Mad Hedge Technology Letter
November 10, 2023
Fiat Lux
Featured Trade:
(ARTISANAL TECH FEELS THE HEAT)
(BMBL), (PTON), (MTCH)
Posts
Bumble (BMBL) is a dating app in which women initiate communication first and their CEO Whitney Wolfe Herd deciding to quit offers deep insight into the state of tech firms.
Remember that Wolfe Herd is the person who established this app and presided over an 83% decline in share price since an initial public offering over two years ago.
Clearly, the writing was on the wall for Wolfe Herd, but she shouldn’t receive all the blame.
There is an industry-wide malaise occurring in some sub-sectors of technology and smartphone dating apps are one of them.
Some investors have started to gain a sense that these apps don’t have enough bang for the buck and these business models are gaining in popularity.
In the past few weeks, the popular dating app Tinder announced a new feature rolling out a new subscription tier for $500 per month boasting it would unlock premium profiles at that price point.
Asking for $6,000 per year is a serious overreach for a dating app and I believe that type of ask will alienate some of the core users.
These apps are supposed to scale but not at $6,000 per year.
What else is the big challenge for Bumble?
How to get consumers to commit money to a dating app when the economy is so uncertain?
That’s the conundrum.
In the months after the pandemic, online dating apps became the hottest ticket in town as the only way to not sacrifice a dating life.
Bumble, which currently has 40 million active monthly users across its portfolio of apps, is now fiercely fighting for users with its competitor Match (MTCH).
As with some of these niche tech businesses, opening up the economy from the lockdowns has been a tough pill to swallow as it relates to the knock-on effect on future sales.
In terms of pure market sentiment, investors have determined a strong likelihood that the lockdowns were the high water mark for these artisanal apps.
Unfortunately, these sub-sector stocks are labeled as a time and place stock and not one that is worth holding in times of chaos and upheaval.
We are far from the start-up frenzy peak where entrepreneurs could make hopes based on fantasies into an app and concoct a targeted addressable market.
It’s not going to cut it anymore, because the bar is so much higher.
In the era of cheap money, funding niche sub-sectors of technology was still quite fashionable and mainstream.
I would even say it caught fire.
Then there is the issue of artificial intelligence concerning how this type of technology delivers poison to the innards of the business model.
How?
Dating apps could easily turn into bots chatting to bots to monetize users with no real value. This would constitute a fake business. Ad sponsors could be paying for this to happen. AI integrates into online dating apps quite poorly because it strips away the authenticity of the end user which undermines communication and the underlying asset.
A fake business would mean a crash in the underlying equity value. Of course, we are not even close to that possibility right now, but keep in mind that force-feeding management to one-up AI capabilities could unearth some bizarre unintended consequences.
Ultimately, the end of 2023 is a dynamic time in technology because the trajectory of companies has never been so uncertain, fluid, and challenging at the same time.
Expect quite a few of these artisanal apps to get swept into the dustbin of history.
Readers need to stay away from sub-sector technology stocks like Peloton (PTON) and instead go for stocks that have broader exposure to more wallets where artificial intelligence will act as a tailwind.
Plus, many people use Instagram, X, or Facebook for dating anyway. No need to overcomplicate life.
Mad Hedge Technology Letter
September 6, 2023
Fiat Lux
Featured Trade:
(SEPARATING THE WHEAT FROM THE CHAFF)
(PTON), ($COMPQ), ($TNX)
Part of the excesses that became ubiquitous with Silicon Valley is starting to get reigned back and that’s a good sign for the tech sector ($COMPQ).
It also means the boom years for the tech sector are over.
I am not talking about the full set of perks tech employees receive at their fingertips in order to entice them to spend most of their time at the office.
I am more referring to ideas that were hyped up as grand but never made a material dent in the tech ecosystem.
Not all tech ideas hit it big and some are complete busts.
Ideas like the Uber of battery-powered scooters are now getting the thumbs down and capital is getting pulled by from these marginal business concepts.
