Was Debt-Ceiling Standoff a Concern? Not for These Stocks

“The hardest thing when studying history is that you know how the story ends, which makes it impossible to put yourself in people’s shoes and imagine what they were thinking or feeling in the past.” — Morgan Housel.

We can count ourselves fortunate to be blessed with the benefit of hindsight before it was due. While the U.S. Treasury was set to exhaust its ‘extraordinary measures’ to manage the national debt as early as the revised deadline of June 5, calmer and more rational heads prevailed in Washington D.C., albeit at the eleventh hour.

President Joe Biden and House Speaker Kevin McCarthy agreed to suspend the current $31.4 trillion statutory debt ceiling until January 1, 2025, in exchange for discretionary spending caps for six years, conditional on the approval of Congress.

While fractiousness, delays, and hiccups are still expected in the legislature amid some opposition from Republican Freedom Caucus and progressives in the Democratic Party, it seems highly likely that we will be out of the woods by the end of this week and manage to sweep the mushrooming national debt under the rug once again.

However, we imagine a scenario in which the responsibility to ensure economic stability would have been undermined in the interest of power tussles, communication breakdown, and zero (or negative) sum game. We imagine how the situation would have unraveled (it still could) had the world’s richest economy, which also issues the global reserve currency, run out of cash and failed to meet its obligations.

While envisioning what Treasury Secretary Janet Yellen has termed an “economic catastrophe” if the United States wouldn’t be able to pay its dues and alternatives, ranging from the gimmicky minting of the trillion-dollar platinum coin to more serious options such as invoking the 14th Amendment, fail, we discuss three antifragile stocks that could have gained from the disorder.

Since Murphy’s Law states that anything that can go wrong will go wrong, the investments could come in handy if and when history (of debt-ceiling negotiations) fails to repeat itself.

The Worst-Case Scenario

Most businesses and economies globally operate on a key and time-tested assumption that the U.S. government always pays its debts. Hence, while fixed-income investors look for instruments that promise returns commensurate to their inherent credit risk, U.S. Treasury bonds are considered free of such risks and promise the lowest rates of interest and yields.

Consequently, U.S. government debt acts as a benchmark against which almost all other debtors price the cost of their borrowings while raising capital by issuing debt. Short-term government debt is equivalent to cash since nothing else is considered safer and pays less.
Hence, U.S. treasury bonds and bills have become a mainstay of risk-free component portfolios of individuals, businesses, banks, and even foreign governments.

A debt-ceiling debacle could impact the bonds and, by extension, the broader economy in two ways.

Even if the government does not default, a drawn-out deadlock between both sides of the aisle could increase anxiety among investors about the creditworthiness of the bonds in which they have parked their money. The Big Three credit rating agencies could share similar concerns and downgrade the US AAA credit rating like S&P did back in 2011, the last time it got this far and came this close.

Worse, however, if Congress doesn’t raise the debt ceiling and the U.S government misses its payment to its suppliers, employees, beneficiaries of social security, etc., it could trigger a mild recession in an economy that has been battered by persistent inflation and overburdened with increasing borrowing costs to contain the inflation.

In the worst-case scenario, if the government misses its payment to the investors holding its bonds, it would be considered a default, and all hell could break loose. With the safety of the benchmark out of the window, the bonds could significantly depreciate in value, thereby leading to a surge in demanded yield and interest rates, as was being teased by the ominously climbing treasury yields and falling AAA-rated corporate bond yields.

Such a catastrophe could trigger massive hikes in borrowing costs, which could effectively bring the economy to a standstill and trigger a financial crisis comparable in proportions to that in 2008. That could lead to a loss of more than 7 million jobs and $10 trillion in household wealth and trigger various higher-order effects, with shockwaves spreading throughout the global financial system.

Safe Havens and Insurances

Now that we have stared into the abyss, here are a few stocks that could protect and perhaps even increase investors’ wealth amid a market turmoil.

NextEra Energy, Inc. (NEE)

NEE is an electric power and energy infrastructure company that operates through FPL and NEER segments.

While the economy has been overheated with persistent inflation and weighed down by aggressive interest rate hikes by the Federal Reserve to counter the former, on May 19, NEE’s segment FPL proposed a $256 million rate reduction with the Florida Public Service Commission to take effect in July.
The rate reduction aims to pass on the benefit of reduced fuel costs due to continued downward revisions in projected natural gas costs for 2023. In this context, macroeconomic turmoil would have benefited the company by helping it improve its bottom line through greater savings from plummeting fuel prices.

Occidental Petroleum Corporation (OXY)

The international energy giant is Warren Buffett’s new love, with Bershike Hathaway Inc. (BRK)upping its stake to 24.4%. The company assets are primarily in the United States, the Middle East, and North Africa. It operates through three segments: oil and gas; chemical; and midstream and marketing.
Due to strong operational performance during the first quarter of the fiscal year 2023, OXY’s production of 1,220 Mboed exceeded the mid-point of guidance by 40 Mboed. As a result, the company reported an adjusted income attributable to common stockholders of $1.1 billion, or $1.09 per diluted share, and raised its full-year production guidance to 1,195 Mboed.

