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Your Quiver | Thursday, May 25, 2023

CIO | Nadine Terman @SolsteinCapital details what she's seeing in global financial markets.

A Stern Warning

Fitch Ratings warned that the US’s AAA rating may not hold because of the debt ceiling delay. Treasury-bill yields maturing in early June (the ones most at risk of non-payment if the gov is out of borrowing capacity) reached levels above 7% yesterday, with the rate on the June 1 and June 6 maturities popping by >1%. McCarthy is saying he’s optimistic a deal will be reached, but UST tell a different story-- the spread between T-bills maturing in early June and shorter-dated securities widened to around 4%. But be careful thinking a deal will be a positive to markets—investors are getting savvy that big spending cuts or caps on gov spend could push the US into a faster recession, which is also not a great outcome.

The Fed's Path

Traders are now pricing in a 25bps hike within the next 2 meetings, with >33% chance it happens in June. Assuming the debt hurdle gets cleared, we’ll be watching the Jun 14 Fed meeting after the release of the Jobs Report and CPI data.

Nvidia + the Tech Trounce

All you need to know about Nvidia’s results: Nvidia price target raised to $500 from $275 at Barclays| Nvidia price target raised to $440 from $275 at Goldman Sachs| Nvidia price target raised to $420 from $363 at Citi. Tech, especially chipmakers, ripped after the bullish sales forecast from Nvidia. Just mention “AI,” and your stock is up. Nvidia shares soared 27% in US premarket trading, driving the company to a near $1 trillion market value (+>$200bn). Datacenter growth was a big driver, given generative AI demand. Mgmt forecasted big 2H23 growth to continue. So, now everyone is trying to figure out where the sustainable levels are. Bernstein noted that a one-year cycle around a new architecture would be rare, so the company could see these results continue. Plus, penetration remains low, and the TAM is big. And everyone loves a big TAM, right?

Missing Out

US large-cap mutual funds are sad today, as they will continue to underperform, because of their underinvestment in big tech. Before today, roughly 1/3 beat their benchmarks YTD, vs the usual 38%, per GS. The average fund is 15 ppts underweight the S&P’s biggest 2023 gainers — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta.

China Update

Don’t take your eye off this ball. We all know China’s growth isn’t “all that and a bag of chips.” Plus, they’re not doing big stimulus, which would get investors excited. So, commodities are suffering (see BBG story on Andurand). Copper fell below $8,000 a ton while iron ore fell below $100, unwinding all the gains made after China reopened back in 2022. If the PBOC cuts the RRR for banks, the country’s growth rate could be lifted by 0.3 ppt this year, per BBG, if the reserve ratio is lowered by 25 bps this quarter. That would add 500 billion yuan ($71 billion) of liquidity. If you’re looking for asymmetry, global funds are extremely underweight mainland China shares, and Asia funds have a small underweight too, per HSBC. Japan portfolio weights are at 5-yr highs.

You Go, Girl

Japan raised its monthly economic assessment in May for the 1st time in 10 mo, pointing to an expected increase in jobs, income, consumer spend, production and exports. Hence the overweight mentioned above.

Upcoming Video

Yesterday, I had a great time connecting with Rajeev Suri, MP at Orios Venture Partners in India. We’ll post snippets of some Q&A once they’re cut. I bring it up because he had a great take on the positive second derivative impact of oil purchases in local currencies. The global oil map is being redrawn. Western sanctions are moving Russian oil to Asia, with China and India receiving >30% of their purchases from Russia, Iran, and Venezuela last month versus 12% in Feb 2022, per Kepler. Flows from the US and West Africa are a trickle. Rajeev talked about the use of Indian rupees for purchases, which has increased demand for the currency, which is creating more trade/reinvestment with the currency—a positive for locals.

No More Free Lunch

Free riders got notified yesterday that Netflix is cracking down on unpaid customers. Folks in Brazil, Bolivia, Belize, France, Germany, Iceland, Ireland, Italy, the Philippines, Malaysia, Israel, Thailand, Taiwan, Switzerland, and Sweden are part of a 100-country start. It’s still unclear how they’ll treat the US market, as they’re not planning on making people set a default location. But they will track logins from different places and then follow-up with you. Netflix said that if they, “detect persistent use of a device outside of the primary account owner’s household, we may ask them to verify that device before it can be used to watch Netflix.” Then, members would have to sign in and perform a verification via a “verification code sent to the account owner email address.”

Get Out Your Popcorn

The Ackman-Icahn feud is on full display. With IEP down -13% yesterday, Ackman headed to Twitter to poke his nemesis. “Transparency is not the friend of $IEP having caused a more than 50% decline in the shares, which has caused Icahn to post more shares, now more than 65% of his holdings. Further declines over the last several days will likely require additional postings…Icahn’s margin lender(s) must be extremely concerned with the situation, particularly in light of the recent involvement of the @TheJusticeDept, which will also likely be investigating the lenders’ involvement in the situation…$IEP reminds me somewhat of Archegos where the swap counterparties were comforted by each having relatively smaller exposures to the situation. The problem is that multiple lenders make for a more chaotic situation. All it takes is for one lender to break ranks and liquidate shares or attempt to hedge, before the house comes falling down. Here, the patsy is the last lender to liquidate.”