A little more on Nvidia... An 'AI factories' love story... The Japanese stock market hits a new all-time high after 34 years... AI has something to do with it... Favorable conditions and cultural differences...

The story of the day...

Yesterday, I (Corey McLaughlin) wrote about chipmaker and AI darling Nvidia's (NVDA) quarterly earnings report.

Nvidia projected $24 billion in revenue for the current quarter, about $2 billion above consensus Wall Street expectations. The company also beat revenue for the fourth quarter by about $2 billion.

Wall Street and the financial media immediately labeled the results as "remarkable" and "a blowout."

You'll hear more about Nvidia from my colleague Dan Ferris tomorrow. I'm sure it'll be an informative and entertaining read, as usual. But I do want to follow up on Nvidia briefly today...

As we said yesterday, the market's reaction to the numbers could serve as a referendum on the buzz around artificial-intelligence ("AI") technology, which has been a catalyst for the broad market's move higher.

Using Nvidia's 16% jump today as evidence, it seems investors and traders continue to be jazzed about AI.

And it's not just investors in love with AI...

When I listened to Nvidia's CEO Jensen Huang speak on a conference call with Wall Street analysts last night, several analysts offered hearty congrats on what they felt was a "stunning" performance and "really strong results."

Huang took advantage of the moment, saying Nvidia is creating a "whole new industry"... and he spoke glowingly about its "AI factories" (data centers).

Nvidia's chief financial officer, Colette Kress, purposely name-dropped Meta Platforms (META) as a happy client of Nvidia's chips and AI technology that "improved advertiser performance" and helped a "significant acceleration in its revenue."

Many chip- and AI-related stocks caught a tailwind today...

Chipmakers Advanced Micro Devices (AMD), Broadcom (AVGO), and Micron Technology (MU) were up 11%, 6%, and 5%, respectively... Computer networking company Arista (ANET) was up 6%... and the tech sector of the S&P 500 finished more than 3% higher.

The positive sentiment and movement in heavily weighted NVDA shares helped push the benchmark S&P 500 Index more than 2% higher today and the tech-heavy Nasdaq Composite Index up nearly 3%.

Yesterday, we said we'd be watching the market over the next few days to gauge where it might head next, and that remains true. Among other things, the age-old signal of bond prices falling while stock prices are rising, which we wrote about last week, is too big to ignore.

So while it's all love for Nvidia right now, I'd caution against chasing it and other popular tech stocks higher. As Ten Stock Trader editor Greg Diamond wrote to subscribers today, technical indicators suggest a pullback could be ahead in the sector...

The strength in chipmaker Nvidia (NVDA) is there, but we're not seeing it in other major technology stocks...

Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) are not making new highs with the indexes.

There's simply too much price divergence and technical divergence (not to mention the time factors) to chase this strength.

Greg actually recommended a bearish trade on Nvidia's strength today, and he told subscribers he's eyeing more of these types of trades if the indexes keep rallying. Ten Stock Trader readers and Alliance members can find Greg's latest updates here.

A three-decade first...

Nvidia's earnings results also helped push up Japanese semiconductor stocks and the Nikkei 225 Index – which is essentially Japan's S&P 500 Index.

So now, we can write something that no one has been able to in three decades...

The Nikkei 225 Index hit a new all-time high today above 39,000, 34 years after its previous "bubble" peak on December 29, 1989. As global news service Reuters reported...

The 34 years it has taken to regain its footing is a record, too, for a major market and is a decade longer than Wall Street took to recoup losses from the 1929 crash and Great Depression.

"For us traders, this marks the arrival of a new era," said Tsutomu Yamada, senior market analyst at Au Kabucom Securities in Tokyo. "It feels like the stock market is telling us that we've finally escaped from deflation and a new world has opened up."

There's a lesson here...

Historic boom and speculative-bubble years in the late 1980s, when real estate prices and everything else soared, gave way to a market collapse when the Bank of Japan raised interest rates to fight inflation. A mountain of property loans went bad... there was deflation... and a "lost decade" followed.

So why new highs now?

This isn't an overnight development...

The Nikkei is up 17% this year after rising 28% in 2023. And remember, this move has been 34 years in the making.

Dan explained a positive shift in the Japanese stock market in an issue of The Ferris Report last year when he recommended a basket of Japanese stocks, which are up about 12% since. Stansberry Alliance members and existing Ferris Report subscribers can read that issue here.

But in short, in 2014, then-Prime Minister Shinzo Abe proposed shareholder-friendly policies that went into effect a year later.

As Dan wrote, it looked like the Japanese stock market may have "finally entered an important new bull market phase," in part because...

A new focus on shareholder friendliness, a manufacturing renaissance, and a slew of cash dividends and buybacks indicate that the era of stagnant prices we've seen since the country's mega-bubble peak in December 1989 is almost over.

For decades, "outsider" shareholders – meaning foreign, institutional, and individual investors who are not insiders or... "cross shareholders" – had no power in Japan.

