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.
“If you get the product and technology right, then the rest usually falls into place.” – Said CEO of Uber Dara Khosrowshahi
Mad Hedge Technology Letter
February 1, 2023
Fiat Lux
Featured Trade:
(5 STOCKS FOR THE UPCOMING A.I. BOOM)
(NVDA), (AMBA), (MBLY), (AI), (AYX)
There has been non-stop talk about how ChatGPT is reimagining the tech sector.
The highest quality artificial intelligence chatbot to ever grace the earth is scaring tech executives around the world.
My personal discussions with people in the know are that every tech company is now forming a work group and assembling its best engineers to figure out how to get their hands on something similar.
That being said, here are five companies that will benefit asymmetrically as this chatbot tech goes from fringe to mainstream.
Buckle up with your cowboy hat because this type of technology will become pervasive in no time.
Since the cutting-edge chatbot was launched, there has been a massive re-rating of A.I. stocks because of the legitimacy of the technology.
It definitely appears that chatbot AI will finally live up to the hype.
On November 30th, OpenAI Chat introduced GPT and has since shown that the software can be used in everything from writing stock reports to resignation emails to messages for dating apps
Nvidia (NVDA), famously known for designing and manufacturing graphics chips, is the first stock that goes off the top of my head to benefit from this new AI craze.
The company's technology is being used for various AI integrations from self-driving cars to robots.
Nvidia's CEO Jensen Huang is one of the better leaders in Silicon Valley.
Recent forecasts estimate that a boom in Chat GPT usage could bring Nvidia revenue of between $3 billion and $11 billion over the next 12 months.
Success of Chat GPT brings Nvidia a potentially significant boost in demand for computing power.
New Nvidia chips are benefiting from the large computing requirements of AI tools such as ChatGPT.
Ambarella (AMBA) is another chip company powering the AI market. It develops semiconductors used in everything from in-car entertainment consoles to cell phones.
AMBA chips are also specifically used in self-driving cars, and the company recently partnered with German auto parts maker Continental for a joint autonomous driving project.
Mobileye (MBLY) was spun off from Intel and focuses on autonomous driving technology and driver assistance systems, which include chips and cameras. Volkswagen, Ford, and GM are among the company's customers.
Mobileye SuperVision is the top AI product at MBLY and is the most advanced driver-assist system on the market, providing “hands-off” navigation capabilities of an autonomous vehicle and designed to handle standard driving functions on various road types, while still always requiring the driver's full attention and eyes on the road.
C3.ai (AI) is a provider of software solutions in the field of artificial intelligence and owes its recent share price increase to the success of Chat GPT. Upon the announcement alone, shares rose about 28% when it was announced that Chat GPT would be integrated into its product range.
Alteryx software (AYX) is best known for data and analytics. The company is also involved in automation and specializes in artificial intelligence integration, albeit to a much lesser extent than competitors like Google and Meta.
There are rosy days ahead for AI stocks that will attach their fortunes to one of the most important trends in Silicon Valley.
Mad Hedge Technology Letter
January 30, 2023
Fiat Lux
Featured Trade:
(A FEBRUARY AIR POCKET)
($COMPQ)
Tech shares have swung violently as the China re-open trade went from a false start in December 2022 to taking off in microseconds in 2023.
That lit a fire under tech shares and we’ve experienced epic gains, just look at Tesla’s 35% rise in just one month.
Bear market rallies genuinely provide those “rip your face off” up moves and the key is to get out of the way and try to hop on the bandwagon.
Now after a 10% gain in the tech-weighted Nasdaq index, investors are scratching their heads as to what comes next.
Could we hit a sudden air pocket and retrace performance?
There is still a 35.4% probability that the Fed will hike .25% at the March meeting which would represent .75% more of Fed hikes.
Right now tech shares are only pricing in .50% of interest rate hikes and any type of confirmation of that this week by Chairman Jerome Powell will trigger another leg up in the tech rally.
A .75% rise in the Fed Funds rate means that a higher chance of a “hard landing” increases and stock will sell off rapidly.
Tech shares are poised for a choppy start to the year as investors rely on incoming economic data and eyeball historical trends for clues
The problem is the scope of last year’s selloff makes historical comparisons difficult to use. In fact, last year’s big losers — like growth-obsessed tech and communications services stocks — are among the best performers this year, leaving investors wondering if the worst of the bear market decline is behind them.
