personal-finance

Another Look at Nvidia

This is not investment or investing advice. It is for entertainment purposes only. Contact your investment or tax professional before making any investment decisions.

A couple of days ago I took a look at Nvidia, to kind of show how I look at where the stock is headed. I actually prefer to buy ETFs or funds than stocks, but I do buy some individual stocks. And some of what I say is also applicable to those funds and ETFs. Although you have to look at them individual and figure out if the ETF or fund matches your objectives. I learned this early on when I bought into some funds to see the sector outperform the fund, only to realize the weighting the fund used wasn’t what I expected.

I use the term support line, but I think of it as more of an area. It’s not that buyers come into the market at 170.95 and lift the price. It’s more that when the stock gets to that price, various people are stepping in to buy. And I use the term people here very loosely. It is a combination of ETFs and funds, along with large institutional investors. It used to be that lunch time on say, Wednesday, you could actually put in a trade that would move a sock price. But I don’t think that’s true any more, mostly because trading volumes are much larger.

Anyway, once prices hit a certain zone, buyers seem to step in and keep the price from falling. It may only be a pause on its way to lower levels. Most support lines are found buy simply eye-balling where a series of lows caused the price action to reverse. It may have dropped below that level for a bit, but quickly comes back up. When the price action drops to the support and comes back up that’s called “testing” a support and the more that happens, the more significant the support area becomes. I picked 171 because I see the price approaching that area multiple times and bouncing back. I don’t think exact numbers are particularly useful.

But the whole market is taking a breather in the morning pre-market session. Nvidia (NVDA) is part of the NASDAQ composite index. (Don’t ask me what NASDAQ stands for). It is a significant part of the index, so it’s behavior will impact the broader index behavior. To me there’s a support area extending from about 600 to 585. (This is the QQQ, which is the cash index for the NASDAQ 100). I view the support areas to be less precise on the cash index because it is the byproduct of a lot of buying and selling, both through the index and its individual components. The line on top is not a support line, it’s a resistance line that suggests most market participants decide anything above 630 drives selling.

The chart of the cash index is different from what most people look at when they look at the NASDAQ, they look at the futures market, as shown below. It is not the product of buying and selling stocks. It is the the prices of the futures market for the index. A different thing is being traded. In the futures market, we see a gap that doesn’t exist on the cash index, and the prices look almost, but not quite, the same.

On the chart of the NASDAQ futures, I see a similar support area but I think they’re actually two support lines. There’s one at 24,937 (remember – not exact) and one at 24,289 (not exact). Remember, I eye-balled the lines and read the price from there. I didn’t pick the price and draw the line. We ploughed right through the first line (which probably means it wasn’t really an area of support). And today, the pre-market is bouncing off the second line, meaning it’s holding. That second line is formed on the basis of it being the bottom of the gap (which was eventually filled). But again, it’s more that zone around 24,289 where a mix of funds, algorithms, and large institutions will see a buying opportunity.

Looking at the S&P 500 Futures I’ve identified what I think is a trend channel. We see a failure to make a higher high at the end of the channel, and a break down from the channel (which we won’t know is significant until we’ve had more than a couple of days trading lower). And we briefly pushed into what I think is a support area. The support area holding means going lower will be a challenge, but the other factors are bearish. (Meaning there’s more interest in selling). But this is just to show the broader market is pausing at some level of support.

To be honest, I have no earthly idea what makes a large fund decide the prices to buy or sell NVDA or the other components of the NASDAQ, a NASDAQ future, or any stock. Maybe they just think we’ve come too far these last couple of days and they’re buying the dip. Maybe it’s just selling or buying to offset options contracts. I really don’t know. And no one knows, except for one thing that investors made clear with Google yesterday and AWS today. They are no longer looking at hundreds of billions of AI investment as paving roads for future growth. They’re looking at it as burning money that may not come back. And because many investors (both small and institutional) use baskets of stocks (like ETFs), stocks are now more likely to move similarly than before.

To wrap this up, I wrote this to clarify my thinking on what’s going on with the market. To remind myself, that even though I drew a line, It should have been a fuzzy, broad line, not a precise, skinny one at a specific number. I also like to see what the giant ball of money is doing today. It’s sloshing away from defensive investments, like consumer staples, and back to risk and tech, now that we had a big move away. That money sloshes back and forth, back and forth, each time allowing the smart money to bleed more and more off retail investors.

And this is not investing or investment advice to you, or anyone. It’s is provided for your entertainment purposes only. And if you are investing, contact a professional before making any decisions. Buying and selling stocks, futures, or any investment is a risky activity and can cause you to lose money, including the principal which you invest.

