Tech Stocks

Assessing Stock Market Valuations and Investor Sentiment: A Value Investor’s Perspective

Determining whether a country’s stock market is experiencing a significant bubble or is at an extreme bargain during continuous uptrends or downtrends isn’t always straightforward for a value investor. Warren Buffett often employs a simple analogy: “If someone’s weight reaches 200 pounds, it’s obvious they’re overweight.” While this method works well for individual stocks, applying it to the entire market is more challenging.

Buffett also suggests a broad guideline: when the total market capitalization to GDP ratio falls between 80% and 120%, the market valuation is generally considered normal. If it exceeds 120%, there may be suspicions of overvaluation, though not definitively so. However, rapid societal changes, such as the dominance of high-tech companies today, make it difficult to ascertain market valuations accurately.

Many compare the current surge in the US stock market to the dot-com bubble of 2000, but this analogy falls short. Unlike then, the current Big 7 in the US stock market not only continues to grow profits but also anticipates sustained growth with no apparent factors hindering their profitability.

Presently, the US stock market is undoubtedly overvalued, but reaching a definitive conclusion is challenging due to potential shifts in the landscape. For instance, the scale of platforms like Alipay and WeChat Pay was unimaginable in the past, reflecting the evolving market dynamics.

However, individual stock valuations remain effective, typically determined by their future discounted cash flows. Examining specific stocks can offer a rough yet accurate assessment of whether the US stock market is overvalued and to what extent.

Regarding specific companies, Dell Technologies(DELL)’s recent stock price surge, despite declining revenues, underscores market enthusiasm for its AI server prospects. Conversely, Costco’s stock price dip post its fiscal report might indicate overly optimistic pricing, considering its historical growth rates.

The valuation challenges extend to retail giants like Walmart, whose stagnant profits and high PE ratios suggest an overvaluation reminiscent of decades ago. Similarly, Target’s recent profit growth, largely driven by cost reductions, underscores its lower valuation potential.

The remarkable growth of the Big 7 companies since January 2023, driven by AI prospects, reflects market optimism toward future profitability. However, companies lagging in AI adoption, like Apple(APPL) and Tesla(TSLA), have seen weaker performances, highlighting the importance of clear AI strategies.

Buffett’s recent shareholder letter hints at potential market instability, emphasizing Berkshire Hathaway’s increased cash holdings and investments in short-term US Treasury bonds, rather than the stock market.

Despite the market’s evident bubble, accurately determining its extent remains challenging. Market bubbles often accelerate before bursting, presenting a perplexing phenomenon. Nevertheless, the self-evolutionary nature of market trends, whether in accelerating uptrends or precipitating downturns, underscores the complexities of market analysis.

Even for traditional computer hardware companies like Dell, whose stock price soared from a low of $12 in March 2020 to a peak of $131 within just four years, there are valuation puzzles. The market’s enthusiasm for Dell likely stems from its anticipated prospects in AI servers. Despite significant insider selling by the company’s management, the market seems unfazed, indicating a fervent embrace of AI technologies.

In contrast, after Costco(COST)’s fiscal second-quarter report for 2024, its stock price dropped by 7%, reportedly due to slightly lower-than-expected holiday sales. However, Costco’s revenue continues to grow at its historical pace, albeit with diminishing growth rates due to its larger scale. Nevertheless, its profit growth remains relatively high.

The market’s reaction to Costco’s stock price decline may be attributed to its previous rapid rise, from $451 in March 2023 to a peak of $738 a year later. Despite historically trading at a PE ratio of 20-30x, Costco’s valuation has surged to nearly 50x amidst the market frenzy. However, challenges lie ahead as emerging cross-border e-commerce platforms like Pinduoduo’s Temu and TikTok Shop could pose significant competition to Costco’s business model.

