Mad Hedge Technology Letter
November 4, 2022
Fiat Lux
Featured Trade:
(THE SILICON RESET)
(LYFT), (AMZN), (STRIPE)
Posts
This is the new Silicon Valley, where layoffs are the talk of the town!
That’s not always a good thing if you’re an employee, but at least health service jobs are still available for the newly unemployed tech workers.
Better get a move on before they run out.
The recent data backs up my biggest fears that many tech firms are getting out the machete and slicing and dicing the fat off the bone.
Staff cuts are on the menu and it’s the main dish, unfortunately.
This will be a roller-coaster ride for the ages where employees suddenly face a predicament in which they must finally prove their value to their bosses, and do it fast.
Gone are the times when Twitter workers could waltz into the front entrance 2 hours late and sit in the cafeteria all day with a cup of joe and an ice cream sandwich.
Not going to happen anymore!
Gone are the cheerleading warriors who were whole “marketing” departments acting like they market products but really doing no work at all.
Three-hour bathroom breaks are now caput.
You know who you are!
It’s finally time to get fingers out of noses.
If companies haven’t announced heart-palpitating layoffs, then they have instituted hiring, promotion, and wage hike freezes.
One company I know well from the inside is Amazon, which announced it will no longer fill certain corporate positions, while Apple said it would stop hiring in most departments.
Meanwhile, younger tech companies including payment provider Stripe and ride-hailing business Lyft (LYFT) are also slashing workforce.
They both said the decelerating economy was becoming increasingly unfavorable for tech.
Last week, Amazon released dismal third-quarter earnings showing revenue growth of 15% which was down from 37% growth a year ago.
AMZN’s stock plummeted 20% overnight, sending the company’s market value below $1 trillion for the first time since 2020.
With aggregate demand for its services falling, Amazon is looking to shrink its risk exposure.
Last week, after the poor earnings report, the company laid off around 150 people from its live radio division, and on Thursday shared with employees that it was implementing a hiring freeze for corporate retail jobs.
All eyes are on Twitter’s Musk now, who is really dishing out the new playbook for how to cut down while being most efficient and productive.
He’s even looking at cutting Twitter cloud costs by $1 billion per year at Twitter.
Musk’s management style is distinguishing him from the charlatans, and I see that as a highly positive development in corporate America long term.
Rumors of workers required to work 84 hours in a sink-or-swim scenario could be true; Musk is testing workers to see who he wants to keep.
I’ve also seen photos of workers who have resorted to taking naps on the ground in sleeping bags in Twitter’s San Francisco headquarters.
The leverage of in-person work is now over for 2023, and we most likely will see another paradigm shift in terms of work environment.
Even more important, the massive .75% rate hike and waving away any possible pauses in interbank interest hikes means that the dollar will get stronger and tech stocks will continue to be a sell-the-rally or buy-the-bear-market-rally type of deal.
Ultimately, this industry needs a reset as the supercharged growth coincided with too much bloat, which is really starting to reveal itself.
In the last few years, effectiveness definitely suffered from diminishing returns, and now that cost of capital is not free; management cannot just sling things at walls to see what sticks.
Responsible management will be the x-factor in choosing who thrives in the next tech bull market.
Mad Hedge Technology Letter
October 12, 2022
Fiat Lux
Featured Trade:
(THE RIDE SHARE DILEMMA)
(UBER), (LYFT), (DASH)
The US Federal government must have its way.
This one move blows up the business models of Uber (UBER), Lyft (LYFT), DoorDash (DASH), and any other tech platforms reliant on self-employed drivers.
Whether it’s denying the expansion of domestic energy capacity or meddling in self-employed worker status, the government is hell-bent on putting its stamp on the economy.
And boy they do.
It’s been rough lately for the ride share firms.
Uber fares have not been trending down lately as the combination of higher insurance costs, higher fuel prices, and higher costs to car ownership have meant passengers pay more to get from point A to point B.
I don’t need to chronicle how the cost of doing business is inching up because it’s happening everywhere and that just means the goalpost is narrowing in order to get costs below revenue.
