Everyone knows NVDA, the graphics chip, turned crypto mining chip, turned leader in AI chip design. AVGO is, I think, somewhat less well-known and far less glamorous. It provides hardware and software that connects AI to the rest of the world–and has evolved in large part through acquisition of tech companies thought to have been past their peak. AVGO rejuvenates them. The best comparison I can come up with, admittedly not very good, is they’re like Shohei Otani and the people who manage Dodger Stadium (ex the parking lots).

Both trade at roughly the same PE multiple of year-ahead earnings.

If we look at past performance, the two stack up like this:

NVDA AVGO

5yr +20x +10x

1yr +79% +76%

6mos +10% +49%

1mo -7.4% -4.7%

5days -10.3% -7.7%

What happened?

–My overall thought is that about a half-year ago, the mood of the market changed. Investors went from trying to hit the ball out of the park during every at bat to giving at least some emphasis to pitching and defense.

That is always more important than why, and the reasons for switching from thinking up-market to down-market are always complex. My guess, however, is that Wall Street sensed voters would regard an aging former reality show star (he’s a few months older than me) with an eccentric economic platform intending to achieve growth by shrinking the workforce and starting an international price war as their best choice for president. Contrary to his stated intentions, the market believes, I think, that recession some time in 2025 would be the result.

–NVDA’s operating margin had expanded to a point where future margin increases were highly unlikely–creating the worry that Wall Street would be slow to recognize this, causing a stock selloff when the lightbulb went on, most likely after a disappointing quarterly result. A slow rolling version of this idea may be underway now

–on AVGO’s last earnings call, management indicated it thinks its AI-related sales opportunity is very much larger than the consensus had appreciated.

The thought just passed through my head that I should just leave the rest of this post blank. That would underline what I actually know about DeepSeek, a Chinese-made AI construct that uses an earlier, cheaper generation of Nvidia chips and needs less electric power.

…but no!

Wall Street’s reaction to the revelation of the existence of DeepSeek over the weekend was to lop around 20% off the prices of the leading AI-related stocks.

That’s all in the rear view mirror now. The important question for us as investors, and for me as a holder of NVDA and AVGO, is where to from here.

I’ve had a big position in NVDA for a long time, thanks to my younger son beating me over the head with the idea. Over the past six months, I’d switched the bulk of that into AVGO. Two reasons: the position size, and my observation that overall employee + SG&A costs had become so small for NVDA in relation to sales that operating leverage had virtually disappeared. Therefore, for a while, profits would likely grow in line with sales but no longer significantly faster. My guess is has been that this deceleration has been unnoticed and would trigger a negative reaction once Wall Street worked this out.

My thoughts now:

–what has attracted me to NVDA is that the company seems to me to have the true growth company’s ability to reinvent itself. This is a rare quality. Typically, visionaries are gradually replaced by bureaucrats and the world begins to pass a firm by. INTC is a classic example. But NVDA has been the graphics card company, then the crypto mining company, then the AI company …and it is already laying plans for its next transformation. My main issue with NVDA has been valuation.

–we don’t know how much of the DeepSeek story is true and complete, although my guess is that at least the part about Chinese coders doing more with less is correct. I think of it as like racing car builders only having access to last year’s top of the line engine. But better tires, a more aerodynamic frame and faster gear=shifting might still let them still produce a faster car. The issue here may be how far better software can go in replacing better hardware. I choose to think that the NVDA chips in DeepSeek do maybe 90% of what the latest models can do–which fits with the timing of the Biden export ban. My guess is also that costs have been understated

–over the past year NVDA has doubled, even after yesterday’s decline, vs. the S&P up 25% and NASDAQ up 27%. So the stock was arguably overdue for profit takers to emerge. To the degree that this is correct, DeepSeek is the trigger, not the cause

Overall, I’m happy to hold what I have of both names. My guess, though, is that this whole area will tread water for a time.

Especially for anyone who has no stock market exposure–and therefore isn’t losing money today–current stock action is very intriguing.

We know that for a long time the trend on Wall Street was to replace human traders with trading bots. Many of the latter are designed to scan the news and respond with very great speed. The ironic thing is that today’s selloff seems to have been triggered by reports a Chinese AI construct that appears to work almost as well as US-made ones but to cost orders of magnitude less. (Apparently if you use the in-China version and want info about the Tiananmen Square massacre of protesters in 1989 you’re out of luck. But otherwise it’s reported to be pretty good.)

