The interest rate that impacts tech stocks the most is the federal funds rate, and that’s important to know for readers.
The Federal Reserve is the body of an unelected group of so-called economic experts who mostly have never had a real job or never have had experienced running a company in their life.
Outsized control is given to these decision makers to decide at what interest rate banks and other similar institutions can lend money.
The biggest news nugget not chatted about lately is how the expectations for future Fed Funds interest rates has collapsed from 5% to 4.75%.
Only 2 more quarter-point increases from here and then we are done and dusted and ready for a reverse in policy.
This is why tech stocks have bolted out the back of the stable to start the year.
The setup is incredibly dovish and the price action so far this year has been overwhelmingly positive.
Many traders believe that inflation is decelerating and are taking advantage of this theme by buying tech stocks in the short term.
The outsized beneficiaries in the short term are the tech stocks that went down the most on the way down like video-conferencing technology firm Zoom Video Communications (ZM).
The Friday snapback meant that ZM rose 6% and other similar growth stocks felt the same wicked price action to the upside.
Fintech company Square (SQ) also rose 6.6% representing a nice reprieve from the constant onslaught of weakness in share price since November 2021.
The bright start to tech in January has a lot to do about positioning with many traders previously stationed for a sharp fall in equity prices.
However, the 800-pound gorilla in the room now is China which has reversed policy and is now open for business.
The shuttering of the failed lockdown policy in China is highly bullish for tech stocks and general equity sentiment.
Chinese consumers who go abroad are big spenders and an open China will translate into meaningful demand for tech software, hardware, products, and raw materials.
Get ready for all the large metropolitan areas around the Western World and Asia to be flooded with cash-rich Chinese who have had 3 years to dream about where and how to spend their cash.
This will easily translate into increased purchases of not only second homes on the French Riviera and Zermatt, Switzerland, but shiny new iPhones, new Teslas, new software for their social media businesses, and the ancillary software needed to manage their businesses like Mailchimp, Wix, Slack, Wave Accounting, Trello, and so on.
These larger macro trends can feed into big tech even if some of them have no direct input.
Luckily, traders are chomping at the bit for the Fund Funds rate to flatten then reverse lower and that will equate to a monster rally into battered tech stocks.
The first week of tech strength is just a preview of what will happen later this year as tech goes from ice cold to the hottest asset in the equity markets.
As positioning goes, traders and investors should be skewed towards a quick upwards burst in price action.
There will be a time to sell this rally and take the other side as well.
Positioning from the short and long side is essential to securing alpha in 2023.
Don’t believe anyone who says you can just buy and hold or permanently sell to buy lower as a legitimate investment strategy, because that ship has sailed. The death of straight line investing is upon us.
New investors should start small and build up positions instead of betting the yurt during a massive deleveraging moment in tech stocks.
Not only is the old world rapidly disappearing before our eyes, the new one is kicking down the front door with alarming speed.
In short: the future is happening fast, very fast.
To a large extent, long-term economic trends already in place have been given a turbocharger. Quite simply, you just take out the people. Human contact of any kind has been minimized.
I’ll tick off some of the more obvious changes.
To say that we are merely fatigued from a nearly three-year quarantine would be a vast understatement. Climbing the walls is more like it.
As I write this, US Covid-19 deaths have topped one million and cases have surpassed 95 million. China peaked at over 5,000 deaths with four times our population. The difference was leadership issue. China welded the doors shut of early Covid carriers.
Here, it said it was a big nothing and would “magically” go away.
The magic didn’t work, nor did bleach injections.
In the meantime, you better get used to your new life. You know that home office of yours you’ve been living in? It is now a permanent affair for many of you, as your employer figured out they can make more money and earn a high stock multiple with you at home.
Besides, they didn’t like you anyway.
Many employees are never coming back, preferring to avoid horrendous commutes, $5.40 a gallon gasoline, mass transit, lower costs, and yes, future pandemic viruses. GoToMeeting (LOGM) and Zoom (ZM) are now a permanent aspect of your life.
Commerce has changed beyond all recognition. Did you do a lot of shopping on Amazon (AMZN) like I do? Now, you’re really going to pour it on.
Amazon hired a staggering one million new distribution and delivery people in 2020 and 2021 to handle the surge in business, the most by any organization since WWII. I can’t believe the stock is only at $122. It is worth double that, especially if they break up the company.
