Pro Perspectives 11/27/23

 

 

 

 

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November 27, 2023

We're almost through Q3 earnings.  As we discussed heading into earnings season, Wall Street was looking for another contraction (albeit slight) in S&P 500 earnings, and (confusingly) that was in a period during which the economy was hot, growing at about a 5% annualized quarterly growth rate. 
 
So, the stage was set for positive surprises.  And positive surprises tend to be good for stocks.   
 
Indeed, we've had a better than average number of companies reporting positive earnings surprises, for a blended year-over-year earnings growth of better than 4%.
 
And over the past six weeks, since earnings season kicked off with the big banks, stocks are up 4% (S&P 500).  And it's broad based.  The equal-weighted S&P is up 4.5%.  
 
Of course, the Fed has a considerable influence on this outcome for stocks.  A few days into earnings season, Jerome Powell signaled the end of the tightening cycle in a discussion at the Economic Club of New York.  That "signal" immediately materialized in the interest rate market, with this technical reversal pattern in the 2-year yield (an outside day).
 
 
Similar reversal patterns followed over subsequent days, in the 10-year yield, the largest corporate bond ETF (LQD), and the largest government bond ETF (TLT).
 
Now, we get October core PCE on Thursday, the Fed's favored inflation gauge.  Will it derail the conditions we discussed above?  Highly unlikely.  
 
It's expected to come in at a 3.5% year-over-year rate of change.  That will increase the "real interest rate" (the difference between the Fed Funds rate and inflation) to 200 basis points, which further tightens financial conditions. 
 
And with that, as we've discussed over the past few weeks, as inflation continues to go the Fed's way (i.e. continues to trend lower), the Fed will have to cut rates aggressively next year.

Pro Perspectives 11/21/23

 

 

 

 

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November 21, 2023

Nvidia reported today after the close.
 
They had, yet again, another jaw-dropping quarter.
 
Here are the numbers …
 
 
Let's review the story of the past six months.
 
It was in late May that Nvidia shocked the world with a $7 billion quarter, and upgraded guidance for Q2 to $11.5 billion (just one quarter ahead).  That guidance was a stunner. 
 
More importantly, the Founder/CEO of Nvidia, Jensen Huang, compared the "ChatGPT moment" (the November launch of ChatGPT) to the "iPhone moment."  And with that, he declared the early stages of a trillion-dollar "retooling" of the world's data centers.  
 
He said demand was steep, they were well supplied, and that the second half would be better than the first.  
 
In Q2, they didn't do $11.5 billion in revenue, they did $13.5 billion.
 
And they guided to $16 billion for Q3.  They just reported $18.1 billion.
 
Next quarter, they are expecting $20 billion in revenue.  Keep in mind, this is on 74% gross margin, and around 50% net income margin.
 
With this performance, the stock is up over 60% since the May report.  But with this growth, the stock has gotten cheaper and cheaper, from a valuation standpoint.  Going into the May report (Q1), it was trading for 32 times annualized Q4 2023 sales.  Now it's trading 17 times annualized Q3 2024 sales (the most recent quarter). 
 
And at today's close, it's trading around 30 times earnings (Q3 annualized net income).  That's in-line with the valuation on the tech giants.  But keep in mind, Nvidia is at a much higher growth stage (a triple-digit year-over-year rate).
 
The stock is cheap. 
 
As I said yesterday, for those that have been calling the boom in AI stocks unsustainable, they are underestimating, if not misunderstanding the significance of this technology revolution.  It's productivity enhancing, and a formula for a boom-time era in economic growth.  The generative AI impact will mean bigger companies, in a bigger economy.
 
This will grow the size of the economic and stock market pie.  
 
This is exactly what Jensen Huang discussed today.  He said "every company, every industry, every country" will go through this computing transition.  He sees "significant total addressable market expansion."  And we're still at the beginning stages.
 
How do you position for the new technology revolution?  Join my new subscription service, the AI-Innovation Portfolio.  We’ve recently added a tenth stock to our portfolio, a dominant-high growth, high margin business that’s delivering the productivity enhancing capabilities of generative AI to its customers.  Join here, and I’ll send you all of the details.     

Pro Perspectives 11/20/23

 

 
 

 

 

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November 20, 2023

We’ll get Nvidia earnings tomorrow after the close.

As I said in my note last week, this Nvidia report will be the most important market event into the end of the year — even more important than the December Fed meeting.