That is the new normal whether we like it or not.
However, for Uber, their business model just might be untenable if they are forced to sign up drivers as full-time workers who receive full benefits including a 401K, health insurance, overtime pay, and paid time off.
This is expensive.
Under the US Labor Department's proposal, workers would be more likely to be classified as employees instead of independent contractors.
Tens of millions of people work in the global gig economy across services like food delivery and transport.
US Labor Secretary Marty Walsh said the rule would aim to stop companies from misclassifying workers as independent contractors.
For those that use ride share, there is no workaround to higher compensation in signing up full-time workers and costs will be passed down to the end user causing ridership to fall.
Gig economy firms have come under increased scrutiny as the industry grows in size.
Payments firm MasterCard has estimated that 78 million people will be employed in the gig economy by next year.
Gig workers are paid for individual tasks, such as food delivery or a car journey, rather than getting a regular wage.
In the first half of 2022, Uber lost almost $7 billion and the only reason why they can still exist is because of investors pouring money down a black hole to fund Uber’s existence.
I still don’t see how they make the unit economics work and their stock price reflects my analysis.
The stock trades around half of $51 which was achieved during the height of the reopening from the arbitrary lockdowns in 2021.
Reality has come back to bite as the same issues persist and every rally in this stock has been a great selling opportunity.
This ride share company has no chance of ever becoming profitable and they have done nothing to signal they are on the right track.
Just because they “do better than Lyft” doesn’t mean it’s a great long-term buy-and-hold stock or even a good company.
On top of poor unit economics, Uber’s ability to tap the debt markets to borrow money has been severely crimped.
Borrowing at extortionate rates makes it impossible to spin profits which means going back to the debt markets once again in a vicious negative feedback loop.
At some point, they will be shut out because of creditworthy issues even if not yet.
Who would want to invest in a company like that?
If a reader wants to put money to work in this stock, sell short after every bear market rally or buy outright puts after every rally.
Don’t reward tech firms that behave poorly or ones that can’t make money.
Mad Hedge Technology Letter
July 13, 2022
Fiat Lux
Featured Trade:
(HOT INFLATION NUMBER BODES POORLY FOR TECH STOCKS)
(LYFT), (UBER), (AMZN), (SHOP), (GOOGL), (SNAP), (META), (TWTR), (MELI), (EXPE), (TRIP)
Fed swaps now fully price in 150 basis points of hikes over the next two meetings after awful inflation numbers came in showing inflation heading in the wrong direction.
The 9.1% inflation print was an acceleration of the 8.6% which was what we got last time.
I don’t want to beat a dead horse, but inflation accelerating and beating the expectations of 8.8%, is paramount to the trajectory of tech shares.
The awful number also underscores the magnitude of policy mistakes that the U.S. Fed Central Bank has overseen.
This is the only thing that matters because macro liquidity drives the trajectory of equities in the short term.
These clowns aren’t serious about tackling inflation, as I said a few times already and this proves it!
Itty bitty rate rises won’t stamp out 9.1% inflation and in fact, encourages it.
The Fed would need to raise the Fed Funds rate by 7.35% to 9.1% immediately from the current 1.75% for the real inflation rate to be non-inflationary.
According to the official Fed website, the Fed targets 2% inflation because they call this level “healthy.”
By their own measure, to achieve this 2% inflation, they would still need to raise rates by 5.35% immediately, but they absolutely won’t because Powell simply has no interest in doing his job, period.
These core expenses skyrocketing is why I keep and kept mentioning that Americans have less money to splurge on tech gadgets and software and again, this inflation report validates my thesis.
Think about pitiful tech stocks that didn’t work in bull markets like ride chauffeurs Lyft (LYFT) and Uber (UBER), I fully expect these companies to perform terribly over the next 6 months amid a rising rate backdrop.
Not only are they growth tech, but their business is directly tied to energy prices.
They are the poster boys for the pain tech companies will feel from hyperinflation.
The outlook is quite poor for technology in the short term, and we are still waiting to form a bottom. It will come back but we need a capitulation.
The accelerated rate of inflation means that we push back the big recovery in tech stocks.
