Will "Goldilocks" economy take S&P to 5K?

Markets are having a record breaking dream run of 7 weeks of positive returns since Nov CPI report came out. Last week's Fed meeting confirmed already well known fact that interest rates have peaked and there are at least 3 rate cuts coming in 2024. Economy feels like "Goldilocks" economy - not too hot, not too cold...it's just perfect the way Goldilocks would have liked. Let's look at some of the key economic indicators.

• Unemployment dipped to 3.7% but wage growth has slowed down. Good
• Inflation dipped to 3.1% and all indicators pointing to further reduction. In fact if recent declining hosing rents are taken into account, the inflation may already be closer to 2.5%. Good
• Earnings were better than expected. Good
• Q3 GDP report was hot but Oct/Nov trends show that there is slowdown coming but enough to cause recession. Good
• Holiday shopping season had good start. Good
• Interest rates coming down. Fed is indicating 3 rate cuts. Good
• Small caps have finally started catching up with their big brothers (still over 10% gap in YTD performance). Good
• REITs (especially commercial ones like SLG, VNO, BDN, BXP) etc may have dodged the bullet of "higher for longer" interest rates and will be able to refinance their mortgages and avoid bankruptcies. No wonder these stocks have doubled in last few months despite all the "gloom and doom" talk by pundits due to workers not coming to offices. Good
• AI momentum continuing - AMD and INTC trying to join the AI gold rush with their recent announcements. Good
• While China is still cold, policy makers have started talking about market friendly policy making. Chinese markets have not gone anywhere and Chinese web companies (like BABA, DIDI and others) are trading at fraction of their American counterparts. Would Chinese web companies turn around in 2024 the way magnificent 7 did in 2023? If you think it could happen, one way to invest would be thru ETF KWEB instead of individual Chinese stocks - Neutral

All of these factors feel like economy is in Goldilocks Equilibrium - not too hot and not too cold. These factors along with soft landing could take S&P to 5000 in 2024.

Indian markets are on a roll..especially after state elections in which ruling party BJP won 3 out of 5 states when expectations were 1. That bodes very well for Narendra Modi coming to power in May 2024 for record breaking third term. Around same time, Adani group got clearance from Indian courts and Americans approving loans (dis-crediting report from short seller Hindenburg) That caused tremendous rally in all of Adani group stocks. While Adani, Ambani and Indian tech stocks are well known to the investing world, there are many hidden gems in Indian markets...Here are couple of examples.

If you folks are fan of single malts and tried recent crop of Indian single malts like Rampur and Indri  (Indri Diwali Collector's Edition 2023 has been awarded as the best whisky in the world at the Whiskies of the World Awards), check out stocks of companies which make these Whiskies.

Rampur is made by Radicco Khaitan - it's stock went from Rs 85 to over 1600 (almost 1800%) in 8 years since Rampur was launched.

Indri is made by Piccadilly Distilleries (subsidiary of Piccadilly Agro Industries) - it was launched in 2021 and stock of its maker has gone from Rs 12 to 220 (almost 1000% in 3 years)

And given the reception of these whiskies and potential of expansion, they may be just getting started....

(disclaimer - I wish I had done this research when I saw Rampur in Bay Area Costco and came to know about Indri few months back. I don't have any investments in these two companies)

There are many similarities in family controlled Indian companies and founder run American companies - but that's for another blog in 2024.

If you are traveling during holidays, safe travels to all of you.

Happy Holidays....

/Shyam

It was not meant to be...

I imagined today' day (Nov 19, 2023) little differently than what it turned out to be..had a watch gathering at my place with few friends for India vs Aus ICC Cricket World Cup Final. Both teams deserved to be in the final - India winning all games in this tournament and Aus winning last 8 games after initially losing 2 games at start of tournament. The match was being played at the biggest stadium in the world (over 132,000 capacity) and over billion people tuning in...maybe most watched single sports event ever. After Australia won the toss, they choose to field (that's what most likely India wanted). India started well but then wickets kept dropping and India ended with total of 240 all out. That's when all of us knew that the dream of winning third world cup is over...despite one of the best bowling squad India ever had....The score was just not enough even for the best bowling to defend against one of the most professional and mentally strong team....No wonder Australia ended up with 6th World Cup Title...They outplayed India in every field - batting, bowling and most importantly fielding...

Billion dreams were broken with this loss and given that India won last two world cups in 1983 and 2011, we instantly knew how long we may have to wait for another win...it could be a decade. But we all feel even more sorry for all Indian players...They did their best throughout the tournament winning all games convincingly...But today it was not meant to me. Most of them will be retired or may not be selected for  next version of this tournament in 2027. So this was their only chance to make history (except Virat who was part of 2011 team). Hats off to all of them. While Virat Kohli deserved and won "Man of the Tournament",  he was visibly saddened that India could not win today's final. I wish at least Virat and Rohit play in 2027 and get another shot at making history.

In the end....It was not meant to be...

Weekend was interesting for another major news...OpenAI changed the world with launch of ChatGPT on Nov 30, 2022. It captured the imagination of world (not only tech world) and unleashed the power of AI which can be compared only with arrival of Internet in 1990s and Smart Phones with launch of the iPhone. But in less than one year the man behind this revolution Sam Altman was fired from CEO position of OpenAI....The reasons given are not clear or convincing. And now there are rumors that OpenAI board is trying to get him back as CEO...What a drama...it's even beyond typical Silicon Valley Startup drama...and we thought Twitter drama was the peak (that's still continuing but it has become as boring and repetative as recent Marvel movies)

What does it mean to AI revolution (or as some call "hype"). The AI genie is out of the bottle and firing of Sam Altman won't change that. In fact if Sam and OpenAI employees start another AI company, it would be able to instantly raise billions of $. 

Next week would be one of the most important earnings season for all of tech world - Nvidia. Can it repeat the feat of last two earnings?..Tech world is betting that it will be able to do exactly that. That would mean Nvidia would be nearly $75 Billion revenue company (from less than $25 billion) in less than one year. But now almost everyone wants a piece of Nvidia's GPU pie..Traditional competition like AMD, INTC as well cloud players like AMZN, Google, Tesla and now Microsoft. In two years there would be enough alternatives to run LLMs that Nvidia's earnings calls in 2025 would be quite different than in 2023. Till then Nvidia shareholders can enjoy the ride.

That's all for now...

Happy Thanksgiving!

/Shyam

1983, 2011 -- Will history repeat again in 2023?

If you have been following most watched tournament in the World, you would have guessed what today's title mean. Yes - it's about Cricket World Cup. India made history by beating then World Champion - West Indies in 1983. Repeated history again by beating stalwarts like Australia and England in 2011. In 2023 World Cup,  India has not lost a single game (out of 8) and is sitting at top of the table. Indian batting and more importantly Indian bowling have dominated this world cup. One more league match remaining. But semifinals are already decided. India would be playing New Zealand in semi and South Africa and Australia will face each other in other semi. Final would be played on Nov 19.  I am hoping and praying that India continues her dominance and win semi first and then win final to claim 3rd World Cup tille and repeat the history again in 2023! 

And like SuperBowl indicator, let's look at Cricket World Cup Indicatior  Last two times India won Cricket World Cup, markets had positive returns - 17% in 1983 and 3% in 2011. What would happen in 2023? (By the way there is nothing like this indicator - it's completely made up by me). Now let's talk about markets...

What a difference couple of weeks can make in changing market sentiments. All it took was change of month (seasonal factors do matter), change of tone from Fed chairman after Fed meeting and not-so-bad earnings from most of the companies - especially tech companies. All these led to biggest weekly gain for S&P (nearly 5.9% gains in one week) in 2023. Tech heavy Nasdaq also had excellent gains thanks to Magnificent Seven and semi sector. Just last week all indexes reached correction territory (10% down from recent high). Everyone started talking about recession and S&P going below 4000 and potentially ending negative for the year.  Markets are in sweet spot - here are the factors due to which markets would keep marching upwards for some more weeks.