Similarly, Walmart(WMT), despite its stock price trajectory resembling that of a unicorn growing into a behemoth, has seen modest revenue growth of just over 30% in the past decade, with stagnant net profits. With a current PE ratio exceeding 30x, Walmart’s valuation reflects levels reminiscent of its high-growth era decades ago. A more reasonable PE ratio of around 10x might be warranted given its matured growth phase and potential future revenue declines.

Meanwhile, Target’s recent profit surge in fiscal year 2024, driven largely by cost reductions, underscores its potential for profitability. However, its current PE ratio might need to adjust downward to reflect the gap between its current net profit of $4.1 billion and its peak profit of $6.9 billion.

Examining the market’s focus on the Big 7 companies since January 2023, with their market capitalization surging by over 80% and comprising over 25% of the S&P 500 index, reveals a shift towards companies with greater AI profit expectations. This trend has seen companies like Apple and Tesla lag behind their peers due to their slower AI adoption.

Apple’s recent underperformance in the stock market can be attributed to its failure to clearly articulate its utilization of AI trends to investors or consumers. While Apple’s valuation may be considered high, a potential drop in its stock price could present a buying opportunity given its consistent profitability.

In the latest annual shareholder letter, the Oracle(ORCL) of Omaha, Warren Buffett, discusses the current state of the stock market in rather cryptic terms. He emphasizes Berkshire Hathaway’s ability to deploy substantial funds to navigate market turbulence, which could present significant opportunities. Despite the market being much larger than when Berkshire was first established, Buffett notes that today’s market participants are no smarter or better educated than those of his youth. He observes a surge in casino-like behavior in the market, which has permeated many households, enticing family members on a daily basis.

Assessing whether the stock market is in a bubble and the extent of any bubble is always challenging. One characteristic of a stock market bubble is that as it approaches its bursting point, it tends to accelerate its ascent—a peculiar phenomenon. Perhaps it’s akin to the notion that before extinction, there must be madness. This presents a disaster for short sellers and often leaves prognosticators with egg on their faces.

Buffett often appears bewildered when discussing the market. However, the fact remains that Berkshire’s cash reserves are growing, and its increased investment in short-term US Treasury bills signals a lack of confidence in the stock market.

Over the past decade, many US companies have amassed significant cash reserves, and management teams are increasingly adopting Apple’s playbook: using surplus cash for stock buybacks, followed by share retirements. Enormous buyback funds serve as a driving force behind stock price appreciation, while share retirements reduce the float, contributing to sustained upward pressure on stock prices.

However, another phenomenon deserves attention: a growing number of management teams are selling substantial amounts of their company’s stock.

Regardless, it’s certain that the US stock market is experiencing a bubble, but determining its extent remains challenging. After all, even if market valuations are excessively high, they can either correct or continue to rise further. Once a market trend is established, it tends to self-evolve, accelerating as it progresses. The final stages of a bear market, characterized by rapid declines, often see leveraged speculative positions unwinding, resulting in a V-shaped bottom reversal. The late stages of a bubble-induced market also see accelerated upward movements, providing much food for thought.

Energy Stocks

Surging Commodity Prices Amidst Geopolitical Tensions: Implications for Investors

Since the beginning of this year, the global economic recovery has led to a rapid increase in prices for major commodities such as oil, gold, and silver, with some prices soaring to levels unseen in years.

In April, driven by factors like expectations of Federal Reserve interest rate cuts and geopolitical conflicts, commodities led by gold have experienced a significant uptrend. Both COMEX June gold futures and London spot gold prices broke through the $2300 per ounce mark this week, reaching historic highs. Crude oil prices, including Brent crude, have also surged, with Brent crude surpassing the $90 per barrel mark for the first time in five months.

In stark contrast to the rally in gold and oil, the performance of US stocks has been lackluster since the beginning of April, reflecting market concerns about the resurgence of inflation. Despite positive signs such as the ISM Manufacturing PMI surpassing 50 for the first time in 16 months and better-than-expected job growth numbers in March, the Federal Reserve faces a dilemma: whether to cut interest rates or not.

