Mad Hedge Technology Letter
October 14, 2020
Fiat Lux
Featured Trade:
(TECH OPTION VOLUME UNHINGED)
($COMPQ), (APPL), (FB), (MSFT), (GOOGL), (NFLX)
Posts
The euphoria in big cap tech shares is the catalyst moving the Nasdaq index recently.
Call option activity is taking the top off of tech shares with usual low beta stocks surging over 5% in single trading sessions.
This unfortunately is causing our options trades to experience heightened stock volatility and the knock-on effect is our strikes getting blown out.
Some of the excess volatility comes down to traders making big bets in the run-up to the election.
Remember when Trump won in 2016, the market exploded higher when many “experts” guaranteed a massive sell-off would ensue.
In the short-term, the unsustainable pace of speculation in derivatives will translate into wild price swings. Monday brought the biggest rally for the Nasdaq 100 Index since April, but measures of volatility rallied as well.
One proxy for the froth still latent in options, the percentage of overall volume represented by single-stock contracts, remains up 19% from a year ago.
Most of the action is concentrated in mega cap technology and momentum-driven shares.
A consensus is coalescing around a few big buyers coming into the options market to corner it with rumors of purchases around $300 million worth of call contracts on tech stocks in a single day.
The Nasdaq 100 Index has gained in all but two sessions this month and just notched its best week since July after last month’s sharp drop.
Whipsawing markets are also possible when liquidity remains thin.
Trading in options showed itself capable of influencing share movement in August and September when dealer hedging (demand from people who sell options for the underlying stock) created feedback loops that helped drive the Nasdaq higher.
That dynamic can also make sell-offs worse than they should be as well as sellers adjust positions.
Big trades in thin markets, especially in technology or momentum trades considered overbought or oversold, increase the potential for exacerbated stock moves as dealers hedge exposure.
Call open interest in Facebook (FB), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL), Apple (APPL) and Microsoft (MSFT) has averaged 12.8 million contracts over the 30 days through Friday, the highest since early 2019.
The tech-heavy Nasdaq index has gyrated an average of 1.8% per day since the beginning of September, while the broader market gauge has fluctuated by 1.2% over that time period.
Recent options activity has been momentum-based, meaning that stocks tend to attract more interest in calls when it’s rallying versus when it trades lower.
Throw in structural forces that are contributing to a sustained high implied volatility environment, and election hedgers have their work cut out for them.
There are fewer short-volatility players as well in the wake of the health crisis.
There’s also less volatility selling by retail investors after the delisting of some popular VIX products earlier this year like the volatility ETF ticker symbol XIV.
It could take a few years for the imbalances to work itself through the system.
Then there’s the resurfacing of an event similar to the “Nasdaq whale” which is reported as Softbank acting like a hedge fund and buying as many big tech call options they could afford.
Softbank CEO has essentially turned his failed hedge fund named the Vision Fund from a start-up investor into a speculative hedge fund in risky option contracts solely betting on the rise of Silicon Valley tech in the age of the coronavirus.
After being burnt by Uber and WeWork, he finally decided to stay out of the messy acquisitions/seed funding and just speculative through derivatives from Tokyo.
The avalanche of options volume will no doubt cause the tech markets to become jittery and it certainly puts a floor under tech implied volatility for a while.
Retail investors have taken notice of this insane volume and largely stayed on the sideline.
At the apex of the madness, retail traders spent more than $511 billion in notional value on call options and that figure was slashed to $343 billion in the first week of October.
Retail traders tend to buy less-expensive short-dated contracts which tend to have greater convexity and ability to exacerbate share movements.
The level of risk-taking occurring in the public markets is at an all-time high.
Just look at America’s most elite university endowments who have slashed their exposure to the stock markets to the lowest levels since before the crash of 1929. And now they’re betting the ranch on secretive, illiquid, and high-risk private-equity funds and hedge funds.
A US teachers’ pension fund has sued Allianz Global Investors, accusing one of the world’s biggest asset managers of employing a “reckless strategy” that cost retirees almost $800m during this year’s market turmoil.
This is just one example of the high-risk strategies taking place with pension money.
In a lawsuit filed on Monday in New York, the Arkansas Teacher Retirement System claims that Alpha Funds, investment vehicles marketed by AllianzGI, had placed bets against an escalation of market volatility in an effort to recover losses they incurred from the same strategy in February.
