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The Interconnectivity of Food Costs, ODTE and NVDA

Are food costs, options that have zero day to expiration (ODTE) and NVDA earnings interconnected?

The WSJ states the last time consumers spent this much on food was 1991.  According to the Department of Agriculture, in 1991 US consumers spent 11.4% of their disposable income on food.  At that time, households were still dealing with steep food price increases following an inflationary period during the 1970s. 

The Journal reports there is no period where food prices go back down…”they tend to be sticky.”

According to the USDA in 2022 consumers spent 11.3% of their disposable income on food.

Depending upon the source approximately 10% to 12% of food exports transit through the Suez Canal and Red Sea.  Violence on the high seas has been at the greatest levels since the end of WWII causing a surge in both shipping costs and transit times. 

The reports are rising of increased food spoilage and livestock deaths, the result of increase transit times.  The inflationary burden is obvious.  What is disconcerting is the predictions of food shortages, shortages that may plague the lesser developed nations.

An accepted reason for the unrelenting advance in the NASDAQ is the belief that interest rates will be considerably lower by year’s end.

The increase in zero dated options is huge.  According to Bloomberg, volumes in ODTE options surged 48% last year, six times as fast as the broader options market.  Bloomberg estimates retail investors make up as much as 40% of the transactions.  The vast majority of these ODTE are in call options.

It is an open-ended question whether FINRA, the Federal Reserve, the SEC or Wall Street risk managers can keep up with the ODTE frenzy.  Is “beta gamming” occurring on steroids?  [Massive call volume which is inherently bullish until the volume suddenly ends causing a large increase in volatility]

Goldman writes NVDA “is the most important stock on planet earth as the eye-popping gains is responsible for one third of the NASDAQ’s 100 advance this year.”  Stakes are so high for the company’s earnings that even analysts who would not comment on individual securities are writing something ahead of the number.

Nvidia is the poster child of AI enthusiasm because the company makes the type of semiconductor chips that power AI and the demand is viewed as extremely strong. 

The forward-looking guidance will be just as important as revenue growth.  The potential extrapolation of the results is huge.

As noted above, a major catalyst for the narrow index advance is the ephemeral belief of a dramatic change in monetary policy, the result of declining inflation, perhaps amplified by the proliferation of ODTE. 

Inflation is extremely “sticky,” now facing Red Sea headwinds.  The unending narrow index advance may be massively propelled by retail participation in index ODTE where the risks are not yet understood. The surge in NVDA is responsible for 34% of the massive gains in the NASDAQ 100. 

All three tenants must remain aligned otherwise volatility may increase.

Last night NVDA posted earnings and forward-looking guidance that exceeded expectations causing shares to surge about 13% in pre-market trading.  NVDA market capitalization has increased by more than $400 billion this year, bringing its valuation to 1.7 trillion or the fourth most valuable company.

Commenting on yesterday’s market action, the markets were nervous ahead of NVDA’s earnings.  The Minutes from the recent Fed meeting were largely a non-event, emphasizing the well-known mantra that the Committee is in no hurry in lowering rates.

Long term Treasury yields reached their highest levels of the year by poor demand for auction of 20-year bonds. 

Swaps tied to Fed meeting dates still see a quarter point rate cut as the likely outcome of the June meeting, at 84%.  A quarter point is fully priced in by July.  For all of 2024, 88 bps of easing is priced in, down from peak level over 150 points measured several weeks ago.

Last night the foreign markets were up.  London was up 0.28%, Paris up 1.02% and Frankfurt up 1.43%.  China was up 1.27%, Japan up 2.19% and Hang Seng up 1.45%.

Dow and NASDAQ futures are up 0.30% and 2.1%, respectively, the result of the surge in NVDA. The 10-year is up 1/32 to yield 4.31%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.