Global Market Comments
April 25, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE ESCALATOR UP AND THE WINDOW DOWN)
($INDU), (SPY), (TLT), (WFC), (JPM),
(TSLA), (TWTR), (FCX), (NFLX), (GLD)
Posts
On Friday, we saw the worst day in the market since October 2020. And it won’t be the last such meltdown day.
The big question for the market now is how far it can fall without actually having a recession. The answer is 20%, and we are down 8.6% so far.
The economy is as strong as ever and everyone that is predicting a recession is using outdated, useless models. If I have to wait nine months for the delivery of my sofa demand is still off the charts.
Spoiler Alert!
I have to do some math here to explain the current situation. So, don’t run down the street screaming with your hair on fire. Math is your friend, not your enemy.
With an average estimated $227.33 forecast earnings for the S&P 500, we are currently trading at a multiple of 19.29X ($4,386 divided by $227.33). At the November high, we were trading at 24X. At the 2009 Financial Crisis low, we saw 9.5X for a few nanoseconds. There’s our range, 9.5X to 24X.
So, stocks are still historically expensive. They won’t start to approach cheap until we drop to 15X, a level we haven’t seen in nearly a decade. That is another 4.29 multiple points lower, or down 22.23%.
How do we get to cheap?
Since November, the S&P 500 has earned another $60, or 1.36X multiple points. We’ll probably pick up another $55, or 1.25X multiple points in Q2. That gets us halfway there.
The (SPX) is down 8.6% so far in 2022, or $414. If Q2 earnings come in as expected, then the (SPX) only has to fall by another 1.68X multiple points, or 8.72% to $4,004 to get to our 15X downside target.
I hasten to remind you that this was exactly 10% below my downside forecast of an H1 loss of 10% in my 2022 Annual Asset Class Review (click here)for the link.
The Ukraine War and the third oil shock, neither of which I, or anybody else, predicted, account for the second 10% loss.
How long will it take to reach these new, enhanced downside targets? My guess is by the summer.
And you wondered why I was still 100% in cash….until Thursday?
So what does the Federal Reserve make of all this? Even though they say they don’t care about the stock market, it really does, especially when it is crash-prone.
Some 2.50% in expected interest rate hikes are already discounted by the futures market. The market has already done the Fed’s work, and we were short all the way, via the (TLT). We will likely get aggressive half-point rate hikes through April to June, especially if inflation goes double-digit, which it might.
At that point, the Fed may be ahead of the curve. If we get the slightest backtrack in inflation, even just for one month, the Fed may well back off a bit on its tightening strategy and skip a meeting, igniting a monster stock market rally in the second half.
Poof! Your inflation fears have gone away.
Jay Powell Thrust a Dagger into the heart of the Stock Market, sending the Dow down 1,000. At this point, the only question is whether we get two back-to-back 50 basis point rate hikes coming, or two back-to-back 75 basis point rate hikes. 75 basis points is becoming the new 25 basis points.
TINA is dead (there is no alternative to stocks) with virtually all fixed income securities offering a 3.00% yield and junk bonds paying 6%. These kinds of yields have started sucking money out of stocks into bonds, which is why I am long bonds.
There is one other sparkly asset class that is worthy of attention here. Gold, the yellow metal, the barbarous relic (GLD), may have just entered a long-term structural bull market. By evicting Russia from the global financial system, we have driven it out of dollars and into gold and Bitcoin for good. Take a look at the Gold Miners ETF (GDX).
And Russia is not alone in pouring its revenues into gold, which can’t be seized by foreign governments, so is every other country that might be subject to future sanctions, like China. This adds up to a heck of a lot of new gold buying and could take the barbarous relic to my old long-term target of $3,000 an ounce.
Bonds Crash Again, with ten-year US Treasury bond yields topping 3.02% overnight, a three-year high. Those who took my advice to buy the (TBT) in November are now up 44%. The market is now oversold in the extreme and could rally $5-$10 at any time. This could happen right around the next Fed meeting on April 28.
