Mad Hedge Technology Letter
April 24, 2023
Fiat Lux
Featured Trade:
(GREAT SETUP FOR MAY)
($COMPQ), (AAPL), (FRC)
Posts
As I glance up at my trading screen this morning and I see First Republic Bank (FRC) shares scoring hot, I know it means only one thing for tech stocks ($COMPQ) and that’s nothing positive.
Tech was trusted as the safety ground for investors during the global bank contagion that wreaked havoc on the supposed jewels of western banking like Credit Suisse in Switzerland.
It wasn’t supposed to happen like this.
Instead, investors coalesced around tech shares and precious metals.
They benefited as they caught a serious bid up in price.
That’s all unwinding as FRC prepares for its earnings report which most likely will signal that the worst of the storm has passed.
That’s on the heels of “too big to fail” banks like JP Morgan, Bank of America, and Wells Fargo reporting better than expected.
April will most likely turn into quite a dud for tech shares which is why I have cooled it on issuing trade alerts.
To prevent panic from spreading, governments and central banks stepped in literally overnight and offered a lifeline to financial institutions delivering historic rescue packages and emergency deals.
Western taxpayers bailing out the institutions has been a common theme since 2001.
Eventually, UBS, Switzerland’s biggest bank, was required by the government to buy its long-time rival Credit Suisse for three billion Swiss francs ($3.25 billion).
Clearly, failure is not an option. The impact would be devastating not only for Switzerland but for the global financial system. It should not be forgotten that 15 years ago, UBS itself needed rescuing by the Swiss government and central bank.
This doesn’t necessarily stop what was happening before meaning high indebtedness, excessive risk-taking, unreasonable exposure to liquidity risk, mismatch between assets and liabilities, poor investment performance, mismanagement.
Customer trust eroded for one sector means that often another sector wins in the short-term with capital flight hitting tech shares.
Some days it's important to notice that Apple shares could act as a second bank account.
APPL also rolled out a new savings account delivering Apple customers 4.15% of interest on their money. That was a smart move by CEO Tim Cook.
Now an unhealthy mix of soaring inflation, rising interest rates, and weaker economic growth could leave banks facing new problems, ranging from steep losses in bond value to higher funding costs and lower loan demand.
After the acute banking stress of the past weeks, a credit crunch could be looming. To adjust to an increasingly unfavorable macroeconomic context, banks have already substantially tightened their credit standards for all loan categories. But that is an additional blow to recession-stricken economies.
If there is another banking crisis following the last one we just experienced, expect big tech to get another avalanche of investors looking for a safe haven.
Although I am not one hoping for another disaster, the savvy investor must do what is right to preserve capital.
These are choppy water we see ourselves in and I do believe the sideways action in tech shares in April has been a big victory for tech.
April was the month investors were planning to dump shares and run for the hills, and that didn’t manifest itself.
The little volatility means that there was very little action taking place.
I understand that as a wildly bullish setup for tech earnings because much of the “bad” tech earnings have been priced into the news.
Conditions favor a mild bullish push in tech shares in May after they report better than first thought earnings.
Mad Hedge Technology Letter
April 12, 2023
Fiat Lux
Featured Trade:
(TECH EARNINGS BECOME BIGGEST RISK TO TECH)
(COMPQ), (APPL), (ABNB)
In prior iterations of the CPI report, a set of data reflecting the current inflation trends in the US, a positive report would have sent the tech index, known as the Nasdaq (COMPQ), soaring.
Today, we got none of that.
Volatility has taken a nap for the time being – even to the downside.
Why is that?
This time around the tech market is already looking around the corner to earnings that are assumed to be terrible.
Most of the profit margin gains were accrued last year and in the first quarter of this year. The rest of the year, tech companies won’t be able to raise the price of services.
Last year, Apple pushed that extra level pricing of iPhone, and Airbnb charged that extra level for that vacation rental. Now – no more.
Tech consumers are at the extreme upper limit of what they can afford and in fact, have been going deeper into debt to pay for software, hardware, and streaming.
The credit card debt levels have been soaring, showing that consumers are paying more for each item but getting less for every tech product.
What does this mean?
Management will offer bleak tech forecasts.
Silicon Valley might use this underwhelming period as a great platform to throw out the kitchen sink with the bath water.
That’s what today’s price action is telling us.
The easy gains in tech share appreciation were secured in January and March.
Conditions for the same melt up have soured quickly, and not bouncing hard off a great inflation report is an ominous sign in the short term for tech shares.
Now is a time when the easiest path of movement is south in shares as many investors could be taking profits heading into the earnings season.
There are no catalysts for a short-term bounce.
One bright note is that the US dollar has continued its awful performance this year which is highly positive for global growth which tech companies more than participate in.
Hollowing out the tech consumers isn’t the greatest strategy, but until now, it has worked. However, at what point will they stop taking on debt to fund their latest purchase? We could be coming to an inflection point, and that is not good for tech stocks.