A debt default by the U.S. would have resulted in the devaluation of the currency. This would play into the hands of OXY, which would have benefited from the dual tailwind of the increased dollar-denominated price of crude oil and favorable exchange rates for more lucrative exports.

B2Gold Corp (BTG)

BTG is a low-cost international gold producer based in Vancouver, Canada. It has three operating mines: Fekola Mine in Mali; the Masbate Mine in the Philippines; and the Otjikoto Mine in Namibia. In addition, it has numerous exploration and development projects in Canada, Mali, the Philippines, Namibia, Colombia, Finland, and Uzbekistan.

The extent to which markets have been on edge over the state of the global economy that even ten interest-rate hikes by the Federal Reserve in just over a year haven’t been able to diminish the luster of gold. Despite the historical negative correlation of the yellow metal with the global reserve currency, the demand for gold from central banks worldwide totaled 1,136 tonnes in 2022.
Recession fears, bank failures, sovereign debt-default risks, de-dollarization, geopolitical conflicts, and the odd black-swan events are all expected to keep gold shining in the foreseeable future.

Is Marvell Technology Inc. (MRVL) a Buy with the Latest AI Projection?

Just before the shares of NVIDIA Corporation (NVDA)got their moonshot post its earnings release on May 24, we discussed how the race to dominate the AI domain is gaining pace. In this article, we will look at another bus to that to which investors are rushing to hop on board: Marvell Technology, Inc. (MRVL).

While NVDA has clearly stolen the thunder over the past week by becoming the first semiconductor company to reach a trillion-dollar valuation, MRVL’s stock also hogged headlines. It surged by 32% after it surpassed top and bottom line estimates in the first quarter of fiscal year 2023, according to its May 25 earnings release.

However, given that the supplier of data infrastructure semiconductor solutions also witnessed 8.7% and 41.1% year-over-year declines in its quarterly revenue and non-GAAP net income to $1.32 billion and $264.2 million, respectively, it was not past performance, but the company’s bullishness regarding its future prospects that got reflected in the stock’s remarkable price action.

While informing analysts that the company had begun to reassess the “tremendous” business potential of AI, MRVL’s CEO Matthew Murphy said, “In the past, we considered AI to be one of many applications within cloud, but its importance and therefore the opportunity has increased dramatically.”
MRVL’s favorable position to capitalize on the tailwind of increasing investments in AI originates in two acquisitions, which, in hindsight, have turned out to be key.

The first of them was a 2019 acquisition of Avera Semi, a spinout of Global Foundries, which contributed to MRVL’s custom chip designing and large-scale Application-Specific Integrated Circuit (ASIC) computing capabilities.

This was followed by a 2020 acquisition of Inphi, which had built a leading high-speed data interconnect platform uniquely suited to meet the insatiable demand for increased bandwidth and low power for both AI Clusters and traditional cloud infrastructure.

However, what was already a growing market share took a quantum leap late last year with the release of ChatGPT, which marked an inflection point for generative Artificial Intelligence (AI) and Large Language Models (LLMs).

With AI, if it isn’t already there, becoming a ubiquitous force majeure that’s touching and shaping every aspect of our modern lives, the traditional ratio of conventional processing through CPUs to accelerated computing through GPUs of 95% to 5% is destined to get inverted with the former component finding greater usage for control than execution.

Moreover, with the ever-increasing adoption of AI, the demand for increased computing power would drive demand for high-speed networking technology and optical productivity, which has been MRVL’s forte.

With triple levers of accelerated computing, data center usage, and high-speed networking to bank on, MRVL was able to quantify its revenue from AI during its recent earnings call. According to a note from Citi’s Atif Malik, “In FY2023, MRVL estimated its AI revenue to be ~ $200 million, representing a strong uptick from FY22. The company expects AI sales to reach ~$400M+ in FY24 before doubling in FY25.”

Bottom Line

According to Bill Gates and a few notable others, we overestimate change in the short term and underestimate it in the long term.
The company's lack of meaningful share repurchases during the previous quarter, despite its clear visibility on stellar growth prospects, makes us wonder if the glowing outlook was a signal to investors or noise to mask top and bottom-line declines.

However, from the perspective of both the current business and the pipeline of opportunities, the substance behind the hype is undeniable.
Hence, since we may be at the beginning of a 10-year cycle of AI-driven semiconductor growth, it could be wise for investors to load up on the stock once the current wave of excitement ebbs and there’s more valuation comfort to buy in for the long haul.

Stocks to Keep an Eye on Following Memorial Weekend

Every year, on the last Monday of May, the United States honors its heroes who made the ultimate sacrifice while serving in the United States Armed Forces. And how does a nation celebrate its martyrs who fell defending the core principles of liberty, democracy, and free markets? You guessed it; by exercising the freedom to choose and lead the good life.

Moreover, with the long weekend coinciding with the onset of summer, most Americans look forward to spending time outdoors. And that can only mean one thing: increased consumption. Think camping, cookouts, weekend trips, and home improvement projects.

All that activity translates to increased expenditure for businesses in relevant categories. A few have historically witnessed boosted top-line performance and an uptrend in stock prices at this time of the year.

