Pro Perspectives 4/25/24

 

 
 

 

 

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April 25, 2024

We heard from Meta after the close yesterday, which we discussed in my last note.

They grew revenues by 27%, compared to the same quarter last year.  They grew net income by 114%.  And they expanded operating margins from 25% to 38%.

Meta was scrutinized for its ongoing massive investment in AI infrastructure.  They are in the third year of what will be a $100 billion three-year spend on servers, data centers and network infrastructure.

The stock was punished.

Today we heard from Google (Alphabet) and Microsoft.

Google grew revenues by 15% compared to the same quarter last year.  They grew net income by 57%.  And they expanded operating margins from 25% to 32%.

Microsoft grew revenues by 17% compared to the same quarter last year.  They grew net income by 20%.  And they expanded operating margins from 42% to 45%.

Like Meta, both Google and Microsoft are making massive investments in building AI infrastructure capacity.  Both stocks went up after earnings (Google, about 10%).

From 2022 through this year, all of the AI barons are spending in the neighborhood of $100 billion in capex on AI infrastructure.  And they will do more, to build the capacity needed to meet the insatiable customer demand for computing resources to run AI products and services.

As Microsoft put it, in the their call this afternoon, this is just the first wave, and they are building for the “second wave” of AI.

So, these are trillion-dollar plus companies, growing at an accelerating double-digit pace, rapidly adding new products and services, with smaller headcount, and at a higher and higher rate of profitability.  And they’re not expensive (Meta – 23x forward PE, Google 22x, MSFT 31x).

It’s still the early days of the most productivity enhancing technology advancement of our lifetime: generative AI.

 

Pro Perspectives 4/24/24

 

 

 

 

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April 24, 2024

We had Meta earnings after the close today.  They grew revenues by 27% compared to the same quarter last year.  They grew net income by 114%.  And they expanded operating margins from 25% to 38%.  
 
Sounds quite good.  But the stock was crushed in after-hours trading.
 
The "sell" algorithms were assumably triggered by 1) Meta's guidance for the next quarter, which will be relatively flat quarter-to-quarter revenue growth, and 2) their plan to spend more than they originally guided in capex for the year.
 
On the former, keep in mind, Meta has rolled out its new large language model across its family of apps, and has yet to attempt to monetize it (which will be a fresh revenue growth catalyst, along with other AI products).  
 
On the latter, the capex spend is a continued massive investment in infrastructure to support AI.  The top end of this year's guidance will put them at $100 billion worth of investment over the past three years on: data centers, servers and network infrastructure.
 
Meta's goal is to be the leading AI company in the world.  And the bigger the spend, all funded by cash flow, the more dominant their position in AI is assured. 
 
With that, we'll hear from Microsoft and Google tomorrow.  They too will report massive investments in AI infrastructure and new product development. 
 
For these companies, the Wall Street scrutiny over "mid-points of guidance" and such, on the quarter, is a meaningless exercise.  
 
These earnings calls from the big tech giants are about discovery.  What are they learning?  What are they building?  How fast is the technology revolution progressing?  And how do they see it unfolding?  
 
In a lot of ways, this reminds me of the Q3 earnings season, back in October.  The tech giants were putting up big numbers.  It was hard to find something to be disappointed about, with how they were performing and reorienting their businesses around generative AI.  But the stocks were being sold. 
 
Broadly, stocks were in a correction at that time, driven by a Fed that had spent the prior few months reupping threats of more tightening.  And that had sent the 10-year yield surging to 5%. 
 
Stocks bottomed the week of big tech earnings, and on the day of the PCE (inflation) report. 
 
That PCE report showed a continued decline in the rate of inflation.  And with that, given that the 10-year yield was at a very restrictrive level and stocks were in a correction, the Fed signaled the end of the tightening cycle.  
 
Fast forward to today, and we're in a stock market correction.  The 10-year yield has had another sharp rise, trading last week to the highest level since early November of last year (4.7%).  And we get the PCE report on Friday. 
 
For perspective, core PCE is almost a percentage point lower than it was last October when the Fed signaled the end of the tightening cycle.  Rates are more restrictive today, than last October. 

Pro Perspectives 4/23/24

 

 

 

 

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April 23, 2024

We had a big bounce back in stocks today.  The rally was broad-based but was led, all day, by the Russell 2000 (small caps).  And that move in the Russell index was ignited by a weak PMI report this morning.
 