As a reminder, they grew revenues by 19% from Q4 to Q1, by 88% from Q1 to Q2 and have guided for a $16 billion for this recent quarter, or 18% quarterly revenue growth.

Based on the commentary from corporate America on the third quarter, they are “investing heavily for the future.”  That means AI.  And at this phase, that means AI infrastructure (servers, data centers and network infrastructure).

So, while Founder/CEO Jensen Huang has set a high bar/high expectations, he should continue to deliver, for the foreseeable future.

Remember, it’s just the early stages of what Huang has called a trillion-dollar “retooling” of the world’s data centers — a move from “general purpose computing” (powered by CPUs) to “accelerated computing” (powered by GPUs).

For those that have been calling the boom in AI stocks unsustainable. They are underestimating, if not misunderstanding the significance of this technology revolution.  It’s productivity enhancing, and a formula for a boom-time era in economic growth.  Growing the economic pie will result in growing the size of the stock market. As I said back in June, in my first AI Innovation Portfolio note, “prepare for the era of (more) multi-trillion dollar companies.”

In short, the generative AI impact will mean bigger companies, in a bigger economy.

With the above in mind, let’s talk about the drama at openAI over the weekend.  This is the nonprofit developer of ChatGPT.  Within 48 hours, one of the most important organizations in the world has spiraled toward dissolution.  My view:  It looks like those involved (donors, investors, leadership) are vying for control of the organization’s valuable assets (they want claim on the bounty).

 

Pro Perspectives 11/16/23

 

 

 

 

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November 16, 2023

Walmart beat on earnings and revenue this morning.  And the stock finished down 8%. 
 
Target beat on earnings and revenue yesterday.  And the stock finished UP 18%. 
 
As you can see in the chart below, we've had this performance divergence over the past year between two of the biggest retailers in the country. 
 
 
This reminds me of the Amazon/Walmart divergence of five years ago (2018).
 
We talked about it here in my daily Pro Perspectives notes.  
 
Here's a look back at that chart …
 
What was going on?
 
The market was pricing Amazon like a runaway monopoly — killer of all industries, especially retail.  And the perception had been that Walmart was destined to become another rise and fall story of a dominant American retailer.
 
But there was a clear and new catalyst that entered. Trump had made it very clear that he was not only looking to balance the playing field globally, but also domestically.  And that meant, the tech giants were due for some regulatory backlash.  Amazon was in the crosshairs — and it appeared that the foot was being lifted from the jugular of the old economy survivors. 
 
And the divergence was resolved (Walmart UP, Amazon Down) …
 
In the current case, the Walmart/Target divergence, Target has found itself in the crosshairs of political and cultural backlash.  But I suspect the WMT/TGT divergence will resolve in a similar way to the AMZN/WMT divergence.  It may have started this week. 

Pro Perspectives 11/15/23

 

 

 

 

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November 15, 2023

The interest rate market is now telling us that central banks in the U.S., Eurozone, UK, Canada, Australia and New Zealand are all done with rate hikes.  And in all cases but Australia, markets are betting on close to 100 basis points of cuts next year.
 
So, as we head toward the end of the year, we now have a government shutdown averted in the U.S.   And we have a Republican-led House with an appetite to curtail the Biden administration spending binge.
 
All of the above bode well for stocks into the year end.  And for perspective, the broader market (equal-weighted S&P 500) has just in the past two days moved back into positive territory for the year (up just over 2%).  
 
 
That said, we have another inflation report next month.  And another Fed meeting.  But at this point, the biggest news into the end of the year will be, not the Fed, but Nvidia earnings. 
 
They will report next Tuesday.
 
Remember, it was just six months ago that Nvidia's CEO shocked the world, declaring "the beginning of a major technology era."
 
Founder/CEO Jensen Huang told us there was a "rebirth of the computer industry" underway, where "AI has reinvented computing from the ground up."  He said the launch of ChatGPT (last November) was the defining "moment" for the industry. 
 
And he had the numbers to back it up.
 
They grew revenues by 19% from Q4 to Q1, by 88% from Q1 to Q2 and have guided for a $16 billion quarter, or 18% quarterly revenue growth. 
 
That's 170% year-over-year revenue growth for a company doing well north of $40 billion in annual revenue. 
 
 

 

 

Pro Perspectives 11/14/23

 

 

 

 

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November 14, 2023

We had the inflation report this morning. 
 
