Friday, 2 February 2024 — Melbourne, Australia

By Kiryll Prakapenka Editor, Fat Tail Daily

[4 min read]

Dear Reader,

I could start with the December quarter CPI. Or the December retail sales. Or the US Fed rate decision. Or the Reserve Bank’s research on falling real disposal income.

But that’s so 2023.

I’ve made a 2024 resolution.

Less macro. Less ‘news flow’.

Greg Canavan, funnily enough, made the same resolution.

Macro is interesting. But does it add value? Especially to a stock picker intent on finding quality businesses?

Where is the edge in digging through Fed statements or interpreting Jerome Powell press conferences?

Often, there isn’t one.

Macro is a fascinating distraction, but a distraction nonetheless.

So, we both resolved to indulge less in macro musings. We’re not shunning macro. We’re not ghosting it. Just becoming politely estranged.

In Greg’s case, he even unsubscribed from a macro podcast he regularly listened to.

But at least he finally returned to Fat Tail’s podcast this week after a two-month absence.

In his last appearance, Greg discussed the Santa rally. Festivities have since dragged into the new year. At the start of December 2023, Greg said this:

‘Everything is about probability. And I think the probability of the Fed or the Reserve Bank pulling off a soft landing when you’ve hiked rates so sharply is quite low. Betting on this rally to continue is a low-probability event.’

But continue the rally has.

Earlier this week, both the S&P 500 and our ASX 200 hit new all-time highs.

What gives?

And does Greg still think the rally continuing is a low-probability event?

Yes.

And this episode is all about why.

Other topics discussed:

• Why US and ASX stocks are rallying
• Does the rally make sense?
• Investor sentiment is greedy and bullish
• Quality ASX stocks trading at high forward multiples
• Why Domino’s Pizza is a warning for investors
• Struggling Aussie consumers belie ASX 200’s rally
• Boring stocks versus hype stocks
• Reading recommendations: Munger, Marks, Lynch

Stock markets hit new highs

What’s going on?

We went from the market widely expecting a recession in 2023 to stocks hitting new all-time highs in January 2024.

Our humble ASX 200 reached a new all-time high on Wednesday, surpassing August 2021’s peak.

But the US rally is the big one.

Over 2023, the Nasdaq 100 gained 54%. The best annual gain since the dot-com boom in the late 1990s.

Auspicious? Inauspicious?

A 54% gain in a year is stellar, for an individual stock. But a 54% gain for an index like the Nasdaq 100? Stupendous.

Of course, it’s the tech behemoths who did most of the lifting. Microsoft, Alphabet, Apple, Nvidia, Amazon, Meta, and Tesla.

Strip the seven away, and the rally is less exceptional.

Brittle rally and lofty expectations

For many, the surge in US stocks is really a narrow surge in tech. Specifically AI.

That poses problems.

This is a brittle rally.

The Magnificent Seven, like Atlas, are propping up the S&P 500. Or rather, high expectations for the Magnificent Seven are doing the heavy lifting.

And as I like to say, high expectations make for high ledges.

We’re seeing that with Tesla already.

Year to date, the automaker is down ~25%.

Greg noted that analysts slashed Tesla’s FY24 earnings per share estimates 60% over the past 12 months.

And we saw that with the market’s reaction to results from Microsoft and Alphabet on Thursday. Both stocks fell after hours, despite revenue beats.

Results were strong. But clearly not as strong as investors expected.

Unmet lofty expectations leave the Magnificent Seven vulnerable. And by extension, the wider US market.

As Bloomberg’s John Authers noted:

‘These companies are now so important that their results are treated almost like macroeonomic data. All could be vulnerable to geopolitical shocks, particularly regarding Taiwan, where many of their semiconductors are made.’

That said, today we had Facebook-owner Meta Platforms come out with its results. The stock is up ~15% after hours.

Clearly, some tech giants are still capable of beating even lofty estimates.

Domino’s issues warning

The ASX doesn’t have stocks burdened with expectations as high as those foisted on the US tech giants.

But expectations hurt any stock unable to meet them.

Take Domino’s recent profit warning. On the day of the announcement, the pizza merchant fell over 30%.

It was a profit warning and an investor warning.

Beware valuations and the earnings expectations embedded in them.

Heed Greg’s caution in a recent Insider piece:

‘With many stocks trading on rich valuation multiples, the market will deal harshly with earnings disappointments.

‘Take Domino’s Pizza Enterprises [ASX:DMP]. Last week it issued a profit warning. The stock price plunged 30%.

‘Prior to the trading update, DMP traded on a P/E multiple of 40 times!

‘But consensus earnings estimates forecast 50% earnings per share growth from FY24 to FY25, so the multiple was reasonable (if you were confident in the forecast).

‘This is the problem when a stock with a growth multiple disappoints. The share price reaction is violent.’

