Have We Hit The Top?

[mattee2264]

Also yet another thing that will frustrate the usual transmission of monetary policy. What is the use of bank lending contracting and bank lending standards tightening if PE firms rush in and pick up the slack? Already credit spreads are much lower than you would expect them to be. 

[ValueArb]

Ruh roh. Is this a signal we've hit the top?

 

Quote

One of the Last Big Bears on Wall Street Turns Bullish on US Stocks

• Strategist hikes S&P 500 12-month target by 20% to 5,400
• Wilson says macro environment becoming harder to predict

Mike WilsonPhotographer: Christopher Goodney/Bloomberg

Updated on 

May 20, 2024 at 5:33 AM MST

 

One of Wall Street’s most prominent bears has just turned positive on the outlook for US stocks.

Morgan Stanley’s Michael Wilson now sees the S&P 500 rising 2% by June 2025, a major about turn from his view that the benchmark will tumble 15% by December

 

https://www.bloomberg.com/news/articles/2024-05-20/morgan-stanley-s-wilson-capitulates-on-bearish-view-of-us-stocks?fromMostRead=true

[rkbabang]

 

[ValueArb]

Another top signal? From Matt Levine's column yesterday.

 

Quote

 

Imagine that you are a bank, and a company asks you for a $10 million loan. “What do you need the money for,” you ask. “Well,” they reply, “we borrowed $400 million from another bank last year, and we’ve got our $10 million quarterly interest payment for that loan coming up. It turns out we don’t have $10 million. So what we’d like to do is borrow $10 million from you, so we can pay interest to them.”

Would you say yes? Oh, I kid, I kid, the answer to that question is pretty much always “well there’s a price.” At some price, you’d say yes.

 

I suppose the trade is better if you do it all at once:

Direct lenders including Blue Owl Capital Inc. have pitched deals in recent weeks that include a “synthetic PIK,” a feature that lets companies make some of the interest payments with additional borrowing without having to count the debt as being serviced “in kind,” according to people with knowledge of the matter.

 

“Payment in kind” lets borrowers make some or all of their loan interest payments by increasing the principal amount rather than using cash. That flexibility is in high demand as the Federal Reserve’s policy-tightening cycle has made it more difficult for heavily indebted companies to service their debt. Private credit funds are well-positioned to provide PIKs, and they’ve often used them to beat out banks when competing to provide financing to companies.

 

But there are limits. Big banks that help fund the lending activities of private credit firms typically cap the amount of such PIK deals they will finance. Synthetic PIKs are a workaround to those constraints. …

 

In a synthetic PIK, lenders provide a company two separate pieces of debt: the main loan the company planned to borrow in the first place, plus a smaller delayed-draw term loan that sits at the same level in the capital structure and has similar terms. Delayed-draw means a borrower has access to the full amount of that loan when the deal closes, but can choose to actually borrow the money at a later date.

 

When interest on the first loan needs to be paid, the company taps the delayed-draw term loan. This allows the company to pay the interest in cash, but it’s technically doing so through adding more debt to its balance sheet.

 

 

Edited June 5 by ValueArb

[Gamecock-YT]

3 hours ago, ValueArb said:

Another top signal? From Matt Levine's column yesterday.

 

 

 

Think this will become more and more common given the Cov-Lite nature of loans made in the 0% interest era start having step-ups in the payments due and refinancing tough to come by. The next piece in the article goes on to mention a PE group investment where the equity got written down to 0, they moved the IP to a new subco and got more financing off of it. Extend and Pretend for all!

[fareastwarriors]

[ArminvanBuyout]

Saw somewhere that ~40% of S&P return YTD came from NVDA

[mattee2264]

Not much more than a hundred billion or two of market cap away from overtaking Microsoft as the most valuable company in the world. 

 

There are other technology companies in the trillion dollar market cap club. But their moats have been time-tested and they've shown the ability to defend them and expand them over time and the use-case is obvious: any modern business needs Microsoft products to operate and there are over 1B I-Phones in circulation and most people can't live without their phones and therefore want the top of the range and Apple has been ruthless in charging companies who want access to their customers. Meta has over 3BN monthly active users who spend a good amount of their waking hours on social media. Google has YouTube and still dominates search. And Meta and Alphabet have a duopoly in digital advertising which accounts for around 2/3 of total advertising worldwide and is used by every company trying to reach consumers. 

