“Price is what you pay, value is what you get.” – Said Legendary American Investor Warren Buffett
Mad Hedge Technology Letter
February 10, 2023
Fiat Lux
Featured Trade:
(NO LANDING OUTCOME COULD HURT TECH STOCKS)
(NASDAQ)
NO LANDING!
That’s where we are at and that’s what we face as tech stocks need to overcome the “no landing” scenario to see better days in valuation.
There has been much chit-chat about what sort of recession the US economy will face in 2023.
Well, hold your horses there mister.
The smattering of positive labor data means there might not be a recession at all, which translates into neither a soft landing nor a hand landing for the economy.
Why does that matter for tech stocks?
The lack of light or deep recession has absolutely everything to do with inflation. High inflation kills growth stocks!
The logic behind this goes that if there is no recession, US workers will by and large keep their jobs.
From a societal point of view, this is great for Americans who can bank their salaries and spend, spend, spend.
However, this doesn’t work out so great if the stock market needs lower inflation for tech shares to go higher.
Let me just insert here that I am totally aware of all the tech job losses and they have topped around 200,000 so far and it’s a drop in the bucket to overall hiring and firing.
Interestingly enough, tech layoffs haven’t always resulted in the fired getting better jobs.
The jobs report shows a massive uptick in hiring particularly for restaurant jobs, retail, and hospitality.
Many of these are also part-time jobs which means the median US job is decreasing in quality and stability.
The result of more hiring for longer is that the US Central Bank might be forced to jack up rates again past the 5% that is priced in.
This is horrible news for the tech sector as the Nasdaq got off to a blistering start in January because of the clear path to lower inflation. This path is starting to close.
Last Friday’s January employment report saw the economy add a much stronger-than-expected 517,000 jobs, while the unemployment rate fell to 3.4%, its lowest level since 1969.
And if the services sector needs to fill hundreds of thousands of jobs, wage gains will threaten to make inflation spike yet again.
The reopening of China’s economy as reverses lockdowns could push commodity prices back to the upside, also contributing to price pressures after several months of slowing inflation readings.
The Fed has always pinpointed strong wage growth and full employment as an impediment to lowering rates.
I have banged on constantly that the Fed hasn’t done enough with lifting rates even though the pace of rate hikes has been historic.
Readers should remember that the amount of stimulus and handouts during the lockdowns were also historic as well.
Demand destruction simply will not occur if real rates are negative and that’s been the case for quite a while I might add.
Now there is a real risk of inflation reaccelerating because the Fed never raised rates high enough for companies to feel pain and fire employees.
This is why tech stocks have been swooning the last few days and the trading environment is still highly complex.
Expect whipsaws for the foreseeable future and if inflation does come back reincarnated, expect a page out of the 2022 playbook with stocks and bonds going decisively lower.
Mad Hedge Technology Letter
February 8, 2023
Fiat Lux
Featured Trade:
(CHATBOT SINKS STOCK 8%)
(GOOGL), (MSFT)
Down 8% on a faulty chatbot conversation – that’s what happened to Google’s (GOOGL) stock today.
That’s why we need to pare back the euphoria and nonstop celebration of ChatGPT.
Hold your horses.
It’s an emerging technology and could end up with chatbots chatting with other chatbots for little or no value.
My point is that it can still go very wrong from here.
Google’s stock swan dived on Wednesday after its own iteration of A.I. chatbot erroneously answered a question about the first usage of space telescopes via its promotional material.
It all lends itself to surmise that Google is way behind in this game and Microsoft has the situation by the scruff of the neck.
Only just a few days ago, Microsoft integrated the AI technology into the front page of its Bing search engine, and is available for user downloads on the Bing app.
The drop in share price meant that Google lost more than $100 billion off its market cap.
The service called Bard is to compete with the popular ChatGPT.
