26th February 2024

Weekly Index Movement

Aussie All Ords-0.1%

Bulls pushed markets higher again last week, mainly due to extremely strong quarterly earnings from NVidia (NVDA)

The S&P500 added 1.7% for the week and finished at record highs. Last week was the 15th advance in the past 17 weeks. Every time the rally from the October lows seems to be fading, the Bulls regroup and make another run to new highs.

I have to talk about Nvidia (NVDA) this week. A blockbuster earnings report turned it into the third most valuable company in the US behind Microsoft (MSFT) and Apple (AAPL). The San Jose, Calif.-based company posted quarterly sales of $22.1 billion, up 265% on last year. Executives also said that revenues next quarter will rise to $24 billion, a phenomenal result for a business that generated only $6.1 billion a year ago. Nvidia shares surged 18% on that news.

It truly is remarkable that Nvidia can continue to grow at this pace and just shows that AI is the only place to be right now.

Nvidia is now worth more than the entire ASX200 added together.

The company also said they are working on a chip that will meet the rules to allow sales in China. The Trump administration introduced rules to stop chip makers selling into China, and the Biden administration has kept them going. But Nvidia thinks they can create something that meets the requirements. That could open up a very large extra market for them.

But I cannot bring myself to buy it now. If you already own this stock, continue to hold, as momentum is an extremely powerful force that you cannot ignore. But I just cannot bring myself to buy more at these levels.

When the stock price increased by 400% recently I thought it was well overdone. But, somehow, the company has managed to increase earnings by MORE than 400% in the last year. The AI believers got it right. If you take the quarterly earnings of $5.16 and multiply that by 4 to get an annual number – Nvidia is trading on a PE of 39, which doesn’t look so bad.

I just don’t think it is sustainable. Companies are building out data centres but once built they can last several years and we just go through a replacement cycle. It is kind of like the advent of mobile phones. For the first few years, advancements meant people changed their phones regularly. Now each new model is much like the old one, people hold on to their phones longer. The same will happen with AI.

In fact, this change is already happening. NVidia won the battle to produce chips for the incredibly difficult task of training AI. But the battle is shifting now to chips in data centres that will enable billions of users around the world to access AI. This market is much bigger but also more competitive as other companies like Qualcomm and AMD have viable alternatives.

The market’s delusions in the case of AI are not on the valuations of companies that are meeting the physical demand for chips that dramatic new investments in the space require.

Instead, the delusion is over the chip buyers and how long this pace of breakneck investment can be maintained. AI still has no widely accepted revenue model, is dependent on rapidly depreciating server farms that carry significant operating costs, and is receiving real investment at a scale much larger than the GDP of most countries. If that’s not a recipe for a misstep I’m aren’t sure what is. Of course, I am not a computer scientist offering the promise of dramatic, revolutionary technology. But as witnesses to prior periods of excess, I struggle to not gawk at the obvious parallels.

The beauty of speculation, of course, is that time scale matters greatly. While everything about the surge of investment into AI bits (and atoms) screams unsustainable excess, that doesn’t mean the market cannot continue to run from here.

And that is why you cannot short this stock and you should continue to hold.

In the meantime, there is a very real macroeconomic challenge for the FOMC posed by AI. Speculative investment is fueling aggregate demand and creating very easy financial conditions. While Panama and AbbVie (ABBV) have nothing to do with AI, their bond sales benefitted from the huge decline in corporate bond risk premiums that strong equity market price action creates. Don’t be surprised if very loose financial conditions fueled by AI mania end up pushing the Fed into a later cut than would otherwise be the case.

This bull market is happening outside semiconductors too. Banks are hitting new all-time highs. Even Japan’s Nikkei 225 made a new all-time high for the first time in 34+ years. Benchmark indices for the European region overall as well as large-cap stocks in France and Germany also closed at new all-time highs.

There is no denying this bull market and we are nowhere near the top.

Index Investing

There was a change to the DOW 30 index announced last week. Walgreens Boots Alliance (WBA) is out and Amazon (AMZN) is in, effective this week. The swap is an effort to rebalance the price-weighted measurement of 30 stocks with increased consumer retail exposure after Dow component Walmart’s 3-for-1 stock split lowered its weight.