As it stands, U.S. inflation is at its lowest level in nearly two years, but underlying price pressures will be sticky for a while.
Inflation rose 5% last month from a year earlier, down from February’s 6% increase and the smallest gain since May 2021, the Labor Department said Wednesday.
The labor market cooled some in March, with hiring gains moderating and wage growth easing. Weekly jobless claims, a proxy for layoffs, are up from historic lows. Also, job openings have dropped—a signal that demand for workers is softening.
Even if the job market has cooled, it hasn’t cooled enough for inflation to crash.
Yes, many tech jobs have been cut, and I see that as a much needed solution to the excesses of Silicon Valley, but today is more of a story of the number one risk to the market shifting from inflation to bad individual performance.
Get ready for many tech companies to tell us why they won’t be doing great later this year.
Remember the market always looks forward, and at the end of last month I predicted a slow April; that forecast has been nothing short of perfect so far.
Mad Hedge Technology Letter
January 30, 2023
Fiat Lux
Featured Trade:
(A FEBRUARY AIR POCKET)
($COMPQ)
Tech shares have swung violently as the China re-open trade went from a false start in December 2022 to taking off in microseconds in 2023.
That lit a fire under tech shares and we’ve experienced epic gains, just look at Tesla’s 35% rise in just one month.
Bear market rallies genuinely provide those “rip your face off” up moves and the key is to get out of the way and try to hop on the bandwagon.
Now after a 10% gain in the tech-weighted Nasdaq index, investors are scratching their heads as to what comes next.
Could we hit a sudden air pocket and retrace performance?
There is still a 35.4% probability that the Fed will hike .25% at the March meeting which would represent .75% more of Fed hikes.
Right now tech shares are only pricing in .50% of interest rate hikes and any type of confirmation of that this week by Chairman Jerome Powell will trigger another leg up in the tech rally.
A .75% rise in the Fed Funds rate means that a higher chance of a “hard landing” increases and stock will sell off rapidly.
Tech shares are poised for a choppy start to the year as investors rely on incoming economic data and eyeball historical trends for clues
The problem is the scope of last year’s selloff makes historical comparisons difficult to use. In fact, last year’s big losers — like growth-obsessed tech and communications services stocks — are among the best performers this year, leaving investors wondering if the worst of the bear market decline is behind them.
Tech forecasts include a small earnings decline, higher borrowing costs, and persistent economic uncertainty, and the reason why stocks could do well through the year is because the bar is set so low.
However, after the great first month of 2023, positioning now has swung dramatically the other way with consensus building and assuming a soft landing.
As the soft landing consensus begins to spread, the individual company news begins to worsen.
Tech firms like Microsoft have issued weak guidance and brutal job cuts.
There hasn’t been another industry that has adopted the pace of job cuts like the technology sector which gives support to the nostrum that tech companies overshoot on the way up and overshoot on the way down.
Apple is about the only big tech company that avoided thrashing the number of jobs in Cupertino, and I believe that is a highly positive sign for the rest of the year.
Another substantial tailwind to the first month of the year has been the tanking of the US dollar.
It has cratered again the most prominent Western currencies and a weak dollar promotes global growth.
Bear in mind that many foreign firms borrow in US dollars and pay back using their own currencies.
I do expect the U.S. Central Bank to downplay the strength in the stock market to poo poo an earlier-than-expected Fed pivot.
The Fed is mostly all bark and no bite which is why dip buyers are so aggressive with their tactical decisions.
I believe after a transitory dip in tech shares, we are most likely off to the races unless the Fed can give us something believably hawkish.
The most important concept to understand is that this current iteration of the Fed is gladly tolerating minus real interest rates as gross interest rates don’t go parabolic.
Although on a personal level, I don’t think this is the right thing to do, at an economic level, this prevents a stock market crash and encourages dip buyers to come in and save the market because they know the Fed won’t pull the rug from underneath them.
Tactical active trading will continue to be the most prominent strategy in the equity market and tech shares moving forward.
Mad Hedge Technology Letter
January 13, 2023
Fiat Lux
Featured Trade:
(BUY ANY TECH DIP)
($COMPQ), (APPL), (TSLA), (CPI)
Deflation is back and hard to believe after a disastrous 2022.
Tech investors finally are cheering on the positive structural backdrop as the mother’s milk has been removed for quite some time.
Last year was so bad for big tech that CEO Tim Cook’s compensation sunk from $99 million in 2022 to only $48 million in 2023.
Is that Putin’s fault too?
Jokes aside – yeh - it’s that bad for the tech CEOs so you can imagine how bad it is for the part-time worker censoring Facebook posts.
It’s not going all smooth at Apple either.
Apple is in the process of moving production from China to India and Vietnam.
Chinese factories aren’t as cheap as they used to be and they aren’t open consistently.
The 6.5% CPI was right bang on consensus yesterday and confirms the notion that prices are coming down fast.
