Mad Hedge Technology Letter
December 2, 2022
Fiat Lux
Featured Trade:
(ACCOMMODATING TECH CORPORATIONS)
(APPL), (AMZN)
Wage growth is too strong to even think about pivoting – that was the takeaway from the latest jobs report.
Granted, tech firms have been firing employees left and right, but that can be contextually misleading.
Essentially, tech firms overhired during the government lockdowns and in most cases are only now cutting back to a headcount that reflects the same number as around a year or 2 ago.
The sensationalist headlines are riveting, but going two steps forward and one step back isn’t really a big deal.
The overarching theme of wage growth in white collar jobs means that the leftover tech workers are handsomely paid and possess a lot of leverage.
Since 2020, many tech workers jumped ship or were poached for a 50% pay rise.
Those gaudy wages have tapered off somewhat in technology as the sector slows down, but in many cases, workers don’t care if their 2023 salary is “frozen” after a 50% increase the prior year.
In fact, many of the recent tech firings were either the weakest of a specific team or the "last in, first out" type of hire and fire.
Employers added 263,000 jobs in November and the unemployment rate held steady at 3.7%.
For the three months through November, average hourly earnings rose at a 5.8% annualized rate, the Labor Department said Friday.
Strong demand for labor and high inflation is triggering the formation of a wage-price spiral.
To be honest I am not surprised by the most recent data.
A 3.75% Fed Funds rate is still ultra-accommodative.
How do I know that?
Tech firms are still borrowing massive amounts of borrowed funds at cheap rates.
Amazon (AMZN) sold investment-grade bonds for general corporate purposes, its second offering this year.
The bond deal is $8 billion of senior unsecured bonds in as many as five parts.
The longest portion of the offering, a 10-year security, yields 1.15% over US Treasuries.
Big tech is still tapping the debt markets for its operations and it’s the smart thing to do with a Fed Funds rate at 3.75%.
Amazon isn’t the only one.
Essentially, any big tech corporate stalwart with a strong balance sheet would be an idiot not to take out debt at these levels.
The iPhone company Apple also tapped the debt markets just in August.
Apple sold $6.5 billion in four parts as the tech giant increasingly looks to return cash to shareholders.
The longest portion of the offering, a 40-year security yields 0.92% above US Treasuries.
Proceeds from the sale are earmarked for general corporate purposes, including share repurchases, dividend payments, funding for capital expenditures, and acquisitions.
Although I am not privy to discussions at an operations level at Apple and Amazon, I do believe some of these billions will be used to pay staff higher wages which in turn will fuel higher inflation.
It takes money to stay on top and instead of allowing the best talent at Apple and Amazon to walk for bigger raises, firms have been stumping up the cash.
I expect wage growth to continue to exhibit strong numbers in 2023.
Without crushing the jobs market, inflation will regress somewhat but then take off again in the back half of 2023.
It all means we are range bound as we juxtapose slower rate hikes with deteriorating earnings forecasts.
“There are a lot of politicians who are just obstructionists.” – Said CEO of Salesforce Marc Benioff
Mad Hedge Technology Letter
November 30, 2022
Fiat Lux
Featured Trade:
(WEAK SALES FOR 2023)
(CRWD), (APPL), (SNAP), (DASH)
Tech growth needs a timeout.
The recent earnings report from cyber security software firm CrowdStrike (CRWD) illustrates the difficulty for firms to project strength in forward guidance.
2023 isn’t looking so rosy for selling security software.
CRWD management offered us weak guidance citing a weakening macroeconomic picture and specifically telling us that small businesses are reluctant to sign new contracts for 2023.
The macroeconomic picture at best isn’t getting better, therefore, some of the forward guidance is coming in tepid.
The natural reaction is for tech stocks to sell off.
In 2022, it’s never been more difficult being a tech CEO and some of the best tech growth companies are getting haircuts that we used to never see before.
Even more worrisome is that tech companies like Apple and Twitter are starting to cannibalize each other because tech is now perceived as a zero sum game more than at any other time I can remember it.
Firms simply don’t think the pie is big enough to share.
This is why ecosystems like Apple and others are executing policies that directly hinder competition.
Unfortunately, cyber security is another add-on that is being sacrificed as tech companies become leaner and meaner.
Many tech companies can still function by skimping on the security defenses.
Shaving the fat to the bone is what we are currently seeing and that doesn’t bode well in the short term for tech stocks that are used to thriving in the excesses.
Another example is Snapchat (SNAP), which ordered back staff to a 4-day in-office work week starting February.
And it’s not just Snapchat or CrowdStrike.
The belt tightening has been broad-based in technology with DoorDash cutting another 1,250 jobs today.
Many of these growth companies over-hired during the government-mandated lockdowns and now are regressing back to the mean.
