Weekly Update 03/12/2024
Are We In A Bubble?
Inflation up in February!
Gas Prices Surge
JPMorgan CEO Issues Shock Bitcoin Reversal
Bitcoin $1M Price Prediction Is Suddenly “pulled forward”
Weekly Meetings:
INVESTMENT CLUB THURSDAYS 6 PM (BPC188)
INVESTMENT FUND THURSDAYS 7 PM (BPC188)
—Market Madness—
Sticky inflation reading not likely to knock Fed off course for rate cuts
Inflation remains sticky, according to a new reading on consumer prices, but some market watchers don’t think it’s sticky enough to knock the Federal Reserve off course for a rate cut this year.
“Things are really where they should be at this point,” John Stoltzfus, Oppenheimer chief investment strategist, said on Yahoo Finance Live Tuesday.
The Consumer Price Index (CPI) showed prices rose 0.4% over the previous month and 3.2% over the prior year in February, more than forecast and an acceleration from January’s 0.3% monthly increase and 3.1% annual gain. This marked the largest monthly increase since September.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in February climbed 0.4% over the prior month and 3.8% over last year.
While both measures were higher than economist expectations, some who follow the Fed closely said a June cut could still be on the table as inflation gradually comes down from its 2022 highs.
A cut in June is “more likely” if the central bank does decide to start easing monetary policy, said Oppenheimer’s Stoltzfus, who doesn’t expect Tuesday’s reading to result in any Fed “drama” about whether “should l go, should I stay.”
Frances Donald, chief economist for Manulife, said on Yahoo Finance Live that the CPI reading was “a little bit hawkish on the surface,” but that “June seems like a reasonable time to expect a first cut” if the labor market and consumer spending begin to soften.
However, rate cut expectations could be pushed out further if that doesn’t happen and there is also a chance still of no rate cuts this year.
What could help the Fed gain more confidence about June, said LPL Financial chief global strategist Quincy Krosby, is if the costs of shelter start to come down faster. Shelter is a major contributor to core inflation.
The shelter index rose 5.7% on an unadjusted annual basis and 0.4% month over month, a deceleration from January’s 6% annual increase and 0.6% monthly rise.
The index for rent and owners’ equivalent rent (OER) rose 0.5% and 0.4% on a monthly basis, respectively. Owners’ equivalent rent is the hypothetical rent a homeowner would pay for the same property. In January, the index for rent rose 0.4% while OER increased 0.6%.
Downward movement in OER “by June or July could certainly assuage Fed concerns regarding inflation remaining stubbornly higher,” said Krosby of LPL Financial.
Investors are currently betting that the Fed will hold steady at its meeting next week as well as May before making its first cut in June, adjusting their expectations following cautious commentary from Fed Chair Jerome Powell and other Fed officials.
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A frothy market misses vital bubble ingredients
Stocks are expensive, they’ve gone up a lot in a very short time and investors are excited. Not surprisingly, talk of bubbles is widespread. But many of the usual accompaniments to a bubble are missing.
The case for stocks being frothy isn’t hard to make. The Nasdaq hit a new high on Thursday, having risen 54% since the start of last year, while the S&P 500 (.SPX) is up 32% and Nvidia’s (NVDA) gains are so big they’re better expressed as the $1.5 trillion it has risen in value than as the hard-to-grasp 441%. In a single day last month, it rose in value by $276 billion, about the value of Chevron (CVX), the 26th-largest member of the index. This isn’t normal behavior.
But is it a bubble? There’s no single definition of a market bubble, but for me it has to involve a speculative mania. It’s when buyers en masse cross the line from assessing future profit potential to buying something they know is unreasonably expensive—or just don’t care about the price at all—because they think a greater fool will buy it off them at an even higher price.
This seems to be missing. Sure, there are some signs of the madness of crowds: The price of SoundHound AI (SOUN) more than tripled in February, mainly because investors were reminded that Nvidia, maker of the chips in demand for artificial intelligence processing, owned a tiny stake. And sure, minuscule stocks are doing phenomenally well, as they often do in a bubble, with the Russell Microcap index up almost 30% in four months, one of its best performances on record.
But compared with the postpandemic silliness in meme stocks, profitless tech, SPACs and crypto, or the dot-com bubble of the late 1990s, this pales into insignificance. Measures of investor sentiment show they are positive, but nothing like past bubbles. One example: The weekly survey by the American Association of Individual Investors shows 47% declare themselves bullish, low compared with the 75% declaring themselves bullish in 2000, or even the 60% in early 2018.
