Mad Hedge Technology Letter
August 2, 2024
Fiat Lux
Featured Trade:
(BAD NEWS IS BAD NEWS FOR TECH)
($COMPQ), (FXY)
Posts
Tech stocks ($COMPQ) won’t be down for too long. It’s been a while since we were caught by a right hook to the jaw, but it still hurts nonetheless.
The myriad of weakness was triggered by weakening employment numbers suggesting the internals of the US economy are falling apart.
Some of the big names are down, but that doesn’t mean they are down and out.
In fact, big tech didn’t fare that badly during earnings even though lots of little software companies were crushed.
It is true that forecasts have been substantially weak as enterprise spending is reigned in and belts tightened.
Then to really cap it off, the Japanese yen (FXY) strengthening via an unexpected interest rate hike by the Bank of Japan, sparked an unwind that really gutted tech stocks in the short-term.
Much of the liquid capital used to bid up tech stocks originated from Japanese banks who lent in Yen only for private funds to buy tech stocks in dollars.
That trade has gotten clobbered in the past few weeks.
There is a strong chance that the Bank of Japan could be out of bullets for now and this isn’t the death of tech.
We are just resting.
The unemployment rate cooling and tech stocks selling off finally means that bad news is bad news.
That translates into a manifestation of an upcoming recession or at least tech investors firmly believe so.
New signs of a cooling labor market are stoking fears that the Federal Reserve may have waited too long to start lowering interest rates.
We are in full-blown risk-off mode.
The US economy added 114,000 nonfarm payroll jobs in July, fewer than the 175,000 expected by economists. The unemployment rate rose to 4.3% — its highest level since October 2021.
Fed chair Jerome Powell said Wednesday that a cut in September was “on the table.”
Powell also said "the question really is one of are we worried about a sharper downturn in the labor market. The answer is we are watching carefully for that."
I still believe we will experience some sort of bounce back from tech stocks.
There is no way we go from soft landing to hard landing in a matter of three days.
What does this do for tech stocks?
With data points of this magnitude, it’s normal for a sharp rotation to occur.
The thing we have here is that we are at all-time highs so the profit-taking can become very vicious and hasty.
But if you want to ask me if the tech rally is over, no, it isn’t but we will need to go into consolidation mode to absorb poor revenue guidance.
The dip will be bigger than a mini-dip so as investors, we need to allow this underperformance to work itself through the system before we are off to the races again.
In the end, lower rates are the most advantageous for tech stocks, but conditions need to stabilize for tech stocks to reap those benefits.
Mad Hedge Technology Letter
July 12, 2024
Fiat Lux
Featured Trade:
(ROTATION HITS THE TECH SECTOR)
($COMPQ), ($TNX), (IWM)
Bond yields ($TNX) diving and the market pricing in a 25 basis point rate cut in September surely translates into another swift leg up in tech stocks ($COMPQ), right?
Hold your horses.
The price action resulted in the exact opposite with big names like Tesla down over 4%.
It was ugly but orderly which is a victory and not of the pyrrhic sort.
The sharp selloff stemmed from a lower-than-expected CPI number.
Decreasing CPI is a strong signal that price inflation is coming down and that is highly conducive to higher stock prices.
However, every inflation report reflecting lower inflation doesn’t guarantee tech stocks in unison will go up.
Tech stocks have done exceptionally well during a backdrop of high rates and high inflation which is extremely unusual.
The market took this opportunity to rotate out of tech and into cheaper stocks that look to benefit more from lower rates.
That’s not saying that tech stocks don’t benefit from lower rates, they certainly do, but the best of the rest has been so beaten down behind the woodshed during this higher rate story that many companies have been on life support and are due for a quick bounce.
The bounce, however, could be short-lived and the bounce could also be given back swiftly.
I suspect a temporary slowdown of tech stocks for the moment will take place while beaten-down sectors get their 15 minutes of fame before they disappear into the background.
I do believe once this short event has worked itself through the system, tech will be off to the races again.
It’s hard to keep tech stocks down because nothing of note has and looks like toppling them.
Presiding over iron-clad balance sheets with Teflon business models and wielding cash cows is the secret recipe to success.
The worst-performing sector in 2024 — real estate — had its best day this year. The Russell 2000 (IWM) climbed 3.6% — the most since November.
US inflation cooled broadly in June to the slowest pace since 2021 on the back of a long-awaited slowdown in housing costs, sending the strongest signal yet that the Fed can cut interest rates soon.
I find this rotation highly beneficial for the overall health of the stock market and it is honestly about time.
Higher rates were starting to turn the screws on many smaller companies.
Many have been in survival mode forcing management into maneuvers like cutting staff, doubling up workloads, trimming expenses, and reducing prices for products.