• 10-year tresuries have come dowm from 5% to 4.5% - clear indication that Federal Reserve may be done hiking interest rates
• Earnings season has been reasonably good with no major downside surprises
• AI powered tech boost is real even after one year
• Employment is reaching equilibirum of not too hot and not falling apart
• Inflation is grinding down lower albeit more slowly that Fed policy-makers would like to see
• Seasonal factors - Nov/Dec/Jan have been one of the best months for markets
• Economy is not showing any signs of recessions with consumer spending relatively strong
• After 10% correction, valuations are not frothy
• Semi sector is resilient. This sector is leading indicator for overall tech spending
• With Biden/XI meeting scheduled next week in San Francisco, markets are expecting better relations between two economic giants (US and China). That's why today semi sector are showing biggest gains.

Overall these catalysts should keep markets around 4300-4600 for double digit return for 2023.

Happy Diwali...and Veteran's Day!

During this Diwali Festival season, Billion Indians are praying for India to win Cricket World Cup. Given my made-up Cricket World Cup Indicator, that should be another catalyst for markets to repeat the history!

/Shyam 

Is 3% the new 2%?

September kept up its reputation of worst performing month for stock markets (October gets the bad press due to major crashes but its not even in top 3 worst performing months). Why Sept? It could be a good topic for Behavior Economics PhD - I am sure someone must have done some thesis on this. S&P fell by 4.9% while Nasdaq fell by 5.9%. While markets are still meaningfully up for the year thanks to performance of Magnificent Seven (new combo post FANG), what's in store for last quarter of 2023?

That would mostly depends on two factors - direction of inflation and interest rates. And continuation of AI momentum - sizzle or fizzle? For today,  let's focus on first factor.

Fed Chairman Powell's in-famous comment about "Inflation is transitory" caused major credibility loss for Federal Reserve. Since then Fed is doing everything to make sure that markets get the message that they are serious on bringing down inflation. Based on latest readings they are reasonably successful with inflation coming down from 9% in summer of 2022 to mid-3% - that's steep downward shift in inflation in less than 15 months. One would think Fed would be celebrating with "Mission Accomplished"....but Fed knows that it's going to take longtime and effort to gain back trust and credibility of markets. Hence Fed is extra hawkish sending its message that we are not done yet in our fight against inflation and have not budged from their stated target of bringing down inflation to 2%. There lies the problem...

There are structural changes happening to US economy (and to some extent world economy). Here are some of those.

• Population is aging across western developed countries and even in China
• Labor participation has reached its peak 23 years back and continues to slide down. People who left or lost jobs during pandemic are not coming back fully
• Last cohort of baby boomers are retiring with significant amount of wealth which they are willing and ready to spend - that's why travel is booming
• Immigration is slow or non-existent in some parts of world
• Governments do not care about deficits no matter which party is in White House
• AI and technology boom is creating supply-demand mismatch for qualified labor
• Even for jobs like plumbing, carpenters, electricians, mechanics and so on, there is  shortage of skilled labor
• Housing supply (new and existing homes) is severely constrained

So unless there is severe recession (which no one is predicting), inflation would be stubbornly high above Fed's target of 2%. Most likely it would hover around 3% for a long time despite more rate hikes. So at some point policymakers at Fed need to accept the fact that "3% is the new 2%" and adjust their policies to reflect this reality to avoid turning soft-landing into hard recession. Fed should do one more hike of 25 basis points in Nov and take pause for long time (12 months or more). The various strikes - writers strike, auto-workers strike and now possibility of projected government shutdown would reflect in employment report due next Friday. That should provide cautionary indication to Fed.

When it comes to markets - it would get adjusted to this reality post Nov and start marching upwards closing the year between 4500-4650. Q3 is closed and in 2 weeks earnings season would start. As seen in last two earnings season, one earnings report (Nvidia) would be the most influential report on entire technology industry and maybe whole market.

In meantime, enjoy the cool and breezy Fall season...I will be off to New England to enjoy the colorful Fall Foliage

/Shyam

Three "i": Inflation, Interest (Rates) and (Artificial) Intelligence

First - Happy Independence Day for India (Aug 15) and Pakistan (Aug 14).

Last week was historical week for Indian Film industry which collected over $100 M on box-office and brought in millions of people to movie theaters with releases like Gadar2, OMG2 and Jailer. I happen to see all three of them. They are decent crowd-pleasers - the main stars in all of them are over 55. In particular I liked OMG2 in the way a difficult topic such as need for sex-education in Indian schools was presented. Pankaj Tripathi's performance is outstanding. 

Now onto three "i" factors 

The usual pattern of markets going downwards or sideways is on display during the dog days of summer...The earnings season is about to wrap up and by most accounts earnings were quite ok as compared to expectations. The companies which beat got rewarded and companies which miss got penalized...nothing new. But despite initial reactions, many stocks gave up all their days due to continued upward march of interest rates and due to fears that Fed fight against inflation may not be over..Next week would be key to two "i" factors which could decide course of markets for rest of year. Let's look at these.

Inflation:

Latest CPI and PPI readings were good in terms of inflation trends. Headline numbers are below 4 and heading downwards albeit slowly. Compared to headline numbers above 8% last summer, this is great progress. Many factors helping good inflation trends...oil prices are down (even though recently they have been creeping up), labor costs are stabilizing (despite historically low unemployment), cost of goods including perishables (like eggs) are down. The only stubborn factor is cost of shelter (NYC apt rents are historically high). Given all these factors inflation is heading in right direction but would get stuck around 3% for long time giving enough ammunition to fed to be hawkish (and repair its credibility which it lost last year with statements like "inflation is transitory")

Interest (Rates):

10-year treasury rates are near 15 year high and inching towards 4.3. That means bond markets are giving clear indications that rates are going to be higher for longer. Fed meeting minutes also were hawkish. Next week Fed chairman Powell is going to speak at yearly conference at Jackson Hole. Last year he used this forum to start the campaign of very aggresive rate hikes. Would he use this forum to give indication that Fed is near end in the campaign (kind of "Mission Accomplished") or keep the hawkish tone that Fed has more work to do...IMO Powell will say that we have more work to do but future rate hikes would be data dependent...that means it would be back to monthly CPI/PPI numbers and "all clear" signals markets are expecting would not be given. So expect volatility based on every statement Fed officials make and monthly CPI/PPI/Employment reports.

(Artificial) Intelligence:

Next week's Nvidia's earnings call may be one of the most important and eagerly awaited call for any company, tech industry and may be all of the markets. Nvidia blew past expectations in last earnings call by raising revenue estimates by more than 50% ($11B vs expectations of $7B) which triggered the late spring/early summer rally and made Nvidia newest trillion $ market cap company. The expectations are even higher and markets could be expecting Nvidia to blow past even $11B...(whisper numbers may be closer to $12.5B) and raise forecasts for the rest of the year significantly. They are expecting company to produce $15B quarter in 2024/2025. That would be almost 4 times as what company was doing just 3-4 years back.  If Nvidia is able to deliver these astronomical expectations, it would lift all tech companies with confidence that AI is still in the early cycles (like Internet in 95-96) and not just another fad/bubble (like crypto). 

So get ready for some interesting moves in the markets from now till Labor Day before two of the worst months for markets (Sept and Oct) start...Watch out for potential "black swan" event. "China's Lehman Moment" given precarious situation of its real estate sector and self-induced pains on its tech industry. But that topic for another day.

In the meantime, Enjoy rest of summer days and Labor Day!

/Shyam

Roaring 20s....Again!

About 2 years back coming out of COVID pandemic, I wrote blog titled "New Roarin' 20s.." It covered what happened in 1920s and what are the factors now which would trigger new roaring 20s. Do check out the blog...almost all factors are valid even now. 2022 went sideways due to inflation pressures which triggered historical steep rate hikes by central banks which led to tech companies taking more measured approach and laying off 200,000 employees....all of that changed in Nov'22 when ChatGPT was launched...even though I had mentioned AI/ML as one of the factor in my previous blog, ChatGPT really captured the imagination of the world and changed the outlook of AI instantly similar to what Netscape did with the Internet and iPhone did with the mobile. The singular concept of "Language is the Interface" made AI accessible instantly to billions of normal people....And now without mentioning AI, no talk starts or ends in tech world..and despite onsite of most-awaited-but-not-yet-here recession and inflation/interest rates duel, market mania is back to almost same level as late 90s...

