Mad Hedge Technology Letter
March 31, 2023
Fiat Lux
Featured Trade:
(BUY NOW PAY WHENEVER)
(AAPL), (AFRM), (MSFT)
Apple is stepping into the "buy now, pay later" industry and these lateral moves epitomize the state of the tech sector today.
For a company known for its dazzling innovation, this doesn’t do much to move the needle, but honestly, it doesn’t really need to recreate the wheel at this point either.
"Buy now, pay later" focuses on the bottom feeder consumer who can’t afford to pay full price for something and must elongate the payment cycle.
These are the people who are high-risk consumers that otherwise wouldn’t be able to buy an iPhone without the subsidy.
The good news is that Apple doesn’t need to innovate to stay on top because many other companies aren’t innovating either. The bar is quite low these days.
I would say that Microsoft is probably the one that takes the lead with its artificial intelligence investments, but the jury is also out on that as well with Italy banning its new service.
Without much innovation going on, Apple is moving onto others' turf and leveraging their whole ecosystem against weaker competition like Affirm Holdings, Inc. (AFRM).
Launching Apple Pay Later, which allows Apple Pay users to split purchases into four interest-free payments paid over six weeks without an additional fee.
Apple conducts a soft credit check, which reviews credit scores to understand one’s current credit.
If approved, the Pay Later option is shown when you use Apple Pay online or make in-app purchases on iPhones and iPads. Purchases using the new service will be authenticated using Face ID, Touch ID, or a passcode.
Aside from Affirm, other competitors include Afterpay, Klarna, and PayPal’s “Pay in 4” option. Here’s how Apple Pay Later compares.
I do believe this is a net positive for Apple even if it does increase the risk of non-performing loans.
Apple would easily be able to absorb these losses if they delivered material harm to the company simply because the balance sheet is so healthy.
Apple has been the recipient of the flight to safety trade along with Microsoft during this technology stock melt up.
The expectation of no more interest rates has been the trigger for new capital allocation into Apple stock.
I fully expect Apple’s stock to perform well during a time when liquidity has been poured into the system by the Fed.
They are doing this because the Fed is prioritizing global systemic banking risk as the number one risk to the market.
This has caused the Fed to rid themselves of quantitative tightening meaning the goalposts have suddenly widened for the tech behemoths and Apple is merely obliging to the easier conditions.
Remember, it is more about conditions in the short term than anything else which is why liquidity is so important to share prices.
Therefore, Apple rolling out a “meh” business like "buy now, pay later," which could possibly turn into a "buy now, pay never" business, is not really a big deal.
Rolling out with essentially the same phone over and over again with different colors also doesn’t matter either.
Conversely, this will do material damage to companies like Affirm, Klarna, Afterpay, and PayPal.
Buy the dip in the best and brightest in tech. Apple is obviously one of those candidates.
“Those who rule chips will rule the entire world.” – Said Founder of Softbank Masayoshi Son
Mad Hedge Technology Letter
March 29, 2023
Fiat Lux
Featured Trade:
(THE FORCE MULTIPLIER)
(MSFT), (TSLA), (CHATGPT)
Is artificial intelligence already on the ropes?
Tesla CEO Elon Musk and a group of artificial intelligence experts have called for a six-month freeze of developing systems that are more powerful versions than the just-released OpenAI GPT-4 system.
GPT-4 quickly impressed early users and has achieved remarkable gains in the short term.
With its ability to simplify coding, rapidly create a website from a simple sketch, and pass exams with high marks takes fractions of a second.
In an open letter, Musk and the experts point to potential risks for society and humanity as a whole.
This would be significantly detrimental to Microsoft’s stock if the development of AI is halted.
No doubt that part of this is Elon Musk not satisfied that his $100 million donation to this “nonprofit” has been parlayed into a Microsoft for-profit smash-and-grab takeover of the asset.
Malfunctioning AI is something that would be a horror story for everyone on the planet.
The creator of OpenAI Sam Altman has also expressed concern about the societal backlash and volume of misinformation that could become one of those nasty unintended side effects.
Some other disruptions include both economic and political disruptions, and researchers are asking developers to work with regulators to create standards for AI development and integration.
Among the names behind the letter are those of Stability AI CEO Emad Mostake and researchers at Alphabet-owned DeepMind.