This U.S. PMI report is based on surveys done by S&P Global on a panel of around 800 companies based in U.S. manufacturing and service sectors.  And this is a "flash" estimate, which takes about 85% of the responses within the current month.   So this is an assessment of April — three weeks into this month, which is the first month of the second quarter.
 
Here are the takeaways:  "The U.S. economic upturn lost momentum at the start of the second quarter" … "The more challenging business environment prompted companies to cut payroll numbers at a rate not seen since the global financial crisis (excluding the lockdown period) … "The deterioration of demand and cooling of labor market fed through to lower price pressures."  
 
So, slowing growth, weakening labor market, and cooling price pressures.  It's only a few weeks, but a continuation of those attributes in the second quarter would absolutely swing the pendulum of Fed rate path expectations back in the other direction.  
 
This weakening view suggests the Fed may get its wish in the coming months, to see a return of the "good inflation readings" they saw in the second half of last year.  But the "good inflation readings" this time would be driven by cracks in the job market, which would put the Fed in its familiar position, of reactionary policy. 
 
Yields fell sharply on the PMI report … 
 
 
So, this is "bad news is good news."  It relieves pressure in the interest rate market, which is positive for stocks.
 
Don't miss out on the AI revolution! Join our AI-Innovation Portfolio to get cutting-edge analysis and insights that will help you capitalize on the next phase of growth in the technology revolution.  You'll be positioned to profit from the most innovative companies, and stay ahead of the curve in the rapidly evolving tech landscape. 
 
We just made a new addition to the portfolio this morning!  Click here to join us, and get all of the details, along with members-only access to our full portfolio.   

Pro Perspectives 4/22/24

 

 

 

 

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April 22, 2024

We've now had an 8.5% drawdown in Nasdaq futures over the past month.  S&P futures have lost 7% peak-to-trough.  And the small cap index, -11.6%.
 
That brings us to earnings week for half of the tech giants.  We'll hear from Meta on Wednesday, Microsoft on Thursday and Alphabet (Google) on Friday.  And the "not-so-giant" (at the moment), Tesla reports tomorrow.
 
With the exception of Tesla, they will all put up big numbers.   
 
Keep in mind, these are the companies working on the frontier of generative AI, a technology expected to be so life transforming that it has been compared to the advent of electricity. 
 
These tech giants are investing tens of billions of dollars in AI infrastructure.  And they're developing the AI models, and products and services surrounding those models, that will power the Fourth Industrial Revolution.  They are building the products and services we will all be using for the foreseeable future.   
 
With that, as we've discussed, from the Nvidia moment of last May, the competitive moat only grew wider for these monopolies. 
 
Why?  They are among a limited class that can afford to buy the computing power to meet the demands of generative AI.  Moreover, they control the deepest and most diverse data in the world, with world class talent.  If they weren't modern day oil and rail barons before generative AI, they are now.  
 
So, we've now had a correction in the broad stock market. 
 
Is it over? 
 
As we've discussed here in my daily notes, the technical reversal signal in stocks, back on April 1, was triggered by Israel's strike of the Iranian consulate in Syria.  With that, the market correction may have ended with what appears to be the end of the tit-for-tat Israel/Iran attacks, with Thursday night's "limited" strike on Iran by Israel.
 
That presents a catalyst, in this week's earnings from the AI barons, for a resumption of the economic and stock market boom (at least in nominal dollar terms). 
 
On the economy:  We'll get a first estimate on Q1 GDP on Thursday, which the Atlanta Fed GDP model projects to be a strong 2.9% annual rate.
 
And then we'll get March PCE on Friday (the Fed's favored inflation gauge).  On that note, the pendulum on rate path expectations has swung from one extreme to the other, over the past four months.  That sentiment extreme means the risk of a negative market outcome from the data should be very limited, which means a positive surprise would provide a burst of fuel for markets.
 
For my AI-Innovation Portfolio members, please keep an eye out for a note from me tomorrow morning.  We will be making a new addition to the portfolio.  If you are not a member, you can join us here.   

Pro Perspectives 4/18/24

 

 

 

 

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April 18, 2024

Stocks put in another lower low today, in this recent correction.
 
And it appears that the weight of geopolitical uncertainty will remain through the weekend, which should continue to weigh on stocks.
 
Let's take a look at oil … 
 
   
When Israel struck the Iranian consulate in Syria on April 1, oil broke this big trendline from the $130 highs of two years ago. 
 
It topped out last Friday, prior to the retaliatory attack from Iran over the weekend.  And even with the threat of escalation, the price has (strangely) fallen as much as 7% this week. 
 
