HI Market View Commentary 06-24-2024
NO VIDEO TODAY
What’s been happening?
- Looking for what needs protecting this week
- NVDA protected up at 125
- Watching all stocks and economic indicators later this week
The Big Picture
Last Updated: 21-Jun-24 09:20 ET | Archive
Taking some pain out of the pain trade
With the S&P 500 and Nasdaq Composite stretching to new highs seemingly every day on the back of mega-cap strength, one might be inclined to think that the so-called “pain trade” is for the market to move lower.
Those moves, though, have triggered a lot of chatter about the market being overbought/overextended and due for a pullback, if not a correction (loosely defined a 10% pullback from a prior high).
We would venture to say that that is the majority view right now. When most people think something will happen, and it doesn’t, you get a pain trade because it hurts for so many to watch the opposite unfold. In brief, a pain trade is the trade that hurts the most people.
This is a devious dynamic of the equity market. It can unfold in individual stocks, industry groups, and/or at the index level. It can also unfold at the economic level, and based on a recent survey of fund managers, there could be a real pain in the asset trade if the economy does not perform as expected.
A Real Nugget
The BofA June Global Fund Manager Survey was released June 18. There were some notable findings:
- Global fund manager sentiment is the most bullish since November 2021.
- Cash levels are at a 3-year low (4.0%) but remain at a neutral level in terms of being a contrarian indicator.
- Only 8% of respondents say the Fed won’t cut rates in the next 12 months, whereas 8 of 10 investors expect 2, 3, or more rate cuts.
- Being long the Magnificent 7 is the most crowded trade since the long U.S. technology trade in October 2020.
- The allocation to technology has fallen to a net 20% overweight, which is the lowest since October 2023 and below the long-term average of a net 22% overweight.
- Investors are the most underweight bonds since November 2022.
Key to our discussion this week, however, is this nugget:
- Just 5% of respondents see a hard landing for the global economy in the next 12 months (while 53% don’t see a recession for the U.S. economy in the next 18 months).
For some added perspective, 30% of respondents in October 2023 saw a hard landing for the global economy in the next 12 months. These are halcyon economic times, then, as far as most fund managers seem to be concerned. Only 5% expect a hard landing.
Any guesses what the pain trade might be for the economy? That’s right. A hard landing would be the pain trade since so few fund managers expect it. Most expect a soft landing (64%) or no landing (26%).
To be fair, most have been right so far. The global economy has performed admirably following a tightening campaign by many of the world’s leading central banks, which, for some, has run its course.
Now, with some central banks starting to cut rates, and the Fed at least suggesting another rate hike is unlikely, there is a belief the global economy will escape the throes of a hard landing absent an exogenous shock.
Something Less Bad
But what if the vast majority of fund managers are wrong? What if their thesis turns against them, and the lag effect of prior rate hikes hits in a meaningful way and the U.S. economy, which is the engine of the global economy, suffers a hard landing?
In short, that wouldn’t be good. For investors, it would be less bad if they opt to build in some hedging for that possibility ahead of time.
That doesn’t mean selling everything and going to 100% cash. That sounds safe, and is safe in theory, but it would include paying capital gains taxes in non-qualified accounts, paying trading commissions in some cases, and it potentially introduces a high opportunity cost if the economy doesn’t suffer a hard landing and/or there is a reluctance to reinvest the cash.
There is a cost to playing it completely safe, which in hindsight after a hard landing always looks worth it. How safe one needs to be or wants to be in front of a possible hard landing, though, will have a lot to do with when they might need the capital in an investment account.
What It All Means
We have been emphasizing the theme of risk management in recent columns. This week’s entry falls along those same lines.
