Mad Hedge Technology Letter
June 14, 2024
Fiat Lux
Featured Trade:
(ON BOARD THE AI TRAIN TO UNCERTAINTY)
(AAPL), (MSFT)
Apple (AAPL) has been on a one-way street to nowhere lately with their China business falling into the backstreet dumpster.
They had to do something before desperation took hold in the Cupertino headquarters.
It’s not like they could turn to Steve Jobs to figure this all out.
Tim Cook is an operations manager masquerading as the CEO and has little vision if any.
Announcing something AI was not a shocker as even legacy firms like Oracle and Dell had done the same with great success. But this isn’t data center stuff, the AI here will affect the Apple iPhone software.
Out the window goes privacy on your little iPhones – do people still even care about that?
Privacy was handed over to Sam Altman’s OpenAI.
Doing a deal like this opens up Pandora’s box and ensures that the Apple of the future will look a lot different than the one today.
Not everyone will like it, but that is tough. It is business.
The CEO of Apple, Tim Cook announced an unexpected and deep cooperation with the company OpenAI, which develops the chatbot ChatGPT, and the biggest loser has to be Microsoft.
MSFT usually doesn’t lose at its own game so this one is a bit of a surprise.
Apple has so far only flirted with the idea of its integration. The company surprised and took many people's breath away.
It is a paradox that the biggest investor in OpenAI is its rival Microsoft. The cooperation agreement took place behind closed doors to the dismay of Microsoft CEO Satya Nadella.
Thanks to artificial intelligence, Siri will be able to access all data stored in the user's phone and cloud through a secure channel.
Siri will no longer have a problem understanding the wider context of your question, connecting the answer with previous questions, or deciphering what you wanted to say if you accidentally mixed up the words.
CEO of OpenAI Altman now has fulfilled a longtime dream by striking a deal with Apple to use OpenAI’s conversational artificial intelligence in its products.
MSFT thought it had a big lead in AI over its peers and apparently, OpenAI, being the newest hottest thing in tech, has decided to sleep with everyone in bed instead of just picking one. MSFT has a right to be angry when they handed over $13 billion to OpenAI and that perceived lead in AI has evaporated.
It will be quite funny to see the software and the algorithms in these firms slowly merge into one product backed by the same AI company.
It screams of too many mouths to feed with just one nipple.
OpenAI has taken full advantage to entrench itself as the preeminent force at the forefront of technological modernity. They are the biggest winner here.
Right away, I wouldn’t say that Apple hit a home run even though the price action in their share price suggests so.
They are simply just boarding a train to uncertainty with the rest of big tech, and this maneuver looks highly defensive in nature.
Since Apple has stated they committing no money to the deal then it has to be coined as a win. It's $13 billion less spent and at a risk the software could turn clunky and unusable.
At that point, they could just terminate the relationship. This move was highly controversial inside of Apple headquarters, but management thought it was worth the risk.
Apple stock has most likely reached a short-term peak.
Lastly, I found it interesting that the Former head of the National Security Agency, retired Gen. Paul Nakasone has joined OpenAI which could mean that OpenAI will also be integrated into the Armed Forces. Apple won’t have much of a say in OpenAI going forward so we will see how it pans out.
Mad Hedge Technology Letter
June 12, 2024
Fiat Lux
Featured Trade:
(WHAT WILL DROPPING INFLATION DO TO TECH STOCKS?)
($COMPQ), ($TNX), (CPI)
It’s “all systems go” for tech stocks ($COMPQ) as the latest inflation report offers us juicy morsels of data laying out a more attractive backdrop for tech companies in the short term.
The Mad Hedge Tech portfolio has benefited from this “bet on the Fed pivot” trend to great effect and I took profits on my Micron June bull call spread.
Remember that short-term rates ($TNX) are the most important variable to whether certain stocks go up and down in the short term.
Long term, the story could be very much different.
A higher-than-consensus report would have resulted in a red day for tech stocks, a pullback of commodities, bond yields spiking, and the dollar launching into the orbit.
We got the inverse of that and this is a strong signal that tech stocks will be like a stallion bolting out the back of the stable because tech stocks are the biggest winners of a lower rate environment.
The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% over the prior year in May — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices.
Inflation has remained stubbornly above the Federal Reserve's 2% target on an annual basis.
Fed officials have categorized the path down to 2% as "bumpy," while other recent economic data has fueled the Fed's higher-for-longer narrative on the path of interest rates.
On Friday, the Bureau of Labor Statistics showed the labor market added 272,000 nonfarm payroll jobs last month, significantly more additions than the 180,000 expected by economists. Wages also came in ahead of estimates at 4.1%, although the unemployment rate rose slightly to 4% from 3.9%.
Notably, the Fed's preferred inflation gauge, the so-called core PCE price index, has remained particularly high. The year-over-year change in core PCE, closely watched by the Fed, held steady at 2.8% for the month of April, matching March.
