How The Smart Money Takes The Dumb Money
People Get Rich In Manias, But Few Stay Rich
On Wednesday night, NVIDIA did what seemed impossible - it took the market’s focus away from the debt ceiling debate in Washington!
While its Q1 financial results beat expectations by a wide margin, it was the company’s forecasted results looking forward that generated headlines like these….
The biggest driver of NVIDIA’s optimism for the remainder of 2023 is, you guessed it, artificial intelligence! The company’s management team said that it was going to make significant investments in its data center business to handle the increased demand for all products & services related to AI.
The markets, of course, loved it.
Traders tacked on about $200 billion to NVIDIA’s market cap, which puts it on the verge of becoming a trillion dollar company. Right now, you can have the privilege of buying the stock at 230 times earnings over the past 12 months or 26 times sales! If you’re a dividend investor, you get the bonus of a $0.04 per share quarterly dividend, which translates to an annualized yield of 0.05%!
I don’t want to turn this into a referendum on NVIDIA because that’s not what I’m interested in, but this whole episode is an excellent reminder of why long-term narratives often experience many short-term distractions along the way. We’ve got several markers already suggesting that risks are still elevated and the possibility of both recession and correction are high, whether that’s manufacturing, jobless claims, housing, commercial real estate, corporate credit or, of course, lumber prices. NVIDIA’s results take the focus off the long-term macroeconomic picture and have the ability to get investors to bite on the latest and greatest (and expensive) high fliers.
The debt ceiling debate in Washington is another great example of a short-term narrative. With about a week to go until the June 1st deadline, the equity markets have been pretty nonplussed throughout, but the bond market is finally getting a little shaken.
Treasury bills with a maturity date of June 6, 2023 recently saw their yields soar on the belief that maybe, just maybe, they won’t get the payment on their bond holding when it comes due after all. The yield on currently issued 1-month Treasury bills is about 5.7%, which is a record high going back more than 20 years. Current credit default swap prices on 6-month Treasuries are more than twice what they were during the peak of the financial crisis.
The stand-off has also caught the attention of the credit agencies, just like it did back in 2011.
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