Issues, News and Views
WORST STOCK ANALYST OF 2018
2019/02/22 - Sports leagues have awards to recognize their players' accomplishments. Baseball has its Cy Young award for the best pitcher, and hockey has its Hart Trophy for Most Valuable Player, to name but a few examples.
This Sunday a crowd of movie people will be handing each other Oscars, reminding the planet that the sports leagues have absolutely nothing on the entertainment industry when it comes to self-congratulatory preening and fawning. The Oscar's, Emmy's, Grammy's, Tony's, the Film Actors Guild, you name it...
Most Americans, well... we just arrive at work on time, do our jobs, and leave when we're done. No fanfare, we just do our jobs because that's what we do.
Ever wonder what it would be like if, say, the IBEW had its own awards night? Like, for example: "Best Electrician, Outdoors, Hot/Humid Conditions, Residential New Construction. - the nominees are - Stanley Kowalski from New Orleans; ..." and so on?
Or the AICPA's annual awards: "Largest on-Budget Tax Audit - the nominees are - Robert Stevens from Deloitte & Touche's Columbus OH office; Steven Roberts from KPMG's Dayton OH office; ..." and so on. Our next category is "Outstanding Performance by an Over-Worked Under-Paid Audit Junior".
Nothing at all wrong with it. It is a good and honorable objective to have the respect of your colleagues and esteem of your peers.
What about stock analysts? Do they have awards and booby prizes for the best and worst performances? What happens when someone really, really screws it up? And on a really big company that many people are following? Or it is so badly wrong you can't help but wonder if it's fraud?
What happens when a stock analyst predicts that the share prices of a $100+ billion company will rise 50% from its then current level, and instead, within 3 months, it plunges 50%? Do you get a booby prize for that? Or maybe a lawsuit?
Let's take a look at the curious case of C.J. Muse, a Senior Managing Director and senior equity research analyst at the investment management firm Evercore ISI.
Muse covers the semiconductor space and had a $300 price target on chip manufacturer Nvidia (NVDA), one of the best performing stocks over several years.
It's actually incorrect to think of Nvidia as a chip "manufacturer" since most if not all of their actual manufacturing seems to be outsourced to the contract manufacturers in Taiwan.
Instead, Nvidia is more of a research and design firm focused on computer graphics, as well as artificial intelligence and autonomous driving (AI/AD), which require chips of similarly cutting edge power, performance and efficiency, which Nvidia also designs.
If you go to Microsoft's website and spec out a Microsoft Surface Book you'll see that the high end model comes with an NVIDIA GeForce GTX 1060 graphics card. This is no garden-variety Intel clunker, it's a really good card for people who demand outstanding graphics.
Semiconductors designed by Nvidia chips have a number of niches in many cutting edge trends in technology such as Data Centers and Autonomous Driving.
Perhaps you saw the Mercedes-Benz Super Bowl commercial where the fellow is walking through town making things happen by the power of his word, then he gets inside his Benz which also responds in kind to his commands. Yup, the technology behind the "Mercedes-Benz User Experience" is you guessed it, Nvidia.
Nvidia is also supplying AI/AD solutions to Volvo, Volkswagen/Audi and Toyota/Lexus. And also to the truck manufacturer Paccar - when you see the self-driving Peterbilt and Kenworth trucks roaming America's interstates in a few years, that technology driving them will be from Nvidia,
And, just to drive the point home, guess who built the world's fastest computer? Well, right now that title belongs to a collaboration between IBM and Nvidia. Pictured below you see IBM CEO Ginni Rometty, Energy Secretary Rick Perry, and Nvidia CEO Jensen Huang being interviewed by CNBC's Dom Chu at the computer's unveiling at Oak Ridge National Laboratory on June 8, 2018.
The point being that Nvidia is a real company that has a long list of accomplishments and name brand clients. Nvidia's capabilities are phenomenal. The real question seems to be, "What can't Nvidia do?"
The problem is that Nvidia chips also found a home in the world of cryptocurrency, or should we say, crap-tocurrency?
But before getting into that, let's consider the company's financial performance. As mentioned, the stock's performance had sizzled over several years, but so too had its innovation, production and financial performance. Sales continued to rise, profits continued to rise, cash flow continued to rise.
The company boasts a fortress-like balance sheet with cash and marketable securities in multiples of its liabilities. Real money. This was no internet bubble-stock about to burn through its cash pile. This company was making real money hand-over-fist. Their 10-Q reports are publicly available. Check em out if you like, they're great.
What could possibly go wrong?
Well, for one thing, their revered CEO Jensen Huang loves fast cars. He could kill himself in a car accident and that could be cataclysmic for the stock. But that didn't happen.