From the get-go, these companies presided over poor unit economics and they could only sustain operations in a world of cheap capital that doesn’t exist anymore.
Rates ($TNX) are high and could shoot higher.
Legally, cities have a say in whether they want their beautiful promenades and piazzas littered with ugly scooters.
In France, Parisians voted to ban battery-powered scooters, confirming that many regarded them as absolutely infuriating.
Banned from the French capital by popular vote, self-service electric scooters are enjoying their last day in Paris on Thursday, marking the end of five tumultuous years of controversial use, much to the dismay of their users.
From 1 September, Paris will become the first European capital to completely ban these self-service two-wheelers.
Many Parisians have become fed up with seeing them as not only an eye sore but also a safety hazard.
Since August, the 15,000 scooters have gradually been taken off the streets.
Of the 5,000 scooters going out to pasture produced by the German company Tier, a third will remain in the Paris region, in 80 communes around Marne-la-Vallée or Saint-Germain-en-Laye. The rest will go mainly to Germany.
In Paris, some 400,000 people chose a scooter to get around in 2022, according to operators.
The operators are banking on their customers switching to bicycles, which are already offered by everyone, which should enable them to avoid redundancies, at least for the time being.
There most likely will never be another boom of battery-powered scooter platforms dressed up as technology companies.
These types of low-quality tech firms are feeling the heat and examples are plentiful such as Peloton (PTON) which has also hit rock bottom.
The next big idea down the pipeline is generative artificial intelligence, but even that has been dialed back somewhat after stocks were priced in for parabolic growth rates.
As the expectation for better technology ideas results in the need to improve business models, there seems to be no room for bottom-of-the-barrel tech like the Uber of battery-powered scooters.
It seemed like a bad idea from the start so it’s surprising it took this long for them to get exposed.
Moving forward, expect tried-and-tested brand names in tech to outperform these mediocre businesses. It’s never been more difficult to grow tech companies with these high interest rates and the death of bad tech ideas will go into overdrive as interest rates continue to surge.
This will help our trading because knowing the pulse of the tech sector is half the battle.
Mad Hedge Technology Letter
August 23, 2023
Fiat Lux
Featured Trade:
(LOSING THE EDGE)
(PTON), (NVDA), (MSFT)
It’s looking like mission impossible for Peloton (PTON) who, if some might remember, was the darling of the lockdowns a few years ago.
This is really a story of making hay while the sun is shining because the sun has decided to tuck itself behind clouds indefinitely to the chagrin of PTON.
I have posted a few negative critiques of PTON because it’s accurate to distill the company down to an iPad on a stationary bike which charges for an expensive subscription.
The fact is once the world opened up, people stopped using PTON products and happily decided to go back to their old routines like visiting fully serviced gyms or exercising outside.
Even the consumers who decided to quit working out altogether are most likely traveling the world spending their PTON subscription money at a pizza joint in Italy.
The downdraft all came to a head today when PTON dropped yet another disastrous earnings report and their stock is down 23% at the time of this writing.
They whined about the decline in paying subscribers and said the cost of an equipment recall was denting its profit.
The fitness-equipment company cautioned that it expected to have negative cash flow in each of the next two quarters as it keeps fighting high inventory levels, and another sequential drop in subscribers.
Chief Executive Barry McCarthy played down the crashing stock price by explaining that the stock market isn’t in sync with the actual business and doubled down by emphasizing the company has its best days ahead of itself.
The New York company also said it is back to purchasing more bike and tread inventory, as it is in a more normalized inventory position than a year ago.
Peloton has struggled with its pricing strategy and recently further lowered the prices for its treadmill and rower by about 14% and 6%, respectively.
Peloton had told investors that it was looking to stem losses and start generating cash flow from its operations after slashing jobs and restructuring its business.
In the latest quarter, the company reported a negative cash flow of $74 million, weighed down by a legal settlement.
Peloton expects to end the September quarter with paying connected fitness subscribers of 2.95 million to 2.96 million, down from three million as of the end of the June quarter.
