Mad Hedge Technology Letter
July 19, 2023
Fiat Lux
Featured Trade:
(CODERS ARE NEXT TO GO)
(GOOGL), (MSFT)
The future is here, and for some, the news isn’t good.
The big picture suggests that generative artificial intelligence stocks will benefit handsomely from this groundbreaking technology, but the losers aren’t as obvious as one might think.
If one might believe this is the cue to jumping head first into becoming an artificial intelligence programmer then think again.
Ironically enough, many of these jobs will, yes, be taken by the very technology itself, and we have received confirmation that this trend is likely to occur from management that makes the decisions of which staff to pay.
Why pay humans when an algorithm can do the same job?
Recently, a prominent generative AI executive stated that coders are at risk of losing jobs in the next 2-4 years.
This executive originates from one of the leading companies in the space, so it’s not like some fake expert offering his two cents either.
During an interview, this executive suggested that countries like India, where many IT jobs get outsourced, might be in trouble in the next few years because firms can just adopt AI tools to write, read, and review codes.
Even labor laws can’t prevent this giant replacement of human labor.
Tech giants like Google and Microsoft have shared similar concerns, though they argue that AI will create new jobs and humans need to co-exist with the technology.
Here is a quick summary of what I learned.
Outsourced coders up to level three programmers will be gone in the next year or two.
That's because new generative AI models "are like really talented grads" and will replace those who sit "in front of a computer" and never get noticed.
So it affects different models in different countries in different ways in different sectors.
In the United States, the two-week notice is real, and coders and engineers at international IT firms are at risk once Silicon Valley figures out they are expendable.
I must say that this might be the job apocalypse that many have been predicting.
The belt-tightening going on in Silicon Valley is just the beginning.
Next, we will see AI get rid of even more lucrative positions.
Google (GOOGL) CEO Sundar Pichai and Microsoft (MSFT) CEO Satya Nadella have also previously shared concerns about potential job loss due to AI.
Pichai and Nadella have repeatedly said that AI will eliminate grunt work.
In large corporations, many workers do just that – grunt work.
Not everyone is making strategic decisions that affect the direct fortunes of the company like Nadella and Pichai. Not everyone is Elon Musk.
AI will replace humans and CEOs like Pichai and Nadella are just being polite because they preside over a massive workforce.
They cannot come out in public and say that everyone will get fired. If they did that, workers would protest, revolt, and unionize as fast as possible. At the bare minimum, they will lay down flat and barely move a finger, resulting in company morale tanking.
At the stock level, this will boost revenue, margins, and profitability to a new golden era of tech stocks.
Workforces are about to get even leaner, and I am not talking about just firing the chief diversity officer or the chief climate change officer. The chief vegan foods officer for the office cafeteria was fired in the last round of cuts. The next round of cuts will start migrating up the value chain and it will be oh so painful.
Mad Hedge Technology Letter
July 17, 2023
Fiat Lux
Featured Trade:
(IS LUCID THE NEXT TESLA?)
(LCID), (OTCPK:BYDDF), (TSLA)
Is it worth it to invest in the “next Tesla” or is it way too optimistic there could even be a next Tesla?
This upstart challenger to Tesla, Lucid (LCID) is more or less what I thought about Tesla a few years ago – buy the car and not the stock.
Like many businesses in the world – it comes down to time and place.
Tesla benefited from generous federal subsidies, first mover advantage and LCID is just a little late to the action.
Why does that matter?
Tesla had its knife and fork at the table by itself when nobody else wanted to join them.
The problem with legacy automakers is that it took them too long to realize that EVs were a tsunami instead of a splash in a pond.
I know with conviction that EV makers like LCID are slogging through because of the numbers that materialize in their earnings reports.
The numbers are a manifestation of the time and place phenomenon that I just mentioned.
LCID continues to face major cash flow issues and will be lucky to exist in a few years.
A high burn rate is a hallmark of smaller EV companies and even Tesla had to be saved at the last second it its early days.
