Mad Hedge Technology Letter
May 11, 2022
Fiat Lux
Featured Trade:
TECH DESERVES WHAT IT DESERVES)
(RBLX), (ARKK), (ROKU), (TDOC), (ZM), (TSLA), (GM)
Posts
A bear market rally in tech would be an overwhelmingly healthy signal that the financial system is working in an orderly fashion.
Yet, as I say that, a looming recession inches closer.
How do I know that?
That was my first reaction when my eyes were stung by the headline of 8.3% inflation.
Sure, not a 10, but it is emblematic of the ongoing inflation concerns with items such as airplane tickets up 18% year over year in price.
Remember the consensus was that inflation pressures are trending towards peaking, potentially setting up for a nice bear market rally.
That narrative hit another catch-22, not as bad as it could have been, but clearly not great and prices biting at the backs of consumers.
The hope that inflation will be crammed back into the genie bottle is not going to happen until later this year and not for the right reasons.
Simply because comparables become easier to beat year over year.
Like I have mentioned in past tech letters, high-growth tech stocks are most sensitive to the fluctuation in rates and investors should be nowhere near growth funds like Cathy Wood’s ARK Innovation ETF (ARKK).
Another head-scratching move was ARK’s Cathy Wood selling Tesla (TSLA) shares and rolling them into GM (GM).
This is for the lady who likes to tell us that we aren’t “doing the research.”
Betting against Elon Musk is a fool’s game.
When it comes to EVs, I would put money on Musk to defy any odds.
Tesla will outperform GM, especially amid a backdrop of lithium prices spiking and supply chain issues going haywire.
Musk is simply the anointed guy that knows how to work miracles.
He only developed the EV industry as he saw fit, invented reusable space rockets, cut the price of space exploration by 10, and reimagined tunneling construction technology.
And by the way, his Neuralink brain interface company is working on implanting chips in human brains so we don’t need to use our fingers on keyboard anymore.
I wouldn’t want to compete with this man and to believe that GM will be able to nimbly outmaneuver Musk who has the audacity to aggressively solve anything no matter how many people he pisses off is not an incremental bet on “innovation” that Wood likes to tout she is participating in.
Neither is the purchase of Roku (ROKU), Zoom (ZM), or Roblox (RBLX) which have all tanked since she put new money to work in them in late April.
Inflation at 8.3% means that the real rate of inflation is still -7.55% and until that’s addressed, any bear market rally will be viciously sold breaching further levels down below.
The carnage in the tech world is indicative at the dregs of the barrel.
Tech IPOs are toxic.
Market for new issues has been bereft throughout the first four-plus months of this year, and nothing that would move the needle is on the tech IPO radar for the duration of the second quarter.
Companies that were aiming to go out in the first half of 2022 have no appetite to continue down that path because there simply won’t be a bid.
Going public today would require a complete revaluation of their business and leave many late-stage investors and employees with out-of-money stock.
Grocery deliverer Instacart is the only company in that class that’s been forthright with its slowing valuation. In March, the company said it cut its valuation by about 40% to $24 billion.
That’s how bad it is out there at the bush league end of the tech sector and many of these stocks that are public such as Teladoc are down 80%.
I do believe that many of these loss-making growth techs are rightfully down 80%.
They had time to show a profit and they failed in the allotted amount of time they were given.
Every window closes and the market moves forward with or without them.
In the near term, I am bearish on the market but I do believe we are oversold which could feed into a dead cat bounce to sell on.
Global Market Comments
May 11, 2022
Fiat Lux
Featured Trade:
(JOIN ME ON CUNARD’S MS QUEEN VICTORIA
FOR MY JULY 9, 2022 SEMINAR AT SEA)
Global Market Comments
May 10, 2022
Fiat Lux
Featured Trade:
(MAY 4 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (ROM), (ARKK), (LMT), (RTN), (USO), (AAPL), (BRKB), (TLT), (TBT), (HYG), (AMZN)
Below please find subscribers’ Q&A for the May 4 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley.
Q: How confident are you to jump into stocks right now?
A: Not confident at all. If you look at all of my positions, they’re very deep in the money and fully hedged—I have longs offsetting my shorts—and everything I own expires in 12 days. So, I’m expecting a little rally still here—maybe 1,000 points after the Fed announcement, and then we could go back to new lows.