It has already received about 750,000 requests for replacement seat posts, ahead of internal expectations, and has been able to fulfill 340,000 of them.
Revenue for the fiscal fourth quarter ended June 30 fell 5% to $642.1 million.
Peloton’s average monthly connected fitness churn was 1.4% in the quarter, increasing from a 1.1% churn in the prior quarter, as a result of the company’s bike-seat-post recall.
This cautionary tale dovetails accurately with my wider thesis of smaller brand-named tech companies losing the war against the tech behemoths.
One little misstep and the inner problems are magnified and PTON has numerous issues under the hood of the car.
The CEO hyping up the company is a fool’s game because the writing is on the wall for this product.
There is no competitive advantage in their product and I believe subscriptions and hardware will continue to fall off a cliff.
Investors should head to higher water and look at premium names like Nvidia or Microsoft.
These types of companies possess strategic footholds in the leading technologies in the world and I can’t say the same for PTON.
PTON will continue to trend into the dustbin of history and don’t get fooled into this stock reversing any time soon.
Avoid this stock like the plague.
Mad Hedge Technology Letter
October 7, 2022
Fiat Lux
Featured Trade:
(TECH GROWTH NOT GROWING)
(PTON)
Peloton (PTON), the glamorous fitness-bike-with-a-tablet company, is going through a gut-churning 4th round of job cut this year.
I call this bad management, because it is.
If a company is going to cut jobs, get it over with one sharp cut of the sword, otherwise, the wounds don’t start to heal.
I can’t imagine how low company morale is in the virtual offices of Peloton as the tech firm lurches from one round of job cut to the next.
It’s hard to understand how anybody gets anything done at Peloton because they are too busy going under company review.
The extra cherry on top for this 4th job cut is the CEO has told us the company has 6 months to prove it can survive as a standalone company.
This is again poor management as it essentially signals to workers to find an imminent backup plan before the rate hikes destroy all job openings.
Yes, there is a name that goes with this dark face and that is CEO Barry McCarthy.
The genius management is one of the big reasons why the stock is down 75% so far this calendar year.
Peloton’s recent strategic changes have sparked speculation that it could be looking to sell itself, but at this point, it’s only worth pennies on the dollar from what it once was at the height of late 2020 and early 2021.
That was when Peloton was strutting around like it could no wrong.
They had the hot product but unfortunately failed to capitalize on their head start.
Head starts don’t last long for marginal firms or in the tech world for that matter.
It only takes months for other tech firms to iterate mediocre products into their lineup and PTON let the short-term success get to their head.
Even more surprising was the overconfident nature of the management when they were still a massively loss-making operation.
My recommendation would have been to roll into a more stable cash flow business during the arbitrary lockdowns, but no, PTON is still an analog company when others have gone digital.
They are still selling the same Podunk stationary bike when the smart consumer figured it out by purchasing a stationary bike themselves and installing a tablet stand.
If you want to argue that the PTON exercise classes were worth the subscription then I would also say a smart consumer can just exercise themselves with a timer and self-selected music.
Small backwater firms only get 15 minutes of fame once in a lifetime, yet management did little to launch them into a more stable operational situation and they lost $1.2 billion just last quarter.
Taking a step back, growth tech has been crushed by these interest rate hikes and only the holy grail of tech products is surviving at this point.
Before, zombie firms used to be able to go back to the debt markets to kick the can down the road, but not anymore as loan costs have soared.
No more excesses fueled by cheap capital – it's sink or swim time.
Clearly, management didn’t get the memo and I don’t see growth tech reversing until we are further through the rate rise cycle and debt servicing costs become lower.
Global Market Comments
June 6, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR JUNE 14-16)
(MARKET OUTLOOK FOR THE WEEK AHEAD, or PUTIN’S DEAD END),
(VIX), (HYG), (JNK), (PTON), (W), (MSTR), (RDFN), (BYND), (F), (TSLA), (NVDA)
The current consensus for market strategists is that volatility will remain high.
