3/4/24

#Stocks – $AVGO

#Macro – $NDX, #inflation, $XLK

Mike’s Reading The Markets Macro Subscription Service on Seeking Alpha

Some Recent Titles:

• RTM – Risk-On
• RTM – Hot Supercore PCE, Highest Since December 2021
• RTM: Still Waiting
• RTM: Market Seeing Inflation As Stalled

 

A lot is happening this week, including lots of data, plus Powell, plus the ECB, and one more thing: Broadcom earnings. We used to care about Broadcom because it was signal to Apple, and the other Apple suppliers. Now Broadcom, has seen its Market Cap rise to $650 billion, and surpass Tesla. Yeah.

Seeing what Broadcom says when they report on Thursday after the close will be interesting. The company is expected to see fiscal first quarter 2024 earnings climb by 85 bps, yes 0.85%, as in <1%, to $10.42 per share on revenue growth of 29.9% to $11.6 billion. For the second quarter, the company is expected to see earnings grow by 8.8% to $11.22 per share, with revenue growth of 37.1% to $11.9 billion. The growth isn’t driven by their chip side (AI) of the business, because semiconductor solutions is growing by 8.3% to $7.7 billion this quarter, and by 12.7% next quarter to $7.7 billion. The growth comes from their software business, rising by 124.6% to $4.0 billion and 140.1% next quarter to $4.6 billion.  Remember this is a company that bought the old Computer Associates years ago, and has made other questionable acquisitions to try and diversify its chip business and increase margins. Additionally, they just recently completed a purchase of VMware, which is driving much of the year-over-year revenue growth.

If they were smart, they would take the recent run up in the stock and do a secondary offering to pay off the $58 billion in debt it is expected to have, and say thank you for the AI hype the market has awarded the stock, rightly or wrongly. Hock Tan is a smart guy, but I think he would be even brighter it he did a secondary offering, and for less than 10% of the company’s value wipe out all its debt. The option holders may not like it, but that is not his problem.

Spreads

Meanwhile, credit spreads continue to ease, and that is also helping to keep these equity markets lifted. The odd part is that given where the dollar is; credit spreads seem historically lower since 2021. The data shows a correlation of 0.70 with an R^2 of 0.50 between the USDCAD and the CDX HY Index, both solid numbers, and yet, we are out on an island at this point, but with both the CDX high yield index moving lower, as the USDCAD moves higher, implying dollar strength. Based on this I would have though that credit spreads would be around 400 to 450.  But it is just not happening, and I do not know why.

NASDAQ 100

So at this point, as discussed on Thursday, the Nasdaq was able to gap higher on Friday, and was able to move above resistance at its Bollinger band, and appears to be heading towards the upper trend line of the rising broadening wedge, which comes around 18,450. We will have to see what happens once we arrive there. That will be the third touching point in the pattern on the uptrend line, and it means either the pattern breaks out and the advance continues or it will mark at turning point where the index heads back to 17,450.

The XLK has a similar pattern, and it hit resistance on Friday. So, the ETF needs to gap higher on Monday, and resistance needs to be taken out. Otherwise, it seems obvious that we will like reverse at some point and start the process of filling the gap at $199.

Finally, CPI swaps are pricing a 3% y/y inflation rate through June. That was where the inflation was in June 2023, so much for the progress.

Anyway, enjoy tomorrow, the rest of the week gets increasingly more busy.

-Mike