US housing is starting to bounce back.
The Nasdaq has been ironclad this year and even if I don’t think it will deliver another 30% to finish the year, the pain trader is higher in tech stocks, marginally higher in bond yields, higher in US housing, and short Japanese yen.
Until we receive some type of concrete confirmation that this pain trade is over, I expect to grind up in the aforementioned asset classes.
“Your margin is my opportunity.” – Said Founder and CEO of Amazon Jeff Bezos
Mad Hedge Technology Letter
July 7, 2023
Fiat Lux
Featured Trade:
(TRAFFIC SAGS FOR THE GENERATIONAL TECHNOLOGY)
(OPENAI), (NVDA)
OpenAI’s splash into AI was the secret sauce as to why tech stocks have gone parabolic in 2023.
The platform achieved a remarkable milestone by amassing 100 million monthly active users quite early on, setting a record for the fastest-growing user base.
With ChatGPT’s widespread absorption, OpenAI has been looked at as the savior for revenue models in Silicon Valley.
However, this period of AI enthusiasm has proved to be short-lived, as the technology experiences its first real pullback.
Based on the latest data, ChatGPT experienced a 9.7% decrease in desktop and mobile web traffic during June. The site also saw a decline of 5.7% in unique visitors.
This was followed by an 8.5% decrease in the average time users spent on the site. In the United States, the month-on-month traffic decline for the website was recorded at 10.3%.
The downtrend in traffic is quite surprising considering that groundbreaking new technologies which are still in their honeymoon phases never report any decrease in eyeballs whatsoever.
There's been a lot of buzz around artificial intelligence since ChatGPT was released seven months ago. About a month and a half before the chatbot was released to the public, the stock market bottomed in a bear market around the middle of October.
I am not saying the bottom will fall out of tech stocks, but the gaps up will probably cool down in the short term.
Take example one stock that has performed spectacularly – Nvidia (NVDA).
They have even managed to achieve this against a backdrop of challenging macroeconomic headwinds and a hawkish Federal Reserve.
The drop in ChatGPT interest is a warning sign that the beautiful girl has hit the wall.
It can’t be as simple as investors cheering on AI from the sidelines and then stocks go magically up. It’s not that easy.
The inherent technology needs evidence of outperformance and cannot lack substance.
A significant majority, comprising 61%, of ChatGPT’s user base consists of individuals from Generation Z.
This AI tool has gained considerable popularity for its educational applications.
For example, according to a research report, respondents reported using ChatGPT for educational purposes, with 33% utilizing it for educational assistance. 18% rely on it to comprehend complex concepts, and 15% use it to acquire new skills.
Investors need to understand that sliding interest in ChatGPT could be a catalyst for the AI bubble to lose air.
At the moment, AI's risks are as massive as its potential. We won't know until ten years later whether AI's impact is more akin to the internet or the Google Glass.
There are also other issues. Sam Altman, chief executive at OpenAI, has described the cost of running the services as “eye-watering.”
ChatGPT is free to use but also provides a premium subscription, where users can pay $20 a month to access OpenAI’s more advanced model, GPT-4.
Some 1.5 million people have signed up for the subscription, but the other tens of millions aren’t on board yet. For many people, it’s not worth paying for yet.
OpenAI has projected $200 million in revenue this year.
I believe it is time to take a short-term breather for the moment in AI. AI might turn out to be the shiny star many experts think it will be, but it doesn’t take one day to become that shiny start especially when the majority of OpenAI users are applying it to do their homework.
“Things that are real sciences don’t need to put ‘science’ at the end of it.” – Said German-American Investor Peter Thiel
Mad Hedge Technology Letter
July 5, 2023
Fiat Lux
Featured Trade:
(TWITTER’S COPY IS FINALLY HERE)
(META), (TWITTER)
Facebook’s Mark Zuckerberg is coming out with a copy of Twitter to rival Elon Musk’s takeover trophy Twitter.
This effectively means that the Metaverse project is a dumpster fire.
Twitter is the town square of the world.
Every big name with clout has a direct voice open to the world on Twitter and nowhere else.
Apparently, Zuckerberg wants the same.
Instagram is not a bad asset, but it's more of a photo collage that acts as a dating profile to the whole world.
World leaders don’t use Instagram which matters so I don’t believe this will be a slugfest – more of a strong whimper.
Facebook’s new product will be called “Threads.”
In short, it’s basically a texting version of Instagram.
Instagram users will be able to keep their user names and follow the same accounts on the new app, according to screenshots displayed on the App Store listing.
Threads won’t make many inroads against Musk, who acquired Twitter last year for $44 billion and has brilliantly purged a useless workforce and added a slew of new advertisers to his new app.
The success has been so good that he has claimed that Twitter will soon be profitable.
Allowing Instagram users to port their profile to Threads could give the new app more traction with potential users by providing a ready-made set of accounts for them to follow.
However, I believe it’s a bad idea because these services will compete with each other and users will be cannibalized.
Interestingly enough, the mainstream media has been printing negative articles on Musk since the day he bought Tesla because Musk has been highly vocal against left wing investors that own major publications like Bill Gates and George Soros.
It’s smart that Musk took Twitter private because a public Twitter would need to navigate his critical tweet storms and dealing with unhappy shareholders.
Most users might be put off by Meta’s data privacy track record and would-be Twitter challengers like Mastodon have found it a challenge to sign up users.
For Threads to succeed, it will need to poach Twitter users.
Pew Research found last year that among U.S. adults who use Twitter, the top 25% of users by tweet volume produced 97% of all tweets. Musk isn’t going to cede Twitter’s role in the social-media ecosystem lightly, if his early reactions to Meta’s plans are anything to go by.
From my analysis, Twitter does a relatively good job with its platform.
At the very minimum, the Twitter experience isn’t such a bad experience to the point where it will bleed users.
I don’t exactly understand where Thread’s advantage is here and how they will cheaply steal Twitter’s business.
If they do steal Twitter’s business, the cost will be extremely cumbersome.
For me, the only way I envision Twitter capitulating is with a self-inflicted wound.
Twitter is stronger than ever not only as a revenue model but also its scarcity value which is at an all-time high.
There is a reason why Zuckerberg is going after Twitter and not the other way around.
Twitter is the best social media app on the market and the so-called negativity of Twitter by coastal journalism has sour grapes written all over it.
Zuckerberg’s Thread has a higher chance of stealing Instagram users.
That being said, Meta shares have had an outstanding 2023 and even if this is another soccer-like flop like the Metaverse, it won’t materially damage the stocks’ trajectory. Buy META on the dip.
“I’d rather be seen as evil than incompetent.” — Said German-American billionaire entrepreneur and venture capitalist Peter Thiel
Mad Hedge Technology Letter
July 3, 2023
Fiat Lux
Featured Trade:
(WILL AI DESTROY THE JOB MARKET?)
(JPM), (AI), (UBER)
