Welcome to Inspiration Station
So, what's going on here, anyway?
Here is my take.
The current set of policies is a cash grab from the private sector to the government sector -- or what will remain of it anyway, as it's being revamped to not pay the cash back into the economy as gov't services like people are used to. Tariffs are a tax, and like any tax they reduce economic activity. Uncertainty around the policy duration also is impacting the equity risk premium, meaning high P/E stocks have now unsupported valuations.
I expect a little bump here, to 5250-5550; then reevaluate. If the negativity persists and today is as much of an "up" day as we see, then that becomes far less likely. There is some evidence of intensive margin calling, with treasuries, and gold, all selling off.
Short term bonds are a good choice right now. Regional banks can and will fail as debt is not repaid (you can short them with an ETF), and the big banks also could fail, but that might be less likely due to the "TBTF" dynamic -- in that case, depositors get "bailed in", which is to say, partly wiped out, hardly a good investment outcome.
Short term treasury bonds can be depended on to do well NOW, but I'm not sure forever. And long term? More risky. You can already see the 2 year really outperforming the 10, which remains stubbornly high. I think Bessent will ultimately fail, in light of not having any realistic plan to actually improve the government's long term finances - he is reducing spending in the short term, but guaranteeing a depressionary small future economy upon which to collect tax revenues.
Not a cheery picture, but I think one worth serious consideration if you still are blinded by the thought that certain things “cannot” happen.
GLP obesity drugs a societal game changer
NVO and LLY will continue to be leaders in the weight loss space. Bigger picture, if you think about it, population obesity reduction on a significant scale equates to a few things:
1) A population reduction when it comes to resource use, food consumption, heating and cooling costs, even vehicle size and types sold. Anyone who's been cheerleading unrealistically about reducing the Earth's population ought to he happy. BUT, it's also accomplished without any reduction in human capital or count of actual humans.
2) An increase in productivity, as fewer people are disabled or exit the workforce early due to illnesses. Reducing suffering from ailments like diabetes and kidney failure will not only benefit a workforce, but also facilitate personal happiness and creativity.
These all sound like pretty good things, if you're asking me.
First reactions to Disney earnings
So why is this down premarket? I think there are technical reasons, but I can also find a (very) few things that might give folks complaints:
=Content sales revenue not good this Q, no major movies out.
=Impairment charge on some Indian thing and linear networks - this was the reason for the EPS "loss" but the adjusted EPS beat.
=Linear networks and ESPN continue to wither, tho CFO says they are taking costs ouy
=Overall revenue only grew 1%. Could be an algo sales reaction premarket to this.
=Whatever is going to happen with Hulu
Aside from that? Well there's a lot to like. So maybe premarket will reverse, but I mentioned there are technical headwinds possible. Some of the good numbers:
=Cash flow story very good. 6mo YOY FCF up a lot. No going concerns issues here
=Dis+ subscribers grew, revenue up, AND profitability metrics turned from loss to not-quite-profit. A surprise to see the subscriber growth TBH. I need to check ARPU still.
=Parks are doing just fine, per normal.
=Excluding one time goodwill impairment, EPS beat by over 10%
Is Google in trouble? Oh yeah.
Their search monopoly means that webpages are optimized for showing up high in results. This is a chicken and egg problem for Google: with pages optimized for scoring well in the algorithm, the algorithm now prioritizes optimized pages, not useful information. This is a significantly different position than google was in back in say 2001 when the world's webpages were optimized to be interesting and useful, and Google's task was to sift through that.
Google is unwilling and unable to break their cash cow ad business to do the above any differently. Huge cash cow businesses always are. They can't change, they won't change, so they are exposed to any better solution that comes along from the outside. Today we all know that every Google result is trying to sell us something. Increasingly, the information provided isn't even useful enough to make that an acceptable trade.
Finally, both users and advertisers have an implicit deal with Google, and it's based on trust that Google will surface correct information. It only takes one or two "... what on earth?" instances of incorrect or distorted search results to destroy trust in the accuracy. If Google has their history-rewriting fiasco bleed over into core search - and I think there's some limited evidence that it is happening - what then? AI image generation is by definition fiction; that's recoverable. Core search making stuff up would destroy their value prop entirely.
Google is competitively walled in by their own product. The competitive advantages in this industry lie with other players. The elevated valuation multiples that were justified for a “eternal monopoly” are not the same as those that will apply to a company that’s on the precipice of losing it.
OpenAI search
So there's talk that OpenAI will come up with a Search product. Something Microsoft has wanted and failed to dominate in for years.
Google's problem is that it's search hasn't been delivering relevant answers now for quite some time .. years. The stuff that got search engine optimized to be at the top of the results is always the sites trying to sell you something. Maybe they are selling an actual product. Maybe the site has medical information but the ACTUAL product is the ad space on the page. Most of the sites that get top hits surface very generic info because that optimizes for volume - useful if you are a simpleton, but if you already know that basic knowledge, then the next layer of info is not available.