The DOW 30 is a curious index. A panel decides which companies should be in it and the idea is they are representative of the US economy. The index is also weighted by share price which means United Health (UNH) has the largest weighting.

This table shows all the changes since 1999.

Some people think that share prices increase when they are added to an index as the index funds must now go out and buy them. But this table does not prove this. There does not seem to be any real performance difference between being added or deleted.

Looking at these changes does illustrate why index investing works. Take 1999. They took out Goodyear and Union Carbide and added Microsoft and Intel.

This is why indexing works. It is because someone changes the index to include the next big value creator so you don’t have to. By owning the index you will always get exposure to the companies driving growth. The other curious thing that happens is with weightings. The Dow30 is odd. But the S&P500 is weighted by market cap so as the company becomes more valuable so too does its weighting in the index so you get more and more exposure to that growing company.

Consider this fact – only four of the 10 S&P500 sectors are outperforming the index. They are communication services, health care, financial services and technology……..and, just one stock in each sector is responsible for these gains.

Meta is 27% of communication services and it’s stock is up 38.8% this year. That effectively gives the sector 10.5% of gains, and the sector ETF is up 9.7% overall. So everything else in the sector is pulling the sector down and just META is pulling it up.

Similar thing in Healthcare. Eli Lilly is up 32% with a 10% sector weighting adding 3.2% overall for the sector which is up 8.4%. Without Eli Lilly the sector would only be up 5.2% and would be underperforming the index.

In Financial Services it is Berkshire Hathaway. Stock up 17% year to date which adds 2.3% to Financials which is up 7.2%. Without Berkshire the financials sector would be underperforming the S&P500 index.

Lastly Technology. It all comes down to NVidia. Stock up 59% which makes up 3.3% of Tech’s 6.7% gains. Without it, tech would be underperforming the major index.

The message here is, buying individual stocks means you can easily miss out on gains if you miss just the handful of leaders. But owning the index means you will catch the gains these individual companies add.

If you like this idea of lazy investing – buy XLK. That is the tech sector part of the S&P500 as an ETF.

And here is why doing that is a good idea.

Gains Since COVID

Sunday, 19/2/24 marked the four-year anniversary of the US stock market’s peak closing level just before COVID hit in 2020.  February 19th, 2020 was an unremarkable trading day that saw the S&P 500 rally about 0.5% and gold hit its highest level since 2013.  At that point, the novel coronavirus was taking a serious toll on China, but there was still only slight anxiety and nervousness about it having a major impact on US shores.  By the following Friday (28/2/20), we were writing about the biggest one-week drops in market history, and by March 2nd, essentially everything was in extreme oversold territory.  Ten days later on the morning of March 12th, equity futures were trading limit down after President Trump addressed the nation the night before.  By March 23, 2020, the S&P 500 was down more than 33% from its 19/2/20 closing level, and while COVID’s impact on the world was far from hitting its peak, that day marked the ultimate low of the COVID bear market for stocks.

It’s hard to believe four years have already passed since COVID hit.  In some respects, it feels like just yesterday, but in other ways, it feels like an eternity ago.  At any rate, below is a look at the performance of key ETFs across asset classes since the pre-COVID peak on 19/2/20.

The single best-performing ETF from all those different classes – XLK. And it is hard to form an argument that it won’t be in the next 4 years too.

Iris Energy – IREN

I tipped IREN for you last year as a good growth opportunity. It was around $4.50 at the time and is $6.00 now so you should have acceptable gains.

But I think it is now time to sell the stock.

They reported numbers last week. Profits came in at $ 14 million verses a $ 21 million expectation and it was “other” costs that dragged it down. One of those “other” costs was $ 4.3 million in employee compensation. It looks like the directors paid themselves a nice bonus at the expense of shareholders. That annoys me,

More annoying is the fact they raised money by selling more shares. Share float increased from 64.7 million to 82.4 million. This was done around $4.75 which was way too low. I get they needed to raise some money but to pay a fat bonus and then raise money is daft.

What it means is it is now 27% harder for the share price to gain in value. Plus costs are running around $14k per bitcoin mined and that is before the halving.

Sometimes your winners are disappointments. This appears one of those cases. Maybe I’m wrong and this catches some major AI bid. Until then, my guess is this will be range bound, reinforced by management’s heavy hand at issuing shares and paying itself.

Sell them now and take your gains.


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.