The epidemic really hammered the mall, where a fatal disease is only a sneeze away. Mall REITs have since taken off like a rocket, once it was clear that the virus was coming under control.
And how are you going to pay for that transaction? Guess what one of the most efficient transmitters of disease is? That would be US dollar bills. Something like 50% of all US paper money already test positive for drugs, according to one Fed study. While in Scandinavia last summer, I learned that physical money has almost completely phased out.
Take paper money in change and you are not only getting contact from the sales clerk, but the last dozen people who handled the money. You are crazy now to take change and then not go swimming in Purell afterwards.
Personally, I leave it all as a tip.
Contactless payment deals with this nicely and is now here to stay. Next to come is simply scanning people when they walk in the store, as with some Whole Foods shops owned by Amazon.
Conferences?
They are now a luxury. All of my public speaking events around the world have been cancelled. Webinars now rule. They offer lower conversion rates but include vastly cheaper costs as well. I can reach more viewers for $1,100 a month on Zoom (ZM) than the Money Show could ever attract to the Las Vegas Mandalay Bay for $1 million.
At least I won’t have 18 hours of jet lag to deal with anymore on my Australia trips. I’m sure Qantas will miss those first-class ticket purchases and I’ll miss the free Champaign.
Entertainment is also morphing beyond all recognition. Streaming is now the order of the day. Disney+ (DIS) was probably the best-timed launch in business history, coming out just two months before the pandemic.
They earned enough to cancel out most of the losses from the closure of the theme parks. Again, this has been a long time coming and the other major movie producers will soon follow suit.
Movie theaters, which have been closed for years, may also never see their peak business again (CNK), (AMC), (IMAX). The theaters that survive will do so by only accumulating so much debt that they won’t be attractive investments for a decade.
The same is true for cruise lines (CCL), (RCL), (NCLH). But that won’t forestall dead cat bounces that are worth a double in the meantime, as they are coming off of such low levels. No vaccination, no cruise.
Exercise has changed overnight. All gyms and health clubs closed, and are only just now slowly reopening. Working out will become a solo exercise far away on a high mountain. I have already been doing this for 30 years, so piece of cake here.
Friends with yoga classes are now doing them in the living room, streaming their instructors online. The economics of online yoga classes are so compelling, with hundreds attending online classes at once. The old model may never come back.
If you are having trouble getting your kids to comply with social distancing requirements, have a family movie night and watch Gwyneth Paltrow and Cate Winslet die horrible deaths in Contagion. It has been applauded by scientists as the most accurate presentation of the kind of out-of-control pandemic we have been dealt with.
It is bone-chilling.
I hope you learned from the last pandemic because the next one may be just around the corner, thanks to globalization. In 1918, it took three months for an enhanced mutated flu virus to get from Europe to the US. This time, it took a day to get from China.
https://www.madhedgefundtrader.com/wp-content/uploads/2021/03/john-thomas-covid-shot.png350468Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-09-16 10:02:242022-09-16 15:56:08Long-Term Economic Effects of the Coronavirus
Automation is taking place at warp speed, displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. banking sector getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware that they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
The front-office staff has already felt the brunt of downsizing with purges carried out from 2022 representing a twelfth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based, and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal (PYPL) and Square (SQ) are chomping at the bit and even tech companies like Amazon (AMZN) and Apple (AAPL) have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher than the number of U.S. financial job losses and that has continued in 2021 and 2022.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
https://www.madhedgefundtrader.com/wp-content/uploads/2022/07/traditional-banking-e1658521100406.png276450Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-22 14:02:242022-07-29 01:03:27Automation and Banking
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WATCH OUT FOR THE RECESSION WARNINGS) (TLT), (TSLA), (FB), (CRSP), (TDOC), (GILD), (EDIT), (SQ), (INDU), (NVDA), (GS)
The drumbeat of a coming recession is getting louder and louder.
There is no doubt that the traditional signals of a slowing economy are already flashing yellow, if not bright red.
Rocketing interest rates are the most obvious one, with ten-year US Treasury bonds yield soaring from 1.33% to 2.71% in a mere four months. This is why investors pulled a gut-punching $87 billion out of bond funds in Q1.
If the Fed continues with a quarter point rise at every meeting for the rest of the year, we might escape this cycle without a recession. If the Fed ramps up to a half point rate at every meeting as was discussed last week a recession becomes a sure thing.