So here we stand with derivative trading in tech options and general equity strategies leveraged to the hills that are betting on the system not breaking, or at least not breaking yet.
Even if the system reaches breaking point, many of these private investors are betting on governments to come rescue them perpetuating the feedback loop and offers a conundrum to savvy asset managers to miss or partake in the gaps up themselves.
Mad Hedge Technology Letter
September 2, 2020
Fiat Lux
Featured Trade:
(THE 2020 TECH BUBBLE)
(TSLA), (APPL), (AMZN), (NFLX)
It was February 19 when the tech comprised Nasdaq index swan dived from a liquidity crisis of epic proportions triggered by the virus only to recover the 30% of loss gains in 3 months.
When the Nasdaq made a V-shaped recovery, experts were shocked by the pace of the recovery as the Fed deployed every tool in the toolbox at saving the stock market.
Well, three months on from the Nasdaq index pulling level year to date, tech stocks are 20% higher as main street still labors under an economy that has seen net job losses of 10s of millions.
The liquidity poured into the system has been overwhelming, but many investors aren’t complaining.
Insane price action is the crucial signal to this market frothiness and can be seen in Tesla (TSLA) whose stock has gone from $85 in March to almost $500.
Apple (AAPL) has surpassed the $2 trillion mark.
The market is “looking through” any bad news and is putting a high premium on tech shares that have usurped the mojo of the rest of the broader economy.
Investors need to be in tech because it’s not only where the growth is, but it is where business models are mostly protected.
Last time I checked, computers and smartphones cannot get the coronavirus.
Billionaire Mark Cuban, team owner of Dallas Mavericks in the NBA, sees a huge tech bubble reminiscent of the infamous dot.com fiasco in the late 1990s and early 2000s.
Suddenly, the get-rich-quick crowd is investing with reckless abandon. It seems these upstarts have a fear of missing out and are chasing the market. Cuban is skeptical about the market rally and the bubble could burst in a couple of years.
Unlike the tech debacle at the turn of the millennium, Cuban opines that this year’s version has the Federal Reserve’s help. The U.S. central bank is pumping money into the pandemic-battered economy, but unintentionally supporting risk appetite on Wall Street. Bolder investors are even picking up shares of bankrupt companies.
People have a newfound interest in the stock market and hopping on the bandwagon because the Feds are injecting money to prop up the economy.
Cuban has investments in Amazon (AMZN) and Netflix (NFLX).
Shopify happens to be the largest publicly-listed company in Canada as of July 31, 2020, besting bank giant Royal Bank of Canada.
The 16-year old e-commerce company year-to-date gain is 170%.
I believe in the wisdom of crowds, and that markets have gotten it right far more often than they’ve been wrong.
Ultimately, there are simply too many dollars chasing too few trades.
Tech stocks have driven much of the U.S. market’s gains since March. Were it not for a handful of them, the S&P 500 may have performed more in line with other economies’ stock indices.
Between the market bottom on March 23 and August 20, shares of Apple, Amazon, Microsoft, Facebook, Alphabet, and graphics processor designer NVIDIA were responsible for a heart-stopping 33 percent—an entire third—of the uptrend in the S&P 500.
Apple alone was responsible for more than 11 percent of the market’s moves. Last week, the iPhone-maker became the first U.S. company to surpass $2 trillion in market capitalization, nearly as much as all the companies in the Russell 2000 Index of small-cap stocks combined. Apple is now valued more highly, in fact, than German stocks in the Deutsche Boerse Index and is closing in on Canadian stocks in the S&P/TSX Composite Index.
We are seeing unprecedented price action in the tech sector with the old normal of 1% gains in one trading day turning into 3% or 5%.
We will need some type of liquidity prevention event to experience a real major sell-off in technology and it is true, the higher we go, the harder we will fall.
Mad Hedge Technology Letter
August 14, 2020
Fiat Lux
Featured Trade:
(BIG TECH AND THE FUTURE OF COLLEGE CAMPUSES)
(SPG), (AMZN), (APPL), (MSFT), (FB), (GOOGL)
The genie is out of the bottle and things will never go back to how they once were. Sorry to burst your bubble if you thought the economy, society, and travel rules would just revert to the pre-coronavirus status quo.
They certainly will not.
One trend that shows no signs of abating is the “winner take all” mentality of the tech industry.
