“The joke about SAP has always been, it's the lingering hangover from the dot-com crash.” – Said American Venture Capitalist Marc Andreessen
Mad Hedge Technology Letter
November 9, 2022
Fiat Lux
Featured Trade:
(RISKY BUSINESS)
(ARKK), (SARK), (ROKU), (TSLA)
Tech growth is a sub-sector that readers really need to stay away from right now.
It’s toxic for the time being.
We are still right in the middle of the Fed Funds rate hike cycle and the pounding has been relentless with former tech darlings breaking records for lower lows.
The poster child for the excesses in tech growth is Cathie Wood who is the CEO of ARK (ARKK) innovation funds.
She has completely ignored “market timing” and has used every brash sell-off to go big without doing much research.
This strategy has proven to be highly unsuccessful, as many of her top holdings like Tesla are again in free fall.
CEO of Tesla Elon Musk just sold $4 billion of stock to divert into his new company Twitter which lost a massive amount of advertising revenue when he took over.
Yesterday, crypto experienced an unbelievable meltdown when the 2nd largest exchange FTX once valued around $35 billion was and still is on the brink of bankruptcy.
The same day Wood bet the ranch on crypto exchange Coinbase (COIN) adding 420,949 shares of COIN to the current 7.7 million that ARK Investment Management currently holds.
Bitcoin is down 13% at the time of this writing, representing yet another giant flop for Wood.
Wood is performing highly risky moves at the peak of turmoil in an industry that many think is a Ponzi scheme.
Her exploits are so infamous that it now has an inverse ETF that tracks the opposite of what she decides and performance has been stellar.
That ETF, called AXS Short Innovation Daily ETF (SARK), has soared more than 111% since launching a year ago. That’s the second best performance among the nearly 450 ETFs that launched over the past year.
Wood’s second biggest position is ad tech firm Roku (ROKU) which has gone from $460 to $48 today.
SARK’s first-year performance is among the 20 best of all-time measured against funds that are still trading.
Wood’s poor performance represents the pitfalls of choosing an investment adviser when they are one-dimensional and unable to acknowledge initial mistakes.
Instead of adjusting a flawed strategy, she has used it as the impetus to double down on a bad strategy.
The best hedge fund managers know when they are wrong and quickly reverse course or cut their losses.
Wood’s failures are quickly dealt with by blaming others, routinely saying that others “don’t do their research.”
Wood’s propensity to hype up tech like there is no tomorrow is now directly working against her.
She views any and every selloff as a brilliant entry point while ignoring broader market fundamentals.
In short, the day Cathie Wood is bearish is the day to go big into tech shares, because there are likely no more incremental buyers willing to hold the bag.
Truth be told, the Nasdaq currently sits 35% down from its November 2021 peak a year on.
I would call that pretty good, considering we are deleveraging from the biggest man-made financial bubble that was ever created in financial markets.
The bubble has caused the US Federal government to shoulder more than $31 billion of government debt that needs to be serviced with constant interest payments.
The only reason why tech shares are down 35% is because every investor believes the US Central Bank will kick the can down the road and save corporate America when push comes to shove.
This is precisely why recent bear market rallies have been epic, and any scintilla of interest rate loosening talk is met with thunderous buying.
If investors were more scared of the Fed, tech shares would be down at least 60% by now.
“A.I. is probably the most important thing humanity has ever worked on.” – Said Alphabet CEO Sundar Pichai
Mad Hedge Technology Letter
November 7, 2022
Fiat Lux
Featured Trade:
(UNREGULATED TECH)
(U.S. MIDTERMS)
As we inch our way towards the US midterms, let’s take a quick audit of what are some of the ramifications of the US midterm and what it means to the technology sector.
The good news is that historically, tech stocks almost always burst to the upside after the results are in.
To say that tech has done well the last few years is an understatement, but that doesn’t make it better for this year as tech has poorly performed.
Luckily, Democratic or Republican rule has produced little tech regulation and that was a boon up until Fed Chair Jerome Powell decided to hike rates.
I believe that Democrats and Republics will continue to both turn a blind eye to what’s happening under the tech hood.
That won’t change.
Congress only likes to hype up its image as the big bad wolf, but at the end of the day, it is usually just showmanship which I boil down to politicians caring more about their short-term re-election cycle.
D.C. still allows tech to be the least regulated industry in America which is why prospects are still bright for Silicon Valley.
Part of regulation is intertwined with tracking and data surveillance which is a widely practiced tactic for many internet companies.
The last few years we have seen internet companies run riot on personal data attempting to seize anything they can get their fingers on.
Sure, for the most part, this dirty practice mostly involves selling digital ads and I believe this trend will get worse for consumers as tech firms reach for more revenue.
The overarching theme is that tech companies still get to do what they want to do and how they want to with unfettered impunity.
Then if we shine a torch on anti-trust implications to ecommerce companies like Amazon, there has been very little going on besides processional congressional hearings and a lot of jawboning that results in zilch.