Money isn’t flooding into the market, leverage isn’t being used to boost investments, and so companies aren’t forming especially to tap a gusher of speculative cash. Stocks might be overvalued, investors might be wearing rose-tinted spectacles, but that doesn’t make it a bubble. Yet.
Sure, stocks are up a lot. But this often happens after a big fall. The point of the Nasdaq (.IXIC) making a new high is that it’s only just passed where it was at the end of 2021, before it fell 36%. The same happened after the price plunges of the mid-1970s, early 1980s, 1990, 2001 and the financial crisis of 2008-2009—only with larger gains than have happened so far this time. Such rebounds were clearly distinct from the bubble of 1999, which led the Nasdaq to gain 154% in the same length of time it’s taken to make 54% this time, or 2021, when the gain was 100%, both with a much smaller fall beforehand.
Likewise microcap stocks. They aren’t even close to making back their near-halving from the early 2021 bubble, and still below where they stood last February.
Valuations don’t suggest a lot of speculative buying, either. The Nasdaq peaked at over 100 times predicted earnings for 12 months ahead in the late-1990s dot-com bubble because buyers didn’t think valuations mattered any more.
At the moment the Nasdaq’s at 27 times forecast earnings, much lower than the 35 times it traded at in late 2020. Nvidia’s stunning rise hasn’t been about higher valuations, either—its profits and forecast profits have been rising faster than the share price, so it trades at a lower valuation than before the AI boom started with the release of ChatGPT.
The great bubbles of the past were quite different, involving massive speculation driving up valuations (Japan’s entire market traded at 50 times forward earnings at its 1989 peak). At the extreme, wild optimism turned into the purest form of speculation. Stocks became no more than gambling chips used in a pure Ponzi scheme of selling to a new buyer.
Stock promoters also raced to create new companies to satisfy the demand from buyers desperate to buy into the fashionable story. In all the big bubbles booming stock prices were accompanied by an IPO boom, perhaps taken to the extreme in the 1720 South Sea bubble. Gullible buyers were tempted by new companies raising cash for projects including ships full of water to carry live fish (the fish died); a flintlock machine gun that fired square bullets (too unreliable); and extracting saltpeter from waste collected from lavatories in England, according to historian Edward Chancellor’s “Devil Take the Hindmost.”
The 2020-21 SPAC boom was the modern equivalent. But today the IPO market is struggling.
AI Stocks: Tech Giants, Cloud Titans, Chipmakers Battle For An Edge
Amid surging investor interest in artificial intelligence, many companies suddenly tout AI product roadmaps. But finding legit AI stocks that already garner revenue from generative AI, like Microsoft (MSFT) and Nvidia (NVDA), is a challenging endeavor for investors. For many companies — such as Google parent Alphabet (GOOGL) — the rise of generative AI poses both risk and opportunity.
Amid the emergence of generative AI — which can generate text, images, sounds and video — it’s a good time to be cautious amid the hype. GOOGL stock recently became ensnared in a controversy over historical responses generated by its AI-powered chatbot.
In general, look for AI stocks that use artificial intelligence to improve products or gain a strategic edge.
NVDA Stock Jumps In 2024
A bellwether for AI stocks, chip maker Nvidia reported fourth quarter sales that tripled from a year earlier, beating high expectations.
Meanwhile, the Nasdaq jumped 43% in 2023, boosted by buzz around AI stocks.
In 2024, chipmakers are out-performing software companies as the top AI stocks. Most enterprise software makers will not monetize gen AI, or “conversational AI,” in a material way until late 2024 or 2025, analysts say.
The top artificial intelligence stocks to buy span chipmakers, software companies, cloud-computing service providers and technology giants that utilize AI tools in many applications.
Initial public offerings may soon test investor appetite for AI stocks. Astera Labs has filed for a $534 million IPO. It makes data center connectivity chips and cloud infrastructure management software. Astera Labs will trade under ticker ALAB.
Another AI-related IPO could be data analytics software maker Databricks.
Meanwhile, Microsoft is the biggest investor in startup OpenAI, the leader in gen AI training models. Drama continues to engulf OpenAI. Tech industry maverick Elon Musk is suing OpenAI — which he co-founded — and CEO Sam Altman, accusing them of prioritizing profit over “the benefit of humanity.” Also, Musk claims that OpenAI’s partnership with Microsoft violates its founding agreement.
