Global Market Comments
May 10, 2023
Fiat Lux
Featured Trades:
(FRIDAY MAY 19, 2023 BOCA RATON, FLORIDA GLOBAL STRATEGY LUNCHEON)
(WHY THE ROBOTICS INDUSTRY IS RAINING GOLD)
(GM), (ISRG), (ABB), (TER), (YASKY), (FANUY), (AMZN), (BMWYY), (KUKAF)
CLICK HERE to download today's position sheet.
We need to look back to the ancient world to discover the origins of robots. During the industrial revolution, humans developed the structural engineering capability to control electricity so that machines could be powered with small motors.
The idea of the humanoid machine was developed in the early 20th century. The first uses of modern robots were in factories as industrial robots. A car company - General Motors - paved the way here first.
General Motors (GM) introduced the first industrial robot, called "The Unimate," back in 1959. It was just a simple hydraulic arm that did some repetitive welding tasks. Seven years later, "The Unimate" made a friendly appearance on The Tonight Show with Johnny Carson, where it played not such a bad imitation of golf.
As technology has improved and become cheaper, robots have become more prevalent. Robot sales in North America have hit record highs for the last three consecutive quarters. We now encounter robots in our daily lives in various forms: they vacuum floors (Zoomba), mow lawns, make coffee, and even provide companionship (see the movie Her).
Additionally, they help combat supply chain disruptions and inflation. Automation allows employees to focus on higher-value tasks and work efficiently. Robots now work successfully alongside humans.
So, the robotics industry looks like a savvy investment.
Why?
The global robotics market is expected to grow at an impressive CAGR of 23% from 2021 to 2026, eventually hitting a cool $186.7 billion by the end of that span.
The range of robotics applications continues to expand at lightning speed and has become evident in everything from manufacturing to healthcare, logistics to agriculture, and beyond. It's all driven by many factors behind the scenes, like advancements in AI and machine learning, growing demand for automation, and improvements in sensor technologies. More and more companies are tapping into robotics R&D, and the stock market is taking notice.
One company that is particularly well-positioned to benefit from the growth of robotics is Intuitive Surgical (ISRG).
Intuitive Surgical is a pioneer in the field of robotic surgery, with its flagship da Vinci Surgical System being used in over 7 million surgeries worldwide. The company has a market cap of $125.6 billion, and its stock has been surging in recent years, growing by over 800% in the last decade.
Presently, about half of all robotic procedures are used in urological and gynecological procedures, but robotic surgery has applications across the medical field. Currently, only 3% of all surgeries are done robotically, so there is a lot of potential for growth in this area.
Another company that benefits from the growth of robotics is ABB (ABB), a Swiss-Swedish multinational corporation specializing in robotics, power, and automation technology.
ABB has a market cap of $67.2 billion and is a leader in industrial robotics, with applications ranging from welding and painting to packaging and palletizing. The company's robotics division has seen double-digit growth in recent years, and it is well-positioned to capitalize on the continued expansion of the global robotics market.
Of course, the growth of the robotics industry isn't limited to these two companies. Other publicly traded firms that are likely to benefit from this trend include Teradyne (TER), Yaskawa Electric (YASKY), and Fanuc (FANUY), among others.
Logistics is also benefiting from robotics. As online shopping and same-day delivery become more popular, companies need help to keep up and must find ways to streamline their supply chains and reduce costs.
Robotics play a major role in solving these problems. Autonomous robots can zip around warehouses, grab products off shelves, and even help load and unload trucks.
A company that is leading the charge in this area is Amazon (AMZN).
Amazon has been investing heavily in robotics for years, and its acquisition of Kiva Systems in 2012 has been instrumental in the company's ability to scale its logistics operations. The company now has over 200,000 robots deployed in its warehouses, and it is constantly experimenting with new ways to use robotics to increase efficiency and reduce costs.
An additional reason that robots are becoming more in demand involves the transportation industry.
