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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Week ended Nov 24, 2023: equities grind higher

 

It was Thanksgiving in the US this past week, shortening the trading week in the States and – by extrapolation – also in much of the rest of the world.  Investors seemed mainly focused on #NVIDIA’s earnings, which were released Tuesday after the close, as well as PMI data from the UK, the Eurozone and the US, which was released in the second half of the week.  #NVDA’s results came in as expected (impressive), and PMI data was slightly stronger than had been expected albeit still mostly in contraction territory.  The economic data served as a reminder that economic growth appears to be slowing even though inflation remains problematic, meaning that rates in most developed countries will probably indeed remain “higher for longer”.  The advance in equities slowed, albeit it did not stop, even as yields pushed slightly higher (prices lower) in the bond market.  Although we do not have hard data yet, all eyes of course were also focused on the kick-off of the Christmas buying season which started officially on Friday. How retail fares on Friday and during the coming weeks will be an excellent barometer of the state of the consumer, and therefore, the global economy.

 

MARKETS THIS WEEK
  • Global stocks were generally better this past week although gains were harder to come by than in prior weeks.  Even so, we are sitting on sharp gains in November, especially in the US, Europe, Japan and emerging markets – where returns MtD range from 6.1% (STOXX 600) to 9.0% (Nikkei 225).

  • In the US in a holiday-shortened week, boring was better as gains were led by the DJIA (+1.3%).  The Russell 2000 was the laggard for the week (+0.5% WoW), but still has experienced a November surge that has pushed the small- and mid-cap index into positive territory YtD, suggesting a broadening rally. This is the fourth consecutive week of gains in the benchmark S&P 500.

  • US Treasury yields rose slightly during the week, with the increase in yields across the curve all coming on Friday following slightly strong-than-expected preliminary PMI data for November in the US. 

  • Credit remained firm and appears to be very much in vogue at the moment.  Similar to the long-anticipated recession that has yet to materialise, the deterioration in corporate credit is also yet to occur.  In fact, credit spreads are grinding tighter as investors pile back into the riskiest corporate bonds, too.  The return on the US high yield bond index YtD is 8.2%.

  • In other assets, gold closed above $2,000/oz, oil prices continued to weaken, the US Dollar was slightly weaker, and Bitcoin resumed its orderly albeit one-directional march towards the next threshold of $40,000. 

 You can find detailed information on the indices and asset prices that EMC tracks in the section “The Tables” below.

 

DRIVERS OF MARKETS LAST WEEK

  

PMI: Economic data better than expected in US and Europe

 

Preliminary PMI data for November in the U.K. the Eurozone and the U.S. was generally better than economists’ consensus expectations, although most remains below 50.0, the level indicating economic contraction rather than growth.  In case you are not familiar with PMI, the acronym stands for “Purchasing Managers’ Index”, and it tends to be a leading indicator of economic activity.  #Investopedia has a good overview of PMI here should you be interested.  Below is a table showing preliminary PMI data for November for the US, the UK and the Eurozone, all released this past week.


 As the data illustrates, PMI manufacturing remains contractionary in all three countries/zones, and PMI services is also contractionary in the Eurozone, which looks to be the most troubled of the three areas.  Although the data suggests that all three economies are growing weaker, the data was slightly better than consensus expectations, which returns the focus to the rate of disinflation.

 

Binance and CEO Zhao tumble

 

Binance CEO Chamgpeng Zhao has become the second head of a major cryptocurrency firm to fall on his sword, which – at least in my opinion – speaks volumes about some of the unsavoury uses of cryptocurrencies.  Having said this, this clearly appears to be a minority opinion in that benchmark Bitcoin not only didn’t flinch, but continued to rally in spite of the news, up 3.1% WoW (and 127.2% YtD).  Think what you may, but the fact that the CEO and the company pleaded guilty to a number of charges related to using cryptocurrencies to circumvent sanctioned countries / entities and allow terrorist groups to transact validates many of the long-standing concerns about the ”merits” of cryptocurrencies.  Maybe I just regret missing out on Bitcoin’s meteoric increase this year!

 

NVIDIA earnings

 

NVIDIA beat consensus expectations, but was slightly undone by cautious guidance.  The stock sold off sharply in the post-market on Tuesday evening, but recovered most of the losses pre-open.  After settling, the stock ended 3.1% lower WoW, not bad given its incredible run YtD.  The results for the company are below, which are juicy to say the least.


I would like to own NVDA stock again, but just can’t quite pull the trigger yet given its valuation.  It seems nearly all the Street is expecting this to be a $700/share stock within one or two years.  There is little I can say about the massive and dominant strengths of NVDA, which have been well-documented.  The track record of the company and its share price also speak for themselves.  But does the company have a one-way, uninterrupted path straight up?  What bothers me are three things:

  1. China, as the company mentioned on the post-earnings call, although I reckon that they will find a way to tap this huge market respecting US restrictions on the most advanced AI chips.

  2. Valuation – NVDA’s results and recent share appreciation has been spectacular.  And the company’s market cap is more than double the next closest chip designer, Broadcom.  Note that Broadcom and NVIDIA have similar TTM sales of around $35 billion, but Broadcom has 50% more EBITDA than NVDA. Which brings me to the third point.

  3. Competition – Similar to TSLA as a first mover in EVs, I can’t imagine that competitors aren’t more aggressively responding to NVDA’s lead in AI chips.  This can be expanded beyond chip designers to include the likes of $MSFT and $APPL.  Why aren’t these competitors licking their chops over an opportunity to capitalise more aggressively on the AI trend? 

As far as valuation vis-à-vis other chip designers and fabricators, the table below summarises market cap sizes and valuations at the end of the week. 


Based on forward earnings, NVDA does not look that expensive, especially given its growth history.  It is also interesting to see that NVDA is larger by market cap than the next six chip designers on this list ((Broadcom, AMD, Intel, Qualcomm, TI, and Micron Technologies). 

 

Conservatives propose tax cuts ­– what?

 

I hate paying taxes, but they are a necessary evil. Taxes are also a fiscal tool which can be used to spur or slow economic activity.  In the U.K. through various mechanisms like reducing the exemption from capital gains and not adjusting income tax bands for inflation, tax revenues have actually increased because of these “stealth” factors.  In fact, according to the Office of Budget Responsibility, tax revenues will reach a post-war high by 2028.  (The OBR  “Economic and fiscal outlook”, which takes into consideration the Autumn Statement, can be found here.)  Chancellor Jeremy Hunt delivered the Autumn Statement to Parliament on Wednesday (transcript of speech here).   Any sort of reduction in tax revenues – effectively a form of stimulus – given the Bank of England’s ongoing fight to rein in inflation feels counterproductive at this point.  It highlights the delimna the U.K. is currently facing.  With an election just around the corner in which the Conservative Party is trailing badly, I suppose desperate measures are in order although I shudder at the thought of what the Labour Party would do in similar circumstances!

 

THE TABLES

 

The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes. 

 

Global equities


US equities


US Treasuries


Corporate bonds (credit)



Safe haven and other assets

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