We are not making a forecast here. Rather, we are highlighting two things:
- The current views of global fund managers; and
- How one might go about building in some hard-landing hedging for their investment portfolio to mitigate the risk of loss in an economic pain trade should one come to fruition
Some simple and popular approaches would include the following:
- Increase cash allocation
- Add Treasury exposure (shorter-dated Treasuries would benefit from policy easing measures to combat the economic weakness, and longer-dated Treasuries would presumably benefit from lower inflation stemming from weak demand, safe-haven interest, and dare we say quantitative easing)
- Underweight deep cyclical sectors like materials, industrials, and energy
- Overweight countercyclical sectors like consumer staples, health care, and utilities
- Stick with the highest-quality companies across market cap size, but overweight the highest quality, large-cap companies
- Look to REITs and dividend-paying companies for income opportunities (i.e., quality companies that have had steady dividend growth as opposed simply to companies with a high dividend yield)
- Add some gold, which doesn’t generate income but is typically regarded as a store of value option during a recession
It is never easy to watch stock prices and/or the market go down in a meaningful way — even when the starting point is from a record level. Lower prices are painful, but arguably they are the most painful when they are least expected.
That’s because there is offside positioning. Quick losses associated with a news catalyst can trigger a sell first, ask questions later mentality that exacerbates the selling pressure along with margin calls and stop-loss orders. When a recession trade kicks in, it’s not so much that there is rapid-fire selling as there is steady selling pressure and an inclination to sell into strength as investors lack faith in earnings prospects.
The extent of any pullback will have to do with whether it is a shallow recession or a deep recession. The latter would be the hard landing, which would invite the pain trade because so few expect it, meaning so few are positioned for it. There are ways to get in position ahead of time, however, if you fear the hard landing so few see coming is going to happen.
—Patrick J. O’Hare, Briefing.com
We won’t be selling off a huge amount of our stocks to buy Treasuries.
We won’t assume we know the future by jumping the gun and just protecting everything at once… (unless we get that quick market drop)
We will be looking at our individual stocks and protect as needed. (NVDA, MU, AAPL)
Looks like some rotation out of TECH and Chip stocks
This should fuel more returns after a cooling off period.
Where will our markets end this week?
Lower
DJIA – Bullish
SPX –Bullish
COMP – Bullish
Where Will the SPX end June 2024?
06-24-2024 +1.0%
06-17-2024 +1.0%
06-10-2024 0.00%
06-03-2024 0.00%
Earnings:
Mon:
Tues: FDX
Wed: MU
Thurs: NKE
Fri:
Econ Reports:
Mon:
Tue New Home Sales
Wed: Consumer Confidence, MBA, EIA Oil Inventories
Thur: Initial Claims, Continuing Claims, GDP
Fri: PCE, Chicago PMI
How am I looking to trade?
- We will add protection as needed after a big run up in our stock market
- Protecting profits
www.myhurleyinvestment.com = Blogsite
info@hurleyinvestments.com = Email
Questions???
Nvidia slides 13% in three days after briefly becoming most valuable company
PUBLISHED MON, JUN 24 20244:57 PM EDTUPDATED 44 MIN AGO
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KEY POINTS
- Nvidia shares fell 6.7% on Monday, the chipmaker’s third down day in a row, and the stock is now down 13% from its peak last week.
- Other stocks that had steep drops on Monday were some of the biggest gainers of late due to their ties to the artificial intelligence boom.
- Investors may be locking in gains in Nvidia and similar momentum stocks after a few hot months.
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Nvidia CEO Jensen Huang makes a speech at an event at COMPUTEX forum in Taipei, Taiwan June 4, 2024.
Ann Wang | Reuters
Since briefly becoming the world’s most valuable company last week, Nvidiahas dropped for three consecutive trading days and is now down 13% from its peak.
Monday’s slide was the chipmaker’s second steepest drop of the year, as the stock fell 6.7% to $118.11. Nvidia’s decline brought with it a slide in chipmakers and other tech companies that have been tied to the artificial intelligence boom.
Super Micro Computer, which sells servers packed with Nvidia’s AI chips, fell 8.7 percent, and Dell, which competes in that market, was off 5.2%.
Chip designer Arm dropped 5.8%, while semiconductor giants Qualcomm and Broadcom dropped 5.5% and 3.7%, respectively.
Many of these companies have been some of the biggest gainers in the last couple of years as investors bet heavily that they’ll be the prime beneficiaries of a wave of AI spending.
Nvidia’s value has nearly tripled in the past year even after the three-day slump. Last week, it topped Apple and Microsoft as the most valuable U.S. company with a market capitalization over $3 trillion before giving up some of those gains. Nvidia was the fourth-biggest loser in the S&P 500 on Monday. Super Micro is still up almost 200% in 2024.
