Tech Letter Archives

Fast forward to 2023 and the Fed is still marching towards more interest rate tightening, but astonishingly the opposite has happened, it has paid to fight the Fed this year.

Not only that, the tech-based Nasdaq has gone parabolic, delivering gains of already over 30% in just the first 7 months.

Anyone that hasn’t fought the Fed has been left bloody in the streets like a standard Parisian riot.

One piece of the puzzle that often gets overlooked is one major catalyst to this trade which is the Japanese yen carry trade.

This is how the trade has worked for many hedge funds this year.

Borrow in Japanese yen because the cost of borrowing is still puny compared to yields in Western countries.

Take that yen back over to the Western equity markets and pour them into stocks like Nvidia, Meta, Apple, Tesla, Microsoft, and Amazon.

The strategy has worked like clockwork and I know many traders that have made second and third fortunes off of the back of this trade so far this year.

Traders have boosted short positions on the yen as the currency moved steadily lower this year amid widening divergence between the Bank of Japan’s easy policy and aggressive hiking cycles for other central banks, notably in the US and Europe.

Talking about the Yen is timely as reports of lower US job numbers and increased Japanese wage gains triggered a one-day selloff in the dollar.

We won’t see a complete unwind of the yen carry trade just yet but the carry trade had gotten a little too long in the tooth, so this is profit-taking to readjust positioning.

If volatility stays high then it will continue to unwind, but if volatility stabilizes then the Japanese yen carry trade parade will continue unabashed.

The yen is one of the worst-performing Group-of-10 this year, reaching 145 per dollar last month, a level unseen since November.

What’s next?

Nothing has fundamentally changed.

The US isn’t going into a recession this year and even if credit card delinquencies are up and household net worth is struggling in America, it’s not enough to move the needle to deter the Japanese yen carry trade.

The mild pullback against the US dollar is in fact a golden opportunity for traders to pour back into the short Japanese yen trade.

As long as the Japanese yen remains weak, tech stocks won’t crack because this liquidity is the lifeblood to many tech stocks.

We have been crowbarred into this goldilocks environment of higher equities, higher bond yields, and now US housing is starting to bounce back.

The Nasdaq has been ironclad this year and even if I don’t think it will deliver another 30% to finish the year, the pain trader is higher in tech stocks, marginally higher in bond yields, higher in US housing, and short Japanese yen.

Until we receive some type of concrete confirmation that this pain trade is over, I expect to grind up in the aforementioned asset classes.

yen

July 10, 2023/by Mad Hedge Fund Trader

Should You Buy Carvana?

Tech Letter

The biggest takeaway I took from the used car platform Carvana’s (CVNA) latest earnings report is: who is dumb enough to buy an old car and get fleeced for $6k?

Apparently, $6k is what CVNA earns per unit in gross terms now.

But hey, if paying a broker $6k is what it takes to buy a used car then so be it.

The problem I have with the $6k gross per unit is how much further can that number go?

My bet is not much.

How much higher broker fees can Americans absorb?

My bet is not much more.

Just doing simple math means that for a $20,000 used car purchase, adding on the Carvana service would mean it costs $26,000 to the end buyer.

Sure, for some people like me and you it’s not a big deal, but I don’t believe this can scale well or efficiently as a tech platform.

That being said, it’s quite a corporate achievement for such gaudy margins and one that meant CVNA’s share exploded to the upside rising 44% on the news.

The stock is down 18% today highlighting the volatile nature of the stock.

Revenue fell 25% to $2.6 billion, but total gross profit rose 14% to $341 million.

The update helped reassure investors that the stock would be able to avoid bankruptcy after plunging as much as 99% from its peak in 2021 on slowing growth and mounting losses, especially as interest rates rise and used car prices fell for much of last year.

Carvana didn’t give guidance for net income but said adjusted earnings before interest, taxes, depreciation and amortization would be $50 million in the current quarter — way above the consensus analyst estimate of a $3.6 million loss — and gross profit per unit would be a record of more than $6,000.

Carvana’s $8.7 billion debt load as of March 31 has been a big problem for the company, which recently scrapped a debt exchange offer that would have reduced its burden because creditors held out for a better deal.

The interest on Carvana’s debt cost the company more than $2,000 per car in the first quarter, which is one reason it reported a loss of $286 million despite gross profit per vehicle sold of more than $4,000.

From peak to trough, Carvana lost 99% of its value as used car prices fell, the company made an ill-timed acquisition of the ADESA auction business, and creditors began preparing for a bankruptcy.

Although in the short term the stock is having a nice bounce, that doesn’t mean the stock’s appreciation is sustainable in the long run.

I do believe the bounce is just the proverbial dead cat bounce and ok for a quick trade and quick profit.

