Tech Letter Archives

The Yen Tailwind to Tech Stocks

In the trader's guidebook of how to trade, it’s quite common to cement the nostrum "don’t fight the Fed" into one’s brain.

Many know this.

In 2022, this nostrum served traders quite well as interest rate increases left the tech market in the dust.

Major tech stocks ($COMPQ) from Meta (META) to small-cap Zoom Video Communications (ZM) fell flat on their face.

That was when "don’t fight the Fed" was the smart thing to do.

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.

quantum computing

February 24, 2023/by Mad Hedge Fund Trader

February 13, 2023

Tech Letter

Mad Hedge Technology Letter
February 13, 2023
Fiat Lux

Featured Trade:

(ECOMMERCE TAKES A BACK SEAT)
(CPNG), (AMZN)

February 13, 2023/by Mad Hedge Fund Trader

October 28, 2022

Tech Letter

Mad Hedge Technology Letter
October 28, 2022
Fiat Lux

Featured Trade:

(ENTRY POINT INTO AMAZON)
(AMZN)

October 28, 2022/by Mad Hedge Fund Trader

Here We Come Vietnam

Tech Letter

There is definitely jet fuel left in Apple’s (AAPL) tank.

I guarantee it.

I like some of their recent moves, like today when they announced that they are in talks with Vietnam for the Apple Watch and MacBook to be produced in the country.

Cutting the China risk is a big deal.

The lockdown-obsessed country is a terrible place to headquarter manufacturing operations.

Apple has deadlines to meet and shareholder value to accrue, and that’s not going to cut it when the government doesn’t allow workers to work.

Vietnam’s government and Apple most likely have a wink, wink – nod, nod agreement to chill on the overbearing lockdowns, otherwise, I cannot fathom why they would move from one lockdown-prone country to another one.

Maybe Apple management just like the Vietnamese spring rolls over the Chinese, but I bet most unlikely.

Oh yeh, almost forgot about the tax breaks, Vietnam most likely will load those up to the eyeballs to convince Apple to put factories there.

Brand name companies don’t put their resources in Podunk places for free.

Another bright spot in Apple is the massive stock buyback and large dividend.

Must love a tech company that rewards shareholders and that’s why Warren Buffet loves this gravy train.

Next, the biggest fish in the largest body of water is still churning out its prized iPhone.

Now we are onto number 14 coming to you later this winter!

Demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.

Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.

The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.

This segues nicely to more eyeballs viewing Apple ads. The annual $4 billion ad business will get upgraded as Apple plans to post more ads around its ecosystem. Ad buyers will be chomping at the bit to flood Apple’s network with ads galore. I see this as a great move to add strength to the balance sheet.

The consumer is still consuming. The top 39% of US income earners who are exposed to the stock market are responsible for 65% of consumption so it is a chicken and egg thing…they will feel like they have the license to spend because they feel wealthier.

That’s what I like because the people who cannot even afford iPhones, won’t buy the iPhone 14 and never had a chance to buy an iPhone when they are shopping at the Dollar store.

There will be zero churn here in iPhone usage and I would argue that the attrition rate becomes healthier.

True, I saw that report from Walmart about higher-income families more concerned about rising prices, but this doesn’t mean their budget will exclude the iPhone 14.

Many of these higher-income families need the iPhone 14 for work purposes and many of them have work-from-home jobs where they need an Apple device always glued to their face.

The Apple monster should keep chugging along, and out of all tech companies, this is the one to ride to profits.

apple vietnam

August 17, 2022/by Mad Hedge Fund Trader

The End of Samsung

Tech Letter

Samsung, Korea’s stalwart chaebol, is toast.

Remember the past two years when lockdowns were in vogue?

Digital products were the hottest item in the world as everybody was stuck in their homes.

Growth brought forward is never a bad thing for a company, especially tech companies.

However, it sets the stage for hard comps to topple and a reversion back to the mean which can look messy.

The world needed chips and phones back then, the world is now traveling, getting on planes, and taking cruise ships to the Caribbean.

This is why video game growth is quite subdued this year.

Samsung internally has also been taking a machete to its forward-looking estimates multiple times in order to front-run collapsing demand.

The boom bust nature of chips and devices is an inherent beast in the industry that is hard to tame.

Samsung was able to hit watered-down targets in the second quarter, but that was mainly due to a 7% currency tailwind of the Korean won sliding fast just like many Asian currencies.

Take a look at the Japanese yen, it’s gone off a cliff all the way to 136 per $1.

I remember when I took a vacation to Tokyo in 2011, Japan felt awfully expensive at 77 yen to $1.

The currency tailwinds are a transitory elixir yet under the hood, these economies are weakening fast.

The aging population and cost of living crisis are also crushing sales.

Internal data reveals deeper damage than initially thought.

Operating profit missed by a wider margin than revenue beat and prices for its premium products isn’t fetching the prices they once did.

For example, Samsung markets its Exynos 2200 chips as on-par rivals to the Snapdragon 8 Gen 1 and Apple’s (AAPL) A15 Bionic chip found in smartphones.

However, the Exynos fails to compete with its supposed flagship chip comps, performing at levels lagging almost a generation behind in speed and functionality.

It’s clear that devices made with Exynos chips simply won’t be able to sell for as much as flagship Android phones with Snapdragon 8 Gen 1 or Apple iPhones with A15 Bionic chips.

I fully expect the operation profit to go from 6% to 3% for Samsung.

US rival Micron (MU) has already rung the alarm. While the world’s third-largest maker of DRAM posted revenue and operating profit for the quarter in line with estimates, its forecast for the coming three months was 20% lower than expectations.

It now sees the PC and smartphone markets much weaker than previously thought.

Tech has experienced a massive downgrade in terms of sentiment and sales while massive pressure on the supply side costs.

Cloud computing and streaming services which all need chips have been the poster boys of underperformance.

Growth stocks have also gotten killed.

I do believe this is more a signal of deeper individual malaise at Samsung and an indication they are getting trounced by Chinese firms who just do it better for cheaper.

Margins won’t ever come back up for Samsung as they lack the nimbleness of the Chinese and brute power of the American tech.

They are essentially stuck between a rock and a hard place where products will become less competitive, face rapidly shrinking margins, and participate in a Korean economy that lacks vibrancy.

Once chip stocks bottom, avoid Samsung, and get into Qualcomm (QCOM) and Micron (MU).

samsung

July 8, 2022/by Mad Hedge Fund Trader

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