Q: Would you scale into ProShares Ultra Technology ETF (ROM) if you’ve been holding it for several years?
A: I would—in the $40s, the (ROM) is very tempting. On like a 5-year view, you could probably go from the $40s to $150 or $200. But don’t expect to sleep very much at night if you take this position, because this is volatile as all get out. It's not exactly clear whether we have bottomed out in tech or not, especially small tech, which the (ROM) owns a lot of.
Q: Is it time to buy the Ark Innovation ETF (ARKK) with the 5-year view?
A: Yes. I mentioned the math on that a couple of days ago in my hot tips. Out of 10 positions, you only need one to go up ten times to make the whole thing worth it, and you can write off everything else. Again, we’re looking at venture capital type math on these leverage tech plays, and that makes them very attractive; however I’m always trying to get the best possible price, so I haven’t done it yet.
Q: We’ve been hit hard with the tech trade alerts since March. Any thoughts?
A: Yes, we’re getting close to a bottom here. The short squeeze on the Chinese tech trade alerts that we had out was a one-day thing. However, when you get these ferocious short covering rallies at the bottom—we certainly got one on Monday in the S&P 500 (SPY) —it means we’re close to a bottom. So, we may go down maybe 4%-6% and test a couple more times and have 500- or 1000-point rallies right after that, which is a sign of a bottom. There’s a 50% chance the bottom was at $407 on Monday, and 50% chance we go down $27 more points to $380.
Q: Is the Roaring 20s hypothesis still on?
A: Yes absolutely; technology is still hyper-accelerating, and that is the driver of all of this. And while tech stocks may get cheap, the actual technology underlying the stocks is still increasing at an unbelievable rate. You just have to be here in Silicon Valley to see it happening.
Q: Do you like defense stocks?
A: Yes, because companies like Lockheed Martin (LMT) and Raytheon (RTN) operate on very long-term contracts that never go away—they basically have guaranteed income from the government—meeting the supply of F35 fighters for example, for 20 years. Certainly, the war in Ukraine has increased defense spending; not just the US but every country in the world that has a military. So all of a sudden, everybody is buying everything—especially the javelin missiles which are made in Florida, Georgia and Arizona. The Peace Dividend is over and all defense companies will benefit from that.
Q: Is Buffet wrong to go into energy right now? How will Berkshire Hathaway Inc. (BRK.B) perform if energy tanks?
A: Well first of all, energy is only a small part of his portfolio. Any losses in energy would be counterbalanced by big gains in his banking holdings, which are among his largest holdings, and in Apple (AAPL). Buffet does what I do, he cross-hedges positions and always has something that’s going up. I think Berkshire is still a buy. And he's not buying oil, per say; he is buying the energy producing companies which right now have record margins. Even if oil goes back down to $50 a barrel, these companies will still keep making money. However, he can wait 5 years for things to work for him and I can’t; I need them to work in 5 minutes.
Q: You must have suffered big oil (USO) losses in the past, right?
A: Actually I have not, but I have seen other people go bankrupt on faulty assumptions of what energy prices are going to do. In the 1990s Gulf War, someone made an enormous bet that oil would go up when the actual shooting started. But of course, it didn’t, it was a “buy the rumor, sell the news” situation. Energy prices collapsed and this hedge fund had a 100% loss in one day. That is what keeps me from going long energy at the top. And the other evidence that the energy companies themselves believe this is true is that they’re refusing to invest in their own businesses, they won’t expand capacity even though the government is begging them to do so.
Q: Why should we stay short the iShares 20 Plus Year Treasury Bond ETF (TLT) instead of selling out for a profit or holding on due to your statement that the TLT will go down to $105/$110?
A; If you have the December LEAPS, which most of you do, there’s still a 10% profit in that position running it seven more months. In this day and age, 7% is worth going for because there isn’t anything else to buy right now, except very aggressive, very short term, front month options, which I've been doing. So, the only reason to sell the TLT now and take a profit—even though it’s probably the biggest profit of your life—is that you found something better; and I doubt you're finding anything better to do right now than running your short Treasuries.
Q: Are you still short the TLT?
A: Yes, the front months, the Mays, expire in 8 days and I’m running them into expiration.
Q: What will Bitcoin do?
A: It will continue to bounce along a bottom, or maybe go lower as long as liquidity in the financial system is shrinking, which it is now at roughly a $90 billion/month rate. That’s not good for Bitcoin.