People keep coming up with state-of-the-art ways to make cars and trucks, and these new production technologies require lots of robots. Moreover, factories worldwide are getting upgrades, so they need revolutionary robots to help them improve.
In 2020, BMW AG (BMWYY) and industrial robots and systems manufacturer KUKA (KUKAF) signed a deal to provide more than 5,000 robots to new production lines and factories worldwide. KUKA stated that these industrial robots would be utilized globally at the BMW Group's overseas manufacturing facilities to produce present and future vehicle models.
Industrial robot costs have become much more reasonable over the past thirty years. They have dropped by an average of 50%. This decrease makes adopting robotics technology in various industries a feasible option.
Robots are not replacing factory workers. Instead, they're working alongside their human counterparts to free up their time for more critical tasks. The Institute for Operations Research and the Management Sciences backs the idea that investments in robotics technology equaled firm employment.
Science fiction robotic concepts have arrived in our modern-day environments and investors will now be able to profit handsomely from this industry.
In the wise words of Warren Buffett, "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble."
While the growth of robotics may lead to job displacement in some sectors, it's important to remember that this is a natural evolution of technology. As new jobs are created in various areas, such as robotics engineering and data analysis, we must adapt and embrace these changes.
In the meantime, savvy investors can capitalize on the continued expansion of the robotics market. Companies such as Intuitive Surgical, ABB, and Amazon are just a few examples of publicly traded firms well-positioned to benefit from this trend.
However, let's remember that the robotics industry is still in its early stages, and there are bound to be new players emerging in the coming years.
As with any investment, it's essential to do your due diligence and invest wisely. But the rewards could be massive for those willing to take the risk. So take Buffett’s advice and put out the bucket, to catch some of that golden rain.
Global Market Comments
May 8, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE GOLDEN AGE OF BIG BANKING HAS JUST BEGUN)
(JPM), (FRC), (BAC), (C), (WFC), (AAPL), (GOOGL), (META),
(AMZN), (TSLA), (NVDA), (CRM), ($VIX), (USO), (TLT), (QQQ)
CLICK HERE to download today's position sheet.
The United States is about to change beyond all recognition.
Most investors have missed the true meaning of the JP Morgan takeover of First Republic Bank for sofa change, some $10.6 billion. It in fact heralds the golden age of big banking. The US is about to move from 4,000 banks to four, with all of the profits accruing at the top.
Look at the details of the (JPM)/(FRC) deal and you will become utterly convinced.
(JPM) bought a $90 billion loan portfolio for 87 cents on the dollar, despite the fact that the actual default rate was under 1%. The FDIC agreed to split losses for five years on residential losses and seven years on commercial ones. The deal is accretive to (JPM) book value and earnings. (JPM) gets an entire wealth management business, lock, stock, and barrel. Indeed, CEO Jamie Diamond was almost embarrassed by what a great deal he got.
It was the deal of the century, a true gift for the ages. If this is the model going forward, you want to load the boat with every big bank share out there.
And the amazing thing was that (JPM) made the highest bid among a half dozen contenders.
Along with Health Care, banking is the last unconsolidated US industry. We have five railroads, four airlines, three trucking companies, three telephone companies, two cell phone providers….and 4,000 banks?
Other countries get by with much less. England has five major banks, Australia four, and Germany two, one of which goes bankrupt every decade (I’m not naming names). America’s financial system is an anachronism of its federal system where each of the 50 states is treated like a mini country.
The net net of this will be a massive capital drain from the entire country to New York where the big banks are concentrated. Local economies in the Midwest and the South will collapse for lack of funding. The West Coast will be OK with behemoth technology companies spinning off gigantic cash flows.
The other big story here is the dramatic change in the administration’s antitrust policy. Until now, it has opposed every large merger as an undue concentration of economic power. Then suddenly, the second largest bank merger in history took place on a weekend, and there will be more to come.