Investors may be taking an opportunity to lock in gains after a few hot months.
“I don’t think the party is over, but it’s had a heck of a run and there are so many other places in technology that offer better attractive risk/reward,” Hightower’s Stephanie Link told CNBC on Friday, calling Nvidia shares “overloved.”
Nvidia has said that demand for its prized AI graphics processing units (GPUs) remains high, as companies including Microsoft, Google, Amazon, Oracle, and Meta buy billions of dollars worth of the chips to power their data centers and cloud services.
Later this year, Nvidia will start shipping its next-generation AI chips, called Blackwell, that some analysts expect could kick off another up cycle of significant growth for the chipmaker and its partners.
Nvidia’s performance “is going to continue for the next 18-24 months,” Constellation Research founder Ray Wang said on CNBC’s Squawk Box on Monday. “I think it’s a good time to buy the dip.”
Disney’s ‘Inside Out 2’ could be the first billion-dollar movie of 2024
PUBLISHED MON, JUN 24 20242:54 PM EDTUPDATED 3 HOURS AGO
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KEY POINTS
- Disney and Pixar’s “Inside Out 2” has tallied $724.4 million at the box office worldwide as of Sunday, making it the highest-grossing film of 2024.
- Box-office experts expect the film will soon surpass $1 billion globally, becoming the first film since Warner Bros.′ “Barbie” to reach that milestone.
- The animated sequel is also one of only seven titles to cross $100 million in its second domestic weekend in theaters.
In Disney and Pixar’s “Inside Out 2,” Riley’s Sense of Self is made up of all of her beliefs, each of which can be heard with the pluck of a string. Sadness (voice of Phyllis Smith) and Joy (voice of Amy Poehler) deliver key memories to this formative land.
Disney | Pixar
Disney and Pixar’s “Inside Out 2” could be the first film since Warner Bros.′ “Barbie” to top $1 billion at the global box office.
The animated feature has tallied $724.4 million worldwide as of Sunday, making it the highest-grossing film of 2024. Warner Bros. and Legendary Entertainment’s “Dune: Part Two” previously held this year’s record with $711.8 million.
“Inside Out 2” has yet to open in Japan, which contributed nearly $33 million to the $850.5 million global total of “Inside Out” in 2015.
“As a global phenomenon attracting moviegoers well beyond families and kids and a message that resonates and is relatable across all cultures and languages, ‘Inside Out 2’ is the rare film that is both a box-office sprinter and a marathon runner,” said Paul Dergarabedian, senior media analyst at Comscore. “It is the perfect candidate for admission to the billion-dollar club.”
While Disney’s 2022 film “Avatar: The Way of Water” surpassed the billion-dollar mark on its way to a more than $2 billion haul, the company’s Pixar studio hasn’t seen a movie reach the benchmark since 2019′s “Toy Story 4.”
After the pandemic, both Walt Disney Animation and Pixar struggled to regain a foothold at the box office. The difficulties occurred in part because Disney opted to debut a handful of animated features directly on streaming service Disney+ during theatrical closures and even once cinemas had reopened.
Before “Inside Out 2,” no Disney animated feature from Pixar or Walt Disney Animation had generated more than $480 million at the global box office since 2019.
The film snared another $100 million domestically over the weekend, an untypical 35% drop from its opening weekend. Films typically see a 50% to 70% drop in ticket sales from their debut weekend to their second weekend.
With this feat, “Inside Out 2” becomes one of only seven titles to cross $100 million in its second weekend. The others are five Disney films — “Star Wars: The Force Awakens,” “Avengers: Endgame,” “Avengers: Infinity War,” “Black Panther” and “The Avengers” — and Universal’s “Jurassic World.”
“Inside Out 2” added $100 million from weekday showings on the previous Monday through Thursday.