Q: Is now the time for Nvidia Corporation (NVDA)?
A: Yes, it’s definitely time to nibble here. It’s one of the best companies in the world that’s dropped more than 50%. I think we’d have a final bottom, and then we’re entering a new long term bull market where we’d go into 1-2 year LEAPS.
Q: What do you think of buying the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) junk bond fund here for 6% dividend?
A: If you’re happy with that, I would go for it. But I think junk is going to have a higher dividend yet still. This thing had a dividend in the teens during the financial crisis; I don’t think we’ll get to the teens this time because we don’t have a financial crisis, but 7% or 8% are definitely doable. And then you want to look at the 2x long junk bond special ETFs, because you’re going to get a 16% return on a very boring junk bond fund to own.
Q: What do you think about Amazon (AMZN) at this level?
A: I think it’s too early and it goes lower. Not a good stock to own during recession worries. At some point it’ll be a good buy, but not yet.
Q: Energy is the best sector this year—how long can it keep going?
A: Until we get a recession. By the way, if you want evidence that we’re not in a recession, look at $100/barrel oil. When you get real recessions, oil goes down to 420 or $30….or negative $37 as it did in 2020. There’s a lot of conflicting data out in the market these days and a lot of conflicting price reactions so you have to learn which ones to ignore.
Q: Should we stay short the (TLT)?
A: Yes, we should. I’m looking for a 3.50% yield this year that should take us down to $105.
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, 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
Mad Hedge Technology Letter
April 29, 2022
Fiat Lux
Featured Trade:
(TELADOC IMPLODES)
(ARKK), (SARK), (TDOC), (ROKU), (SHOP), (ZM)
The Cathie Wood circus keeps making new lows as digital doctor platform Teladoc (TDOC) recorded the biggest drop in shares since its IPO.
At one point, shares were down 45% and this was the day after buying another tranche of over $200 million worth of shares before the earnings came out.
TDOC was a pandemic darling and since then, the stock has done nothing but dive lower.
There is even an inverse ETF to jump on the anti-Cathie Wood bandwagon called Tuttle Capital Short Innovation ETF (SARK).
SARK is almost up 100% year to date showing that as market conditions distort, traders must distort with them.
To stay long tech growth is like throwing money off an apartment balcony.
The lack of understanding Cathie Woods exhibits about the stock market is hard to fathom.
Her go-to excuse is that others “aren’t doing the research.”
We were smack dab in a low-rate environment for a decade when even marginal tech companies would get the benefit of the doubt.
As the goalposts have moved and narrowed, Wood is still sticking to her 5-year time horizon and still explaining to investors that other analysts “aren’t doing their homework.”
This really is a case of the emperor having no clothes if I have ever seen it.
To add insult to injury, she has gone on public television to speak about how she believes the global economy is experiencing deflationary pressures.
No matter what changes to the trading environment, she sticks to her narrow story of deflation and her 5-year time horizon while her investors lose money.
If that’s not enough, she blames the market for not understanding her ARKK fund which is down more than 50% this year.
She claims that many people are “devaluing innovation” and just do not understand innovation like she does.
With an unrelenting belief in her growth strategy, miraculously, another $1.5 billion of inflows have juiced up her fund in 2022.
There are many out there that still think she is a great money manager after her one call of Tesla going up was correct.
Investors have chosen to back her further even with mounting losses and that has now backfired as ETF ARK Innovation ETF (ARKK) appears as if the market has not recognized how smart Cathie Wood is.
ARKK is Teladoc’s largest shareholder with a 12% stake worth.
It’s not just TDOC, but other investments like Roku (ROKU), Zoom Video Communications (ZM), and Shopify (SHOP) whose shares have experienced cataclysmic meltdowns of epic proportions.
Why did TDOC shares perform so poorly?
Higher advertising expenses in the mental health market, as well as an “elongated sales cycle” in chronic conditions as employers and providers of healthcare plans evaluate strategies.
TDOC’s services aren’t as good as first thought.
TDOC also took a $6.6 billion charge for impairment of goodwill, a non-cash charge the company excluded from its adjusted results.
The competition also has increased significantly and many of these first-move advantages are not holding up like they used to in tech.