Please pinch me because I think I died and went to heaven. For every time the Volatility Index (VIX) tops $30, I make another 10%-15% for my followers.
The bulk of market players are now obsessing whether we are entering a recession or not, as if their investment faith depended on it.
Recession, resmession.
As long as I can keep making a 65.40% trailing one-year return, while the Dow Average is off -4.2% during the same time period, I could care less what the economy is actually going to do.
After an impressive 380-point, 10% rally in the S&P 500, it now looks like the stock market is failing once again. Best case, we revisit this year’s low at 3,800. Worst case, we break to new lows at 3,600. The very worst case, we break below 3,500 and wish you had never heard of the stock market.
If you are a trader, there is a fantastic opportunity here to buy low, sell high, and retire early. If you are disciplined, you still have a ton of cash left over from the end of 2021 (I was 100% cash) and will be cherry-picking on the big down days.
It's really very simple. The longer you have been doing this, the easier it gets and the more money you will make. After 52 years of practice, I can do this in my sleep.
As the bear market worsens, we are seeing old asset classes return from the dead like the revived dinosaurs of Jurassic Park. Call convertible bonds are the velociraptors of the bunch.
Take the main junk bond ETF like the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Barclays High Yield Bond Fund (JNK), which have seen yields double from 3% to over 6% in only six months.
If you are willing to take on more risk, individual busted convertible bonds yield infinitely more. You know all the names. Peloton (PTON) converts are paying a 10.4% yield to maturity, Wayfair (W) 11.0%, MicroStrategy (MSTR) 13.1%, Redfin (RDFN) 14.5%, and Beyond Meat (BYND) 19.5%. Buy ten of these and even if one goes under, you still earn a decent double-digit return.
Having run a convertible bond trading desk for ten years, I can tell you that the risk/reward balance for many individuals with this investment class is just right.
As my summer military duty approaches, information about the Ukraine War is pouring into me. I will share with you what I can, what has been declassified for the war is still a major factor in your investment outcomes. I have been able to use my “top secret” status for 50 years,= to your benefit.
The amazing thing is that in this modern age, information goes from “top secret” to declassified in only a day. It is a new strategy used by the current administration that is working incredibly well. Information is more valuable shared than locked up.
I have been getting a lot of questions from readers as to why Vladimir Putin committed such a disastrous error by invading Ukraine as he is considered a smart guy. My initial response was that he surrounded himself with “yes” men who only told him what he wanted to hear, leading to terrible outcomes, which I have seen happen many times.
The costs of the war for Putin have so far been enormous; 50,000 casualties, 1,000 tanks, 1,300 armored vehicles, banishment from the western economy, the loss of $1 trillion in foreign held assets, and the decline of the national GDP from $1.5 trillion to $1 trillion.
The costs are about to substantially rise. The US is now sending over its most advanced artillery systems, the MRLS, or Multiple Rocket Launch System, which can hit any target within 300 miles with an accuracy of one meter. All you have to do is dial in the latitude and longitude of the target and it never misses. This one weapon will certainly bring the war to a stalemate and consign it to page three of the newspapers.
But after doing a ton more research, my view has evolved. Putin has in fact launched a Resource War against the entire rest of the world. The result has been to boost the price of practically everything Russia produces, including oil ($123 billion), refined petroleum products ($63 billion), iron & steel ($28 billion), coal ($17 billion), fertilizer ($13 billion), wood ($12 billion), wheat ($9 billion), aluminium ($8 billion), platinum, palladium, uranium.
There is also the inflation angle. While the US benefits from many of these high prices as well, they have raised the US inflation rate from 5% to 8.3%. That damages the election prospects of Biden and the Democrats. High inflation improves the election of prospects of a former president who Putin seems to vastly prefer for whatever reason.
After covering Russia for 50 years, flying their front-line fighters, springing a wife out of jail in Moscow, I can tell you that everything there is a chess game, and they play a very long game.