Tech giants will apply their huge relative gains to gut different industries.
Once a shark smells blood, they go in for the kill; and nothing else will suffice until these revenue machines get their way in every other adjacent industry.
Recently, we got clarity on big box malls becoming the new tech fulfillment centers with the largest mall operator in the United States, Simon Property Group (SPG), signaling they are willing to convert space leftover in malls from Sears and J.C. Penny.
Then I realized that another bombshell would hit sooner rather than later.
College campuses will become the newest of the new Amazon, Walmart, or Target eCommerce fulfillment centers starting this fall, and let me explain to you why.
When the California state college system shut down its campuses and moved classes online due to the coronavirus in March, rising sophomore Jose Garcia returned home to Vallejo, California where he expected to finish his classes and hang out with friends and family.
Then Amazon announced plans to fill 100,000 positions across the U.S at fulfillment and distribution centers to handle the surge of online orders. A month later, the company said it needed another 75,000 positions just to keep up with demand. More than 1,000 of those jobs were added at the five local fulfillment centers. Amazon also announced it would raise the minimum wage from $15 to $17 per hour through the end of April.
Garcia, a marketing and communications major, applied and was hired right away to work in the fulfillment center near Vallejo that mostly services the greater Bay Area. He was thrilled to earn extra spending money while he was home and doing his schoolwork online.
This is just the first wave of hiring for these fulfillment center jobs, and there will be a second, third, and fourth wave as eCommerce volumes have exploded. Even college students desperate for the cash might quit academics to focus on starting from the bottom in Amazon.
Even though many of these jobs at Amazon fulfillment centers aren’t those corner office job that Ivy League graduates covet, in an economy that has had the bottom fall out from underneath, any job will do.
Chronic unemployment will be around for a while and jobs will be in short supply.
When you marry that up with the boom in ecommerce, then there is an obvious need for more ecommerce fulfillment centers and college campuses would serve as the perfect launching spot for this endeavor.
The rise of ecommerce has happened at a time when the cost of a college education has risen by 250% and, more often than not, doesn’t live up to the hype it sells.
Many fresh graduates are mired in $100,000 plus debt burdens that prevent them from getting a foothold on the property ladder and delays household formation.
Then consider that many of the 1000s of colleges that dot America have borrowed capital to the hills building glitzy business schools and rewarding the entrenched bureaucrats at the school management level outrageous compensation packages.
The cost of tuition has risen by 250% in a generation, but has the quality of education risen 250% during the same time as well?
The answer is a resounding no, and there is a huge reckoning about to happen in the world of college finances.
America will be saddled with scores of colleges and universities shutting down because they can’t meet their debt obligations.
Not to mention the financial profiles of the prospective students have dipped by 50% or more in the short-term with their parents unable to find the money to send their kids to college.
Then there is the international element here with the lucrative Chinese student that added up to 500,000 total students attending American universities in the past.
They won’t come back after observing how America basically shunned the pandemic and the U.S. public health system couldn’t get out of the way of themselves after the virus was heavily politicized on a national level.
The college campuses will be carcasses with mammoth buildings ideal to be transformed into eCommerce inventory centers.
The perfect storm is hitting on every side for Mr. Jeff Bezos to go in and pick up a bunch of empty college campuses for pennies on the dollar as the new Amazon fulfillment centers.
This will happen as the school year starts and schools realize they have no pathway forward and look to liquidate their assets.
Defaults will happen by the handful in the fall, while some won’t even open at all because too many students have quit.
Then the next question we should ask is: will a student want to pay $50,000 in tuition to attend online Zoom classes for a year?
My guess is another resounding no.
By next spring, there will be a meaningful level of these college campuses that are repurposed, as eCommerce delivery centers with the best candidates being near big metropolitan cities that have protected white collar jobs the best.
The coronavirus has exposed the American college system, b as university administrators assumed that tuition would never go down.
Not every college has a $40 billion endowment fund like Harvard to withstand today’s financial apocalypse.
It’s common for colleges to have too many administrators and many on multimillion-dollar packages.
These school administrators made a bet that American families would forever burden themselves with the rise in tuition prices just as the importance of a college degree has never been at a lower ebb.
Like many precarious industries such as college football, commercial real estate, hospitality, and suburban malls, college campuses are now next on the chopping block.