The Fed has been unbelievably late in controlling inflation, but that market doesn’t care and tech stocks care less as the AI narrative has been able to supersede anything and everything.
The market is controlled and dictated to by a bunch of algorithms.
Food up 2% after a double is in fact a “victory” to the algorithms even if the middle class in the United States has felt the heavy brunt of it.
It is probably accurate to say that tech stocks are in a world of their own and the price action certainly behaves as if this is the case.
What does this all mean?
Get ready for higher-tech share prices.
Lower rates will help emerging tech companies tap the debt market to fund operations.
Many smaller tech firms don’t have the privilege to tap a multi-trillion dollar balance sheet for cash whenever they want.
In the short-term, except the AI stocks to gap up yet another leg as the market prices at lower rates for companies that hardly need it.
Talk about having your cake and eating it too – this would be it!
For the best of the rest, it helps but won’t move the needle in terms of catching up to big tech, but this should stimulate the investors on the sidelines nudging them to handpick certain stocks that have been ignored during the time of high rates.
Either way, the Fed has really put itself in a box here and without even killing inflation to the 2% mandate.
The markets fully expect the Fed to cut once or twice by the end of the year.
Whether this decision is political or not, the new developments have put a floor under many high-quality tech names.
Consequently, the second half of the year should see some ample returns in tech stocks that preside over good business models.
“Never spend your money before you have earned it.” – Said Thomas Jefferson
Mad Hedge Technology Letter
June 10, 2024
Fiat Lux
Featured Trade:
(OIL, THE US DOLLAR, AND SILICON VALLEY)
($COMPQ)
The dollar, tech stocks, and Saudi Arabian investment are inextricably linked almost like a web of nodes that shouldn’t be messed with.
The Saudis are a financial heavyweight and I would never dismiss their capital flows as it relates to tech stocks.
It is definitely not a drop in a bucket and we should take notice when Saudi Arabia creates a $100 billion fund this year to invest in AI and other technology.
That is just pocket change for one year.
It is in talks with Andreessen Horowitz, the Silicon Valley venture capital firm, and other investors to put an additional $40 billion into A.I. companies.
In March, the government said it would invest $1 billion in a Silicon Valley-inspired start-up accelerator to lure A.I. entrepreneurs to the kingdom.
Saudi wants to invest in tech and to do that they need dollars. Tech and its value are almost always entirely priced using dollars and not any other currency.
So I will address the conspiracy theory that we are about to go completely off the dollar as the global reserve currency.
The behavior of foreign investors suggests that the dollar’s role in global currencies is increasing and not the other way around.
Some even suggest that the Chinese yuan is about to replace the dollar as the world’s most important currency.
I strongly disagree with that opinion.
A place still using capital controls for trillions worth in tech seems like lunacy.
It flat-out does not happen.
Middle East oil-producing nations have other reasons to stick to the dollar.
A crucial one is that most of their currencies are pegged to the greenback, requiring a constant influx of dollars to support the arrangement. Those savings are held in dollar accounts, so Middle East countries have an interest in keeping the dollar strong.
There is not much traction in practical terms of the much-hyped idea of using the yuan to price oil.
American investor Ray Dalio likes to describe America as a weakening power that is succumbing to China. I strongly disagree with that hot take from Dalio. China is in fact faltering at an accelerating pace and its internal problems are piling up like a stray dog locked in a strangers back yard.
If you believe in conspiracy theories, the introduction of a petroyuan, and the ensuing collapse of the petrodollar, would be a first domino, potentially weakening the whole US financial system.
Redraw the global economic map amid a backdrop of crisis and wars.
Astonishing as it is, the narrative is a mirage.
The appetite among OPEC producers to price oil in yuan using a Chinese exchange is basically zero.
Middle Eastern national oil companies closely watch how Beijing tries to manipulate local commodity prices such as iron ore, cotton, coal, or grains every time prices rise above its pain threshold. Having spent 60 years building a formidable cartel, why would Middle East nations cede pricing power to China using a whacked-out currency?
The Saudis need to put their money somewhere and the anointed place has been technology and many times Silicon Valley technology.
They have already invested in many of the most high-profile tech companies in the US and will continue to do that.
Saudi and other foreign money is another reason why this tech market can’t and won’t get sideswiped.
Any dip is viewed as a prime buying opportunity as other industries give way to the freight train that is the AI narrative.
Anyone would be crazy to short the AI trade with unlimited petro-dollars from the Middle East.
Pump the black gold from the ground and dump the profits into volatile tech stocks.
Wait for them to explode to the moon – rinse and repeat.
I am bullish on tech in the short term.
“The man who reads nothing at all is better educated than the man who reads nothing but the newspapers.” – Thomas Jefferson
Mad Hedge Technology Letter
June 7, 2024
Fiat Lux
Featured Trade:
(HEWLETT PACKARD – REMEMBER THEM?)
(HPE), (SMCI), (NVDA), (ORCL), (DELL)