I do believe that this scarcity mentality will come to an end and this does give more room for other tech companies other than the Magnificent 7 to overperform.
To be honest, the over-reliance on 7 tech stocks to power the tech market is getting a little long in the tooth, and the narrow concentration of alpha is highly irregular and negative for the long-term sustainability of the tech sector.
I would tell readers to get your gunpowder ready because we are setting up for an optimal entry point into tech stocks for the next leg up.
Just be patient.
Mad Hedge Technology Letter
July 10, 2024
Fiat Lux
Featured Trade:
(GERMANY BRINGS DOWN BITCOIN)
(BTC), ($COMPQ)
The German government unloading hundreds of Bitcoin (BTC) shows how a random event can reverse positive sentiment.
Technology stocks ($COMPQ) aren’t immune to this type of price action and as we inch closer to the election in November, get prepared for the likelihood of wonkiness to increase.
Luckily enough, the onslaught of regulatory attacks from all sorts of governments has more or less been priced into tech stocks.
A billion fine here or there for many of these tech titans is just a drop in the ocean.
Even political events now do little to sway tech stocks, because many events are just ephemeral in nature and don’t change the trajectory of tech.
Bitcoin isn’t necessarily directly important to tech stocks but operates in parallel.
It is true that there is a lot of crossover between talent pools in the labor forces. Everyone working in Google and Apple knows people working in Bitcoin and vice versa.
More often than not big tech has acted as a feeder source to fill position at Bitcoin and crypto companies.
For weeks now, Germany’s government has been selling hundreds of millions of dollars worth of Bitcoin — and it’s been a key factor behind the cryptocurrency’s intense sell-off.
Last month, the German government began selling Bitcoin from a wallet operated by the country’s Federal Criminal Police Office.
They also sold 900 bitcoins in June.
Last week, the government sold an additional 3,000 bitcoins worth roughly $172 million. Then on Monday, German police sold a further 2,739 bitcoins or $155 million worth of the cryptocurrency.
Bitcoin prices have also been under stress from the payout of billions of dollars worth of digital currency from the collapsed bitcoin exchange Mt. Gox — which went bankrupt in 2014 — to creditors.
A trustee for the Mt. Gox bankruptcy estate has started making repayments in bitcoin and bitcoin cash to some of the creditors through a number of designated crypto exchanges.
Bitcoin’s price is still up a good 89% in the last 12 months.
In January 2024, police in the eastern German state of Saxony announced the seizure of close to 50,000 bitcoins, worth around $2.2 billion at the time.
Today, Germany’s BKA holds roughly 32,488 bitcoins. At current prices, the government’s holdings are worth roughly $1.9 billion.
Although it might feel like a one-off, I do believe governments around the world will be in a position to confiscate more crypto in the future.
This could end up government owning more and more of the finite Bitcoin supply in circulation and could lead to regulation taking a backseat.
The golden goose won’t be killed if the government has skin in the game.
Even though this could become an unusual way for governments to onboard themselves into the crypto ecosystem, killing crypto would have a contagion whiplash that can’t be fully quantified as of now.
Uncertainty always tanks the market.
In fact, I believe the drop in Bitcoin from $73,000 to $53,000 is a positive event for investors because they can load up again at cheaper prices.
I believe we are in a goldilocks phase in technology where Bitcoin and tech stocks grind higher.
Temporary events that drop tech stocks or bitcoin by 20% are few and far between.
Many tech investors would love a better entry point, and it will truly take a real black swan to knock tech stocks or Bitcoin off their high and mighty perch.
As it stands, expect higher prices in both asset classes.
Mad Hedge Technology Letter
June 17, 2024
Fiat Lux
Featured Trade:
(INNOVATION IS THE SAVIOR)
(TTDKY), ($COMPOQ)
The only way out of the mountain of US Federal debt black hole is to innovate out of it via the tech sector ($COMPQ).
That is the only way.
A savior can only come in one form and that is it.
Nothing will forgive these trillions of debt and the pile is growing by the day.
The close to $35 trillion and counting will increasingly be a pain in the side of US businesses and that includes tech companies listed on the stock exchange.
Innovation leads to surging productivity manifesting in revenue gains that make it possible to dig ourselves out of this situation where interest expense drags us further down the rabbit hole.
Innovation has happened before to the US economy in the past like the gas-powered car and the creation of the internet.
It’s likely to happen again as well.
Instead of one big idea, it could come in the form of many solid yet meaningful gains.
One just came in that could truly improve the productivity of American tech and that is from Japan’s TDK (TTDKY) which boasted a breakthrough in materials used in its small solid-state batteries.
The batteries set to be produced will be made of an all-ceramic material, with oxide-based solid electrolyte and lithium alloy anodes.
The high capability of the battery to store electrical charge, TDK said, would allow for smaller device sizes and longer operating times, while the oxide offered a high degree of stability and thus safety.