Nvidia published results in mid-May and gave guidance which was nearly 50% higher than analysts were predicting ($11B vs expectations of $7.2B) - all due to surging AI driven demand to its chips...overnight it became the most important company in the new AI world...no wonder markets pushed it's valuation over trillion $ (7th company in the world to reach this milestone). Late 90s Internet driven demand drove valuations of many companies to similar stratosphere (500Billion in 2000 is more than trillion now)....and then dot.com bubble busted...even though internet and technologies invented during those times changed the world forever....Couple of today's trillion $ companies were born during those times (Amazon and Google).

So what happens now...are we in time-period similar to 1996 when Fed chairman Greenspan made his famous "Irrational Exuberance" comment about markets when dot.com mania was in early stages. Similarities of those times are eery...

• Interest rates and mortgage rates were high (similar to today's rates)
• Collapse of LTCM in 1998 was similar to bust of SVB and couple of other regional banks
• Optical/Networking companies were like AI/Cloud companies - doubling every year (I joined one of such company that time)
• Democrat president was in White House...only difference was that President Clinton was able to manage finances to create Budget Surplus. And now President Biden is signing the debt-deal to raise debt-limit to $35 trillion....(yes that's Trillions)

Can AI momentum continue to benefit all of tech eco-system and eventually world and mankind? The short answer is YES...eventually. It will have its own journey where both good and bad outcomes would come out. Hopefully more good will come out than bad preferably by multiple factors (I wish the ratio is 99.9999 good and .0001 bad)

The hypothesis mentioned at start of year in "Tech in Vogue again.." is playing out exactly the way I predicted...And the stocks in TAMANNA are up significantly...NVDA and META up over 100%

We are in early phase of this AI driven momentum..circa mid-1990s...It's feels like we are in 2nd innings of baseball game...So despite worries of most-awaited recession, inflation, interest rate hikes, tech layoffs, mini banking crisis, upcoming blow-up of commercial real estate....markets would do ok and in fact they may reach all time high (S&P crossing 4800) in next 18-24 months...Nasdaq may reach all time high even before that....so my advice would be stay with ETF/index funds (SPY, XLK, QQQ, SMH) to ride the upswing but avoid chasing individual stocks unless you know what you are doing and willing to tolerate the volatility...

Couple of interesting quotes to wrap up the blog..

“History Doesn't Repeat Itself, but It Often Rhymes” – Mark Twain.

and new one built on "Why the Software is Eating the World - Marc Andreessen"

"Software is Eating the World...AI will Eat the Software and Change the World"

/Shyam

It's "Cloudy" out there!

Today morning I went for my usual walk to neighborhood Farmer's market - it was pleasant cool spring morning with fog/clouds on the Evergreen hills! After brisk walk rewarded by bagel and Cappuccino, started thinking of last week's flurry of earnings results by tech giants, potential seizure of First Republic by FDIC and general direction of economy...that's the premise of this blog!

Last two weeks tech giants except Apple and Nvidia have reported. Here is quick report-card

• Tesla: OK but markets did not like constant price cuts to stimulate demand
• Alphabet: Earnings were good especially with GCP reporting profits first time. Google Cloud is about 11-12% of revenues and 25% of cost but growing at 20-30%. Clearly established itself as 3rd option. Markets would have preferred more clarity on cost cutting and plans to get into leadership position in Generative AI. So stock reaction was muted
• Microsoft: It delivered on all fronts with Azure still growing at 27%, buzz with OpenAI integration across all products and potential of BING taking market share from Google. No wonder stock reached 52 week high and could continue to grind higher
• Meta: This was the best of the lot. Markets loved results from "Year of Efficiency" and even better revenue growth. Mark Z's laser focus on cost cutting, focus on "core" apps, stabilization of ad markets and use of generative AI to help small merchants create ads are the factors which doubled the stock in less than 4 months and would continue to rise higher reaching over 300  in 2024 or before.
• Amazon: Markets initially liked the impact of cost cuts and AWS numbers. Being the biggest cloud provider, AWS sets the tone for overall cloud spending. Commentary during the earnings call about Apr trends reversed all the gains. Basically cloud spending is slowing down as many companies are either slowing down cloud migration or optimizing cloud spending. 
  
• Apple: Next week it would announce..Most important number would be iPhone sales (as it has been for many years) and services growth. Given Apple's track record, it would beat again but market reaction would be similar to Google's earnings
• Nvidia: Generative AI have really excited the markets with this company and stock (along with Microsoft). No wonder it's up more than 70% YTD. Many analysts believe that there is no one even close to catching up with Nvidia in AI arms-race. That alone could prompt this stock to reach all time high in 2024 and could touch trillion $ market-cap.

So in summary next few months are going to be "cloudy" for companies like Amazon, Tesla and many SAAS providers. (it was evident from earnings of Cloudfare).  Next few weeks, many SAAS companies would report their earnings. Stocks of companies like TWLO, DOCU, OKTA etc have given up their 2023 gains. While current stock prices are attractive for long-term there may be short term pain...it's going to be "cloudy" out there for these companies!

Now let's look at economy and other factors...

Banking - another California bank which prided itself in serving high-tech clients would bite the dust and would be seized by FDIC and sold in pieces. This would be another biggest bank failure. 3 in 2023 vs 1 during 2008-09. Are there other dominos to fall?...Quick actions by FDIC and acknowledgment by Fed about its own mistakes as regulator have created relative calm in the markets...but hey, similar calm persisted after Bear Sterns collapse in March 2008 before storms re-appeared in summer leading to collapse of Lehman in Sept 2008. So it's "cloudy" out there in financial sector!

Economy grew 1.1% in Q1- the long awaited recession is still 2 quarters away (as it has been for last 4-6 quarters). It may just skirt the recession but under 2% growth is also not very exciting...so it would muddle thru sub-optimal growth. While employment and consumer spending is still strong, getting interviewed and hired in high-tech sector is getting difficult. So for the sector which has been major economic driver for US economy, it's "cloudy" out there!

Fed would increase interest rates by 25 basis points next week and keep the door open for another 25 hike for Jun meeting with caveat that it would be decided by economic indicators like employment, CPI etc. Fed is trying to communicate "don't expect rate cuts in 2023" to avoid markets getting ahead of itself. Let's see if Powell is successful in bringing markets and Fed on same page.  It's "cloudy" out there for overall direction and terminal rate and period for Fed rates!

How will markets react to all of these? Apr kept its promise as one of the best month...but that brings us to seasonal factors. Historically markets have done worse during May-Oct period than Nov-Apr period. And that seasonal period starts tomorrow.....So for markets, it's going to be "Cloudy" out there!

In the meantime, NBA playoffs are in full swing with Warriors and Kings playing their Game 7 today.  Kings have played wonderfully with young players like Monk and Fox! But for me it's going to be "Go Warriors" since I would like to see Lebron-Curry Matchup!

/Shyam

The ABC....of 2023!

First quarter of 2023 is over and it was quite an interesting one with so many unexpected events...almost similar to first quarters of past few years...Markets don't like unpexcted events - so it was surprising that with so many expected events, markets did pretty well especially Nasdaq with double digit gains. What's in store for rest of 2023...for that let's look at some ABC...factors!

AI: ChatGPT and followup GPT-4 captured the imagination of world in just few months and revived the excitement around AI similar to what Netscape did for Internet and iPhone did for mobile. Those two events marked the pivotal moments and changed the world and lives of billions of people forever. It's still too early for AI to decide if this is indeed such moment...we will know that in next decade or two. But for now there is definitely lots of excitement with every company jumping onto the bandwagon of AI to project that they are not left behind...Companies which would benefit from this are:

• "ARMs" dealers - companies which provide components to power AI. Biggest winners would be semiconductor companies like NVDA, AMD and to smaller extent INTC, QCOM and ARM (no pun intended)
• Companies which would create useful (to millions of customers) applications using AI. Think about how bookings.com used internet to change travel industry. The winners are not obvious but VC money would flow into these to create next real companies.
• Big tech companies like Microsoft, Google, Apple, META which would integrate AI in all their offerings and charge fees for APIs/Usage similar to what Apple/Google did with 30% cut for revenue from mobile apps

Banking: My last blog covered some aspects of this...this was kind of "mini" black-swan event and threatened to repeat 2008 March events. Luckily US and Swiss policymakers moved quickly and stopped the potential contagion. But going by most respected banker JP Dimon's long shareholder letter, it's not over yet. Many banks (small and big) are sitting on hundreds of billions of paper losses on their balance sheets due to aggressive moves in interest rates...If they have to sell these assets in 2023 (if there are stupid bank runs like at SVB), it could wipe out equity of many banks. The "implicit" guarantee signals Yellen/Binden and Powell have sent have calmed down the run on deposits. But the events have awakened passive holders of cash and they have started taking steps to move the money where they can get 4% (instead of 0.4% in banks). That's double whammy for banks profits. Next two weeks of earnings would tell us the real story on banking sector going forward...so watch out. This could be like 2008 if skeletons start coming out or like 2009 where stock prices were so depressed that it provided once in generation opportunity.

