Global Market Comments
June 28, 2021
Fiat Lux
Featured Trade:
(BACK FROM MY 50-MILE HIKE)
Posts
I received an email from a reader last week that I really had no idea what the stock market was going to do and that I was just guessing.
I answered that I couldn’t agree more. These are unprecedented times for the American economy. There is no playbook for what is going on, we’re just making it up.
“I’m guessing, Jay Powell is guessing, we’re all guessing.” I threw in an afterthought: “guessing and hoping.”
That is why the hottest inflation rate in 13 years sends interest rates into freefall when they should be soaring.
I have been one of the most bullish strategists in the market since the March 2009 low and have been richly rewarded as a result. (Even though being bearish sells more newsletters). You have been too.
I thought the market was overdue for a 7.8% correction. So, even I was flabbergasted when the latest market selloff amounted to only a meager 4.3%. There is still so much money trying to get into the market it is unable to go any lower.
Don’t get fooled again, to quote that eminent market guru, Peter Townsend.
Which raises an issue for investors. That 7.8% correction I thought was overdue is still ahead of us. That demands caution and prudence for shorter term investors. Long term investors can work on their golf swings or take that dreamed of round the world cruise.
What was especially encouraging last week was the leadership maintain by the big five tech stocks. I ran some numbers last week to see if there was more than meets the eye and came up with some eye-popping results.
The rocket fuel last week was provided by progress by an infrastructure bill that could unleash another $579 billion. That could be enough stimulus to keep the recovery on steroids powering well into 2022.
Big tech stocks saw this a month ago when they started discounting robust 2023 earnings reports much farther in advance than usual.
The top five big tech companies, Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT), earned a staggering $88 billion in profits in Q1, or an annualized $332 billion.
That amounts to an average 40% YOY growth rate. Some 16.7% of total US profits of $1,984 billion was generated by only 2% of the workforce. These are positively ballistic numbers. Tech was never going to be down for long. That’s why most went to new all-time highs last week.
Don’t get fooled again.
The Infrastructure Deal is done, at $579 billion in new spending, will provide a further boost to the economy. The climate had to be cut to get Republican support. Transportation is the big winner at $312 billion. Grid and broadband upgrades received major funding. I don’t think that Biden expected to get his whole $2 trillion. It was just a negotiating strategy. Still, something is better than nothing. Look for Infrastructure 2.0 after the 2022 midterms with lots of climate spending.
NASDAQ Hit New High. Prime day has catapulted Amazon (AMZN). Microsoft (MSFT) became the second $2 trillion company and Alphabet (GOOGL) will probably be next. Apple (AAPL) is bringing up the rear but could hit new highs in the coming months. The big question is whether this is a one-night stand or a long-term relationship with the bull. Me, being the stable guy that I am, vote for the latter.
Poof, Inflation is Gone! Almost all commodity prices have given up their 2021 gains after traumatic selloffs over the past weeks. Bad boy lumber has dropped by half, and bitcoin has been slaughtered. That puts interest rate hikes on hold. In the meantime, Tesla (TSLA) and the Ark stocks are recovering. Load the boat with big tech, we are going to new all-time highs across the board. Turns out the Fed was right after all.
Weekly Jobless Claims drop to 411,000, down from the pandemic peak of 900,000 in January. We’re headed to 100,000 by yearend.
$1.2 Trillion Poured into Equities in H1, more than double the previous 2007 record. Corporate share buybacks are also approaching new highs. That means the 150-day moving average for the (SPY) should hold well into 2022. As high as we are, equities are still the best game in town.
Bitcoin battles at $30,000, for the fourth time in two months, at one point falling to a $24,000 low. China miners, about 70% of the total, are facing a total ban. Many loaded their servers on planes over the weekend and moved to unregulated Maryland or Virginia. The charts are pointing towards a $20,000 bottom. The ultra bulls are targeting $100,000 by yearend.
Existing Home Sales down for the fourth month, down 0.9% to an annualized 5.8 million in May. Shortage of supply remains the big problem with inventories at an incredible 2.5 months. Some 89% of the homes sold were on the market for less than a month. Conditions will get a lot worse before they get better.
New Home Sales dive 5.9%, thanks to shortage of supply and high prices. Labor, land, and lumber are through the roof. The median price of a home sold in May is $374,400, up a staggering 18% YOY. Supplies rose to 5.1 months. The cure for high prices is high prices. This trend should last a decade.