Amazon dominates e-commerce and cloud. And built up both businesses over many years from nothing. 

 

It is easy to understand why NVIDIA is minting money in the here and now. They are selling shovels in an AI gold rush and such is the confidence that there will be gold that everyone wants the shiniest shovels. And they aren't selling to penniless miners but to the richest companies in the world who make so much money they can afford to stockpile AI chips rather than risk missing out on the next big thing. But there seems to be an assumption that this dynamic will go on for decades. And it seems implausible that these companies will continue to spend most of their capex budget on AI chips from a single supplier for the next decade or two, let alone the next year or two. 

 

And the underlying premise seems to be that computational power is the only limiting factor and all you need to do is throw more and more computational power at AI development and it will achieve all the wonderful things people are predicting of it. And there is a lot of extrapolation. Right now you can use AI to write an email, make meeting notes, do some basic coding, do a term paper, and generate some cool images and write a bit of poetry. Useful and fun. But if that was all there was to it you wouldn't see Nvidia with a $3TR market cap and AI has probably accounted for a significant amount of the trillions of market cap that other Big Tech companies have added over the last year and a half. 

 

So implicitly there is this notion that AI will be able to replace millions of workers and therefore a significant proportion of the money companies used to spend on wages will end up lining the pockets of the companies selling AI technologies.  And it will happen fast enough to satisfy investors who are notoriously impatient. After all, all the things people were expecting of the internet such as the mass adoption of e-commerce and digital advertising eventually happened but not fast enough to support the market caps reached at the peak of the bubble. 

 

Edited June 5 by mattee2264

[Luke]

8 hours ago, mattee2264 said:

Not much more than a hundred billion or two of market cap away from overtaking Microsoft as the most valuable company in the world. 

 

There are other technology companies in the trillion dollar market cap club. But their moats have been time-tested and they've shown the ability to defend them and expand them over time and the use-case is obvious: any modern business needs Microsoft products to operate and there are over 1B I-Phones in circulation and most people can't live without their phones and therefore want the top of the range and Apple has been ruthless in charging companies who want access to their customers. Meta has over 3BN monthly active users who spend a good amount of their waking hours on social media. Google has YouTube and still dominates search. And Meta and Alphabet have a duopoly in digital advertising which accounts for around 2/3 of total advertising worldwide and is used by every company trying to reach consumers. 

Amazon dominates e-commerce and cloud. And built up both businesses over many years from nothing. 

 

It is easy to understand why NVIDIA is minting money in the here and now. They are selling shovels in an AI gold rush and such is the confidence that there will be gold that everyone wants the shiniest shovels. And they aren't selling to penniless miners but to the richest companies in the world who make so much money they can afford to stockpile AI chips rather than risk missing out on the next big thing. But there seems to be an assumption that this dynamic will go on for decades. And it seems implausible that these companies will continue to spend most of their capex budget on AI chips from a single supplier for the next decade or two, let alone the next year or two. 

 

And the underlying premise seems to be that computational power is the only limiting factor and all you need to do is throw more and more computational power at AI development and it will achieve all the wonderful things people are predicting of it. And there is a lot of extrapolation. Right now you can use AI to write an email, make meeting notes, do some basic coding, do a term paper, and generate some cool images and write a bit of poetry. Useful and fun. But if that was all there was to it you wouldn't see Nvidia with a $3TR market cap and AI has probably accounted for a significant amount of the trillions of market cap that other Big Tech companies have added over the last year and a half. 

 

So implicitly there is this notion that AI will be able to replace millions of workers and therefore a significant proportion of the money companies used to spend on wages will end up lining the pockets of the companies selling AI technologies.  And it will happen fast enough to satisfy investors who are notoriously impatient. After all, all the things people were expecting of the internet such as the mass adoption of e-commerce and digital advertising eventually happened but not fast enough to support the market caps reached at the peak of the bubble. 

