AI GOLD RUSH IS BIGGER THAN ANYONE THOUGHT, FITCH PUTS U.S. CREDIT RATING ON NEGATIVE WATCH, HOLIDAY SCHEDULE

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Better Than Perfection

Please click here for a chart of Nvidia stock (NVDA).

Note the following:

  • The Morning Capsule is about the big picture, not an individual stock.  The chart of Nvidia stock is being used to illustrate the point.
  • The chart shows a 29% jump in Nvidia stock after hours.
  • The after hours jump in Nvidia stock equates to a $218B jump in market cap.  This is the biggest market cap jump after hours in a semiconductor company in our over 30 years in the markets.  To understand how big of a jump in market cap this is, the entire market cap of Intel (INTC) is $120B.  Not long ago, Intel was the biggest semiconductor manufacturer in the world.
  • Going into earnings, Nvidia stock was primed for perfection.
  • Nvidia reported earnings not only better than perfection but significantly better than perfection.  In our over 30 years in the markets, we have never seen such a big earnings beat by a stock that was already primed for perfection.
  • There are many numbers from Nvidia’s earnings forecast and the conference call.  Here are the mindblowing key points:
    • In the current quarter, Nvidia is projecting sales of $11B vs. $7.18B consensus.
    • Even with this kind of jump in sales, Nvidia is under shipping the demand.
    • In addition, in spite of the big sales jump, Nvidia is projecting gross margins of about 70%.
    • Nvidia is projecting $1T will be spent on upgrading data centers to accommodate ChatGPT and similar generative AI tools.
    • We have been receiving a large number of emails from investors and money managers taking an issue with our bullish calls on AI.  Such investors and money managers are claiming that AI is in a bubble.  Our call has been that it is not a bubble, it is just a frenzy.  The foregoing data from Nvidia earnings is proof positive that our call is right.  Nvidia earnings show that the AI gold rush is bigger than anybody thought until 4pm ET yesterday.  It is important for investors to not get locked in an opinion but be open to new data as it comes.  
  • A fortune is to be made in AI over the next seven years.  However, it is not going to be a straight line.  There are going to be many pitfalls.  Investing in AI is going to be treacherous.  As a historical reference, it is worth remembering that at one time Amazon (AMZN) stock lost about 95% of its value.  From our long experience with thousands of investors and money managers, we know that investors who take time to develop deeper knowledge do significantly better than investors who do not.  The easiest way to develop your AI knowledge is with a membership to Arora Ambassador Club.  Unfortunately, the opportunity to join Arora Ambassador Club is now closed.
  • As an important caution, this Morning Capsule is not a call to buy Nvidia stock right here by those who are not holding Nvidia.  As a full disclosure, after hours yesterday, The Arora Report gave a signal to take partial profits on a small quantity, such as 5% of the full core position size, to take advantage of the strength.  Consider having investing discipline and sticking to the ZYX Change Method along with ZYX Asset Allocation Model that have generated enviable returns in both bull and bear markets.
  • Many investors on social media are sadly mistaken about what happened yesterday after hours.  They are pointing to a very expensive evaluation of a trailing PE of 164, a forward PE of 63, and price/sales of 26.  Yesterday’s earnings changed it all.  If the present trend continues, in The Arora Report analysis, Nvidia will likely earn $10 – $12 in 2024.  Using $11 as the mid-point and even after a 29% stock jump after hours, this translates to forward PE of 36.  For a stock that performs significantly better than perfection, a forward PE of 36 is reasonable.  As a matter of fact, The Arora Report is raising its target on Nvidia to $565 – $615, compared to the closing price of $305.38.  Nvidia is in the ZXY Buy Model Portfolio.
  • Nvidia is a large stock now with about 6% weight in QQQ.
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Negative Watch

Credit rating agency Fitch has put the U.S. debt rating on a negative watch.  Fitch expects a deal on the debt ceiling but the negative watch is due to the high risk given the fast approaching X-date.  Right now, the stock market is ignoring it due to the AI frenzy.  In 2011, the stock market experienced a major drop after the U.S. credit rating was put on a negative watch.

As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.

GDP

GDP second estimate came at 4.2% vs. 4.0% consensus. This indicates that the economy has been stronger than previously thought.  Those who want to learn more about GDP and estimates should listen to the podcast titled “Recession: What You Need To Know To Gain An Edge.”

Jobless Claims

Initial jobless claims came at 229K vs. 247K consensus.  This is a leading indicator and carries heavy weight in the adaptive ZYX Asset Allocation model with inputs in ten categories.  Adaptiveness means that the model automatically changes with market conditions.  Please click here to see how adaptiveness is achieved.

Germany

Germany officially entered a recession on Q1 GDP being revised to -0.3% vs. -0.1% consensus.  

Honoring Our Brave On Memorial Day

Memorial Day holiday is upon us.  Please join us in remembering the brave who sacrificed their lives for us to enjoy the freedoms we have.

Due to the holiday schedule, there will be no Afternoon Capsule today, and the offices will be on a reduced schedule Friday.  Posts other than the capsules will be published as needed.  Capsules will resume on Tuesday.

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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial)  tech stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking up, and bonds are ticking down.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1941, silver futures are at $22.91, and oil futures are at $73.36.

S&P 500 futures are trading at 4161  as of this writing.  S&P 500 futures resistance levels are 4200, 4318, and 4400: support levels are 4000, 3950, and 3860.

DJIA futures are down 36 points.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

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It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

 

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Picture of Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Picture of Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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