Bring on the Bull!
Consumer sentiment is terrible, one article said. Market breadth is much too narrow, another article said. Inflation is too stubborn and rates are headed higher, bond yields are precarious, banks are still in danger of failing, earnings aren’t rebounding, manufacturing surveys are weak, consumer credit is too high and delinquencies are spiking – they droned on and on with “proof” that there’s just no way there could actually be a new bull market in the works…
Nope. Nuh-uh. Not possible.
It’s 1987 before the crash, it’s 1970s style stagflation, it’s 2008 all over again again, it’s the 2000 dotcom bubble…
I listen as the bears make their case, because there’s really nothing like a well designed bear market argument. They just sound s-o-o-o…smart.
Any investor is well-acquainted with the feeling that we are somehow missing some vital piece of information. “Holy crap! The guy that predicted the Great Financial Crisis says it’s about to happen again! Office real estate mortgages are the tip of the iceberg!”
Then there’s the guy that said “uhhh, AI stocks C3.ai (NASDAQ: AI) and Schrodinger (NASDAQ: SDGR) look pretty good” two weeks ago. And even though C3.ai has run from $24 to $44 and Schrodinger from $27 to $36 since I…er…ahem…THAT GUY had the nerve to be bullish and recommend a few stocks, that kind of analysis just doesn’t pack the same punch (even though it’s proven to be pretty darn profitable…).
I tell ya I don’t get no respect…
But seriously, the reason so many investors miss the first stages of a bull market is because of attitude and sentiment. The most fundamental driver of a bull market is the belief that there is money to be made, that the future might actually be better.
And that’s true for investors and companies alike…
Since last summer, we’ve been hearing companies say that higher costs are hurting and the business climate looks dicey and that they are laying off workers. And the majority of those grumpy academics with calculators – otherwise known as economists – continue to say that recession is right around the corner…
But you know, over the last month, companies have changed their tune. As companies hosted their first quarter earnings conference calls, the number of companies that cited “recession” as a concern was down 27% from 3 months ago. The number of companies citing “inflation” was down 21%.
Conversely, the number of companies talking about AI has jumped 47% and 41% in each of the last two quarters, respectively.
For any company to start spending money and investing capital there has to be a reason to believe that they will make more money in the future. AI has obviously started a bull market for big tech – I won’t be surprised to see a spillover wealth effect that improves sentiment for more companies and investors.
******As the primary source for the chips that power AI, Nvidia (NASDAQ: NVDA) is the talk of the town. And rightfully so, after it raised its revenue forecast for the current quarter from $7 billion to $11 billion. The message was clear: the demand for building out AI infrastructure (ie, data centers) is much stronger than anyone thought. And it’s happening right now.
Of course the bears are all over Nvidia, saying the stock is a bubble and likely to retrace all of its post-earnings ramp. And I don’t totally disagree. But not because of the recent rally for the shares…
Nvidia tardeed down to $108 back in October. And it started this year at $145. The rally to recent highs at ~$400 shows that investors were well aware of Nvidia’s dominant position, and much of that was already priced into the stock. Last week’s 25% ramp job was gravy.
I think there is a better opportunity with other stocks that haven’t priced in as much good news, like Amazon (NADSAQ: AMZN).
Still, don’t overlook the fact Nvidia got cheaper last week, when it ran from $305 to $380. Analysts had been forecasting $6.16 in per share earnings for fiscal 2025, which starts November 1. Before last week’s earnings report, Nvidia was trading at about 50 times fiscal 2025 earnings.
But since that blowout earnings report, analysts have raised their forecast for fiscal 2025 earnings to $10.37 a share. So even after jumping 25%, Nvidia’s forward P/E fell to 38 times fiscal 2025 earnings. And it’s a pretty good bet that Nvidia will beat those forward numbers.
*****Now, because of the U.S. chip ban that blocks China from buying basically any advanced semiconductors or the equipment to make them, Nvidia’s AI chips aren’t available to Chinese tech companies…
So, I can’t help but wonder how frustrating it is for China to look 80 miles across the Taiwan Strait and see thousands of Nvidia chips coming out of Taiwan Semiconductor’s (NYSE: TSM) foundries, chips that they aren’t allowed to have?
******I don’t pay much attention to Master Limited Partnership (MLP) companies that control much of the U.S energy infrastructure, like pipelines and storage facilities. And it’s because, well, they’re boring…
So I didn’t know about the permitting issues that had basically scrapped the Mountain Valley pipeline that proposed to carry natural gas out of West Virginia into southern Virginia.
But somebody sure knew that W.Va. senator Joe Manchin was making sure that granting the permits for the pipeline to be built would be some of the pork included in the debt ceiling bill…
Somebody recently plunked down $2.9 million to buy 100,000 call options for the company that wants to build the Mountain Valley Pipeline, Equitrans MidStream (NYSE: ETRN)…
I grabbed this screenshot over the weekend, after some details from the debt limit bill were announced. You can see the outstanding interest for the $8 strike calls that expire in October – 108,990. The last price for those call options was $27.
Now here’s what it looked like on Tuesday, after the market opened and shares of Equitrans MidStream were ramping 40% higher…
Those calls that traded for $27 each on Friday were trading for $141 yesterday. And that $2.9 million trade is now worth a cool $15 million.
Nice work if you can get it, right?
Ok, that’s it for me today, take care and I’ll talk to you on Friday. And send me an email at the address below if you got something on your mind, I promise I’ll answer.
Briton Ryle
Chief Investment Strategist
brit.ryle@protradertoday.com
Facebook: https://www.facebook.com/ProTraderToday
Twitter: https://twitter.com/BritonRyle
Array