 Hello and welcome back to the Friday podcast and I'm going to say Friday because any of the regular listeners, if they might have heard that we've got a new series running called the deal room which is very much more corporate finance vibe. Let's talk about all things M&A, IPO, private equity deals, these sorts of things and that's with our head of corporate finance, Stephen. One thing, Piers, I'm not sure if you caught the episode yet, but Stephen did say that he reckons he's going to get more downloads than you just putting that out there. He also said that, oh, maybe it was you actually said that he's more attractive, a younger, a more attractive version of me. I'm not sure how I feel about that, knowing full well that both are very true. You forget my job is to make you and Stephen shine. I'm just here. Best in both of you. So I'm going to say the same thing. You're really the star here, Piers. Let's be nice. Keep talking. But yeah, I thought it was very good. Yeah, if anybody listed if you didn't catch that, it's going to be every week. I think that's a really, really good new show. So yeah, looking forward to that every week for sure. Yeah, so just in terms of routine to be clear, if you're new to the channel, we have a global markets wrap up, which is Piers and I and we talk about things like today, you're going to talk about NVIDIA, the stock market, debt ceiling, these types of more top level macro topics. And Stephen, we drill really into the deal flow, specifics, strategy, corporate side, in much more detail. So hopefully if you're thinking about career in all parts of finance, whether in asset management, PE, trading, we've got you covered. That's the point. So yeah, we'll have the trading room or the deal room on a Wednesday, the trading floor on the Friday. That's the setup. Looking at the stats though, just before we begin, and I quickly give you an idea of what we're going to cover. I did clock that the majority of people who do listen regularly are not actually subscribers. So if that is your listening, hit that follow button and then you won't miss out on any of the future shows. And yeah, I know a lot of you are absolutely stressed at the moment with exams. So yeah, you can go back, listen to them, get yourself up to speed if you're starting an internship or you're getting your head in the right place and focus for the next application season. Hopefully it helps. But yeah, let's get into it and give you a quick summary of what we're going to cover in the next half an hour or so. Nvidia earnings can't have missed that. They are up 25%. And they've now become the fourth largest company in the Nasdaq 100. Bigger than Alphabet, bigger than Meta, bigger than Tesla. Nvidia is right up there. So we'll talk about what happened, why it's a really interesting story that's been underpinning their shares for a long time, in fact. And then we're going to talk about stocks in general. And we just keep going up despite a lot of risks out there. The banking crisis has cooled off, but that's obviously quite fresh in mind. Got the debt ceiling, will the US default, all these different things and yet stocks keep going up lots of bullish bets, flooding into the market and we'll discuss what's the current status, but also what are the current risks at this point in time. And then we'll have a quick update on the debt ceiling saga as well. It still rumbles on, but we're getting very close to the cliff edge now. So what's the latest there? So perhaps, Nvidia finished yesterday's session up 25% earnings beat. Perhaps most significantly, Nvidia said they expected sales of about $11 billion. And I saw minus 2% in the current quarter. Because remember it's backward looking when they report their corporate earnings. The idea being that in the current quarter, their expectation of $11 billion is more than 50, 50%, 50% higher than Wall Street estimates of $7.15 billion. That I have not seen before. Right. Well, I was going to say that it's just, I literally never seen anything like it. Just the most remarkable set of numbers. And yeah, you're right. It's all about this forecast. So they're a bit out of sync, Nvidia, which often, I don't know, if you're not tuned into earning season and all the rest of it, it often catches you a bit by surprise because they're quarters the way they report. They're a bit out of sync with the sort of calendar quarters. So when we're talking about their forecast for the quarter we're in now, that's for them, that's the quarter to the end of July. So that's why they're reporting their quarterly earnings here in in May, when most companies report them in April, they're basically one month out of sync of the usual timings but all this had forecast that in this quarter up to the end of July in video would generate sales of $7.2 billion. And they came in with no, we're going for 11. And yeah, as you say, it's a 50% uptick on the street forecast. My favorite stat, I mean obviously the share price just went, you know, stratospheric went up 24%. We're not messing about here. This isn't a small cap. This is like one or already one of