During the episode, Greg ran the FY24 price-earnings multiples on a slew of quality ASX businesses. Here’s the quick breakdown:

• Commonwealth Bank is trading at 20x
• CSL at 35.2x
• Macquarie at 20.4x
• Wesfarmers at 26.5x
• Goodman Group at 26.3x
• Aristocrat Leisure at 21x
• James Hardie at 25.2x
• Cochlear at 54x
• Carsales at 40x
• Seek at 40x
• Breville at 32x

Compare that to the forward multiples of the Magnificent Seven:

It seems some household ASX names trade at higher growth expectations than the US tech giants.

I’ll reiterate my earlier point.

High expectations make for high ledges.

Enjoy the episode!

Regards,

Kiryll Prakapenka,
Analyst and host of What’s Not Priced In

Kiryll Prakapenka is a research analyst with a passion and focus on investigating the big trends in the investment market. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding of the fundamentals behind companies. He’s the host of our weekly podcast What’s Not Priced In, where he and a new guest figure out the story (and risks and opportunities) the market is missing to give you an advantage. Follow via your preferred channel and check it out!

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

Can AI Make Us Better Humans?

~ An ad at Bloomberg

One of the most remarkable things about this remarkable period in our history is the astounding value of ‘Information Age’ equities.

The leading ‘Info Age’ stocks — the Magnificent Seven — are worth far more than the leading ‘industrials.’ The Ford Motor Company, for example, was founded 121 years ago. It has provided millions of wheels to millions of people. Today, the company is worth less than $50 billion. Compare that to Apple, now worth $3 trillion — or 60 times as much. And yet, which would we rather give up — our cellphone…or our F-150 pickup? Which is more valuable?

Because of the success of these big techs — Amazon, Microsoft, Netflix, Nvidia, Alphabet, Meta and Tesla—the value of the entire stock market is close to an all-time high.

‘The New Oil’

Meta passed the $1 trillion market cap mark last week. That puts all but one of the Magnificent Seven — Tesla — over $1 trillion…with a total value for the group over $13 trillion. Poor Tesla; in this company, it can’t keep up. Its revenue increased only 3.5% last year. The stock sold off last week, down 13%.

Semiconductors, we are told, ‘are the new oil’. They power this new ‘information’ economy…by passing around bits and bytes of data at terrific speeds. But we know what oil has done. It has fuelled our cars, planes, factories, and tractors. It heats our houses and raises productivity so much that it has enabled billions of people to have life…and have it more abundantly.

By contrast, what has the information revolution done for us lately? It distracts, misleads, annoys…filling our minds with lies, delusions and myths…while filling our lives with time-wasters. For every useful bit of information there is at least one bit of misinformation to balance it out. And for every valuable insight there are dozens of click-bait dead ends…and hundreds of opinions by morons whom the internet has elevated to the role of ‘influencers.’  

Our question today: is information really worth so much?

A Remarkable Period

Compared to oil, semiconductors have been big winners, with the semiconductor ETF up 825% over the last 10 years versus a 37% gain for the energy ETF ($XLE).

[We remind readers that we think the tide has turned AGAINST US equities. But not necessarily against all equities…and only in ‘nominal’ terms. Before this inflationary cycle is over, we might see the Dow over 100,000…the S&P over 25,000…and investors over the moon, but under water. If our Primary Trend is headed the way we think it is, actual values (adjusted for inflation) will be lower 10 years from now than they were at the start of 2022…Nota bene: we could be wrong.

…We’re also betting — our Trade of the Decade — that energy will outperform Big Tech over the next six years. TBD!]

So far, the Magnificent Seven are the ‘one decision’ stocks of this remarkable period. You buy them. And you count on them to make you rich.

MarketWatch:

Megacap technology stocks have retaken leadership of the U.S. stock market as the S&P 500 hit yet another record closing high, defying hopes on Wall Street for a more broad-based rally.

Since the start of 2024, the so-called Magnificent Seven have gained a combined $540.7 billion in market capitalization, compared with a total market-cap gain of $802.5 billion for the S&P 500 through Tuesday’s close, according to Dow Jones Market Data. Some members of the group, including the high-flying artificial-intelligence darling Nvidia Corp. have seen their shares gain more than 25%.

The Real World

Whoa! These seven stocks are worth a half trillion more than they were less than a month ago. How could that be? What made them worth so much in the first place?  And how could they now be worth so much more? And look what they are doing to the whole stock market. An ordinary investor — who would probably have at least one of them in his portfolio — would have seen a 17% gain (based on the S&P 500) so far this year.  

All of this happened, we remind ourselves, against a backdrop of rising interest rates, falling money supply and fear of an imminent recession. So, what gives?

Is this another New Era? Are we wrong to use the Dow ‘industrials’ as a metric? Is it a mistake to try to apply the lessons of the old economy — based, as it was, on energy, industrial output, and interest rates? Maybe energy and output are just out-of-date? And maybe Tesla — anchored in the real world of things…is actually an old-fashioned ‘industrial company’ dressed up with electronic gizmos?

We’ll return to these questions tomorrow.  

A parting thought: our main goal is to avoid the Big Loss. Where’s the risk of a Big Loss now?

Regards,

Bill Bonner,
For Fat Tail Daily