Triple witch sabbath, new energies - the difficulty of investing in trends, outlook for Tesla and NVIDIA

Chart of the week

Last Friday was a triple witching sabbath on the stock market. This is the name given to an event on the financial markets that takes place on the third Friday of certain months. During triple witching, three types of financial derivatives contracts - equity options, equity index futures and equity index options - all reach their expiration date on the same day.

Why this is important
On these days, traders and investors must make decisions about their options and futures positions, which can lead to potential shifts (and opportunities) in the markets. This can lead to increased trading activity and price volatility. Opportunities may arise in this environment. However, due to the risks associated with triple witching, it is of utmost importance for market participants to remain disciplined and practice strict risk management.
As the chart above shows, some futures transactions with a volume of over 2 trillion have to be processed on such days. To ensure that this works smoothly, the major banks and trading houses endeavor to keep volatility as low as possible. If options that have been worthless for weeks suddenly increase in value, a dangerous dynamic with margin calls and high losses can lead to daily movements of 5-10%.  

The Tripple Witching dates for 2024 are:

- March 15, 2024.
- June 21, 2024.
-September 20, 2024. fed
- December 20, 2024. fed
The dates in September and December are the most striking. In the same week, on Wednesday, the US Federal Reserve is expected to make its decisions on interest rate cuts. The first rate cut of the new cycle is currently expected in September and the third in December.  If the central banks surprise investors negatively, these two weeks have crash potential. Inexperienced futures investors are better off staying out of the market during these two weeks to avoid losing all their profits.

New energies - the difficulty of investing in trends
Everyone is talking about the energy transition. Billions are to be invested in the production and storage of new, more sustainable energies over the next few years.  
In addition to the switch to sustainable energies, however, the demand for energy will continue to increase due to population growth and the rise of millions of people in Asia and emerging countries into the new middle class. Depending on the optimistic or pessimistic estimate, global energy demand will increase by between 30% and 70% by 2050.

The expected global increase in energy demand by 2050 depends heavily on various factors, such as population development, economic growth and technological advances in the field of energy efficiency and generation.

The chart illustrates the projected development of the various energy sources up to 2050. It clearly shows that wind and solar energy have the greatest growth potential, with a projected increase of 690%. Nuclear energy (+60%) and hydro energy (+45%) are also expected to increase. In contrast, the use of coal is expected to fall by 40% and that of oil slightly by 1%, while natural gas could only see a marginal increase of 0.3%.
So how can investors benefit from this? In view of these figures, the solution seems simple. An investment in “new energies” must yield a high return. An increase of 609% must be worthwhile for the companies in this sector and for investors.  

In view of these opportunities, many new energy ETFs have been launched. Has an investment paid off?

The chart shows the performance of the iShares Global Energy and iShares Global Clean Energy ETFs. While the iShares Global Energy ETF (black line) has shown an overall positive performance since 2008, the iShares Global Clean Energy ETF (orange line) has shown a more volatile performance. Since 2020, however, we have seen a significant rise in global energy stocks, while clean energy stocks have declined again after a sharp rise.
How can it be that everyone is talking about the energy transition, but investors who put money into companies in the sector are making losses?

This was due to two factors:

- Solar cells and wind turbines are becoming cheaper and cheaper and many new systems are being installed. At the same time, there was ruinous competition. China has classified the new energy sector as strategically relevant. The rare earths, 90% of which come from China and are used for solar cells and batteries, should be processed locally and not exported. Thanks to hidden subsidies, Chinese suppliers of solar cells rose to become market leaders. US and European companies had no chance with their high cost structure and went bankrupt in droves or were taken over by Chinese companies.

The cut-throat competition is still in full swing for batteries and has only just begun for electric cars. Both sectors are facing the same fate as solar cell manufacturers.
Consumers benefit from falling prices and the global energy transition can succeed more quickly, but at the cost of complete dependence on China.

- Many companies in the new energy sector are smaller companies with new technologies. They need subsidies from the state or loans with low interest rates.
Covid has meant that many governments have had to reallocate subsidies and the unprecedented rise in interest rates since 2021 has led to massively higher financing costs. Both are poison for smaller companies that only focus on growth.