Speaking about recent trends in the US stock market, the team led by Shamik Dhar, Chief Economist at Mellon Bank of New York(BK), pointed out in an email to the Daily Economic News that the main downside risk is the emergence of a second wave of inflation, which could lead to unexpected tightening of monetary policy.

Although Federal Reserve Chairman Jerome Powell has reinforced prospects of interest rate cuts this week to alleviate market concerns, several high-ranking Fed officials have subsequently voiced opinions suggesting that there may not be interest rate cuts this year. Following the release of the March non-farm payroll data, the CME Group’s “FedWatch” tool indicates that the market’s probability of a Fed rate cut in June has decreased from around 63% before the non-farm data release to 50.8%.

Gold breaks through $2300, Brent crude surpasses $90 after 5 months

Gold prices have maintained an upward trend since the beginning of this year. In March, New York gold futures prices rose by 9.8%, marking the largest monthly gain in over three years.

Entering April, gold prices continued to hit record highs: on April 1st, London spot gold and COMEX gold respectively broke through $2260 and $2280 per ounce; on April 3rd, the COMEX June gold futures price reached $2315.0 per ounce, marking a fifth consecutive trading day of record high closing prices; on April 4th, spot gold also broke through $2300 per ounce; on April 5th, spot gold briefly dipped before rising above $2330 per ounce, while COMEX gold futures prices reached $2350 per ounce.

With gold continuing to soar, global commodity futures have also risen. According to Wind data, this week, COMEX silver rose by as much as 10.77%, LME zinc rose by 7.5%, and LME nickel and LME copper both rose by over 5%.

The significant rise in gold prices is supported by multiple factors, including enhanced expectations of Federal Reserve interest rate cuts, escalating geopolitical tensions in the Middle East, and continued gold purchases by central banks worldwide.

However, despite the frequent record highs in gold prices, the global gold ETF holdings have been declining continuously. Data compiled by ING Bank of the Netherlands shows that as of April 4th, gold ETF holdings have decreased from around 856,000 ounces at the beginning of this year to approximately 820,000 ounces. ING believes that there is still significant room for gold purchases at present, but investors may wait until the Federal Reserve actually begins to cut interest rates before rushing to buy.

Research reports also point out that the bull market in gold is not over, but the sustainability of the uptrend faces challenges due to reliance on grand narratives and unattractive holding returns. Referring to the historical experience of gold breaking $1000 per ounce in 2009, $2400 per ounce may be an important resistance level.

Changes in the Middle East situation are also profoundly affecting the performance of the oil market. In addition, on the same day, OPEC+ decided to maintain the current production cut plan, indicating future market supply tensions.

WTI crude oil rose by 4.5% this week, reaching $86.91 per barrel, while Brent crude rose by 4.22% to $91.17 per barrel, surpassing $90 for the first time in five months. Next, market attention will turn to the OPEC+ ministerial meeting scheduled for June, where the extension of the production cut plan into the second half of the year will be crucial for whether oil prices can break through the three-digit mark.

An article published on the CME Group website on April 5th stated that because recent attacks involve major oil-producing countries, geopolitical events are affecting oil supply. In the short term, attention in the oil market remains focused on the tense situation in the Middle East, with next week’s international oil prices expected to remain high. If geopolitical tensions continue to escalate, there is no ruling out the possibility of further upward momentum. The mainstream operating range is expected to be $83-88 per barrel for WTI and $86-92 per barrel for Brent.

Rebecca Babin, Senior Energy Trader at CIBC Private Wealth US, believes that the escalation of tensions between Iran and Ukraine, coupled with the confirmation that OPEC+ will continue the production cut until June, has driven the expansion of price increases. Babin also noted that while the outlook for the coming months is positive, downside risks include the possibility of OPEC+ resuming some production, weakening demand, and Federal Reserve interest rate cuts being lower than expected.