The lack of regulation has allowed Apple to make arbitrary rules for their Apple store which usually favors their net profits.
The lack of regulation has allowed Amazon to prioritize Amazon search results for their own homegrown products which usually favors their net profits too.
The lack of regulation has allowed social media platforms to censor whatever they want to appease sponsorships and ad budgets with the unintended result that social media is now the arbiter of truth like Facebook.
The lack of regulation has allowed the Chinese communist-backed video app TikTok to steal 100s of millions of American’s personal data from facial recognition to location data while selling this on to private companies.
In short, tech gets away with a lot and there’s not much political motivation to reverse that trend.
The only substantial piece of tech legislation passed by Congress lately was when President Biden signed into law a $280 billion package meant to boost the domestic chip-making industry and scientific research.
Ultimately, the federal government has largely stayed in its lane allowing tech companies to profiteer and I fully expect them to give tech a pass for at least the next two years until the next Presidential election.
It was not Congress who popped the tech bubble, but the US Central Bank with higher interest rates.
Congress wished the gravy train kept going.
When interest rate expectations reverse, I would expect the status quo to re-emerge as a key investment thesis with tech growth leading the indexes to higher highs.
Even more specifically, the biggest tech companies will continue to exert a level of market power that is akin to a monopoly or duopoly, and that staying power is potent and time-tested.
Overheated tech shares coming back to reality is not an indictment on the long-term profitability of the sector, but more a buy-the-dip moment in the long-term bullish trajectory of the overall tech sector.
WASHINGTON HASN’T LAID A FINGER ON BIG TECH
“Technology is a useful servant but a dangerous master.” - Said Norwegian Historian Christian Lous Lange
Mad Hedge Technology Letter
November 4, 2022
Fiat Lux
Featured Trade:
(THE SILICON RESET)
(LYFT), (AMZN), (STRIPE)
This is the new Silicon Valley, where layoffs are the talk of the town!
That’s not always a good thing if you’re an employee, but at least health service jobs are still available for the newly unemployed tech workers.
Better get a move on before they run out.
The recent data backs up my biggest fears that many tech firms are getting out the machete and slicing and dicing the fat off the bone.
Staff cuts are on the menu and it’s the main dish, unfortunately.
This will be a roller-coaster ride for the ages where employees suddenly face a predicament in which they must finally prove their value to their bosses, and do it fast.
Gone are the times when Twitter workers could waltz into the front entrance 2 hours late and sit in the cafeteria all day with a cup of joe and an ice cream sandwich.
Not going to happen anymore!
Gone are the cheerleading warriors who were whole “marketing” departments acting like they market products but really doing no work at all.
Three-hour bathroom breaks are now caput.
You know who you are!
It’s finally time to get fingers out of noses.
If companies haven’t announced heart-palpitating layoffs, then they have instituted hiring, promotion, and wage hike freezes.
One company I know well from the inside is Amazon, which announced it will no longer fill certain corporate positions, while Apple said it would stop hiring in most departments.
Meanwhile, younger tech companies including payment provider Stripe and ride-hailing business Lyft (LYFT) are also slashing workforce.
They both said the decelerating economy was becoming increasingly unfavorable for tech.
Last week, Amazon released dismal third-quarter earnings showing revenue growth of 15% which was down from 37% growth a year ago.
AMZN’s stock plummeted 20% overnight, sending the company’s market value below $1 trillion for the first time since 2020.
With aggregate demand for its services falling, Amazon is looking to shrink its risk exposure.
Last week, after the poor earnings report, the company laid off around 150 people from its live radio division, and on Thursday shared with employees that it was implementing a hiring freeze for corporate retail jobs.
All eyes are on Twitter’s Musk now, who is really dishing out the new playbook for how to cut down while being most efficient and productive.
He’s even looking at cutting Twitter cloud costs by $1 billion per year at Twitter.
Musk’s management style is distinguishing him from the charlatans, and I see that as a highly positive development in corporate America long term.
Rumors of workers required to work 84 hours in a sink-or-swim scenario could be true; Musk is testing workers to see who he wants to keep.
I’ve also seen photos of workers who have resorted to taking naps on the ground in sleeping bags in Twitter’s San Francisco headquarters.
The leverage of in-person work is now over for 2023, and we most likely will see another paradigm shift in terms of work environment.
Even more important, the massive .75% rate hike and waving away any possible pauses in interbank interest hikes means that the dollar will get stronger and tech stocks will continue to be a sell-the-rally or buy-the-bear-market-rally type of deal.
Ultimately, this industry needs a reset as the supercharged growth coincided with too much bloat, which is really starting to reveal itself.
In the last few years, effectiveness definitely suffered from diminishing returns, and now that cost of capital is not free; management cannot just sling things at walls to see what sticks.
Responsible management will be the x-factor in choosing who thrives in the next tech bull market.
“Any product that needs a manual to work is broken.” – Said CEO of Twitter Elon Musk