That many workers are replaced which adds to the bottom line margins of big tech is delusional IMO. Before that happens the capitol will be highjacked again or simply most consumers will become addicts and homeless because what happened to the rust-belt will happen in many western regions. I could very much imagine that happening but society will face a depression for the short term and then the government will come up with some "new deal" to provide the people a basic income who don't have to work anymore which will be financed by corporate tax hikes, capital gains tax hikes or wealth tax hikes. Or more of a deficit haha and the USD will then slowly implode leading to similar breakdown outcomes. 

 

The language models are how profitable now? The short-term winner is Nvidia but Apple, Microsoft, Alphabet, Amazon, Tencent, Baidu, etc are not paid to make Nvidia rich but to increase shareholder value which is not realized by going on an infinite capex spend to buy Jensens GPUs. Is someone an electrical engineer here? Apples chips have been a monster and their semiconductor design team is top notch. How long will they pay Nvidia for what they can order from TSMC or Samsung themselves? Will they allow Nvidia to have a software monopoly and have their margins impaired? I don't think so. 

 

This was a brilliant window for Nvidia and it will be open for a while but as you said @mattee2264, it seems implausible that this 3Trillion winner spawned and will be allowed to take this much money back home indefinitely, as the stock price suggests.  

Edited June 6 by Luca

[Luke]

On the other hand, this is what the new Prosus CEO said regarding AI lately: 

 

"We have lots of impacts in other more fancy things, so we have like interface to people talk, through share to make orders to share it. We can do interface to do the chat, to not only make orders, but to talk in the call centres. So even our internal call centre team, they use AI to get recommendations about how they should serve better the customer. The external customer and the drivers. We deliver around 3 to 4 million orders per day. So most of the feedback to the customers are done through an AI systems. I want to highlight one or two things specifically, fraud detection. All kinds of fraud assistance, the level of improvements on AI were dramatically, so we really can operate the business much better in terms of costing less to support the customers and to reduce bad behaviour of customers. Other funny or interesting ways to do that, for example, when a restaurant joins iFood, they can take a picture of… This user generated AI, the picture of their existing menu. We automatically import everything. We prepare their whole menu. We put the pictures, and we improve the quality of the pictures in terms of lights and the descriptions. We can even help them to describe better their own food, just taking the picture of their menu."

 

So there is also a case to be made that it can really improve businesses in many areas...: 

 

"So it increases sales of the restaurants, reduce the time for the restaurant to get into the platform and increase the experience of the customer better. I have 30 examples like that. So most people hear AI, they think about how this robot is going to change my house. There is no robot. Everything you do is simpler, faster, and cheaper. And that's the approach we have to have. Have very good people improving all the business every week, enhancing models."

 

Koos Bekker said why having an engineering background for management positions is more important in today's world due to AI etc: 

 

" And what makes the engineering demand especially acute is what's happening with AI. So, in my life, I went through a few transitions. One was open advertising supported television, moving to pay TV. And eventually pay TV knocked the stuffing out of everyone else, because it was the revenue model that worked. Then mobile phones taking over from fixed line. You remember a time when AT&T was running the world. The most solid company in America, and fixed line completely disappeared as an economic entity, and then later, the commercial internet. Now, what's happening with AI, at least in my assessment, something of that scale and order. The way we look at it, either we attack with AI as our friend, and we invade other people's territory, and we grow, or we'll get wiped out. We won't be the same company five years from now. There's no chance, the technological switch is too huge. So there's definitely been a shift in our thinking towards an engineering stance, to say firstly, we've got great assets, they need to be run. Let's run them as well as we can, stay close to the customer, close to the product, provide a really good service. The money will follow the customer service. And then the second big consideration is that at this historic moment, AI is impacting, it's an explosion, and we need to transform our company for the new world. And that's what we hope Fabricio will help us to lead us in."

 

I am angry folks, had a huge position in TSMC but sold it for more China haha...guess what performed better..XD 

 

Nvidia was also pretty straight in front of our eyes and was not THAT hard to understand at 30x earnings...

 

 

 

 

 

[John Hjorth]

So much for that @Luca,

 

Microsoft, Apple and Nividia now constitutes ~20 percent of the SP 500. Kisses aren't low hanging for my part here.

[Luke]

8 minutes ago, John Hjorth said:

So much for that @Luca,

 

Microsoft, Apple and Nividia now constitutes ~20 percent of the SP 500. Kisses aren't low hanging for my part here.