Cloud/Capex: Move to cloud has been driving the spending on IT for last decade producing cloud giants which would be Fortune 50 companies on their own. The trend is gaining momentum due to various factors even though there may be bumps along the way. Companies preferring one time large Capex outlays to periodic Opex model is changing the dynamics of enterprise and consumer spending. Cloud providers are also heavy Capex spenders to build the capacity...But 2023 is "Year of Efficiency" and hence we could see slowdown in Capex spend by these companies impacting growth of suppliers to cloud companies.

Data/Debt: AI is only as effective as data it's built on.We have heard the cliches like "Data is the new Oil" and to some extent I do agree with it. So companies which "own" the data and able to create useful insights from the data or monetize access to the data are going to be winners. That's why SNOW, DDOG are still trading at 20-40 times revenue.  

American government is the biggest debt holder in world and if congress does not act soon to increase the debt-limit, it could create situation similar to debt-limit crisis in 2011 summer...but congress always act when it comes down to wire after lots of drama and grand-standing. Consumer seems to be in much better shape when it comes to household debt as compared to 2008-09. But with clouds of recession and high interest rates, consumer may hold back adding more debt which itself may lead to soft recession (consumer drives 2/3rd of US economy)

Economy: If you believed pundits and economists, economy should have been in recession already. But looking at March employment report - unemployment continues to be lowest in last 50+ years, economy seems to be doing just fine despite all the crisis. So is Economy heading into recession, hard-landing, soft-landing or gaining momentum? No one knows for sure...even experts at Fed or various economic think-tanks have no idea. So when it comes to predictions on economy, don't believe any tweets, news or blogs like mine. Trust your own gut-feeling and how your own economic situation is - income, expenses and debt. That's the best indicator you would have when it comes to where economy is heading.

Fed Policy: Federal reserve's campaign of rate hikes are about to end. They would do 1-2 25 basis point rate hikes in May and Summer and then hold the rates at that level thru Fall'23 and may consider small rate cuts towards end of year. Markets are already expecting rate cuts in summer and may be disappointed.  It would all depend on GDP growth and data on Inflation. All economic reports would be scrutinized by markets and Fed. Bond markets and Fed are having interesting dance moves...10 year and 2 year treasury yields are suggesting that cuts are imminent while Fed officials are saying....not so soon. Let's see who blinks first.

I could go on but it's becoming little long read. So let's wrap up. What all these ABC...mean for 2023 and normal investors? That's where we take help from another cliche "History rhymes...". Here are some historical anecdotes

• Markets are up 80-90% of times 6 month and 12 month after interest rate pause with double digit gains (https://monetagroup.com/blog/the-other-side-of-the-pause-market-returns-when-the-fed-stops-hiking/)
• Year 3 of presidential cycle of first term has been best year (compared to rest of years). Guess what -  2023 is 3rd year of Biden presidency. (https://apnews.com/article/business-b55b1efd70e3d3a2e8ebf48111850f0e)
• And if you believe in sports and markets superstition, when Chiefs won Super Bowl (1970, 2020 and 2023) or Uconn won NCAA championship (1999, 2004, 2011, 2014, 2023), markets have always been up (except one year when markets were flat)

Have a great Easter Weekend!

/Shyam

March Madness came early in Silicon Valley!

What a week of events - no one would have predicted that the 16th largest bank in USA (Silicon Valley Bank) would be no more in less than 48 hours....almost exactly 15 years after the events of Bear Sterns collapse...While one more (again California) bank failed (Silvergate) no one shed any tears due to its high-risk ties to Crypto world...But SVB was no small bank...in fact it was the "go to" bank for last 40 years for startups, VC and many Silicon Valley companies... but what started as typical course of action - upcoming rating downgrade due to loss on treasury holdings, attempt to raise funds to cover capital requirements turn into classic bank run as depicted in  all time classic 1946 movie "It's wonderful life"...Only this time it was not a small town bank..it was one of the premier bank in most innovative place on the Earth...maybe that's what caused its downfall...it was bank for VCs and startups and they exited in droves with slightest doubt and moved their money at internet speed....nothing wrong in protecting their interests..but what could have been a normal capital raise to cover losses became a bank run triggered by tweets and many startups and tech companies found themselves in situation were billions of $$ are stuck and some of them will not be able to pay their employees on payroll day. They could access $250K per account on Monday morning..that's all. After that it all depends on how quickly FDIC and regulators move and unwind the mess...bank management made some wrong choices and caught off guard due to fast rising rates...regulators did not catch the red flags...and analysts (including Jim Cramer) were pumping the stock like its best bank stock to own just few weeks back. What a mess right in our own backyard...and SVB is not alone in this situation...every bank of similar size with similar exposure to bonds/treasuries could find themselves in similar situation since no one can trust any regional bank to keep amount over the FDIC_insured limit of $250K...unless of course regulators move fast and provide assurances that depositors would be made whole. The crypto mess continues with supposedly stablecoin USDC lost parity with $ and touched low of 90 cents (due to money tied in SVB)....This is the second "stable coin" which lost value and became "unstable"

This all happened in same week when Mr Powell told congress and markets to expect higher rate hikes to bring down inflation...Now Federal Reserve may have to watch out for systematic risk in financial system and un-intended consequences due to aggressive rate hikes.  I expect rate hikes to be at pace of 25 basis points for next 3-4 meetings with terminal rate around 5.5 to 5.75. Based on stronger employment report, US economy seems to be doing just fine..but markets do not like good news due to fears of aggressive rate hikes...but Fed will not be able to get to goldilocks economy (not too cold, not too hot). So expect lot more volatility in markets for next few weeks/months.

It's Oscar weekend so time for predictions:

• Best Picture: Everything Everywhere all at Once
• Best Director: Martin Mcdonagh (The Banshees of Inisherin)
• Best Actress: Cate Blanchett (Tar)
• Best Actor: Austin Butler (Elvis)
• Best Editing: Paul Rogers (Everything Everywhere all at Once)

Two special predictions due to its connection to India

• Best Documentary (short): The Elephant Whisperers
• Best original song: Natu Natu (RRR)

This Sunday is also finale for "The Last of Us"...one of the breakout new series on HBO...

Let's hope banking regulators make right calls over weekend and calm the SVB (and other bank) customers and avoid repeat of 2008-2009 financial crisis equivalent.

/Shyam

SuperBowl: Friends, Food and of course Football

It's that Sunday of the year when all of America is in party mood no matter what's happening in the nation or around the world. Super Bowl is one event which had helped Americans forgot the gloomy news of 2001 dot-com bust, 2009 great recession and recently pandemic induced lockdowns. Over 100 million Americans would be tuned to TV with family and friends and enjoying the much deserved matchup - Colts vs Chiefs. This is also significant in terms of generational shift. It's first time when the baton of quarterbacks would be passed from likes of Tom Brady/Aaron Rodgers to young, energetic African-Americans - Jalen Hurts (Age 24) and Patrick Mahomes (Age: 27). Their styles, risk-taking attitudes and running should make this an exciting matchup. 

