Capital 19 Catch-Up

Weekly Index Movement

Aussie All Ords-1.1%

Hopefully you didn’t listen to me and buy everything two weeks ago as things have become a fair bit cheaper now.

Stocks entered correction territory last week, down about 10% from their peak in late July. A renewed run toward 5% on the 10-year Treasury yield and mixed earnings reports from mega-cap tech were the sparks for the S&P 500 to hit its lowest point in five months. While the “Magnificent Seven” (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA and Tesla) have powered the rally since last year’s bear-market low, they have also been the ones to drag major indexes lower since mid-October. Is the recent market turbulence part of an uncomfortable but normal correction, or the start of something bigger?

I’m in the “this is just a correction and we are close to a bottom” camp so will be buying more here, not selling.

Here are ten reasons to back up my view

  1. The economy is strong. GDP came in at +4.9% last week. We are a long way from a recession.
  2. Inflation continues to fall. PCE (Fed’s preferred measure) fell to 3.7% last week from the prior 3.8%. Yes we still have a long way to go and it is falling slowly, but it is going in the right direction
  3. We are close to the end of this Fed hiking cycle. We might possibly get one more hike at some point, but that will be it, after that, we will be on hold for a while and then the next move is down. Stocks look 6 months forward so they are already thinking about a drop in rates.
  4. Bond yields are peaking. After hitting 5% twice, the 10yr bond yield has fallen away and is now 4.84%. All stocks want is a stable yield here to head higher and it looks like it is happening.
  5. Valuations have improved. The forward S&P PE ratio is now 17, down from 19. Yes it isn’t exactly cheap but it isn’t overvalued either. In fact, if you look at the equal weight S&P PE ratio it is 14 – and that is cheap. The standard index PE is heavily influenced by the high PEs of the big 7 stocks. But they deserve those elevated values due to their consistent growth. More on that later.
  6. After three consecutive negative quarters, corporate profits are on track to return to growth in the third quarter and are expected to improve further through 2024. Solid demand is driving a reacceleration in revenue growth, while the decline in material and input costs is likely to help profitability rebound
  7. Manufacturing activity has been in contraction for most of the past year. But the S&P Global PMI survey released last week returned to expansion territory in October and appears to be curving out of a bottom.
  8. Oil prices have been stable. Despite some turmoil in the Middle East, Oil is still around $84 and not adding to inflation.
  9. Sentiment is no longer complacent. While sentiment among investors was very positive and in some cases euphoric during the summer months amid enthusiasm around AI and stronger growth, the mood has turned darker as of late. These swings in emotions are reflected in the AAII Investor Sentiment Survey, which showed a bulls-to-bears ratio of 2 in July vs. a 0.68 ratio currently. This is a contrarian indicator as retail investors usually get it wrong.
  10. Season factors turn positive in November and December.

There you have it. My bull market case. Let’s see if my argument holds true over the next month.

Earnings Announcements

We had some big names announce last week and in general it was all positive.

Amazon (AMZN) rode a $1.2bn pretax valuation gain on Rivian (RIVN), its EV delivery truck supplier, to a 62% EPS beat. Total revenues were 1.6% higher than estimated despite a modest 0.3% miss for AWS revenues. Excluding FX, AWS sales were up 12% YoY. The stock jumped about 7% on the news.

Meta (META), the social media giant, beat revenue estimates by 2% but guided Q4 revenues 1% lower than estimated. Monthly active users were in-line and daily active users beat. The company’s Reality Labs segment of metaverse/augmented reality businesses continues to burn billions; operating losses were slightly lower than expected at $3.74bn but the unit generated a dismal $210mm of revenue in the quarter, two-thirds of what had been estimated by analysts. Guidance is for those operating losses to rise further. 2024 guidance for total expenses was 2% lower than feared by analysts but will still be up 7% at the midpoint on growing payroll and infrastructure costs. The underlying business is clearly healthy but the scale of cost growth and capital plowed into businesses consumers have no interest in remains remarkable. META was flat on this annoucement.

Microsoft (MSFT) smashed it out of the park. Revenues rose 13% YoY and topped estimates by 4% as all three segments beat estimates. Cloud revenue was 2% higher than expected and is growing 24% YoY and actually re-accelerated in Q3 having fallen to 21% growth in Q2. Total YoY constant currency revenue growth was up 12% versus 9% estimated. Bottom line results showed adjusted EPS topping estimates by 13%. The stock added 8%

Alphabets (GOOGL) results were much less clean than the across-the-board beat from MSFT, though a range of results were still very positive. Cloud revenue missed by 2% as total revenues ex TAC were 2% higher than estimated. EPS was firm, beating by 7%, but the sales miss in cloud was joined by a 39% operating income miss for the segment. Management talked up a “continuing focus on making AI more helpful for everyone” and “AI-driven innovations” but the slowing growth of cloud and a full company operating income miss were not good news. The stock fell almost 10% on this news and is looking an attractive buy here.