Nvidia's Chief Scientist Bill Dally is an avid cyclist a dangerous pursuit - and annually participates in a California bike race called the Death Ride (check it out deathride.com). It is entirely possible that he could kill himself in a bike crash on the Death Ride and that would be bad. But that didn't happen either.
Everything seemed to be going right, and while the stock price had rallied significantly, there was every justification based upon the great things the company was doing. Its time was now, with its best years still ahead. It was - and still is - at the cutting edge of everything important.
Cryptocurrency is an arcane world and not well-understood by most people. And it is never wise to invest in something you do not understand. Cryptocurrency was and still is a good thing to stay away from.
You can buy crypto's such as Bitcoin, or you can earn them, by "mining" for them, as they call it. But to mine them takes a lot of computer processing power. Something Nvidia's chips might be useful for. So crypto minters took a liking to Nvidia's gaming chips, and started buying them. And more of them. And more of them.
Unfortunately the fringe world of crypto-mining began to take a bigger and bigger share of Nvidia's revenue. But since its just a fringe world, it still can't be that big, right? After all, Nvidia had a market capitalization of about $150 billion dollars, and annual revenues of over $10 billion. But this risk factor was indeed growing and becoming material, yet Nvidia's management - CFO Colette Kress by name - thoroughly neglected to disclose this growing danger.
And then, during the company's third quarter, a number of crypto-miners threw in the towel, gave up, and put their Nvidia cards up for sale. So how many, you ask, 100? 1,000...? OK, how about a HALF A BILLION DOLLARS WORTH!?!? Revenues collapsed, and the stock price dropped by 50%!
So what did Nvidia's management have to say leading up to this debacle? In its second quarter 10-Q filing released August 16, 2018, on Page 29 under "Risk Factors", it is stated that...
" Refer to the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 28, 2018 . There have been no material changes from the risk factors previously described under Item 1A of our AnnualReport on Form 10-K for the fiscal year ended January 28, 2018. "
Did you get that? "No material changes" in risk factors. No material changes. The stock is about to implode, but don't worry, no change in risk factors, everything's pretty well like it was.
Note the company's reported quarterly revenues Does that look like "No material changes" to you?
So what did the 10-K report from February 2018 say about Cryptocurrencies? The word "crypto" appears only 4 times in the report:
In all, the Company made no meaningful effort to provide the reader with any useful indication of crypto's share of company revenue, with the effect of trivializing the significance of crypto to the company's business.
In March of 2018 CEO Jensen Huang appeared on CNBC's Mad Money. Jim Cramer pushed Huang on crypto, and Huang thoroughly downplayed the significance of crypto to company revenue, allowing only that its impact was "a bit". Got that? "a bit". View the entire video, but especially 7:03 to 9:43.
In May of 2018 the company released its quarterly 10-Q filing and stated "There have been no material changes from the risk factors previously described under Item 1A of our Annual Report on Form 10-K for the fiscal year", the exact same statement it would make three months later in its August 10-Q as mentioned above.
And that's where our pal C. J. Muse steps up. On Thursday September 27 NVDA stock closed at a price $267.40. Muse and his Evercore team and investors spend three days in meetings with Nvidia's senior management, and came out so impressed, that Mr. Muse increased his NVDA price target from $300 to $400 per share. The stock rose on the news and it closed the month the following day at $281.02. Check out this video.
And it is at that precise point where things go horribly wrong. And for that we nominate Muse for "Worst Stock Analyst" for 2018. Check out this thrilling video.
After peaking at an all-time high of $292.76 on October 02, NVDA began its southward march, closing October at $210.83. It closed November at $163.43. It closed December at $!33.50. Every time you thought the stock could go no lower, it went much lower.
Now isn't that just fantastic? Muse predicts a price surge of 50%, and instead, within 3 months, the stock plunges by 50%! Isn't that amazing?
Which begs several questions - why does Muse still have a job? Why does Nvidia's CFO Colette Kress still have a job?
But this isn't the end of the story. One of Nvidia's largest investors, the Vision Fund, which is managed by Japanese investment firm Softbank, was buying Put options - effectively, insurance policies against price declines - at the same time Evercore was pumping up Nvidia's stock price with lofty projections, even while the Company's sales were falling off a cliff.
What if Nvidia, Evercore and Softbank were working together in an elaborate "pump & dump" scheme? Consider this dark, alternate perspective on what might have actually been going on:
By the mid-point of the third quarter - September of 2018 - it must have been clear to Nvidia's management that revenues were evaporating. Probably Evercore and Softbank suspected it too, and were pressing Nvidia's management on their concerns. That much probably is true.
So, we speculate, they hatched a plan: Evercore would issue a lofty recommendation on the stock which would serve two purposes - it would pump up the stock price allowing Evercors's clients to pull out of Nvidia and nice profits; and simultaneously lower the cost of the insurance policies that Softbank would buy to protect against the imminent price plunge.