[Update] The screen shots above are from the pre-market session. The regular session can look a little different, for example, here’s NVDA, note the slightly different representation of today’s candlestick. Which is also a reminder that what you see may be determined by the conditions under which the prices were collected.

I Was Not Alone and ADP

I think I was not alone yesterday in looking at the big blob of money wandering around. At one point it looked like the market was going to be broadly down, because the options are depressing. As the blob of money lumbers out of tech and into not tech, valuations wind up rich, especially given rates. Here’s a way to look at it. Take a company that has about a 3% real long term return through a combination of price appreciation and re-invested dividends. I say “real” to mean inflation adjusted. That means every 24 years, or so, you double your money in real terms. The nominal (or not inflation adjusted) rate of return might be 5% (assuming a 2% rate of inflation).

You could also buy bonds, which might be paying 2% in real terms. (The nominal rate is 4% but there’s 2% inflation). If you reinvest the dividend, you double your money in real terms in 36 years. But the bond is considered near zero risk (given the time horizon) while the stock may or may not pan out. Even a very stable business with a simple and straightforward revenue model may not survive all 24 years. Or, like GM, it may stumble repeatedly. 10 years of bad management and shrinking margins may seriously undermine your 24 year plan. The stock has more risk than the bond (which does have interest rate and reinvestment risk – but we’re eliminating interest rate risk by holding to maturity and assume the the reinvestment risk averages to zero over 36 years).

One way to look at the double your money equation is to say you bought the company for cash, today. Every share. How long would it take to make that money back? Well, your money doubles, in real terms, in 24 years. That means it will take 24 years to make your money back. The company earnings are what provide the price appreciation and dividends (although stock buy-backs are seen by stupid investors as more tax efficient). So how much would you pay for one year of that company’s earnings? It’s simple, 24 times. At that rate you should have accumulated enough to buy the company outright in real terms.

That leads to a fairly simple model of how to anticipate the change in value of the company, given the interest rate. If the nominal interest rate goes down to 3% (but holding inflation at 2%), then we would be willing to pay more for that company. Why? Because it would now take 72 years to double our money with the bond versus 24 years for the company. While the company has more risk, it is is more attractive and we would be willing to pay maybe 36 times earnings. We’re taking higher risk, but more reward than the zero risk option. Likewise, if nominal interest rates go up to 5%, and it now takes us only 24 years to double our money with bonds, the company looks less attractive. It’s worth maybe 12 times earnings, for the given level of risk.

That’s the “perfect world,” thought experiment view of valuing a company. The giant ball of money screws with that by suddenly injecting a ton of buying into that company. CNBC and influencers talk about the massive run up in the company. Other idiots then try to follow the trend. That company should be trading 24 times earnings long term, but the ball of money pushes it to 30 and the idiots help drive it to 35. Retail investors get sucked in because “this time it’s different.” Retail investors are left holding the back when the ball of money chases the new shiny thing. The smart money that owns much of the ball gets out at 35. Retail investors ride it down from 35 times earnings to some over-correction down to 18 time earnings, essentially turning over their wealth to the great ball of money.

Which brings us to the ADP report. Is the ADP report an accurate gauge of employment. Not especially. It is a little erratic. But if we look at it over the last few months, we see it’s trending down. And most of the delta between the expected value and the reported value surprised to the down side. The former is consistent with a slowing job market hypothesis and the latter is consistent with most professionals being over-optimistic about conditions. But the picture is cloudy, not clear. We have the Schrodinger’s job market, that’s both good and bad at the same time depending on which number you look at. And that also feeds in to conflicting data, such as manufacturing in the US expanding, but not manufacturing employment.

There is no one number that tells you how the economy is doing. There is no set of numbers that tell you how the economy is doing. In truth, we’ve had a lot of change and I think some numbers, like first time unemployment claims, are no longer indicative of much. While I used to write off ADP as only useful to get journalists on TV hot and bothered when it dropped a wild number, the government jobs number has had a series of issues with major restatements. Companies (for whatever reason – but in this day and age it could be ideological) are failing to report on time, requiring the economists to produce a less accurate estimate. It has never felt so hard to get a bead on the economy.

[Update] Services PMI came in as inflationary to me. Although employment continues to grow in services (which is much larger than manufacturing). New orders are still growing, but slower.

The Fraud Is Coming

Michael Burry is shorting some tech companies. With the market as frothy as it is, that’s not exactly prescience. Unless you’re as good a market gambler as Burry, I wouldn’t recommend it. (And if you were as good as Michael Burry – you would already have a lot more zeros in your net worth). It is still true the market can stay irrational longer than you can be solvent. But what Burry isn’t just pointing out the emperor has no clothes. He is pointing to financial engineering. Why is that important? Why does presenting the information in a slightly better fashion matter?