My thoughts:

–let’s assume the story is at least substantially true

–is it so surprising that after being cut off from access to the most advanced NVDA offerings that Chinese firms would turn to using last year’s (maybe 10% less powerful) in more subtle ways than non-boycott areas that will quickly get more powerful toys to play with?

–for a while, valuations have seemed to me to be unusually stretched for the biggest tech names, meaning a correction was on the cards, even if the eventual trigger was unclear

–the AI news has erased the degrading way immigrants rounded up by ICE were shipped off to Colombia over the weekend, apparently in handcuffs and without bathrooms, as well as the inability of the White House to spell that country’s name

–I think the most serious issues for the stock market in 2025 will have less to do with tech and more to do with government policy–with tariffs, deportations and a growing government deficit (with implications for interest rates and the currency) heading the list of key variables.

It has been my long experience that it’s a huge red flag when people want to talk about politics as a motive force in the stock market. Typically they have the lowest possible degree of skill and no usable information. Having said that, my political thoughts:

In contrast to his first term, Trump is moving fast and breaking things from the outset. This makes it harder to see the rhyme and reason behind what’s going on. But in the whirlwind, I see two themes:

–the insurrectionists who stormed the Capitol to prevent ratification of the 2020 election win by Biden have been pardoned. If news reports are correct, all the Justice Department lawyers involved in prosecuting the case that Trump masterminded this attempt have also been fired. It seems to me that the two actions–the loss of expertise and the loss of leverage over possible witnesses–make it all but impossible to resurrect the case after Trump leaves office, assuming he does so. The same, I guess, for the secret documents case, where the real issue, I think, isn’t where Trump kept them but whether he gave/sold the information to foreign powers.

–so far, there’s no coherent economic program. Tariffs against China, ex EVs, seem to be off the table for now, for example. “Drill, baby, drill” is an administration mantra, but yesterday Trump asked OPEC to lower the oil price–which would make drilling less profitable. Although the availability of electric power is a national issue, especially for data centers, Trump is ordering the shutdown of wind-generated electricity. He also somehow thinks that commercial banks have the power to lower interest rates.

My conclusion is that it’s going to be hard to make money by playing the typical domestic business cycle driven with the help of coherent and uniform government action. There is the possible bump from a reduction in the domestic corporate tax rate ahead, but after that I don’t have much to say. This leaves three areas, in my view: tech, multinationals and value stocks.

”’thinking out loud…

In 1991 the firm I was working for hired a political analyst. He was very shrewd but didn’t generate much revenue and was fired within a year or so. I still remember his characterization of the major political parties in the US, though–the Democrats have a social agenda but no economic program; the Republicans don’t believe in much of anything and were entering a potentially dangerous alliance with religious fundamentalists focused on triggering the end of the world (which they regard as a good thing). A third of a century later, this characterization seems to me to still be true.

It’s also my conclusion that a prime motivation for now-President Trump to run again must have been to put an end to his legal troubles–from sexual assault to falsifying business records to the violent attempt to overturn the election results when Biden defeated him in 2020. Personally, I regard the classified documents investigation as the most dangerous to Trump, but we may never know.

If this is correct, it raises the question of what positions Trump advocated during the campaign just to get elected vs. what he actually intends to do. Another wrinkle is the question of his increasingly bizarre behavior during campaign rallies and the related issue of the extent of his overall Biden-like cognitive decline.

Taking off my hat as a human being and putting on my analysis hat, it seems to me that:

–tariffs will make Americans poorer, so secular growth multinationals are probably a better bet than purely domestic firms. On the domestic front, maybe downscale retail deserves a second look. Walmart, too.

–another cut in the corporate tax rate may well also be on the cards. That would likely spark a one-time expansion of the market multiple, as it did in 2018. This could also intensify worries about the country’s ability to honor its Treasury bond obligations, however. That would play out through some combination of a decline in the dollar vs. foreign currencies–good for multinationals and exporters, bad for domestic consumers/firms–and a rise in interest rates. The latter would likely cause a contraction in PEs and lots of trouble for entities with variable-rate debt.

There are early signs that the tech billionaires who are the president’s new-found friends are also exerting an important influence on his thinking. The quarrel that’s just arisen with the EU over taxation of US-based multinationals is one sign. The apparent effort to block Chinese EV makers from manufacturing in Mexico is another–not that many decades of protection have done Ford or GM any good.