The breakthrough is the latest step forward for a technology industry experts think can revolutionize energy storage, but which faces significant obstacles on the path to mass production, particularly at larger battery sizes.
Solid-state batteries are safer, lighter, and potentially cheaper and offer longer performance and faster charging than current batteries relying on liquid electrolytes. Breakthroughs in consumer electronics have filtered through to electric vehicles, although the dominant battery chemistries for the two categories now differ substantially.
The most significant use case for solid-state batteries could be in electric cars by enabling greater driving range.
TDK, which was founded in 1935 and became a household name as a top cassette tape brand in the 1960s and 1970s, has lengthy experience in battery materials and technology.
The US federal debt is annualizing at a loss of $2 trillion at a time of full employment.
Imagine the devastation if we need to do quantitative easing again while already burning $2 trillion per year.
The number needed to pull us out of a recession could be $8-$15 trillion and that will come with a nasty set of inflationary outbursts.
The number of full-time jobs has fallen off a cliff and tech firms have cut the bloat.
It will be the ingenuity of tech companies like Japan’s TDK that will infuse the US economy will much-needed productivity.
I believe if the tech sector can keep peppering us with these breakthroughs in productivity, progress can supersede the out-of-control fiscal spending that has launched an uncontrollable bout of inflation in the US.
Remember that the top tech stocks in the world have been shielded from inflation only because they have hopped on the generative AI train.
For the rest of tech, inflation is hitting them like a sledgehammer between the eyes.
The biggest beneficiaries of cutting-edge innovation would be the share prices of the best tech stocks.
As it stands, tech will keep grinding higher in the current conditions, but better-than-expected innovation would shoot tech stocks to the moon and include a wide breadth of participation while putting a cap on inflation.
Mad Hedge Technology Letter
June 12, 2024
Fiat Lux
Featured Trade:
(WHAT WILL DROPPING INFLATION DO TO TECH STOCKS?)
($COMPQ), ($TNX), (CPI)
It’s “all systems go” for tech stocks ($COMPQ) as the latest inflation report offers us juicy morsels of data laying out a more attractive backdrop for tech companies in the short term.
The Mad Hedge Tech portfolio has benefited from this “bet on the Fed pivot” trend to great effect and I took profits on my Micron June bull call spread.
Remember that short-term rates ($TNX) are the most important variable to whether certain stocks go up and down in the short term.
Long term, the story could be very much different.
A higher-than-consensus report would have resulted in a red day for tech stocks, a pullback of commodities, bond yields spiking, and the dollar launching into the orbit.
We got the inverse of that and this is a strong signal that tech stocks will be like a stallion bolting out the back of the stable because tech stocks are the biggest winners of a lower rate environment.
The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices.
Inflation has remained stubbornly above the Federal Reserve's 2% target on an annual basis.
Fed officials have categorized the path down to 2% as "bumpy," while other recent economic data has fueled the Fed's higher-for-longer narrative on the path of interest rates.
On Friday, the Bureau of Labor Statistics showed the labor market added 272,000 nonfarm payroll jobs last month, significantly more additions than the 180,000 expected by economists. Wages also came in ahead of estimates at 4.1%, although the unemployment rate rose slightly to 4% from 3.9%.
Notably, the Fed's preferred inflation gauge, the so-called core PCE price index, has remained particularly high. The year-over-year change in core PCE, closely watched by the Fed, held steady at 2.8% for the month of April, matching March.
The Fed has been unbelievably late in controlling inflation, but that market doesn’t care and tech stocks care less as the AI narrative has been able to supersede anything and everything.
The market is controlled and dictated to by a bunch of algorithms.
Food up 2% after a double is in fact a “victory” to the algorithms even if the middle class in the United States has felt the heavy brunt of it.
It is probably accurate to say that tech stocks are in a world of their own and the price action certainly behaves as if this is the case.
What does this all mean?
Get ready for higher-tech share prices.
Lower rates will help emerging tech companies tap the debt market to fund operations.
Many smaller tech firms don’t have the privilege to tap a multi-trillion dollar balance sheet for cash whenever they want.
In the short-term, except the AI stocks to gap up yet another leg as the market prices at lower rates for companies that hardly need it.
Talk about having your cake and eating it too – this would be it!
For the best of the rest, it helps but won’t move the needle in terms of catching up to big tech, but this should stimulate the investors on the sidelines nudging them to handpick certain stocks that have been ignored during the time of high rates.
Either way, the Fed has really put itself in a box here and without even killing inflation to the 2% mandate.
The markets fully expect the Fed to cut once or twice by the end of the year.
Whether this decision is political or not, the new developments have put a floor under many high-quality tech names.
Consequently, the second half of the year should see some ample returns in tech stocks that preside over good business models.