All it takes is a Twitter run by depositors. Every weekend has become a waiting game for the foreseeable future.
Needless to say, this makes all the big banks a screaming buy. Hoover up every one of the coming dip, including (JPM), (BAC), (C), and (WFC).
Big is beautiful.
To prove I am not perfect, my position in First Republic Bank (FRC) still sits on my broker statement a week after it filed for bankruptcy, dead, moribund, and worthless as if it is some form of punishment. It’s a very small position but it stings nonetheless.
It’s like they want to punish me for leading them astray. They have been copying my trades for ages without paying for them and I hope they took a big one in (FRC).
So far in May, I have managed a modest +0.55% profit. My 2023 year-to-date performance is now at an eye-popping +62.30%. The S&P 500 (SPY) is up only a miniscule +8.40% so far in 2023. My trailing one-year return reached a 15-year high at +120.45% versus -3.67% for the S&P 500.
That brings my 15-year total return to +659.49%. My average annualized return has blasted up to +48.86%, another new high, some 2.79 times the S&P 500 over the same period.
Some 40 of my 43 trades this year have been profitable. My last 20 consecutive trade alerts have been profitable.
I initiated no new trades last week, content to run off existing profitable ones. With the Volatility Index at a two-year low at 15.78%, opportunities are few and far between. Those include both longs and shorts in Tesla (TSLA), a long in the bond market (TLT), and a short in the (QQQ).
That leaves me with only one remaining position, a short-dated long in the bond market. I now have a very rare 90% cash position due to the lack of high-return, low-risk trades.
The Fed Raises Rates 0.25%, likely the last such move in this cycle. Futures markets are now discounting a 25-basis point CUT by September, the beginning of a new decade-long falling rate cycle. The problem is that AI is creating more jobs than it is destroying, keeping the Fed fixated on the wrong data.
Nonfarm Payroll Jumps by 253,000, another hot number. The headline Unemployment Rate dropped to a half-century low of 3.4%. These figures suggest for rate hikes to come.
The JP Morgan Buys First Republic Bank from the FDIC, for $10.6 billion, thus wiping out the shareholders. It’s a huge win for (JPM), which picked up 87 branches and $90 billion in loans in the wealthiest part of the country, taking the share up $5. What you lost on (FRC) you made pack on (JPM) LEAPS. Live and learn. On to the next trade! The FDIC got out for nearly free, a big win for the government.
Government Default Date Moved Up to June 1, by US Treasury Secretary Janet Yellen, smacking the bond market for three points. The House remains an albatross around the bond market’s debt.
Europe Ekes Out 0.1% Growth in Q1, versus a 1.1% rate for the US. This is despite the drag of the Ukraine War, energy shortages, high inflation, and Brexit. What’s the difference between the US and Europe? We allow immigrants who become customers, while the continent doesn’t.
You Only Need to Buy Seven Stocks This Year, as the rest are going nowhere. That include (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM). Watch out when the next rotation broadens out to the rest of the market.
Is Volatility Bottoming Now? The Fed announcement of a 25 basis point hike on Wednesday could end the move up in stocks. After that, shares will only have an imminent debt default and US government downgrade to focus on. ($VIX) seven-week fade will end that revisit the old highs in the high $20’s. Great shorting opportunities are setting up.
Oil (USO) Crashes 5% on US debt default fears in the biggest drop since January. This is the worst asset class to own going into a recession. EV competition is also starting to take a bite. No gas needed here. $66 a barrel here we come.
More Tesla Price Cuts to Come, with swelling inventories forcing Musk’s hand. The only consolation is that Detroit will suffer more. Musk is cutting profits while the big three are accelerating losses. Tesla has excess inventory for the first time in its 20-year history.
