The Top 7 Megacaps Soar into the Stratosphere, The Economy in America Cools.
Chart of the week
The chart shows how many loans banks in America make to companies. In blue, the average lending in each month over the last 20 years is shown. In green, lending last year, and in red, lending in 2023.
Why this matters
In 2023, companies did not receive loans from banks. This can be for two reasons, either firms don't want loans or banks aren't lending. The reality is probably in between.
Because of the sharp rise in interest rates, many firms cannot afford additional loans. At the same time, because of the banking crisis, the banks have tightened up the criteria for granting loans.
Whatever the reason, companies are not investing in tomorrow's growth. This is a clear sign that higher production can hardly be expected in 2023.
On average, the profits of companies in the S&P 500 have not plummeted. But if you look at the individual sectors, things look a little different. In particular, companies in the energy sector were able to more than double their profits compared to last year. In the consumer and financial sector, it looks a little different. There, profits have slumped by almost 40%. Such a large difference between the sectors is rare.
The chart shows the monthly change in retail sales in the USA. In black, the officially communicated change. In blue, the inflation-adjusted change is shown. In the past 30 years, the value has only been this low twice. In the financial market crisis and in the COVID crisis. This suggests lower corporate profits for the second quarter.
Last week, the new figures for the LEI index were published in the USA.
The LEI index is published by the Conference Board, an independent research association. The index is available for countries such as the United States, the Eurozone, Germany and Japan. It is based on ten components, or economic indicators, which together paint a more accurate picture of the future than any single value. They reflect changes that, in turn, can predict the direction of the global economy in the months ahead. In short, leading economic indicators show the course of the business cycle.
The index has now fallen for the 13th consecutive time. Each time it has fallen below the red line in the past 20 years, a recession has occurred within 12 months.
The chart comes from a Bank of America survey of the largest institutional money investors. As recently as last November, the majority had expected a recession in the first and second quarters of 2023 (light blue bars). So far, this has not materialized.
Currently, the majority expects a recession in the third and fourth quarters of 2023.
The top 7 megacaps soar into the stratosphere
The chart comes from a Bank of America survey of the largest institutional money investors. They were asked where they see the biggest "crowded trade." That is, a trend that is completely overheated. The investors who are moving the largest funds will stop investing in the trade. A trend reversal is then usually close.
Like last month, the pros saw the biggest tech stocks as completely overheated and therefore overvalued.
The chart shows the money flows into the technology sector in the last week. Since the large investors, as shown in the previous chart, no longer invest in the technology sector, the money can almost only come from retail investors.
The chart shows the sum of call options, forward contracts speculating on a higher stock market, in the technology-heavy NASDAQ index. This is the highest level in 9 years. At such high levels, a trend reversal usually occurred.
The chart shows the market breadth of the NASDAQ index on (purple), the Advance/Decline line. The AD line is a breadth indicator calculated by adding the difference between advancing and declining issues to the previous value. When the increase exceeds the decrease, the AD line rises; when the decrease exceeds the increase, the AD line falls. It is important to compare the increase/decrease line drawn by the index with the actual performance of the index. The AD line should confirm a rise or fall with a similar movement.
Since March, this has not been the case. This is because the market is driven by very few large stocks. More specifically, there are seven stocks that dominate everything.
The chart shows the return of the broad US equity index S&P 500 (dark blue). In USD terms, this index has already gained 8% this year. This entire increase in value is due to the return of just 7 stocks. Without these seven stocks (light blue) the return would have been 0%.
The seven stocks are Apple, Amazon, Microsoft, Google, Nvidia, Tesla and Meta (Facebook). These stocks are soaring to dizzying heights.
Three of the stocks, Microsoft, Google and Nvidia, are in the middle of the AI hype. Any stock that has anything to do with Artificial Inteligence is being blindly bought by investors. This frenzy is expected to die down soon. The tools like ChatGPT are truly amazing. When 1000 heavyweights like Elon Musk or the CEO of Open-AI Sam Altman, warn in a letter from the technology and demand a pause, it sends clear signals.
The biggest problem from our point of view is that AI has no morals and no conscience. If the algorithm starts learning with the wrong data, it will give racist or criminal answers. There is also a lot of legal work to be done. For example, if the next referendum in Switzerland is advertised with a clearly racist poster that was created by an AI tool, who can be prosecuted? The artist (in this case the AI algorithm), the programmer, the provider of the tool, the person who entered the keywords to create the image (but which are not racist), or the person who paid for the advertisement?
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