Fake Bounce Thursday – NVDA Gains $250Bn – Blasts Nasdaq Back to 13,900!

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Nasdaq 100 Chart HourlyHoly cow!  

NVIDAI (NVDA) just saved the Nasdaq all by itself by reporting $2.1Bn in earnings for their quarter, which ended on April 30th but that was actually 20% LOWER than last year – it was, however a 15% beat of expectations.  What really got the stock going was the revenue guidance, which was raised from $7.18Bn in Q2 to $11Bn – a 53% increase thanks to non-stop demand for NVDA’s very expensive AI chips, which are currently being scalped on the market for double their usual cost.  

Demand [related to generative AI and large language models] has extended our data center visibility out a few quarters and we have procured substantially higher supply for the second half of the year,” Nvidia (NASDAQ:NVDA) executives said on an earnings call

This is nothing we didn’t know already but the market reaction is surprising as you would have thought the good news was priced in as NVDA is already up 200% from the October lows.  This morning’s gains will make NVDA “worth” more than META or TSLA (for the moment).  And, of course, MRVL, AMD, AI, PLTR and SYNA are all popping as well – as are MSFT and GOOGL – anyone who said the word “AI” in a conference call is up this morning.  

Perhaps NVDA will end up making $20Bn this year instead of the $11Bn they were projecting.  Does that really justify putting them in the $1Tn club at 50x best-case earnings?  They had the right chip at the right time but so have Intel (INTC) and AMD at other times.  Chips are a very cyclical sector and I an never one for chasing them.  

However, INTC was going to be our Stock of the Year for 2024 if it was sill below $30 in November and it’s more like $28 this morning as they do NOT have the right chips at this time – but what better time to buy them than when they are down?  $28.25 is $115Bn in market cap and INTC will be lucky to make $1.6Bn this year as it is still an investment year but that cycle ends next year, when they expect to make $7Bn – which would be 16.4x.

We were hoping to catch it closer to $25 but now I’m worried they will say “AI” and pop to $35 so, for now, let’s add INTC to our Portfolios as such:  

In the Income Portfolio, let’s:

    • Sell 5 INTC Dec 2025 $30 puts for $5.80 ($2,700)
    • Buy 15 INTC Dec 2025 $30 calls for $6.50 ($9,750) 
    • Sell 10 INTC Dec 2025 $40 calls for $3.60 ($3,600) 
    • Sell 5 INTC Sept $30 calls for $2 ($1,000) 

That’s net $2,450 on the $15,000 spread so we have $12,550 (512%) upside potential at $40 and we’ve used 113 of 939 days we have to sell so maybe 8 sales left can generate another $8,000 and bring our upside potential over $20,000 and, more importantly, generate about 40% per quarter in INCOME – which is the point of this portfolio! 

INTC May 25 2023The net Portfolio Margin of 5 short Dec 2025 $30 INTC puts is just $955 – so it’s a very margin-efficient trade but we do have the potential of having $15,000 worth of INTC stock assigned to us so we will set aside 1/2 of an allocation block – which are $30,000 each in our $150,000 portfolio. 

In the Long-Term Portfolio (LTP), which has $500,000, we will be more aggressive with:

    • Sell 10 INTC Dec 2025 $35 puts at $9 ($9,000) 
    • Buy 30 INTC Jan 2025 $25 calls at $7.50 ($22,500) 
    • Sell 20 INTC Dec 2025 $30 calls for $6.50 ($13,000) 
    • Sell 10 INTC Sept $30 calls for $2 ($2,000) 

Notice we bought the Jan 2025 $25 calls instead of the $9 Dec 2025 $25 calls but that’s because we can always spend $1.50 to roll them but, for now, we have a net credit of $1,500 on the $30,000 spread so $31,500 (2,100%) upside potential plus a solid $10,000 of potential short-call sales as well.  The more aggressive puts require $2,349.03 in net margin and the LTP has 20 $50,000 allocation blocks and we’ll assign a full block to this one as we HOPE INTC goes lower and we can double down.  

We also have a golden opportunity to fill out the missing parts of Tuesday’s SQQQ hedge, which will well-cover both portfolios potential long ownership of Intel – what a great morning – thank you NVDA shoppers!  

Meanwhile, Fitch has warned that the United State’s AAA credit-rating on NEGATIVE WATCH as debt ceiling talks continue to go nowhere. Fitch said that a missed payment after June 1 would likely be “inconsistent” with a triple-A rating. The ratings firm also said that potential workarounds—such as invoking the 14th amendment to ignore the debt limit—would undermine U.S. creditworthiness. S&P downgraded the U.S. credit rating after a similar standoff over the debt limit in 2011 and has never raised it back. 