Bad news for our RBA last week. The Consumer Price Index (CPI) rose 1.2% this quarter. The most significant price rises were Automotive fuel (+7.2%), Rents (+2.2%), New dwelling purchase by owner-occupiers (+1.3%) and Electricity (+4.2%). Over the twelve months to the September 2023 quarter, the CPI rose 5.4%. This marks the third consecutive quarter of lower annual inflation and down from the peak of 7.8 per cent in the December 2022 quarter.


Inflation is still way too high and only fell 0.6% over the 3 month period since the last report.

The RBA needs to act here. I suspect they will. In fact, I think they need to throw 4 rises at it and add a full 1% to the overnight rate.

US inflation is at 3.7% and the Fed is afraid it is becoming entrenched. Once inflation digs itself in, it is harder to move than the South African rugby scrum. (congratulations SA on becoming the most successful team in World Cup history).

Australian inflation is 5.4%. If the Fed is worried, the RBA should be pooping their pants.

The RBA must act. With Albanese announcing a new $2billion spend for critical minerals and lower taxes due in July next year, if the RBA do nothing, inflation will not only become entrenched it will rise. They must act and act decisively.

Which will greatly upset middle class home owners, but please retirees. Except those retirees won’t like seeing their bank stocks fall (why take equity market risk to get a 4.5% dividend when you can get 5% risk free in a term deposit?)

Most readers of this missive will be long US stocks and will be sitting on significant FX gains right now.

If I am right about the need for the RBA to act, the AUD will rise and you will see those FX gains disappear.

Unless you do something about it. It is relatively easy to hedge your currency and lock in these FX gains.

Give us a call to discuss if you are not sure how to do it.


You know I am not a big fan of Bitcoin. But I must admit it isn’t going away. It will never replace a currency or be a medium of true exchange because it is too volatile and impossible to reverse a transaction (that cancels any ability to use it for trade as errors are irreversible).

However, as a store of wealth, like gold. It might have some merit. Once they can sort out a truly secure way to hold it so you don’t have to worry about your money going up in smoke when you wallet collapses like FTX.

There a couple of things coming that are bullish for bitcoin.

First is regulators becoming more open to the idea of listing a bitcoin ETF. (We already have access to bitcoin futures here at Capital 19 – call us if you want to know how to buy them). BlackRock, Franklin Templeton, VanEck and WisdomTree have all applied to launch a bitcoin ETF and the SEC seems to be relaxing its decade long ban on the idea.

If one of these big guys can get one launched, that adds a whole lot more buyers into this market.

The second event is the next halving.

Bitcoins are created in blocks every 10 minutes, and it’s coded so that every 210,000 blocks, or about every four years, the number of bitcoins you can get per block drops by half.

The first halving took place on November 28, 2012, and cut the mining reward per 10-minute block from 50 to 25. The second was on July 9, 2016 – from 25 to 12.5, and the third was on May 11, 2020 – 12.5 to 6.25.

The next halving is scheduled for April 13 next year when the reward for mining will drop to 3.125 per block.

When this happens, it removes supply from the market.

According to Dan Roberts, CEO of my favourite Bitcoin miner – Iris Energy (IREN):

“If you look at the …metrics for Bitcoin 90 per cent of all Bitcoin haven’t moved in the last month. 70 per cent of all Bitcoin haven’t moved in the last year. The nature of it as an asset is you get these long-term holders that understand the value of it long term, bottom draw it and they’re off the market.”

So we have a possible increase in demand and a definite reduction in supply coming. That’s a pretty good setup for gains.

You can get long Bitcoin futures through your Capital 19 account, or you can buy IREN.

A quick recap on Iris Energy (IREN) for those who didn’t read it last time.

IREN is an Aussie company but listed on the Nasdaq. It is a Bitcoin miner and has a simple business model. Mine coins and sell them. Profits come from the difference between cost and sale price.

The interesting thing is IREN has built its servers next door to renewable energy sources and so, apart from being good for the environment, it also has a very low cost of mining (the cost of electricty needed to power the servers is a major cost for a miner)

They have also just recently purchased 10,000 NVidia chips so they can rent out space on their servers to that other high-energy business – AI. A second income stream is never a bad thing.

You can buy IREN now for around $3.20 per share and it will fly in the Bitcoin price improves.

Next Week

The Fed meets Tuesday and announces its interest rate decision on Wednesday. They will probably not move but Powell’s words will be parsed heavily looking for indications of whether they will raise next time.

Company earnings continues but are beginning to slow.


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.