AI Stocks: Cloud Computing Giants
Cloud computing giants Amazon.com (AMZN), Microsoft and Google sell AI services to business customers.
So far, the biggest demand for AI chips has come from cloud computing giants. Nvidia earnings have boomed amid demand for AI chips built into computer servers.
But analysts expect a market for “edge AI” — on-device processing of AI apps to emerge. While “training” AI models is now the biggest market for chipmakers like Nvidia, the market will shift to “inferencing,” or running AI applications, in the long run.
Qualcomm (QCOM) aims to build Snapdragon AI chips for Android smartphones and the “internet of things.” ARM Holdings (ARM) is another AI chip maker. ARM stock has gained 75% in 2024.
AI Stocks: How Will Apple Fire Back?
Meanwhile, Apple (AAPL) topped the $3 trillion market valuation mark in 2023 despite having no immediate answer to ChatGPT. That could change in 2024.
“As AI enabled tools become more mainstream we think there will be a strong value proposition to run AI on the edge (inferencing),” said Evercore ISI analyst Amit Daryanani in a report. “We think Apple’s AI strategy will focus on incorporating on-device inference for language models that will substantially uplift the user experience for the iPhone. Given their vertical integration and especially their control over their own silicon, Apple seems best positioned to not only expand the moat surrounding the iOS ecosystem but also potentially drive an accelerated refresh cycle should the final implementation be deemed a big enough change.”
Also, AI technology uses computer algorithms. The software programs aim to mimic the human ability to learn, interpret patterns and make predictions.
Until recently, machine learning was largely limited to models that processed data to make predictions. The AI models focused on pattern recognition from existing data. Corporate spending on AI projects was modest as companies mulled return on investment.
Now many companies are scrambling to launch generative AI pilot programs. But investors want AI stocks to show progress in boosting revenue as exploratory projects translate into tangible demand.
AI Stocks To Watch By Industry Group
CompanySymbolComp RatingIndustry nameAI angleNvidia(NVDA)98Elec-Semiconductor FablessCloud computing giants buying more chips to train AI models or run AI workloads. Big lead over rival Advanced Micro Devices (AMD).CrowdStrike(CRWD)97Computer Software-SecurityAI chatbots expected to automate more functions in security-operations centers and reduce the time to detect computer hacking.Arista Networks(ANET)93Computer-NetworkingSells computer network switches that speed up communications among racks of computer servers packed into “hyperscale” data centers. With AI growth, internet data centers will need more network bandwidth.Microsoft85Computer Software-DesktopBiggest investor in generative AI startup Open AI, whose ChatGPT users require Azure cloud services. Microsoft’s business AI assistant, Office 365 Copilot, will have general availability on Nov. 1.Salesforce(CRM)91Computer Software-EnterpriseIntegrating conversational AI assistants within the user interfaces of all Salesforce apps. Expected to use a mix of subscription and consumption-based pricing.Amazon.com(AMZN)92Retail-InternetAlexa smart assistant lags in chatbot technology. Cloud computing unit working with OpenAI rivals Anthropic, Hugging Face and Falcon 40B.
New generative AI models process “prompts,” such as internet search queries, that describe what a user wants to get. Generative AI technologies create text, images, video and computer programming code on their own.
Companies will aim to boost productivity by developing customized AI for specific industries. Proprietary company data will be used to train AI models.
AI systems require massive computing power to find patterns and make inferences from large quantities of data. So the race is on to build AI chips for data centers, self-driving cars, robotics, smartphones, drones and other devices.
Foundation Models Boost Artificial Intelligence
One key question for investors is whether tech industry incumbents will be the big generative AI winners. Or, will a new wave of AI startups eventually dominate?
Large language models provide the building blocks to develop applications. LLMs help AI systems understand the way that humans write and speak. Also, LLMs require training data for specific tasks. Companies with access to troves of data hold an edge.
OpenAI is part of a wave of LLM startups that includes AI21 Labs, Anthropic and Cohere. OpenAI reportedly is on track to generate more than $1 billion in revenue over the next year.
However, OpenAI’s dominance faces a challenge from open-source LLMs.