Losing an AAA credit rating for the U.S. would have a negative impact on the National Debt and interest payments. It would likely increase the borrowing costs for the Government, as well as for companies and consumers that rely on Treasury securities as a benchmark for interest rates. Higher rates would also increase the Government’s debt service burden, which is already 12% of its $4.66Bn in Revenues at $594B.

According to S&P, a one-notch downgrade of the U.S. credit rating could raise interest rates by 0.25 percentage points and increase annual interest payments on $32Tn in debt by $80 billion – that is the cost of the GOP temper-tantrum!  

Table showing change in militarism spending from 2001 to 2023

As the Democrats have been saying for 50 years (since Nixon!), the problem with deficits are not about Discretionary Spending, which is only 38% of the non-Military budget – it’s about LACK OF TAXATION as the Government only collects $2.6Tn of Income Taxes and $1.5Tn of Payroll Taxes and $445Bn in Corporate Taxes.  That’s $4.5Bn against a $6.1Bn budget so we’re $1.6Tn short – very simple…  

Pie chart of discretionary budget for FY 2023. Militarism is 62 percent.

Part of that, of course, is the GOP/Trump-approved 2023 Defense Sector Budget of $1.8Tn and that’s up $800Bn since the 2001 budget (see chart above).  As with all these “must have” Defense increases, they never come along with any way to pay for them – just more and more debt and now, when we hit the debt ceiling – cutting it back is off the table and, instead, we’re supposed to steal more money from Social Security and Medicare (which the recipients worked their whole lives saving for and is supposedly ENTRUSTED to the Government – not gifted to it!) or cutting the Health Budget (we saw how well that worked out leading up to Covid) or Housing or Feeding our Citizens. 

The ENTIRE US non-Defense Discretionary Budget of $800Bn is LESS than the INCREASE in the Defense budget over the past 20  years!   

U.S. Defense Spending Compared to Other Countries

That’s from 2021!  Perhaps if we spent less, other countries would not feel pressured to spend as much.  Remember how Trump was beating up on NATO to spend more?  That’s because we were looking more and more like idiots by comparison.  

Just like this country spends 2-3 times more on Healthcare than other counties (yet we have the worst outcomes), the US spends 4-5 times more on Defense per capita as well.  Perhaps, like Russia, our outcomes would be poor as well if they are ever tested.  As I noted about politicians having to wear patches from their sponsors yesterday – a good portion of those patches would be from Defense Contractors.  

Corporate tax isn't working – how can we fix it, globally? | World Economic  ForumSo Defense spending is out of control but even more out of control is how little we tax Corporations.  $445Bn is not even 10% of Corporate Profits (and that’s AFTER massive deductions, depreciations, loopholes, etc.) and it’s not even 10% of total tax collections and it’s only 1.7% of our $25Tn GDP.

The GOP solution is not to raise Corporate Taxes but to cut Social Security and Medicare, which contribute 7% of the GDP – about 4x more than Corporations do.   That massive 5.3% gap, which has been pretty consistent since Reagan jacked up the Military and slashed Corporate Taxes, if you multiply it by a cumulative $415Tn of GDP (1982-2022), it comes to $22Tn of underpaid Corporate Taxes.   That plus the interest on the unpaid amount is our ENTIRE National Debt!  

THAT is what is wrong with our country and it’s very easy to fix by simply making companies pay their fair share of income taxes.  Will that ever happen?  No it won’t so enjoy it while you can – the debt collectors are knocking on the door while Congress pretends we can fix this by squeezing more money out of the bottom 90%.

AI Overlords can’t take this mess over fast enough in my opinion!  

 

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Good Morning.

The demand for Nvidia chips is being driven by megacap tech and private AI companies developing models and deploying consumer LLMs. It is not being driven by corporate end customers. Those companies are trying to cut OpEx right now and cloud expenditures are part of that. The corporate market is better reflected by Snowflake that is rapidly decelerating. No one talking about this one today – take a look at it. There is a lot of nonsense on CNBC. Statements that AI will drive some kind of magical productivity improvement in the next quarter are crazy – have heard that one many times.

There is a real capacity shortfall in compute. It started before all of the LLM mania. There has also been a trend of brute forcing models which can make compute increase many times. But the blank checks will run out from both megacap and VC funded startups. At some point, the demand needs to be driven by paying end customers – consumers and corporations. Based on current expectations, there is a big gap between the development outlays and the real value capture. It is not clear when this will be realized by markets.