Ecommerce stocks will suffer like Amazon (AMZN), Shopify (SHOP), and MercadoLibre (MELI) because of the decline in discretional spending for the consumer.
Digital ad giants like Google (GOOGL), Snap (SNAP), Meta (META), and Twitter (TWTR) will need to reckon with smaller ad budgets from 3rd party ad purchasers as companies cut back on marketing spend.
Don’t need to increase marketing spend when people have no money to spend on products.
Travel tech stocks like Expedia (EXPE) and Tripadvisor (TRIP) can expect summer to mark peak travel as Americans get more concerned about food and oil budgets after the summer of travel revenge from the arbitrary lockdowns.
It also means there will be a meaningful next leg down for tech stocks as many CFOs are now furiously crunching the new revenue and margin downgrades to reflect this heightened risk.
The new re-rating isn’t reflected yet in tech shares.
It’s already been a few months on the trot where many analysts say this is the top, they have been inaccurate every time.
Even if it is the top, inflation will stay higher for longer and stagflation is the consensus for 2023.
The clowns at the Fed not doing their job means that economic cycles will be shorter and a great deal more volatile because the smoothing effect of moderated inflation is now stripped out of calculations. This effectively means a contracted boom-bust trajectory for tech stocks which is unequivocally what we are seeing in market behavior.
Mad Hedge Technology Letter
June 22, 2022
Fiat Lux
Featured Trade:
(EARNINGS REVISION IN THE PIPELINE)
(SARK), (ARKK), (AAPL), (UBER), (LYFT)
“We could have a couple of negative quarters” – uttered Federal Reserve Bank of Philadelphia President Patrick Harker.
We badly needed to hear that, because the jargon we’ve been offered so far from federal representatives has not been honest enough.
Ironically enough, saying the truth could offer relief to the Nasdaq index as pricing in a recession moves us along, but that doesn’t mean we are out of the woods yet.
Harker also said it is possible the U.S. economy might see a modest contraction in growth, but he expects the job market to remain strong.
Let me translate that for you.
Harker expects a soft recession, and he feels that it is increasingly priced into stocks.
However, the Nasdaq isn’t priced for a hard recession today, which could be the potential driving force for another dip in the index.
Adding some validation to a possible leg lower is that one of the biggest dip buyers out there, Blackrock (BLK), has said that it is not buying the dip in stocks, as valuations haven’t really improved.
Maybe they are targeting more single-family homes!
To get a real reversal of momentum, we will need not only big stocks like Apple to participate, but also the big buyers.
Don’t look at the Saudi’s either, they are busy earnings $2 billion a day selling oil.
From behind the scenes talks, there is still the hush hush feeling that positioning indicates that we are in for a sharp V-shaped rebound.
How do I know this?
Tech earnings still have a highly optimistic tinge to them, and lower inflation is built into earnings’ calculations.
Don’t forget that many garden-variety tech CFOs built low inflation into their 2nd half of the year revenue models.
Inflation, according to them, is supposed to subside triggering earnings’ beats around the pantheon of great tech companies.
This is what is supposed to happen if consensus plays out.
It rarely does.
Adding fuel to the fire is a proposed federal gas tax holiday by the current administration which is extraordinarily inflationary even if it does help marginal tech companies like Uber (UBER) and Lyft (LYFT) in the short run.
A tax holiday will destroy oil capacity by disincentivizing oil companies in capital investments.
Supply will also crash by encouraging gas hoarding by clever consumers and CEOs hellbent on taking advantage of this brief tax holiday.
The 800-pound gorilla in the room is clearly China.
Imagine if the Communists finally start to peel back their dystopian arbitrary lockdowns and what that will do for rampant inflation.
Pork prices will rise 25% and more importantly oil prices will revisit the peak we had from the on set of the military event East of Poland.
All of this matters for tech companies that consummate contracts for chips, parts, pay salaries to inflationary traumatized coders and build computers.
The conundrum here is that CFOs and CEOs might be guilty of being too positive in regard to the economic cycle.
