Mad Hedge Technology Letter
September 20, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS RECEIVE A GIFT)
($COMPQ), (NVDA)
Posts
No recession – highly bullish for technology stocks ($COMPQ) in the short term.
That is my hot take from Jerome Powell’s and the Fed’s surprise 50-point basis interest rate cut.
Tech stocks will overwhelmingly outperform the rest of the equity market because that is where the profits and earnings are.
I don’t see a situation for the ‘catch up’ trade, or if it does transpire, it will be very transitory in nature.
There is no other subsector that is about to overtake technology in terms of prestige or growth, and that is where I take comfort in believing that technology will harvest the lions’ share of the gains from the Central Bank’s interest rate cut.
The cut was a jumbo one, which means even better projections for tech share prices in the short run.
It is hard not to take a look-in back at the Magnificent 7 for another winter rally that should take the Nasdaq quite a bit higher from here.
That is why I executed a deep-in-the-money call spread on chip behemoth Nvidia (NVDA) this morning.
The tech-weighted Nasdaq index hit an all-time high in 2024 around July, with prices trading around 18,700 points, and we are around 5% from that high.
Any pullback in quality tech firms will be brought up, and I urge readers to enjoy the rally because of the unexpected jumbo hike, the rally is now pulled forward.
Highlighting the hawkish cut was the FOMC vote was 11-1, with Governor Michelle Bowman preferring a quarter-point move.
Powell pushed through a half-point move instead and ironically told reporters that the economy was great.
Unemployment numbers of around 4.2% were once considered full employment back in the day.
A half-point cut into a strong economy to pre-empt a recession is an interesting move.
It is clear they don’t want to get behind the curve after they badly botched inflation on the way up.
In most normal cases, tech stocks would rocket higher, and bond yields would sink, but the 10-year yield has gone the other way, signaling that this hawkish cut could ignite another bout of higher inflation at the long end of the yield curve.
The Nasdaq index gained 3%, showing that it can power through no matter what bonds are doing, and that has been the case since 2020.
The Japanese yen also shot higher from the 140 level to the 144 to the US dollar today.
A weaker trending yen is a highly bullish signal for the trajectory of U.S. tech stocks.
The committee expects the long-run neutral rate to be around 3%, a level that has drifted higher as the Fed has struggled to get inflation down to 2%.
Gross domestic product has been rising steadily, and the Atlanta Fed is tracking 3% growth in the third quarter based on continuing strength in consumer spending. Moreover, the Fed chose to cut even though most gauges indicate inflation well ahead of the central bank’s 2% target. The Fed’s preferred measure shows inflation running around 2.5%, well below its peak but still higher than policymakers would like.
The current jobless level is 4.2%, drifting higher over the past year, though still at a level that would be considered full employment.
A 50 basis point rate cut into an economy growing 3% per year will surely get GDP moving closer to 4%.
Think about it in terms of housing and all the buyers waiting on the sidelines waiting to get into the housing market.
Inflation is sure to come back again in the long term, but in the short term, this nudges 3% GDP to 4%, and that is highly bullish for tech stocks. This also should help unemployment stick close to the 4.2% in, which the Fed is worried about, which is a victory for equity markets.
The tech rally is here, and don’t miss out on it!
Global Market Comments
August 26, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or BEWARE THE NEXT BLACK SWAN) plus (REVISITING UKRAINE),
(SPY), ($INDU), ($COMPQ), (FXI), (COPX), (NVDA), (GM), (GOOG), (FCX), (UUP), (FXE), (FXB), (FXC), (FXA)
The summer is winding down and I view it as a huge success.
I ended up using all 20 of my vintage Hawaiian shirts, which I often get compliments on. I don’t tell people I bought them when they were new. My dry cleaner thought she died and went to Heaven.
Now that an interest rate cut is a sure thing, what happens next? This is the first bull market in history not preceded by an interest rate cut. It might pay us to review how much markets have really gone up in such a short amount of time.