Nonfarm Payroll Report comes in at 390,000, better than expected. Leisure & Hospitality led the gains with 84,000, and Professional & Business Services by 75,000. Manufacturing fell to only 18,000, largely because of a shortage of workers. The Headline Unemployment Rate remained the same at 3.6%. Average hourly earnings rose by an inflationary 5.2% YOY. The U6 “discouraged worker” rate rose back to 7.1%.
Weekly Jobless Claims jump 19,000 to 200,000, a two-month high, according to the Department of Labor. Compensation for American workers has hit a 30-year high. New York showed the largest increase followed by Illinois.
OPEC+ raises oil output to meet surging energy demand caused by the Ukraine War. Up 648,000 barrels a month for July and August. They could easily do a lot more. The cartel is aiming for the pre-pandemic 10 million barrels a day. No dent in prices at the pump yet.
Hedge Funds were slaughtered in May, with the flagship Tiger Global Fund down a massive 14%. Gee, Mad Hedge Fund Trader was UP 11% in May and am up 44% on the year. Maybe there’s something in the water here at Lake Tahoe. Or, maybe it’s the “Mad” that is giving me my edge?
S&P Case Shiller National Home Price Index tops 20.6%, a new all-time high. Tampa (34.8%), Miami (32.4%), and Phoenix (32.0%) lead the gains. Incredible as it may seem, price rises are accelerating. But expect that to cool off once current prices start feeding into the index.
Home Listings soar, with homes for sale up 9% YOY as homeowners fear missing getting out at the top. New listings have doubled in a year, according to Redfin. Outrageous over-market bids have definitely ended in California. So far, no hint of price drops….yet.
A Ford (F) Electric Pickup can power your house for ten days, but only if you live in a tiny house. Ford is the first company to introduce bidirectional charging that lets your home run off the vehicle’s 1,300-pound lithium-ion battery. All you need is a $3,895 hardware upgrade from Sunrun. The range is 320 miles, not as much as the latest Tesla Model X (TSLA). Good luck getting one. Ford isn’t taking any new orders until it fills the 200,000 it already has. Expect Tesla to copy the move.
The Fed may overshoot on raising interest rates if Fed governor Christopher Waller has his way. That’s because going too tight may be necessary to break the back of inflation. That’s what happened in 1980, when Fed Funds hit 17%, and ten-year bond yields hit 15.84%. My first home mortgage interest rate for a coop in Manhattan back then was 17%.
China Covid Cases fade, prompting a big Bitcoin rally. This could be the impetus for a sudden global economic recovery that will deliver a big US stock market rally. Good thing I loaded the boat with tech stocks two weeks ago.
The Fed Minutes were not so horrible, downplaying the risk of a full 1% rate rise, triggering a 1,000-point rally in the Dow. With five up days in a row this is starting to look like THE bottom. Is this the light at the end of the tunnel?
NVIDIA (NVDA) rips, surprising to the upside on almost every front, sending the stock up $30, or 18.75%. Mad Hedge followers bought (NVDA) last week. This is one of the best run companies in the world. I expect the shares to rise from the current $178.51 to $1,000 in five years. Buy (NVDA) on dips.
Q1 GDP dives 1.5%, in its final read. It’s the worst quarter since the pandemic began during Q2 2022. Weekly Jobless Claims dropped 8,000 to 210,000.
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 hyperaccelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my June month-to-date performance recovered to +2.49%.
My 2022 year-to-date performance exploded to 44.36%, a new all-time high. The Dow Average is down -9.37% 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 65.40%.
That brings my 14-year total return to 556.92%, some 2.37 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.97%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 84.7 million, up 300,000 in a week and deaths topping 1,000,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 6 is the 78th anniversary of the D-Day invasion of Normandy. All of the veterans I knew have long since passed. I’ll miss the memorial this year.
On Tuesday, June 7 at 8:30 AM, the US Balance of Trade for April is released.
On Wednesday, June 8 at 10:30 AM, US Crude Inventories are published.
On Thursday, June 9 at 8:30 AM, Weekly Jobless Claims are out.