Apple (AAPL) Earnings Beat, led by stronger than expected Q1 iPhone sales at $53.1 billion. EPS came in at $1.53 versus $1.42 expected, revenues at $94.84 billion versus $92.96. Mac and iPad sales are down YOY. Services rose 5.3%. Apple bought back a stunning $90 billion of its own shares and paid dividends. The shares popped $3. The long-term growth play here is low prices phone in India where second hand phone sales have been burgeoning. That's why Apple is now offering to buy your old phone. Next stop: New Delhi.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 8 at 7:30 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, May 9 at 6:00 AM, the NFIB Business Optimism Index is announced.
On Wednesday, May 10 at 11:00 AM, the US Inflation rate is printed.
On Thursday, May 11 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index.
On Friday, May 12 at 8:30, the University of Michigan Consumer Sentiment Index for April is released.
As for me, I have been going down memory lane looking at my old travel photos looking for new story ideas and I hit the jackpot.
Most people collect postcards from their foreign travels. I collect lifetime bans from whole countries.
During the 1970s, The Economist magazine of London sent me to investigate the remote country of Nauru, one half degree south of the equator in the middle of the Pacific Ocean.
At the time, they had the world’s highest per capita income due to the fact that the island was entirely composed of valuable bird guano essential for agriculture. Before the Haber-Bosch Process to convert nitrogen into ammonia was discovered, guano was the world’s sole source of high grade fertilizer.
So I packed my camera, extra sunglasses, and a couple of pairs of shorts and headed for the most obscure part of the world. That involved catching Japan Airlines from Tokyo to Hawaii, Air Micronesia to Majuro in the Marshall Islands, and Air Nauru to the island nation in question.
There was a problem in Nauru. Calculating the market value of the bird crap leaving the island, I realized it in no way matched the national budget. It should have since the government owned the guano mines.
Whenever numbers don’t match up, I get interested.
I managed to wrangle an interview with the president of the country in the capital city of Demigomodu. It turns out that was no big deal as visitors were so rare in the least visited country in the world that he met with everyone!
When the president ducked out to take a call, I managed to steal a top-secret copy of the national budget. I took it back to my hotel and read it with great interest.
I discovered that the president’s wife had been commandeering Boeing 727s from Air Nauru to go on lavish shopping expeditions to Sydney, Australia where she was blowing $200,000 a day on jewelry, designer clothes, and purses, all at government expense. Just when I finished reading, there was a heavy knock on the door. The police had come to arrest me.
It didn’t take long for missing budget to be found. I was put on trial, sentenced to death for espionage, and locked up to await my fate. The trial took 20 minutes.
Then one morning I was awoken by the rattling of keys. My editor at The Economist, the late Peter Martin, had made a call and threatened the intervention of the British government. Visions of Her Majesty’s Navy loomed on the horizon.
I was put in handcuffs and placed on the next plane out of the country, a non-stop for Brisbane Australia. When I was seated next to an Australian passenger, he asked “Jees, what did you do mate, kill someone?” On arrival, I sent the story to the Australian papers.
I dined out on that story for years.
Alas, things have not gone well for Nauru in the intervening 50 years. The guano is all gone, mined to exhaustion. It is often cited as an environmental disaster. The population has rocketed from 4,000 to 10,000. Per capita incomes have plunged from $60,000 a year to $10,000. The country is now a ward of the Australian government to keep the Chinese from taking it over.
If you want to learn more about Nauru, which many believe to be a fictitious country, please click here.
As for me, I think I’ll pass. I don’t ever plan to visit Nauru again. Once lucky, twice forewarned.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
April 28, 2023
Fiat Lux
Featured Trade:
(BUY AMAZON ON THE DIP)
(AMZN), (AAPL)
The one sound bite that really jumped out at me on Amazon’s earnings calls that sums up the zeitgeist right now in the tech sector is when CEO Andy Jassy said “customers are looking for ways to save money however they can right now.”
Savings money is foreign to growth tech, but investors should get used to the new Silicon Valley.
When the success of a tech firm is utterly reliant on mass volume of sales, this isn’t the type of trend that will drive earnings higher in the future.