″’Inside Out 2’s′ performance is the culmination of many things,” said Shawn Robbins, founder and owner of Box Office Theory. “A meaningful story that people of all ages and backgrounds can relate to, beloved goodwill toward the original film, Disney and Pixar’s legacy brand appeal, pent-up demand for a family movie, a very consumer-friendly runtime under two hours, school breaks, and oppressive heat waves driving many people indoors for air-conditioned entertainment can all be pointed to as ingredients in the recipe for this box-office storm.”
The film has over-indexed with family audiences, which accounted for more than 70% of those in attendance during the film’s domestic debut, according to data from EntTelligence. This moviegoing crowd has been underserved after the pandemic, as many family-friendly titles headed straight to streaming or were displaced from the calendar due to theater closures or production shutdowns.
Last year, that audience came out in droves for Universal’s “The Super Mario Bros. Movie,” which generated more than $1.36 billion at the global box office.
“Inside Out 2” also drove the coveted teen demographic to cinemas, with 14% of foot traffic coming from those aged 13 to 17. This younger generation has been largely absent from the market in recent years.
As the future of moviegoing, this group is particularly important to the industry. Getting them back to the big screen has become a top priority for studios and movie theater operators.
“A blockbuster run is just what the doctor ordered for theater owners as well,” said Robbins. “They were starved of event-level releases to begin the summer season in May, thanks largely to release delays caused by last year’s labor strikes. It typically does not take until the middle of June to see a box-office performer of this stature, but alongside the continued health of ‘Bad Boys: Ride or Die,’ it may well beckon the kind of avalanche of success which the industry hopes for out of several high-potential releases to begin the second half of the year.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC. NBCUniversal is the distributor of “Jurassic World” and “The Super Mario Bros. Movie.”
Warren Buffett buys Occidental shares for 9 straight days, pushes his stake to nearly 29%
PUBLISHED TUE, JUN 18 20248:57 AM EDTUPDATED TUE, JUN 18 20249:13 AM EDT
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Warren Buffett walks the floor and meets with Berkshire Hathaway shareholders ahead of their annual meeting in Omaha, Nebraska, on May 3, 2024.
David A. Grogan
Warren Buffett’s Berkshire Hathaway has scooped up more shares of Occidental Petroleum over each of the past nine trading sessions, driving his gigantic stake in the Houston-based oil and gas producer to almost 29%, according to regulatory filings.
The Omaha, Nebraska-based conglomerate purchased Occidental shares every trading day from June 5 to Monday, totaling an additional 7.3 million shares with purchase prices slightly under or above $60, filings showed.
The purchases brought Berkshire’s holding to over 255 million shares, representing a 28.8% stake. Occidental is Berkshire’s sixth-biggest stock holding, and the conglomerate has become Occidental’s biggest institutional investor by far.
Berkshire also owns $10 billion of Occidental preferred stock and has warrants to buy another 83.9 million common shares for $5 billion, or $59.62 each. The warrants were obtained as part of the company’s 2019 deal that helped finance Occidental’s purchase of Anadarko Petroleum.
The stock closed at $60.2 Monday, making Buffett’s warrants “in the money.” A full redemption of the preferred equity could lift Berkshire’s ownership of Occidental above 40%.
Buffett has clarified that he wouldn’t take full control of the oil company, once known for being founded by legendary oilman Armand Hammer. There had been speculation of a takeover after Berkshire received regulatory approval to purchase as much as a 50% stake.
‘Read every word’
The “Oracle of Omaha” previously said he started buying Occidental after reading a transcript of the oil company’s earnings conference call.
“I read every word, and said this is exactly what I would be doing,” Buffett told CNBC.
Occidental CEO Vicki Hollub is “running the company the right way,” he added.
Occidental also pays a 1.5% dividend yield. The stock is about flat this year after dipping 5% in 2023.
The legendary investor said he took advantage of the elevated volatility in the market in early 2022 to acquire 14% of the energy firm, worth more than $7 billion, in just two weeks.
“I find it just incredible. You couldn’t do that with Berkshire. … Overwhelmingly, large companies in America, they became poker chips,” Buffett said in 2022. “Imagine trying to [buy] 14% of the farms in this country; 14% of the apartment houses; 14% of the auto dealerships, or just anything, when already 40% were locked up some other place.”
HI Financial Services Mid-Week 06-24-2014