March Madness

For those of you who would prefer to listen:

It’s that time of year again: The NCAA tournament. The big dance in college basketball. Practice is over. Proper preparation is key. It’s the time for performance. Anything can happen. Win or go home. Titans tend to reign. But Cinderella stories are also born. It’s an event like no other. It’s March Madness.

Brackets from coast-to-coast are both strategically and randomly created. Some succeed. Most get busted. The odds of a perfect bracket are 1 in 120 Billion. So, there’s a chance…

Work productivity across the country sinks. Studies have shown it costs America over $17 Billion. A poll of Human Resource Departments showed a 22% decrease in employee productivity, 21% misuse of company resources and a statistically significant 16% increase in inappropriate work behavior. One can only imagine. Importantly, a large number of HR representatives said that March Madness does increase morale and team bonding. So that’s something.

There was a great deal of movement away from the basketball court this week. There were strong performances, strategic moves and a few surprises. It was definitely Market moving. 

On Wall Street, the Tech Titans have dominated for years. But the broadening out of the rally has seen much greater participation of late. Industries like Industrials, Materials and Health Care have taken the lead. Strength has rotated away from certain areas within Tech. Make no mistake though; Artificial Intelligence remains the dominant investment theme.
 
Nvidia hosted its global Artificial Intelligence conference this week in San Jose. There was over $100 Trillion in industry represented. That’s a really big number. Every major Tech company imaginable is driving its way into the AI revolution. Nvidia Founder and CEO Jensen Huang called it “the world’s most important AI conference because the entire ecosystem is there to share knowledge and advance the state of the art.” AI has been pushing the world into accelerated computing and this event was the “tipping point.”
 
Nvidia’s new GPU (Graphics Processing Unit), named Blackwell, after the mathematician David Blackwell, produces 30x the power of its previous GPU with 25x less energy. This is just remarkable. It’s considered the world’s most powerful chip. Nvidia produces the computational workhorses that power the AI boom.

Computing has been reinvented. It’s revolutionary. It’s Generative AI. The software never existed before. It’s all about the new. There are new types of electrons. It’s a new industry. They’re building new factories and data centers. Accelerated computing: Faster. Smarter. More impactful. Deep learning. The computer can write its own software. That’s Artificial Intelligence. 

AI has been the undeniable growth theme in the Stock Market. It’s the driver of Big Tech outperformance. The Tech Titans have been dominating, which has drawn concerns about the narrowness of the Stock Market rally. 

Nvidia was up 80% on the year, heading into the conference. It cleared the $2 Trillion milestone in late February. It trails only Microsoft and Apple as America’s largest companies. Nvidia is expected to grow earnings a whopping 90% in 2024, while revenue is forecast to surge 81% to over $110 Billion.

The Tech Titans have been scrutinized for their size and tactics for years. Their dominance is being targeted. Apple has formally been accused of being a monopoly. The Department of Justice filed an antitrust suit against the popular iPhone maker this week. 

Last year, the DOJ filed a suit against Google for its dominance in digital advertising. That was on top of the existing suit for its alleged monopoly in search. The Federal Trade Commission has also sued Amazon for its dominance in e-commerce, claiming the company uses anticompetitive tactics. The commission is also going after Meta, the company formerly called Facebook, trying to split up its Instagram and WhatsApp platforms.

What it comes down to is the question: Have these companies become titans because they cheat or because they’re that good and their customers really value them? That will be answered, eventually. It’s an important case with the burden of proof on the Federal Government.

The race for AI is heated and highly competitive. Apple is reportedly in talks to build Google’s Gemini AI engine into the iPhone. Both Apple and Google have been criticized for being slow to move on this innovative theme. They’re responding. Apple is seldom first. But once they enter a market, they dominate it. With over 1 Billion loyal customers, Apple will no doubt be a major player in this AI revolution and will most likely make it easier for the user to embrace. That will make it more popular.

America’s original chip Titan is in the midst of a comeback. Intel dominated the 1980s and 90s, tethering its innovative success to the PC. Intel was inside pretty much everything. The company had little to no competition. It didn’t last. The move to mobility, led by the advancement of the iPhone, followed by this AI revolution, completely left Intel in the dust. Nvidia saw what Intel didn’t and went all-in on AI. Now Intel is playing catch-up. And they’re doing it on American soil. 