Since the pandemic low, the Dow Average ($INDU) is up 116%, the S&P 500 (SPY) 181%, and the NASDAQ a positively ballistic 262%. Just since the October 26 low, the Dow Average ($INDU) is up 44%, the S&P 500 (SPY) 60%, and the NASDAQ a positively ballistic 86%.
And you want more?
So, what happens now when we get the first interest rate cut in five years? Another new bull market?
Maybe.
Dow 240,000 here we come.
Mad Hedge Fund Trader enjoyed a meteoric performance run so far in 2024, even dodging a bullet from the August 5 Nonfarm Payroll black swan. Whenever that happens, I start to get nervous. So I thought I’d make a list of potential black swans on our horizon that could upset the apple cart.
1) NVIDIA (NVDA) reports, earnings disappoint, and revises down its spectacular forward guidance citing that the AI boom has become overheated. I give this maybe a 5% probability, but even a good report could mark a market top.
2) The September 6 Nonfarm Payroll Report comes in too hot, and Jay Powell does NOT cut interest rates on September 18. This would be worth a very quick 10% correction and a retest of the (SPY) $510 August low. I give this maybe a 30% probability. The market now considers a rate cut a 100% certainty, which is always dangerous.
3) Jay Powell cuts interest rates on September 18, but only by 25 basis points. If he does this in the wake of an awful September 6 Nonfarm Payroll Report and a jump in the headline Unemployment Rate, we would similarly get a 10% correction and a retest of the (SPY) $510 August low.
4) The calendar alone could give us a correction. The biggest selloffs of both 2022 and 2023 both ended in mid-October. Is history about to repeat itself? Or at least rhyme?
5) The war in the Middle East expands when Iran attacks Israel again. For most American traders the map of the world ends on the US coasts. So even if this happens it’s not worth more than a 4% correction.
Of course, it’s the black swans you don’t see coming that really hurt. That’s why they’re called black swans. Who saw the 9/11 terrorist attacks coming? The 2014 flash crash? The pandemic?
I landed in London on the eve of the big event of the year. No, it was not the King Charles III coronation.
It was the Taylor Swift Eras concert. Thousands of ecstatic Americans crossed the pond to catch the show. I actually thought about going to Wembley Arena to watch her. The last time I had been there was in 1985 for the Live Aid concert. Before that, it was the Beach Boys and Rod Stewart in 1977, which I recently reminded Mike Love about.
But at $1,000 a ticket to get crushed by a crowd of 100,000 I decided to give it a pass. Better to give these old bones a break and catch her on iTunes for free.
But I did get a chance to grill a card-carrying Swifty about the mysterious attraction while waiting at the Virgin Atlantic first-class lounge on the way back to San Francisco.
First of all, she loved the music. But it’s more than just music. More importantly, she admired an independent woman who wrote her own songs and became a billionaire purely through her efforts.
Maybe there will be more strong, independent women in our future.
So far in August, we are up by +2.67%. My 2024 year-to-date performance is at +33.61%. The S&P 500 (SPY) is up +18.23% so far in 2024. My trailing one-year return reached +52.25. That brings my 16-year total return to +710.24. My average annualized return has recovered to +51.91%.
I executed no trades last week and am maintaining a 100% cash position. I’ll text you next time I see a bargain in any market. Now there are none.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 49 of 66 trades have been profitable so far in 2024, and several of those losses were break-even. That is a success rate of +74.24%.
Try beating that anywhere.
Jay Powell Says the Time to Adjust Policy is Here, and that much progress has been made toward the 2% inflation target and a sustainable path to get there is in place. Stocks had already front-run the move, but bonds liked it. The path is now clear for a September rate cut, but how much?
Where did the 818,000 Jobs Go? 50 states compiling data in 50 different ways on differing time frames is going to generate some big errors like this one. That means monthly job gains fell from 250,000 to 175,000. Is the message that the Fed waited too long to cut rates?