Since there are no more lockdowns in non-Chinese countries, there is no need for the giant number of DoorDash food deliverers.
Yet the US consumer is still spending even if they get less for each incremental $1 spent.
CrowdStrike reported annual recurring revenue (ARR) of $2.34 billion, up 54% year over year. The company also added 1,460 net new subscription customers for the quarter.
In high times, CrowdStrike and the tech growth with superior business models are unique and stand out.
However, in overwhelming macroeconomic weakness, CRWD gets lumped in with the rest.
I don’t recommend buying CRWD on the dip even if it feels cheap.
The peak CRWD share price almost reached $300 meaning the current stock price is only around 35% of what it once was.
Tech growth will overshoot to the upside when it finds it mojo again, which won’t come back until sometime in 2023.
The lockdowns brought forward a tsunami of demand, revenue, and momentum.
Now we are experiencing the reversing of those tailwinds which is why the stock price has suffered.
Avoid tech growth for now, they will have their time in the sun once again once the headwinds have been digested and CRWD should be on your list for a tech growth stock to purchase on the way up.
“I've done a lot of things I'm not proud of, such as getting my girlfriend pregnant when I was 23 and the way I handled that.” – Said Co-Founder of Apple Steve Jobs
Mad Hedge Technology Letter
November 28, 2022
Fiat Lux
Featured Trade:
(US ECOMMERCE HOLDING UP)
(CPI), (TWTR), (BNPL)
Black Friday and the ecommerce season hit us with a bang and we are embracing it.
How has it gone so far?
We’ve broken numerous records offering positive news for the US economy and the corresponding tech sector.
Ecommerce sales grew 2.3% year-over-year on Black Friday.
The US economy continues to be the cleanest shirt in the laundry hamper.
There’s been some doubt whether the US consumer can hold up during the holiday season amid unrelenting price increases on just about anything and everything throughout 2022.
It’s looking good so far.
The numbers vindicate the amazing US online economy with consumers spending a record $9.12 billion online shopping during Black Friday this year.
Another nice bullet point to add to the success of the ecommerce holiday season is the particular items that were purchased which drastically favored tech items.
Popular items included gaming consoles, drones, Apple MacBooks, Dyson products and toys like Fortnite, Roblox, and Bluey.
Thanksgiving was also a major success this year with sales expanding by 2.9%.
The strength of the US consumer is exactly why I believe the biggest upside surprise to next year’s tech story is the economy not succumbing to a painful recession as early as we first thought.
Consumer sentiment has decreased somewhat because of the associated headwinds that have caused discretionary budgets to tighten like higher shelter prices and energy costs.
Yet, the US consumer stays resilient.
This year, Cyber Monday is expected to drive $11.2 billion in spending, up 5.1% year-over-year.
The cons to the latest news are that the US consumer is going deeper into debt to make these holiday purchases.
Buy Now Pay Later payments increased by 78% compared with the past week, and Buy Now Pay Later revenue is up 81% year-over-year.
The runway will eventually run out for the BNPL model because consumers won’t be able to make payments if they overextend themselves.
Another issue that could crop up is if BNPL makes it costlier to borrow money to finance purchases instead of a 0% interest borrowing plan.
That will definitely dent the volume of ecommerce sales.
Then there is the issue of not just the nominal numbers, but the real numbers.
Inflation measured by the CPI index is 7.7% but sales growth was 2.3% for Black Friday.
In real terms, real growth is negative 5.4% year-over-year.
There is a high likelihood that the US consumer is spending an extra 2.3% on products, but receiving significantly less in value for what they pay for.
Many products are being made with less quality and in smaller sizes or are being discontinued altogether.
Effectively, the American consumer is spending an extra 2.3% but getting back -5.4% in relative value, but tech corporations can and will claim victory for growing ecommerce sales.
This type of data offers insight into why American GDP is barely growing with full employment.
Usually, full employment would suggest stronger GDP growth.
To extrapolate more, the data suggest that the efficiency per worker in the US is declining and stark examples can be found at companies such as Twitter.
Twitter runs better as a product, management, staff, and service after firing 75% of staff.
All in all, nominal tech ecommerce numbers performed well enough, but such hidden downsides in the report give a bitter aftertaste.
This could mean we are range bound in the short term for tech shares.
There was nothing in these numbers that would make me want to bid up tech shares going into yearend unless a bullish external macro event suddenly takes place.
“The AI technology will keep you out of harm's way. That is why we believe in an AI car that drives for you.” – Said CEO of Nvidia Jensen Huang
Mad Hedge Technology Letter
November 23, 2022
Fiat Lux
Featured Trade:
(BETWEEN A ROCK AND A HARD PLACE)
(AAPL), (ARKK), (OECD)