The letter comes two days after Europol joined organizations that share ethical and legal concerns about the widespread use of advanced artificial intelligence such as ChatGPT and warn of possible misuse of the system in phishing attempts, disinformation, and cybercrime.
Since its launch last year, ChatGPT has taken the world by storm and has accelerated the development of large-scale language models and companies to integrate generative AI models into their products.
This logically caused a wave of negative comments in addition to positive comments, as a significant part of the scientific community believes that this technology is not yet ready for such widespread use.
Artificial intelligence can cause serious damage, and the big players are increasingly more secretive about what they're doing. That makes it harder to protect the public from any harm that may ever manifest itself.
This news is on the heels of investment bank Goldman Sachs forecasting that as many as 300 million full-time jobs around the world could be automated in some way by the newest wave of artificial intelligence.
They predicted in a recent report that 18% of work globally could be computerized, with the effects felt more deeply in advanced economies than emerging markets.
Fighting the richest man in the world has its drawbacks.
ChatGPT has already destroyed the meaning of going to university for most of the students out there.
Generative AI is the force multiplier that tech has waited for and delaying it with the potential of stopping it would hurt tech shares and put a cap on future returns.
This battle could be the one that defines humanity and is definitely the fight that will define tech market valuations 5 or 10 years from now.
If this technology gets stopped, there is no other force multiplier in the works that could replace something as powerful as this generative artificial intelligence.
“Companies don't like uncertainty; travelers don't like uncertainty.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
March 27, 2023
Fiat Lux
Featured Trade:
(SMART MONEY HAS LEFT)
(AAPL), (MSFT), (FRC)
The Federal Reserve is moving deeper into a trapped corner because the Fed is facing inflation that they haven’t fixed yet.
That’s not a problem so far as they are gradually lifting rates to cure it, but what happens when a systemic event occurs and they are forced to pivot when inflation is still at 6%?
This is why I have always championed just doing one big rate raise to get it over with.
The longer the Fed draws it out, the more chance they have to pivot when inflation is still toxic to the consumer.
Why do I care about all this?
The systemic event has arrived and that could mean that precious dollars are steered away from tech shares in April and are funneled over to the banking sector where the smart money is buying the dip in “too big to fail” banking stocks.
Since the beginning of March, three U.S. banks have failed and others — most notably California-based First Republic (FRC) — are teetering on the edge amid deposit outflows.
All else equal, in a banking crisis, investors would expect the Fed to cut rates to ease pressure on the financial system.
Since 1977, the Federal Reserve has worked to fulfill a "dual mandate" of achieving maximum employment and stable prices.
Tech stocks had a strong initial bounce from the banking shock, but that doesn’t mean it will last.
I took profits in some of my tech positions and the pricing action in the last few days has been poor to the upside.
I do believe we could experience a transitory sideways move which might be followed by an earnings scare that could induce a short-term pullback.
Tech has done remarkably well in the first few months of the year and the grind up during the banking crisis has shown resilience.
However, where is the use case for the incremental investor in tech?
Sure, we got some nice bounces from Facebook and Google cutting staff.
Getting leaner is certainly better.
Then there was the OpenAI bounce with artificial intelligence going from a fad to the new buzzword.
Microsoft and Apple have separated themselves from the crowd.
I am concerned about the breadth of the tech sector because many growth companies are starting to dip and dip some more.
It’s true that many investors are on the sidelines because they believe that the banking crisis has just started.
At the end of the day wasn’t it Russia that was supposed to preside over a failing economy susceptible to bank runs?
Ironically enough, by the end of 2021, as a result of high oil prices and a post-pandemic recovery, Russia's annual growth rate exceeded 5%. While the rate was expected to slow down in 2022, prewar forecasters would pin it at around 3 percent.
After the buy-the-dip in banks crowd moved out of the safety tech trade, we could be in for a sideways correction that could lead to some downside risk.
It doesn’t help that the Western financial system has creaky knees and it seems at this point tech might have to navigate around bank blowups in the short term.
The real safety tech trade continues to be Apple and Microsoft because the banking contagion has effectively led to the death of tech startups and small caps.
“Risk comes from not knowing what you're doing.” – Said American Investors Warren Buffett
Mad Hedge Technology Letter
March 24, 2023
Fiat Lux
Featured Trade:
(BLOCK GETS BLOCKED)
(SQ), (UBER), (META)