Meta Platforms (META) and IBM (IBM) on Dec. 5 joined with 40 other companies and organizations to form the AI Alliance – an industry group that will support open-source AI models versus proprietary systems from OpenAI, Google and others. Members of the AI Alliance include Intel (INTC), Advanced Micro Devices (AMD) and Oracle (ORCL).
For example, Hugging Face is an open-source community that offers tools to enable users to build LLMs. Hugging Face recently raised $235 million in a Series D funding round. Investors included Google, Amazon, Nvidia, Intel, Qualcomm, IBM and Salesforce.
Amazon in September said it would invest up to $4 billion in Anthropic, a rival of OpenAI. Amazon owns a minority stake in Anthropic, which will use Amazon’s cloud-computing services.
How Will Software Firms Monetize AI?
Enterprises will spend more than $40 billion worldwide on gen AI solutions in 2024, up 106% from the previous year, forecasts International Data Corp. The forecast includes software, hardware and business/IT services.
Meanwhile, IDC forecasts that the market will hit $151 billion by 2027, growing at an average rate of 86% annually.
Analysts expect Microsoft’s business AI assistant, Office 365 Copilot, to boost revenue in 2024. Microsoft introduced higher-than-expected pricing, at $30 monthly per user, for its Copilot AI software tools.
Further, many other software firms are still testing how to monetize AI products, including Salesforce (CRM), ServiceNow (NOW), Adobe (ADBE) and Workday (WDAY).
In addition, Adobe on Sept. 13 announced the commercial availability of its Firefly generative AI tools. Price hikes related to integrating Firefly tools into cloud products took effect Nov. 1.
At its Dreamforce customer conference, Salesforce touted new generative AI initiatives. But the company didn’t hold an analyst day to discuss financial goals at the event. UBS models only a 1% revenue boost for CRM stock from generative AI in fiscal 2025, which starts in February.
Meanwhile, cybersecurity firm CrowdStrike Holding (CRWD) announced pricing for its “Charlotte” generative AI upgrade. It will cost $20 annually per endpoint — either a laptop or smartphone user.
JPMorgan CEO Issues Shock Bitcoin Reversal As $1 Million Price Prediction Is Suddenly ‘Pulled Forward’
Bitcoin (BTC) has smashed through its previous all-time high, rocketing over $70,000 per bitcoin this week as Donald Trump suddenly flips bullish.
The bitcoin price has added around 350% since it crashed to recent lows of $15,000 per bitcoin in late 2022, largely thanks to Wall Street giant BlackRock which is quietly eyeing a $90 trillion bitcoin bonanza.
Now, with speculation swirling around a “secret sovereign bitcoin bid,” JPMorgan’s chief executive Jamie Dimon has reversed a previous call for bitcoin to be “closed down” as a huge $1 million bitcoin price prediction is suddenly “brought forward.”
“I don’t know what the bitcoin itself is for, but I defend your right to smoke a cigarette, I’ll defend your right to buy a bitcoin,” Dimon, who has remained staunchly anti-bitcoin and crypto as it has been slowly accepted by the financial establishment, said during the Australian Financial Review Business Summit it was reported by Reuters.
However, he added he “won’t personally ever buy a bitcoin.”
In December, Dimon lashed out at bitcoin during a Senate banking committee hearing, telling influential Democratic senator Elizabeth Warren that he’s “always been deeply opposed to crypto, bitcoin, etc.,” that its “only true use case for it is criminals, drug traffickers … money laundering, tax avoidance” and if he “was the government, [he’d] close it down.”
While Dimon has previously called bitcoin “a hyped-up fraud” and compared it to a “pet rock,” he has led his bank in developing its own bitcoin-inspired blockchain called Onyx.
The latest bitcoin price boom, sparked by a fleet of bitcoin exchange-traded funds (ETFs) being approved by the U.S. Securities and Exchange Commission (SEC), has led the already hyper-bullish Ark Invest chief executive Cathie Wood to bring forward her “$1 million by 2030” bitcoin price prediction.
“Our target is above that and with our new expectations for institutional involvement, the incremental price that we assume for institutions actually has more than doubled,” Wood said in an interview with the New Zealand Herald.
“That target was before the SEC gave us the green light, and I think that was a major milestone, and it has pulled forward the timeline,” Wood said. “No platform has approved Bitcoin yet, so all of this price action has happened before they approve it, and so we haven’t even begun.”