The US Government is awarding Intel $20 Billion in grants, which includes up to $8.5 Billion in direct funding through the CHIPS and Science Act. All that money will advance Intel’s Made in America projects across Arizona, Ohio, New Mexico and Oregon. This supports Intel’s plans to invest $100 Billion in America to increase domestic chipmaking capabilities critical to emerging technologies like AI. Saudi Arabia announced this week it plans to spend $40 Billion on Artificial Intelligence. It’s a global theme. The race is on. 

The need for power is going to be enormous to fuel this Artificial Intelligence renaissance. A data center can use as much energy as it takes to power 80,000 American homes. I had to read that and re-read that stat. Wow. What’s more, new data centers are opening every 3 days.

The Fed met again this week. America’s central bank still expects to cut interest rates 3 times this year. They just don’t know when. The strong Economy and stubborn inflation are making it clear it won’t happen before Summer. The timing keeps getting pushed out. A June cut went from 100% probability to less than 60%. There was zero chance of a cut this week. The rate of price increases have come down. But they’re still increasing. Yields were up 6 consecutive days ahead of the meeting. They fell afterwards. The Stock Market liked it.

In the beginning of the year, the Market was pricing in 7 rate cuts. The change in expectation sure hasn’t curbed the rally. Higher for longer has not slowed down America’s Economy, nor its Stock Market. The S&P keeps hitting fresh all-time highs. You know what else hit an all-time high? Gold. The precious metal has been sleepy strong, jumping above $2,200 an ounce for the first time ever. Ever is a long time. 

It took nearly a decade, but the Bank of Japan has finally called it quits on negative interest rates. The BOJ hasn’t raised rates in almost 17 years; Until this week. The decision marks the end of the global era of cheap money, rooted in rubble from the Financial Crisis.

Negative interest rates were designed to stimulate growth. Deflation was the menacing threat then. It was a radical idea. And it lasted too long. Cheap money created reckless behavior and asset bubbles in the United States. Inflation surged in response to Covid, resulting in aggressive tightening cycles across the globe. Japan had been the only holdout. The move towards policy normalization suggests the BOJ is confident it has emerged from the threat of deflation. 

The IPO Market has been pretty quiet over the past 2 years. It made noise again this week. The popular social media platform Reddit, made its initial public offering. Excitement and demand were high.

IPOs are rookies, or freshmen if you will, in the Stock Market. It’s their debut. Some are highly touted with great expectations. Others catch investors by surprise. They tend to be young and fresh companies focused on the future. IPOs represent ideas and new ways. A strong IPO Market reflects increasing demand for growth and some risk-taking. Bull Markets thrive on it. Small Caps can become Large Caps. Little things lead to big things. 

Reddit was the first major social media stock to IPO since before Covid. Though popular, with strong revenue growth, Reddit has never turned a profit in its nearly 2-decade existence. A notable early Reddit investor is OpenAI CEO Sam Altman. That’s the company that owns ChatGPT. 

Reddit just signed an AI content agreement with Google, which is expected to bring in more deals to help train large language models. They see a $1 Trillion opportunity for global content and advertising, and their loyal and active users are coveted. Investors got excited about that too.

Reddit has reserved as much as 8% of its stock offering for its power users. That’s the active army of individuals who help guide and create the platform’s many communities. In other words, Reddit is paying its players. That’s a theme that’s happening with increasing frequency in college sports too. 

Back to the Madness:

Small Caps are picking up speed. They have been left behind for years. These tend to be small, sleeper stocks that very few investors have heard of. Like Drake, Oakland, or Morehead State, smaller lower-ranked schools that have the opportunity to come out of nowhere and dazzle fans, small cap stocks are coming back to life in March. They’re making some noise. That’s a good thing.

The Oakland team, from Rochester, Michigan, fueled the Madness and busted brackets Thursday. Senior Jack Gohlke, who led his Oakland Golden Grizzlies with ten 3-pointers, instantly became the tournament’s Cinderella story by knocking out the highly-ranked Kentucky Wildcats. A legend was born overnight. Gohlke had this to say: “You’ve got to go out there and think you have the same talent level as them. I know they have draft picks, and I know I’m not going to the NBA, but I know on any given night I can compete with those guys – and our team.” It should be noted that Gohlke spent most of his college career playing Division II.

I just love to see Cinderella succeed. I’m a total sucker for the underdog. Heart, passion and a never quit attitude: It’s a powerful combo. It’s a thing of greatness. Regardless of industry, competition brings out the best. Rules are critical and definitely need to be followed. Organizations come together for a common cause. They work together. They’re committed to each other. Opportunity knocks. They open the door. Little things lead to big things.

That’s my not-so-rapid rundown from America’s heartland. Thanks for reading.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

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