The Week in Charts (6/1/23)

By Charlie Bilello

01 Jun 2023

Note: view the video of this post on YouTube here.

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The most important charts and themes in markets and investing…

1) AI Mania

The exuberance over generative artificial Intelligence had been building throughout earnings season, with 190 mentions of the word “AI” in earnings calls for the largest tech companies versus just 36 mentions a year ago.

And then Nvidia reported earnings, transforming the AI boom into a full-fledged mania. While Q1 revenues were actually down 13% year-over-year, all the attention was on forward guidance. Nvidia said revenues in the current quarter would hit $11 billion, a new record high for the company (prior high was $8.3 billion) and 50% above wall street estimates. What’s driving this? Surging demand for the AI chips in which Nvidia is currently the dominant player (>90% market share for discrete GPUs).

This sent Nvidia’s stock soaring, hitting a new all-time high and gaining 25% on the week. Nvidia became the first major tech company to recover all of its losses from 2022, but Microsoft and Apple are not far behind.

Many other semiconductor stocks surged higher after the Nvidia report, with the anticipation that they too will benefit from the AI boom.

The notable exception: Intel, which has been a laggard in the space as its production is concentrated in CPUs. The contrast over the last 3 years is stark, with Nvidia gaining 353% while Intel has declined 48%.

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This week, the euphoria has continued, and Nvidia joined the big 4 (Apple/Microsoft/Google/Amazon) in the $1 trillion market cap club.

Notably, this is all due to lofty future expectations, as Nvidia currently has only $26 billion in sales versus $208-525 billion for the big 4.

Just how high are these expectations? Nvidia now trades at over 38x sales and over 200x earnings. We’ve never before seen a price to sales ratio that high for company of its size.

The closest comparison that comes to mind is Tesla, which traded at nearly 30x sales when it hit the $1 trillion mark back in 2021. What happened after that? It would go on to decline over 70% with its price to sales ratio falling to 5x.

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But valuations, we are told, no longer matter in the age of AI – it’s all about growth. Where have we heard that before? In every mania of the past – AI is just the latest example.

2) Sector Reversal

The 180 degree reversal in trends this year is something to behold. The three worst performing sectors in 2022 (Communications, Consumer Discretionary, and Tech) are the 3 best performers thus far in 2023 while the leading sector from 2022 (Energy) is down 9%.

Technology is once again beating everything, up 33% on the year. Its relative strength versus the broad market has fully recovered from the 2021-2022 drawdown, surging to its highest level since September 2000.

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How did it do that? Strength where it counts. The two largest Tech sector holdings (46% of $XLK), Apple and Microsoft, are up 39% and 35% respectively versus a 10% gain for the S&P 500. Meanwhile, the average stock in the index is roughly flat on the year, with the S&P 500 equal weight ETF ($RSP) showing a 0.3% gain.

The question investors are asking: is this lack of broad participation an ominous sign pointing future weakness? Or will smaller companies simply play catch up, and join the large cap/tech/growth advance?

There’s no easy answer here as is often the case in markets. Sometimes it is the former and sometimes the latter. There’s no consistent historical pattern when it comes to breadth or the lack thereof, though you’ll often hear pundits claiming otherwise.

3) Sneaker Slowdown

Foot Locker is not a huge company ($2.4 billion market cap, $8.5 billion in sales), but it can be an interesting indicator at times of the health of the US consumer.

In 2021, the US consumer had never been in a better position, flush with cash from three rounds of stimulus. Revenues exploded higher, quickly recovering from the 2020 lockdown dip. Fast forward to today and we’re seeing the opposite, with revenues down 11% year-over-year, the biggest decline since Q1 2020 and before that Q2 2009.

Why the downturn? CEO Mary Dillon blamed lower tax refunds and pressure on discretionary spending from persistent inflation in household necessities (food/gas/rent). Importantly, she also noted that the company has seen an increase in the use of credit, confirming a broader consumer trend (17% increase in credit card balances is biggest since 2001 recession).

Foot Locker isn’t the only retailer showing signs of weakness. The S&P retail ETF ($XRT) is at its lowest level of the year, down 44% from its peak in 2021.

4) Travel is Booming

While retailers may be struggling, the travel industry is most certainly not.

There was an average of over 2.5 million US airline travelers per day over the last week, the highest number since August 2019.

Cruise lines have staged a remarkable comeback, with Royal Caribbean ($RCL) reporting 102.1% occupancy rates in the first quarter, up from 47.4% in early 2022.

Heading into the peak season (July/August), revenues are on pace to exceed 2019 levels.

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Lastly, conferences are back, with Las Vegas attendance and hotel booking now exceeding 2019 levels.

5) A Wave of Defaults

What’s not back? Office workers returning to the office, which along with rising interest rates is putting strain on the commercial real estate sector.

BBB CMBS spreads are now at their widest levels in over a decade (1,094 bps), signaling a wave of defaults to come.

The default cycle is just getting started with delinquency rates only slightly above recent all-time lows.

6) Debt Ceiling Farce

The “debt ceiling” farce is coming to an end with the House passing a bill in which neither side seemed to get exactly what they wanted. The Senate is expected to follow with the president signing the bill into law before the government “runs out of money.”

Under the terms of the deal, there will be no ceiling until January 1, 2025, at which point we could (depending on the 2024 election results) go through the same exact debate.

With no limit for the next year-and-a-half and a nearly $2 trillion deficit, we’ll soon see a new national debt milestone of $32 trillion followed by $33 trillion at some point in 2024. The one constant is more debt, and there seems to be no sense of urgency to do anything about it.

7) Buying vs. Renting

There are only 4 major metro areas in the US where it’s currently cheaper to buy a home than to rent: Detroit, Philadelphia, Cleveland, and Houston. Nationwide, the average home costs an estimated 25% more per month to own rather than rent (note: this does not include estimates for repairs/maintenance which would further skew the analysis in favor of renting).

The most extreme? San Jose, California, which costs 165% more to buy than to rent, the largest premium in the country.

While rents have ballooned in recent years, home prices have skyrocketed even more. This combined with the 30-year mortgage rate more than doubling has made the average house unaffordable to the average American household.

But we may be starting to see a change in the equation with median home prices falling 4% year-over-year (Redfin), the largest decline since 2012.

The median price of a new home sold in the US is now down 15% from its peak last October. After the last housing bubble peak the median new home price fell 22% nationally.

8) The Road Back to Normal

The road back to a more normal inflationary environment is paved with a normalization in the money supply. And on that front, we continue to move in the right direction.

After a 40% increase in 2020-21, we’ve seen a 180 degree shift. The US Money Supply has fallen 4.6% over the last 12 months, the largest year-over-year decline on record (note: M2 data goes back to 1959).

In the next two CPI reports (June 13/July 12), we should see a significant decline in the inflation rate as the year-over-year comparisons become more much favorable (housing, energy and many other commodity prices peaked last June).

A great sign: Truflation’s real-time US inflation gauge has moved below 3%, down from a peak of 12% last June.

And that’s it for this week. Have a great rest of the week/weekend!


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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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