LCID simply doesn’t have the expertise and economies of scale to bring down the unit economics where it delivers a profit.
This achievement is also pushed out far into the future.
We are also seeing a widening gap in its production and deliveries, with approximately 4.76K units undelivered, with a growing inventory value of $1.01B.
LCID's resale value appears to be drastically impacted, with one recently auctioned for $85K, compared to the base model of $110,000.
The intense capital burn has forced LCID management to issue more common stock which dilutes current shareholders and suppresses the stock price.
While LCID may have won the battery competition through its longest driving range and market-leading design, the management's choice to go premium has clearly undermined the mass market.
This is a segment that fellow automakers such as Tesla (TSLA) and BYD (OTCPK:BYDDF) have invested great efforts while improving their supply chain and pricing strategies.
This alone suggests LCID's highly niche market segment based on the hefty price tag of $150K per unit, compared to TSLA at $40K and BYD between $20K to $30K (in China), effectively will stoke higher cash burn levels.
For now, LCID has not achieved break-even, selling every EV at a loss.
This signals weak consumer demand for LCID.
This automaker's expanded annualized production capacity of up to 90K vehicles in the AMP-1 facility and up to 155K in the Saudi Arabia facility.
Production is still miles behind Tesla at a time when supply chains and material costs are squeezing EV makers even more.
When we consider that the stock was trading at $20 per share just 1 year ago, the stock languishing at $7.50 today represents quite a pitiful performance.
I do acknowledge they make quite a nice EV.
However, it’s still highly debatable whether its business model is sustainable.
I do believe that around $4 per share is a good entry point for this EV maker.
Any pop from $4 should be sold.
There is no reason to overpay for LCID right now in a market that values accelerating and positive free cash flow.
Better the stock come to you than to go fishing for it.
“I am not trying to chase what other people are doing.” – Said Softbank Founder and CEO Masayoshi Son
Mad Hedge Technology Letter
July 14, 2023
Fiat Lux
Featured Trade:
(BAD TECH EARNINGS ARE PRICED IN)
(AAPL), (TSLA), (AMZN), (FB)
There are many so-called “experts” and “economists” dumping on the upcoming tech earnings season.
I got it – they won’t be the best ever.
No need to beat a dead horse when it’s down.
They say that the optimism of a soft landing for the economy is dissipating as stubbornly high inflation keeps central banks hawkish.
It’s hard to believe that tech stocks have been on a tear in 2023 during a period of hawkishness.
Higher for longer luckily has not affected tech stocks yet, yet many are saying this earnings season could be the straw that breaks the camel’s back.
I must admit, at the intro level such as venture capitalism and start-ups, the rate environment has been nothing short of catastrophic.
Investors aren't giving money for just ideas anymore.
The good news is that at the incubator level, nobody cares because these paltry numbers don’t move the stock market and are decades away from going public.
It doesn’t matter to the tech market that the next Amazon or Facebook has a tough time borrowing with these sky-high rates.
Nobody cares because most people hold Apple and Tesla stock.
I am also willing to call B.S. on the negativity for the upcoming tech earnings season and will say it should be just fine.
I am not diminishing the belt-tightening going on inside the offices, it certainly is happening.
Tech companies are hunkering down, which is true because the low-lying fruit has been plucked off the branch.
42% of respondents from a recent survey said the biggest negative for the earnings season will be the impact of further tightening of financial conditions.
I would say that if that is the biggest risk out there to respondents, then tech shares will certainly end the year higher from today.
There’s also a widespread belief that earnings per share (EPS) will fall off a cliff and then rebound to growth in the final three months of the year, according to data by Bloomberg Intelligence.
This seems like the perfect setup for tech executives to lower the bar.
While the tech rally was boosted by the hype around artificial intelligence, over 70% of survey participants say the impact of AI on tech earnings is overblown.
Amid the gloom, the biggest positive drivers for equities will be any signs of easing inflation and cost cutting, according to the majority of those surveyed.