The pressure is on to show something. All the public companies in the AI orbit, with elevated stock prices because they’re part of the “AI-play,” need to show earnings. The non-public AI startups do not need to show earnings. Oracle, Broadcom, Micron, etc. need to show revenue. Immediately they do not need to show revenue, as they sign contracts. That’s future revenue, and the stock price goes up as a multiple of earnings. With expected future earnings rising, the value of the company increases, even though current earnings may not have moved. A company that trades at 15 times their earnings begins trading at 30 times their earnings, based on the expectation of making more money in the future. But at some point, the imaginary future money needs to become real money in the present to justify that multiple.

Could companies like Palantir and Oracle be over-stating their income by altering the way they treat depreciation? Maybe as much as 20%? That’s what Burry sees. When companies structure their earnings to provide a better light than what would otherwise be the case, we refer to that as lower quality earnings. It may be legal and within the GAAP (generally accepted accounting principles), but it suggests the actual earnings are inflated. This is completely legal, as long as it is disclosed. Eventually, the lower quality earnings should result in a lower multiple. But in the short term, investors may ignore it or simply accept the statements of the companies that the new accounting practices make more sense. Longer term, investors tend to give companies that do a lot of financial engineering side-eye. Eventually reality will set it and the fundamental reasons they aren’t doing well will overtake the financial engineering.

But where there’s that much pressure to push earnings, it means there is building pressure to fake earnings. This can be done by either aggressively booking sales when the sale isn’t really complete and moving liabilities off the balance sheet. I would suspect the former is already unfolding. When everyone is desperate for more data center space, more power, more networking, and more processors, booking a sale early may not seem like a big deal. You feel the actual sale will almost certainly close in the very near term. Or you can call the next firm in line, waiting to snap up the same scarce resource. So why not report it in this quarter to juice your numbers a little? But it doesn’t take long before some firms start booking speculative sales, to keep the line on the sales chart going up and to the right. One of two things will happen, either the auditors will stumble over this and realize there’s fraud going on, or (more likely) a short seller will sniff it out. The former is bad enough when firms are forced to restate their prior earnings, as some executives go ‘spend more time with family,’ and shareholders bring suits. But the latter is devastating, usually resulting in obliteration, with the fraud investigations coming later.

The other approach is to engage in balance sheet engineering. A loan or an obligation to make payments in the future are recorded as liabilities. There are ways to move the liabilities off the balance sheet of the parent company, for example, by using special purpose vehicles to actually carry the obligation. Company X doesn’t owe the money. The money is actually is actually owed by Able Baker, a joint venture between X and Y. Company X doesn’t record the liability, even though the counter-party (the lender) can collect from Company X, should Able Baker default. The auditors may miss this if Company X misrepresents the true nature of the obligation (commits fraud). No one will notice a thing as long as the market that props up Able Baker is healthy. Once that changes, and Able Baker defaults, Company X may find itself illiquid.

On overstated earnings or engineered balance sheets you can quickly build other frauds. For example, understating the risk of loans to those companies. Lenders may be aware that something fishy is going on, but continue to lend to the companies, collecting fees on deals that should never have been closed. Even in the best possible light, it means suspicious insiders put aside suspicions to chase the deal. After all, the entire market can’t be wrong. And everything looks good for now. If the demand for the underlying market dries up, the loans held either by the direct lenders or the positions investors have in that lender, are worth pennies on the dollar. (Or nickles, now that we’ve stopped minting pennies). Suddenly, the lender (now likely to be a private equity firm rather than a bank) is exposed to losses large enough to wipe out its equity. Investors that invest or lend to the private equity firms suddenly find their positions wiped out as well, creating significant counter party risk. Which can ripple through other sectors of finance through reinsurance products. And liquidity dries up as everyone becomes unsure of any of their counter-parties actual financial health. What threatened to bring down the entire house of cards in 2007/2008 was the overnight lending market between banks was shutting down.

What makes this especially troubling in the current environment is a confluence of factors. First is the inability to actually jail corporate executives of very large companies. Even if there is fraud, we fine the corporation rather than hold its officers criminally liable. Let me do the math for you. Let’s say you put together a 300,000,000 dollar deal where your bonus is 5%. If you commit the fraud necessary to close the deal, you will be paid 15,000,000 dollars. Should you even get caught, you will have to give most of it back but won’t go to jail. And you keep all the other bonuses you also received. It’s likely the government will settle with your former employer. And if you’re not caught, and the company goes under, they still owe you the 15,000,000. You can sue for it in bankruptcy court, or from the company that acquires your old employer. If the company gets bailed out with public money, contractually, they will still need to pay you the 15,000,000. But what if it isn’t fraud and it’s just making a bet you wouldn’t otherwise make? There is are incentives to take outsized risks. After all, they’re losing other peoples’ money. So you will likely make 15,000,000, or maybe as little as 3,000,000 on the off-chance you’re caught. You won’t go to jail. And you won’t lose any of your houses just because you lost your job.