Just look at some prices like used cars – prices are down 8.8% year over year.
The end result is that a recession will be delayed and the tech market won’t crash because of rapidly sinking earnings, but propped up by rapidly sinking interest rates.
Just look at the bond market – the U.S. 10-year rate has crashed.
Earnings won’t be great and tech has led the way with firings from many of the famous big tech firms.
It’s true that this is a down patch for big tech, but big tech will come roaring back like it always does.
The leaders will most likely be different motley crew this time around.
Tech companies aren’t doing great right now, but it could be worse.
The ones with strong balance sheets are looking to add growth externally such as Microsoft’s potential investment in OpenAI.
The dirty secret is that many tech companies aren’t looking to add cash-burning companies which prevent a lot of potential deals since most start-ups aren’t profitable.
Another clear sign that tech is on sale is the much-publicized Tesla price cuts so lower revenue is definitely on tap or at best – revenue plateauing.
Consumers can now get their Tesla for an eye-watering discount – just don’t anger the CEO or he’ll turn your software off.
The discounts have spread to Europe, in Germany, Tesla cut prices on the Model 3 and the Model Y from 1% to around 17%, depending on the configuration. Tesla’s Model 3 was the bestselling electric vehicle in Germany in December 2022, followed by the Model Y.
Part of the real reason that tech has rallied so hard to begin the year is because the sector was battered so badly last year.
We cannot claim victory after just 2 weeks of positive price action – only politicians get to claim victory for nothing – the rest of the year won’t be easy by any metric.
The world is wonky where the American consumer is tapped out, but much of the job firings have been limited to tech. Former tech workers can still rotate into other sectors to find work as tech companies become streamlined. I expect a very different tech sector moving forward with far less waste. I forecast something more similar to a single CEO delegating work to an army of bots and algorithms.
Tech overhired in the first place, so going back to 2020 staffing levels supersede any sensationalist headline that tech is over. I believe tech companies need to go back to 2015 staffing levels.
As long as deflation is priced into tech shares for the rest of 2023, tech stocks will be a buy-the-dip type of asset class.
However, in the short term, we have run quite hot for the first 2 weeks as the tech sector sets up for the first dip of the year.
Mad Hedge Technology Letter
January 6, 2023
Fiat Lux
Featured Trade:
(JOBS REPORT A TAILWIND FOR TECH SHARES)
($COMPQ)
Don’t forget that we are still in the middle of a good-news-is-bad-news paradigm.
This paradigm could be positive for tech stocks in 2023.
Why is that?
Tech shares and the investors that participate in the trading of these shares are betting that the Fed doesn’t have the gall to lower inflation to the mandated 2%.
The incessant desire for the Fed pivot would result in the Fed changing directions and reversing its quantitative tightening.
The Fed will delay the much-awaited easing of monetary policy if there is too much good news.
Sure, this all seems counterintuitive, and that isn’t your fault.
The Fed isn’t too interested in killing inflation because it could instigate a stock market crash or an economic depression.
The verbiage the Fed uses is a “soft landing.” That’s what they want opposed to a “hard landing.”
Why did tech shares skyrocket on the latest jobs report?
The headlines were fantastic therefore based on the above description, tech shares must have sold off, but the inverse happened and tech markets went gangbusters this morning.
The economy added 223,000 jobs in December, beating expectations, but most of these jobs weren’t white-collar or full-time jobs.
The US gained 4.5 million jobs in 2022, making it one of the best years of job growth ever, but the tech market doesn’t care about that one because the stock market trades on forward-looking valuations.
In fact, the US tech sector has been leading the charge in layoffs with many tech executives saying they overhired during the arbitrary lockdowns.
The tech market clung to one number and naturally the one that has a direct influence on the high inflation rate - wage growth at 3.4% year over year.
This was also the smallest job gains in the past 2 years.
Today's jobs report is a stark reminder that wage growth is being smothered by Bidenflation.
More folks have to take on a second job just to make ends meet.
Sometimes even a darn third job if time allows.
Lately, wage growth has come in incredibly high, because for quite some time, those high-paying full-time jobs were still on the table.
Ultimately, broad-based job losses are what will lead to a Fed pivot and not just tech jobs losses.
Tech is way ahead of the game executing broad-based layoffs and they will be rewarded for it. These are also great entry points to buy the dip.
It’s natural to observe many tech firms tightening up operations. Money isn’t free anymore and earnings are falling apart as we speak.
Tesla is cutting the price of Tesla EVs in China.
Amazon is cutting a more-than-expected 18,000 workers.
Many tech firms are slimming down their model to prepare for a recession.
The endpoint here is low rates and a lot of pain will occur to get to that end.
Tech in early 2023 will merely be a high-volatility trader’s dream until we get the green light for easy money again.
Buy big dips and sell large rallies – rinse and repeat. There is no way that tech stocks will go up in a straight line because earnings simply aren’t accelerating – they will be lucky to just pass the sniff test at this point so position accordingly.
