Comment of the Day
6th June 2023
Eoin Treacy
Jun 7
Video commentary for June 6th 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Ukrainian counter offensive, tech valaution expansion, China meagre supports, US banks rebound to unwind oversold condition.
Weak market being obscured by megacap gains
This article by Martin Pelletier may be of interest. Here is a section:
It's understandable to assign higher revenue multiples to smaller and highly disruptive companies with exponential growth potential. However, the combined market capitalization of these seven companies now exceeds US$10 trillion, so how can they deliver such growth while defying the laws of diminishing returns, especially when they were unable to do so when they were smaller, more innovative and capital was next to free with interest rates hovering around zero per cent? Over the past decade, Nvidia's revenue has grown sixfold and yet the market is now giving it a 38 times multiple. Microsoft has grown revenue by 2.7 times with a current 12 times multiple, and Apple's revenue has grown 2.2 times and yet it has a seven times multiple.
It isn't as if this hasn't happened before. Take Sun Microsystems Inc., which traded at more than 10 times its revenue prior to the bursting of the 2000 tech bubble. In 2002, chief executive Scott McNealy responded to the aftermath with a thought-provoking quote.
"At 10 times revenues, to provide a 10-year payback, I would have to distribute 100 per cent of our revenues to shareholders for 10 consecutive years in the form of dividends. This assumption assumes that I can achieve such an arrangement with our shareholders, that we have no cost of goods sold (which is highly unlikely for a computer company), that we have zero expenses (difficult with 39,000 employees), that we pay no taxes (also challenging), and that you, as shareholders, pay no taxes on the dividends received (which is illegal)," he said.
"Additionally, this assumption presumes that, with no investment in research and development for the next 10 years, we can maintain the current revenue rate. Considering these unrealistic assumptions, would any of you be interested in purchasing our stock at US$64? Can you fathom the absurdity of these basic assumptions? We don't need any transparency or footnotes to recognize their implausibility. What were you thinking?" In a seemingly repetitive cycle, we wonder if we will eventually be questioning ourselves again with a "what were you thinking?" moment. If you are tempted to say "this time it's different," we checked with ChatGPT and will leave you with its answer.
…"It's prudent to exercise caution, diversify portfolios and focus on fundamental principles rather than getting carried away by the idea that the current situation is entirely unprecedented."
Eoin Treacy's view
I created a chart today to demonstrate the dominance of mega-caps in the Nasdaq-100. The eight FANGMANT shares represent 61.86% of the Index’s market cap. Those companies are Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Netflix and Tesla.
Gold Wavers as Traders Assess Fed Rate Path After Australia Hike
This article from Bloomberg may be of interest to subscribers. Here is a section:
Gold swung between gains and losses as traders mulled the Federal Reserve’s interest-rate path after a surprise hike by Australia’s central bank.
The Reserve Bank of Australia unexpectedly raised its key rate and kept the door open to further hikes. Treasury yields rose alongside a strengthening dollar, keeping bullion’s upside in check. Traders have been increasingly betting the US central bank will hold rates steady at its June meeting, while keeping the option for hikes later open.
“After many traders were surprised by the hawkish rate rise by the RBA, fears are growing that the Fed might need to do a lot more tightening,” said Ed Moya, senior market analyst at Oanda.
Eoin Treacy's view
The RBA’s willingness to continue raising rates is being shaped by concerns inflation is stickier than they hoped. The jump in the minimum wage is worrisome since it puts upward pressure on wage demands across the spectrum and that tends to also be sticky.
Major dam breached in southern Ukraine, unleashing floodwaters
This article from Reuters may be of interest. Here is a section:
The dam, 30 metres (yards) tall and 3.2 km (2 miles) long and which holds water equal to the Great Salt Lake in the U.S. state of Utah, was built in 1956 on the Dnipro river as part of the Kakhovka hydroelectric power plant.
It also supplies water to the Crimean peninsula, annexed by Russia in 2014, and to the Zaporizhzhia nuclear plant, which is also under Russian control and which gets cooling water from the reservoir.
The International Atomic Energy Agency (IAEA) said there was no immediate nuclear safety risk at the plant due to the dam failure but that it was monitoring the situation closely. The head of the plant also said there was no current threat to the station.
Eoin Treacy's view
The destruction of the Kakhovka is an obvious response to the beginning of the Ukrainian counter offensive. Back in February there were several stories about how Russia had opened the sluice gates at the dam to drain the reservoir. That action puzzled commentators at the time but the intention is now clear.
© 2023 Eoin Treacy
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