Though nefarious, malevolent and illegal, it makes perfect sense: Nvidia stoutly refused to disclose any negative information regarding impediment to their sales revenue, while Evercore issued fawning praise of the Company, allowing its investors to pull out and lowering the cost of Softbank Put contracts.
Softbank, for its part, was to hold off on selling, thereby preventing downward pressure on the stock price, providing cover for Evercore. Once Evercore was out, then Softbank could begin selling its shares at inflated prices, and as the sales began exerting downward pressure on the stock price, Softbank would cash in on its Put contracts - the insurance policies it had bought on the cheap.
In the past few weeks it has come out that Softbank has liquidated its position in Nvidia, but suffered virtually no losses because it had Put contracts in place to offset losses on the share price.
Doesn't it seem odd that after three days of meetings with Nvidia management Evercore would issue a research report predicting a 50% increase in the stock price, even as management most certainly knew its revenues were falling off a cliff?
Doesn't it seem like things worked out just a bit too well for Softbank? That they knew the exact right time to buy insurance policies? If they wanted out, why didn't they just sell their stake, like most investors normally do?
Doesn't it seem like "pump and dump"? Doesn't it seem like insider trading?
There's something rotten in Denmark. Or Santa Clara California. And a booby prize for C. J. Muse, 2018's winner of the "Worst Stock Analyst" trophy. And perhaps deserving of the "Most Fraudulent Equity Research Report" as well, we just don't know that.
SEMI-ANNUAL REVIEW - THE WORLD ACCORDING TO CHALPREM
2019/01/23 - Herewith Chalprem provides you with our semi-annual economic review, update and prognostication for the United States economy as well as geopolitical implications of and for the world around us.
Back in July we made the statement "We are not predicting recession or runaway inflation - at least not yet. But it does seem that we are rather close to a tipping point" to make the point that the economic strength that we had enjoyed to that point was in peril and we would need to see wise policymaking to keep the non-inflationary expansion rolling. Let's consider some of the policy choices being considered and/or implemented by policymakers at this time.
EXPANSIONARY DISINFLATIONARY FORCES (+/+):
But here we are. Cheap plentiful domestic energy great for consumers, great for folks employed in the business, and great for national security and our geopolitical strategic options.
And think about the secondary effects spun off by cheap oil - cheap oil is great for the airlines, for employees of airlines, for customers of airlines, and for shareholder of airlines. And railroads. And automakers.
The main point here is that there is no intrinsic trade-off between inflation and expansion good policymaking can deliver the best of both worlds.
Chalprem assessment: We fully support President Trump.
Deregulation lowers costs to business and ultimately consumers, which is clearly disinflationary. Since prices will decline, at the very least on a relative basis over time, more of the product will be purchased, and businesses will increase hiring to deliver that product.
As costs go down and sales go up, profits also will rise, which is good for business, and good for the government authorities that tax both the employees and the employers on their increased wages and profits.
Chalprem assessment: We fully support President Trump.
RECESSIONARY DISINFLATIONARY FORCES (-/+):
Tactically, the Fed waited far too long to raise rates, and now, playing catch up, they are raising rates far too quickly, raising rates with both excessive frequency and severity. This is having the effect of disrupting markets and potentially creating the Powell Recession, which would be a completely unforced error.
Conceptually, we would recommend lessening the frequency of rate hikes to no more than two per year, and reducing the severity of the increases from 1/4% to 1/8%; but in practical terms in the here and now we probably need no further rate hikes before the summer; and if we get any rate hikes before our next semi-annual update please quickly head for the hills.
Strategically, we wonder if the Fed knows what they are doing. As we have pointed out above, there are forces at work that are continuing to deliver disinflationary expansion, yet Powell & the Fed seem convinced that anything that is expansionary is by definition inflationary which is flatly false. And if their policymaking framework is falsely premised, can we trust them to make the right decisions? Nope.
Chalprem assessment: Neutral monetary policy, foreseeing loosening more likely than tightening
Chalprem assessment: We fully support President Trump.
RECESSIONARY INFLATIONARY FORCES(-/-):
Want the worst of both worlds?
But our lopsided trading arrangements with other nations, that are effectively welfare-for-countries schemes like the Marshall Plan, are worse. We have been running our trade policy like a soup kitchen.
We have allowed nations to take advantage of us, but when we allow the world's second largest economy to do so, and to lie and cheat and steal in so doing, well then shame on us. Shame on Bush 43, and shame on Obama 44. Fail. Both.
The environment and the American worker have both been casualties, if not fatalities, of China's take-no-prisoners make-things-cheap strategy for global domination. Surely the American left and the American right can agree on the need to get tough on China, if absolutely nothing else?
