25th March 2024

Weekly Index Movement

S&P500+2.3%
Nasdaq+3.0%
Aussie All Ords+1.3%

Powell Unleashes Bulls

Last week was Central bank week and both Australia and the US surprised me.

First was Australia, Michelle Bullock walked the tightrope and delivered a message so neutral markets didn’t move. There was something in there for everyone and you can read it in whichever way you favour. She impressed me with the delivery that left markets still thinking rates have topped out but not sure when the first cut will come. No new information so no market moving event.

Second came Powell, he surprised me also. I was expecting a similar message to Bullock. What we got was a very clear message that rates are coming down this year, probably before inflation gets down to the 2% target.

“The other thing is, in the second half of the year, you had some pretty low readings, so it might be harder to make that 12-month window forward. Nonetheless, we’re looking for data that confirm the low readings that we had last year, and give us a higher degree of confidence that what we saw was really inflation moving sustainably down to 2%.”

“Strong hiring in and of itself would not be a reason to hold off on rate cuts, the job market by itself is not cause for concern around inflation. An unexpected weakening in the labor market could also warrant a policy response.”

On the slightly higher than expected inflation readings of the prior week:

“I think they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%. We’re not going to overreact to these two months of data, nor are we going to ignore them”

And on the path for interest rates

“We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year”

The Fed also releases what they call the Summary of Economic Projections which is where the Fed thinks economic measures will be at the end of the year. The SEP forecast 3 rate cuts by December.

Markets have been expecting rate cuts and now the Fed has confirmed it.

I bet you Australia does a similar thing. They always follow the Fed’s lead. So if you have a mortgage or car loan……hold on for just a few more months. Things will get better soon.

Of course, this confirmation released the Bulls who ran rampant over every Bear silly enough to stand in their way.

NVidia

On Monday Jensen Huang delivered a keynote speech and announced they have developed new artificial intelligence chips and software called Blackwell. The first chip in the lineup, the GB200, will ship later this year and is billed to be even more powerful than the “Hopper” H100s and similar versions that have powered an AI-boom and related stock surge. “Hopper is fantastic, but we need bigger GPUs,” Nvidia CEO Jensen Huang said Monday. The company didn’t say how much the GB200 will cost, though H100s cost between $25,000 and $40,000 per chip.

Nvidia (NVDA) shares won four upgrades from major investment research firms following the launch of new class-leading artificial intelligence products. It did not matter. Shares opened 2% lower and quickly succumbed to nearly a 4% deficit as bears jumped on the decline.

Bears seemed to be in total control. Then abruptly they were not. Nvidia shares completely reversed, finishing higher by 1%. The pattern should be familiar by now. Professional money managers continue to buy dips, even the most minor. They are worried about falling behind their benchmarks heading into the end of the first quarter.

It is very hard to see what could cause any kind of significant dip here. There are just too many buyers. But that is always the way with significant dips. You can never see them coming.

In other news, Apple is in talks to use Google’s AI in its smartphones. So no Apple created AI. They want to use their competitor’s product instead. Just another sign Apple has lost its way and the days of innovation are gone. Add to that the Department of Justice claiming the iPhone maker has built a monopoly at the expense of consumers. The DOJ is bringing a lawsuit against Apple.

Apple is now down about 14% from its prior highs, and it is down 8% for 2024.

What is wrong with the world? Apple spends billions on research and creates a product so good everyone wants it then the regulator decides it is too good and brings a lawsuit against them. Imagine if this was you. You create a company and because it is good the regulator tries to take you down and give your competition a leg up. What is the point in trying?

And then we come to Intel. Intel was awarded $8.5billion in CHIPS Act funding from the White House. This is part of an effort by the Biden administration to bring semicondutor manufacturing to US soil. Why didn’t Nvidia get this? Because only Intel has manufacturing capability in the US.

I don’t think I have ever said buy Intel because, like Apple, I couldn’t see any real innovation. But this is interesting news. The deglobalisation program could benefit them greatly and the company could well be worth a little dabble.

Bitcoin

Tuesday saw Bitcoin down over 6% for its worst day in over a year.

Something you might not realise is Bitcoin has no central exchange. It means there is no one Bitcoin price. The price of Bitcoin you see is what your exchange says it is, but if you look at a different exchange you might well see a different price.

This became apparent on Tuesday. Bitcoin is currently trading at just over $63,000, but overnight on one exchange (BitMex), it crashed down to $8,900 due to a large number of sell orders totaling $55.5 million. For an asset class that is worth over $1 trillion, a $55 million sell order causing a crash of that magnitude certainly doesn’t suggest a lot of liquidity.

That in itself says it is not an investible product in my books. How can you seriously invest in something that goes from $63,000 to $8,900 in seconds?

Stocks trade on an exchange with protocols to stop this kind of thing happening.

Bitcoin has a long way to go before it can be treated seriously.

Valuations

Valuations alone are not an investment edge. Everyone on Wall Street owns a calculator. Knowing that the S&P trades for “X” times future earnings is therefore baseline knowledge, not the decisive piece of information upon which to make investment decisions.

Everyone thinks stocks are expensive right now. But are they?

The Schiller price/earnings ratio is one such way to value stocks and at face value you could say stocks are expensive.

This graphic shows you a bit of long-term history for the Schiller PE.

The Shiller PE in 1990 was 17. It is now double that at 34. On face value it looks like stocks are expensive.

But I say they are not.

Look at the companies that make up the Top 10 in 1990. Energy is notoriously cyclical. Retail – cyclical. Pharmaceutical – cyclical.

But look at 24. Pretty much all Tech with consistent earnings.

I’d pay twice as much for consistent earnings than cyclical earnings.

Which comes back to the original point. Turning a complex environment into one basic number does not give you a basis for outperformance. It is not enough to look at something and say “oh this is undervalued” or “that is overvalued”. Investing is much more complex than that.

15 Year Anniversary

March 9th marked the 15-year anniversary of the low during the Financial Crisis of 2008. From that point the S&P500 is up 900%. Large-caps have outperformed small-caps (641%) but both have smashed global equities with the MSCI All World ex US ETF (CWI) up just 275%.

In Australia, the ASX200 is up just 49%

But…….the real performer is the Nasdaq 100, that is up 1,850%. The ETF I mentioned last week, XLK, is up the same amount.

It baffles me why anyone looks to the ASX for growth. The above shows you that it just does not happen. That is because of our culture that lacks innovation and growth but also because Australian investors are so in love with dividends.

If you want income, then yes the ASX makes a lot of sense.

If you want growth…..you are not going to get it from Australian equities.

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.