The rate-of-change in prices continued to fall in October.  The core inflation rate (excluding food and energy) broke 4%, at 3.91% (according to Fed index data).   That's the first time under 4% since May of 2021. 
 
Markets immediately declared the rate hiking cycle as over.    
 
Stocks exploded higher.  We talked about the opportunity in small caps earlier this month, a clear laggard on the year.  The Russell 2000 was up over 5% today. 
 
Yields fell sharply.
 
As you can see in the chart above, the 10-year yield has now fully retraced the levels of the September Fed meeting — reversing the expectations the Fed intended to set at that meeting.   
 
And today the dollar had one of its biggest declines of the past three years.
 
 
The last time the dollar had a daily decline of this magnitude was after the October 2022 inflation data — almost a year ago to the day.
 
The time before that?  March of 2020, after the decision by the Fed to go "all-in" to stabilize the lock-down economy.
 
As we've discussed last week, we shouldn't expect to get an "all clear" signal from the Fed on inflation.  They will continue verbally posture, in attempt to keep some foot pressure on the economic brake.
 
But the market is signaling regime shift in monetary policy. And keep in mind, at this point the Fed technically ended the rate hiking cycle in July. 
 
So, the market will now be making bets on how early the first rate cut will come, and how many will come next year.
 
This anticipated change in policy direction should mean a weaker dollar cycle.  And a weaker dollar should mean higher commodities prices and higher emerging market stocks.  

Pro Perspectives 11/13/23

 

 
 

 

 

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November 13, 2023

We get the big October inflation report tomorrow.

As we’ve discussed over the past week, if inflation continues to go the Fed’s way (i.e. continues to trend lower), the Fed will have to cut rates aggressively next year, otherwise real interest rates (the difference between the Fed Funds rate and inflation) will continue to rise, which will tighten financial conditions even further.

They haven’t acknowledged it.  But it’s obvious.  In fact, UBS said today that they expect the Fed to cut by 275 basis points next year!

So, what does tomorrow’s inflation number look like?  

The consensus view is for a 3.3% year-over-year change.

Remember, a powerful driver of falling inflation (the fall from over 9% to 3%) has been DEFLATION in energy prices.  That said, that deflationary contribution from energy prices should be waning, given supply/demand fundamentals.  But October was a reprieve.

If we look at the price records from the EIA (Energy Information Administration), the year-over-year change across broad energy should be negative for the month of October. 

That should contribute to a slide in October headline inflation from 3.7% (the prior reading).  And that should be welcomed by markets and cheered by the media — more fuel for stocks, and more downward pressure on bond yields. 

And this will come as we already have this bullish trend break across the S&P 500, Nasdaq and DJIA …

And 10-year yields are already trading in the mid-4% area, after failing to break above 5%.

With that, the Fed has a line-up of speakers this week.  We should expect them to curb any enthusiasm.  Remember, they’ve acknowledged that higher longer-term bond yields, lower equity prices, and a strong dollar have “tightened financial conditions significantly.”

But they’ve also made it clear that they want these conditions to persist.   

 

Pro Perspectives 11/9/23

 

 

 

 

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November 09, 2023

Stocks were down today, after a streak of nine consecutive days of higher closes.  And yields finished sharply higher, after printing a seven day low.
 
What's going on?   
 
After a barrage of Fed speakers over the past two days, Jerome Powell (the most important voice) made some prepared remarks at an IMF panel discussion today.  Would he walk back on some of his commentary from last week's post-FOMC press conference?  
 
Today he said, "if it becomes appropriate to tighten further, we will not hesitate."  Nothing new there.  
 
Keep in mind, we shouldn't expect to get an "all clear" signal from the Fed on inflation.  Some ambiguity, with a threat that they could do more, is exactly what we should expect.  And that's what they are giving us.  The verbal sentiment manipulation keeps some foot pressure on the economic brake, which adds downward pressure on inflation (some insurance).   
 
With that, and with the chart below in mind (from my Tuesday note), we should expect them to be reactive on the way down (i.e. behind the curve on rate cuts).
 
    
So, it seems clear that they will be too tight as inflation continues to fall next year.  The question is, will the Fed's stance induce recession, or just reduce growth (from hot to moderate).
 
Now, while Powell didn't say anything new today, it was the Treasury auction that was the driver of the decline in stocks/rise in yields. 
 
