WEEK IN REVIEW
There’s only one thing to keep in mind in the following week: what Mossad agents have called the most ‘dangerous May since 1967’ in the Middle East.
Events have moved with stunning rapidity over the last ten days. The US finally left the Iran nuclear treaty, after three consecutive visits from European leaders trying to persuade him otherwise. As The Truffle described last week, the problem with this is not so much the act itself, as what it means for the situation moving forward. The US has very few options outside of coercion left, but a direct confrontation with Iran would be nothing short of catastrophic.
A further complication is the gathering momentum towards more violence in Israel. The next ten days or so features the movement of the US embassy from Tel Aviv to Jerusalem, as well as the annual celebration of Israel’s occupation of the eastern half of that city, ‘Jerusalem Day’. Both events are sure to cause high tension, even if observers believe that Mahmoud Abbas and the Palestinian Authority are keen to avoid violence.
Keep your eye, however, on Hezbollah. With the huge air strike launched by Israel against Iranian positions in Syria last week, you can rest assured that the Islamic Republic will be looking for ways to its retaliation, and are more than likely to use their proxies in the West Bank. As always, the future in the Middle East remains unpredictable – but full of unpalatable outcomes.
Markets
The US departure from the Iran treaty will have another outcome – oil prices will continue to be volatile, with a trend upwards. Already this week Brent has been trading over $77 a barrel.
The Truffle has also been following the economic turmoil in Argentina with some amazement. Only a year ago they have tapped international financial markets after a long period of forced absence – only to give investors another blow. The same structural issues came to light – Argentina borrowing in US dollars, the dollar strengthening, and Argentinian authorities scrambling to stabilize their currency through increasing interest rates. This time it reached 40%.
What is different this time is that the government took quick action and asked for support from the IMF. Christian Lagarde, the chairwoman, has already signaled cooperation. How it will look in detail is being negotiated at this point, but in our opinion, this a positive development for Argentina, even though many older citizens are still very disillusioned from the previous financial crisis and the IMF’s role in it.
There is just no other solution other than swift cooperation with global financial institutions, even if it means to give up some of Argentina’s sovereignty temporarily and enduring the stinging pain to its national pride.
For the world, Argentina is too small to have an impact on other emerging markets (EM), and the swift action by the government should insulate it from spreading to other EM countries. But the trend is certainly something to pay attention to, as other EM countries have been struggling themselves with weakening currencies in light of a stronger US dollar, such as in Turkey.
“After all, financial history shows that when rapid currency swings are combined with a turn in the credit cycle, it can flush out leveraged entities — and deliver Argentina-style surprises.”
NVIDIA – Better Than Expected Earnings, but…
Something peculiar has been happening this earnings season. Top companies and those that are lauded to the sky don’t disappoint with earnings, yet their share prices disappoint. Better Than Expected Earnings doesn’t seem enough to propel prices higher.
NVIDIA trades at over $150 billion market cap with an estimated $5 billion income for FY 2019. It’s a good company but completely mispriced – something we call a ‘story stock’!
Just read the official company description why it’s been hot for the last 2 years:
“Nvidia Corporation focuses on personal computer (PC) graphics, graphics processing unit (GPU) and also on artificial intelligence (AI). The Company’s GPU product brands are aimed at specialized markets, including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users. It incorporates GPUs and multi-core central processing units (CPUs) to drive supercomputing for mobile gaming and entertainment devices, as well as autonomous robots, drones and cars.”
More than 83% of profits still from its traditional core business (GPU – i.e. sophisticated graphics cards). Again, it’s only a chip-maker and faces all the challenges that come with being in a cyclical, very competitive and constantly changing industry. Any minor disappointment will send the stock down – big time.
The Truffle expects a slow decline for the entire industry beginning this year and accelerating in 2019 – something which already started in the first quarter of 2018. In last weeks 1st Quarter earnings announcements, expectations for next quarter are strong, yet, the stock dropped after-hours back to $255 because of a negative outlook for mining-related sales.
Though, sales are expected to be compensated by growth for data centers some analysts and traders were disappointed. $3.2 billion in sales/ $1.24 billion income (Q1) can’t justify a valuation of $155 billion.
Retail investors are setting themselves up for massive disappointment if we see more realistic expectations setting in due to changing macro factors. This year’s earnings motto: Good, but not good enough to justify a 155 billion valuation.
The company is fairly easy to short, but scary for non-professionals. Short interest as of April 15th is around 14.5 million shares at 607 million shares outstanding and 16.4 million average trading volume.
TESLA
Again, the newsflow is amazing. The name Musk appears in the headlines almost every other day. It ranges from Elon Musk proudly challenging Warren Buffett in an all-out chocolate war, to the Falcon 9 Heavy launching successfully, to threats of a short squeeze for Tesla haters. All this undeniably gives Musk plenty of media coverage and attention. The question is now does it profit Tesla’s sales and production challenges.
The short answer – very little!
The news that shareholders would like to hear is painfully missing. On the contrary, we hear news like this:
“Tesla says top vehicle engineer Doug Field is ‘taking time off’ amid Model 3 production woes”
This continues a streak of top-executives leaving Tesla at a critical moment of Tesla’s evolution to being a mass-market producer. Anyone knows that this can’t be good news. And everyone knows that this is not a “say hello to the World” type of leave of absence. At the very least it means, it will take more time and money to create and mold a better executive team.
Besides, it will cost Tesla a lot just to keep Doug Field on the payroll for so much longer and he is certainly not on a temp contract. As former Apple Executive, I am sure Doug has negotiated a mighty compensation package.
WEEK AHEAD
With the US out of the deal with Iran, focus next week will return to the US-China trade disputes and negotiations.
This Week, Chinese Vice Premier Liu He is expected to travel to Washington to continue his trade talks with, Treasury secretary Steven Mnuchin. Keep in mind that earlier this year, President Trump announced his intentions to impose heavy tariffs on imported steel and aluminum that many fear could escalate into a full trade war with dire consequences for the global economy. Listening to Warren Buffett at his annual shareholders’ meeting, we should expect both parties to do the right thing. This might be true but the ride towards returned harmony will be a bumpy one!
With earnings season over, we will be watching our existing shorts carefully, as we enter a period of relative calm that will last until the summer ends. In the weeks ahead we will announce a string of possible short candidates that will be added to our Truffle Watchlist that could be later added to our Truffle Model Portfolio. We want to be ready for the months of September and October as the FED continues to raise rates and the debt markets will have to react.