Big tech not only will make these campuses optimized for delivery centers but also gradually dive deep into the realm of educational revenue, hellbent on hijacking it from the schools themselves as curriculum has essentially been digitized.
Colleges will now have to compete with the likes of Google (GOOGL), Facebook (FB), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) directly in terms of quality of digital content since they have lost their physical presence advantage now that students are away from campus.
Tech companies already have an army of programmers that in an instance could be rapidly deployed against the snail-like college system.
The only two industries now big enough to quench big tech’s insatiable appetite for devouring revenue is health care and education.
We are seeing this play out quickly, and once tech gets a foothold literally on campus, the rest of the colleges will be thrust into an existential crisis of epic proportions with the only survivors being the ones with large endowment funds.
It’s scary, isn’t it?
This is how tech has evolved in 2020, and the tech iteration of 2021 could be scarier and even more powerful than this year’s iteration. Imagine that!
AMAZON PACKAGES COULD BE DELIVERED FROM HERE SOON!
Mad Hedge Technology Letter
June 5, 2020
Fiat Lux
Featured Trade:
(EUROPE’S BIG TECH TAX GRAB),
(COMPQ), (NFLX), (APPL), (AMZN), (GOOGL), (MSFT)
Big Tech regulation gets the protection of the U.S. government.
The U.S. government has announced that it is looking into aggressive regulation originating from foreign countries that would die to have a FANG themselves.
This is just another salient data point to which tech will lead us through the maze of complexity that the world now finds itself in.
Many jumped on the bandwagon saying it was a matter of time before regulation destroys big tech, but I will argue that big tech has become too big to fail and the value generated from stock appreciation and tax revenue has become even more important.
Tech has been the only industry to not get pummeled by the coronavirus and the ramifications of social unrest.
The U.S. government doesn’t want to tip over the last remaining pillar the U.S. economy is clinging to, they are desperate to allow the U.S. tech models to stay intact.
The Federal and State budgets have massive holes in them and crushing tech’s contribution to the revenue coffers would be political suicide.
Understanding how the administration cherishes big tech means viewing them through the prism of how other countries treat U.S. tech companies hoping to take a piece of the pie themselves through clever “regulation.”
The European Union, the Czech Republic, and the U.K. plan to siphon off tax revenue from big tech even though confronted by possible trade sanctions from the U.S.
The U.S. probe also will look into the digital services tax plans of Austria, Brazil, Indonesia, Italy, Spain, and Turkey because they are all looking to skim some cash off of big tech’s cash cow.
To read more about the tax fiasco, please click here.
Europe and the emerging economies have been hit harder than the U.S., not in terms of deaths, but in relative economic terms because they don’t possess the rolodex of Fortune 500 companies that can just issue more corporate debt or a Fed central bank that is delivering trillions in liquidity that has saved the stock market.
Washington has specifically been eying up France for a section 301 investigation after it became the first country to fully implement a digital sales tax in July 2019.
France has been quite aggressive in calling out big tech for undermining and exploiting their economy by not paying tax due.
French Finance Minister Bruno Le Maire has been sharp-tongued criticizing America’s big tech companies for running wild in European markets.
A 3% digital sales tax was in the cards before the U.S. slapped on a counter tariff to French goods which delayed the frosty confrontation.
Europe’s vast network of splintered resources and unbalanced innovation combined with Europe’s infamous avalanche of bureaucracy meant that developing a famous tech company fell through the cracks.
Nothing even remotely close to Silicon Valley was ever conjured up inside the confines of the European Union.
The consequences have been costly with most Europeans relying on Apple cell phones, Google software, Netflix subscriptions, and Microsoft enterprise products to get them through the day just like most Americans.
The tax grab is out of desperation as the EU confronts a post-coronavirus world where they are increasingly controlled by decisions from the Communist Chinese and subject to a graying population that delivers a reduced tax revenue base.
The European Union is one of the biggest losers from the coronavirus.
The hands-off warning by the U.S. government on its own big tech companies puts a premium on their existence to the U.S. economy.
Instead of twisting their arm to squeeze every extra tax dollar out of them, they will most likely get more access to deliver the services most Americans are hooked on.
It’s not a secret that current U.S. President Donald Trump is hellbent on destroying big tech but there is no way to do it without destroying the U.S. economy and the U.S. stock market.