And when it comes to economic impact of Super Bowl - here are some numbers:

• Boost to local economy of host city Phoenix is going to be around $600-700M
• 325 million gallons of beer would be consumed on Super Bowl day - that's almost 3 gallons of beer by everyone watching the Super Bowl - no wonder Beer companies spend so much on Super Bowl ads and they are always so interesting
• 30 seconds spot to advertise is going to cost $7M. It used to be below $3M just 15 years back
• $16 Billion of betting would happen on everything from color of outfit Rihanna is going to wear during Halftime show to how long National Anthem is going to take (over or under 2 min and 7 seconds) - not to mention numerous combinations of game statistics!
• Tons of pizza, chicken wings, chips and salsa would be consumed

But most importantly this is an occasion when friends can get together and just have a good time. As tradition, we are going to meet and enjoy the game, halftime show and equivalent of "Chai and everything else pe Churcha"

And how can one not mention completely un-scientific Super Bowl Indicator: if "NFC" team wins Super Bowl, markets would be up (70% accuracy) - except it has been wrong when it comes to recent wins by these two teams

- Colts (NFC team) won in 2018 and markets were down by 6%

- Chiefs (AFC team) won in 2020 and markets were up by 16%

So Super Bowl predictor has been wrong in recent years. Personally I am hoping that Mahomes is back from his leg injury and plays to his full abilities and game becomes as interesting as FIFA Soccer World Cup final. 

Enjoy the Super Bowl Afternoon with Friends, Food and great Football!

/Shyam

Tech - in Vogue Again?

First of all, Happy New Year...Due to holiday travels my new year blog got delayed..it's about time to write first blog of the new year...and last two weeks of action in markets, inflation and general economy definitely deserve a look and make some predictions for what's ahead in 2023.

What a change on the calendar makes a difference in sentiment...technically year change should not matter ..it's abstract boundary created by humans to manage their life...animals don't have any calendar year..they have only seasons..but humans also invest in markets and somehow change of year makes change in psych of investors..as if all the worries of 2022 are over and it's new start. Well if it helps change the sentiment, I am all for it every now and then!

Let's look at some of the trends and make some predictions.

• Inflation trend is definitely downwards and it can reach near desired fed target of 2% - at least when it comes to core CPI. I won't be surprised that by end of year, inflation could be below 3%
• Fed rate hikes also may be near end...most likely we will see another 75 basis point increase (50, 25 or 25, 25, 25) to reach around 5% and then stay there for 6-9 months. Fed could start cutting rates at end of 2023 or early 2024 (similar to what happened in 2019)
• Despite all tech layoffs, employment would remain strong. It's at lowest levels since 1969 and would remain below 4.5% throughout 2023
• What about trillion(s) $ question - Recession? Despite all the gloomy predictions by many experts, US economy may just skirt the recession or have a very shallow recession - almost unnoticeable to everyone except record keepers and people making gloomy predictions (you know these people from their tweets)
• Earnings - Q4 earnings have started coming out. All major banks had decent earnings. Big tech earnings would be out in next 2-4 weeks. Given analysts have already cut their predictions, Q4 earnings would be ok. Most of the companies would reset expectations for 2023 earnings and set lower foundation. Since stocks of all tech companies took big drubbing in 2022, the stock prices would go up even when earnings forecast are reset. After all earnings are not coming down by 30-50%. In summary - after Tech Drubbing of 2022, Tech would b in Vogue in 2023!
• Markets - look at how markets did in 2019. 2023 could be repeat of that - may not return 30% the way it did in 2019 but low teens is possible. Means S&P could end 2023 between 4200-4500.

So where to invest? Given dismal record of 2022 stock predictions, I decided not to make individual stock predictions. Instead I would suggest sectors which look promising.

• Semiconductors - Semi is the Oil for the Digital Economy. Now that valuations are reset to reasonable levels, 2023 would be great year for Semi. (ETF: SMH)
• SAAS companies - this sector was even worse than semi and it was much needed reset given that valuations were out of whack as companies were getting 20-80 times sales valuation. After drubbing of 50-80%, valuations have come down to 2-20 times sales. There are so many companies in this sector. Best way to decide which ones to buy - you would have to do your own homework to create the list. But I use these general rules
• Price-to-sales less than 5
• ARR growing at 20% plus
• Renewal rates over 80% - ideally over 100% 
• Advertise based companies - Ad market has slowed down but not falling off the cliff. So companies in social/search sector (e.g. META, GOOG, AMZN and SPOT), streaming (e.g. PARA, SPOT, NFLX) provide a great way to get exposure to this sector
• Energy - This was the best sector with returns over 50% in 2022. While 2023 would not have similar performance, this is safe sector to get decent dividends (ETF: XLE)
• Defense/Industrials/Healthcare - I had not studied individual companies but given the macro view, these would be another safer areas to explore. 
• China - after abrupt shift in zero-covid, Chinese leadership is focused on revising economy with less more friendly approach towards tech companies. That means investors patiently waiting should get rewarded (ETF: KWEB)

But if you want to keep it simple, just do periodic (bi-weekly/monthly) investments in SPY. S&P could reach all time high again in 2023/2024 - that would be 20% from current levels.

Happy Sankranti and let's enjoy the NFL playoff season leading to Super Bowl.

/Shyam

"Fed" Up - The Way of Inflation!

First Avatar movie got released in 2009 in midst of market turmoil due to housing crisis. 13 years later,  "Avatar - The way of Water" got released this week - again in the midst of post-pandemic, inflation driven market turmoil. James Cameron took 13 years to make second Avatar movie and I am sure it would be another blockbuster like first one (needs to make $2B box-office collection just to break even). But "Fed" up sequel seems to have repeated in just 4 years. Last time I wrote with exact same topic was in Oct 2018. Most of the content in that blog could be repeated here. Markets are frustrated that Fed is again behind the curve by continuing to raise rates till it reaches 5.1% even though everyone fears that economy is heading into recession. As reaction to Fed meeting and Powell's Q&A session, markets crashed to send a message - enough! But Powell's fed wants to make sure that inflation is really coming down and willing to take the risk of "transitory" or "technical" recession. The employment is still very strong. Post 2009, economy had jobless recovery. Post pandemic, economy may have "job-full" recession since there is 1.6 job for every worker who wants to work. Post pandemic, job participation has gone down. While many high-tech companies have done layoffs, it's small part of overall employment. No wonder all these layoffs made no dent into unemployment report. So Fed is right to keep the course and raise interest rates to 5% and keep it at that level for 6-12 months. That should help take excesses out from speculative markets like Crypto, SPAC etc. The valuation of once high-flying SAAS companies have already come down to earth and now boast one the most attractive valuations. Let's look at the headwinds and the tailwinds facing economy and markets and how one should position for 2023.

Headwinds:

• High interest rates raising cost of capital (and side effect of money moving to no-risk treasury market instead of risky stocks)
• Economy heading into recession
• Covid still spreading - with covid controls gone, it would become worst in China before Chinese get vaccination and/or herd immunity
• Retail sales have shown some weaknesses
• Lack of labor 
• and most importantly - stubbornly high inflation 

Tailwinds:

• China moving away from strict zero-covid policy and focus on economic growth. It's also relaxing some of the policy targeted to bring down tech giants
• Reasonable valuations for many companies especially in tech areas like software, social, comunications
• Recent downward trend in inflation indicators like PPI and CPI, reduction in gas prices, rental market, slowdown in hosing market
• Everyone is talking about recession and S&P reaching low of 3000. Means there is no "irrational exuberance" giving Fed some leeway to stop after raising rates by another 75 basis points cumulatively in 2-3 meetings (50, 25). Fed would stop after March 2023 meeting (they did same in 2019)

S&P returns were -6.6% in 2018 when Fed was raising rates. Guess S&P returns in 2019? Plus 30%. If history is any guide, 2022 would be like 2018 and 2023 has potential to be like 2019...S&P returning low double digit gains is not out of question. But Q1 would be treacherous till direction of Fed rate hikes is uncertain. In Q1 2019, S&P was up by 13%. That's macro market prediction. When it comes to individual stocks, beaten down mega caps like META, BABA, GOOG, AMZN, APPL and MSFT offer some of the best and safe investments (in that order - before investing do your own diligence). They are like energy giants of 2021 (look at returns of Chevron and Exxon in 2022). 

Tomorrow is FIFA Soccer World Cup final. Both Argentina and France deserve the spot in final. Messi may be playing his last World Cup while Mbappe has few more world cups to shine. So I am rooting for Argentina. But it would be interesting to see if France can match Brazil's record of back-to-back WC wins! Either way, it would be an exciting game. So enjoy the game with friends and family.