But coupled to that is a president who is willing to pardon anyone who is a supporter. He has commuted or pardoned people for political advantage. Like CZ to make good with the crypto crowd. Or the violent protester from January 6. It could be that even though there is criminal fraud, having donated to the campaign, the ballroom, the inauguration, and made statements pleasing to the ear of the administration, is sufficient to insulate your from Federal prosecution. And if you’re in a state such as Texas, it might also insulate your from state prosecution. We may find that explicit fraud was committed, people knew and traded on the fraud, but the fraudsters supportive of the administration are pardoned. In other words, they get to walk away with a lot of zeros in their bank account and no accountability.

If it were “free money,” I wouldn’t care. But what happens when a PE firm, lending money for data center construction, suddenly finds itself the proud owner of a bunch of half built data centers? Or even finished data centers filled with useless, expensive, and rapidly depreciating assets because AI demand isn’t what many expected? And what happens to the pension fund that put 250 million into that PE firm? And multiple other PE firms who also couldn’t resist deals around AI? Or the bank that provides liquidity for the PE firm? It’s not “free money,” it’s coming from somewhere. And that somewhere could be a wide-spread, systemic problem. How does the Federal government backstop PE firms, who are not insured or regulated like banks? Does the government step in and buy stock in the fraudulent company, injecting good money after bad? How do we put possibly trillions of dollars of bailout into firms but let the fraudsters walk away with all their money? Does the government step in and buy the data centers? Do the fraudsters stay in charge if they made enough dulcet noises of support for the administration?

Let’s put together a package that “doesn’t cost the taxpayers a dime.” It involves backstopping the loans, purchasing shares in troubled companies, and buying some data centers. All with money is effectively printed by the federal reserve or raised from “investors” with guaranteed loans. Essentially, this injects a pile of money into the economy, which will fuel inflation. It would also expand the debt, causing even more worry about the US debt burden. A burden the US has every incentive to ease by devaluing the dollar and inflating its way out of the crisis. And like the COVID relief bills, a lot of that money will go into creating even more income disparity. Not only will the wealthy (including fraudsters) walk away with the money they made on the way to the crash, eventually they will reap the reward of the stimulus injected to moderate the economic damage. And while the previous administrations tried to put some limits on how either the post 2008 or COVID stimulus could be used, I doubt this administration will suffer that burden.

I don’t know if or when the AI trade unwinds. I suspect it’s ‘when,’ and the longer it goes on, the more I suspect it will unwind badly. There is little I’m hearing that makes me sanguine about an orderly end to this. On the spectrum there will be true believers to outright fraudsters. Like flies to shit, fraudsters are drawn to environments where people making money would rather not look too closely as long as money is being made. If anyone did look closely, the party’s over no one is making money. After all, a little ‘wiggle room’ makes the market possible. To repurpose Mao, this is the water in which the fraudster swims. Whether its repacking bad home loans, creating accounting practices at suspiciously rock-star energy companies, or the sales figures at ‘world leading’ telecom companies, no one wants the gravy train to come to an end. But rest assured, the longer the massive (and frankly stupidly large) sums of money are changing hands (or not actually changing hands) over various AI deals, the more openings fraud will find.

AI Wins the Shutdown

It’s Monday, November 10, and I’m going through the news. The shutdown may be coming to an end. Welcome news to some, although I believe the Democrats caved. The Republicans indicated they were willing to scorch the earth over ACA subsidies. These are the payments that help people buy health insurance, when they can’t possibly afford 15,000 or 20,000 a year in premiums. It seemed as though Republicans were willing to let air travel fall apart in front of the holiday season rather promote access to healthcare. All while the government feels they have enough money to possibly send $2,000 rebate checks from the taxes collected through tariffs. And the Democrats blinked. The government, assuming the house approves and the administration doesn’t have a spaz and veto the bill, will likely re-open.

What stocks do you think would be doing well on that news in the pre-market? They airlines? Yes, they’re up. Defense contractors? They’re mixed. What about health care? Mixed to net negative. What’s ripping? AI hardware and semi-conductor companies. NVIDIA is up over 3%, while the strongest airline, UAL, is up just barely 2%. The DOW and the SP500 are up largely because of just the AI and related semiconductor stocks.