the biggest companies, right? And for it to go at 24%, my favorite stat, it added $184 billion for its market cap, which makes it the biggest one day gain ever. Is that right? Yeah, the biggest one day gain for a company's market cap ever. It kind of puts it in perspective as to exactly how remarkable this move is, and they're kind of, it takes them up to just shy, I think, well, depends where they open today, I guess, but they, their total market cap post rally 939 billion. So just shy about the VIP room. Definitely. And as a reminder, who's in the VIP room? Well, the one trillion dollar club, Apple, Microsoft, Alphabet, Amazon, and then Saudi Aramco, the kind of, yeah. It must be an odd posse when you're in the club. Yeah, it's definitely an odd one out. So yeah, they're nearly there. Yeah, so quite, quite extraordinary. And one of the things I saw, I mean, it's just been littered with stats, obviously given such a move. Nvidia is now six times the size of Intel. And yet, I think it was Intel's revenue is double. Yeah. So that leads us and then so yeah, Intel's revenues are twice Nvidia and yet Nvidia is six times larger. So people are pricing in forward looking potential here. So let's talk about that, because that's really what's driving the stock price just like you said, yes, it was a biggest move on record but I was the stat there was how many multiple thousands of percent is Nvidia up over a 10 year period. This stock has been integral to the evolution through what even the chip that drove the mobile phone phase to the services products that came on the back of that and beyond and now they're involved in so much more. It's the changing of the guard. I think a good historical sort of analogy sort of comparison would be Nokia and Apple. I'm talking about the mobile phone market where Nokia were absolute dominant kings, and then Apple came along with just the next generation. And slowly but surely, you know, the baton was handed over and the superpower status shifted from one to the other is exactly the same here with with Intel and video video are built for the future. And the future just all of a sudden the size of the market that's available has just suddenly exploded or it's accelerated. Because look, we're thinking that at the moment in terms of what I will actually let's just step back a sec before we get into the to find a detail because I don't know. Yeah, they're not. I always think they've kind of, they kind of playing like the younger brother if you like to the big tech boys. I don't think they quite get the superstar status often that your other big texts, you know, when you're talking about Fang indexes and all the things like the end in Fang is not in video. It's Netflix and you're like well actually that's ridiculous because it really should be in video so I always think they've never quite got the credit they deserve and often I don't know that if people quite fully understand I mean obviously they're, they're in the chip game but they they produce graphics processing units that's there so GPUs I was reading actually asked chat GPT explained to me what a GPU is as if I was a seven year old. It gave me quite a good analogy. I'll read it out. Do you want to hear. So, the analogy was, imagine if a computer is like a construction site. Okay, the CPU, that's the central processing unit. That's obviously a piece of kit in the computer. That's like the site manager. All right, so that's making sure everything's running smoothly it's handing handling a lot, lots of different tasks okay it's managing the whole thing. The GPU is like a skilled worker that's really good at one specific thing so obviously in the case of videos GPUs it's creating and manipulating images. Okay so so whilst the CPU is busy coordinating all sorts of general tasks. The GPU focuses on making sure all the visuals look great. Now, this kind of, you know why is in video all of a sudden just exploded. It's because, really, they were in the business of creating GPUs for the gaming industry. It's all about graphics, right, and fine obviously the gaming industry has been growing. Very sharply over the last 10, 20 years whatever okay and so obviously in video have been on the rise but all of a sudden, it is the case that video are prime perfect place to take advantage of the AI revolution. So, the AI breakthrough. So, the kind of latest AI breakthrough is the transformer model. Okay, talking about invidious products that the key ones something called the H 100. And this is like the foundation for how large language models basically operate so these, this this kind of sudden AI explosion. It's thought that a invidious got the technology for it and but most importantly or not equally as importantly, they've got the capacity to deliver on the massive spike in demand because it's all so well and good having the product but can you build enough, especially in this particular situation where the demand is suddenly just gone exponential and invidia do have. It's believed the infrastructure to actually meet this increasing demand with a massive, you know, sharp uptick in