Mad Hedge Technology Letter
February 12, 2025
Fiat Lux
Featured Trade:
(WHEN THE RUBBER MEETS THE ROAD)
(PHD), (FED), (AI), (MAG 7)
Posts
It’s funny that the Fed ever thought they could initiate an interest rate cut cycle with gold bullion at $3,000 per ounce and bitcoin at $100,000 per coin.
Whatever they are smoking – please pass some of it over here.
These indicators show that there is too much paper out there following too few good and services.
This is why eggs are about to become 4 bucks per dozen.
The Federal Reserve employs 100,000 PhDs to botch the only job they have (decide what to do with interest rates) by refusing to deploy common sense.
Apparently, PhDs don’t deliver much these days either, which is why nobody goes to college anymore.
The consequence is that the bond market has dictated to the Fed what to do, and we have seen that over the past few years.
The US 10-year interest rate lurching closer to 5% means that tech stocks will have a tough grind and small tech companies get disproportionally penalized in this whipsaw environment.
On cue, Magnificent 7 are going strong because it put to use a strong balance sheet that many other tech firms don’t have.
It is funny to think about that once upon a time, these Mag 7 tech companies were the scrappy upstarts.
They have turned into total corporate monoliths like a titanic unable to steer.
New inflation data out Wednesday showed headline consumer prices rose more than forecast in January as core prices reversed last month's easing with the Federal Reserve's path forward in focus.
Seasonal factors contribute to higher inflation, like higher fuel costs and continued stickiness in food inflation, which kept the headline figures elevated. Notably, the index for eggs increased 15.2%, the largest increase since June 2015. It accounted for about two-thirds of the total monthly food at home increase.
Core inflation has remained stubbornly elevated due to sticky costs for shelter and services like insurance and medical care. Shelter did, however, show some signs of easing last month, rising 4.4% on an annual basis, the smallest 12-month increase in three years.
On Monday, President Trump announced global 25% tariffs on steel and aluminum imports, which will take effect on March 12. 25% tariffs on Mexico and Canada are set to come next month, while 10% duties on China have already been implemented.
The unpredictable volatility of interest rates will mean a choppy trading environment for tech stocks.
The Deepseek AI fiasco for OpenAI will also mean that tech companies will need to show investors soon if AI will profit or not.
This sets the stage for a polarizing short-term trading environment.
I will issue tech trade alert on big dips and ride them for defined time frames.
This is the best way to go about tech equities.
Readers need to understand that the time of just sitting and holding tech stocks to infinity is over.
This is when the rubber meets the road, and big drawdowns are susceptible when prices are this high and the system is creaky with institutions of centuries destined to bite dust.
At the very best, institutions like the Fed are ineffective.
Tech stocks will need to prove their worth in 2025 or else expect discounts across the board.
Mad Hedge Technology Letter
October 19, 2022
Fiat Lux
Featured Trade:
(IGNORE THE APOCALYPSE RUMORS)
(NFLX), (FED)
Netflix (NFLX) adding 2.41 million global subscribers means the technology sector will not have the earnings apocalypse that many thought was around the corner.
It’s good news for tech stocks as a whole.
This is why tech stocks have rallied hard the last few days as well as news that there is a 100% probability of a .75% rate hike at the November 2nd Fed meeting priced into current tech valuations.
The market always loves certainty.
The multi-million subscribers added is commendable for the streaming company, but like many things in life, the devil is in the details.
Later in the earnings report, Netflix management says that “aggregate annual direct operating losses this year alone could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit.”
In short, Netflix is adding subscribers, at least this past quarter, but not in a profitable way.
They have had to dilute the quality of their services by integrating an ad model which goes against the spirit of what Neflix was intended to be.
Not only tech companies, but companies around the world are decreasing the quality of services through shrinkflation or “smart” packaging or just offering a worse version of a previously better iteration.
Costs have come up for everyone too but I don’t believe losing over $10 billion in annual operating losses will sit well with tech investors.
That means that Netflix must either raise the quality of their content so customers are inclined to pay higher prices or integrate more ads into their ad models.
The question must be asked, how much are Netflix subscribers willing to pay for a monthly service?
The premium package is already $19.99 and my bet is that NFLX experiences serious attrition if they go to $25 per month.
The ad version being priced at $6.99 is being too hyped up and I see it as a net negative for NFLX.
I don’t believe NFLX can do the undoable which is ramping up the quality of content in the short term.
Earnings apocalypse is off the table precisely because Americans are still spending because they still have jobs.
Yet, this sets the stage for weaker and shorter bear market rallies followed by thundering sell-offs.
This isn’t just about one indicator versus the next.
It was current US Treasury Secretary Janet Yellen who responded to a reporter in the past that she wasn’t worried about America’s large federal debt because “interest rates were low.”
Well, now there is finally a cost to rolling over that federal debt and tech stocks are valued lower for it.
Netflix is a symptom, not the main virus.
That is why Netflix adds over 2 million subscribers but will lose $10 billion annually to do it. This is also why the US economy boasts of full employment but has a negative GDP. As the zombie companies pile up, the key is to preserve free cash flow and as for the tech market, sell any big bear market rally.
