Man in Black

No, it's not Johnny Cash, Will Smith, or Tommy Lee Jones. He's better at his job than those guys ever were.

Nvidia CEO Jensen Huang's net worth took another jump on last week's 'beat and raise' earnings report. And with no downside catalysts in sight, it looks like there's more to come. While you can whine about the valuation of the stocks involved or the concentration of the market, this market isn't done trying to chase the most compelling story since the commercialization of the internet - Artificial Intelligence. And the fastest-rising billionaire is the new kid on the block of superstar CEOs.

Ever since he and his colleagues cooked up a plan 30 years ago in a San Jose Denny's booth, NVDA's boss has been focused like the lasers in his semi-fabs on a plan to dominate the chip market. He has pulled it off spectacularly. It's a great story but even a greater validation of the winner-take-all business model that information technology creates. When you dominate a market, this is what you get. Each H100 chip Nvidia sells is produced at a cost of $300 - less than a set of golf clubs. But the list price is $25,000 - the cost of a golf club membership! I have never seen a company with a 98% gross margin that wasn't doing something illegal, but Huang has done it cleanly.

So does that make the stock a buy? Yes, yes, and no. If there isn't another competitive product from a supplier of consequence, the stock is bulletproof. If there was a company that could compete but wasn't publicly listed (or Chinese) the stock is probably still higher. But if the basic use case for Generative AI has been over-hyped in terms of productivity benefits, causing a decline in adoption rates, then the answer is no. Perhaps Google's warning this week is a preview of that reality check.

Trying to forecast the outcome of the AI gold rush is a mug's game. Last week, I argued for a cautious approach to the market should NVDA's earnings forecast 'miss'. So much for caution, they beat spectacularly. But notice I didn't say 'short' the stock or the market. The Risk Model was supportive and the pull-back in this week's reading is still in 'risk on' territory. But I can't help feeling a bit of déjà vu from the 2000 Tech Bubble era. Nortel was a scarring experience.

So the micro data is dominating the market now that investors have unanimously accepted of the soft landing/Fed pivot narrative. There is still too much money chasing too few stocks, but I'm seeing a bit of internal rotation and sorting out. This week's victim is Alphabet - $GOOGL. In their haste to compete in the AI arms race has caught them napping. Their Chat offering has bugs that weren't caught before their offering went to market. Down a quick 12% from the highs! They now have joined APPL and TSLA in the quickly diminishing MAG 7 that has dwindled to a Fab 4. Who's next?

Some of that money is finding other homes now. Breadth as measured by the AD Line has reached new highs on the NYSE.

The Health Care and Industrial sectors have had a surprising resurgence perhaps based on the re-shoring of America and positive revisions to growth. And JP Morgan has reached a new high, despite the CEO's imitation of Eeyore and his intention to keep selling stock. His call of the bottom in reverse last October is intact. Perhaps his bearishness is based more on the angst created by the fact that private credit and passive investing have eaten his core business's lunch lately. Either way, he seems to be fighting the tape a bit.

So the bull stampedes on. The only potential impediment I see is a sudden sharp increase in bond yields. The massive supply of fresh bonds this year has somehow been absorbed. Corporate issuance is at record levels at the same time the U.S. Treasury is increasing its offerings by the week. How long can it last? The narrative of lower rates that boosted stock valuations has similarly motivated a 'duration grab' by the bondies as they extend term. But if that is pre-loading their calendar for the year, and the economy reaccelerates as I expect, the merry-go-round of quiet rates markets may end abruptly. Stay tuned.

Meanwhile, back at the economy, Lowe's and Macy's numbers are weaker than expected given some support the the dwindling 'recession is imminent' crowd. That seems more of a market share issue as Costco and Amazon didn't see similar weaknesses. Real wage growth is slowly backfilling the inflation hole in the consumer's wallet, and that is at the heart of the soft-landing thesis. Extrapolating any trend in this choppy consumer deceleration is highly risky but the balance of risks argues for a reacceleration in Q2. in my view.

So we have to play the hand we have been dealt. Earnings surprises have offset the interest rate/valuation risks for now. The bond markets have started to absorb their fair share of excess savings that had been built up due to past recession calls from the 'Chicken Little' bears. The main characteristic of a bull market has been met since the October Dimon Bottom - more buyers than sellers. For now.

But the ultimate outcome is still a bit hard to see. Sort of like a man in black.

Risk Model: 4/5 - Risk On

Short covering and capitulating bears are powerful forces in this overbought market. For those who haven't seen a bull market before, it must be exhausting. But it is normal for narratives to take on lives of their own and become self-fulfilling, especially in an innovation-driven cycle like the one we last saw in 2000. Stock selection strategies that concentrate on momentum are gaining assets and accelerating existing trends. Don't fight this tape, it will eat you alive.

Bulls will keep buying until the bell rings. But at some point, the correction of the overbought market will come - swiftly and without warning, everyone will rush for the exits at once. Keep some dry powder for that day. I have sadly sat most of this AI move on the sidelines, so that could be my book talking.

The Cu/Au ratio is still stuck in a trading range. It shows that the global economy is muddling through a rate-shock environment without much conviction either way. The rotation to more cyclical strategies is once again on the back burner for now. Perhaps the seasonality will fail this year, but I am still hoping for at least a small rotation into hard assets rally now that the Mag 7, like the Beatles, are breaking up the band.

CU/AU