supply. So that's kind of another key thing here. So give it some like commercial numbers so they're flagship AI GPU that a 100 that sells for around 10,000 US dollars at chip. Is that right why I didn't know that 10,000. Wow. So and that's the hardware of choice as you said for large language AI models now a supercomputer. Yeah, use thousands of those chips at any one time. So an AI supercomputer constructed by Microsoft so hosts like open AI or something like that. That will be featuring tens of like thousands of these things. So you can imagine and then yeah the H 100, which is like the next evolution. That's then talking about cloud based AI supercomputing. Yeah, which is like then the next gen, if you like so. Well this product is insane. It's got the H 100. It's a hardware accelerator. It's got 80 billion transistors on it. So this kind of manufacturing technology is called for nanometer manufacturing process that basically the chip game is who can build the most powerful chip right who can build a chip that can deliver the most powerful sort of power. And ultimately that's just a game of how many. How many transistors can you get. Can you mount on a chip and remember the chips got fit into a bit of hardware so sizes key here so can you make a super small chip that's got as many transistors on it as you could possibly fit. So this has been the game over the last decade and in video right up the forefront of smashing all the records and this for nano meter so they're just able to mount transistors for nano meters apart, meaning they can get more of the transistors are smaller and mount them closer. And this is the game that they're in and actually I'll just a quick, maybe a slight tangent only briefly before we come back to the main kind of nuts of it but this is quite the geopolitics involved here because back in August last year. And then announced a banning of four major semiconductor technologies for export to China. So this is the key advantage that the US have over China in the chip race. It's, it's, it's their ability to this for nano meter manufacturing technologies only only the US have cracked it China's quite a long way behind here. They're producing a nowhere near as powerful. So Biden's aim is right let's cut off access. Let's cut China's access to these more powerful chips and in so doing, let's slow down the rate at which their kind of whole technology stack is evolving. So there is a bit of politics in here. What was interesting to hear though, on the call, the video CEO spoke very briefly about this and he's anti this he was saying that look, if China can't buy from the US they'll just build it themselves and his view is that by banning the export of this stuff. It just will accelerate China's kind of 100%. Yeah, so it's a classic, it's a classic kind of gas, that kind of corporate espionage, like that China are the kings of that and so if they can't get them. Take, get the information that's required to then, and we know that China have a patent that type of behavior so such a classic short termist, political gas. It seems to be quite bullish and video shares though because if I was like the company in itself and its management knowing the political context. Yeah, and the pressure points of the current administration. They're going to be favorable, surely. So when this is one of the things about being the drummer in the band and not the lead singer is that no one cares. No one wants to see me going to Tesco is to do my shopping and take a funny photo of me. I'm going to do that for the lead singer. That's your apple. That's your good. Yeah, I'm in the back, right. And I'm absolutely creaming it. No one knows who I am. And then I go to the club not get bothered. I like video is the drummer. I like the same time the, the government, you know, you're kind of, you've got the benefit of this whole crack down on big tech doesn't really affect me. Because politically I'm like the jewel in the crown. And then be, I'm not really that public with what we do doesn't really hit the mainstream in that same way. And so there isn't that like political kind of mentorship that you see when they come to big tech and talk about privacy and all these types of things. You're just a manufacturer product. So you're kind of shielded from a lot of that potential growth barriers that that might hit other larger tech firms. Well, like all the kind of antitrust stuff like blocking like Microsoft, you know, trying to buy stuff and getting blocked by the entry trust regulators. Yeah, you're right. And that's not even without talking about the fact that we know we've only talked about generative AI and stuff but you know, before that you remember everyone was going nuts over web three and we're being then accumulation lots of different things so virtual reality, graphics, crypto currency mining on a huge scale. So all of these different things these elements, they are critical right in multiple parts. Yeah, I mean, are they overvalued? Well, 11,000% in the last 10 years. Yeah, but okay, so if you think about the total addressable market. Yeah, right to am at