I was pleasantly surprised at the relatively strong performance of NVDA in the pre-market yesterday when I was writing about the favorable market reaction to NVDA’s quarterly earnings announcement after the market close on Wednesday. That glow didn’t last very long after the opening bell, however, with the stock trading down by about 8.5% by the close–dragging other AI-related stocks down with it as well.

the issues

—earnings momentum. If a company posts quarterly earnings results that are getting sequentially stronger, meaning, say, +10% yoy, followed by +12%, +14%, +16%, two factors tend to propel the stock upward. They are: the earnings gains themselves and, crucially, the pattern of accelerating eps growth. This second is typically what causes the stock’s PE to expand.

The opposite of this last pattern, where eps growth is decelerating, typically causes the PE to contract. That’s the issue with NVDA.

—what everybody knows. NVDA has excellent financial disclosure, in my view. To anyone who has taken the briefest glance at the financials, the issue of decelerating earnings growth momentum has been clear for six months or more.

So I was especially interested in the latest NVDA results because I thought they would show how much of the multiple contraction issue had already been factored into the stock price. After all, NVDA had peaked at $150+ in early January and fallen by 18% since. So maybe this is what that decline was all about.

The pre-market yesterday seemed to me to be saying that, yes, investors had read the financials, knew that most of the company’s operating leverage had already been exhausted–and that therefore operating earnings would no longer be rising much more quickly than sales.

Regular trading yesterday said the opposite–that the decelerating eps growth momentum still surprised a significant number of holders.

Oh, well.

The issue now, as far as I’m concerned, is when to rebuy the shares I sold a few months ago. I don’t think there’s any rush, though.

NVDA

NVDA reported its latest quarter after the close yesterday. A lot of the financial press commentary was about the lack of operating margin expansion, which apparently came as a surprise to many.

Myself, I was much more interested in whether the stock price would go up or down when the company released the financials. I’d switched the bulk of my NVDA holding into Broadcom (AVGO) after the prior quarterly results announcement made it very likely, I thought, that the period of margin expansion was over for NVDA–because the company’s research and admin costs had become so small as a percentage of sales.

I thought there was a non-zero chance that, because public commentators on NVDA seemed unaware of this, the stock would go down when NVDA made the latest financials public. As I’m writing this, however, the stock is up a little in the pre-market–although it remains about 10% below its early January high. Good news for the overall AI sector, I think.

an aside about margins

Contrary to popular belief, even in the analyst community, high margins aren’t a clearly good thing. If anything, they’re a bad thing.

Two reasons:

–high margins attract competition, in this case from the in-house chip-designing operations of NVDA’s customers. My guess is that this is not a today issue for NVDA, but it has to be a worry down the road. This possibility is most likely the major influence in the company’s decision on how high to mark up its chip offerings over the price it pays TSMC to make them

–high margins can also be a sign of weakness. For example, a generation ago tons of furniture stores dotted the sides of secondary roads in the suburbs. The vast majority of these are long since dead, despite the fact that they had huge operating margins–well in excess of the 50% markup Tiffany charges for its jewelry. …the problem? These stores turned their inventories only once a year, so they had huge carrying costs.

rare earths

Canada, Greenland, Ukraine. The current administration appears to covet the mineral resources of all three, especially rare earths. I’d been scratching my head to figure out why, until I read a report that in retaliation for Trump tariffs placed on China during his first term, that country had cut the flow of rare earths to the US.

The “idea” is to somehow increase domestic oil production by 3 million barrels daily from the current 13.5 or so million. That will drive the world price down by–my guess is by15%-20%, but let’s just say by 10%–simultaneously encouraging higher petroleum usage and lowering inflation.

The oil revenue numbers that this supposition generates are as follows:

13.5 million x $75 = $1.025 billion daily

16.5 million x $67.50 = $1.112 billion daily

Not a huge difference in spending. In addition,

the US uses about 20 million barrels of oil daily, more than any other country in the world. The increase in domestic output would shrink our imports, much of it from Canada, by 3 million barrels as well. That would also improve our trade position by $70 billion+ yearly.

This isn’t the end of the story, though.

What happens to the 3 million daily barrels the US is no longer importing?

If we assume it just goes away–that is, that non-US producers decrease their overall output by 3 million–then the administration calculation is reasonable. To the degree that the administration has thought this through, this is what they are banking on. But how likely is that?

A related possibility, I suppose, is that the world stores the excess production. But this costs money and just kicks the can down the road.