At this point, just a handful of tech companies comprises over 22% of the S&P and this will most likely continue as other industries are still licking their wounds with some analysts believing it will take 10 years to get back to late 2019 economic levels.
The most likely scenario for big tech is that the array of crises has delayed real regulation indefinitely and the U.S. will protect big tech from a tax grab abroad.
The best-case scenario is zero regulation leading to zero extra costs.
Either way, stock appreciation is in the cards for tech’s future.
The end result is that big tech could eventually comprise up to 30% of the S&P in the next 3 years which dovetails nicely with a recent analyst call that Microsoft will hit over $2 trillion in market capitalization in the next 2 years.
Mad Hedge Technology Letter
June 3, 2020
Fiat Lux
Featured Trade:
(ABOUT YOUR RIOT-PROOF PORTFOLIO),
(COMPQ), (WMT), (APPL), (AMZN), (TGT), (JWN), (EQIX), (GOOGL), (MSFT)
Social unrest will have NO material effect on tech shares moving forward.
Some investors expected the Nasdaq (COMPQ) index to roll over big time, throttled by a national insurrection. Anti-police-violence protests, some becoming riots, have broken out in more than 60 cities.
However, it appears to be another false negative for the Nasdaq as it motors upwards acting on the momentum of outperformance during the coronavirus.
One thing that the coronavirus pandemic, as well as protests, have taught investors is the unwavering faith in technology’s strength will continue powering the overall market rebound.
Any social unrest will not stop tech shares because they simply don’t subtract from their revenue models.
This will perpetuate into the rest of 2020 and beyond.
Much of the public reaction from big tech has been paying some form of lip service about the national situation being untenable followed up with a small donation.
Apple (AAPL) says it's making donations to various groups including the Equal Justice Initiative, a non-profit organization based in Montgomery, Alabama that provides legal representation to marginalized communities.
To read more about big tech’s donations, click here.
Aside from some PR formalities, it will be business as usual after things settle down.
Apple might suffer some slight inconveniences of having some stores looted, but that doesn’t mean consumers can’t buy products online.
Tech companies simply contort to fit the new paradigm and that is what they are best at doing.
Apple has charged hard into the digital service as a subscription world that has served Amazon, Apple, Google (GOOGL), and Microsoft (MSFT) so well.
To read more about the robust performance of software stocks, please click here.
Many of these tech companies don’t need a physical presence to drive forward earnings, revenue models, and widen their competitive advantages.
That’s the beauty of it and their brands are so entrenched that it doesn’t matter what happens in the outside world at this point.
It’s true that a few tech companies might have to scale back or modify operations until the storm subsides but not at a great scale that will worry investors.
Amazon is reducing deliveries and changing delivery routes in some areas affected by the protests.
Big tech dodged a bullet with the majority of the financial burden falling on the shoulders of big-box retailers like Walmart (WMT) and Target (TGT) and city center-located businesses.
Walmart closed hundreds of stores one hour early on Sunday, but most are slated to reopen. Nordstrom (JWN) temporarily closed all its stores on Sunday.
Amazon (AMZN)-owned Whole Foods are often located in neighborhoods that are perceived likely to escape the bulk of the turmoil.
The events of the last few days will have significant side effects on the normalcy of society or the new normal of it.
Combined with the pandemic, consumers will opt for more spacious housing options in less concentrated areas of the U.S.
The social unrest once again delivers the goodies into the hands of e-commerce as people will be less inclined to leave their house to consume.
A stock that really sticks out during all of this is the leader in interconnected data centers Equinix (EQIX) because of the explosion of data being consumed from the stay-at-home revolution.
Sadly, the price of tech share does not account for life quality which is part of the reason we see stocks lurching higher.
By the time all the different crises, including coronavirus and protests, are snuffed out, we could be in a world where the only strong companies left are technology, "big tech".
They have an insurmountable lead at this point with guns still blazing.
When you add the windfall of trillions in cash the Fed has pumped out and unwittingly diverted into tech shares recently, it is hard to envision ANY scenario in which the Nasdaq will be down a year from now.
I am bullish on the Nasdaq index and even more bullish on big tech.
Even the supposed “rotation” to value has only meant that tech shares haven’t gone down.
A dip now in tech shares means shares dip for two hours before resurging.
Why would anyone want to sell the best and highest growth industry in the public markets with unlimited revenue-generating potential?