Amazon Prime Day Sales top $11 billion, including the Havaheart 0754 single door humane rabbit trap I bought for only $27. That made Monday and Tuesday the biggest online sales days of the year. Use the recent profit-taking to load up on (AMZN) shares and LEAPS. It’s headed to $5,000. Oh, and I’ve caught three rabbits so far.
Intel to build huge German chip factory,to address the global shortage. Germany’s largest auto industry makes it a natural location. Buy (INTC) on dips.
NVIDIA is going ballistic, with Raymond James raising its target to $900 as the best-positioned chip company over the long term. I was early at $1,000. The explosion in crypto has been a big plus. A new generation of high-end gaming is coming where (NVDA) has a complete monopoly and supplies are short. I have bought six of their GeForce and RTX graphics cards in the past month. But artificial intelligence is the big grower over the long term, which is exploding everywhere, and their $5,000 Tesla M10 GPU is dominant. Buy (NVDA) now.
We may lose Christmas, as lack of containers and ships makes transport from China problematic. Home Depot (HD) has chartered its own ship to make up for the shortfall, and Target (TGT) is considering the same. Conditions are so bad there is also a fireworks shortage for the Fourth of July where China is a major supplier (they invented them).
My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.
My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 12.62% so far in 2021.
I spent the week sitting in 100% cash, waiting for a better entry point on the long side. Up this much this year, there is no reason to reach for the marginal trade, the maybe instead of the certainty. I’ll leave that for the Millennials.
That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 123.54%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.
The coming week will be a weak one on the data front.
On Monday, June 28 at 10:30 AM, the Dallas Fed Manufacturing Index for June is out.
On Tuesday, June 29 at 9:00 AM, the S&P Case Shiller National Home Price Index is published.
On Wednesday, June 30 at 8:15 AM, the ADP Private Employment Report is released.
On Thursday, July 1 at 8:30 AM, the Weekly Jobless Claims are published.
On Friday, July 2 at 8:30 AM, the all-important June Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I’m in Los Angeles this week visiting old friends, and I am reminded of one of the weirdest chapters of my life.
There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included free housing at the coroner's department.
I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.
Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marlin Mansfield and Jane Mansfield. He did not disappoint.
For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.
Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.
The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.
Once, I and another driver were sent to pick up a teenaged boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.
A few minutes later found a hearse driving down the Santa Monica freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.
Once, I was sent to a cheap motel where a drug deal gone bad had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.
Still, I ended up with some of the best summer job stories ever.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
Another part of the tech bull case that gets overlooked is the more than $700 billion in buyback authorizations that could manifest itself in tech shares in the near term.
Right now, that buyback authorization is holding steady at $500 billion but primed to grow.
This powerful combination of shareholder returns and continuous strong earnings are likely meaningful catalysts that could take us to higher highs in technology stocks later in the year.
Certainly, we have seen a massive rotation back into growth stocks the last few weeks that have buoyed tech shares.
The likes of PayPal (PYPL) are bouncing off technical weakness.
Just take a look at Apple which is the buyback alpha male of the S&P this year and trailing 12-months.
When you consider that apart from the dividends and buybacks, they generate over $110 billion in free cash flow, it’s hard not to like the stock.
Apple itself has authorized $90 billion in buybacks and the company is the biggest in the world.
Yes, the stock underperforms sometimes, but don’t overthink this name.
Apple is easily a $170 stock with no sweat.
The iPhone maker repurchased $19 billion of stock in the March quarter, bringing the total for the past fourth quarters to around $80 billion.
Luca Maestri, the company’s chief financial officer, said in a conference call that “we continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time.”
That is code for many buybacks in the near to medium term and investors must love it.
Apple had $83 billion of net cash at the end of the quarter.
Apple’s aggressive stock buyback plan is one reason that Berkshire Hathaway CEO Warren Buffett is so interested in the company.
Berkshire (BRK.A and BRK.B) holds a 5% stake in Apple and is one of its largest investors.
The same thing is happening at other tech firms.
Google repurchased a record $11.4 billion of stock in the quarter, up from $8.5 billion a year earlier, and Facebook (FB) bought back $3.9 billion, triple the total a year ago.
Apple’s share count declined by almost 4% year-over-year and by over 20% since the end of 2016.