US consumers still have money and they will have enough if they don’t lose their jobs, but the Fed is hoping to artificially induce a job crisis.
Mad Hedge Technology Letter
September 22, 2022
Fiat Lux
Featured Trade:
(POTENTIAL TECH REVERSAL PUSHED BACK)
(FED), (META), (AAPL)
Tech investors want nothing to do with an aggressive Federal Reserve, but that’s what we have.
I don’t choose this and neither do many others out there.
We have been spoilt in a world with low inflation, global peace, low energy, and high liquidity which was the perfect scenario for tech stocks.
The reverse has happened almost overnight and now it’s that much harder to earn your crust of bread in the tech world.
Gone are the days of buying Facebook for peanuts then going for a sauna and a nap. It’s not that easy right now.
Tech stocks don’t go up in a straight line anymore – there will be many zigs and zags along the way moving forward.
Tech stocks aren’t immune to these exogenous stocks and as anointed growth companies, they inherently need to borrow capital and grow more than the cost of it.
That endeavor is stretched to the limit as bond yield explodes to the upside with this latest rate rise.
Raising interest rates by 0.75% for the third consecutive time this afternoon was the consensus, but in fact, there was a 25% chance of a full 1% rate rise. We avoided that bullet.
Tech stock doves were hoping US Federal Reserve Governor Jerome Powell would save them, by initiating a pivot to save the stock market, but no do this time around.
It underscores that Powell is adamant about continuing this inflation battle even if I do believe it’s too little too late.
The central bank’s new benchmark borrowing rate is now between 3.0% to 3.25%, up from the current range of 2.25% to 2.5%. This would bring the fed funds rate to its highest level since 2008.
Tech stock reacts most sensitively to the change in Fed Funds rates which is why we have seen CEO and Founder of Meta (META) or Facebook Mark Zuckerberg lose $71 billion of his net wealth this year.
Not only is the macroenvironment squarely against him, but his flagship product Facebook is losing steam, and his new product the Metaverse has garnered tepid reviews from outsiders.
How long does the Fed intend to increase rates?
The updated consensus for the Fed Funds Rate shows it at 4-4.25% by the end of 2022, another hike to 4.25-4.5% at end of 2023, and one more cut in 2024 and two more in 2025.
The answer is quite a while longer.
In the meantime, this will initiate a “reverse wealth effect” and tech stocks are the biggest losers, and the US dollar is an unmitigated winner.
Delaying lower Fed Funds rates means delaying the reversal in tech stocks which need lower rates to explode higher and without it, they are quite ordinary.
Signaling higher rates for longer is designed to tame inflation, but there are so many unintended consequences for US tech stocks.
The most important themes to be concerned about are revenue and financing.
The .75% increase in rates will mean that tech stocks will produce lower annual revenue because financing costs will be higher.
This is already at a time when general costs have exploded higher such as an uncontrollable wage spiral, supply chain bottlenecks, health care costs, transportation costs, and energy costs.
It’s a great deal harder to keep the numbers down enough to profit which basically means gross margins will compress further from today.
Tech stocks will come back because they always do. They are the profit engine of corporate America, and that will never change.
I see great tech companies like Apple (AAPL) installing the framework so they can maximize on the next move up when the bull market reignites.
They are doing this by moving iPhone production to India and other tablet production to Vietnam to get out of lockdown China.
Now is the time to reset before tech bounces back and it’s painful to see tech get slaughtered, but this is a necessary evil after a wonderful bull run from 2012 to November 2021.
US FED GOVERNOR GIVES NO LOVE TO TECH STOCKS
Mad Hedge Bitcoin Letter
June 16, 2022
Fiat Lux
Featured Trade:
(FED SUPPRESSES CRYPTO)
(BTC), (CBDC), (FED)
The unthinkable just happened when the US Central Bank pulled the trigger on a 75-basis point rate rise which highlights the severity of broad financial trouble at the macro level.
This also underscores the need to sell Bitcoin to pay the bills for the median Bitcoin holder whether it be to keep the lights on, fill up the tank, or go to the grocery store.
These issues can’t be downplayed and dismissed anymore as even rich people are suffering from sticker shock as well.
One might believe that the 1,000 plus professional Ivy-league trained economists employed by the Fed might waltz into a supermarket to check out the prices.
Apparently not and what we have is an echo chamber which the group has firmly enshrined as the go-to strategy for our federal bankers.
Unfortunately, the insane price hike we are seeing is really killing cryptocurrencies’ mojo and that is terrible news for this cryptocurrency newsletter.
Crypto prices go up when there is an excess level of capital sloshing around the system due to bursts of overload liquidity like what we saw with fiscal stimulus measures enacted for a once-in-a-century arbitrary lockdown-society situation.
Now that the Federal government is taking away the punch bowl, extreme volatility in the stock market and crypto markets is rearing its ugly head and it doesn’t look pretty.
Sadly, the situation for crypto will get worse.
As the looming recession is brought forward by aggressive rate hikes, it means crypto holders will lose their day job, triggering yet another wave of mass crypto selling.