The recent performance has been met with a bevy of analyst downgrades and tech growth as a sub-sector will have a hard time recovering until a lower interest rate sentiment comes back to sweep up the market.
Still, not a peep out of Cathie Wood on modifying her controversial strategies and that’s when we are staring down a barrel of multiple 50 basis point interest rate rises.
She was photographed partying in the Bahamas at some beach parties the day before the TDOC debacle, apparently, she isn’t bothered that much by her followers losing generation wealth.
If readers want to get back into tech growth after an easing of credit conditions, avoid buying ARKK and just buy a collection of strong tech growth yourself.
Mad Hedge Technology Letter
March 16, 2022
Fiat Lux
Featured Trade:
(THE GENIUS AT SOFTBANK GETS EXPOSED)
(SFTBY), (ARKK), (DIDI), (BABA), (CPNG)
Mad Hedge Technology Letter
March 7, 2022
Fiat Lux
Featured Trade:
(SHORT TERM PAIN FOR SILICON VALLEY TECH)
(NFLX), (QQQ), (EPAM), (SNAP), (TDOC), (ARKK)
The American tech sector has largely been overshadowed by the events across the world.
Many would question why that would even matter.
What does that even have to do with an American smartphone or devices that permeate our society?
We deal with American tech stocks for this newsletter, and not with moral outrage or foreign policy matters.
So we stay in our lane and deal with various exogenous stocks that come our way as it relates to the Nasdaq (QQQ).
I don’t get to pick these shocks – they come in fits and starts and in different sizes.
The end of omicron was almost to the point of visualization, but we roll into yet another macro crisis of many groups’ makings.
Tech doesn’t operate in a vacuum, and politics, more often than I would like to admit, sometimes do overlap a great deal.
The world has changed dramatically in the past 14 days and the knock-on effects mean that American tech companies and their trillion dollars business models are pulling out of Russia, a country with a population close to 150 million, in droves.
It is what it is, and life moves on.
Netflix (NFLX) has been in operation in Russia since 2016 and the decision to vacate Russian business means they will lose around 1 million subscribers.
Most likely the worst tech company to work for right now in the world must be EPAM Systems (EPAM).
The internal chaos going on mainly stems from the 58,000 employees, with 14,000 of them in Ukraine and more than 18,000 staff in Belarus and Russia, according to company filings with the U.S. Securities and Exchange Commission.
EPAM’s stock is down 74% YTD in 2022 and is a stock that epitomizes the situation in Eastern Europe right now.
When workers refuse to work with each other, it’s hard to imagine that much gets done at all.
And this is just the tip of the iceberg.
The American tech withdrawals encompass all shapes and sizes.
Apple and Microsoft both said no bueno to selling products in Russia.
Game maker EA pulled the plug as well.
Google and Twitter have suspended advertising in Russia.
It’s a terrible time to monetize a YouTube channel in Russia because Google won’t pay you for it.
Likewise, Snap (SNAP) has pulled its marketing dollars from Russia too.
Another sonic boom hit Russian tech when Airbnb room-rental service suspended all operations in Russia and Belarus and has said its nonprofit subsidiary will offer free temporary housing to 100,000 Ukrainian refugees.
It's also waived host and guest fees for bookings in Ukraine, as people worldwide use Airbnb as a way to provide income directly to Ukrainians.
Adobe is halting sales of new Adobe products and services in Russia. In addition to making sure its products and services are not being used by sanctioned entities, Adobe is also cutting Russian government-controlled media outlets off from its cloud services.
What is emerging as quite black and white is that American technology companies hoping to apply their business model in autocratic states doesn’t integrate as well as first thought.
The weak rule of law along with all-powerful demagogue leaders make it hard to sustain any sort of business carve-out for the long term.
Eventually, many American companies are forced to abandon their ambitions in these marginal states.
The next question a tech investor must ask is will the American tech sector follow the lead from Russia and pull out from China.
Obviously, this has major implications for companies like Apple, Micron, and a handful of American tech companies that are entrenched in the Chinese economy and society.
Many people think this will blow over and tech will come back front and center, but short-term, this is highly negative for American tech stocks.
The more this situation drags out, the higher risk American tech is more involved in this mess from a different gateway.
The tech portfolio has been outright short recently and it was the perfect call to sell the dead cat bounce in growth tech like Teladoc (TDOC) and ARKK funds (ARKK).