Moreover, with still enough pent-up demand from the pandemic to go by and a jump of 0.8% in spending in April, with personal consumption expenditure beating estimates to rise 0.4% for the month despite 10 consecutive interest-rate hikes by the Federal Reserve, history seems more than likely to rhyme, if not repeat itself.

Here are a few stocks that could benefit from the holiday tailwind.

Tesla, Inc. (TSLA)

The global e-mobility pioneer’s automotive segment includes the design, development, manufacturing, sales, and leasing of electric vehicles as well as sales of automotive regulatory credits.

Although the company has recently increased the price of the vehicles in the U.S., China, Canada, and Japan, they remain lower than at the start of the year due to several rounds of price cuts worldwide.

In the recent earnings call, TSLA’s maverick CEO Elon Musk signaled that the automaker will be targeting larger volumes of sales versus higher margins but said he expects the company “over time will be able to generate significant profit through autonomy.”

Moreover, since TSLA’s energy generation and storage segment includes the design, manufacture, installation, sales, and leasing of solar energy generation and energy storage products such as the Solar Roof and Powerwall, the stock could also be a home-improvement play this Memorial Day.

In 2022, TSLA’s price return during the fortnight around Memorial Day amounted to 4.3%, compared to 3.4% for the S&P 500.
Continue reading "Stocks to Keep an Eye on Following Memorial Weekend"

IonQ, Inc. (IONQ) Hits Amazon… Again: Should Investors Buy Into the Surge?

On May 17, at Commercialising Quantum Global 2023, IonQ, Inc. (IONQ), which develops general-purpose quantum computing systems and makes them available through various cloud platforms and direct API access, announced that its most-powerful commercially available quantum computer IonQ Aria would be available on Amazon Braket, AWS’s quantum computing service.

This announcement marks IONQ’s latest addition to Amazon’s cloud platform after the debut of its harmony system in 2020. Although both Aria and Harmony would be available on Braket to be used as per the users’ discretion, with 25 algorithmic qubits (#AQ), the former’s computing power is more than 65,000 times that of the latter.

Further details regarding Aria’s performance, capabilities, and applications are available here.

Increasing the number of qubits, along with the number of processor operations (known as gates), makes it more likely that mistakes will creep in during calculations by making quantum computing systems susceptible to the tiniest of disturbances, including minuscule amounts of heat or radio-wave energy. In this context, it isn’t difficult to see why Aria’s commercialization is a big deal.

With users now able to explore, design, and run more complex quantum algorithms to tackle some of the most challenging problems of today across industries such as finance, healthcare, chemistry, and manufacturing, IonQ Aria has been justifiably embraced by Airbus, GE Research, Dow Chemistry, Hyundai Motors, and the United States Air Force Research Laboratory.

The markets have been prompt to mirror the optimism, to say the least. The stock has surged more than 83% over the past month to trade above its 50-day and 200-day moving averages.

However, just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, even if the next big thing comes along and changes the world (and the Internet really did), its fundamentals that determine whether a business can survive to capitalize on those windfalls.

For the fiscal year 2023 first quarter that ended March 31, although IONQ’s revenue increased by 119.4% year-over-year to $4.29 million, the topline growth has not been translated to its bottom-line improvement. The company’s loss from operations and net loss widened by 53.3% and 546.7% year-over-year to come in at $28.02 million and $27.34 million, respectively.

With the age of easy money well and truly behind us, a business with the aforementioned (lack of) financial performance would have been written off had it not been in an industry as promising as quantum computing. Continue reading "IonQ, Inc. (IONQ) Hits Amazon… Again: Should Investors Buy Into the Surge?"

The Changing Landscape of Brick-and-Mortar Stores in Today’s Economy

After registering two consecutive months of declines of 0.2% and 1%, on May 16, the advance sales report showed a recovery of 0.4% in retail sales for April. However, this modest rebound missed the Dow Jones estimate of a 0.8% increase. In this article, we will explore what this tepid growth means for the prospects of brick-and-mortar stores in today’s economy.

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spending practically-free money to spend like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

With the stash of stimulus cash fast dwindling, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April carried out by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

Could online retailers fare better with a complementary offline presence?

  • Yes
  • No
  • Can’t Say

While consumption may be undifferentiated from a macroeconomic perspective, businesses have evolved to tailor their offerings to cater to various consumer segments. Despite current economic uncertainties and hardships, high-income segments have been relatively unaffected, with affluent patrons queueing up for finer things in life on offer from the likes of Tiffany & Co. and LVMH.

However, middle-income consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money which has gotten dearer. Hence, they have been forced to trade down to budget-friendly retailers, leaving the businesses that offer something in between wrong-footed and stranded.

The divergent prospects between off-price retailers and their middle-of-the-road peers are evident from the Street expectation regarding business performance. The fiscal first quarter revenues of Burlington Stores, Inc. (BURL) are expected to grow by 13% year-over-year compared to an 8.7% year-over-year decline at Macy's, Inc. (M).

Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment. Continue reading "The Changing Landscape of Brick-and-Mortar Stores in Today’s Economy"