A major question at hand does the present valuation of NVDA reflect all the good news and then some? NVDA is down about 25% in about 20 trading days. CNBC states that the company has declined almost $1 trillion in this short period, a decline that has accelerated after a “really good quarter and bullish forward-looking statements.”
However, the greatest carnage in the markets are not the main players of AI but rather the main actors in crypto where many companies are down over 50% in less than 6 weeks with perhaps MicroStrategy as the poster child. Not too after MicroStrategy was added to the S & P 500, the company has declined a stunning 67%.
Bloomberg writes the company’s business model was to buy bitcoin at “X” and have it be worth 2x in their valuation. Then with a stock price higher, the company can issue more stock to buy more bitcoin, which resulted in bitcoin magically being higher in how it was treated in in their stock price giving the ability to sell more stock to buy more bitcoin.
This business model has undergone dramatic unravelling.
Bitcoin is down over 35% since early October. Bloomberg states that “alternative asset managers” are down about 15%, a blend of AI stocks down about 18%.
In concert with recent weakness in AI companies, high yield bond spreads have widened to about 310 bps, considerably wider than 250 bps several weeks ago when NVDA was trading around $212. The fear is that many tech firms may soon flood the corporate bond market to fund AI expenditures that may not generate an acceptable rate of return.
Wow! The velocity of change is stunning. Markets are swimming in an endless stream of AI generated commentary—commentary that has extremely conflicting narratives and opinions– that is making everyone sound certain even as the economies are undergoing tectonic changes.
There are more questions than answers, especially in a data void, the result of the government shutdown over Obamacare subsidies.
Speaking of which, and I am not making this up, there are “credible reports” emanating from the White House, “the new subsides will be limited to those with income at or below 700% of the poverty line.”
This is nuts on so many levels. The most of which is why this high level and how is this going to be funded?
And then there is housing. According to the NAHB, for the first time ever the average new home price is lower than the average existing home price. Existing home inventory is still very low because of interest rate dynamics…who wants to sell a home with a 3% mortgage rate? The incentives, however, are great to buy a new home given new home inventory levels. It is a surreal development.
Against this backdrop, the markets are now suggesting an 80% chance of an interest rate reduction in December, up from about 25% mid last week, the result of several dovish statements from Fed officials. Last Friday following a dovish statement, the S & P 500 experienced a stellar rally where the advancers led decliners by a 10-1 margin.
This rally was primarily the result of algorithmic traders utilizing momentum and headlines, which many would no doubt say are AI generated.
What will happen today? Trading is expected to wane during the day ahead of Thanksgiving.
Speaking of which I wish all Happy Thanksgiving. There is so much we can be thankful for as we are living in the most dynamic country the world has ever experienced.
Last night the foreign markets were up. London was down 0.13%, Paris up 0.26% and Frankfurt up 0.04%. China was down 0.15%, Japan up 1.85% and Hang Seng up 0.13%.
Futures are slightly higher on rate cut optimism. The markets are suggesting a 80% chance of interest rate reduction in December and three more by the end of 2026. The 10-year is off 3/32 to yield 4.01%.