I am not blaming Amazon for customers pinching pennies.
It has more to do with the generally macro malaise that US consumers are facing with the explosive price rises of the last few years.
There is no point to rehash about inflation, but the net effect is that there is less opportunity for these ecommerce companies to flog products.
The US consumer is even more reliant on debt to finance purchases than before and smart companies like Apple (APPL) have rolled out savings accounts because they are aware that the fight for deposits is up for grabs after the banking contagion.
Even though AMZN delivered us a great quarter in terms of profitability and top line growth, the larger takeaway was the uncertain path going forward.
Amazon CFO Brian Olsavsky told investors on the company's earnings call AWS customers are continuing "optimizations" in their spending.
The CFO described the first quarter as “tough economic conditions.
Revenue in Amazon's AWS unit grew 16% during the first quarter, down from an annual growth rate of 37% seen in the same quarter last year.
Disclosure that sales growth at AWS had slowed further in April sets the stage for AWS’s weakest growth rate since Amazon began breaking out the unit’s sales.
Amazon’s advertising business continues to deliver robust growth, largely due to ongoing machine learning investments that help customers see relevant information when they engage.
US customers are moderating spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty.
A little bit of a mixed bag, but disappointing guidance in AWS really sticks out like a sore thumb.
As we exit the bulk of big tech earnings, it is clear there is quite a bit of runway left for big tech shares to go higher.
I can’t say the same for every tech stock, because growth stocks have a different set of challenges that they haven’t been able to overcome.
Amazon still posted great earnings and investors should absolutely look to buy shares on the dip.
Even at less than 100%, AMZN is still worth owning over a lot of SPACs, growth tech, or emerging tech.
What we are seeing now are these behemoth tech companies leveraging their balance sheet in an interest rate matters world which is why small companies can’t compete anymore.
Although not technically monopolies, some of these tech firms are getting darn close with their closed “ecosystems.”
Buy AMZN on the next dip.
Global Market Comments
April 28, 2023
Fiat Lux
Featured Trade:
(THURSDAY, MAY 16, 2023 KEY WEST, FLORIDA STRATEGY LUNCHEON)
(APRIL 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(FRC), (IWM), (QQQ), (AAPL), (TSLA), (AMZN), (TSLA), (RIVN), (CRM), (TLT), (HYG)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the April 26 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Las Vegas, NV.
Q: Would you start adding to The Russell 2000 (IWM) around here?
A: No, the Russell 2000 is the most sensitive to market action and the most sensitive to an economic downturn, which it seems we have already entered. And you don’t add positions one week into the downturn, you do it like 3-6 months into the downturn. So, I would not touch (IWM) right around here.
Q: Are you buying more First Republic Bank (FRC) down here?
A: No, at this point the stock is a no-go. It is a ripe takeover target for someone, and the risk is, the takeover price is lower than your cost. I don’t understand why First Republic is down this far—like 97% — and when I don't understand things, I stay away. I had never seen a bank go under before that didn’t have bad loans, nor has anyone else. A lot of people were asking if they should double up, we went from $16 to $6 in a day, and the firm answer is that I just don’t know. The fundamentals of the company by no means justify that discount, it must be discounting something terrible that we haven’t heard yet. So I’m going to stay away and look for better trades to do.
Q: I missed the Tesla (TSLA) trade on Friday, should I be looking to buy the dips down here?
A: Yes, I would. I put out a May $110-$120 vertical bull call debit spread on Tesla, which is now only 3 weeks to expiration. Remember, at Tesla’s growth rate, the company is now 12% larger than it was when it hit the $104 bottom in January. I should point out that once our trade alert went out, it literally triggered billions of dollars worth of market action and crushed volatility. It took the implied volatility on Tesla options down 10% on that one day. So, with implied volatility this low, I’m not sure you can get Tesla done at any price that makes sense—but if you can, I’m all for it. As for the short, we’re almost in max profit on our Tesla short position. It’s cratered about $35 since we put it on, so I wouldn’t be chasing that one.
