15th July 2024

Weekly Index Movement

S&P500+0.9%
Nasdaq-0.3%
Aussie All Ords+1.7%

CPI was the big announcement last week and we saw some changes to the way the big boys are positioning themselves.

CPI Inflation for June headline/core came in at -0.1%/+0.1%.

That makes annual inflation +3.0%/+3.3% for headline / core. Which is getting close the the Fed’s target.

Looking at the components of this, the most important is what they call Shelter. Shelter makes up 44% of inflation. This is what Shelter has been doing:

And what is important here is to know that this is a lagging indicator and so should continue to come down in future months.

All of which means US inflation is definitely getting close to the Fed target of 2-3%.

At a recent press conference Powell stated that the risk is they hold interest rates too high for too long and this has a detrimental affect on the economy.

When you consider inflation getting down near target and a Fed Chair conscious of high rates, the market has concluded there will be two cuts this year and a 50% chance of it being three.

We have seen the market expectations for interest rate cuts swing around this year, but this time does feel different because the equity boys started changing their allocations.

They sold down large cap tech winners. NVida (NVDA) was down -5.6% and Apple (AAPL) was down -2.3% but the Russell 2000 jumped +4.7% in two days.

The Russell 2000 is the small cap index. This rotation shows traders taking profits on large cap tech that has had a big run and is presently overbought and reallocating cash to undervalued small caps.

It will disappoint all those who claim the market is about to correct because it is only a few stocks keeping the rally going, as it destroys their argument and it will make most investors happy as finally the other stocks in their portfolio are moving.

We have a strategy that invests in mainly small-cap stocks. I remember back in 2020 (the last time the Fed went on an interest cutting cycle), the Top 30 Strategy gained 90% in ten months.

This strategy has been out of favour for some time but now conditions are back to when it performs again, it would well be time to consider the small-cap end of the market once more.

Tesla – TSLA

I’m not a big fan of this stock as an investment. Far too volatile and lacks fundamental validation, but I suppose it would make an interesting swing trader for you short-term guys out there.

As you know Tesla is a car manufacturer much like General Motors (GM) and Ford (F).

GM trades for 4.8x analysts’ forward year earnings estimates. F trades for 6.6x

The S&P500 goes for 21.2x forward estimates

Tesla trades for 94.9x.

All this really says though is Ford and General Motors look very cheap verses the market and Tesla looks extremely expensive . This is not enough to base an investment decision on. Stocks tend to be cheap / expensive for a reason.

I like to think of things this way – a company’s value is based on two factors: what it earns today and what it might earn in future.

You can take the present earnings and multiply them by 10 as an estimate of what the current earnings are worth for the next 10 years.

For Tesla, current earnings are $2.38 which implies a current stock value of $23.80, based solely on current earnings.

Another way to think about this is to say, if Tesla profits remain the same for 10 years then the stock should be worth $23.80

The stock is actually trading at $248.23, which means that if you pay $248 for the stock, you are actually paying $224 for a hope that earnings increase in future.

This tells me this stock is a faith based stock. Not a facts based stock. Anyone who pays $248 is hoping that earnings will increase significantly.

Given increasing competition and price cutting to keep up with foreign makers, this hope for significantly increased future earnings is being tested.

That faith in increasing earnings took a hit last week.

Tesla was set to unveil a robotaxi on August 8th. But last week the company pushed this date back to October. Clearly it is not ready and when you trade at 10 times fair value any threat to the expectation for massive profit increases is going to hit you hard. The stock fell 8% on the news.

The above numbers are why I am not a buyer of Tesla. I’m simply never going to pay 10 times what I think is fair value based on the hope it can somehow produce massive increases in profits in future.

I’d much rather own something Ai that has a better chance of definitely producing those increased earnings.

SoundHound Ai (SOUN)

As you know, anything with Ai in it is hot right now. Soundhound makes voice Ai and announced on Wednesday that it has done a deal with Stellantis (the car market behind Peugot, Opel and Vauxhall) to integrate the Soundhound Voice Ai in vehicles across 11 European markets including Austria, France, Germany, Italy, Spain, and the United Kingdom. By the end of July, the rollout will be extended to 17 markets in 12 different languages.

With the introduction of SoundHound Chat AI into Peugeot, Opel, and Vauxhall, drivers and passengers will now enjoy hands-free voice control for a wide range of functions. Whether managing navigation, making calls, or accessing real-time information such as sports scores and weather updates, the voice assistant enhances the convenience and enjoyment of driving. The integration of ChatGPT into the natural voice recognition system allows users to ask about any topic—from historical facts to creating stories for children—making the journey both informative and entertaining.

Users can ask detailed questions and continue the conversation, seamlessly interacting with external knowledge sources and in-vehicle controls interchangeably, e.g.:

  • “What’s the most scenic route from Paris to Bordeaux?”
  • “What are some historic attractions along the way?”
  • “How far am I from the first one?”
  • “What is the weather like there now?”
  • “Roll down the windows and navigate me there.”
  • “Find the nearest electric vehicle charging station.”

We are starting to see real world applications of AI in a really useful environment.

You can’t use your phone while driving which means no abailty to type into your phone without pulling over. But you can talk and listen. Ai in cars is a game changer and Soundhound has first leader advantage.

First quarter earnings announced in May (before this deal) were impressive.

  • 73% year-over-year revenue increase
  • 66% gross margin

They did lose $33million for the quarter but have customer order logs worth $682million and that is up 80% on last year. Seems like everyone wants to buy their product now.

It’s not just cars that are using voice Ai. Jersey Mikes Subs uses Ai voice for customer ordering.

Voice Ai is going to be everywhere. Soundhound is at the forefront.

The stock is around $6.20 now and I have no idea where it could go to. I’ve learnt that when it comes to Ai, trying to predict tops is useless.

Get in now before everyone knows about it.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.