Weekly Jobless Claims Fall to 233,000, down a whopping 17,000, but how real is it in the wake of this week’s 12-month revision? The report comes with Wall Street on edge amid signs that job growth is slowing and even signaling a potential recession on the horizon. Jobless claims have been trending higher for much of the year, though still remain relatively tame
$6 billion Poured into US Equity Funds Last Week, bolstered by bets of a Federal Reserve rate cut in September and easing worries about a potential downturn in economic growth. That is the largest weekly net purchase since July 17. A benign inflation report last week and the Fed meeting minutes on Wednesday, indicating a potential rate cut in September, boosted investor appetite for risk assets.
Mortgage Rates Hit New 2024 Low. The average for a 30-year, fixed loan was 6.46%, down from 6.49% last week. Borrowing costs are down significantly after topping 7.48% earlier this year, giving house hunters more purchasing power and coaxing some would-be buyers off the fence. Sales of previously owned US homes in July or the first time in five months.
Waymo Picks Up the Pace, Alphabet's (GOOG) Waymo said it had doubled Robotaxi paid rides to 100,000 per week in just over three months. If robotaxis take over the world, imagine the amount of job losses to taxi drivers.
GM (GM) Cuts Staff, GM is laying off more than 1,000 salaried employees globally in its software and services division following a review to streamline the unit’s operations. This follows many other firms that are trying to keep expenses low as the economy starts to slow.
Copper (COPX) Flips from Shortage to Surplus, as the Chinese economic recovery drags on. Copper surpluses of 265,000 metric tons are now expected this year, 305,000 tons in 2025, and 436,000 in 2026. Prices may recover in the fourth quarter if exchange stocks are drawn down. ME copper hit 4-1/2 month lows of $8,714 a ton in early August as U.S. recession fears and concern the Federal Reserve has kept interest rates too high exacerbated negative sentiment from soaring inventories and lackluster demand.
China (FXI) consumes more than half of global refined copper supplies, estimated at around 26 million tons this year. But much of the copper used in China is for wiring in household goods which are then exported. A housing market slump and China's stagnant manufacturing sector highlight the headwinds copper demand faces. Hold off on (FCX).
Dollar (UUP) Hits Seven Month Low, as US interest rate cuts loom. It could be a decade-long move. Buy (FXE), (FXB), (FXC), and (FXA).
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 600% 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, August 26 at 8:30 AM EST, the US Durable Goods orders are out.
On Tuesday, August 27 at 6:00 AM, the S&P Case Shiller National Home Price Index is released.
On Wednesday, August 28 at 7:30 PM, EIA Crude Stocks are printed.
On Thursday, August 29 at 8:30 AM, the Weekly Jobless Claims are announced. We also get Q2 US GDP.
On Friday, August 30 at 8:30 AM EST, the US Core PCE Index is disclosed. Also, New Home Sales are disclosed. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, you know you’re headed into a war zone the moment you board the train in Krakow, Poland. There are only women and children headed for Kiev, plus a few old men like me. Men of military age have been barred from leaving the country. That leaves about 8 million to travel to Ukraine from Western Europe the visit spouses and loved ones.
After a 15-hour train ride, I arrived at Kiev’s Art Deco station. I was met by my translator and guide, Alicia, who escorted me to the city’s finest hotel, the Premier Palace on T. Shevchenka Blvd. The hotel, built in 1909, is an important historic site as it was where the Czarist general surrendered Kiev to the Bolsheviks in 1919. No one in the hotel could tell me what happened to the general afterward.
Staying in the best hotel in a city run by Oligarchs does have its distractions. That’s to the war occupancy was about 10%. That didn’t keep away four heavily armed bodyguards from the lobby 24/7. Breakfast was well populated by foreign arms merchants. And for some reason there we always a lot of beautiful women hanging around.
The population is getting war-weary. Nightly air raids across the country and constant bombings take their emotional toll. Kiev’s Metro system is the world’s deepest and at two cents a ride the cheapest. It where the government set up during the early days of the war. They perform a dual function as bomb shelters when the missiles become particularly heavy.