Tesla Earnings Soar by 87% YOY, taking the stock up $90. Musk is still predicting that 50% YOY growth in sales will continue as far as the eye can see and could reach 2 million this year if they can get the lithium. There is a one-year wait for a Tesla now. With gasoline at $6.00 a gallon everyone who bought a Tesla in the last 12 years is looking like a genius. $10,000 a share here we come! Keep buying (TSLA) on dips, as I have been begging you do to for the last 12 years.
Netflix Gets Destroyed, on horrific earnings and falling subscribers. Disney and Amazon are clearly eating their lunch. Hedge fund manager Bill Ackman dumped his position with a $400 million loss. At this point, (NFLX) is a high risk, high return trade than may take years to play out, not my cup of tea.
Corn Hits Nine-Year High, above $8 a bushel. Russia’s invasion of Ukraine may take one-third of the global wheat supply off the market and cause Africa to starve. Who is the world’s largest food importer? China, which may be why the yuan has seen a rare selloff.
Weekly Jobless Claims Fall to 184,000, why the unemployed hit a 52-year low. No need for stimulus here. It’s clear that fear of interest rate rises is not scaring off companies from hiring. Fifty basis points here we come. The unemployment rate may hit an all-time low with the April report on May 6.
Twitter Adopts Poison Pill, to fight off Elon Musk’s takeover attempt. Musk’s offer is a generous 20% higher than the Friday close. If the poison pill is successful then Musk will dump his 9.9% holding, cratering the stock. The battle of the century is on! Incredibly, the stock is up today. (TWTR) holders should take the money and run.
Investor Optimism Hits 30-Year Low, according to the Association of Individual Investors. Now only 15.8% of investors are bullish, down 9% in a week. A lot of pros are starting to see this as a “BUY” signal.
World Bank Cuts Global Growth Outlook on Russian War, from 4.1% in January to 3.2%. This compares to 5.7% in 2021. Europe and central Asia are taking the big hits.
Natural Gas Hits 13-Year High, to $7.80 per MM BTU, up 100% YTD. American exports are rushing to fill the gap in Europe. With the war showing no end in sight, prices will go higher before they go lower.
Copper is Facing a Giant Short Squeeze, and the world rushes into alternative energy, says Freeport McMoRan (FCX) CEO Richard Adkerson. World copper output will have to triple just to accommodate Tesla’s long-term target of 20 million vehicles a year. Buy (FCX) on dips, like this one.
US Housing Starts Hit 15 Year High, up 0.3% in March to 1.79 million. Applications to build top 1.87 million. The US has a structural shortage of 10 million homes caused by the large number of small builders that went under during the financial crisis and never came back.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My March month-to-date performance retreated to a modest 2.58%. My 2022 year-to-date performance ended at a chest-beating 29.28%. The Dow Average is down -6.8% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 71.86%.
On the next capitulation selloff day, which might come with the April Q1 earnings reports, I’ll be adding long positions in technology, banks, and biotech. I am currently in a rare 100% cash position awaiting the next ideal entry point.
That brings my 13-year total return to 541.94%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.54%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 80.6 million, up only 300,000 in a week, and deaths topping 988,000 and have only increased by 3,000 in the past week. Wow, we only lost the equivalent of eight Boeing 747 crashes in a week! Great news indeed. You can find the data here. Growth of the pandemic has virtually stopped, with new cases down 98% in two months.
The coming week is a big one for tech earnings.
On Monday, April 25 at 8:30 AM EST, the Chicago Fed National Activity Index for March is out. Activision Blizzard Reports (ATVI).
On Tuesday, April 26 at 8:30 AM, US Durable Goods for March are printed. At 9:00 AM the S&P Case Shiller National Price Index is announced. Alphabet (GOOGL) and Microsoft (MSFT) report.