Imminent positive real yields for the first time in a decade also threaten to draw money out of stocks and into bonds.
I happen to be in the non-recessionary camp and the reason is very simple. Companies are making too much damn money. This is especially true for technology companies, which account for some 75% of the profits made in the US. If anything, their profits are accelerating, although at a lower rate than seen in 2021.
Certainly, the tech companies themselves aren’t buying the recession scenario. They are hiring and investing as if the economic boom will continue forever. Tesla alone has completed two new factories in the past month, in Berlin, Germany and Austin, Texas, each capable of producing a half million vehicles a year. Tesla’s existing factories are all expanding capacity.
Sitting here in Silicon Valley, I can tell you that the job market is as hot as ever. Those who have jobs, like my own kids, are besieged with multiple job offers. It seems the standard time to keep a job these days is a year, after which one takes the next upgrade, promotion, and batch of stock options.
But the stock market seems hell-bent on discounting a recession anyway. You see this in the most economically sensitive sectors of the market, banks, semiconductors, and transport, which have just clocked a miserable month. If I am right (I’m always right), and there is no recession, these will be the sectors that lead the recovery.
Until the market makes up its mind, the disciplined among us will have to while away our time constructing lists of companies to buy for the rebound. That’s when the next leg of the bull market resumes.
We find out when this happens on Wednesday when the next batch of inflation data is released, which is likely to be diabolical.
Quantitative Tightening to Start as Soon as May, according to Fed Governor Brainard. That means our central bank will start selling its vast $9 trillion in bond holding in two months, a huge market negative. Bonds tanked. The Fed only quit quantitative easing in March.
Tesla Blows Away Q1 Sales, shipping 310,000 vehicles, far above expectations. This is despite supply chain problems, soaring interest rates, and the Ukraine War. Sky-high gasoline prices helped a lot, which is driving buyers into Tesla showrooms in drives. All other competitors are falling farther behind, unable to obtain parts and commodities which Tesla locked up long ago. This puts Tesla well on its way to its 1.5 million production goal for this year. Keep buying (TSLA) on dips. My long-term target is $10,000 a share.
The Metaverse May be Worth $13 Trillion by 2030, says Citibank. The same is so for Web 3.0, which includes virtual worlds, like gaming and applications in virtual reality. Citi’s broad vision of the metaverse includes smart manufacturing technology, virtual advertising, online events like concerts, as well as digital forms of money such as cryptocurrencies like I’ll be looking for the best plays.
Biotech May Be Staging a Comeback, after spending a year in hell, taking some shares down 80%-90%. Investors are also nibbling at the sector as a recession and bear market plays, as these companies keep growing regardless of the economic cycle. Buy (CRSP), Teledoc (TDOC), Gilead Sciences (GILD), ad Editas Medicine (EDIT) on dips.
US Bonds Just Suffered their Worst Quarter in a Half Century, with yields rocketing from 1.33% to 2.71%, and Mad Hedge was triple short most of the way down. Bear LEAPS holders, which are many of you, made fortunes. We could stall around current levels until the Fed delivered both barrels of a shot gun, two back-to-back half point rate rises from the Fed.
30-Year Fixed Rate Mortgage Rates Top 5.00%, trashing the home builders. If you thought buying a home was tough, its worst now. So far, no impact on home prices.
US Dollar Hits New Two-Year High. It’s all about rising interest rates. Expect a stronger greenback to come before the turn. The coming QT will put a two-step turbocharger on the move.
German Battery Sales Soar By 67%, to residential buyers to cope with pending energy shortages. Germany already has 2.2 million solar installations out of a population of 83 million. It’s a very smart move as batteries powered by solar panels can remove you from the grid entirely, as I have amply proven with my own installation. It may be the permanent solution to over-dependence on Russian energy supplies.
Tesla Moving into Bitcoin Mining, in partnership with Blockstream and Block, formerly Square (SQ). Tesla will supply the electric power with its massive 3.8-megawatt solar array. That is the size of a large nuclear power plant. The mining facility is designed to be a proof of concept for 100% renewable energy bitcoin mining at scale. If Elon Musk likes Bitcoin maybe you should too.
