Market Randoms, And Chasing A Bubble
Market Randoms, And Chasing A Bubble
Some random thoughts as tensions between bulls and bears continue to rise $IWM $SPY $QQQ $NVDA $SNOW $SMCI
Since cyberspace is packed-full of bearish and bullish views on the markets I feel it is my duty to add a few more disjointed takes, and to bring you to the same level of confusion that is swirling in my head. So, without further blah-blah-blah…
The last two market collapses (‘00-’03 and ‘07-’09) were caused by credit crisis. For now stocks are going to have to find a different trigger because credit is white hot: IG risk spreads are 86bps, 16bps away from the best levels of this century. HY spreads at 314bps are a little further behind, but not much. As reference, history shows that these spreads don’t become a problem for equities until they rise above 150bps and 500bps respectively. Meanwhile, corporate bond issuers don’t seem at all bothered by the relatively higher base rates (i.e. Treasury rates) and continue to feed starved bond buyers new paper to the tune of $350b YTD.
The credit problems stemming from the “cyclical (secular?) winter” engulfing commercial real estate - primarily office, but residential may be the next shoe in 2-3 years - are nowhere close to the end; in fact New York Community Bank (NYCB) may be the first salvo. We will see if banks can bring us a sequel to the 2010-2012 “extend and pretend” thriller, and smooth out the pain without shocking the system; I honestly don’t have a view. But even in the worst of scenarios, I think the odds of a systemic accident are very low. There are trillions of dollars waiting to be deployed (and waiting to start generating management fees) in distressed situations, and this is NOT pro-cyclical money (i.e. bids that disappear when the shit hits the fan).
If rotation is the hidden force behind lasting bull markets, the much maligned small-caps in the Russell 2000 (IWM) look to be flexing their muscles, even as all the focus (and much of the risk?) is on the megacaps. I know a large percentage of the companies in the IWM are unprofitable, and they are much more sensitive to higher interest rates, but price is king, and this is NOT a bearish chart.
The number of parabolic charts has gone parabolic and betting that parabolic moves don’t end as they always do (badly) is not an option. That said, the sharpest drops happen in the midst of bull markets (1987 was a fun one if you were around) so a come-to-Jesus moment for the Super Micro Computer’s (SMCI) of the world may/should actually be welcome by the bulls.
Did I mention how wildly strong is corporate credit right now?
Sometimes it IS different: the 2s10s inversion which began in June of 2022 is now the longest since the Sep. 1978 - Dec. 1981 stretch (chart below). Considering the inflation/rates chaos of those years, it is fair to say that the duration and depth of the current inversion is different. After the last two more recent inversions (‘99-’00 and ‘06-’07), credit crisis and market collapses followed shortly after the Federal Reserve cut rates reversing a sustained period of rate hikes (chart below). Keep that in mind, because all those who are bulled-up on a coming series of rate cuts are 100% betting that “this time is different”. I am not saying it can’t be, but it’s worth/necessary keeping one’s antennas up. If it is not different this time, corporate credit spreads should be our tell before a whole lot of stuff implodes. On that front….
Did I mention how wildly strong is corporate credit right now?
Lastly, as we enter Nvidia’s (NVDA) earnings week, which clearly should be made a quarterly national holiday, I will offer that I have no idea - none, zippo, nada - of how that will play out. But I am convinced that there is no NVDA without AI, and there is absolutely no AI, without data to train AI on. Which brings me to one of the most expensive stocks in the universe, a company which based on estimates will lose money as far as the eye can see and, if that were not enough, it has a stock comp plan that is well beyond offensive. For all these reasons (and the fact that this blog is free so you know exactly what you are getting) I am now long Snowflake (SNOW) through various dated options. SNOW, and its twin brother Databricks (private), are slowly but inevitably becoming more important to AI than NVDA’s chips. There is no AI without LLM and there is no LLM without the insane amount of data/data mining capabilities that the SNOW/Databricks duopoly can offer; and those offerings are still at the embryonic stage, let alone being in SNOW’s financial estimates. SNOW’s current valuation is the definition of a “bubble”, but it won’t surprise me if this bubble will pale compared to the TAM in front of this duopoly.
By the way, did I mention how wildly strong is corporate credit right now?
Positions in indices and SNOW