With the Middle East on a "knife-edge" (in the words of the UN Chief), the price of oil isn't reflecting the supply disruption risk — certainly not supply shock risk. 
 
Add to this, one of the best research-driven commodities analyst teams of the past three decades (Leigh Goehring and Adam Rozencwajg) have recently drawn attention to what they believe are overstated U.S. oil production data. 
 
They think the new EIA Administrator's restatement of data, in the middle of last year, to account for a new "adjustment factor" resulted in overstating crude growth by 40%.  Moreover, they see risk of U.S. production growth turning negative in the coming reporting months.  
 
That would put OPEC+ back in the driver's seat to determine oil prices.  And higher prices serve their interest.   

Pro Perspectives 4/17/24

 

 

 

 

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April 17, 2024

The correction in stocks continues.
 
The S&P futures are now down 5.3% from the April 1 record high.  Nasdaq futures are down 5.8%.  Dow is down 6.2%.  And the Russell is down 9.5% (20% lower than the record highs of November 2021).  
 
Interestingly, it's not the broad indiscriminate selling of stocks you might find in an economic shock, or the unwinding of a grossly overvalued market.
 
Over 40% of the S&P 500 stocks were up today (4 out of 10 sectors).
 
This continues to look like a technical correction in a bull market.  Not only do we have the catalyst of a new industrial revolution underway, but the economy continues to be flush with cash. 
 
Remember, we've looked at this chart of money supply …
 
 
The money supply remains trillions of dollars above trend.  And Biden's proposed 2025 budget would require printing another $1.8 trillion.
 
And if we extrapolate out the trend (crudely) in money market funds, the balance there is around $1 trillion above trend. 
 
 
So, the correction is a buy in stocks.  It's a matter of when.  
 
As we discussed yesterday (here), given the adjustment in rate expectations, and the headline risk with Israel/Iran, it's fair to expect a deeper correction, still.  With that, based on historical performance of the S&P 500 we should expect intra-year corrections, on average, of better than 10%. 

Pro Perspectives 4/16/24

 

 

 

 

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April 16, 2024

Jerome Powell made some prepared comments today at a "fireside chat" with the head of the Bank of Canada.
 
He called the economy "quite strong."  He called the labor market "very strong."  And he said the recent inflation data has "clearly not given us confidence" that it's sustainably moving toward their 2% target. 
 
And with that he says it's "likely to take longer than expected to achieve that confidence." 
 
So, today Jerome Powell intentionally dialed down expectations on rate cuts. 
 
Let's take a look at the evolution of the market expectations on the rate path since October of last year, when Powell signaled the end of the tightening cycle. 
 
As you can see in the chart below, the market had priced in six rate cuts by the end of 2024 (with a chance of seven).  Now it's pricing in just one cut by year end. 
 
 
That expectations change is effectively tightening policy.
 
Add to that, we've talked about the correction that's underway in stocks.  Declining stocks will also contribute to the tightening of financial conditions.
 
The chart below shows where stocks were trading when rate cut expectations were at peak (i.e. expectations of greater than six cuts for the year).  That was early January. 
 
That's 9.4% away from the April 1st peak in S&P futures.  The peak-to-trough drawdown at the moment is 4.8%.
 
 
Given the adjustment in rate expections, and the headline risk with Israel/Iran, it's fair to expect a deeper correction for stocks.  In fact, based on historical performance of the S&P 500 we should expect intra-year corrections, on average, of better than 10%.  
 
Below is an excerpt from a study done by Calamos (investment manager).  As you can see, even in the late 90s boom for stocks, there was a greater than 10% correction in three of the five years (all finished UP, big).  
 
     
 
 

Pro Perspectives 4/15/24

 

 

 

 

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April 15, 2024

Last Monday, we looked at this chart and talked about the "set up for a correction in stocks" …
 
 
We had been watching this big trendline for the better part of the past two months — a nearly perfect 45 degree angle ascent of the world's benchmark stock market (proxy for economic and geopolitical health and outlook).  
And we talked about the technical reversal signal that materialized (the outside day) in the S&P futures, Russell 2000 futures, Dow futures and the German Dax futures. 
And we talked about the breakdown of this important trendline on April 4th.
 
With that, here's the up-to-date look at this chart …
 
 
As you can see, the break of the line did indeed start a correction in stocks.  It's underway.  As of today's close, the S&P futures are down 4.5% from the (record) highs of early this month.  The Nasdaq futures are down 4.6%.  Dow futures are down 6%.  And the Russell futures (small caps) are down 8.4% from peak to trough, over just two weeks.
 