On Wednesday, April 27 at 8:30 AM, the Pending Homes Sales for March are released. Qualcomm and Meta (FB) report.
On Thursday, April 28 at 8:30 AM, the Weekly Jobless Claims are printed. We also get the first look at Q1 GDP. Apple (AAPL), Amazon (AMZN) and Intel (INTC) report.
On Friday, April 29 at 8:30 AM, the Personal Income and Spending for March are disclosed.At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, when you are a guest of the KGB in Russia, you get treated like visiting royalty par excellence, no extravagance spared. That was the setup I walked into when I was sent by NASA to test fly the MiG 25 in 1993.
Far a start, I was met at Moscow’s Sheremetyevo Airport by Major Anastasia Ivanova, who was to be my escort and guide for the week. She had a magic key that would open any door in Russia and gave me a tour worthy of a visiting head of state.
Anastasia was drop-dead gorgeous. She topped 5’11” with light blonde hair, and was statuesque with chiseled high cheekbones and deep blue eyes. She could easily have taken a side job as a Playboy centerfold. But I could tell from her hands she was no stranger to martial arts and was not to be taken lightly. And wherever we went people immediately tensed up. They knew.
For a start, I was met on the tarmac by a black Volga limo. No need for customs or immigration here. Anastasia simply stamped my passport and welcomed me to Russia, whisking me off to the country’s top Intourist hotel.
The next morning, I was given a VIP tour of the Kremlin and its thousand-year history. I was shown a magnificent yellow silk 18th century ball gown worn by Catherine the Great. I asked her if the story about the horse was true, and she grimaced and said yes.
In a side room were displayed the dress uniforms of Adolph Hitler. I asked what happened to the rest of him and she said he was buried under a parking lot in Magdeburg, East Germany.
Out front, I was taken to the head of the line to see Lenin’s Tomb, which looked like he was made of wax. I think he has since been buried. In front of the Kremlin Armory, I found the Tsar Cannon, a gigantic weapon meant to fire a one-ton ball.
There was only one decent restaurant in Moscow in those days and Anastasia took me out to dinner both nights. Suffice it to say that the Beluga caviar and Stolichnaya vodka were flowing hot and heavy. The service was excellent. We were never presented with a bill. I guess it just went on the company account.
After my day in the capital, I was whisked away 200 miles north to the top secret Zhukovky Airbase to fly the MiG 25. A week later, Anastasia was there in her limo to take me back to Moscow.
The next morning Anastasia was knocking on my door. “Get dressed,” she said. “There’s something you want to see.”
She drove me out to a construction site on the southwestern outskirts of the city. As Moscow was slowly westernizing, suburbs were springing up to accommodate a rising middle class. One section was taped off and surrounded by the Moscow Police. That’s where we headed.
While digging the foundation for a new home, the builders had broken into a bunker left from WWII. Moscow had grown to reach the front lines of the 1942 Battle of Moscow. In Berlin during the 1960s, I worked with a couple of survivors of this exact battle. I was handed a flashlight and we ventured inside.
There were at least 30 German bodies inside in full uniform, except that only the skeletons were left. They still wore their issued steel helmets, medals, belt buckles, and binoculars. There were also dozens of K-98 8 mm rifles, an abundance of live ammunition and potato mashers (hand grenades), and several MG-42’s (yes, I know my machines guns).
The air was dank and musty. My guess was that the bunker had taken a direct hit from a Soviet artillery shell and had remained buried ever since. As a cave in threatened, we got the hell out of there in a few minutes.
Then Anastasia continued with our planned day. Since it was Sunday, she took me to the Moscow Flea Market. Russia was suffering from hyperinflation at the time, and retirees on fixed incomes were selling whatever they had in order to eat.
Everything from the Russian military was for sale for practically nothing, including hats, uniforms, medals, and night vision glasses. I walked away with a pair of very high-powered long-range artillery binoculars for $5. I paused for a moment at an 18th century German bible printed in archaic fraktur. But then Anastasia said I might get hung up by Russia’s antique export ban on my departure.
