Mad Hedge Technology Letter
April 17, 2023
Fiat Lux
Featured Trade:
(SIDEWAYS CORRECTION IN THE SHORT TERM)
(AAPL), (NVDA), (TSLA), (AMD)
Not all is lost.
We’ve held up quite well in April largely experiencing a sideways correction.
That - after a great January and March.
I quietly predicted that April would be an underwhelming month for tech shares and it appears that I am spot on with that call.
It’s true with poor earnings looming, the path of easiest resistance is to the downside, but like we saw with last week’s sideways correction, bad earnings are already priced into the Nasdaq.
Margin compression is widely consensus at this point.
But the real thing going in the markets is that banks have delivered pretty strong earnings debunking the narrative that a recession is coming sooner than first thought.
That means it will take a longer time to reach that rate-cut cycle that all investors are clamoring for.
Then at today’s open we had Alphabet (GOOGL) in the red by 3.5% and growth metaverse stock Roblox (RBLX) down over 12%.
Even if one might surmise that blue chip tech stocks can muscle through the short-term headwinds, the growth stocks are likely to get whacked as investors avoid stocks that have bad balance sheets in times of stress and are most reliant on a rate-easing pivot.
Then if one might believe that the retail trader might bail out the pros, then think again.
Retail traders are usually the ones to pile in at the end delivering that one last magical surge at the end of the bull market.
Well, they won’t be rescuing the Nasdaq anytime soon as retail traders are currently underwater.
The average retail investor portfolio is down by about 27% since November 2021.
Since then, stocks have staged four double-digit bear market rallies. Tech stocks in particular rallied more than 20% — twice.
Retail investors will remain hesitant to raise their risk exposure as they got burned multiple times last year.
Timing is everything with traders and retail traders usually time it wrong without the help of John Thomas.
Wall Street had a turbulent 2022, clocking in its worst year since the 2008 financial crisis while ending a three-year streak of gains. Inflation, rate hikes, and authoritarian lockdowns in China plagued all financial assets last year.
As earnings season gets underway the S&P 500 is projected to post about a 7% decline in first-quarter earnings from a year ago.
Tech forecasts are also predicting lower revenue and growth.
Still, the outperformance coalesces around the usual suspects such as high-profile stocks like Apple (APPL), and Tesla (TSLA), which account for about 30% of the average retail investor’s portfolio while Nvidia (NVDA), and Advanced Micro Devices, Inc. (AMD) account for 10% of their portfolio.
From these stock picks, NVDA has had a gangbuster rally, up 84% this year given the excitement around ChatGPT and AI engulfing the market.
The Nasdaq pricing in a generative artificial intelligence revolution does not have legs and some of this hot money is bound to escape, setting the stage for some reversion to the mean.
In whole, I’m quite impressed with a sideways correction substituting a selloff and that type of price action is only positive moving forward.
Ultimately, conditions in tech are setting up for yet another possible short-squeeze in the following months.
“I love museums but I don't want to live in one.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
April 14, 2023
Fiat Lux
Featured Trade:
(GLOBAL TECH GRINDS TO A HALT)
(BABA), (CCP), (SOFTBANK)
Hard to believe that Softbank is throwing in the towel on its stake in Alibaba (BABA), but that is what is happening.
If you can remember, Alibaba was that can’t miss e-commerce company that ran into the wall that is the Chinese Communist Party (CCP).
They were then regulated into oblivion.
Even through arbitrary lockdowns, Softbank didn’t sell its stake so I find it peculiar that they would finally decide to divest out of China because maybe they know something that I don’t.
The golden years of Chinese ecommerce development is far in the rear view mirror.
However, there was a reason Softbank held onto its BABA stake for all this time, and BABA being a monopoly is a great reason.
This relationship epitomized the freewheeling globalization which many of us grew to love in the early 2000s and the decades after that.
That type of globalization has been replaced by something a lot more insidious that looks something more similar to balkanization.
It could be a simple as getting money out of China.
Many investors have recently said withdrawing money abroad has become almost impossible these days as the CCP has really tightened up capital outflow.
This is not only bad news for Chinese tech companies, but bad for all international tech deals in general at a time when venture capital money in tech has dried up.
SoftBank has sold more than $7 billion in Alibaba shares this year through prepaid forward contracts, after selling $29 billion last year.
The contracts give SoftBank the option to buy the shares back from Alibaba, but the group has settled previous deals by handing over the stock.