Q: Is there a reason why Freeport McMoRan (FCX) is not progressing upwards?
A: Recession fears—the long-term case for copper is spectacular— I’m looking for $100 in (FCX) a couple years down the road. With the short term, all they see is recession and US government debt default, and as long as those two things are overhanging the market, all of the economically sensitive plays are going to go down. You’re not going to get gains, you’re going to get losses. If you want to know how the debt default is working out, you can write a letter to Kevin McCarthy in Washington DC and ask him what he’s going to do. The stock market doesn’t like it for sure, so I’m inclined to go back to 100% cash and duck that whole cluster.
Q: Can China survive without foreign investment?
A: Yes, with a much lower standard of living, and technology that is greatly lagging behind the US. The Chinese use all the foreign investment going on to upgrade their own technology—it's very common for a Chinese worker to work for an American company for a year and then walk across the street and work for their main Chinese competitor. That is a major means of technology transfer. Without that, they fall way behind, and they know it. You can’t copy your way to leadership, as Japan found out to their great expense in the 1990s. You can add that to the long list of reasons why China will never invade Taiwan. Not only have they cut off their food and energy supply, but also their technology supply.
Q: Would it be safe to deposit my money with Apple (APPL) who’s offering a 4.15% interest rate?
A: Yes, Apple has about $150 billion in cash on the balance sheet to back up any deposit runs. I imagine Apple financially is probably far safer than any small regional bank in the US. But, there are better things to do than Apple, and that’s the good old 90-day US T-bill. That bill never defaults; it’s offering 5.2% — it may even be a little bit higher after May 3 when the Federal Reserve raises interest rates by 25 basis points.
Q: Aren’t earnings coming in better than expected?
A: Yes they are, however, the earnings season was frontloaded with the best-performing sector in the market—i.e. the banks—which you were 100% long of until last week, and the weaker performers are next. That seems to be what the stock market is telling us with the selloff, and of course, the weaker performers are technology stocks. So that's why I piled on the shorts (especially in the Invesco QQQ Trust), that’s why I cut back position sizes, it’s time to take the money and run.
Q: How much longer do you plan to do this?
A: Well Warren Buffet is 92 and he seems to be doing just fine. Joe Biden plans to be President of the United States until he is 86. Work for these men is their lives and they will never quit. The same is true for me. If they can do that, I can certainly run Mad Hedge Fund Trader until I am 92, or for 21 more years. Besides, what else would I do? I’m terrible at golf, I hate pickleball, Bingo is boring and is usually rigged, and all the other stuff that people my age do doesn’t appeal in the least.
Q: Are there ETFs that mirror the rates of 90-day T-bills, or is it better just to buy direct through my broker?
A: It’s always better to buy T-bills directly because your ETF does not work for free. They’re taking out fees somewhere, even if you can’t see them, even if they’re not in the marketing material—nobody works for free; except the US government, it would seem. So buy directly from the US government. If you own the T-bills and your institution goes bankrupt, you can always get your T-bills back in a couple of days. If you own their ETF that mirrors the T-bill, that can become a complete loss and you’ll get tied up in bankruptcy proceedings that last three years (and you may or may not get your money back.) So T-bills directly are the gold standard, I would buy those if you’re looking for a cash alternative.
Q: What about Rivian (RIVN)?
A: It’s red meat in this kind of market—don’t touch it. If the entire car industry is rolling over, including Tesla, don’t expect Rivian to outperform in that situation. As for Amazon (AMZN), like all tech stocks, I’m going to wait for the current selloff to work its way for its system, but then it’s probably a great long term buy and a two-year LEAPS.
Q: What’s your estimate for S&P earnings?
A: I’m at $220 a share which today gives us a multiple of 18.73, which is the middle of the recent range. We may drop a point or two from there, but that’s close enough for the cigar.