Anastasia and I kept in touch over the years. I sent him some pressed High Sierra wildflowers, which impressed her to no end. She said such a gesture wouldn’t even occur to a Russian man.
We gradually lost contact over the years, given all the turmoil in Russia that followed. But Anastasia left me with memories I will never forget. And I still have those binoculars to use at the Cal football games.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 22, 2022
Fiat Lux
Featured Trade:
(APRIL 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (TSLA), (TBT), (TLT), (BAC), (JPM), (MS),
(BABA), (TWTR), (PYPL), (SHOP), (DOCU),
(ZM), (PTON), (NFLX), (BRKB), (FCX), (CPER)
Below please find subscribers’ Q&A for the April 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley.
Q: Should I take profits on the ProShares UltraShort 20+ Year Treasury ETF (TBT), or will it go lower?
A: Well, you’ve just made a 45% profit in 4 months; no one ever gets fired for taking a profit. And yes, it will go lower, but I think we’re due for a 5 -10% rally in the (TBT) and we’re seeing some of that today.
Q: Do you think the bottom is in now for the S&P 500 Index (SPX)?
A: No, I think the 50 basis point rate hikes will put the fear of God into the market and prompt another round of profit-taking in stocks. So will another ramp up or expansion in the Ukraine War, and so could another spike in Covid cases. And interest rates are getting high enough, with a ten-year US Treasury (TLT) at 2.95% and junk at 6.00% that they will start to bleed off money from stocks.
So there are plenty of risks in this market that I don’t need to chase thousand point rallies that fail the following week.
Q: What would cause a rally in the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Everyone in the world is short, for a start. And secondly, we’ve had a $36 point drop in the market in 4 ½ months—that is absolutely screaming for a short-covering rally. It would be typical of the market to get everybody in the world short one thing, and then ramp it right back up. You can bet hedge funds are just gunning for that trade. So those are two big reasons. Another big reason is getting a slowdown in the economy. Fear of interest rate rises and yield curve inversions are certainly going to scare people into thinking that.
Q: Where to buy Tesla (TSLA)?
A: We had a $1,200 all-time high at the end of last year, then sold off to $700—that was your ideal entry point, on that one day when the market was down $1,000 and they were throwing out Tesla stock like there was no tomorrow. We have since rallied back to the 1100s, so I'd say at this point, anything you could get under just above the $200-day moving average at $900 would be a gift because the sales are happening and they’re making tons of money. They’re so far ahead of the rest of the world on EV technology that no one will ever be able to catch up. A lot of the biggest companies like Ford (F) and (GM) are still unable to mass produce electric cars, even though they’re all talking about these wonderful models they're bringing out in 2024 and 2025. So, I think Tesla is just so far ahead in the market that no one will catch them. And the stock will have to reflect that by trading at a higher premium.
Q: I Bought the ProShares UltraShort 20+ Year Treasury ETF (TBT) at your advice at $14, it’s now at 425. Time to take the money and run?
A: Yes, so that you’re in position to rebuy the (TBT) at $22, or even $20.
Q: I bought some bank LEAPS such as Bank of America (BAC), JP Morgan (JPM), and Morgan Stanley (MS) just before earnings; they’re doing well so far.
A: That will definitely be one of my target sectors on any recovery; because the only reason the stock market recovers is because recession fears have been put away, and the only reason the banks have been going down is because of recession fears. Certainly, the yield curve inversion has been helping them lot, as are absolute higher interest rates. So yes, zero in on the banks, I’m holding back waiting for better entry points, but for those who are aggressive, there’s no problem with scaling in here.
Q: If Putin uses a tactical nuclear weapon in the Ukraine, what would be the outcome?