NVDA trading at 214 P/E as of 2 mins ago. Sounds like a bargain one NEEDS to own (sarcastic of course). at what point should one think to play a top in that stock?

about 10 minutes ago

Agree. Do not bet against Nvidia short term – next 12 months they will sell out everything they make. The thing I react to strongly is the assertion that somehow AI productivity bails us out of inflationary pressures in the next quarter. It does feel a lot like the .com period. I made a bunch of money on Cisco at that time. Got out at the top only because I needed the money to buy an apartment. It is interesting to look at the Cisco chart – and also pets.com and webvan.

IBM has been in AI for decades, banks use their mainframes to catch suspicious activity. QCOM snapdragon has excellent AI capabilities for SP’s. Its going to lift most chip stocks, I like suppliers like AMAT and MKSI. This is a multi year expansion.

I think the challenge for nvidia will come from home grown gpus at places like google/meta/apple/amazon. Given the demand and gpu profit margins, all the cloud vendors cannot rely on nvidia alone to meet the gpu demands and already have or in the process of building their gpu platforms.

INTC has missed the boat entirely on gpus. The only hope for intc is to fix their fab story and make sure they are still relevant from cpu perspective. Most of the cloud vendors and apple have their own homegrown cpu stories which outperforms intc and is cheaper. So, it is a very difficult ride for intc going forward.

Phil, Did you mean SQQQ 2025 $25 calls are now $9.43 ? The $20 calls are 10.48

Thanks Phil and Warren,
The only problem for me, if I understand correctly is it assumes we’re already in the trade before the price goes up or down, and not still trying to get in.

Thanks Phil,
That is really good info. I think I have been doing that a bit intuitively with liquidating the old portfolios when NQ is higher, but haven’t always been buying back short calls when lower. Maybe add that to Top Trade alerts to remind people like me 😊

Hehehe, good one, but I think I’ll print it out 😂

Phil,
I have a question because I’m still trying to finish filling the KO calls for the income portfolio. With most of the calls down $1 or more, would you recommend sticking with the original prices or is it decay that must be accepted?
TIA

Thanks Phil,
I understand not wanting to sell short calls too low when we are bullish, but I feel I’m missing out on selling some premium to decay before KO starts going up. Misplaced FOMO? 😁

Last edited 11 days ago by brucethenet

So if I understand correctly, you’d wait 25 days (1/4 of the time left?) to see if it comes back up before capitulating and selling the call(s)?

I calculate that theoretical price around $2.45 – ($0.025/day x 25 days) = $2.45 – $0.625 = $1.825 which is higher than $1.

Thanks for spelling it out. I read it is human psychology to feel losses more than gains.

So entry price is more important than having a complete position?

PHIL/INTC

The SEPT 30 Calls have fallen to $1.20 (listed as $2 above) – I assume at times like this we should patiently wait for a fill at $2 — or adjust lower?

Please ignore the following post. I was looking at LTP when I should be looking at Income Portfolio:

Different question about INTC play:
If I can’t sell calls with expiry after my longs, would you push out the longs (I think so) or pull back the date of the shorts?
TIA

Last edited 11 days ago by brucethenet

That county in California that lost population – that was wildfires. But climate change isn’t real, right…..

WBA is sub-30 now. That’s now back to 2010 levels.

WBA, PARA, T, VZ , INTC dividend payers that havn’t work out for me.

Ugh! me too- losers all.

Don*t mention it Phil`s favorite stock. Today is one of the craziest days on Wall Street, S&P up 35 and I hardly can see one plus in my ports.


WBA always seems low, but when I go into their store, I remember why they are terrible. Online prices on their website are always lower than in-store prices, but they do not price match and rather make you order the same item online for in-store pickup – very silly.

And pharmacies should not be selling cigarettes.

Big difference today between S&P and Russell. Which one will catch the other?

PARA – Wonder what the magic price is when we see a buyout? They and all streamers are getting squeezed. Can’t help thinking sugar daddy Apple wouldn’t be interested

STLA is under pressure too. last round I got in was at 11.50 or so, but they have also increased their dividend since. Unfortunately, they called me away at the last dividend. Waiting for next entry but Div at ~9% is very tempting. maybe interesting for $700 portfolio

Phil, If we dont get a debt deal and the markets crash, whats on our buy watch list? I have the group from the beginning of the year and just wondering if anythings changed. ( other than T or F from below)

Ok, I will fall on the sword for everyone, is there a link to the list? 😎

Mr. Wolf…..
Watch List provided on April 26, 2023 by PSWco