What we’ve seen from Nvidia the past 18 months reminds me of Cisco in the late 1990’s. I wrote about this recently… not much has changed. The path of earnings and the share price have been similar. NVDA’s revenues are up over 2.5x on a YoY basis, causing EPS to be up over 4x over the same period. 18% EPS growth in a single quarter is very impressive but here’s my question… will we see that in 2 or 3 years from now? We didn’t from CSCO – it collapsed. Time will be the judge of that…. not me. Despite the expected “beat and raise” from the AI chip maker – the rest of the market fell sharply. Without NVDA’s ~9% share price gain – the S&P 500 would have been down 1.5% for the day. That tells us how narrow this market is – extremely dependent on stellar earnings from a handful of companies like NVDA. That’s not a healthy setup.
"Inflation"
“Heads I Win and Tails You Lose”
After almost three decades at this game – something you learn is not to fight the tape. Trade against momentum at your own peril. Consider the news today… it was both bad and good. I will start with the (perceived) ‘good’. The Consumer Price Index (CPI) was slightly cooler than expected. And whilst it’s still a long way above the Fed’s target of 2.0% – the market was thrilled it was only up 0.3% MoM and 3.4% YoY. Bond yields plunged and stocks ripped. Sure… 3.4% isn’t great… but that’s Main Street’s problem… Wall Street doesn’t care. However, the bad news was retail sales plunged. But wait a minute – that’s also “good news” – as it could mean a more accommodative Fed. Heads I win and tails you lose.
Are Commodities Telling Us Something?
Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool’s errand – there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation… whilst not perfect – there are a set of reasonably strong correlations which exist over extended periods. And it’s these types of correlations we can use to our advantage.As I will demonstrate – over the past 5 decades (after the US dollar removed its peg to gold in 1971) – inflation levels have largely correlated to what we see with commodity prices.
Powell Appeases the Market… Or Does He?
For me, there were two (big) questions for the Powell this week: (1) are rate hikes off the table – given faster-than-expected inflation and continuing economic strength? and (2) when will the Fed commence QT tapering (and by how much)? Powell was unequivocal on possible rate hikes… forghedaboudit. Equities cheered. But why remove optionality? Why Powell is so convinced we don’t see a re-acceleration in inflation? Admittedly it’s a lower probability outcome… but we can’t rule it out. But he apparently can…
For a full list of posts from 2017…