A: Well, I don't think he will, because you don’t want to use nukes on your neighbors because the wind tends to blow the radiation back into your own country. It also depends on when he does this; if Ukraine joins NATO, joins the EC, and NATO troops enter Ukraine, and then they use tactical nukes, France and England also have their own nuclear weapons. So, attacking a nuclear foe and risking bringing in the US, who could wipe out the whole country in minutes, would not be a good idea.
Q: Would you get into Chinese stocks here?
A: Not really; China seems to have changed its business model permanently by abandoning capitalism. The Mad Hedge Technology Letter is currently running a short position in Alibaba (BABA) which has proved highly successful. Although these things are stupidly cheap, they could get cheaper before they turn around. Also, there’s the threat of delisting on the stock exchanges facing them in a year or two, and the trade tensions which continue with China. China doesn’t seem friendly anymore or is interested in capitalism. You don't want to own stocks anywhere in that situation. And by the way, Russia has also banned all foreign stock listings. China could do the same—not good if you’re an owner of those stocks.
Q: How would you play Twitter (TWTR) now?
A: I think it’s a screaming short, myself. If the board doesn’t accept Elon’s offer, which seems to be the case with their poison pill adoption, there are no other buyers of Twitter; and Elon has already said he’s not going to pay up. So you take Elon Musk’s shareholding out of the picture, and you’re looking at about a 30% drop.
Q: Many of the biggest Covid beneficiaries are near or below their March 2020 lows, such as PayPal (PYPL), Shopify (SHOP), DocuSign (DOCU), Zoom (ZM), Peloton (PTON), Netflix (NFLX), etc. Are these buys soon or are there other new names joining them?
A: I think this will continue to be a laggard sector. I think any recovery will be led by big tech, and once big tech peaks out after a 6-month run, then you may get the smaller ones catching up—especially if they're still down 80% or 90%. So that’s a no-touch for me; too many better fish to fry.
Q: Do you think inflation is transitory or are we headed toward double digits over the long term?
A: The transitory argument got thrown out the window the day Russia invaded Ukraine; they are one of the world’s largest producers of both energy and wheat. So that definitely set those markets on fire and really could end up adding an extra 5% in our inflation numbers before we peak out. I think we will see the highs sometime this year, could be as low as 4% by the end of this year. But we may have a double-digit print before we top out, and that could be next month. So, if you’re looking for another reason for stocks to sell out, that would be a good one.
Q: If the EU could limit oil purchases from Russia, then the war would be over in a month since Russia has no borrowing power or reserves.
A: The problem is whether they actually could limit oil purchases, which they can’t do immediately. If you could limit them in a year or cut them down by like 80%, we could come up with the other 20%, that is possible. Then, the war would end and Russia would starve; but Russia may starve anyway. Even with all the rubles in the world, they can’t buy anything overseas. Basically, Russia makes nothing, they only sell commodities and use those proceeds to buy consumer goods from abroad, which have all been completely cut off. They’re in for an economic disaster no matter what happens, and they have no way of avoiding it.
Q: What are your thoughts on supply chain problems?
A: I actually think they’re getting better; I watch the number of ships at anchor in San Francisco Bay, and it’s actually down by about half over the last 3 months. People are slowly starting to get things that they ordered nine months ago, used car prices are starting to roll over…so yes, it’s going to be a very slow process. It took one week to shut down the global economy, it’ll take three years to get it fully reopened. And of course, that’s extended by the Ukraine War. Plus, as long as there are supply chain problems and huge prices being paid for parts and labor, you’re not going to have a recession, it’s impossible.
Q: What’s your outlook on tech stocks?
A: I see them bottoming in the current quarter, and then going on to new all-time highs in the second half.
Q: What about covered calls?
A: It’s a really good idea, allowing you to get long a stock here, and reduce your average cost every month by writing calls against your position until they eventually get called away. Not too long ago, I wrote a piece on covered calls, so I could rerun that again to get people familiar with the concept.