What do you mean John?

[John Hjorth]

5 minutes ago, Luca said:

What do you mean John?

 

I think I mean basic valuation metrics for these companies by now are streched beyond my personal limits.

[John Hjorth]

25 minutes ago, John Hjorth said:

 

I think I mean basic valuation metrics for these companies by now are streched beyond my personal limits.

 

It seems like so, but what do I know about that, by now?

[Luke]

https://www.reuters.com/markets/europe/ecb-begin-cutting-rates-even-inflation-fight-continues-2024-06-05/

 

0.25% rate cut to 3.75% deposit rate by the ECB! 

[mattee2264]

I can see markets melting up this summer when it becomes clear that central banks across the world are quite happy to start cutting rates even while inflation is still above their respective targets. But if falling interest rates are accompanied by falling earnings later in the year then it might be a case of "be careful what you wish for". 

 

 

[gfp]

3 minutes ago, mattee2264 said:

I can see markets melting up this summer when it becomes clear that central banks across the world are quite happy to start cutting rates even while inflation is still above their respective targets. But if falling interest rates are accompanied by falling earnings later in the year then it might be a case of "be careful what you wish for". 

 

 

 

My experience with falling interest rates is that it has always meant bad things for the economy and stock prices.  Will this cutting cycle be the exception?

 

2000 - bad

2007 - bad

2019-2020 - bad

2024 - good?

[frommi]

yes thats the last nail.

first sign - Yield curve negative - since more than 1 year now, just like 1989, 2001 and 2008.

second sign - Unemployment rate growing, low was 3.4% last year, we are at 3.9% now. like 1989, 2001 or 2008.

third sign - Rate cuts. Economy is weakening.

0-6 months after these events we had a 20-25% "crash" in every case. And you wont find a lot of instances where 1. and 2. happened without a crash. It only occured in 1979-1982, the pullbacks there were just 5-10%. But Shiller P/E in those years was 7-8, while we are now at 35.

I would argue, based on these facts, the top is close or already in.

[TwoCitiesCapital]

5 hours ago, gfp said:

 

My experience with falling interest rates is that it has always meant bad things for the economy and stock prices.  Will this cutting cycle be the exception?

 

2000 - bad

2007 - bad

2019-2020 - bad

2024 - good?

 

It's the inversion that signals the recession. And it typically un-inverts by rate cuts catching down to the 10-year 

 

We have a few cuts to go before that happens unless if they're making big moves. 

[Sweet]

21 minutes ago, TwoCitiesCapital said:

 

It's the inversion that signals the recession. And it typically un-inverts by rate cuts catching down to the 10-year 

 

We have a few cuts to go before that happens unless if they're making big moves. 

Saw on Twitter yesterday I think that the yield curve has been inverted for nearly 600 days.

[frommi]

It takes time after the inversion, and the stock market weakness typically starts after the first rate cut.

[Castanza]

All election years/campaign seasons too

Edited June 6 by Castanza

[Gregmal]

All recession forecasts take time. The key is to just be a broken record and eventually you get to say I knew it 

[Sweet]

48 minutes ago, frommi said:

It takes time after the inversion, and the stock market weakness typically starts after the first rate cut.

This is the longest inversion ever and no recession yet.  Typically the recession, if it comes, happens a few months after the inversion. 

[TwoCitiesCapital]

1 hour ago, Sweet said:

This is the longest inversion ever and no recession yet.  Typically the recession, if it comes, happens a few months after the inversion. 

 

Not quite. There are historical observations where its been as little as 2-3 months after the inversion and historical observations where it took 12-18 months after the inversion. And while it has a 100% track record, there are so few observations of recessions that any "average" of those observations isn't likely to NOT be super predictive or the 'actual' mean of the distribution. 

 

The inversion is the warning sign that things are slowing down. It's also somewhat causal by choking off new credit creation since banks earn negative significantly reduced margin on new loans. It's when things un-invert that is basically the confirmation. You probably don't catch the top of the equity market by waiting for the reversion of the yield curve - but you typically miss out on the nastiest part of the recession and you don't get out 1-2 years too soon either. 

Edited June 6 by TwoCitiesCapital