The Bank of Japan Now Owns 7% of the Japanese Stocks Market. The central bank had to buy the shares after it had already bought all the bonds in the country to support the economy. So, what happens when the policy flips from QE to QT? How about unloading $371 billion worth of shares on the market. This would e a neat trick since so much of the country’s shares are locked up in corporate cross holdings. Methinks I’ll be steering clear of Japanese stocks for the foreseeable future.
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 0.38%. My 2022 year-to-date performance ended at a chest-beating 27.23%. The Dow Average is down -4.20% 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 68.89%.
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 539.79%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.36%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 80.3 million, up only 100,000 in a week and deaths topping 985,000 and have only increased by 2,000 in the past week. You can find the data here.Growth of the pandemic has virtually stopped, with new cases down 98% in two months.
On Monday, April 11 at 8:00 AM EST, Consumer InflationExpectations are released.
On Tuesday, April 12 at 8:30 AM, the Core Inflation Rate for March is announced.
On Wednesday, April 13 at 8:30 AM, the Producer Price Index for March is printed.
On Thursday, April 14 at 7:30 AM, the Weekly Jobless Claims are printed. We also get Retail Sales for March.
On Friday, April 8 at 8:30 AM, NY Empire State Manufacturing Index for March. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, back in 2002, I flew to Iceland to do some research on the country’s national DNA sequencing program called deCode, which analyzed the genetic material of everyone in that tiny nation of 250,000. It was the boldest project yet in the field and had already led to several breakthrough discoveries.
Let me start by telling you the downside of visiting Iceland. In the country that has produced three Miss Universes over the last 50 years, suddenly you are the ugliest guy in the country. Because guess what? The men are beautiful as well, the decedents of Vikings who became stranded here after they cut down all the forests on the island for firewood, leaving nothing with which to build long boats. I said they were beautiful, not smart.
Still, just looking is free and highly rewarding.
While I was there, I thought it would be fun to trek across Iceland from North to South in the spirit of Shackleton, Scott, and Amundsen. I went alone because after all, how many people do you know who want to trek across Iceland? Besides, it was only 150 miles or ten days to cross. A piece of cake really.
Near the trailhead, the scenery could have been a scene from Lord of the Rings, with undulating green hills, craggy rock formations, and miniature Icelandic ponies galloping in herds. It was nature in its most raw and pristine form. It was all breathtaking.
Most of the central part of Iceland is covered by a gigantic glacier over which a rough trail is marked by stakes planted in the snow every hundred meters. The problem arises when fog or blizzards set in, obscuring the next stake, making it too easy to get lost. Then you risk walking into a fumarole, a vent from the volcano under the ice always covered by boiling water. About ten people a year die this way.
My strategy in avoiding this cruel fate was very simple. Walk 50 meters. If I could see the next stake, I proceeded. If I couldn’t, I pitched my tent and waited until the storm passed.
It worked.
Every 10 kilometers stood a stone rescue hut with a propane stove for adventurers caught out in storms. I thought they were for wimps but always camped nearby for the company.
I was 100 miles into my trek, approached my hut for the night, and opened the door to say hello to my new friends.
What I saw horrified me.
Inside was an entire German Girl Scout Troop spread out in their sleeping bags all with a particularly virulent case of the flu. In the middle was a girl lying on the floor soaking wet and shivering, who had fallen into a glacier fed river. She was clearly dying of hypothermia.
I was pissed and instantly went into Marine Corp Captain mode, barking out orders left and right. Fortunately, my German was still pretty good then, so I instructed every girl to get out of their sleeping bags and pile them on top of the freezing scout. I then told them to strip the girl of her wet clothes and reclothe her with dry replacements. They could have their bags back when she got warm. The great thing about Germans is that they are really good at following orders.
Next, I turned the stove burners up high to generate some heat. Then I rifled through backpacks and cooked up what food I could find, force-fed it into the scouts and emptied my bottle of aspirin. For the adult leader, a woman in her thirties who was practically unconscious, I parted with my emergency supply of Jack Daniels.
By the next morning, the frozen girl was warm, the rest were recovering, and the leader was conscious. They thanked me profusely. I told them I was an American “Adler Scout” (Eagle Scout) and was just doing my job.
One of the girls cautiously moved forward and presented me with a small doll dressed in a traditional German Dirndl which she said was her good luck charm. Since I was her good luck, I should have it. It was the girl who was freezing the death the day before.
Some 20 years later I look back fondly on that trip and would love to do it again.
Anyone want to go to Iceland?
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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