Happy Holidays!

/Shyam

House of Cards meet Game of Thrones!

Last week was one of the most eventful week - elections, crypto crash, soft inflation triggered massive rally in stock markets, layoffs at Meta and many other tech peers, slow counting of votes and of course the chaos at Twitter.....each of these can be a blog topic. But let's focus on how FTX "House of Cards" came crashing due to "Game of Thrones" in Crypto Universe!

I have written about Cryptos in my previous blogs 

"Coinbase IPO: Netscape or Webvan moment for Crypto", 

"Crypto-currencies: Fad, Fraud or Frontier", 

"Tulips, Eyeballs and Dogecoin"

Many of those hypothesis and predictions came to forefront this week which led to collapse of FTX - once valued at $32 Billion and its young founder Sam Bankman-Fried became from hero to villain.  FTX was saving crypto world during summer meltdown by buying or supporting other smaller "houses of cards" built on fraud coins, over-leverage, no regulations...no one had any idea that same is happening at FTX also. FTX built its empire based on FTT coin created by itself and using money from customer accounts to trade, leverage, party in Bahamas and exotic locations and donate to politicans to avoid scrutiny and regulations. FTX and Sam were top 10 donors in this election cycle. No wonder everyone was turning blind eye to the Wild West of Cryptos. Another big player Binance controlled by another young founder Changpeng Zhao (CZ) was growing on international markets without much regulations. The tensions between these two founders came out in open (where else - Twitter). CZ announced that Binance is going to sell FTT  coins which it got when it invested $100M in FTX. That was enough for FTT to start crashing wiping out the paper (or virtual) wealth created by FTX. There was classic "bank run" on FTX when major players started pulling out money (over $5 billion). FTX tried to sell itself to it's rival Binance and initially CZ agreed to buy only to reverse it next day...It was classic "Game of Thrones" kind of move because he knew that the Hunter has become the Prey and it's time to go for the kill....well FTX.COM filed one of the biggest bankruptcy on Friday and appointed Mr Ray who helped thru bankruptcy process of guess which entity....Enron! After all FTX was Enron of Crypto world! All of these events led to major crashes across all crypto coins costing investors and speculators lose over half trillion $. To complete the "Game of Thrones" analogy, "Winter is Coming"....So if you are participant in crypto, be careful! There are more "House of Cards" to collapse...we just know which ones are these.

Now onto other events of last week...

CPI reading came better than expected which gave hopes to markets that Fed may be closer to doing its job of controlling inflation and may slow down interest rate hikes. This cased massive rally in growth stocks - some of the biggest companies (from FANG group) went up by 10-30%. This was similar to Vaccine hopes during depth of COVID pandemic. Markets would digest these massive gains over next few weeks till Fed meeting in mid-Dec. There would be multiple reports like employment report, Nov CPI/PPI reports before Fed meeting. If those indicators came as good as Nov, Fed would raise interest rates by 50 basis points and give an indication that they are closer to slowing down with terminal rate around 5%. That should set foundation for markets to rally during holidays and S&P may end the 2022 year near 4200.

Elections - The counting is still not over at some places...so Washington is still waiting who will control house and senate. How can most developed nation takes more than 5 days to complete counting of just few thousand votes at some places? India finish its counting in less than 48 hours most of the times despite having 4 times votes to count...maybe the US needs to send some election officials to India to learn. One of the great outcome of the elections was finally GOP would start side-lining Trump...already the Murdoch media world has started setting the stage of dumping "Trumpty Dumpty" and supporting Ron DeSantis.

Twitter - Chaos at Elon Musk's Twitter continues with fake but "verified by paying $8" accounts spreading rumors and fake news...but that topic for some other time.

That's all for now! 

/Shyam

"Gridlock" is Good!

Many of you know the famous Gordon Gekko (played by Michael Douglas) dialogue from the 1987 movie Wall Street - "Greed is Good". Well - on the eve of mid-term elections, let me tweak that dialogue into a political context and say "Gridlock is Good".

Over the last two years, we've had a one-sided government within all branches of government (President, House and Senate controlled by Democrats). We got some meaningful policy actions done by Biden and Congress. But some of those actions also created the inflation mess that the economy is dealing with (another reason is slow action by Fed in raising interest rates) as well as gyrations in stock markets.

Most of the predictions suggest that Democrats are going to lose House by a few seats and there is small possibility that they may lose control of Senate (my prediction is that the Senate will remain 50:50). Either way, with the House gone to GOP, there would be "gridlock" in Washington. Here are my reasons to suggest that "Gridlock is Good":

• Both parties must agree to budgets, taxes (increasing or reducing), debt-limit, all kinds of funding. This would bring some much needed financial discipline which has been lacking for last few years.
• Major policy decisions will not take place unless both parties agree and there is very small chance that they would agree to anything. 
• Power to the centrist political leaders - the election setbacks would bring Washington to centrist policies. In last 6 years, it feels that Washington has been taken over by "ultra-right" or "ultra-left" and centrist have lost their sway.
• 2024 - These elections would set the tone for 2024 elections and hopefully send message to both parties to promote centrist policies and make America united again!
• And history had proven that when there is gridlock in Washington, markets do well. In the last 80 years, markets have been up every time after mid-term elections and in most cases, mid-term elections have balanced the power. History is bound to repeat again - after mid-term elections, markets would start finding bottom and inch higher with S&P heading to 4000 or higher by the end of the year.

As a follow-up to my earlier blog regarding the 4 "Cs" of Tesla - a lot had happened in last few days. Musk is focused on Twitter (based on his non-stop tweets and so many drastic actions he had taken in first few days) and during last 6 days, Tesla had lost 14% of market cap, which is ~80 Billion (reaching 17-month low). And if my hypothesis is correct, there is more pain ahead for the stock and company! As far as Twitter, the story is going to get worst before it gets better due to recession, boycott by many companies and individuals, low employee morale and the CEO's "strategy by tweet" approach. It's possible that after initial churn, Elon Musk may be able to transition it but may has to keep it private for many years.

Tomorrow is election day in USA, Go out and Vote (I already voted by mail)

/Shyam

4 "C"s of Tesla!

I have a written few blog posts about Tesla while it was still a small company with a market cap of less than $10B (unfortunately, I did not follow my own advice of owning the stock instead of or in addition to the car; as the saying goes, hindsight is 20/20). Now that Tesla is a much bigger company (with a market cap equal to or greater than all the other car companies in the world combined), it's time to take another look at the company and the stock. So here it goes.

$TSLA reached a 52 week low this week despite very optimistic "pedal to the metal" projections from Elon Musk. After touching a $1 trillion valuation, it has been sliding down (call it the trillion dollar curse, similar to what Meta also experienced – but that's another blog topic) and lost over 40% in 2022. What's impacting Tesla and its stock? There are 4 "C"s which will decide what's next for the company.

Competition:

It used to be EV + Autonomous Driving + Cool Factor = Tesla just a few years back. There were hardly any other EV choices. The big car companies saw the writing on the wall and finally woke up, and now almost every one of them has at least one all-electric model (Ford F150, VW iD4, and so on) in the market or will have one very soon. With California's mandate of only EV sales by 2035, this decade will see at least 50-100 choices when it comes to EVs in all price ranges. While Tesla will probably still keep its leading position, other car companies may see decent success (they have to for survival). Also, watch out for Japanese car companies like Toyota and Honda; they have trusted brands and reputations for reliability at affordable prices. Tesla could see a similar trajectory as what Netflix saw in streaming market when competition from existing studios like Disney arrived...

Car Industry:

Tesla is, after all, in the car industry, which is known for its enormous capital needs, low gross margins, and intense competition. While Tesla is also a tech company, I estimate that its products have an average turnover of about 10-15 years (unlike mobile phones which is 2-4 years). That's why the average P/E multiples in the car industry hover around 10. Eventually the large numbers and the structure of the car industry will catch up with Tesla valuation and its P/E would get compressed from a tech industry valuation to a car industry valuation.