So, what's the driver? 
 
Is it the Fed's lack of confidence in the disinflation trend? 
 
Or is it geopolitical threats that markets have been (mostly) ignoring, but have now become the central focus? 
 
It looks like the latter. 
 
If we look back to the technical reversal signal in stocks.  It happened on April 1st.  That was market reaction to Israel's attack on the Iranian consulate in Syria. 
 
    
A few days later, the big trendline in stocks gave way when a flurry of geopolitical headlines hit, ranging from the threat of U.S./Israel policy change to U.S./Taiwan policy confusion, to provocative (to Russia) Ukraine/NATO relations. 
 
Then later that day, this headline (below) hit, warning of a retaliatory attack on Israel from Iran.
 
 
That brings us to the events of this past weekend, and the market behavior today.
 
As we discussed in my April 4 note (here), with these events, the world became more dangerous, and with that, rate cut timing becomes less important for markets.   
 
The dominant theme for markets for now is risk aversion, and capital flows will be driven by whether or not there is escalation (in this case, a response by Israel to Iranian attacks over the past weekend).
 
Where does capital flow in times of global risk aversion?  U.S. Treasuries (still).  Gold.  The Dollar.  And the big tech oligopoly has also proven to be a favored safe-haven in the crises of recent years, and likely even more so in the age of generative AI.
 
De-escalation should trigger a very healthy appetite to buy into the correction in stocks.   

Pro Perspectives 4/11/24

 

 

 

 

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April 11, 2024

After yesterday's inflation report, we talked about the overreaction in markets. 
 
With a slightly hotter March CPI report, the rhetoric from the investment community surrounding the inflation picture, and the Fed's rate cut prospects, was irrational. 
 
This is a market that's gone from pricing in as many as seven quarter-point rate cuts this year, to five, to three.  And by the end of yesterday the Wall Street Journal said it was "now a matter of IF," the Fed will cut this year.
 
Of course, that mentality led to sell-offs yesterday across stocks, and bonds.  
 
That said, only twenty-four hours later the European Central Bank concluded its meeting on monetary policy (this morning). They (newly) introduced the possibility of rate cuts in the policy statement (likely June). 
 
Moreover, in the press conference Christine Lagarde (ECB President) admitted that there were members that wanted to cut rates today.
 
This is of particular significance, when evaluating the Fed path, because global central banks have been overtly coordinating policy — so closely, that they repeat the same language. The latest shared mantra has been the need for more "confidence" in the disinflation trend.
 
So, if there was concern that the stall in the U.S. disinflation trend was a signal that another inflation shock was coming, the ECB positioning this morning should offer some sanity.             
 
With the above in mind, yesterday's move in the Nasdaq was completely reversed today.  It was a rare dip to buy in the AI theme, and the investment community showed little patience when presented with the opportunity to buy at lower prices.
 
On that note, while interest rates and geopolitical noise continue to get most of the media attention, the technology revolution is moving at a sprinter's pace.
 
This week, Google hosted its annual cloud conference. 
 
It was all about AI and Google's (Alphabet's) developing AI ecosystem, and maintaining dominance in the age of generative AI.
 
Google unveiled its "most powerful, scalable and flexible AI accelerator" chip. 
 
Intel hosted it's Vision 2024 conference.  It featured a new AI chip called Gaudi 3, which is said to be capable of training large language models 50% faster than Nvidia's H100 chip, and 40% more power efficient. 
 
Apple announced an AI chip this week, to be in the new Mac PCs (an AI personal computer). 
 
And Amazon's CEO, Andy Jassy, published his 2023 Letter to Shareholders today.  He said, "generative AI may be the largest technological transformation since the cloud, and perhaps since the internet."  And they have AI chips. 
 
So, everyone has AI chips.  And that's good.  If Jensen Huang is right (Founder/CEO of Nvidia), the cost to "retool" the world's data centers to accelerated computing has already climbed from $1 trillion to $2 trillion (over the next five years).  
 
Given that Nvidia is supplying 90% of it (at the moment), and they've done under $50 billion in data center revenue over the past year, this global computing power transformation has a long way to go. 
 
There's a lot of demand to fulfill, and it's still very early. The $39 billion worth of Chips Act grants started deployment just three weeks ago.  And we should expect multiples of that amount, in private investments, that will follow the government money.
 
The next wave will be the tremendous potential for new businesses to form around generative AI, and for old businesses to adopt and realize the benefits of generative AI.
 
