The FTC Won’t Let Me Be

NVDA_Stop

NVIDIA became a member of two clubs last week: The prestigious $3 trillion market cap club and the less desirable antitrust club, featuring Microsoft and OpenAI, as the Justice Department and Federal Trade Commission (FTC) have announced an antitrust investigation against them. The Department of Justice will lead the NVIDIA investigation, while the FTC will manage the Microsoft and OpenAI cases. This encapsulates two goals of the current administration: first, governing the rapid growth of the tech industry, and second, regulating the direction of artificial intelligence. There has been an increase in antitrust action globally, which is creating yet another parallel to the 2000 tech bubble.

Investors have been ignoring the government’s activity, but there may be strict regulatory moves as agencies look harder into unfair monopolistic advantages. There is concern over NVIDIA software creating a dependence on its semiconductors and apprehension about its distribution practices. A government investigation is certainly not welcome for a stock with a 40 price-to-sales ratio. Taking NVDA’s stock price and dividing it by sales per shares outstanding, we arrive at that astronomical ratio.

The NASDAQ 100 had an attractive price-to-sales ratio of 1 in 2009 following the Global Financial Crisis, and now carries what many believe is an unsustainably high price-to-sales ratio of 5. To gain perspective on what a 40 price/sales ratio represents, it means that if NVIDIA were to pay out the ludicrous sum of half of its revenues in dividends, you get your money back in the 25th century if you buy the stock today. And no, NVIDIA’s actual dividend is not generous. It pays out a whopping 16 cents per share, representing less than 1% of profits, which is a far cry from 50% of sales. It is fair to say that the stock is priced for continued optimal performance, so any governmental interference could tarnish perceptions about NVDA’s fortunes and have negative repercussions.

NVDA is a great company, but the latest price spurt had more to do with its 10-to-1 stock split that occurs today, lopping a zero off its stock price, making it more attractive to the GameStop crowd. Therefore, everyone better hope that the government never tells NVIDA to stop doing anything.

Mixed Bag for the Fed

An analyst reported Friday that the May employment report showed “accelerating job and wage growth and rising joblessness.” It was a nonsensical but accurate statement. The Household Survey showed a decrease in those working despite companies reporting a larger-than-expected increase of 272,000 new workers in the Establishment Survey. The wage inflation news was one negative for the stock and bond markets because it will create concerns among Fed voters.

Wage inflation, as measured by Average Hourly Earnings in the nonfarm payroll report, increased at a 4.1% rate for both the 3-month annualized and annualized wage inflation measures. That surprisingly high number shifted the odds of a September Fed rate cut to a coinflip and dropped the year-end market consensus to an even chance of one or two cuts. Wage inflation has fallen from 5.9% in Q2 2022, which is encouraging, but its failure to drop below 4% keeps inflation elevated for services such as restaurants, air travel hotels, and rents.

The problem for the Fed in the payrolls report is the labor weakness reflected in the Household Survey. I have contended the Household data is the more accurate of the two payroll surveys because it includes independent workers and does not double count if someone holds two jobs, unlike the Establishment Survey. The unemployment rate rose above expectations to 4.0%, which is approaching a dangerous area for the Fed. A recession indicator the Fed relies on is the Sahm rule, which forecasts a recession once the 3-month average of the unemployment rate rises by 0.5% from its low. The low was registered at 3.6%, so if the unemployment rate were to rise, say to 4.1% in June and 4.2% in July, the Sahm rule would trigger. Markets can forecast turns beforehand, so if the collective view anticipates that 1) the Sahm rule will trigger and 2) the indicator will be correct again this time, then it is advisable not to buy the dip if the stock market begins to sell off.

Under the Hood

The equity markets are continuing to hit all-time highs with regularity. A warning sign that has occurred at previous market tops forms when the advance/decline line fails to match those price highs. The advance/decline line is one of the myriad of technical indicators stock investors use to determine the strength and direction of the markets. It measures the difference between the number of stocks that were up versus those that dropped on a given day in a particular index. It is a cumulative index, so if 100 more stocks rose than fell, 100 is added to the advance/decline (A/D) indicator.

The traditional way of looking at this gauge is to measure it across the components of the New York Stock Exchange Composite Index. That index is not at new highs, which is a divergence in and of itself. But looking at the advance/decline line for the S&P 500 and the Nasdaq 100, both of which registered new highs last week, there was insufficient participation across enough of the stocks in their respective indices. That is, the A/D registered a negative divergence by not matching the index highs. It is certainly feasible that this week, those stocks could advance, pushing the A/D indicator to new highs that could re-establish an alignment with the indices. For now, however, we are faced with a signal that should be respected should stocks reverse lower.

What to Look for This Week

1. This one is easy: it’s the Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday, with the market keying on the Summary of Economic Projections (SEP) released Wednesday, June 12 at 2:00 pm E.S.T. Chai,rman Jerome Powell’s press conference is convened half an hour later. The market will be scrutinizing the year end 2024 Fed Funds projection. The March SEP called for three cuts, and our expectation is for two cuts to be in the updated projection. We will focus on the spread of forecasts to better understand how the FOMC views inflation and prospective rate cuts.

2. The CPI report for May is slated for 8:30am Wednesday June 12. We know who will be watching then: the 12 voting members of the FOMC will be paying particular attention because the data is published before they cast their final rate vote for the June meeting later that day. It is hard to conceive of a CPI number that could move them away from the consensus expectation of no change for the meeting, but it could shade their views for the SEP. The Cleveland Fed’s Inflation Nowcasting forecast is for a 3.55% annual core CPI print for May, in between the 3.5% consensus and the April reading. I would not expect fireworks.

3. The National Federation of Independent Businesses (NFIB) Economic Trends Survey for May is sent out Tuesday June 11 at 6 am E.S.T. The NFIB’s Jobs Report last week showed that hiring plans rose, but compensation plans fell to a three-year low. Critical areas: Earnings Trends and Expected Real Sales. The former is still deeply negative, and the latter had a big 6-point jump in the April survey.