China:

Tesla deserved credit for its excellent success in China's EV market – for manufacturing cars as well as grabbing a large market share in the premium EV market despite intense competition from Chinese EV players like NIO and XPeng. But relations between USA and China have further worsened during the Biden administration. With the Taiwan flashpoint and US efforts to prevent China from getting ahead in key industries, it's just matter of time before tensions reach a breaking point. Xi will be China's leader for at least the next 10 years, and given how China's own companies (such as Alibaba, Tencent, etc.) have been cut to size, Tesla, being a US company, may be in danger of the same. Imagine what would happen if China decides to apply the brakes on Tesla's ambitions...

CEO:

Tesla = Elon Musk. Period. He saved the company from bankruptcy and became richest person in the world due to Tesla's success. Without Elon Musk, we would not have Tesla in its current form. But even Elon Musk cannot change the first three "C"s. And his recent digressions into social networking with the Twitter deal will have a direct impact on Tesla. During a recent conference call, he tried to pump up the stock (Elon said that Tesla would be bigger than Apple and Saudi Aramco combined - which would be $4.3 trillion valuation), but markets did not like what they saw in the results. Also a CEO pumping their company's stock is never good.

So these are the 4 "C"s. I used to recommend buying Tesla stock instead of the car. Now I would say treat yourself to a new car and watch out how these "C"s play out before buying the stock!

Happy Diwali to all!

/Shyam

October: Markets and Festivals!

After long hiatus due to personal reasons, it's time to get back to blogging. And what better day to start than on first day after historically worst month for markets. This year was no different. Sept kept to its reputation as worst month with markets ending at lowest point for 2022 (S&P down by 25% and Nasdaq by 32%). This week saw the leaders (like Apple etc) taking the hit...that may be an indication that markets may be getting closer to bottom...now that we are in Oct which had the reputation of having worst crashes, we may get one or two big crashes...that would be clear sign of market bottom. As they say "Don't fight the Fed" - that holds true in both directions. Fed is determined to get back it's credibility and will not (and should not) pause interest rate hikes till inflation indicators show clear downward trend....It's possible that Fed may do more than needed and damage the economy at least for short run...Economists, companies and policy makers are already preparing for recession in 2023 (if we are not already in recession). Question is - would it be shallow like 2020 or multi-quarter like 2008-2009? 

All indicators are pointing to markets playing out like 2008-2009. At that time, the volatility was much higher due to potential of complete meltdown of financial system. This time banks are in much better shape...so this may be a combination of 2008-09 and 2001-02. High tech valuations are getting compressed but other sectors like Energy are holding up well.

Last year every company was talking about supply chain issues preventing them from filling the orders and booking the revenues. If Nike's announcement is any indication, this earning season would be about too many goods and inventory glut leading to write-offs. So much about just-in-time and efficient supply chain management. Fortunately companies have not started mass layoffs.  Employment in US is still holding strong...even now it's still very difficult to fill positions with qualified candidates even at significantly higher compensation. Would that change? Possibly given initial announcements from mid-size companies (DOCU, TWLO) to bigger companies (10% cost cutting by Meta and 20% productivity improvement by Google are indicators)

So what's in store for last quarter of 2022? Now-a-days making predictions has become a fool's game. But let me still take a swag at it. 

• Fed will raise interest rates by 50-75 basis points in Nov and 50 basis points in Dec and give an indication that they would monitor the economic indicators before further hikes. No rate cuts in 2023 unless economy enters into severe recession and inflation fears turn into deflation talks...For now inflation would start inching towards 6-7% by year end with downward trend.
• Corporate earnings would be better than feared but companies would be extra cautious in their projections for Q4 and point to recessionary pressures and high costs (especially labor)
• Holiday shopping season would be reasonably good...people would be traveling and spending money. However travel sector (cruise companies etc) would continue to suffer due to capital structure (too much debt at very high rates)
• Elections: Dems would keep the senate (50-50) and may lose house majority with small margin
• After volatile October, markets would stabilize post elections with S&P ending the year between 4000-4200 (10-15% higher from current levels)

October is also festive season across the world. Jewish celebrating Yom Kippur, Hindus celebrating Navratri/Dussera and Diwali and then there is Octoberfest in Germany and around the world.

This quarter also has many sporting events - Cricket T20 World Cup, Soccer World Cup and in US, NFL and College Football keep weekends exciting (first time I am playing NFL fantasy football with my son and his friends..it definitely makes watching games more interesting). So for rest of 2022, forget about what's happening in markets and enjoy festivals with family and friends, sports, movies or just a walk in the park with colorful foliage!

/Shyam

Markets: "MayDay" or "May the 4th be with You"?

Mayday is an emergency procedure word used internationally as a distress signal in voice-procedure radio communications.

May 4, or, "May the 4th Be With You," marks a celebration of all things Star Wars attributed to famous phrase "May the Force be with You" used by Jedi Masters!

After dreadful month of Apr and worst start of year for Nasdaq ever, high-tech growth stocks are sending "Mayday" signal and hoping that some kind of Force would save them from daily pounding. It feels like dot.com bust all over again. Covid pandemic pulled forward growth of many high-flying stocks. Now that pandemic is over as worldwide issue despite spurts in Chinese cities and even in New York, investors are worried about lack of growth for once high-flying growth companies. Even "FANG" group is not spared. Many stocks are back to where they were before pandemic. For few of them, 5 years of gains got wiped out in last 5 months. 

So obvious question is - what's next?

Let's look at some macro and geo-political events which would continue to influence markets more than underlying earnings.

• FED double-barrel shot at inflation - By all measures, Powell's Fed is behind the curve when it comes to dealing with inflation and lost some credibility. To restore it, Fed is going to be more aggressive than it used to be and reduce it's balance sheet and increase interest rates by 50 basis point for next 3-4 meetings. This time they won't have much sympathy to market tantrums. They would slow down only when inflation comes within their target range (2%) and economy does not enter into severe recession, That means days of EASY MONEY are GONE!
• Russia-Ukraine (NATO) War - this is unfortunate and un-necessary war and it's very saddening to see so many lives are getting lost and families displaced. Unfortunately both sides are not willing to negotiate means war would go on for many months at minimum. This would put more pressure on commodities (Oil, gas, corn, wheat and so on) and hence inflation
• COVID resurgence in China and elsewhere - this is micro-version of what happened in 2020 spring. After two years, world policy makers are better prepared to handle COVID. Since most of the world is vaccinated, there is no panic. It would definitely take a bite out of growth in China but if at all it would become positive catalyst for markets as China starts relaxing lockdowns.
• Supply-chain bottlenecks - Supply chain bottlenecks would continue due to war, covid in China, labor shortage and so on. But as demand cools down, supply-demand may come into balance by end of year and could be another mini-catalyst both for inflation outlook and markets
• Growth - Many high-growth companies have grown multi-fold due to pull forward of demand. Now they have to keep growing on  bigger numbers. That's difficult to do. That means growth premium built into stock valuations would have to compress. In many cases it has already happened after last 2 earnings seasons. P/S (price-to-sales) ratios have come down from 30-50 to under 10. For example: Roku, FB, PayPal, Spotify are trading at low single digit P/S ratios.

Markets go thru such normalization every few years as seen during 2011 and 2018. So 2022 would be like one of those years. Nasdaq is already down by 21% and S&P by 14%. After few more weeks of volatility both ways, markets should find footing late summer to get ready for holiday recovery. Indexes may end year with flat or single digit up or down compared to where they were at start of 2022. So if you are patient investor, best way is to do ETF investing on monthly basis. I am still sticking with my previous recommendation of XLE, XLK and XLF on regular basis. To keep it simple, you can just go for SPY.

May the 4th be with You!

/Shyam

March Madness!

It's that time of the season when NCAA Basketball have their March Madness tournament in which college basketball teams play to win National Championship and millions of brackets are published. At one time, Buffet announced  $1 Billion prize money to anyone with 100% accurate bracket - no one won it. It's just impossible probability (one in 9.2 quintillion). But it's fun - This year my ranking is close to half-million in CBS Sports Men's Bracket Challenge even with 30 correct predictions till now.

March also brings another interesting aspect about markets - in last 15 years, markets have reached bottom 2 times during March. March 9, 2009 during housing bubble crash and March 23, 2020 during pandemic induced crash. So we may be in for repeat of this pattern when S&P reached short-term bottom on Mar 7 2022  (at 4170).  Based on how most of the indexes recovered since then, it feels that way. Even Chinese stocks seem to have reached bottom on Mar 15, 2022 and roared back with 30-100% gains since then in just few days. For example, DIDI went down below $2 and roared back to gain more than 100% in just 4 days.