With its elevated repurchase program, Alphabet is slicing into its share count, which fell almost 2% year-over-year in the March quarter. The buybacks are comfortably exceeding Alphabet’s ample issuance of stock compensation to employees. Alphabet authorized an additional $50 billion of stock repurchases.
Facebook’s buyback program hasn’t dented its share count, which was little changed year-over-year at 2.85 billion.
Microsoft (MSFT) is making more headway, with its buyback reducing its share count by nearly 1% in the past year. Microsoft bought back about $7 billion of stock in the March quarter and $20 billion in the first nine months of its fiscal year ending in June.
Apple and Microsoft also return cash to holders through dividends, although both now have yields under 1%. Alphabet and Facebook don’t pay dividends.
Although buybacks have not yet reached pre-health crisis levels, the trend seems to be heading in that direction.
Tech firms are ratcheting up the buybacks, meaning they are comfortable expending that cash in the current economic climate as opposed to holding onto it as reserves or using it for R&D.
There is always unpredictability in the economic environment, but these tech stocks are saying, things are a lot better than 2020 and there are many CFOs out there pulling the trigger on dividends, buybacks, and reducing share count which is a highly bullish signal to the rest of the tech market.
Since 2009, asset inflation has gripped global equity funds everywhere and the most convincing winner in terms of asset classes has to be the Nasdaq index which has experienced a 900% return during that 12-year time span.
You must believe that buybacks are just another reason why this overperformance of 900% has happened.
Tech is still where almost all earnings’ growth resides and that capital flow is being recycled into shareholders’ pockets and catalyzing tech CFOs to execute financial gymnastics by reducing share count.
It’s hard to discount that strength which is why there are always buyers on the dips whether that buyer is a domestic pension fund, short-term speculator, a multibillion-dollar family office, or a foreign hedge fund.
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
The five largest tech companies last Fall 2020, Apple, Microsoft, Amazon, Alphabet, and Facebook, accounted for 23.8% of the S&P 500 and now that figure has surpassed 25%.
As much as we like to bring out the champagne and celebrate how well big tech has done, the euphoric times often lay the groundwork for the dramatic downfall.
A few warning signs have started to rear their ugly head.
These business models are rock-solid now, but that doesn’t mean the people who manage these business models are always rock-solid too.
Today, I would like to zone in on one of the architects of big tech that have taken one of these behemoths and juiced it up for shareholders — Alphabet CEO Sundar Pichai.
I am not arguing that returning capital to shareholders is bad, but when other critical elements are ignored, it sets the stage for toxicity to fester from the top down.
Don’t get me wrong, revenue and profits are charting new highs every three months for Alphabet.
They are now worth $1.67 trillion and rising. Google and its array of apps have made themselves indispensable in the lives of everyday Americans.
But an increasingly hostile workplace is taking hold that has been made worse by decisive leadership and improving the company has been shelved for a stultifying mindset of incrementalism and bureaucracy.
This is the 2021 version of Alphabet and attrition rates have soured at the management level.
Many of these key managers blame Pichai for leaving mentioning a bias toward inaction and a fixation on public perception as the real mantra inside Google headquarters.
This has created a workplace that has devolved into culture fights, and Pichai’s attempts to “wait out” the problems have an air of arrogance about it that employees don’t like.
Internal surveys are also hard to analyze as employees are indirectly encouraged not to speak out against positions of authority.
However, recently left employees do admit that Google is a more professionally run company than the one Pichai inherited six years ago.
During Pichai’s leadership, it has doubled its workforce to about 140,000 people, and Alphabet has tripled in value. It is not unusual for a company that has grown so quickly to get cautious.
At least 36 Google vice presidents have left the company since last year, according to profiles from LinkedIn.
Google executives proposed the idea of acquiring e-commerce firm Shopify as a way to challenge Amazon in online commerce a few years ago.
Rumor has it that Pichai was turned off by the high price of the asset even though SPOT has tripled in value since then.
As time goes by, Pichai is becoming known as the steward of what Google built before he got there and just a guy there to squeeze out the numbers.
Google was once known as the scruffy start-up and it’s only natural that it has become more conservative in its approaches. They simply have more to lose now.
The meteoric growth has also led to rising concerns about the U.S. stock market becoming increasingly concentrated in a just a few names.