So you can search for something and increasingly you fine that none of the top ten or twenty or more results has the answers you actually want. It wasn't obvious back when it was the only option, but now it's starting to be a glaring problem. Google has optimized for revenue and volume; but they haven't optimized for information delivered to the user. And because they stopped optimizing for that, many sites stopped even having content that is informative.
And Google have no idea how to optimize for info any more. Because they've ironed away the "what has the most links to it?" evidence they relied on in the early days of the internet ...
Advantage remains with Microsoft for now.
EV auto sales takes a breather
EV industry is going to be in a little bit of a pause/rethink mode for a while. On the automaker side. Oversupplied with cars that are engineered for "get them produced" instead of "make em work properly". And without interest rates low, people don’t want $60k cars.
It'll be fine in the long run, the automakers will rethink what they need to actually make. The cars need to be much lighter and cheaper. I mean I sympathize with the several chief engineers at certain automakers who are probably going "... but it's impossible!". But reality is: the ones who do do it, will be the ones that win. The only way the "but it's impossible!" strategy works is if literally no other carmaker can figure it out. And Honda has a history of lapping everyone else when you take your eye off them ...
You don't want to end up the Mitsubishi of EVs. Make good cars and people will buy 'em. That's basically the only rule in the auto strategy book.
On megaprojects ..
Eversource announced today it was cancelling three big offshore wind projects and taking a charge. After years of development.
The big problem here is that the approval, financing and building process spans more than one economic, energy price, or interest rate cycle. By the time they get close to building, the economics no longer work and the projects are cancelled. Nuclear faces this problem as well.
As long as this is true, we might as well forget about successfully completing any megaprojects in America that don't have direct congressional backing. If you can't build something in 3-5 years, odds are pretty good you never will. This is a much bigger problem than nimbyism, engineering or the supposed "difficulty" of working in a similar environment to an offshore oil rig.
What a rush … !
After a very pleasing November, a good observation to have right now is: the yield curve is still inverted (10Y-2Y). And it's probably going to uninvert, because it generally doesn't stay that way forever. So in 2000, and in 2007, what happened to ST and LT bond values respectively when it uninverted? Which did better?
The short answer is, BOTH 10 and 2 year bond yields fell. The 2 year yields fell more, but because prices are more sensitive for longer maturities, you likely made more money if you were holding 10 years. They started falling before the SPX picked up on a crash. Do falling bond yields "cause" a market crash? It's unclear what sort of thinker that would make sense to. A better way of thinking is that they predict that equities are more at risk of a drawdown, in advance, than equity bidders believed they had been. Further, that equity indexes can be projected to fall in association with recessionary periods, of which previously high interest rates can be a cause, and the treatment for which is lower market rates. (The Fed can be expected to follow, though not in response to equity investors, but in response to some other systemic problem).
None of that means that equity indices can't go higher. In fact, they easily could, given the strong directionality of movement recently. If the SPX can break out just a few points higher past 4607 top, then odds are pretty good of a year-end runup. The next few days ... no less than the last few .. will tell us a lot ....
... and guess what election year Januaries usually look like .... https://financial-charts.effingapp.com/
UAW strikes
My suspicion has long been the Big 3 went "all in" on EV because they believed (as I do) that automated manufacturing would be enabled by eliminating the complex and integrated gasoline powertrain assembly + install. And that would allow them to close plants, shake off the UAW wage burden, and move forward.
But now they are in trouble, because they've realized that batteries are really expensive, the cars are too heavy and inefficient, people don't want to pay too much more for them and now - to top it off - the UAW is demanding they be compensated for the work they're no longer doing on each car. (40 hours pay / 35 worked).
It's not just Big 3. Also Mercedes, Volkswagen and some others; and Nissan's a carmaking basket case even without EV. Meanwhile Tesla has been busy vertically integrating and their price cuts are going to define EV pricing for a decade.
Honda is "behind" but it's OK because they're basically buying GMs platform one car at a time, instead of sinking billions into it, while positioning themselves as one of the remaining ICE engine makers of the future. Toyota seemingly is about to dive into EV, but they may save themselves as buyers realize plug hybrids are about 10x as cost effective from a battery-buying perspective. Subaru? Ain't nobody know what their EV game is, I don't worry about it; but somehow they give you a ton of really safe car for very little money so that's what I drive.
Supermicro Q4 earnings “miss”
Being run up in price so much left it vulnerable to a correction, but there's more to it than that.
Cash flow went from strongly positive to just negative. Why?
Leadership talked at length about supply chain issues, implied to be Nvidia but not uniquely. They're having trouble getting enough components to make as many servers as they could otherwise. Cash flow going negative suggests paying more for components, maybe by sourcing from different places.