Prospects for Tesla and NVIDIA
Last year, almost 70% of the S&P 500's gains came from just 7 stocks. The Magnificant 7 (Apple, Google, Amazon, Microsoft, Meta, NVIDIA and Tesla. The majority of these stocks also performed well in the year, but not all of them. Time to take a closer look at the best stock (NVIDIA) and the worst (Tesla).

he chart shows the development of the Magnificant-7 share prices compared to the S&P 500. NVIDIA also gained 190% in the year, while Tesla lost 30-40%.
There are two basic investment strategies that contradict each other:

The Trend is your Friend:
This is one of the best known pieces of stock market wisdom. Trends usually last longer and go further than most people think. If you had sold Apple shortly after the success of the iPhone, you would have missed out on the biggest gains; the same applies to Google or Amazon.

Value approach based on valuations
The strategy is primarily based on valuation. A share is bought if it can be bought at a discount of at least 20% to its intrinsic value. If it is overvalued, it is sold.

The question that arises with the Magnificant 7 is: when is enough, enough?
On average, shares with a P/E of over 25 are considered expensive. The current PEs of the Magnificant 7 are: Meta, Google, Microsoft, Apple between 25 and 40. Tesa has a P/E of 86, NVIDIA of 250 and Amazon of 312

A P/E of 250 means that if you were to buy 100% of the company today, the company would have to make the same profit as it does today for 250 years until you make a profit on your investment. The purchase would only be amortized in 251.

Since the stock market indices have not yet been around for 250 years, we take Tesla with a P/E of 86 for the next comparison. If we look at the S&P 500; 86 years ago there were only 30 of these 500 companies. Forecasting over such a long time is like reading coffee grounds.
But all the arguments from the value investors could have been made at the end of 2023. At that time, NVIDIA's P/E was 50, and if you had sold then, you would have missed the 190% gain that year. Hence the question again: When is enough, enough? How long should you stay invested, when should you get out?
When you invest in stocks like Magnificant-7, you have to analyze the underlying trend and form an opinion as to whether it will continue. You also have to ask yourself whether the economic environment fits the trend.

Tesla:

Underlying trend: electromobility (cars), energy transition (batteries).
Anyone who has read the market report from the beginning already knows the answer. The trends underlying the success have changed significantly.

Subsidies are being successively reduced. In Germany, the subsidy of EUR 4,000 per electric car was abolished at the end of 2023. In Switzerland, taxes have also had to be paid on electric cars since 2024.

China has classified both the electric car and battery sectors as strategically central. The Chinese company BYD (Beyond Your Dream) is the world's largest manufacturer of electric cars and is now starting to conquer the market in the USA and Europe.
We do not want to be misunderstood here. We are not predicting the bankruptcy of Tesla. Tesla is a good and innovative company that is and will remain an important market player in many areas. But the magic is over and the competition is cutthroat.

Tesla can still be a good investment for those looking for short-term gains. After the last quarterly figures and the announcement of 100% import tariffs on BYD cars in the US, the share price has risen 50%.

But we removed Tesla from our long-term portfolio at the beginning of 2024.

NVIDIA
Underlying trend: Artificial intelligence.

The chart shows how many companies in the S&P 500 mentioned the term “artificial intelligence” in their press conferences in the first quarter of 2024. 41% of companies want to invest in this area and acquire customized solutions. The trend is unbroken.
The development of good AI solutions usually requires good language models as a basis. Open AI, Meta, Google, etc. have put a lot of effort into developing these. New companies that want to offer solutions in the field of AI have a high barrier to entry. This used to be the case, but has no longer been the case for a few weeks now.

Meta has decided to make its Liama language model available to all developers under a free license. This is a similar step to when Google released its Android operating system. All developers can now start programming their new solutions immediately without any additional expenditure. The computing power to run these solutions is still only offered by one company, almost without competition: NVIDIA.
China is also active in the artificial intelligence trend. Most patent applications in this area come from China. But no killer application in this field has yet come from China. In addition, China does not (yet) have the expertise to produce chips that come close to those of NVIDIA.

China is also active in the artificial intelligence trend. Most patent applications in this area come from China. But no killer application in this area has yet come from China. In addition, China does not (yet) have the expertise to produce chips that come close to those of NVIDIA.
Despite the insane P/E of 250, we remain invested in NVIDIA, which we have held in our long-term equity portfolios since 2020.

NVIDIA will publish its quarterly figures this Wednesday. If these disappoint, we will use the weakness in the share price to increase the position even further.