In a world where big tech is really crushing it, small tech needs that extra little bit of juice or special sauce to navigate the iron clad balance sheets of Silicon Valley.

Selling used cars is hard to digitize and I believe this platform will continue to burn cash on the road to a never ending feedback of explaining why it can’t be profitable.

Sell this one on the bounce.

used car

June 9, 2023/by Mad Hedge Fund Trader

Quote of the Day - May 10, 2023

Tech Letter

"The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge," said the late Professor Stephen Hawking.

May 10, 2023/by Mad Hedge Fund Trader

Quote of the Day - April 14, 2023

Tech Letter

“All of technology, really, is about maximizing free options.” – Said Risk Analyst Writer Nassim Nicholas Taleb

April 14, 2023/by Mad Hedge Fund Trader

February 24, 2023

Tech Letter

Mad Hedge Technology Letter
February 24, 2023
Fiat Lux

Featured Trade:

(PART 2: THE BEST OF THE REST IN QUANTUM COMPUTING)
(GOOGL), (QUBT), (IBM), (MSFT), (AMAT)

February 24, 2023/by Mad Hedge Fund Trader

Part 2: The Best of the Rest in Quantum Computing

Tech Letter

Alphabet (GOOGL)

In 2019, Google claimed that it had achieved what it called quantum supremacy. The company claimed to have built a computer with capabilities far beyond those of traditional computers.

In a report published in Nature, Google said its quantum computer managed to calculate something that would take a normal machine 10,000 years.

What practical applications Google's performance will have in the real world is still unclear. The initial computation was a demonstration of capability rather than a product that will have a significant commercial impact any time soon.

Having a horse in the race will also mean they can turn it up a notch once they receive more direction on where this might lead.

Like so many of its other companies, Alphabet invests heavily in the latest computer technology.

Many of these ventures probably won't bring in much money; others, on the other hand, will likely recoup the company's entire research budget and then some. And the good thing about Alphabet is that it's so busy that a single project, such as B. quantum computing, will not decide on the entire investment.

I am not going to sit here and say that Google is a quantum computing company because it’s not, but they are ready to pounce if the opportunity presents itself.

Quantum Computing (QUBT)

Quantum Computing is an innovative company focused on its namesake. It sees a market opportunity in the ability to create a service that coordinates computing needs.

There are providers of quantum computers, such as IonQ or Rigetti. Then there are customers in large companies, universities, or research laboratories. Quantum Computing sits in the middle, making software to help customers manage their quantum computing needs.

Currently, quantum computing has almost no revenue. Management acknowledges that the company is still in the early stages of market development and understanding customer use cases.

QUBT stock is highly speculative, as are most other companies in the sector. However, as the market for quantum computing vendors and customers grows, a brokerage service that connects the two could represent a fairly profitable niche.

IBM (IBM)

Tech analysts like to compare IBM to companies like Radio Shack and Eastman Kodak (KODK) as a dinosaur inevitably heading towards the dustbin of history.

However, the truth is much more nuanced.

IBM still achieves $60 billion a year in total revenue, and that number is actually on the rise again. They also have a PE ratio of 21 as its ongoing operations in consulting, services, and cloud, among others, are very profitable. And IBM continues to invest heavily in research and development, including quantum computing.

IBM's quantum computing division promises to unlock information beyond the reach of even the world's fastest supercomputers. The IBM partnership for quantum computing already involves 160 Fortune 500 companies as well as national laboratories and academic institutions. These partners work in areas such as finance, chemistry, and logistics.

Microsoft (MSFT)

Like IBM, Microsoft wants to take the lead in the emerging field of quantum computing. Microsoft has an inbuilt advantage, as its Azure cloud platform already has a massive installed base with a variety of Fortune 500 customers.

Now Microsoft is building its quantum computing capabilities directly into Azure. Microsoft describes this as “the world’s first full-featured, open cloud ecosystem for quantum computing.”

It makes a lot of sense that this would be offered as part of a cloud package. After all, most customers probably don't need their own supercomputer. Rather, they want the ability to buy that computing power only when they need it.

If Microsoft can seamlessly integrate this experience into its native Azure platform, it could be a major win, both for this product and for securing greater market share in cloud computing.

Applied Materials (AMAT)

Another approach to betting on quantum computing stocks is to be long on suppliers. Given that the technology is still very new, it can be difficult to determine which companies will ultimately be among the winners in this space. What is certain, however, is that if quantum computing catches on, we will need faster and more powerful semiconductors.

Applied Materials is one of the industry leaders in terms of patents and industry know-how when it comes to manufacturing chips that will be used in quantum computing hardware. During a gold rush, you want to be the one selling the shovels. Applied Materials should be the shovel dealer for the quantum computing industry.

In the meantime, Applied Materials' existing business is extremely profitable.