Q: Won’t wider credit spreads hurt iShares iBoxx $ High Yield Corporate Bond ETF (HYG)?
A: Yes, for the short term, but you’re being compensated for that by the 8% yield; and you’re buying junk bonds not for where they are for the next month or two, but where they are for the end of the year, which would be at least 10$-15% higher than they are now, so your total “all in” return might be as much as 25%. Not bad.
Q: What’s your thought on the Salesforce (CRM) drop?
A: I’ll buy it in about 3 months, once the next tech washout is finished and they’re throwing these things out with the bathwater.
Q: Do you think iShares 20 Plus Year Treasury Bond ETF (TLT) will trade higher if the market collapses?
A: Yes it will; that is your classic flight to safety out of stocks into bonds. We haven’t seen it in quite a while because both of them have been moving up and down together.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Playing the Penny Slots in Las Vegas is Definitely NOT my Retirement
Mad Hedge Technology Letter
April 26, 2023
Fiat Lux
Featured Trade:
(THE FORTRESS)
(GOOGL), (MSFT), (NVDA), (META), (TSLA), (AAPL), (AMZN)
This is a seven-stock tech market and there is no point to getting exotic and buying something aside from these 7.
That is what the price action is telling us.
Four of the seven are no other than tech overlords Alphabet (GOOGL), Amazon, (AMZN), Microsoft (MSFT), and Meta Platforms (META). These four Big Tech stocks alone account for 41% of the S&P 500's 2023 gain.
The other three are Apple (AAPL), which reports next week, Nvidia (NVDA), and Tesla (TSLA) stock.
These seven account for 86% of the S&P 500's 2023 gain.
These seven Big Tech stocks have essentially made the market this year and everybody else is dragging behind kicking and screaming.
Part of the great performance has to do with the market's oversold nature in 2022.
Rarely does a market operate at the extremes for so long.
These seven have done more than bounce back.
The January Effect is a seasonal increase in stock prices throughout the month of January. The increase in demand for stocks in January is often preceded by a decrease in prices during the month of December, in part due to tax-loss harvesting.
Second, many of these tech companies have been aggressively cutting costs.
I would even say again that Facebook cutting 25% of staff since 2022 is not enough.
Get rid of 80% like Twitter did.
Even more important, the world's most advanced AI models are coming together with the world's most universal user interface - natural language - to create a new era of computing.
Microsoft helped kick off Big Tech's AI obsession with its multi-year, multi-billion dollar investment in ChatGPT developer OpenAI.
MSFT has since implemented versions of OpenAI's technology in its Edge browser, Bing search engine, Microsoft 365 productivity software, and cybersecurity offerings.
Microsoft leading the AI means that rival Alphabet's Google (GOOGL) is playing catch up. Amazon (AMZN), meanwhile, is working to bring generative AI to its services, while Facebook parent Meta (META) is piecing together teams to kick-start its own efforts.
And while Microsoft’s stock has seemingly benefited from both the AI hype and overall market rebound after a rough 2022, the company's main growth driver continues to be its cloud computing efforts in its Azure unit.
But that growth has drastically cratered over the last year. In Q3 2022, Microsoft reported Azure growth of 46% year-over-year. But that's since fallen each quarter, landing at 27% in Q3 2023.
Part of the reason for this decline was large customers pulling back on spending as higher interest rates challenged global growth. Microsoft is also contending with scarce PC sales, as demand from consumers and business customers falls from pandemic-era highs.
It’s easy to say that tech has fared quite well this year.
However, peel back the layers and the lack of participation in this tech rally is highly worrisome.
In a winner take all economy, we have never been reliant on a small group of stocks to save us from collapse.
Interest rates as high as they mean that without a strong balance sheet, it is tough sledding out there for the growth companies.
In the short term, I fully expect tech companies with poor fundamentals to struggle and show minimal price appreciation as recession risks pile up.
These 7 should be a fortress for investors looking to protect their wealth.