Tech forecasts include a small earnings decline, higher borrowing costs, and persistent economic uncertainty, and the reason why stocks could do well through the year is because the bar is set so low.
However, after the great first month of 2023, positioning now has swung dramatically the other way with consensus building and assuming a soft landing.
As the soft landing consensus begins to spread, the individual company news begins to worsen.
Tech firms like Microsoft have issued weak guidance and brutal job cuts.
There hasn’t been another industry that has adopted the pace of job cuts like the technology sector which gives support to the nostrum that tech companies overshoot on the way up and overshoot on the way down.
Apple is about the only big tech company that avoided thrashing the number of jobs in Cupertino, and I believe that is a highly positive sign for the rest of the year.
Another substantial tailwind to the first month of the year has been the tanking of the US dollar.
It has cratered again the most prominent Western currencies and a weak dollar promotes global growth.
Bear in mind that many foreign firms borrow in US dollars and pay back using their own currencies.
I do expect the U.S. Central Bank to downplay the strength in the stock market to poo poo an earlier-than-expected Fed pivot.
The Fed is mostly all bark and no bite which is why dip buyers are so aggressive with their tactical decisions.
I believe after a transitory dip in tech shares, we are most likely off to the races unless the Fed can give us something believably hawkish.
The most important concept to understand is that this current iteration of the Fed is gladly tolerating minus real interest rates as gross interest rates don’t go parabolic.
Although on a personal level, I don’t think this is the right thing to do, at an economic level, this prevents a stock market crash and encourages dip buyers to come in and save the market because they know the Fed won’t pull the rug from underneath them.
Tactical active trading will continue to be the most prominent strategy in the equity market and tech shares moving forward.
“Your time is limited, so don't waste it living someone else's life.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
January 27, 2023
Fiat Lux
Featured Trade:
(MANAGEMENT UNDER FIRE)
(CRM)
Vulture Fund investor Elliot Management is coming for Salesforce (CRM) and that could mean CEO Marc Benioff’s tenure there will soon be over.
Why?
Elliot’s primary strategy to lift the share price is to fire management and replace it with one of “their guys” to streamline the operation to profits.
Usually, an Elliot takeover is a swipe against how bad current management is and often with famously branded companies.
They just took a large position in Pinterest (PINS) and shares have done well since that investment.
Their track record bodes positive for the medium term of the share price.
Even if they are labeled as vulture fund investors, they usually turn out to be correct more often than not.
The reason I pinpoint Marc Benioff as someone that could be taken out to pasture is that he has been there for a long time and his ideas have most likely become stale.
His big investment in MuleSoft was a failure and he hasn’t moved the needle in the last few years. He even decided to retain a Co-CEO who he later fired and reinstalled himself as a solo CEO. Sounds like too much power in one person’s hands to me.
It’s hard for these types of tech magnets to leave the companies they created.
Therefore, Elliot usually invests enough that allows them to fight for board seats where they can influence who the future management will be.
We have seen this time and time again.
It has been a volatile stretch for CRM.
Earlier this month, the company said it was laying off 10% of its workforce and reducing its office space in certain markets.
Again, like with most tech companies, I believe 10% is just not enough, but they might as well fire the ones who are social justice warriors first.
Tech firms should use this time as a way to get as lean as possible and CRM could have easily cut 55% of staff.
However, they are worried about a worker revolt.
Many customers are also starting to pare down CRM services as they sense less business flowing through because of the most anticipated recession in history.
Salesforce had nearly 80,000 employees globally as of Oct. 31, up from more than 49,000 as of Jan. 31, 2020, according to company filings.
Salesforce's reported revenue for its fiscal third quarter ended Oct. 31 of $7.84 billion, up 14% from the prior year. That marked a sharp slowdown from 27% revenue growth in the same quarter a year earlier. The company also declined to issue guidance for its fiscal year 2024.
Instead of fighting this CRM – Elliot partnership, readers should just wait for a big dip to put money to work.
Granted, it could get messy if Benioff is jettisoned, but this is still an established brand that is a foundational software platform for many corporate companies including the big guns.
It certainly does look like an internal struggle will take place as CRM just added 3 new board members to combat Elliot.
Either way, Elliot seeks to install better management and wants a stronger company that will lead to a higher share price.
Whether entrenched executives fight this or not, once the ball gets rolling, it is mighty hard to stop.
Buy CRM on the dip.
