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US Economy Too Strong for Fed, Where to Invest Now (Szn 6, Epsd 10)

With Leo Schmidt, River Eddy Capital

Leo Schmidt, founder of family office River Eddy Capital, rejoins the podcast to discuss his views on economy, markets, and where to invest capital in what may be a ‘stagflation lite’ environment.

This podcast episode was recorded on Friday, June 7, 2024 and made available to premium subscribers the following Monday. Visit the Substack or Supercast for more information about premium subscriptions.

  • “Labor markets are way too hot.” There will be “no landing” (1:48);
  • Non-farm payrolls came out much stronger than anticipated. What this says about the labor market (4:59);
  • ‘Stagflation lite’ (8:31);
  • Our views of credit creation are outdated. The shadow banking system has replaced commercial banks as the primary source of credit. What this means (11:59);
  • The Federal Reserve probably needs to cut rates. Could they? Probably not — this year (22:21);
  • What does an investor do now? First up: Stocks that are AI/Nvidia (NVDA) plays. Celestica (CLS), Flex (FLEX), Sanmina (SANM), Jabil (JBL) (27:51);
  • Pharma spin-outs: Haleon (HLN), Kenvue (KVUE), Organon (OGN), Viatris (VTRS) (31:54);
  • Dollar stores, especially Dollar Tree (DLTR), are poised to outperform once there is an economic slowdown (39:07);
  • The bullish case for pipeline companies (46:59).

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Stock Market Expectations Getting Ahead of Economic Realities (Szn 6, Epsd 9)

With Bob Elliott, Unlimited

Bob Elliott of Unlimited rejoins the podcast to discuss his view that stock markets are pricing in a lot of optimism that may not be based on economic realities…

Content Highlights

  • Stock markets are pricing in a lot of optimism. Just how unrealistic is that? (1:19);
  • What is there to indicate the economy could slow this year or even next? (4:34);
  • A recession may be years away rather than months under current conditions. But conditions, as we know, can change quickly… (8:58);
  • There is a precedence to interest rates going up dramatically without it causing an immediate and dramatic entrenchment in economic growth (11:52);
  • Tech stocks might be overvalued but comparisons to the dot-com bubble are unfair and inaccurate — and may preclude a spectacular bust (16:10);
  • Today’s economic expansion is income-driven. Not a result of credit expansion (18:13);
  • What kinds of indicators should investors study to spot a slowdown in this particular type of economic activity? (30:45);
  • Regional banks are for the most part fairly priced at present… (35:50).

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The Search for ‘Undiscovered’ AI Chip Stocks

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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