This is a company that last quarter came up short on earnings because they couldn't complete and ship enough servers. If they recognize revenue on shipment, then COGS are presumably matched in period to revenue, meaning any high component costs today would roll through costs next Q. (They actual recognize based on meeting performance obligations, so there is some judgement involved).
It's possible that revenue will also increase when they recognize it, if their own customers are paying up. But also possible costs will increase more than revenue. And, there was talk on the call about customers over-ordering to try and get allocation. If they do - will the order book flow out to revenue, or will SMCI be sitting on the cash costs for their components?
None of this is necessarily negative in the context of overall AI server demand being strong. It'll probably continue. But weakness in cash flow may have temporarily spooked investors.
Nice job, Berkshire!
In Q2, GEICO insurance premiums were actually flat to down YOY. Increase in underwriting profit comes from lower losses and expenses. Lower losses were based on lower revised estimates on previously incurred, which is always a tiny bit suspect but one trusts the actuaries to do their job. Low expenses comes from GEICO pulling back on advertising, which also contributed to lower policy sales and PIF. GEICO also took rate, between the rate actions and the more selective sales pipeline they achieved 16% rate. To me, knowing how hard it is to get rate from each state, that is very impressive.
Berkshire Primary and Reinsurance, less of a dive here, but this is actually where insurance segment premiums rose - in both of those subsegments - but underwriting profit fell. Increased premiums suggests pricing power (tight capital in reinsurance right now!) while losses are partly based on prior period sales.
I still say impressive. BRK.B is trading near highs though, so potentially not the best entry point. I do own more BRK than any single stock and generally wish I owned even more. I just prefer to buy on pullbacks rather than highs :) Probably I should be getting 5% Tbills in the interim, like Warren is ...
ChatGPT and investment analysis
Worrying about your job if it involves tasks you think an AI generative chatbot could do? It struck me recently that many analysts and professional investors - people who are constantly judged by other people based on their output - might be looking for some resources.
If you want to know my view on ChatGPT and how to USE it instead of being passively REPLACED by it - which is really the only option that works well for you - I do have some. I started putting together a one-pager reference material.
Depending on interest, I can make this a course.
It’s OK not to just buy big tech
Bummed about the S&P showing some weakness? There's plenty of stuff out there that is near lows, might do fine even if tech retraces. And not the mystical "if you only know where to look!" type.
You've heard of this stuff. Mostly. Boston Properties. International Paper. Danaher. DIS or INTC for the ever-hopeful. UAN. ITIC (ok, maybe nobody has heard of that one). Eversource.
Nobody can tell you if these WILL go up, but I'm just saying, the choice is not "buy tech or go home".
(And right now, the cap-weighted S&P is mostly big tech).
Market exuberance
It’s felt frothy for a while, but correction not yet happening. AI is here to save the day, right?
I see the green bars going up at an accelerating rate. This is not that common to see. I avoid buying in times like these - though I am happy to buy selective stocks like BXP, or hold winners like SMCI or PLPC with stops on them.
SPX commonly sees 6-7% pullbacks. I can't say what future holds, of course, but that would put index back around 4150.
Even if you don't buy a recessionary gloom and doom theory - I envision one yes, but the market looks forward - then a pullback is a better buy than here. IF it happens.
On hated stocks
There are a number of previously great companies out there trading at depressed values. VERY depressed.
3M (MMM) is one of them, weighed down by US Army earplug lawsuits.
Boston Properties (BXP) is another, back at 15-years-ago levels! Based on mismatch between office building supply and demand.
Disney? (DIS) It's not down as much as these, and it's also not clear how many negatives are left to play out.
For Disney, I'm encouraged that I see adults in the boardroom now, who seem willing to take tough steps to kill off money-losing experiments and focus on execution. I also wonder how many people there are still left to sell the stock ....
JNJ now more “value”
JNJ rarely trades +/- 10% off it's upward sloping trendline.
It's down about that much off it right now. You never know what the future holds but it's a better bet than if it were up at +10%.
That said, that trendline only slopes up about 7% annually, plus 3% dividend, making total return that of a lower growth, mature company. That's exactly what JNJ is.
Nvidia is killing it recently
Data centers, last decade, huge emphasis on serving up content. Streaming video. Needs lots of CPU cores. I think it as one core / stream, though it is not actually 1:1. Take bits from a hard drive, serve em out to someone's ipad in chunks. Do this for 45 minutes.
There's other stuff too like "run business applications" for some company or another. Constant CPU work.
That's not stopping, but next decade, the AI generative models will run mostly on GPUs. Each query needs a thread active on a GPU.
So for that emerging workload, you really only need a CPU to route tasks to all the GPUs that are busy generating letters (chatgpt) or pixels (generative art) or frequencies (generative music). And pass back the output. The ratio of work is probably way different. And the CPU less important.
My current take ..