My Look Out Ukraine ap duly announced every incoming Russian missile and its targeted neighborhood. The buzzing app kept me awake at night so I turned it off. The missiles themselves were nowhere near as noisy.
The sound of the attacks was unmistakable. The anti-aircraft drones started with a pop, pop, pop until they hit a big 1,000-pound incoming Russian cruise missile, then you heard a big kaboom! Disarmed missiles that were duds are placed all over the city and are amply decorated with colorful comments about Putin.
The extent of the Russian scourge has been breathtaking with an an epic resource grab. The most important resource is people to make up for a Russian population growth that has been plunging for decades. The Russians depopulated their occupied territory, sending adults to Siberia and children to orphanages to turn them into Russians. If this all sounds medieval, it is. Some 19,000 Ukrainian children have gone missing since the war started.
Everyone has their own atrocity story, almost too gruesome to repeat here. Suffice it to say that every Ukrainian knows these stories and will fight to the death to avoid the unthinkable happening to them.
It will be a long war.
Touring the children’s hospital in Kiev is one of the toughest jobs I ever undertook. Kids are there shredded by shrapnel, crushed by falling walls, and newly orphaned. I did what I could to deliver advanced technology, but their medical system is so backward, maybe 30 years behind our own, that it couldn’t be employed. Still, the few smiles I was able to inspire made the trip worth it.
The hospital is also taking the overflow of patients from the military hospitals. One foreign volunteer from Sweden was severely banged up, a mortar shell landing yards behind him. He had enough shrapnel in him to light up an ultrasound and had already been undergoing operations for months.
To get to the heavy fighting I had to take another train ride a further 15 hours east. You really get a sense of how far Hitler overreached in Russia in WWII. After traveling by train for 30 hours to get to Kherson, Stalingrad, where the German tide was turned, is another 700 miles east!
I shared a cabin with Oleg, a man of about 50 who ran a car rental business in Kiev with 200 vehicles. When the invasion started, he abandoned the business and fled the country with his family because they had three military-aged sons. He now works a minimum-wage job in Norway and never expects to do better.
What the West doesn’t understand is that Ukraine is not only fighting the Russians but a Great Depression as well. Some tens of thousands of businesses have gone under because people save during war and also because 20% of their customer base has fled.
I visited several villages where the inhabitants had been completely wiped out. Only their pet dogs remained alive, which roved in feral starving packs. For this reason, my major issued me my own AK47. Seeing me heavily armed also gave the peasants a greater sense of security.
It’s been a long time since I’ve held an AK, which is a marvelous weapon. But it’s like riding a bicycle. Once you learn you never forget.
I’ve covered a lot of wars in my lifetime, but this is the first fought by Millennials. They post their kills on their Facebook pages. Every army unit has a GoFundMe account where doners can buy them drones, mine sweepers, and other equipment.
Everyone is on their smartphones all day long killing time and units receive orders this way. But go too close to the front and the Russians will track your signal and call in an artillery strike. The army had to ban new Facebook postings from the front for exactly this reason.
Ukraine has been rightly criticized for rampant corruption which dates back to the Soviet era. Several ministers were rightly fired for skimming off government arms contracts to deal with this. When I tried to give $3,000 to the Children’s Hospital, they refused to take it. They insisted I send a wire transfer to a dedicated account to create a paper trail and avoid sticky fingers.
I will recall more memories from my war in Ukraine in future letters, but only if I have the heart to do so.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
August 23, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS LAUNCHED INTO ORBIT BY JEROME)
($COMPQ), ($TNX)
The job is done – The Fed won against inflation.
When is the parade?
That was largely the message that was delivered to us this morning by U.S. Federal Reserve Chairman Jerome Powell.
Migrating into rate-cutting mode means that tech stocks ($COMPQ) are about to explode into orbit.
We will only know how much higher tech stocks will go when we can understand how much Powell’s Fed will cut.
If he cuts the Fed Funds rate from 5.25% to 2% then tech stocks will be up at least another 50% from these levels.
What is bizarre is that Powell is cutting rates ($TNX) with housing prices, grocery costs, stock market, and a price for one ounce of gold at all-time highs.
