Morning Note: Market news and our thoughts on the Nvidia share price.
Market News
The yield on the US 10-year Treasury note rose to 4.3%, the highest since late November, after hotter-than-expected producer price figures reignited concerns of stubborn inflation in the US economy. Producer prices accelerated to 0.9% in January, more than the 0.6% expected. Equity markets also fell during Fridays session – S&P 500 (-0.5%), Nasdaq (-0.8%) – on speculation the Federal Reserve will be in no rush to cut interest rates. US markets are shut todays for the Presidents’ Day holiday.
This morning in Asia, equities traded broadly lower amid lingering concerns over China’s economy: Nikkei 225 (flat); Hang Seng (-0.9%); Shanghai Composite (+1.6% in its first day of trading after the Lunar New Year break, albeit lagging the big advances seen last week in Hong Kong). Chinese travel and spending during the holiday topped pre-Covid levels. Some 474m tourist domestic trips were made, up 19% from 2019. However, disappointing property sales over the past week suggested more would need to be done to support the market and Li Qiang yesterday urged for “pragmatic and forceful” action to boost confidence.
The FTSE 100 is currently little changed at 7,704. Currys has this morning confirmed it received a possible cash offer from Elliot Advisors. The Board considered the offer, at 62p a share, significantly undervalued the company and unanimously rejected the proposal. In early trading this morning, Currys is trading 36% higher at 63p.
The Bank of England risks deepening the UK’s recession if it doesn’t pivot to interest-rate cuts soon, Andy Haldane said. UK home sellers increased their asking prices 0.9% this month to £362,839, a second straight gain. Sterling trades at $1.2621 and €1.1702.
Commodities may face steeper price swings in the first half as investors bristle at the effects of high US rates and widening fault lines in China’s growth prospects, Bloomberg Intelligence said. Brent Crude trades at $82.85 a barrel, while gold moved up to $2,020 an ounce.
Source: Bloomberg
Share Price View - Nvidia
The last time we checked in on the chip maker Nvidia in these pages was back in May 2023 - https://www.linkedin.com/pulse/all-aboard-ai-patronus-partners-ltd%3FtrackingId=qXCB%252FDsJjSsLzAkKCNMtqw%253D%253D/?trackingId=qXCB%2FDsJjSsLzAkKCNMtqw%3D%3D
As a reminder, Nvidia designs high specification semiconductors that are used to power some of the most advanced technologies such as artificial intelligence.
In that commentary we joked about the assumptions implicit in the valuations with reference to a quote from Scott McNealy, CEO of Sun Microsystems during the tech boom in 99-00. We noted the importance of passive index funds buying the shares and the implication that valuation is no longer a key driver of short-term share price movements. Since then, the share price has roughly doubled.
Source: Bloomberg
To be clear, Nvidia is doing well and growing its revenues quickly. It’s just that while these “fundamentals” make for a nice story, they’re not really the thing that’s driving this. Of all the shares bought in Nvidia today, tomorrow and the next day (and there will be billions of dollars’ worth) virtually none of them will be bought by someone objectively looking at Nvidia, assessing its prospects and valuation and deciding to allocate capital.
Below is a list of observations from analysis we have been reading on the dizzying ascent of the shares.
Nvidia has added the market capitalisation of Tesla in just the last couple of months. There was a time when Tesla was the poster child of speculative frenzy.
Nvidia has about the same market cap as all of China’s H-shares (Chinese companies listed in Hong Kong).
The size of the largest companies (e.g. Apple and Microsoft) mean that many active funds cannot legally own enough of them to avoid being underweight. As technology continues to massively outperform, fund managers are looking for alternative high beta tech names to get them up to weight to stem the relative performance bleeding. Nvidia fits the bill.
In inelastic markets, there simply aren’t enough shares for sale to meet this demand of “get me to index weight in this sector” that is destroying active management careers. The result is explosive.
There is an old quote from the godfather of value investing, Benjamin Graham that “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” While this is still almost certainly true, the problem is that under the current market structure, what constitutes the long run has been stretched beyond recognition. Or as Keynes said, “In the long run, we are all dead.”