The total market capitalization of U.S. tech stocks reached over $11 trillion, eclipsing that of the entire European market—including the UK and Switzerland, which is now valued at $9 trillion.
Although there are some flaws popping up in Google’s business model, and management appears to be getting worse, I don’t believe we are even close to any sort of in-house meaningful reckoning that would adversely affect its share price.
The external risks are currently far greater than the risk of Google blowing up from the inside.
And while I do acknowledge, it might not be the workplace it once was and much less than ideal, it still pumps out record earnings and the degree to which it outperforms earnings’ expectations is uncanny.
That’s why I would recommend trading this stock aggressively in the short-term while rumors of broken management model are unfounded, because fundamentally and technically, it’s hard to find a better business model and more beautiful chart.
While the golden goose is feeding you eggs, you eat as many eggs as you can and ride this trade until Google management finally runs into REAL problems and I am not talking about petty anti-trust fines by European regulators.
Simply put, even the best companies run into vanity problems that are storms in teacups. Artificially creating problems sure has to be a first world problem and until there is true evidence that Google’s ad tech is being dismantled, I don’t believe investors have anything to worry about with the ad dollars coming in.
Big tech is on the verge of breaking out after being range-bound, and it would be daft to overthink this move and not participate in the melt-up.
Short-term, I would be inclined to buy on any big or little dip in GOOGL, take profits, and wait for the next dip to get back into the same position.
Global Market Comments
June 23, 2021
Fiat Lux
Featured Trade:
(WHY YOU MISSED THE TECHNOLOGY BOOM AND WHAT TO DO ABOUT IT NOW),
(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)
I often review the portfolios of new concierge subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.
The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the US government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce?
Those who stuck with the deeply flawed analysis that led to those flawed conclusions saw their retirement funds turn to ashes.
Traditional value investors also fell into a trap. By focusing only on stocks with bargain basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest-growing sector of the economy.
If they are lucky, they picked up shares in Apple a few years ago when the earnings multiple was still down at ten. But even the Giant of Cupertino hasn’t been that cheap for years.
And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.
Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?
Take Google (GOOG) for example. I bet you all use it. How many of you have actually paid money to Google to use their search function? I would venture none.
What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. I would pay $10,000 as I use it all day long. With 92.05% of the global search market comprising 2 billion users, that means $200 billion a year of potential Google revenues are invisible.
Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $55.31 Billion in revenues and $17.93 billion in net income in the most recent quarter.
But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax-free until the shares are sold, which may be never.
I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members who actively participate in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.
Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities to municipality emergency alerts, to your preferred political party.
This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.
Tesla (TSLA) has one million customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon-free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline-powered car over its entire life.
REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.
If you spend a lot of your free time in these two stores, as I do, The United States is composed entirely of healthy, athletic, good-looking, and long-lived, intelligent people.
There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest-growing online financial services firms of the past decade. What is the value of our community? To give you a hint, the price of my Global Trading Dispatch has soared from $29 a month to $3,000 a year.
We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.
We produce daily research services covering global financial markets, like Global Trading Dispatch, the Mad Hedge Technology Letter, and the Mad Hedge Biotech & Healthcare Letter. We teach you how to monetize this information with our books like Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.
We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios and my Global Strategy Luncheons.
The luncheons are great because long-term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.
The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.
It all comes together to enable customers to make up to 20% to 100% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.
So, if you missed technology now what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will eventually hit my $5,000 target. You want to be buying graphics card and AI company NVIDIA (NVDA) on every 10% dip. It’s going to $1,000.
You can buy the breakouts now to get involved or patiently wait until the 10% selloff that usually follows blowout quarterly earnings.
My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of US profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.
I Finally Found Tech Stocks!
Mad Hedge Technology Letter
June 21, 2021
Fiat Lux
Featured Trade:
(SOFTBANK’S EPIC COMEBACK)
(SOFTBANK), (CS), (CPNG), (GRAB), (AAPL), (GOOGL), (BABA)
I haven’t touched on the Softbank Vision Fund since pre-pandemic times, but it is time to take a barometer of the state of their fund because they also represent a snapshot of the state of emerging technology.
The Fund reported a massive loss of $18 billion during the nadir of the tech correction in 2020, and its clout in the tech world fell by epic proportions to almost pariah status.
Those were perilous times for Softbank Founder and CEO Masayoshi Son who held the distinction of losing the most wealth in the world before making it all back.