Things are about to get more expensive – that is guaranteed.
Ironically, the Fed is planting the seeds for the next rip-roaring wave of inflation, because 3% inflation levels will be the new floor and not the ceiling.
Once the CPI hit 2.9% just a few days ago, the Fed went into the “the job is done” mode which is extremely dangerous.
Either way, tech stocks are in for a spectacular monster rally heading into the year's close and we just added a big position in chip stock Micron (MU).
There should be two to three .25% cuts by the end of the year which is highly bullish for equities.
"The direction of travel is clear," Powell added.
Powell acknowledged recent softness in the labor market in his speech and said the Fed does not "seek or welcome further cooling in labor market conditions."
The July jobs report rattled markets earlier this month, revealing that there were just 114,000 jobs added to the economy last month while the unemployment rate rose to 4.3%, the highest since October 2021.
Data earlier this week also showed that 818,000 fewer people were employed in the US economy as of March, suggesting reports have been overstating the strength of the job market over the last year.
Powell's remarks on Friday were reminiscent of those he delivered at Jackson Hole in 2022, in which the Fed chair offered a direct assessment of the economic outlook and, at the time, the need for additional rate increases.
The similar part of the speech was his call to action to change the direction of policy and he did just that.
We are about short-term trading and trade alerts here in what moves the market with tech trades.
I do believe long-term, what Fed chair Jerome Powell did, will turn out to be a policy mistake that will result in a lot higher bond yields.
The Fed's slow walking the rate hikes on the way up and then now slow walking the rate cuts on the way down is a recipe for disaster and the wrong way to approach this problem.
The ironic thing here is that tech stocks are the only equities, apart from energy and supermarket stocks, to do well in a higher inflation backdrop and part of that has to do with their monopolistic power which continues unabated.
Not that tech needed any help, but help is arriving in terms of lower rates and I do believe tech stocks will do well as we move closer to year-end.
Buckle up, put on your cowboy hat, and enjoy the tech rally!
Mad Hedge Technology Letter
August 16, 2024
Fiat Lux
Featured Trade:
(BIG RISKS TO TECH DISSIPATE)
($COMPQ), ($TNX), (FXY)
I don’t believe the tech sector is toast and it isn’t true to say that the burnt crust is the only part left over.
There is still vitality in it at the core of the tech sector ($COMPQ).
Granted, the trajectory left isn’t enough to propel tech stocks to a meteoric rise, but tech stocks should perform quite robustly in the run-up to the next earnings report.
So for all that are waiting for the bubble to burst – wait a little longer my friends.
In the meantime, let’s take a quick barometer of some of the outsized risks to big tech and ponder about the idea that outside or indirect events could possibly takedown tech shares.
China bailed the world out of the last three recessions and now they are a risk to drag down the rest of the world.
In each case, China's high growth and massive issuance of stimulus kick-started global expansion, and now that is gone with the wind.
China's model of economic development which worked so brilliantly in the boost phase, is now out of potency.
If American tech shares are sideswiped by global contagion, don’t bet on China to come bail out the radical overlords of Silicon Valley. China has its own problems and is entirely focused on that.
The era of zero-interest rates and unlimited government borrowing has ended. As Japan has shown, even at insane low rates ($TNX) of 1%, interest payments on skyrocketing government debt eventually consume virtually all tax revenues.
Japan was the black swan that could have cratered the tech market. Instead, it was a mild selloff yet manageable selloff creating a beautiful entry point for most of tech stocks.
Money is coming off the sideline to join in on a sharp rally into the U.S. presidential election so in the end the Japanese currency (FXY) risk was basically much-a-do-about-nothing.
At the start of the cycle, global debt levels (government and private sector) were low. Now they are high. The boost phase of debt expansion and debt-funded spending is over, and we're in the stagnation-decline phase where adding debt generates diminishing returns.
The era of low inflation has also ended for multiple reasons, but the tech shares have proven they can unequivocally march higher in an era of high inflation.