Q: If Warren Buffet retires, what happens to Berkshire Hathaway (BRKB) stock?
A: It drops about 5% one day, then goes on to new highs. The concept of a 90-year-old passing away in his sleep one night is not exactly revolutionary or new. Replacements for Buffet have been lined up for so long that now the replacements are retiring. I think that’s pretty much baked in the price.
Q: Any plans to update the long-term portfolio?
A: Yes it’s on my list.
Q: Too late to buy Freeport McMoRan (FCX)?
A: Yes I’m afraid so. We’ve had a near double since September when it started moving. However, I would hold it if you already own it and add on any substantial selloff. Freeport McMoRan announced fabulous earnings today, and the stock promptly sold off 9%. It was a classic “buy the rumor, sell the news” type move. This is despite the fact that the United States Copper Fund ETF (CPER), in which (FCX) is a major holding, is up on the day. Please remember that I told you earlier that each Tesla needs 200 pounds of copper, that Tesla sales could double to 2 million this year, and that they could sell 4 million if they could make them. It sounds like a bullish argument of me, of which (FCX) is the world’s largest producer.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
April 20, 2022
Fiat Lux
Featured Trade:
(PEAK EYEBALLS)
(DIS), (CURI), (ROKU), (PTON), (ZM), (WBD), (FUBO), (NFLX)
Online streamers now have no pricing power.
Remove jacking up prices from the equation and streamers like Netflix (NFLX) and Disney (DIS) look quite mediocre and that’s what the 35% drop in NFLX shares are telling us.
NFLX Ahh factor has vanished.
It used to be that they knew they could raise prices whenever they wanted and that tool in their kit kept investors on board.
CNN+’s dismal foray into pay tv was another red flag when owner Warner Bros. Discovery (WBD) decided to pull all marketing spend because of the paltry viewing results.
There’s just too much competition out there and instead of creating more leeway, growth was pulled forward the past 2 years, and now the chickens are coming home to roost.
Shelter-at-home stocks like Peloton (PTON) and Zoom (ZM) are now surplus to requirements.
It was just not that long ago, that fresh streaming TV options launched at a frenzied pace.
With many subscription services available, streaming entertainment became ubiquitous in U.S. homes as consumers spent large quantities of time and money on streaming media.
As economies reopen following the end of the health situation, and consumers spend more time outside of their homes, there still are just other things to do like going outside.
The idea that there are still many years of streaming growth lie ahead for the streaming industry has turned out to be an utter fallacy.
These are some tech companies impacted.
- Disney (DIS)
The much-anticipated Disney+ streaming service was launched in late 2019, just in time for the health situation.
It added tens of millions of subscribers worldwide in its first year and quickly became the second-largest subscription streaming service after Netflix. Disney also owns the streaming services Hulu and ESPN+ in the U.S. but they still don’t turn a profit on many of these streaming assets yet.
It is unlikely that new content will reverse generating excessive losses.
Better Disney stick to the amusement parks.
- Roku (ROKU)
Streaming TV has been a boon for the smart TV and streaming device maker.
Roku has become the largest TV platform in the U.S., distributing content via The Roku Channel and acting as a hub for households to manage all of their streaming subscriptions.
Roku distributes its smart TV software and streaming devices at minimal cost, making money instead on advertising and by managing subscriptions.
With peak eyeballs on streaming, don’t expect any explosive growth from Roku, in fact, they could go with a whimper and wait for a buyout.
This is a warning sign for any tech company that chooses to not produce their own in-house content and relying on others to draft the narrative of future health is awfully dangerous in a zero sum game.
- fuboTV (FUBO)
Streaming service fuboTV, a relative newcomer to the streaming media industry, went public in 2020.
This small service has gained popularity as a live TV platform, and it’s a top option for those who want to watch live sporting events.
The smaller they come, the harder they fall.
Smaller streaming companies have little recourse when multiple exogenous forces impact the company.
fuboTV is nowhere near profitability and has lost close to half a billion dollars in each of the past 2 years.
