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Category: Blog

What’s Got the Fed Spooked?

Published July 10, 2024

This blog post is an amended version of the Daily Contrarian from July 10, 2024.

Federal Reserve Chair Jerome Powell in his Congressional testimony yesterday again put forward the case for rate cuts. “Elevated inflation is not the only risk we face,” Powell said. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

It may not sound like much, but this is some of the most dovish commentary we’ve gotten from Powell since before his 2022 Jackson Hole speech. It begs the question whether the economy is really in as dire enough shape to where rate cuts become necessary, presumably as soon as the FOMC meeting on Sept. 18.

Existing economic data doesn’t exactly shout slowdown, much less recession:

  • Job production is still plentiful. Jobless claims are up a bit, but that’s from a low base.
  • Retail sales may not be growing as much as they were early in the year, but are holding steady at a very high plateau.
  • The housing market has slowed in certain parts of the country, but that might be more due to overbuilding than broader macroeconomic forces.

Conspiracy theories aside, it’s hard to see how the Fed could legitimately have an ulterior motive for cutting rates early. Either Jay Powell & Co are just stupid and reckless, or they’re trying to get ahead of things. Perhaps there’s a third alternative, which is that they’re setting the market up for rate cuts just in case they need them?

Come to think of it, even that gets into conspiracy territory. They probably are just concerned about the trajectory of the economy based on labor data and the housing market. Whether that is justified is another question entirely.

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The Search for ‘Undiscovered’ AI Chip Stocks

Published May 21, 2024

This blog post was originally published as part of today’s Daily Contrarian.

Recent market activity shows investors don’t want to wait for Nvidia (NVDA) earnings tomorrow to bid up AI chip stocks. Marvell Technology (MRVL) was one of the biggest winners yesterday. Smaller AI names like Soundhound AI (SOUN) also put in rallies, as did the usual suspects AMD (AMD), Micron (MU), Super Micro Computer (SMCI), Broadcom (AVGO), and Taiwan Semiconductor (TSM).

AI bull

Here’s an idea for an ETF: small AI hardware names. Limit it at, say $5 billion market cap companies. The focus on hardware would (presumably) allow for a margin of safety. It would also weed out names like the aforementioned Soundhound, C3.ai (AI), FARO Technologies (FARO), and others including companies that just plaster the term ‘AI’ all over their marketing materials to attract attention.

Unfortunately, this doesn’t leave much. The Contrarian did a preliminary search and found just a few such companies, almost all of them suppliers to the semiconductor industry. Of course, ‘undiscovered’ is a bit of a misnomer here. Investors have picked through any and every stock even remotely related to AI. Still, it’s fair to say these securities are certainly under-covered by Wall Street.

Names include ACM Research (ACMR), Camtek (CAMT), FormFactor (FORM), Ichor Holdings (ICHR), Kulicke and Soffa Industries (KLIC), Photronics (PLAB), Ultra Clean Holdings (UCTT), and Veeco Instruments (VECO).

It’s likely the AI hype story is already priced in to these stocks (didn’t check). But it may be worth putting these names in an index to track them, to the extent that somebody hasn’t done it yet. If nothing else this could give us an idea of stocks to buy when (if) there is a pullback in AI chip names.

There are obviously private companies as well, including Anthropic (OpenAI rival), Graphcore, Cerebras, SambaNova, Groq.

The Contrarian does not hold any of these stocks.

Update June 4, 2024: ACM Research will be removed from this list as the company does most of its business in China.

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Optimism on Wall Street: A Contrarian Indicator, though not the Mother of All Contrarian Indicators

Optimism on Wall Street: A Contrarian Indicator, though not the Mother of All Contrarian Indicators

Published January 2, 2024

This is an amended version of today’s Daily Contrarian. This briefing and accompanying podcast are made available to premium subscribers every market day morning before 0700.

What will 2024 bring? Last year at this time we were all preparing for imminent recession. This year things are far more optimistic. The venerable Wall Street Journal yesterday reported how “optimism abounds on Wall Street.” That’s the kind of thing that gives The Contrarian cause for concern.

It’s not the mother of all contrarian indicators though. Yeah, Wall Street analysts have horrific records at predicting, well, anything. But the mother of all contrarian indicators, if you must know, is the mother in law indicator.

It doesn’t have to be your mother in law (parents, taxi drivers, baristas, high school classmates, cousins, gym buddies, etc. all work), the key is for it to come from somebody who is a complete novice at investing and has zero clue about stocks or bonds — or for that matter even knows the difference between the two (or that there is a difference). When these people come out of the woodwork asking for “stock tips” then the bull market is truly on its very last legs.

We aren’t there yet. We could get there in a couple of months if the buying continues. But then, why should it? The prevailing reason provided is that the Federal Reserve is about to cut interest rates. While this would indeed provide a short-term boost to stocks, the bigger gains would likely come in the bond market.

And that’s assuming the Fed can cut rates to begin with. Remember that the Fed needs the annualized CPI to be at 2% or lower before it can declare victory over inflation. At its current level of 3.1%, it’s still a ways off. Until you get to 2% (or ideally below), the Fed runs the very real risk of igniting inflation anew — and destroying whatever is left of its credibility with it. Remember, too that Fed rate cuts are intended as economic stimulus. One could argue that they should be reserved only used in such instances. Judging by labor markets and consumer behavior, the economy is a long way from needing any kind of stimulus.

So be careful what you wish for. Yes, the economy still looks fine and that should be a positive where corporate earnings are concerned. But without a clear turn for the worse in the economy, the Fed runs a very real risk of causing all kinds of problems should it still decide to cut rates. Not just inflation, but very real concerns with the Fed’s credibility.

Listen to the audio here, courtesy of our YouTube channel:

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