So it's time to take a long term view and fight the good fight. China has been at war with us for decades, defeating us without firing a bullet.
Don't believe it? Well, what did we do to the Soviet Union? China has been doing the same to us. Beating us at our own game. Wake up people.
Overall we are pessimistic that a full, fair, favorable deal will be forthcoming any time soon. Probably not during President Xi's watch. Now that we are fighting back, the battle has been joined, and it could be long and brutal. But you gotta do what you gotta do. Like WW2. This is WW3.
Chalprem assessment: We fully support President Trump
Minimum Wage Increases
The 2010 nationwide surge of Republican control of governorships and legislatures ushered in a new era of positive economic policy initiatives at the state-level, for example, Scott Walker in Wisconsin. Unfortunately statist leftist Democrats reclaimed a significant share of their 2010 losses in the 2018 elections, and foolish state-level economic policy is already on the horizon.
Minimum wage increases took effect in twenty states this month (as well as some cities), including significant increases to particularly high levels in New York and California.
Chalprem is not opposed to higher wages, indeed we fully desire to see higher wages. But you have to earn it, people! Wage increase by government dictate is a problem, not a solution. Dumbasses.
The way for an employee to increase her wages is to stay in school, get a better job, continue to learn new skills, work hard, take initiative, stand out, get promoted, keep at it.
When this happens across the workforce, there will be noninflationary expansionary growth throughout the economy. And higher wages. And public policy should be enacted that institutionalizes a workplace structure that incentivizes this behavior and culture in the workforce.
Minimum wage laws do the opposite. Dumbass government regulation by nature exerts recessionary and inflationary forces. Minimum wage laws increase costs, which raise prices, and reduce demand, so fewer workers are needed. And business will substitute capital for labor, with additional workers being swapped out for automated alternatives.
In addition, this type of regulatory anti-solution embellishes a retrograde workforce culture that disparages hard work, smart work and investment in oneself; and rewards political agitation, confrontation, and conflict.
Instead, states should ensure that their system and structure of incentives motivates the qualities we mentioned above: hard work, smart work, staying in school, investing in oneself, learning how to be a productive and profitable employee.
Chalprem assessment: Policy error, state governments doing exactly the opposite of the right thing
EXPANSIONARY INFLATIONARY FORCES (+/-):
Loose Fiscal Policy
But that's not what we're getting. At least in the short term, big-time government spending like the shameful $1.3 trillion spending package passed by the last Congress provides a boost of sugar energy for the economy, but in the long term makes us fat.
We need to reverse the current fiscal overload and stop borrowing from China to pay for it. But don't bet on any reversal any time soon.
Chalprem assessment: Cut government spending and the deficit and the debt now.
Monetary Loosening (not currently in effect, but that could soon change):
If the Fed stopped raising rates, and possibly started cutting them, this would allow capital markets time to settle a bit and overcome the shock of the Powell Fed's aggressive, almost violent, interest rate policy.
Chalprem assessment: Neutral monetary policy at this time, loosening may soon be necessary
WHAT DOES ALL THIS MEAN?
The second takeaway is that there are far too many policymakers out there who are simply not that bright, are too politically motivated to think straight, in a position to make the wrong policy moves.
And thirdly, some of the best and wisest policy choices, like an all-out trade war with China, or fighting for a border wall, may involve some unavoidable near term economic pain.
The economy is clearly slowing, but that hardly means a recession is imminent, and it certainly doesn't mean we are on the brink of a collapse like 2008.
On the plus side, $50 oil is stimulative. Almost every recession in America is preceded by high oil prices. In 2008 it peaked at $140, the next thing you know is that we have a recession. Not happening - not only is the low price expansionary, most of that oil is now produced in America instead of imported, so that too is expansionary.
In terms of the greatest current risks to the economy, the three 800 lb. gorillas in the room are interest rates, the trade war, and the government shutdown.
Regarding interest rates, it seems that the dimwitted plutocrat Powell has realized that he doesn't want a recession named after him, and that we may not see any further rate hikes for quite a while.
But there is less reason to be optimistic about China, and about the shutdown. Dictators don't give up easily on plans for world domination, and like others of his ilk President-for-Life Xi will not be easily dissuaded. Maybe China will surprise us, but the smart money says expect Xicialism to continue.
Nancy Pelosi and the House Democrats will not be any less intransigent then Xi. As long as the Democrats place the interests of non-Americans ahead of Americans the shutdown will continue. Don't expect that to change until Americans wake up and force Pelosi to do the right thing.
So there you have it - recession in 2018 is possible but completely avoidable if we get some good policy outcomes soon. But if we're still having these conversations in our July semi-annual review, then a 2019 recession will... probably be... probable.
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