Public companies are often harangued for going ex-growth the second they are tradable in New York, and this is the epitome of what I am talking about.
The stock has gone from $35 to $5 today in the past 5 months.
Don’t catch a falling knife here.
- CuriosityStream (CURI)
CURI is another newbie to the dying streaming industry.
This streaming media company focuses on documentaries and science content and was founded by Discovery’s
CURI is competing against some well-entrenched rivals in the non-fiction TV space, including Discovery and Disney’s National Geographic (available on Disney+).
The young company keeps its content creation costs relatively low since it focuses on educational material and partners with universities, but who really wants to see this type of content anyway.
This company sounds boring and naïve.
CURI’s stock price has gone from $17 to $2 in the past 5 months.
Avoid like the plague!
Mad Hedge Technology Letter
April 18, 2022
Fiat Lux
Featured Trade:
(OMINOUS SIGN FOR TECH EARNINGS)
(NFLX)
A market nostrum I religiously follow of not catching a falling knife could not resonate more with the current situation at streaming giant Netflix (NFLX).
The stock has imploded from $690 to $330 in less than 6 months.
November 2021 represented the high-water mark for many tech growth stocks and NFLX has been dragged into this mess as institutions and hedge funds rush to de-lever their tech portfolio as the panic of higher rates sets into the trading environment.
Does this mark the end to the NFLX model that was the darling of this bull market for so long?
Investors must grapple with this salient question.
NFLX must tap into the bond market to secure funding in order to supply us with high-quality content, so this question is really the crux of the issue.
We are certainly reaching an inflection point where many questions are still in need of answers.
As we approach NFLX’s earnings report tomorrow, the bar has been set extremely low for NFLX.
The backdrop is poor with weekly earnings adjusted for inflation decelerating at the fastest since the housing crisis of 2008.
There’s not a lot to look forward to in the tech world as higher expenses are destroying demand, delaying capital investments, and wage increases are depressing the bottom line at a time when supply chain bottlenecks are going from bad to awful.
NFLX is a product that isn’t essential to daily life like energy or food and non-essential services are the services that are getting cut in 2022.
NFLX also has a Russia problem as the company suspended operations in Russia on March 6 with no end in sight to when or if they might return.
Russia had 1 million NFLX subscribers which only represents a drop in the bucket of the 221 million total NFLX subscribers.
Therefore, I must say that the hit to the bottom line will be miniscule if anything.
However, this proves the point of NFLXs arduous slog through iterating in the emerging world. It’s not as easy when you enter a territory with different rules, currency, culture, and rule of law.
For instance, NFLX isn’t even allowed in China and India has fierce competition from local streaming bulwarks.
If they want to return to Russia, NFLX must first answer to breaking Russian law when they refused to abide by a new law that would require the streamer to include 20 "free-to-air" Russian State TV channels.
NFLX remains heavily focused on the emerging world as it looks to aggressively expand its footprint overseas. Four Russian originals were in the midst of production prior to the suspension. The projects have since been put on ice indefinitely.
Sadly, the saturation of NFLX’s cash cow in America and other rich Western democracies has reared its ugly head.
A multipronged revenue slowdown could spiral out of control.
The low-hanging fruit has been plucked and NFLX is still a model that relies on explosive growth to net the incremental subscriber.
It’s not working anymore and there is no plan B which could result in underperformance of the content quality.
Most of the bullishness in the stock’s price action coalesces around higher than expected subscription adds and without that, there is a dark future waiting for NFLX.
In addition to subscriber growth, analysts predict that management will have to answer other key questions, with a particular focus on business operations and profitability, the company's password sharing crackdown, gaming strategy, M&A, and more.
In the near term, NFLX’s guide is more important than ever.
In the heat of deglobalization, a leveraged globalized strategy triggers cognitive dissonance. A strategic reset is needed.