If they own a house, they will sell it because they won’t be able to afford the mortgage payments without a job.
Even if they are lucky enough to rent out their house, then finding their own place to rent will be impossible.
Rents are primed to explode higher as former homeowners turn into a wave of new renters fighting for the little supply on the market.
This means they will be paying more for shelter in a recession relative to their payments on their old mortgage before the recession.
This doesn’t seem like a great model for ensuring your customers have money to throw at crypto.
Also, these workers who lose their jobs won’t be able to find a new one right away if we are in a deep recession triggered by large rate hikes.
Companies don’t hire in deep recessions because they cut costs.
Making matters worse is that the entire crypto ecosphere is illiquid right now because of systemic risk brought about by panic liquidation from institutions.
The loss of confidence has infiltrated every corner of the crypto industry.
One must be insane to put new money to work which will result in zero dip buyers.
Good luck getting any real spendable dollars out of this mess.
The only ones that will end up net positive are the investors who got in SUPER early, and I mean really early like Bitcoin at 40 cents.
These fortunes earned in crypto can handle a downdraft like this or they have already cashed out long before to ride into the sunset on their horse.
If systemic risk starts to ramp up to unbearable levels, then stakeholders will be forced to beg the government to regulate it to prevent it from happening again - it will be replaced by a central bank digital currency (CBDC), the wildcat banking era of internet money will be effectively over.
The silver lining in the technology is solid.
However, this inflation problem really killed the crypto bubble for those who aren’t rich, and there lies the problem.
It’s never a positive result to bankrupt most of one’s customers whether it be from lower crypto prices, lower stock prices, or a cost-of-living crisis.
Crypto will need to reinvent itself for the next iteration if it plans to go on another epic bull run like we saw in 2021.
Mad Hedge Technology Letter
May 6, 2022
Fiat Lux
Featured Trade:
(ECOMMERCE NOT AS EASY AS IT USED TO BE)
(AMZN), (FED)
The Nasdaq reversing all its previous gains and then some has more to do with the bond market disagreeing with US Fed Chair Jerome Powell.
How do I know that?
After the one-day reversal which materialized because Powell took a 75-basis point cut off the table, the 10-year US treasury bond ripped past the psychological mark of 3% and surged past 3.1%.
As many have taken note, expensive tech stocks crater the deepest with uncontrollable interest rate rises and the pace of the move has been quite rattling for many investors.
In addition, the price action sure smells like a massive hedge fund blowing up and a force unwinding as well to add insult to injury.
Unfortunately for the American consumers, Powell taking 75 basis point cuts off the table does nothing to tame inflation even though I would like to point out that in normal times when the Fed is actually doing its job, a 50-basis point rise would usually be suitable.
However, the Fed is so late to the game, basically ignoring a compounding inflation catastrophe for over a year, that to believe that a 50-basis point rate increase will tame 8.5% inflation is nonsensical.
Without a reasonable plan to fight inflation, Wall Street has sniffed this out and understands that tech firms will suffocate under the pressure of more inflation which is why we are getting these larger-than-life selloffs after Powell tried to package his speech as dovish as possible.
The Fed absolutely neglecting their work duties has real knock-on effects on the tech industry.
It has absolutely poo-pooed the trajectory of Amazon’s (AMZN) stock because Amazon is a comprehensive bet on the rich Western world buying more stuff in volume and the median Amazon prime buyer is bewildered by these aggressive price increases we are seeing all around the economic spectrum.
In short, people aren’t buying more stuff and that hurts Amazon’s ecommerce business.
If oil goes to $150 per barrel, that means more cutting back for Amazon prime customers because filling up at the pump is a necessity and not a luxury like an incremental bottle of perfume on Amazon prime.
In the past 6 months, AMZN’s share price has dropped 35% and that was just a ramp up to the actual rate rises that have barely happened yet.
The market is completely disagreeing with the Fed and instead of aggressive raises, we are stuck with the incremental raises in which the bond market shrugs off and yields are off to the races.
The Fed’s missteps translate into a longer than necessary negative price momentum for tech stocks and it’s the Fed’s fault.
Amazon has been posting weaker-than-usual earnings for a few quarters because not only are their customers dealing with high inflation, but there have been various operational headwinds from unionization, higher expenses, and supply chain problems.
Amazon has almost doubled its fulfillment network since the start of the pandemic, and there is a lot that can go wrong with that in this day and age.
Essentially, the health situation of 2020, brought forward revenue and now we are seeing a major drop off in that rate of growth.
It doesn’t mean that Amazon is dead, but they will need to battle these headwinds for at least the next 12 months if not longer and much of this is not up to them.
That’s because firms have been suffering from the world's deglobalizing and Amazon is hurt more than others.
Amazon Web Services (AWS) is a bright spot.
The business posted a 57% increase in operating income and a 37% gain in sales in the most recent quarter.
For all that think this is the bottom for Amazon, you were also wrong in March as well.
The trading climate couldn’t be worse for Amazon and even though the secular bull case is still intact for Amazon long term, the rest of the year looks harsh.
Being a bet that Americans will buy more stuff isn’t the greatest bet right now.