Consensus estimates (IBES data by Refinitiv) still show very healthy levels of earnings growth. S&P 500 earnings per share for 2022 remain at +10.8%, but the expectations for 2023 continue to reflect a probably optimistic +8.1% growth, with revenues up 4%.
This is ridiculously overly optimistic and isn’t in tune to the realities on the ground.
It is highly plausible we will experience another bear market rally in tech only to be reminded by upcoming earnings’ revisions that there’s still multiple contractions that needs to be rammed down our throat.
Tech stocks will be the most volatile during this period and traders looking for the best bang for a buck should look at smaller positions but in higher beta names like Tuttle Capital Short Innovation ETF (SARK) for the post-bear market rally and ARK Innovation ETF (ARKK) for the current bear market rally.
It’ll be interesting to see if stocks like Apple (AAPL) can eclipse their previous bear market rally peak of $151.
Apple stands at $138, and I presume with these lower gas prices, it should eke out at least $145 before another acid test.
When the sushi hits the fan – the sushi really does hit the fan.
We are at the beginning of a massive tech reckoning, and many will shed a tear because of the new changes.
The lavish era of artificially rock-bottom-priced interest rates that fueled an unconscionable tech bubble has now reached an end.
There wasn’t even a main street parade for the closing.
Many fortunes were christened over the past 13 years, mostly by the "Who’s Who" of Silicon Valley as founders and CEOs.
This meant that wild speculation was the flavor of the day which was a force that delivered the equity markets astronomically high tech valuations that we have never seen before.
Those likely won’t be back any time soon.
Many investors haven’t adjusted to the new normal yet.
Similar to 2009, the founders & executives that run VC-backed companies have been quick to figure it out.
They understand that the cost of capital is now exorbitantly high and that high cash burn rates are now impossible.
These artisanal tech companies with zero killer technology like Uber, Lyft, and Peloton are more or less screwed in this new environment.
Even though the executives and founders get what is going on, the same can’t be said on the field of play.
Tech employees who may have enjoyed higher than average success aren’t prepared to enter this new era where accountability and costs matter.
When I talk about employees, I am referring to the ones working in technology in the Bay Area.
Up until now, tech employees have been used to pretty much naming their benefits and compensation package and companies fighting over them.
A rude awakening meets them as tech companies who once showered stock options on new employees now wait in horror as that same method of payment is demonstrably less attractive to future employees with low stock prices.
Most employees have only experienced this amusement park-like setting in the Bay Area, which is what led to many employees dictating the work-from-home situation.
Unfortunately, they might now have to come into the office or get fired.
In many ways, this is not their fault. Excess capital led to excessive showering of employee benefits and heightened expectations.
Unfortunately, you can't ignore the fact that if your company isn't cash flow positive & capital is now expensive, you are living on borrowed time.
During the arbitrary societal lockdown, many companies experimented with remote workers, most from outside of the Bay Area.
Based on anecdotal conversations, this trend is likely to continue post-pandemic. This means the Bay Area employee is now competing with a broader set of alternatives.
In today's world, positive cash-flow matters & surviving requires outmaneuvering competitors.
You need teammates that are ready to grit it out and not whine like an adolescent teenager.
Sadly, we may have conditioned a contingent of employees in a way that is incongruent with this mindset.
As we enter the cusp of layoffs, the guy at the bottom is clearly hurt the most or the last one in is usually the first out.
There is nobody to blame for this situation.
The low rates encouraged that type of poor behavior because they could get away with it.
When everybody is making money, most companies don’t clamp down and top employees can’t get away with a lot.
Tech firms like Teledoc (TDOC) and DocuSign (DOCU) are in real trouble if the capital markets only offer them 10% cost of capital for the next few years.
As the greater economy looks to reset, the goalposts have narrowed in the technology sector and the firms considered “successful” from here on out will have a checkmark next to profitability.
Growth at all costs has now been substituted with survive at all costs in Silicon Valley, so get used to it.
Mad Hedge Technology Letter
May 4, 2022
Fiat Lux
Featured Trade:
(RIDE-SHARING NEEDS A FACELIFT)
(UBER), (LYFT)
