Dudley Wants a Cut Now

MARKETS

Down Days

Now that’s a selloff.

Unless you’re short and/or a permabear, days like Wednesday are no fun.

But they happen, just not very much at all lately, and they are essential elements in the complex processes that are bull markets.

I say that with the benefit of about 15 minutes of post-close perspective and on the basis of a whole lot of stock market history.

Your comfort level right now is probably a function of your confidence in your long-term plan.

Now is an opportunity/reminder to review yours if you haven’t in a while and to establish one if you haven’t already.

After all, there’s no question “BTFD” has been an effective strategy in the post-pandemic era.

And, with the S&P 500 now down 4.24 percent from an all-time closing high set just six trading days and 14 news cycles ago, as the great Eddy Elfenbein framed it, we’re surely talking about a dip.

The S&P 500 has suffered a serious drawdown or slipped into a bear market four times when it ended a long streak of without a 2 percent decline

So stocks sold off hard, the Nasdaq Composite giving back 3.64 percent on rising skepticism about the return ever justifying the investment in artificial intelligence projects.

Tesla $TSLA and Alphabet $GOOGL turned red in Tuesday’s post-market due in large part to questions about AI initiatives raised by their second-quarter reports and slid another 12.33 percent and 5.04 percent, respectively on Wednesday.

TSLA is also showing something of an Elon discount, with many of the EV automaker’s operational issues traceable to the mercurial CEO’s ever-changing dreams and moods.

And Nvidia $NVDA, the poster stock for the AI revolution, was down 6.80 percent and has now lost about $640 billion in market capitalization since reaching a new all-time high on June 20.

Nvidia $NVDA was down 6.80 percent on Wednesday, July 24, 2024, and has now lost $640 billion in market capitalization since reaching a new all-time high on June 20, 2024

The S&P 500 and the Russell 2000 both shed more than 2 percent, while the Dow Jones Industrial Average, with no NVDA exposure and only a handful of top-tier tech names, was off just 1.25 percent.

It’s the first time in 356 days the S&P has closed down more than 2 percent.

The combination of “bad” earnings and seasonal weakness plus a genuinely strange series of market and political anomalies seems to have investors, traders, and speculators on an edge they went over yesterday.

Perhaps Bill Dudley saying the Federal Reserve risks recession by not cutting its benchmark interest rate next week also shook some confidence in the macro situation and the prospects for forward earnings growth.

It’s fair to say a rate-cut announcement after the Federal Open Market Committee concludes on July 31 is likely to induce a negative reaction.

Today is a new day. Of course we’d be silly not to observe the follow-up price action but data compiled by Jason Goepfort of SentimenTrader shows it’s unlikely to devolve into a serious bear market.

Fresh catalysts include second-quarter GDP and weekly jobless claims data, out at 8:30 a.m. ET, and earnings reports from 726 of the 1,960 companies scheduled to report this week.

Semiconductor maker STMicroelectronics $STM will share results and guidance before the open, and Deckers Outdoor $DECK will do the same after the close.

There’s nothing as dramatic as a Magnificent Seven earnings report or two dropping, so those representatives will have to do.

We will see Microsoft’s $MSFT and Meta’s $META earnings on Tuesday, July 30. Amazon.com $AMZN will report next Wednesday, July 31. Apple $AAPL is up on Thursday, August 1.

Nvidia won’t close this chapter of The Magnificent Seven story until August 28.

So how significant is Friday’s Personal Consumption Price Index report anymore…

DEEP DIVE

In-n-Out

That’s what a great rotation is all about.

The other side of the historic great rotation into small-caps this July is a corresponding great rotation out of Big Tech.

It accelerated on Wednesday after Tesla $TSLA, in particular, and Alphabet $GOOGL, in a less direct way, offered results and guidance that left investors, traders, and speculators wanting.

TSLA was down more than 12 percent, GOOGL more than 5 percent, as concerns about the deep foundations of this bull market and the pillars of earnings-growth optimism got a little more serious.

The Magnificent Seven big tech mega-caps had their worst trading day since 2022 on July 24, 2024

TSLA posted its softest profit margin in half a decade and missed analyst expectations for earnings per share despite a slight revenue beat.

Management is making desperate moves to move inventory, like slashing prices and boosting incentives, even as EV production and innovation lag.

It’s possible some Elon Exhaustion is settling in. But I’m prepared to be proven wrong on that one; his is an adoring shareholder base, maybe whether or not we see a robotaxi in October.

There’s something else happening here with GOOGL.

Management posted expectations-beating results at the top and bottom lines and boosted its full-year profit guidance.

The problems here are twofold, a slowdown in YouTube ad growth and the appearance that high AI capex isn’t showing up in earnings.

So there are concerns about margins. And that’s legit. I don’t know if it’s re-price-by-5-percent legit, is the thing. We’ll see what happens with the 71.43 percent of The Magnificent Seven that hasn’t yet reported earnings.

FROM THE RESEARCH DESK

Not For Laser-Eyes Only

Are you a Bitcoin bull?

If you’re curious about crypto and maybe even want some Bitcoin $BTC exposure in your portfolio there’s a simple way to do it through the stock market.

And Sanford C. Bernstein says now is the time to do it, with 70 percent potential upside from here.

MicroStrategy $MSTR, a business intelligence, mobile software, and cloud-based services provider, is also the biggest corporate holder of Bitcoin.

MSTR holds 226,331 BTC on its balance sheet at a total cost of $7.358 billion and an average purchase price of $35,158.

Co-founder Michael Saylor initiated the BTC-buying strategy on August 11, 2020, buying 21,454 when the world’s No. 1 crypto was trading around $11,653.

MSTR is now widely considered a proxy for BTC.

Pretty decent proxy…

MicroStrategy $MSTR is the largest corporate holder of Bitcoin $BTC

Bernstein is bullish on crypto generally but sees specific opportunity in MSTR, initiating coverage with an “outperform” rating and a $2,890 12-month price target.

Analyst Gautam Chhugani boosted his BTC target from $150,000 to $200,000 by 2025. MSTR will benefit, and that’s just math.

“Since August 2020, MSTR has transformed from a small software company to the largest bitcoin holding company, owning 1.1 percent of the world’s Bitcoin supply worth $14.5 billion,” Chhugani wrote in a note to clients.

MSTR closed at $1,672.69 on Wednesday, down 2.85 percent as investors, traders, and speculators slipped into “Sell! Sell! Sell!” mode.

But MSTR is up nearly 150 percent in 2024, “outperforming its underlying,” if you will, with BTC up about 50 percent year to date.

Saylor is the ultimate HODLer, laser eyes do or eye, and Chhugani thinks his energy and leadership can attract capital, stimulate deal-making, and accelerate Bitcoin’s integration into the financial system and adoption by the general public. Wall Street is totally bullish too: All seven analysts who cover MSTR rate it a “buy.”

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