Despite the chatbot’s claim in the ad, NASA reports that the first photo of a planet outside the Milky Way was taken by the Very Large Telescope in 2004 — nearly 19 years before NASA’s Webb telescope.
Unpreparedness by Google could translate into a significant loss of ad revenue for Google’s cash cow Google search.
The desperation of throwing Bard out there not on their timeline could mean they are exposing a product that isn’t up to Google’s standards.
An AI chatbot that consistently delivers false answers will turn off an advertiser quicker than no AI chatbot.
Investing in Google is still worth it even if it takes time to correct the quality of their AI. because it is logical to give a good company the benefit of the doubt.
Another problem is that Google could be stuck with bad AI for a few years before it turns the corner.
For better or worse, they were forced to go public with whatever they had just for the optics of competition even if they are badly lagging behind.
The worst-case scenario is receiving a direct blow to the cranium in terms of total ad revenue.
Google is still relying on search to drive the rest of its business.
They earned over $200 billion in ad revenue in 2021.
This is the first threat to Google’s search model in a generation and the threat has them on their toes.
I do believe they possess the resources to solve this issue.
No doubt that Google CEO Sundar Pichai is throwing the kitchen sink to find and poach the best AI engineers to beef up the chatbot team.
Ultimately, the real new world of higher interest rates and high inflation environment means that your father’s tech playbook must be thrown out the window.
It’s quite evident that we are in the midst of a paradigm shift and new leaders during this shift will emerge.
History shows us that tech leaders of old have a habit of falling behind because they are too set in their ways to adapt to a world with new rules.
It might be so that at some point in the not-so-near future, we might need to set the search default to Bing.
How ironic?
“Bad times are incredibly good for Palantir.” – Said CEO of Palantir Alex Karp
Mad Hedge Technology Letter
February 6, 2023
Fiat Lux
Featured Trade:
(PLATOONING AND TECH IS A MATCH MADE IN HEAVEN)
(ODFL), (CVLG), (ARCB), (ULH), (SNDR), (WERN)
If trucks drive themselves, what will happen to long-distance drivers?
Self-driving cars are still a little ways off - but I do believe it will happen.
What will become of long-distance drivers?
Actually, self-driving cars should have been part of the street scene for a long time, at least according to Twitter CEO Elon Musk's forecasts.
In 2015, the Tesla founder predicted that two years later fully autonomous cars would be driving around.
Not so fast.
Since then, he has adjusted the forecast year after year. Musk recently said that 2023 will finally be the day.
But it's not just Musk who has butchered it when it comes to self-driving cars. Many car producers have announced autonomous cars every year, but they are still a long way off.
Many questions remain unanswered and will still remain unanswered for the foreseeable future.
No wonder, because the technical and social challenges involved in getting fully autonomous cars on the road are enormous.
Then there is the legislation of it – can an industry that is tilted towards benefitting Elon Musk really expect any Democratic legislation that is positive?
The consensus is that anything he will try to do will get delayed and he will need to wait for the Republicans.
What about the technical level?
What happens in unforeseen traffic situations? What if the human has to take the wheel, but his driving skills have long since atrophied? What do autonomous vehicles mean for traffic and urban planning? Who is liable in case of accidents?
Is "platooning" revolutionizing the forwarding business?
In the short term, there are traffic situations that are manageable in their complexity and in which autonomous vehicles could definitely play an important role in the future.
For example, experiments with automated truck convoys have long been carried out on freeways and highways. In this so-called "platooning", several trucks drive behind one another, with only the first vehicle in the column having to be driven by a person.
"Platooning" is intended to save fuel, since the vehicles' slipstream can be used more efficiently. But there is also the suspicion that staff could also be saved because fewer long-distance drivers are needed.
Last but not least, last year’s trucker protests in Canada highlight how governments can quickly turn authoritarian in nature, in this case, by closing truckers’ bank accounts.
Nobody in their right mind can say that’s pro-business and who in their right mind would want to open a new Canadian trucker business after that.
