29 May Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords||-1.8%|
Regular readers will know I have been worried about this debt ceiling. Not because they wouldn’t raise it, of course they will raise it, as that is where their pay comes from, but the concern is in how they raise it.
Back in 2011, they raised the debt ceiling. After it was done and details released, the rating agencies downgraded US credit. Not because the ceiling was raised, but because there was no plan to manage future debt levels. The S&P promptly fell 16% on the credit downgrade.
Biden and the Republicans seem to be poles apart. In typical Democrat fashion, Biden wants to raise and spend. The Republicans are not against the raise. They just want measures to get things in order in the future.
The failure to reach any kind of agreement last week initially caused traders to sell stocks. Yellen told us a few weeks ago that the Treasury would run out of money on June 1st. With the date fast approaching and a possible first-ever default, the pressure was on.
Until Friday when Yellen came out and said “New deadline is June 5th”. Stocks jumped 1.3% because the possible default had been pushed back 4 days. Ridiculous stuff.
Over the weekend we have learned the parties have reached an agreement. Funny they should be able to do that just before the start of a long weekend. Clearly, heading to your Hamptons house in Spring is far more important than responsible government spending.
This agreement has to get through a Congress vote, but one would assume that is a formality. And that magical new date of June 5th gives them just enough time to get it done. Even if not, I expect Yellen to pull another magical date from the air if there are any delays.
On face value, it would appear the risk is over. But it isn’t, we still need to see how the rating agencies react. Fitch has already put the US on negative watch.
The other ridiculous event of the week was NVidia (NVDA).
This is a $700 billion computer chip manufacturer. It posted earnings on Wednesday and the CEO said he expected revenues to be 50%+ higher next quarter due to demand for all things AI chip related.
The stock jumped 25% on the news.
Nvidia added $200 billion in market cap because they are making a few chip sales. To put this in perspective, the entire market-cap of McDonalds is $209billion!
Shall we all rush out and buy Nvidia then?
The bull case is every company is going to be forced into AI applications because their competitors will. (JPMorgan is developing IndexGPT to give AI investment advice). This AI rollout will need to replace all existing data centres etc and so there are several years of sales for Nivida coming.
The bear case says, technology replacement cycles typically last 4 years. Once a firm purchases new equipment they don’t need to do that again for 4 years. Yes, NVidia sales were good, but can they keep this growth coming? Do they have the size to scale up production and see even higher sales or is this near the high point? How long can they maintain it for? Because on a PE of 200 they really need to hit massive growth numbers.
Think about it, if the stock drops in value by 50%, it would still be trading on a PE of 100. Apple trades on a PE of 30. Even overpriced Tesla trades on a PE of 54.
So 200? That is just plain ridiculous and there is no way I will be buying it.
Reminds me of Sun Microsystems from back in the dot-com bubble.
When the bubble burst the stock fell 95%
This is what CEO Scott McNealy said after the burst
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?
NVidia right now is trading on 35X Revenue.
Nvidia is clearly in an AI bubble. The problem with bubbles is they can go on expanding for longer than you think.
To answer the question of whether NVDA is a buy right now – that depends on your time horizon. Want to make a quick buck in the next month or two? Probably yes. Looking to add something to your portfolio for the next 5 years? Probably no.
Regardless of whether AI is a bubble or not, this kind of action shows we are very clearly in a bull market. It wants to head higher. All my caution is probably misplaced. We should probably all load up on MANTAMA (Microsoft, Apple, NVidia, Telsa, Amazon, Meta, Alphabet). Or just buy FNGU and make it easy. Just don’t hold for long as it won’t last forever. (FNGU was up 10% on Friday)
The most amusing piece about Nvidia, is that the hype-taking idiot who had destroyed more money for moms and dads than Cramer, Cathy Wood, sold her Nvidia position at around $235 per share saying the valuation was very high. Strange from the person who only buys unprofitable-super-high-valuation-tech. But hey Cathy, you can’t win them all right? Or in her case, pretty much any of them.
Of all the ridiculous things this week, this one takes the cake. I read this week that Billionaire Mike Cannon-Brookes is in final discussions to acquire collapsed solar megaproject Sun Cable. The A$30 billion project to build Australia’s largest solar farm and transmit the power by subsea cable to Singapore has become the source of a stoush between the tech tycoon and fellow billionaire Twiggy Forrest.
Am I the only one who thinks it is ridiculous that we should be building the largest solar farm in Australia, and instead of using it to reduce power bills for Australians, we are going to build a massive undersea cable to Singapore and let them have all the benefits?
If someone knows how I can complain about this and stop the power going to Singapore, please let me know.
A few other short headlines from this week that could prove important.
The core personal consumption expenditures index, the Fed’s preferred gauge of inflation, rose 0.4% in April. That’s more than economists polled by Dow Jones expected. Year over year, core PCE rose 4.7%, also more than expected. Inflation is not going away and accelerated last month. The Fed will react to this and raise rates again in June.
Poor old Germany is in recession. GDP came in at -0.5% for Q1 after -0.3% in Q4. Who would have thought that shutting down all your coal power plants then your nuclear power and buying electricity in from your neighbours would cause power prices to skyrocket so much industry slowed down. Idiots. But that is a good warning for Australia. I suspect there are a lot of Germans suffering from MorganMuffel. (Look it up)
Elon had an up-and-down week. He got to celebrate when his Neuralink company said it has won approval for human trials of brain implants in the US. Maybe I can stop JP Morgan’s indexGPT taking my job by inserting a Neuralink and hooking it up to ChatGPT to control my typing fingers.
But he was left with egg on his face with the failure of the announcement of the DeSantis presidential campaign. Usually, these announcements would be made in front of cable TV. Trump’s CNN town hall drew 3.3million viewers. Twitter crashed when 600,000 tried to view at the same time. They brought it back up after 20 minutes with a limit of 300,000. It would have been considered a disaster if it was on cable.
Musk has always viewed Twitter as a media company but this shows it is a long way from ousting traditional media for live events.
The last thing this week is this table I came across. It shows the stocks that have gone up 10 times in the last 10 years from the Russell 1000 index. Note none of these companies was big to start with. Growth like this only happens in the small end of town. If you want to 10X your money, you won’t do it buying today’s largest companies. You have to look down the lists and find those that have room to become big in 10 years’ time.
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.