So what should an investor do? My 2 cents advice: Just invest in index funds/ETFs regularly and don't try to time the market for individual stocks. 

But if you are itching to find next winner(s) similar today's mega-cap tech companies (e.g. AMZN, Netflix, Apple) post dot.com bubble bust or big banks post housing bubble bust (BAC, Citi, MS) or big energy companies during depths of panic of Covid Pandemic (XOM, CVX, VLO), I would recommend to follow some simple rules before jumping in.

As we had seen during pandemic bubble bust, most of the hyper-growth stocks have come down to earth due to gravity of big growth during pandemic and lack of same post-pandemic. If you look at stocks of Zoom, Netflix, Peloton and many other similar companies, they are at same level as pre-pandemic after touching sky-high valuations. So how do we discover value in these hyper-growth stocks? 

Here are some simple rules we can follow:

• Don't ever buy hyper-growth stock near it's 52 week high
• When hyper-growth stock starts coming down, don't buy till it's down by at least 75%
• When it's down by 75-90%, you may want to consider as long as
• Still growing at double-digits
• Price-to-sales come down to single digit
• And most importantly it has enough money to survive till it becomes profitable
• If it's down more than 90%, stay away since it's possible that it may go out of business if it's not able to raise enough money to survive. There would be few survivors but it's big gamble
• Simple fact:  When a stock comes down 75% from its 52-week high, it needs to go up 300% just to break even. On corollary, when you buy at 75% discount, you could make 100% even if it's down by 50% from its 52 week high.
• Resist the temptation to buy when it's down by nearly 50%...there is more downside to such stock. After all there is saying on Wall Street - "Don't catch a falling knife"

Now that markets may have reached short-term bottom, you could do your own research based on above criteria if you must buy individual stocks. My advice - Don't and instead stay with index ETFs!

Happy Holi!

/Shyam

The Four Ps of Markets

Similar to The Four Ps of marketing mix (Product, Price, Place and Promotion), I was thinking of The Four Ps of (current state) of Stock Markets. Let's look at "The Four Ps of Markets"

Post Pandemic Growth: Pandemic pulled forward growth of many companies such as Zoom, Roku, Netflix streaming numbers, enterprise spending, cloud growth etc. 2 years later Pandemic seems to be on its way out and world is returning to normalcy. Post earnings calls. Markets started worrying about what would post pandemic growth look like for high-growth companies. Stock prices of most of these companies reached peak 12-15 months back and are now 50-80% down from those peaks (Zoom stock reached peak in Oct 2020 when it was valued more than IBM). High double digit (in some cases triple digit) growth is over and these companies must be valued based on growth going forward. Even achieving 30-50% growth on bigger numbers is going to be difficult. And we all know what happens when growth music stops...Some of us are still waiting for peak valuations reached during .com bubble bust.

Powell Fed Policy: Powell's Fed is definitely behind the curve when it comes to inflation (which was transitory according to Fed just few months back). Inflation and expectation of high inflation have started taking roots and that's dangerous as it would drive customer behaviors. Combined with supply chain issues and tight labor markets, it could really get out of hand. Hence many Fed committee members have started advocating 50 basis point rate hike in March meeting and follow thru further rate hikes in every meeting. Just few weeks back, markets did not model this and now must adjust to this new reality. That means 2022 may end with Fed interest rates closer to 2% and 30 year mortgage closer to 5%. With easy money gone it would have impact on everything from crypto prices, cooling of housing (which is much warranted) and busting of unicorn valuations as well valuations of high-growth  companies. The price-to-sales ratios would compress from 30-100 to 5-20. In fact some of the companies like Fastly, Roku, Spotify are already near 5 P/S ratios. Now they need to start earnings profits while maintaining high growth and that's difficult balancing act. 

Putin Games: Putin may be one of the shrewdest leader running a big country. He knows what he wants - basically restore the old glory of Soviet Union and raise his personal standing on world stage. He knows that West is not united and Americans don't want to fight someone else's war after war fatigue from wars in Iraq and Afghanistan. Putin had experienced mild reaction from world when he took control of Crimea in 2014. As long as China is neutral and West is divided, Putin would play his mind and war games to make sure that Ukraine and other Soviet Bloc countries remain under Russian influence as long as he is leader. And unfortunately he won't mind going to war to achieve these goals. Normally this should have impact only on energy markets. But given first two Ps, every news on Ukraine crisis seem to impact valuations of everything.

Pain and Panic: Nasdaq (down 13.5%) is already in correction mode and S&P (down 8.5%) is close to correction levels. But indexes don't tell the full story - except energy and utility sector, most of the sectors are in bear markets. Software companies are down by 30-50% and Pandemic darlings are down by 50-80%. Even company like Moderna which effectively saved the world (along with Pfizer, J&J and AZ) with its covid vaccine is down by 70%. So pain is wide-spread. But still there is no panic similar to March 2020 or March 2009. And guess what - March 2022 is just around the corner. So it's possible that final flush may be only few weeks away. Once markets see real panic, that may be signal that it has reached bottom.

There you have it - The Four Ps of Markets!

/Shyam

Post Pandemic Return to Normalization

Exactly two years back first COVID case was detected in US. Two years, Two Presidents from two parties with very different approaches to dealing with COVID and USA is still having highest daily cases, highest hospitalizations and unfortunately deaths due to COVID. Unfortunate state of affairs despite having three effective vaccines and majority of people vaccinated. After two years,  people are frustated and have moved on and treating COVID like endemic which is going to stay with us for many years to come. That's going to be normal world in 2022. All of us should continue to wear masks and take eligible vaccine boosters when available.

While world is adjusting to Covid as endemic, markets are trying to adjust to post-pandemic economic world. Let's look at few macro attributes and their effects on stock markets in 2022

• Inflation running very hot and is at 40 year high reminding people of Volcker Fed days
• Supply and labor shortages - I experienced it first hand
• 30 min to pick coffee at Starbucks (25 people were in front of me) even after ordering on app
• 45-60 min to pick prescriptions at Walgreens since they had to reduce hours due to shortage of pharmacists
• 30 min in line at Sprouts checkout counter
• Avg dinner ticket has gone up by 30-50%
• Cleaners and gardeners are booked and requesting 40% increase in their rates (which I think deserve due to physical work they have to do)
• Houses in Cupertino/Sunnyvale getting sold for $1M over asking price ($2.6 M listed house went for $3.8M with 26 bids - crazy)

No wonder Fed had to correct its course and acknowledge its mistake that inflation is no more "transitory" and act aggressively. And looking at their last meeting minutes and subsequent communications, they plan to do total 8 interest rate hikes (3 in 22, 3 in 23 and 2 in 24) for total of about 200 basis points. And of course markets - in particular bubble markets don't like it.  Markets were thinking that by bringing down indexes into correct territory would scare Fed to slow down. Let's see what Fed does in their FOMC meeting next week.

The myth of crypto as hedge against inflation is broken. Most of the cryptos are down by 50%. (In comparison stock indexes are down by 5-15%). Stocks of well know companies (CRM, SQ, PayPal, NFLX) are at 52 week lows. The darlings of Pandemic (PTON, ZM, Roku, MRNA, DOCU, TDOC and many others) are down by 75%. Pandemic fueled hangover in these stocks is over and now they have to show real growth based on inflated growth they had during Pandemic. And large numbers make expected 30-50% growth difficult. 

So what happens now and where should one invest (or better word would be "hide")? For that we would have to go back to post dot.com (bubble 2000-2001) or housing/financial bubble (2007-2009). The Pandemic bubble (2020-2021) is bursting and 2022 would be the year of normalization. There would be many survivors and some great companies (similar to AMZN, NFLX during dot.com bubble) would come out stronger. But it would be very difficult to pick winners. So I would stay with my advise of staying with indexes (SPY, XLE, KWEB, XLF, XLK, SMH, AMLP, IJR)

Markets are irrational in short term and rational in long term. So if you are investing for long term (5-10 years), 2022 would provide ample opportunities since indexes would be meaningfully higher in 2030 than now just based on economic expansion and strength.

/Shyam