In the U.S., the truck driver is the most common occupation in 26 out of 50 US states. There is a 67% chance of it disappearing completely in the next twenty years because artificial intelligent solutions will deliver us a timely way to replace the driver.
The economist John Maynard Keynes predicted in 1930 that by 2030 we would only be working 15 hours a week. In an essay entitled "Economic Possibilities for our Grandchildren," the Brit didn’t consider that these gains would be pocketed by corporations and not the people.
It’s highly possible that within 10 years, humans won’t be driving groceries or other goods across states and this function will be replaced by an algorithm. If not that, then products will be platooned to a destination headed by one driver followed by a herd of self-driving trucks behind him or her.
Instead of passing on the cost savings to the end consumer, the gains will materialize in increased buybacks, higher dividends, higher stock prices, higher executive compensation, increased operational efficiencies, and decreased wage expenses.
Some of the winners of this A.I. revolution will be public trucking names such as Old Dominion Freight Line (ODFL), Covenant Logistics Group (CVLG), Arcbest (ARCB), Universal Logistics Holdings (ULH), Schneider National (SNDR), Werner Enterprises (WERN).
Mad Hedge Technology Letter
February 3, 2023
Fiat Lux
Featured Trade:
(HIGH BETA IS SUDDENLY HOT)
(DOCU), (META), (LYFT), (AMZN), (NFLX)
The Federal Reserve swung its big stick again.
They are and will continue to be the largest influencer in tech share price action in the short-term and the last 2 days has proved it.
Whatever you think or say about the equity market, we can’t hide from the truth that liquidity will either wreak havoc on short-term price action or shoot it to the moon like we saw post-Fed announcement about the latest rate hike.
Tech shares lifted off like an Elon Musk spaceship to Mars and the Mad Hedge Technology Letter was tactical enough to take profits on a DocuSign (DOCU) put spread and stomp out in Meta (META) before the earnings report.
I was able to add some additional long tech as Friday is proving to benefit from the spillover effect.
No matter how we view it, volatility isn’t going anywhere any time soon.
Why?
Since January 2020, the US has printed nearly 80% of all US dollars in existence.
Lots of fiat paper sloshing around in the system has many unintended consequences.
When pushed into certain asset classes, the hot money polarizes price action. That’s how we got all the meme stock craziness.
This phenomenon won’t be going away anytime soon and the Fed slowly reducing their asset sheet pales in comparison to the liquidity hanging around on the sidelines.
The Fed hike means short-term rates now stand at between 4.5%-4.75%, the highest since October 2007.
The move marked the eighth increase in a process that began in March 2022. By itself, the fund's rate sets what banks charge each other for overnight borrowing, but it also spills through to many consumer debt products.
Tech shares took off because Chairman Powell acknowledged that “the disinflationary process” had started.
In a blink of an eye, the Nasdaq was up 2% and growth stocks were up 5%.
Powell intentionally didn’t pour cold water on the rally when he had a chance to smash it down with more hawkish rhetoric or a 50 basis point hike.
It appears highly likely that Powell isn’t interested in tech stocks or any equities for that matter experiencing another bloodbath like 2022.
There might be pitchforks out for him if there is a 30% loss in major indexes this year and perhaps he is scared that Washington would bring the heat. He likes his cushy job and the benefits that come with it.
I do believe this is only the first of a series of Powell Houdini acts where he is willing to disappear behind any sort of opportunity to smash down the markets and let them run wild.
Tech stocks will be a natural buy-the-dip opportunity during this deflation narrative.
We have a clear runway from 6.5% inflation to around 4% and during this 2.5% deflation drop, I can easily see the Nasdaq lurching higher.
I used Friday to add a bullish position in Lyft (LYFT) and Amazon (AMZN) after their terrible earnings while I took almost maximum profit in our Netflix (NFLX) call spread.
It was almost as if Powell announced a new round of QE or, well, sort of.