On the Russel 2000, there’s more broadly positive price movement. The second tier defense contractors are doing well. When the Russel 2000 does well, it is a proxy for investors being more willing to take risk. In the sense that ending the shutdown is positive for the economy, taking on more risk through AI and smaller companies follows. With the gross dysfunction abated, it is more likely companies will make money. But the undercurrents of self destruction over providing health care to people is still there. One party is willing to burn it all down, including intentionally withholding food assistance to their base. They are willing to ignore their roll in checking even illegal acts. I don’t know if my outlook on the future is as sanguine as the other investors stepping up to shoulder more risk.

I feel like we’ve lost our ability to discern what is good and bad. All we know to do is calculate which option gives us more money. What you build is not important. Who you defraud is not important. What you destroy is not important. The dystopia you are creating is not important. And with enough money you can buy a legacy. All that matters is making as much money as possible. The invisible hand free of moral and ethical constraints. Even democracy and the constitution fall by the wayside if there is money to be made. Greed is not just elevated to ‘good,’ along with other good values. Greed is the only thing that matters.

There’s a Bad Smell

If you don’t think something is very wrong, you’re not looking very hard. Recently, the cost of the average new car in the US topped $50,000. The median household income in the US (meaning the half way point, if you arrange all peoples’ incomes from lowest to highest) was about $83,000. The mean was about $66,000, suggesting a lot of skew from a bunch of very high incomes at the top end of the data set. So the “average,” under some definition of average, American household would pay about 70% to 80% of their income for the average new car.

If we go back 30 years, to the mid 1980s, median income was about 24,000 in 1985. (Not adjusted for inflation). If you adjust it for inflation, we have to face the ugly fact that 40 years has only taken us from $64,000 of 1985 median household income in today’s dollars to $83,000. Meaning that with all the advancements we’ve seen, and all the gains in productivity, our earning power grew just 35% or so. That’s less than a 1% improvement per year. But in the 1980s, a nice Buick or Dodge set you back less than $10,000. You could get economy cars for $5,000 – $7,500 price range. The average new car set a family back less than 50% of its income. Less than a third, if the bought an economy car. Even if you adjust for inflation, the average new car should be in the $25,000 to $30,000 range. To get to that that “less than 50%” range in today’s actual prices., you need an income of at least $100,000, if not slightly more.

This is the difference between purchasing power, wealth, and income. Partly it’s inflation, and partly it’s not inflation (to the degree inflation measurements aren’t arbitrary). The price of an “average” new car has risen faster than inflation. So has housing. So has medical care. So has education. If you could easily afford an average car in 1985, but struggle to buy an average car in 2025, you are poorer as far as cars are concerned. If you could afford to go to the doctor’s office in 1985 but not 2025, you are poorer along that axis. However, an IBM PC computer or original Macintosh cost maybe 10% of your 1985 median household income. Today, that (relatively) high-end computer is in the 3-4% category. We’re much richer on that axis. The necessary stuff is more expensive, but escapism is cheap.

I would argue that the things that matter, like food, housing, and transportation are why we feel poorer today. Setting aside the paltry growth in inflation adjusted median household income (while upper incomes have grown much faster than inflation), having to put yourself in deep debt to do “normal” things hurts.

The fact we are drowning in televisions, computers, and other gadgets doesn’t compensate for not being able to afford college. If I were to ask most people struggling to buy a house, would you rather have: more expensive TVs and computers or cheaper houses? They would opt for the house. If I asked the person trying to get one more year out of the ride that gets them to their job, if they wanted cheaper cell phones or cheaper cars, they’d opt for cheaper cars. Or a public transportation system that didn’t feel punitive in its cost and inefficiency.

You need transportation, you need a house, you need to go to the doctor and the dentist. Those seem more and more like luxury items. That’s what feels so wrong about today. I caught a passing notice about Paul Krugman saying China has passed the US in purchasing power parity. They may have. I haven’t read it. I’m a little tired of Krugman, who lost credibility with me as an economist, for focusing on too many nakedly partisan issues. But we all feel it. If you make more money next year, it doesn’t really feel like you got ahead. In fact, it feels like you’re falling further and further behind.

So you tell me, after 40 years of progress, with companies worth trillions of dollars, and with two people in a race to be the first trillionaire, does it feel like we’ve advanced? Do you feel wealthier? Does that seem like a system that’s working for the benefit of most people? Do numbers like GDP and a soaring stock market paint a rosy picture, so we we learn to ignore what our lying eyes are trying to tell us?