Best Stokcs Tech Stocks

Tech Giants Engage in Talent War as AI Talent Becomes Hot Commodity

As technology companies continue to delve deeper into the field of AI, a talent war is unfolding.

Recently, Tesla(TSLA) CEO Elon Musk posted on social media platform claiming, “OpenAI has been aggressively poaching Tesla engineers with high salaries, and unfortunately, there have been successful examples of poaching.”

Last month, machine learning scientist Ethan Knight became the third Tesla engineer to join xAI. Musk revealed that just as Knight was about to switch to Open AI, he intervened and successfully persuaded Knight to join xAI.

“The AI talent war is the craziest talent war I’ve ever seen,” exclaimed Musk!

Is Musk’s AI startup poaching from Tesla? xAI is an AI startup founded by Musk in July 2023, focusing on addressing deeper scientific questions and hoping to use AI to help people solve complex scientific and mathematical problems and “understand” the universe. On March 17th of this year, xAI officially announced the open-source large model Grok-1, releasing model weights and architecture under the Apache 2.0 license.

Recent reports suggest that investors closely associated with Musk are in talks to help xAI raise $3 billion in a funding round, which would value the company at $18 billion.

The recent incident that prompted Musk to post an explanation was the poaching of talent from Tesla. Last month, machine learning scientist Ethan Knight joined xAI, making him the third Tesla engineer to do so.

Following reports of xAI poaching from Tesla, Musk posted an explanation, stating that while it may seem like xAI is “poaching” from Tesla, it’s actually Open AI poaching from Tesla, “if xAI doesn’t offer an offer, the person will be poached by Open AI.”

Before Musk, tech titans Mark Zuckerberg and Sergey Brin had also joined the AI talent war. Earlier reports suggested that Meta CEO Zuckerberg personally wrote emails in an attempt to recruit AI researchers from Google’s DeepMind AI team; Google co-founder Sergey Brin had called an employee planning to switch to Open AI, urging them to stay at Google.

“The high salaries” are making this AI talent war even more intense. According to reports, when OpenAI poached from Google, it promised annual salaries (mainly in the form of stocks) ranging from $5 million to $10 million; Meta offered annual salaries of $1 million to $2 million for senior researchers hired externally; Musk also stated that he would raise salaries for Tesla(TSLA)’s AI team.

China’s AI positions, such as large models, are also attracting high salaries At a time when a talent war is raging in the global AI industry, China’s artificial intelligence positions, represented by large models, are also witnessing a phenomenon of high-paying “poaching”.

At the previous Shanghai Spring Comprehensive Employment Promotion Fair, reporters noticed that positions related to new productive forces industries, represented by artificial intelligence and large models, had become a hot spot in China’s recruitment market this year.

Zhang Jiaqing, co-founder and Chief Marketing Officer (CMO) of OpenShin, said in an interview with Securities Times reporters that the development of large models has entered a deep-water area, empowering thousands of industries. At this time, more diversified talents are needed, including data processing, model training, and application development based on large models.

Represented by ChatGPT, generative AI has sparked a technological craze, and leading Chinese enterprises are actively exploring the boundaries and applications of generative AI large models, leading to a surge in talent demand for corresponding positions. A report released by China Talent International shows that in the context of overall internet salary reductions, the salary increase for positions such as large model architecture and natural language algorithm engineers can still exceed 30%.

“Talents in positions such as large models, big data, and computing power are relatively scarce in the job market, and many companies will focus on recruiting them, with demand being quite high,” said Liu Mengmeng, Senior Marketing Director and Head of the Market Research Center at China Talent International, in an interview with reporters. “Enterprises are willing to go to great lengths and allocate resources to recruit talents in the forefront of current technologies.”

According to Liu Mengmeng, many of her clients are deploying positions in areas such as large models and artificial intelligence. “During the Spring Festival, some clients sent demands for related positions.”