I can envision NFLX winning in some countries and losing in others, but to copy and paste that strategy to every emerging country, which usually has a weak rule of law, sounds like a recipe for continuous weak guidance in the new normal we are in.
Even more worrisome, as high inflation bites more at home, Americans might start to cut back on their NFLX and substitute it with free ads on YouTube and that’s the tail risk that’s not baked into the price of the stock yet.
Mad Hedge Technology Letter
March 7, 2022
Fiat Lux
Featured Trade:
(SHORT TERM PAIN FOR SILICON VALLEY TECH)
(NFLX), (QQQ), (EPAM), (SNAP), (TDOC), (ARKK)
The American tech sector has largely been overshadowed by the events across the world.
Many would question why that would even matter.
What does that even have to do with an American smartphone or devices that permeate our society?
We deal with American tech stocks for this newsletter, and not with moral outrage or foreign policy matters.
So we stay in our lane and deal with various exogenous stocks that come our way as it relates to the Nasdaq (QQQ).
I don’t get to pick these shocks – they come in fits and starts and in different sizes.
The end of omicron was almost to the point of visualization, but we roll into yet another macro crisis of many groups’ makings.
Tech doesn’t operate in a vacuum, and politics, more often than I would like to admit, sometimes do overlap a great deal.
The world has changed dramatically in the past 14 days and the knock-on effects mean that American tech companies and their trillion dollars business models are pulling out of Russia, a country with a population close to 150 million, in droves.
It is what it is, and life moves on.
Netflix (NFLX) has been in operation in Russia since 2016 and the decision to vacate Russian business means they will lose around 1 million subscribers.
Most likely the worst tech company to work for right now in the world must be EPAM Systems (EPAM).
The internal chaos going on mainly stems from the 58,000 employees, with 14,000 of them in Ukraine and more than 18,000 staff in Belarus and Russia, according to company filings with the U.S. Securities and Exchange Commission.
EPAM’s stock is down 74% YTD in 2022 and is a stock that epitomizes the situation in Eastern Europe right now.
When workers refuse to work with each other, it’s hard to imagine that much gets done at all.
And this is just the tip of the iceberg.
The American tech withdrawals encompass all shapes and sizes.
Apple and Microsoft both said no bueno to selling products in Russia.
Game maker EA pulled the plug as well.
Google and Twitter have suspended advertising in Russia.
It’s a terrible time to monetize a YouTube channel in Russia because Google won’t pay you for it.
Likewise, Snap (SNAP) has pulled its marketing dollars from Russia too.
Another sonic boom hit Russian tech when Airbnb room-rental service suspended all operations in Russia and Belarus and has said its nonprofit subsidiary will offer free temporary housing to 100,000 Ukrainian refugees.
It's also waived host and guest fees for bookings in Ukraine, as people worldwide use Airbnb as a way to provide income directly to Ukrainians.
Adobe is halting sales of new Adobe products and services in Russia. In addition to making sure its products and services are not being used by sanctioned entities, Adobe is also cutting Russian government-controlled media outlets off from its cloud services.
What is emerging as quite black and white is that American technology companies hoping to apply their business model in autocratic states doesn’t integrate as well as first thought.
The weak rule of law along with all-powerful demagogue leaders make it hard to sustain any sort of business carve-out for the long term.
Eventually, many American companies are forced to abandon their ambitions in these marginal states.
The next question a tech investor must ask is will the American tech sector follow the lead from Russia and pull out from China.
Obviously, this has major implications for companies like Apple, Micron, and a handful of American tech companies that are entrenched in the Chinese economy and society.
Many people think this will blow over and tech will come back front and center, but short-term, this is highly negative for American tech stocks.
The more this situation drags out, the higher risk American tech is more involved in this mess from a different gateway.
The tech portfolio has been outright short recently and it was the perfect call to sell the dead cat bounce in growth tech like Teladoc (TDOC) and ARKK funds (ARKK).
