Pro Perspectives 11/30/23

 

 

 

 

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November 30, 2023

Today we had the report on the Fed's favored inflation gauge, core PCE.  It confirmed the continuation of a steady decline, with a fall to 3.5% year-over-year change.
 
As we've discussed often here in my daily notes, the Fed has historically beat inflation by taking interest rates above the rate of inflation.  If we measure that by the Fed Funds rate (interest rate) against core PCE (inflation rate), the Fed has been there (above inflation) since March.  That "restrictive monetary policy" position puts downward pressure on inflation, and economic activity. 
 
And as we discussed on Monday, as inflation continues to fall, the level of restriction rises (i.e. real rates rise).
 
With that said, we'll hear from Jerome Powell tomorrow.  He's speaking at an event at Spelman College.  We should expect him to comment on the sharp slide in bond yields since the Fed's last meeting, particularly because it was the preceding sharp rise in bond yields that gave the Fed pause on doing more. 
 
Does it mean he will convince markets tomorrow that a December hike is back in play?  Highly unlikely.  The reality of rising real rates, and an economy running at a much more modest rate in Q4, relative to Q3, should keep the market focused on aggressive rate cuts next year. 
 
Let's talk about the big tech stocks …
 
Last month, we talked about the technical reversal signals that were flashing in the interest rate market.  First it was the 2-year Treasury yield.  Then the 10-year.  And then the big corporate bond and Treasury bond ETFs.  That indeed predicted the turn in the bond market.  
 
Now we have a reversal signal in big tech stocks. 
 
It came yesterday in Microsoft, at the record highs ….
 
 
We have the same signal (yesterday) in Google, Apple and Meta.
 
Is this a predictor of some regulatory uncertainty (brakes) to come, related to AI?  Maybe.
 
It comes as these stocks are up 80% on the year, as an equal-weighted basket.  Meanwhile the equal-weighted S&P is up less than 5% on the year.  Small cap stocks are up just 3%.  This looks like a rotation out of big tech, and into value. 

Pro Perspectives 11/29/23

 

 

 

 

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November 29, 2023

Elon Musk had a lengthy interview after the market close today.  
 
He's a co-founder and key donor of OpenAI, the developer of ChatGPT.
 
He's also the founder of competitor xAI which has its own generative AI platform called Grok.
 
What did he have to say about AI?  He said we are within three years of computer intelligence exceeding human intelligence (not human intelligence + machine intelligence, but human intelligence alone). 
 
With that, let's revisit the drama that unfolded at OpenAI over the past two weeks. 
 
Yesterday, we talked about the speech by China's President Xi at the recent APEC forum in San Francisco.  At the same forum, the OpenAI CEO, Sam Altman, participated in a panel discussion on artificial intelligence.  He was fired a day later.
 
Here's what he said:  "Four times now in the history of OpenAI, the most recent time was just in the last couple of weeks … we sort of pushed the veil of ignorance back and the frontier of discovery forward."  There is a lot of speculation around the comment and his firing, but at the very least, it's fair to say he's referring to a large leap in the model capabilities (if not a stronger form of AI).
 
He's since returned to his role at OpenAI.
 
With the above in mind, as we discussed back in June, the speed of change in this new technology revolution is already unlike those of the past.  It's fast moving.
 
How do you position for the new technology revolution?  Join my new subscription service, the AI-Innovation Portfolio.  We’ve recently added an eleventh 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 11/28/23

 

 

 

 

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November 28, 2023

A year ago this month, China's President Xi opened China's International Import Expo with an opening ceremony address titled: "Working Together for a Bright Future of Openness and Prosperity."
 
He said, China remains committed to "opening up to the outside world." 
 
The speech was full of language suggesting China wanted to play nice in the world for "mutual benefit," working with "all countries" to share opportunities from "deepened cooperation."
 
As a signal, Xi (the PBOC) strengthened the yuan that day (which they control) from fifteen-year lows.  A stronger yuan is counter to their economic interest (and policy), where they like to manipulate a weak currency to drive exports.  So, a stronger yuan was intended to signal alignment with Xi's speech (of cooperation/global friendliness).
 
As you can see in the chart, the strengthening of the yuan continued over the next three months, to the tune of about 10% …
 
 
As you can also see in the chart (to the far right), China strengthened the yuan to coincide with Xi's speech at the recent APEC meetings in San Francisco.  
 
What did he say?
 
In the face of tense U.S./China relations, the speech was full of conciliatory and idealistic language.  He said China is "ready to be a partner and friend of the United States."  He called for a peaceful coexistence, cooperation and "mutual respect."  And he promised to "never pursue hegemony or expansion."
 
So, perhaps as a sign of good faith, Xi and the PBOC are strengthening the yuan again (again off of fifteen-year lows). 
 
Also keep in mind (a little backstory), for the decade prior to the Trump presidency, China agreed to slowly allow the yuan to appreciate (against the dollar) in response to tariff threats from Senators Graham and Schumer (yes, Schumer). 
 
They let the yuan climb by an average annual rate of just 6%.  That kept the toothless U.S. tariff threats at bay.  Meanwhile, using the continued weak currency advantage to fuel exports, the Chinese economy grew by four-fold during over that ten-year period.  Enter Trump, and he went forward with tariffs on Chinese goods, penalizing China for unfair trade. 
 
So, while in San Francisco, did Xi and the Biden administration make a deal that includes a stronger yuan and relaxed tariffs? Maybe.
 
For markets, what performed over that stretch in late 2022/early 2023, of a stronger yuan and weaker dollar (from the chart above)?  Chinese stocks (up 12%), Emerging market stocks (up 27%), Copper (up 23%), and gold (up 21%).

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.