On Friday, June 10 at 8:30 AM, the blockbuster US Core Inflation Rate is announced. More importantly, the new dinosaur movie, Jurassic World: Dominion, is released. At 2:00 the Baker Hughes Oil Rig Count are out.
As for me, this is not my first Russian invasion.
Early in the morning of August 20, 1968, I was dead asleep at my budget hotel off of Prague’s Wenceslas Square when I was suddenly awoken by a burst of machine gun fire. I looked out the window and found the square filled with T-54 Russian tanks, trucks, and troops.
The Soviet Union was not happy with the liberal, pro-western leaning of the Alexander Dubcek government so they invaded Czechoslovakia with 500,000 troops and overthrew the government.
I ran downstairs and joined a protest demonstration that was rapidly forming in front of Radio Prague trying to prevent the Russians from seizing the national broadcast radio station. At one point, I was interviewed by a reporter from the BBC carrying this hulking great tape recorder over his shoulder, as I was the only one who spoke English.
It seemed wise to hightail it out of the country, post haste, as it was just a matter of time before I would be arrested. The US ambassador to Czechoslovakia, Shirley Temple Black (yes, THE Shirley Temple), organized a train to get all of the Americans out of the country.
I heard about it too late and missed the train.
All borders with the west were closed and domestic trains shut down, so the only way to get out of the country was to hitch hike to Hungary where the border was still open.
This proved amazingly easy as I placed a small American flag on my backpack. I was in Bratislava just across the Danube from Austria in no time. I figured worst case, I could always swim it, as I had earned both, the Boy Scout Swimming, and Lifesaving merit badges.
Then I was picked up by a guy driving a 1949 Plymouth who loved Americans because he had a brother living in New York City. He insisted on taking me out to dinner. As we dined, he introduced me to an old Czech custom, drinking an entire bottle of vodka before an important event, like crossing an international border.
Being 16 years old, I was not used to this amount of high-octane 40 proof rocket fuel and I was shortly drunk out of my mind. After that, my memory is somewhat hazy.
My driver, also wildly drunk, raced up to the border and screeched to a halt. I staggered through Czech passport control which duly stamped my passport. I then lurched another 50 yards to Hungary, which amazingly let me in. Apparently, there is no restriction on entering the country drunk out of your mind. Such is Eastern Europe.
I walked another 100 yards into Hungary and started to feel woozy. So, I stumbled into a wheat field and passed out.
Sometime in the middle of the night, I felt someone kicking me. Two Hungarian border guards had discovered me. They demanded my documents. I said I had no idea what they were talking about. Finally, after their third demand, they loaded their machine guns, pointed them at my forehead, and demanded my documents for the third time.
I said, “Oh, you want my documents!”
I produced my passport, When they got to the page that showed my age they both started laughing.
They picked me and my backpack up and dragged me back to the road. While crossing some railroad tracks, they dropped me, and my knee hit a rail. But since I was numb, I didn’t feel a thing.
When we got to the road, I saw an endless stream of Russian army trucks pouring into Czechoslovakia. They flagged down one of them. I was grabbed by two Russian soldiers and hauled into the truck with my pack thrown on top of me. The truck made a U-turn and drove back into Hungary.
I contemplated my surroundings. There were 16 Russian Army soldiers in full battle dress holding AK-47s between their legs and two German Shepherds all looking at me quizzically. Then I suddenly felt the urge to throw up. As I assessed that this was a life and death situation, I made every effort to restrain myself.
We drove five miles into the country and then stopped at a small church. They carried me out of the truck and dumped me and my pack behind the building. Then they drove off.
The next morning, I woke up with the worst headache of my life. My knee bled throughout the night and hurt like hell. I still have the scar. Even so, in my enfeebled condition, I realized that I had just had one close call.
I hitch-hiked on to Budapest, then to Romania, where I heard that the beaches were filled with beautiful women. My Italian let me get by passably in the local language.
It all turned out to be true.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
One More Off to College
If You Don’t Like the Price, Don’t Use it
