04 Sep Capital 19 Catch-Up
Weekly Index Movement
S&P500 | +2.5% |
Nasdaq | +3.2% |
Aussie All Ords | +2.1% |
Stocks closed out the last week of August in rally mode after falling for much of the month.
The Nasdaq Composite led gains, rising more than 3% last week while the S&P 500 gained 2.5%. The Australian All Ords lagged its peers, rising 2.1%.
US markets will be closed on Monday in observation of Labor Day, with updates on the services sector, the Federal Reserve’s latest Beige Book report, and a smattering of corporate earnings serving as highlights in the week ahead.
I’m happy to see August come to an end. Bring back the steady increases we saw in the first half of the year please!
Unfotunately September often does not provide much joy.
The chart below shows the median performance of the S&P 500 and each individual sector since 1990 (when daily sector data begins). For the S&P 500, its median performance during September has been a decline of 0.23%. Along with it, more than half of all sectors tend to decline during the month with Consumer Discretionary (-0.79%), and Real Estate (-0.60%) doing the worst, while Energy (1.68%) and Utilities (0.61%) have managed to buck the broader market trend.
September has historically been weak for stocks, but it comes with an important caveat. The S&P 500’s performance in September has historically tended to be positive in those years when the index was already up by double-digit percentages on a YTD basis through the end of August. As it has been this year.
When the S&P 500 was already up at least 10% heading into September, performance was positive for every sector, and all but two had median gains of at least 1%. Leading the way higher, in the ten prior years when the S&P 500 was up 10%+ YTD, Energy and Financials each had median gains of 3.44% and 2.96%, respectively.
The blue bars are the years similar to this year. Note Energy and Financials as the standout performers.
Of those two, stick with Energy.
Financials have headwinds coming. U.S. regulators on Tuesday unveiled plans to force regional banks to issue debt and bolster their so-called living wills, steps meant to protect the public in the event of more failures. All American banks with at least $100 billion in assets would be subject to the new requirements, which resemble rules that apply to the world’s biggest banks.
No surprise here. After the mini-crisis this year they were always going to impose further regulation on regional banks. The issue is one of cost. When you are small but have to meet the same rules as your large competitors your margins are going to get squeezed.
AI Boom
I’ve been thinking more this week on NVidia and whether I should just admit defeat, follow my FOMO and just buy it.
Then I came up with a better plan.
Nvidia (NVDA) is currently viewed as THE engine powering the AI boom. AI needs a lot of power and to work it needs to do lots of calculations simultaneously. Graphics work the same way. NVidia has been the leader in graphics chips for some time (AMD might argue the case about this) which is why it is NVidia chips that everyone has been buying to power their AI engines.
It is rumoured that ChatGPT runs on 10,000 of NVidia’s most powerful chips. Which helps explain the 200%+ gain in the NVDA share price this year.
Without NVidia there is no AI. Kind of like back in the 1990’s when Cisco (CSCO) was powering the engine of the Internet. So we can look at what happened to Cisco as a potential path for NVidia.
At the peak of the Dot Com boom in March 2000, Cisco was the largest company in the world and surprise, surprise, when Cisco started making money hand over fist, competitors (like Juniper) popped up like bindis in my backyard at the start of summer.
Cisco rallied 93,000% in the ten years leading up to its all-time high on March 27th, 2000. By that measure NVidia still has room to run as it is only up about 13,000% in the last 10 years.
After hitting that peak Cisco shares fell around 88% and still have not recovered that high. Nvidia is only at the start of its journey, and could well push a lot higher, but history shows competitors will show up to ruin the party at some point.
Talking of competitors, NVidia’s long time competitor in the graphics card space has been AMD.
At present the AMD MI250 chip runs at only 80% of the speed of the NVidia A100 chip. Which explains AMD sales of $1.3B verses NVidia’s $10.3B.
Nvidia has a new chip coming out, the GH200 that has 141GB of memory.
AMD is about to release the MI300X chip that comes with 192GB of memory.
Is this the beginning of competition to NVidia?
If you think so, AMD is a bargain right now and a wonderful alternative to paying too much for NVidia.
The only problem – AMD did not announce any major client sales for its new MI300X chip. But I suspect most buyers will wait and see before taking the plunge.
Big Trouble in Little China
China could be in big trouble. Evergrande is the world’s most indebted property developer and China’s biggest. Back in 2021 it asked for a share trading suspension as it tried to restructure its debts. It filed for Chapter 15 bankruptcy protection in the US last week and is facing more than 2,000 lawsuits. It has failed to complete developments leaving suppliers unpaid and homebuyers out of pocket.
It’s come up with a plan to restructure debt though and shares began trading again this week. And promptly dropped over 80%.
Another Chinese developer, Country Garden, reported a staggering loss just short of 50bn CNY, equivalent to roughly one-third of its cumulative net income since the second half of 2007. The chart below needs to be seen to be believed and illustrates just how massive the shock working its way through the Chinese financial system is.
If this was anywhere else, stocks would plummet. But as it is China the world is waiting to see how the government will react. In all likelihood they will step in and take over open projects. Their reaction here is key. There is an outside chance the world does not view their reaction as adequate and stocks will quickly tumble. But it is an outside chance so no need to take action yet. Just keep an eye on this space.
Bitcoin Bulls
Could we be on the brink of the next big thing for crypto? An appeals court in Washington, D.C., has opened the door for bitcoin exchange-traded funds. The court ruled against the Securities and Exchange Commission, which denied Grayscale’s application to convert the Grayscale Bitcoin Trust to an ETF. The decision could also benefit other companies that want to create bitcoin ETFs, such as BlackRock and Fidelity, as well as crypto bulls who see such an ETF potentially leading to more mainstream adoption. Bitcoin and Ether surged after the news, along with other major cap crypto coins. Coinbase, which is listed as the custodian partner in multiple spot bitcoin ETF applications, closed nearly 15% higher on Tuesday.
Another beneficiary was Iris Energy (IREN) which I have written about recently. It jumped 23% on the news. Iris mines bitcoins using 100% renewable energy and then sells the coins mined. The higher the bitcoin price the higher their profits.
They are like a BHP for Bitcoin. Well, maybe not a big BHP. More like a small BHP, more of a bhp.
But they are also diversifying their business. Last week they announced that they had purchased 248 Nvidia H100 GPUs for $10 million dollars. This purchase signifies the expansion into using the company’s existing data centers for adjacent computing markets, including generative AI.
Dan Roberts, the company’s CEO, stated:
“Leveraging our next-generation data centers into generative AI is an exciting opportunity, particularly given current industry shortages in rack space and compute. We believe demand for sustainable computing is unlikely to go away, and feel we are uniquely positioned to capture ongoing growth in the broader industry; whether that be ASICs for Bitcoin mining, or GPUs for generative AI and beyond.”
Bitcoin mining and AI both require huge amounts of power. Iris gets 100% of this power from cheap renewable sources making their cost of operations very low, as well as very green and attractive to buyers.
This chip purchase enables them to rent out their data centres to the AI bods and creates a second income stream.
As with all mining companies, revenues and profits are not consistent. But renting out servers for AI is.
It is a really nice diversification for an already attractive company.
The best bit – they are an Aussie company, but not listed in Aus. No problem though as you can easily buy them on the Nasdaq code is IREN.
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.