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.
“An ounce of patience is worth more than a tonne of preaching.” – Said Indian Mahatma Gandhi
Mad Hedge Technology Letter
January 25, 2023
Fiat Lux
Featured Trade:
(UNIMPRESSIVE FROM THE BEHEMOTH)
(MSFT)
The most talked about topic at the forum of the elites in Davos, Switzerland was the souring economic environment globally.
That’s starting to look more real by the day as companies realize aggressive revenue estimates need to be flushed down the toilet.
As funny as it sounds, the January gangbuster rally could have been just a delayed Santa Claus Rally that got pushed back one month.
Now we are entering earnings season, and that means some companies won’t be able to spin numbers in the right way.
That bodes ill for many tech companies as, beneath the surface, the engine humming along that is the tech sector is starting to flash a few red lights.
Tech shares sold off sharply this morning which is quite unusual when the U.S. 10-year treasury barely moves.
Why did it open up poorly?
Microsoft offered us unimpressive guidance that was $2 billion less than the consensus.
Clearly, Microsoft is trying to lower the bar earlier than the other tech companies, boding ill for sector-wide guidance.
That’s highly unusual for the tech bellwether who has the habit of beating and raising forecasts almost systemically.
I can’t imagine tech firms in the ecommerce space like Amazon or Etsy offering better than expected guidance either for the annual year or the quarter’s ahead.
Microsoft was also one of those tech firms that took a machete to staff and sliced off a big chunk of them.
I would have liked to see Microsoft fire more than 10,000 workers and felt they could have easily handled a 50,000 reduction.
The $1.2 billion charge resulting from these layoffs is just a drop in the bucket for MSFT.
CEO Satya Nadella used the words "caution" at least six times on the one-hour call on Tuesday.
Nadella also let investors know that Microsoft Azure, the cloud product, is slowing down to 31% and although still healthy, growth products aren’t growth products anymore when they dip into the 20% range.
The tech business model and the sector as a whole is getting a little stale.
They aren’t the shining stars of the equity market anymore as costs skyrockets and revenue decelerate. That designation is now reserved for energy and precious metals.
Don’t wait for tech to pull a rabbit out of the hat in the short run.
The bad news is that it doesn’t seem that revenue weakness will only be confined to Microsoft.
A large swath of the tech sector could be painted red when it’s all said and done, which is why equity holders are betting on US Central Bank head Jerome Powell saving the day.
The silver liner on offer from Nadella was telling us how MSFT is betting the ranch on artificial intelligence particularly ChatGPT.
Artificial Intelligence inching closer to material revenue contribution is highly positive, but in the here and now, it’s hard to see where the incremental great idea comes from.
Nadella also told us that enterprise software isn’t doing as great because companies are being thriftier in what software they use.
Firms are cutting software and reducing their software footprint where they can get away with it.
Sales of Windows Licenses dropped 39% year over year highlighting the issue of companies attempting to universally cut costs.
When the overall economic mindset originates from a thrifty-based beginning, it doesn’t favor technology stocks.
Tech usually basks in the glory of the excesses, which is why they overshoot to the upside.
Hence, Chairman Powell is now priced in to singlehandedly rescue tech shares as many investors wait for his pivot back to zero interest rates yet again just like the 2008 Great Financial Crisis on repeat.
"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." – Said 3rd U.S. President Thomas Jefferson
Mad Hedge Technology Letter
January 23, 2023
Fiat Lux
Featured Trade:
(PLANT-BASED MEAT IS A NO GO)
(BYND), (COST)