With all of the above in mind, as you know, I've been working on identifying and thoughtfully building a portfolio of companies on the leading edge of this transformation, in my AI-Innovation Portfolio.
 
We now have 17 stocks in the portfolio, since we launched in June of last year.
 
We started with a focus on AI infrastructure stocks.  These are the "picks and shovels" of this technology revolution.  And we've since added massive SaaS companies that will deliver the capabilities of generative AI to companies around the world.
 
We added the cheapest of the tech giants leading the technology revolution, and they own perhaps the most valuable data on the planet.
 
As for the industrial metaverse, we also own a pioneering infrastructure engineering software firm that's been leading metaverse technology since 2016.  It's founder led, with double-digit growth, high profitability, and high gross margins (already).  And this company is actively shaping the digital transformation that will drive the coming infrastructure/building boom.
 
Again, it's still early in this technology revolution. There are tremendous investment opportunities, in an era that has already brought us the multi-trillion dollar companies.  More are coming.
 
If you aren't yet a member, and you'd like to join us and get all of the details on these stocks and the rest of our portfolio, you can do so following the instructions below.
 
Here's how you can join me…
 
The AI-Innovation Portfolio is about allocating to HIGH-GROWTH.
 
For $297 per quarter ($99 per month), you'll gain exclusive access to my in-depth research, expert analysis, and timely investment recommendations focused on the generative AI revolution — all email delivered to your inbox.
 
You can join me by clicking here — get signed up, and then keep an eye out for Welcome and Getting Started emails from me.
 

 

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Best,

Bryan

 

Pro Perspectives 4/10/24

 

 
 

 

 

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April 10, 2024

There was a lot of fuss about the inflation data today.

March CPI came in a tenth of a percentage point hotter.

Stocks were crushed.  Yields spiked.  And the dollar rallied.

This reminds me of the inflation report back in February (the January inflation data).  Similar to today’s report, both the headline and core inflation came in a tenth of a percent above expectations.  Stocks were crushed.  Yields spiked.  And the dollar rallied — all of a magnitude similar to today’s market response.

With that, back in my February 13th note (here) we discussed what looked like a clear overreaction, given the magnitude of the decline in stocks, rise in yields.

And we looked back at the only two times, over the prior three years, that shared the features of 1) a down greater than 4% Russell 2000 and 2) at least a 14 basis point spike in the 10 year yield.

Let’s revisit that analysis …

It happened on February 25, 2021.

What was going on?

It was about inflation.  The 10-year yield had risen from 1% to 1.6% in less than a month.  And the move was quickening.  And this quickening was driven by the market’s judgement that the additional $2 trillion fiscal package coming down the pike from the new President and his aligned Congress was inflationary at best, and recklessly extravagant, at worst.

The $2.2 trillion Cares Act and the additional $900 billion in stimulus passed in December, before Trump’s exit, had already driven a nearly full V-shaped economic recovery (by late January ’21).  And the economy was projected by the CBO (Congressional Budget Office) to grow at a 3.7% annualized rate in 2021 (hotter than pre-pandemic growth), with an unemployment rate falling to 5.3% – about right at the average unemployment rate of the past 50 years.

The prospects of more, massive spending packages was an inflation bomb.

This feature of a big 4%+ down day in small caps and spike in yields also happened on June 13 of 2022.

What was going on?

It was a Monday meltdown, following a hot Friday inflation report.

The Fed had just started tightening and was way behind the curve.

Inflation was near 9%, the Fed Funds rate was below 1%.  With a Fed meeting just days away, the market ratcheted up expectations for an aggressive 75 basis point hike.  And history suggested they needed to take rates a lot higher in order to stop fueling inflation, and start curbing it.

So, in both cases (Feb of 2021 and June of 2022) stocks fell sharply and yields spiked on significant inflation fears.

It’s fair to say the circumstances are quite different today.

And you can see it in the chart below …

This is the continuation of the “stall” in inflation progress we discussed yesterday.  But it’s not a Feb 2021 or June 2022 “significant inflation fear” moment.  Far from it.

As we know, in the current case the stall in CPI is largely due to a couple of hot spots in the data (shelter and insurance).  On the latter, the auto insurance component was up 22% year-over-year in the March inflation report.  Just pulling that out, the headline CPI drops below 3%.

Bottom line, Fed policy remains “highly restrictive” (in the Fed’s words).  The next move by the Fed will (still) be easing.  It’s a matter of when and how much.

Today’s overreaction presents another opportunity to buy a dip in bonds.