Demand was weak for 30-year debt issued today, with bonds sold at a higher yield than indicated going in.  That created some deserved scrutiny about the oversupply of U.S. debt, which the Treasury is issuing to pay interest and finance the bloated deficit. But it was later reported that a cyber-attack (ransomware) at a Chinese bank impacted the Treasury demand.
 
As I said throughout the years, here in my Pro Perspectives notes:  "in its short history, Bitcoin has a record of being a tool of corruption and money laundering."  On that note, a 2022 study by Chainalysis found that the price of Bitcoin tends to rise in the weeks leading up to some sort of malfeasance.  Perhaps the move of the past four weeks was a signal of this ransomware attack.  
 
     

Pro Perspectives 11/8/23

 

 

 

 

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November 08, 2023

The midterm elections were a year ago to the day.
 
And going in, we talked about the midterm election analogue.
 
Remember, going back to 1962, there has never been a 12-month period, following a midterm election, in which stocks were down.
 
And the average one-year return, following the fifteen midterm-elections of the past sixty years, was +16% (about double the long-term average return of the S&P 500).
 
That record still stands.  As of today's close, stocks delivered a 16% total return over the past twelve months.
 
Now, the expected outcome going into last year's midterm election was, at the very least, a divided Congress.  And after the fiscal insanity of the previous two years, gridlock on Capitol Hill would be welcomed.
 
We did indeed get a divided Congress.  But instead of fiscal restraint, we've had more fiscal insanity.  This past summer, the Republican-led House agreed to suspend the debt ceiling through 2025, giving the Treasury license to issue unlimited debt for the next two years (through the end of the Biden first time).
 
The interest rate market did this …  
 
 
But now we have change — a new Republican Speaker of the House.
 
And the early indications suggest that this leadership will bring action against the excesses of the past two years, which came from the aligned government. 
 
The recent slide in rates is probably no coincidence.
 
Position yourself for the new technology revolution:  Join my new subscription service, the AI-Innovation Portfolio.  We’ve recently added a tenth stock to our portfolio, a dominant-high growth, high margin business that’s delivering the productivity enhancing capabilities of generative AI to its customers.  Join here, and I’ll send you all of the details.  

Pro Perspectives 11/7/23

 

 

 

 

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November 07, 2023

Since the Fed meeting last week, the 10-year yield has fallen by as much as 45 basis points, the market has priced out the chance of a December hike, and is now pricing in a coin flips chance of 100 basis points in cuts by the end of next year.
 
Remember, last Wednesday, Jerome Powell acknowledged that "financial conditions had tightened significantly in recent months, driven by higher longer-term bond yields, among other factors (like lower equity prices and a stronger dollar).  
 
But he also made it clear that these conditions would need to persist, to sideline the Fed.  Of course, markets have since moved.
 
With that, the Fed deployed a media blitz today, with an army of speakers, intended to plant some seeds of doubt in the market, on whether or not the Fed is indeed done hiking rates. 
 
The verdict?  Markets weren't buying what Fed officials were selling.  Yields finished down on the day, stocks finished up.
 
Let's take a look at another reason we should believe the Fed is done with this tightening cycle.
 
This chart below shows the current effective Fed Funds rate, along with the Fed's projected path, all in orange.  In blue, we have the current inflation rate (the Fed's favored core PCE), along with the Fed's projected path for inflation.  The data is from the Fed's September Summary of Economic Projections (here). 
 
 
Now, the difference between the Fed Funds rate and inflation is the "real interest rate" (black numbers in the above chart).  The real rate puts downward pressure on inflation and the economy.  And as you can see, it's currently 1.6%. 
 
And you can see on the right side of the chart, the Fed, itself, projects the long-run real rate to be 0.5%.  
 
Clearly, at 1.6%, conditions are very tight, relative to the Fed's view on the long-run real rate. 
 
This is where the visual is striking. We have a Fed that's contemplating, at the moment, whether or not it's too tight.  Yet, if we look at their forecasts through 2025, they are projecting to be even tighter (an even higher real rate, circled in blue) than the current real rate.
 
The takeaway:  To avoid getting tighter, as inflation continues to go the Fed's way (lower), they will have to cut rates.
 
Position yourself for the new technology revolution:  Join my new subscription service, the AI-Innovation Portfolio.  We’ve recently added a tenth stock to our portfolio, a dominant-high growth, high margin business that’s delivering the productivity enhancing capabilities of generative AI to its customers.  Join here, and I’ll send you all of the details.