The sales will reduce the Japanese conglomerate’s ownership of Alibaba to less than 4% which is a far cry from the 14.6% stake the company said it was slated to hold as of end-September.
Softbank once owned about a third of the company spanning from an early $20 million investment in one of venture capital’s most famous bets.
Last month, the online commerce leader said it plans to split its $240 billion empire into six units that will individually raise funds and explore initial public offerings.
SoftBank, once one of Silicon Valley’s largest investors, has been crippled by billions of dollars of losses.
SoftBank’s billionaire founder Masayoshi Son has said he wants to focus on a planned listing of its chip design unit Arm Ltd. later this year and make the debut “the biggest” in the history of the semiconductor industry.
The re-listing of Arm, which had traded on the London exchange prior to SoftBank’s $32 billion acquisition in 2016, is expected to be a big windfall for the world’s biggest technology investor.
However, the Arm deal could be one of the last in the door for tech as many economies have become nationalistic and inward looking.
India is supposed to be the next China, and I believe it will be difficult for Silicon Valley money to get ahead there if defensive barriers are erected in the support of local capital.
The golden years of Silicon Valley are in the record book, and the next chapter appears to be focused on generative artificial intelligence super charging profits.
Tech shares will see a big decoupling of companies that jump on this hot new technology and the ones who are left behind.
Like always in Silicon Valley, iterate or die.
“All of technology, really, is about maximizing free options.” – Said Risk Analyst Writer Nassim Nicholas Taleb
Mad Hedge Technology Letter
April 12, 2023
Fiat Lux
Featured Trade:
(TECH EARNINGS BECOME BIGGEST RISK TO TECH)
(COMPQ), (APPL), (ABNB)
In prior iterations of the CPI report, a set of data reflecting the current inflation trends in the US, a positive report would have sent the tech index, known as the Nasdaq (COMPQ), soaring.
Today, we got none of that.
Volatility has taken a nap for the time being – even to the downside.
Why is that?
This time around the tech market is already looking around the corner to earnings that are assumed to be terrible.
Most of the profit margin gains were accrued last year and in the first quarter of this year. The rest of the year, tech companies won’t be able to raise the price of services.
Last year, Apple pushed that extra level pricing of iPhone, and Airbnb charged that extra level for that vacation rental. Now – no more.
Tech consumers are at the extreme upper limit of what they can afford and in fact, have been going deeper into debt to pay for software, hardware, and streaming.
The credit card debt levels have been soaring, showing that consumers are paying more for each item but getting less for every tech product.
What does this mean?
Management will offer bleak tech forecasts.
Silicon Valley might use this underwhelming period as a great platform to throw out the kitchen sink with the bath water.
That’s what today’s price action is telling us.
The easy gains in tech share appreciation were secured in January and March.
Conditions for the same melt up have soured quickly, and not bouncing hard off a great inflation report is an ominous sign in the short term for tech shares.
Now is a time when the easiest path of movement is south in shares as many investors could be taking profits heading into the earnings season.
There are no catalysts for a short-term bounce.
One bright note is that the US dollar has continued its awful performance this year which is highly positive for global growth which tech companies more than participate in.
Hollowing out the tech consumers isn’t the greatest strategy, but until now, it has worked. However, at what point will they stop taking on debt to fund their latest purchase? We could be coming to an inflection point, and that is not good for tech stocks.
As it stands, U.S. inflation is at its lowest level in nearly two years, but underlying price pressures will be sticky for a while.
Inflation rose 5% last month from a year earlier, down from February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday.
The labor market cooled some in March, with hiring gains moderating and wage growth easing. Weekly jobless claims, a proxy for layoffs, are up from historic lows. Also, job openings have dropped—a signal that demand for workers is softening.
Even if the job market has cooled, it hasn’t cooled enough for inflation to crash.
Yes, many tech jobs have been cut, and I see that as a much needed solution to the excesses of Silicon Valley, but today is more of a story of the number one risk to the market shifting from inflation to bad individual performance.
Get ready for many tech companies to tell us why they won’t be doing great later this year.
Remember the market always looks forward, and at the end of last month I predicted a slow April; that forecast has been nothing short of perfect so far.
“My goal wasn't to make a ton of money. It was to build good computers.” – Said Co-Founder of Apple Steve Wozniak
Mad Hedge Technology Letter
April 10, 2023
Fiat Lux
Featured Trade:
(UNIGNORABLE SIGNALS)
(AAPL), (HPQ), (NASDAQ)