Ultimately, it has already been baked into the pie that margins will come under pressure as companies lose the ability to keep raising prices when inflation cools and as growth slows.
That doesn’t mean there will be anything more than a technical and orderly pullback which I have been championing for.
A result like that would be healthy for tech stocks.
Tech shares simply cannot go up in a straight line forever, but they keep defying gravity in the first 7 months of the year.
Even if the big 7 tech stocks signal some downshifting revenue trajectories, it won’t be more than a few days' drop in shares signifying a marvelous opportunity to finally get into some of these premium names that rarely offer optimal entry points.
Expect nothing special from this earnings season and buy any garden variety dip from premium tech stocks.
“If you’re offered a seat on a rocket ship, don’t ask what seat.” – Said Former COO of Meta Platform Sheryl Sandberg
Mad Hedge Technology Letter
July 12, 2023
Fiat Lux
Featured Trade:
(CPI ACTS AS LAUNCHING PAD FOR TECH STOCKS)
(CPI)
Everyone has been on pins and needles waiting for the U.S. CPI inflation report every month because of the volatile reaction to tech stocks.
Lately, it’s panned out well for tech.
It’s been almost like an ancient Incan ritual ever since Congress and the Fed pushed quantitative easing and stimuli to the moon resulting in spiking inflation over the past few years.
It appears as if we have finally turned the corner with the inflation rate dropping down to 3.0% YoY which was in line with expectations.
Coming down from 4%, the rolodex of normal asset reactions occurred such as higher tech stocks, higher spot gold price, lower US dollar, and spiking oil prices.
Ironically enough, the coming down from 4% could set the seeds for the next inflation reversal as Americans still have jobs and are likely to spend, spend, and spend more at these lower price points excluding oil.
In sum, the numbers could give the Federal Reserve some breathing room as it looks to bring down inflation that was running around a 9% annual rate at this time in 2022, the highest since November 1981.
The Fed will embrace this report as validation that their policies aren’t finally stinking up the joint – inflation has fallen while growth has not yet stalled.
However, central bank policymakers tend to look more at core inflation, which is still running well above the Fed’s 2% annual target. The report is unlikely to stop the central bank from raising rates again later this month.
When inflation first began to accelerate in 2021, Fed officials and most Wall Street economists thought it would be “transitory.”
They included surging demand for goods over services and supply chain clogs that created scarcity for vital items such as semiconductors.
However, when inflation proved more resilient than anticipated, the Fed began tightening.
During the inflation surge that peaked last June, worker wages had run consistently behind the cost-of-living increases.
Traders are still pricing in a strong possibility that the Fed will enact a quarter percentage point rate hike when it meets July 25-26. However, market pricing is pointing toward that being the last increase as officials pause to allow the series of hikes to work their way through the economy.
What does this mean for tech stocks?
Buy on the dip. Don’t need to make it more complicated than that.
Big tech such as Microsoft, Meta, Apple, and Google are up big this morning suggesting that consumers who have more purchasing power and higher real incomes will buy their products.
The lower inflation number also suggests that the Fed could be right about the “soft landing” which is also demonstrably positive for tech stocks.
Tech stocks don’t need any exogenous shocks to the system and in the short term, this effectively cancels out spiking inflation as a legitimate market risk to tech stocks.
It will be hard to topple tech stocks in the short-term and I’m not talking about orderly technical pullbacks.
Workers might start to be able to get ahead of the cost-of-living increases with slower price hikes.
The even larger challenge is getting from 3% to 2% because we now cross the point of when comparable prior data turns from tailwind to headwind.
If the Fed continues with these little 25 basis point hikes until the end of the year, nobody cares because most people are sitting on their sub-3% fixed 30-year mortgages and pouring their paycheck into tech stocks.
Ultimately, today’s report sets up for a positive last 5 months for tech even if we are technically stretched in the short term.
Buy tech on the dip.