The ensuing flood of liquidity, accessible at the tech lows, catapulted most of Softbank’s investments in the U.S. tech market and they recently reported the highest-ever profit for a Japanese company.
Softbank Group reported profits of $48 billion for the fourth quarter, while Softbank Vision Fund, which invests in startups, reported a profit of $37 billion.
After massive weakness in assets including Airbnb, Oyo, and WeWork, we saw the value in these startups dip to an all-time low, then they were essentially bailed out by the Fed.
During that recapitalization process, Softbank Vision Fund fired 10% of its employees to cut costs.
When you combine that with big up moves from South Korean e-commerce company Coupang (CPNG) and ride-hailing firm Grab planning to go public via an SPAC, betting all his chips in emerging tech was the right thing to do and Son was handsomely rewarded for this outsized risk.
Son is quite famous for some of his speculative energy that he has channeled towards China’s Alibaba (BABA) before Alibaba became famous.
More than a decade later, that investment is worth $130 billion, becoming one of the most successful startup bets in history. He then aggressively invested in several startups around the world, including Snapdeal, Oyo, Ola, and Paytm in India.
For as many lemons in his basket, he’s had his fair share of 10-baggers and 433-baggers like Alibaba that validated his aggressive tech strategy.
Son got into many investments before venture capitalists in tech started being copied around the world and before the Arab sovereign funds and Chinese could get their house in order to partake as well.
He wasn’t the first, but the first group mover advantage made these deals possible, and by borrowing heavily against his Softbank equity, he was able to bet the ranch on many emerging techs by acquiring the proper financing and leverage.
However, the Softbank Vision Fund is a harbinger for what’s to come in tech and Son laughing all the way to the bank could also be loosely translated as the low hanging fruit in tech and its harvest has been plucked dry.
Venture capitalists are having a harder time in 2021 finding those 433-baggers or even 3-baggers.
An ominous sign that bodes ill for emerging tech is the financing hawks that have started to highlight the extreme risks involved in investing big in little-known business models with the propensity to fail.
Credit Suisse (CS) has put Son recently on notice by dissolving a longstanding personal lending relationship as the bank clamps down on transactions with his company, according to regulatory filings and people familiar with the situation.
The moves came after the collapse of SoftBank-backed Greensill Capital that caused turmoil for Credit Suisse forcing them to book a massive loss.
That was on the heels of Credit Suisse’s $5.5 billion loss originating from trading by family office Archegos Capital Management.
The bank is now avoiding business with big tech investors who are likely to reach further up the risk barometer and inflict heavy damage.
Does this mean the era of subsidized tech business models is over?
No, but it will become more difficult to originate financing from traditional methods like European banks to invest in these types of exotic tech projects.
Mr. Son had long used Credit Suisse and other banks to borrow money against the value of his substantial holdings in SoftBank.
As recently as February, Mr. Son had around $3 billion of his shares in the company pledged as collateral with Credit Suisse, one of the biggest amounts of any bank, according to Japanese securities filings.
The share pledge loan relationship stretched back almost 20 years. By May, that lending had gone to zero.
Bloomberg News reported in May that Credit Suisse refuses to do any new business with SoftBank, but the silver lining is that Softbank has $48 billion in new profits to theoretically spin into some new projects it likes.
Of course, it’s always easier when you use other people’s money, but these are then new rules of the game.
Its bounty from the liquidity surge will help them advance into this new post-pandemic tech ecosystem with substantial gunpowder.
So I can’t say it’s been all bad for everyone at the individual level because this pandemic divided the masses into tech winners and losers.
Notice that many Bay Area tech investors were taking profits from the tech pandemic stock surge and rolled the capital into $3-5 million Lake Tahoe Mountain chalets as a summer house or dinner party house.
And if they didn’t do that, they were rolling these profits into Hawaiian beachfront properties with views of Diamond Head in Oahu or even dabbling in villas on the Kauai Island.
This could partially explain why Apple (AAPL) has gone sideways for the past 11 months.
This year has instigated a tech reset and in the short term, the Nasdaq has been overwhelmed by external headlines like of perceived inflation fears, chip shortage, and a built-in assumption that earnings will be perfect.
These sky-high earnings expectations have created a “buy the rumor and sell the news” type of price action with only a handful of companies able to top these insane expectations like Google (GOOGL).
