05 Aug 5th August 2024
Weekly Index Movement
| S&P500 | -2.1% |
| Nasdaq | -2.1% |
| Aussie All Ords | -0.1% |
Finally I get something to write about. Markets have been boring all year but now we are getting what I have been waiting months for. A time to buy.
At the time of writing the Nasdaq is in correction territory, down 11% from its highs and the S&P500 is down over 5%. The semiconductor index (chip stocks) is in a bear market being down over 20%.
Why? Because we are in a classic mid-cycle growth scare phase.
Bull markets start with enthusiasm for things becoming better. They continue when fundamentals show improvement. But around the mid-cycle, traders get worried it isn’t mid cycle and is rather the end of the cycle. But they are nearly always wrong. This time is no different.
It was an exciting week. Stocks first rallied because Powell came as close to saying there will be a rate cut in September as a shave from a gillette razor.
Officially the Fed statement said:
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
But in the press conference after Powell said:
“a rate cut could be on the table at the September meeting”, “the reduction of the policy could be as soon as September”, “base case [is] that policy rates would move down from here”.
Which is what the market had been pricing for some time.
But then on Thursday we got manufacturing data that was a little weaker than last time and the market reversed all the Wednesday gains.
On Friday we got employment numbers. This is where it gets interesting.
The US added 119,000 jobs in the month. The run rate has been about 250,000. But note it added over 100,000 jobs in a single month.
Unemployment rose from 4.2% to 4.3%. A mere 0.1% increase.
Wage growth came in at +3.6%. The same as the upper end of the range in 2019, before COVID.
Reading those numbers – are you thinking. Oh we are likely to have a recession?
Me neither.
But for some reason the market traded like we are.
Stocks fell 2% on Friday and at the time of writing today, Futures are down 2.5%, predicting more selling tonight. Japanese stocks fell 12% today, which was big but they have been falling for a few days now after their central bank increased rates by 0.25%.
The employment news on Friday increased the odds of a 50bp cut at the September meeting from 7% to 74%.
The Fed has not cut by 50bps outside a recession before, so you can see what short-term traders are thinking.
It is ridiculous. But ridiculous means opportunity.
We are an awful long way from recession and the Fed can cut many times to stimulate growth if they think the economy is slowing.
The stupid thing about this selling is – the whole point the Fed increased interest rates was because inflation was too high. Employment was too good and wage growth very high causing more inflation.
Wage growth is still now the equivalent to the highest that it was in 2019 before COVID so how is that possibly a negative signal?
Powell sees the labour market weakening as “normalisation” rather than the ominous sign of a looming recession. I see it the same way. Most measures are back to where they were pre-Covid and no-one was talking recession then. Things are just back to normal after the excessive money printing due to Covid.
This move is brilliant. If you have cash and want to buy a bargain
Do it now while you can and before everyone realises how stupid this amount of selling is.
The Great Rotation
Something interesting is happening to US stocks.
The leading three sectors are all retreating and these are the 3 that contain all the Mega Cap Tech.
But look what is happening to the other sectors……
As tech is falling money is flowing into everything else.
This is an extremely good sign for the ongoing bull market.
I suspect this will continue for a few more weeks, but once October hits, I’d be betting this reverses and money goes back to Tech.
CrowdStrike
I probably should have spoken about this last week, but I have had a few questions so here is my take on it.
Crowdstrike provide internet security services to other companies to keep them safe from hackers. On 19th July 2024, it distributed a faulty update to its security software that caused widespread problems with computers running Microsoft Windows. That led to outages for many companies for several hours.
The stock immediately fell about 8% on the news and has continued to fall. It is now down over 30% from just before the problem.
So is it a buy now?
All companies make mistakes. But mistakes are about the only way a company really learns and improves processes. Rolling out a faulty update is just a mistake and you can bet the company went through a thorough internal investigation and will make changes to make sure it does not happen in future.
It will therefore be a better company as a result of this.
Which makes it sound like a buy.
Except, the story is not over. The question is, will they need to pay compensation to customers? Will they keep their customers?
I suspect they will keep the vast majority of customers as those customers won’t abandon them due to one error. But there will likely be a hit to revenue (offering discounts) or expenses (compensation). Delta Airlines has said they are seeking damages.
These negative stories will keep the stock price depressed for some time.
There will be a time to buy Crowdstrike. Just not now. Wait it out and give investors time to forget the event. Only then will the stock recover.
Microsoft Earnings
It’s hard being a market leader. Microsoft announced earnings on Tuesday. The tech giant’s overall sales and profit growth beat expectations in the latest quarter. But revenue for its Azure cloud business—a central part of its AI operation—rose 29%. That was below the prior quarter’s 31% growth and lagged behind analysts’ expectations it would rise by 30%.
The result – the stock got sold down 7%, although it quickly recovered to be down only 1%
Imagine beating on sales and profit, but a 29% growth in one segment is not enough so investors dump your stock.
It’s just silly. Their loss is our gain. The stock is down 12% from its high and is the same price as it was back in March of this year.
If you have been watching it power higher since March and wishing you had bought it….now’s your chance.
One interesting point I saw in the details was Microsoft has had success reselling OpenAI’s artificial intelligence to its cloud customers, a core part of its plan to build a new multibillion-dollar profit machine. New data show which customers are powering the business. TikTik, for instance, was paying nearly $20 million per month to buy OpenAI’s models through Microsoft as of March… That was close to 25% of the total revenue Microsoft was generating from the business, when it was on pace to generate $1 billion annually, or $83 million per month.
Seems someone apart from the chipmakers is starting to profit from Ai
Meta Earnings
Meta said quarterly digital advertising grew rapidly while the company’s investments in artificial intelligence and the so-called metaverse weighed on profits. The company’s sales increased to $39.1 billion, up 22% compared to a year prior.
The result was well received with the stock jumping 8%.
It takes investment today to create the growth of tomorrow. The fact Meta is using today’s excess profits to fund projects that will bring more excess profits in future is what well run companies do.
Note it did not decide to pay a large dividend like an Australian company would. It spent that money to ensure even more future profits. It’s called delayed gratification for shareholders. Next time you get a big fat dividend ask yourself – do I really want this or would I prefer the company I own invest in the future to grow sales and profits?
Apple Earnings
Apple shares were up more than 6% on Friday morning as the company announced the biggest buyback in corporate history and AI developments get closer to fruition. Prior to Friday’s trading though, AAPL was down more than 12% from 2023 highs in December amid concerns around slowing iPhone sales, especially in critical markets like China, and some uncertainty around Vision Pro sales. This quarter Mac, iPad, and Apple Watch installed bases all reached all-time highs along with record revenues in a number of countries. Despite an “uneven macro environment,” AAPL managed to beat on the top and bottom lines, with shares up on earnings for the first time in a year.
Mind you, Warren Buffet has dumped half of his massive position in Apple. It is still by far his biggest holding, but he sold an awful lot of it in the quarter. Does he know something we don’t?
Lastly, a bit of Fun
A lot has been said about comparing NVidia’s gargantuan run to what Cisco did back in the 1990s.
Here is an update from Deutsche Bank
If this graph is right, it is scary how close the two moves are. It is also scary to see what Cisco did next.
Will history repeat?
I hope not or there will be a lot of people hurting.
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.