This is ironically due to tech being better positioned than other industries on a relative basis, because of their strong moats and iron-clad balance sheets.
The resilience in tech also echoes the idea that every company has become a tech company by integrating its products and revenue streams into daily business operations.
Tech productivity boom is hardly a one-off so as readers fret, please don’t think shares will magically drop to zero.
Dips are being bought and prices will go higher in the short term.
Economists were in awe in the early 1990s by the productivity stemming from the tremendous investments made in personal and corporate computers, a boom launched in the mid-1980s with Apple's (AAPL) Macintosh and desktop publishing, and Microsoft's Mac-clone Windows operating system.
By the mid-1990s, productivity continued to rise and the emergence of the Internet triggered the adoption of most of the population to get online and do business.
All the doomsday prophets who said high debt and high interest rates were the cocktails to finally stop tech stocks in their tracks got it completely wrong.
I am not saying debt and high interest rates are positive for equities, but tech has been able to skillfully navigate the headwinds with their excellent management skills and pivot towards leanness.
The buzz around AI holds still has a lot to prove, but the market is still celebrating its deflection of the Japanese yen carry trade.
I am not saying that tech shares will never have to confront anything that can drag them down meaningfully, but many of the high risks have either been postponed or dealt with.
We are in a position where tech should steamroll into the end of the year barring some type of crazy event.
Mad Hedge Technology Letter
August 14, 2024
Fiat Lux
Featured Trade:
(POSITIVE SIGNAL FOR THE TECH RALLY)
($COMPQ), ($TNX)
We received highly bullish news from the fiscal policy side today.
Conditions are everything in the short-term which is why macro events sometimes steal the whole show by destroying or propping up market sentiment.
Scare events can shock investors and become the impetus to take profits to protect capital.
Fortunately, the data from the CPI index has most likely given the green light for the US Central Bank to officially initiate its easing cycle next month.
My guess is that Fed Governor Jerome Powell cuts by 25 basis points and it could turn out to be a hawkish cut.
This is massively bullish for tech stocks ($COMPQ) leading up to the next earnings report in October.
This sets the backdrop for tech stocks to motor towards the upper left in upcoming months.
Lower rates ($TNX) translate into lower costs of capital for tech stocks to borrow money for paying stuff like salaries, software, and hardware.
The high-rate environment has translated into a dearth of companies going public and has stifled the creative juices at the formative stages of Silicon Valley.
That last jobs report offered new signs of a cooling labor market, which stoked fears that the Fed may have waited too long to start lowering interest rates after keeping them at a 23-year high for the last year.
A milder inflation reading released Wednesday removes one of the last hurdles the Federal Reserve needed to clear before cutting rates in September.
The Consumer Price Index (CPI) increased 2.9% over the prior year in July, down from June's 3% annual gain in prices. On a "core" basis, which strips out the more volatile costs of food and gas, prices in July climbed 3.2% over last year — down from 3.3% in June. That was the smallest increase since April 2021.
The new numbers are the latest confirmation that inflation is in fact dropping off a cliff after heating back up during the first quarter of the year, a development that prompted the Fed to warn at one point that rates would likely stay higher for longer.
Fed Chair Jerome Powell made it clear at the end of last month that a cut in September was “on the table” as long as the data supported it. He and other policymakers have said they want to be sure that inflation is in fact moving “sustainably” down to their 2% goal.
Tech stocks have positively correlated with interest yields since 2020, which is counterintuitive.
What this really means is that the growth rate of tech has overpowered the 5% Fed Funds rate which is quite impressive.
That high rate was supposed to pummel tech stocks and that fear-mongering failed to materialize.
No doubt the AI boom delivered a helping hand to tech shares as well.
Tech stocks were one of the few sectors in the public market that remained attractive in the face of aggressive rate hikes.
With the Fed almost to the point of reversing hawkish policy, I do believe it is “all systems go” for tech stocks in the short-term and this removes yet another possible black swan event off the table.
I am bullish on tech shares in the short-term.