The most likely scenario, in my view, is that the major oil companies yes Washington to death and do nothing to increase domestic production.

During the 1970s, for example, when OPEC boosted the oil price from below $2 a barrel to over $30, the US passed a series of laws aimed a controlling the price of oil produced from domestic wells. The price of “old” oil, that is, output from wells drilled before 1973, was capped at about $5 a barrel. The response of the oil majors was to cease production from “old” oil wells and to concentrate on “new” oil that could be sold at the market price. The industry was convinced, correctly, as it turned out, that regulation wouldn’t last forever and producing “oil” oil was like flushing money down the drain.

As it was back in the 1970s, the oil majors’ conduct will likely be colored by their assessment that the administration won’t be astute enough to figure out what’s going on and/or that the current administration won’t be around long enough to exact any price for their non-compliance.

My guess is that actual and threatened Trump tariffs are now having, and will continue to have, the (unintended, I think) effect of reinvigorating the mainland Chinese economy.

Tariffs themselves are making Chinese goods sent to the US less attractive. As I see it, Xi is now in kind of the same position as Deng was in the late Seventies (see the history section below). Central planning doesn’t work and domestic businesses are starting to shift out of China as a way of dealing with US tariffs. So the status quo of Party control that Xi has instituted isn’t good enough any more. Xi needs support from entrepreneurs. Hence, the rehabilitation of Jak Ma, for instance. Xi also has to have something to counteract the influence of Elon Musk in Washington as he seeks to protect his troubled auto business from cheaper and better-made Chinese offerings coming from Mexico.

For the first time in a decade, I find myself interested in Chinese and Hong Kong names.

history, starting from way out in left field…

In the early 19th century, Hegel developed an evolutionary theory of history–that through “dialectical” struggle mankind is evolving to ultimate cultural/economic perfection

In the mid-19th century, Marx applied this theory to Europe, incorrectly thinking horrible working conditions and pay would cause German workers to revolt, triggering the advance to a better social order

In the late 19th century, Lenin theorized that the evolutionary process needed to be jumpstarted by a revolutionary cadre. He put this idea into practice in Russia

(Btw, in the 1980s, George Soros, the brilliant currency trader, wrote a book, The Alchemy of Finance (1987), in which he claims the Hegelian theory, as laid out in the Phenomenology of Mind (1807), as his own invention. ???)

After WWII, Mao Zedong followed Lenin’s lead in China, installing central planning by Party elders. This was a total social and economic train wreck

In 1977, Deng Xiaoping, ditched central planning in favor of “communism with Chinese characteristics,” i.e., Western capitalism. This set off a decades long explosion of private entrepreneur-led economic growth

In 1997, Deng died and was succeeded by Xi Jinping. Around ten years ago, Xi began to reassert the primacy of the Communist Party over the domestic economy. Mao-style, he arrested and “reeducated” prominent businesspeople, He also effectively ended Hong Kong’s role as a commercial meeting place to conduct business and arrange financing with non-Chinese entities.

…here’s where Trump comes in

As I see it, Xi is in the same position as Deng was in the late Seventies. Central planning doesn’t work and domestic businesses are starting to shift out of China as a way of dealing with US tariffs. So Xi needs support from entrepreneurs. Hence, the rehabilitation of Jak Ma, for instance. And, as I see it, Xi needs something to counteract the influence of Elon Musk in Washington as Musk seeks to protect his troubled global auto business from Chinese rivals.

Since becoming president again, Trump has targeted the mineral resources of Canada, Greenland and Ukraine–especially rare earths and battery components–in his suggestions that the US somehow annex all three.

Three thoughts:

–I find it a little odd that Trump should at the same time be touting fossil fuels and wanting to acquire essential materials for EVs

–in 1970, the “hot” mining commodity was lead (because auto batteries would be forever). In 1980, when I added mining to my oil and gas repertoire, it was molybdenum, to make hardened steel. A few year later, it was copper–the main reason being that a prior glut had discouraged new investment in mines and demand had finally caught up with supply.

More generally, given the massive initial investment and long lead times involved in bringing a new mining project on-line, this is a classic boom/bust industry. Chemicals is another that comes to mind; autos, too, and EVs, as well. It’s hard to know how this factors into Trump’s thinking

–it’s not clear, certainly in the case of Ukraine and probably for Greenland, whether their deposits are large enough and concentrated enough for mining projects to actually be commercially viable

Other than the subway mugging vibe behind these demands, I find it hard to deduce the reasoned plan behind making them.