"Cross shareholders" was a term given to alliances of Japanese companies who owned each other's shares, which limited capital efficiency. Dan explained that in general, since the post-World War II era...

Though some U.S. investors had modest success in Japan, it was well known that Japanese companies were notoriously shareholder unfriendly. In fact, individual and foreign shareholders were considered such a nuisance that management teams came up with clever ways of avoiding responsibility to them entirely...

Now, this anti-outsider mentality is shifting.

This has pushed a rising number of foreign investors, most notably Warren Buffett, to put money to work in the country, which has the world's fourth-largest economy.

As we wrote last May, Buffett's Berkshire Hathaway (BRK-B) sold its entire multibillion-dollar stake in Taiwan Semiconductor Manufacturing (TSM) last year. Buffett said it was a great business but, squarely in the crosshairs of U.S. tensions with China, a risk he didn't like. At the same time, Buffett was buying Japanese financial stocks.

Favorable conditions...

Investors have liked the conditions of the Japanese economy and stock market, despite Japan recently reporting a second straight quarter of negative GDP (a recession).

Japan has also seen notable inflation just above 2% (welcome news for Japan). And, as we wrote earlier this week, the Bank of Japan – Japan's equivalent of the Federal Reserve – is weighing continued easy monetary policy in 2024 (i.e., negative interest rates and encouraging banks to lend).

That's despite a weakening yen compared with the dollar over the past two years. Many analysts are expecting the Bank of Japan to raise lending rates as soon as April, but the central bank hasn't done it yet – and might not.

As Dan explained last year, when Japanese "core" CPI was above 3% (it was 2.3% in December and 1.6% in January)...

Still, it's unlikely that the Japanese central bank will significantly tighten monetary policy soon. Its economy has been too depressed for too long...

Japan's culture is different from that of Western countries. Change tends to happen more slowly. As long as the [Bank of Japan] continues to expect lower inflation rates going forward, it will not tighten its monetary policy.

That's good news for us because it means Japanese stocks should keep rising. We see especially lucrative times ahead in Japan's manufacturing sector...

In the meantime, Japanese companies are making more profits than they have in a long time... Goldman Sachs recently reported that Japanese companies posted fourth-quarter earnings 45% higher than the same period a year earlier.

The Japanese economy is also benefiting from Western tensions with China, diverting business from a Chinese economy that, as we said earlier this week, has been experiencing nearly two years of producer price deflation.

So kudos to Dan on his Japanese recommendation, which is still a buy in the Ferris Report portfolio. (If you don't have access already, you can hear more directly from Dan in this new presentation and get details about how to get started with a subscription.)

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New 52-week highs (as of 2/21/24): ABB (ABBNY), Abbott Laboratories (ABT), Berkshire Hathaway (BRK-B), Brown & Brown (BRO), Diamondback Energy (FANG), Fidelity National Financial (FNF), JPMorgan Chase (JPM), Linde (LIN), Procter & Gamble (PG), Parker-Hannifin (PH), Ferrari (RACE), Sherwin-Williams (SHW), SPDR Portfolio S&P 500 Value Fund (SPYV), Viper Energy (VNOM), Waste Management (WM), and W.R. Berkley (WRB).

In today's mailbag, thoughts on valuations in the market today, stemming from Dan's latest Friday essay but also connected to yesterday's edition about chipmaker Nvidia... Do you have a comment or question? As always, e-mail us at [email protected].

"My creds are [in] geology and economics... and mineral economics from the Colorado School of Mines. I drilled for oil and gas for Pennzoil and then [went] to Wall Street as a metals and mining and energy analyst and portfolio manager. I was struggling with my stocks in 2000, when internet stocks soared and resource stocks continued to get crushed. Two things in 2000 caused me to recommend resource stocks. 1) In January, Mary Meaker (internet queen) of Morgan Stanley recommended buying a stock based on eyeball views. I could hear Graham and Dodd scream. 2) Julian Robertson (resource king) announced closing Tiger Asset Management due to poor performance.

"In the spring of 2000, I ran a market capitalization analysis of all globally, publicly traded companies in the resource space excluding oil and gas stocks. The sum of the market capitalization of that group of stocks was, wait for it, less than that of Microsoft. I presented this information in the daily morning analyst meeting, after which you could hear a pin drop. Within weeks we began to buy resource stocks and energy stocks – overweighting most of the funds.

"We are at the same place now. AI = Internet (2000) and resources (and energy) = resources (2000 – metals and mining ex. oil and gas). All of the resource and energy market capitalization is less than the Magnificent Seven. We lived without [those stocks] 35 years ago (at Colorado School of Mines, I took Fortran and Basic programming, both in their infancy), but we could not live without the 'the Old Economy stocks' 35 years ago, [and we can't] today, or 35 years from now. It's time for a massive mean reversion." – Subscriber Clay H.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 22, 2024