the moment, it's thought to be $100 billion right the kind of AI space to from the chip point of view so in video's total addressable market currently 100 billion. And that's kind of shot up right but they expect that to grow 39% agar, as we say so, you know, annual sort of compound annual growth rate, okay 39% per year every year. So actually by the 2030 that one 100 billion becomes north of $1 trillion total addressable market. So are they overvalued? I don't know. Here's one argument to suggest that this is a kind of not a flash in the pan that's wrong but just a temporary blip higher, but it's temporary and it pulls back and people calm down a bit only because as you've just been saying right open AI. I've just bought, I don't know how many of these H 100 chips, but a lot because all of a sudden. Obviously there's been a huge demand for their product number one, but obviously number two, you need cash to buy this stuff right and oh they just had $10 billion of cash just shoved into their account from Microsoft. So is there a temporary spike in demand that isn't sustainable. I'm not saying demands not going to rise over the long term I'm just saying maybe there's been a temporary acceleration in demand that's not sustainable and the growth rate in demand might slow. Maybe as we track through the rest of the year but so maybe look we might be in a bit of a short term frenzy here big spike, but don't get me wrong the long term, you know fundamentals look phenomenal. It's just be careful about a bit of FOMO here. There are technicals as well because the spike on Wednesday did take them above the 2021 high for the 2021 high was about $330 that got taken out in style. So there might be a bit of technicals here and smashed up to $380 I think so it's made a new all time high. So when was that when was that high in 21 Feb. So that would have been as well post the four for one stock split they would have done a couple months earlier before that right. Yeah if you go to I mean look if you go to the start of 2021. I'm talking at 130 bucks. By the end of the year is 320 330. So yeah they had a big 2021 like it like, like most of the tech industry right and talking about FOMO then let's talk about the broader stock market. So some data from city earlier this week, and all of these banks, obviously quite have good visibility of flow coming from their clients. And they said investors have pumped $21 billion into US stocks. So despite this debt ceiling media frenzy, which is all been quite negative. So some of the data suggests then that it's all been parked into long S&P futures positions. And actually the longs now outnumber shorts, nine to one, at this present point in time. Yeah, maybe you could perhaps explain a little bit about this idea of how they track the flow and what does nine to one really represent in terms of Well if you're thinking about price right what moves price what is buyers and sellers. And so you know ultimately a fundamental level you know it's that perennial battle how many buyers are there how many sellers and says more buyers than sellers well then the thing goes up right and if there's more sellers than buyers and it goes down but the bigger the difference in size of those two camps gets well then you know if you're at nine to one it means that you're kind of a very extreme levels the point being right if 90% are buyers and they've already bought. Well, who else is going to buy, I mean how can the price continue to go up. If everyone's already bought. When it gets to extreme levels like this it is a signal to suggest that the momentum to the upside is now perhaps running out and it maybe it's the top. Put the FOMO people aside the other thing about Brett. Yeah, right difference between the previous market rally where tech was getting hit. Actually at that time as interest rates were pointing to be going higher, we're now on the other side of that markets are pricing rate cuts text now rallying. However, it's very concentrated so what when people when people read about Brett, what is it that they should take away from that. So when you're thinking about an index, and when it's going up, why is it going up. It's not that, like with the S&P 500 or 500 companies so if the index is going up that doesn't mean all 500 companies are going up. But there are different components right and actually it is the case that this rally is a bit this is very weird this this rally and so much as. So if you take the top 10 stocks in the index, or for starters, the top 10 stocks in the index of 500 companies, the top 10 make up 29% of the whole index, which is very high historically. That's a that's a very high amount it's not it's not unusual for the top 10 to make up like 20%. I mean the top 10 normally dominate, but not quite to the point it's got to an extreme level here right. So the top 10 like who are the top 10 well Apple number while I'll list them in order. Okay, Apple make up 6.6% Microsoft 5.6 they're the absolute two giants. When you drop to Amazon that makes up 2.5% Nvidia have now just smashed up this list big time. And they they make up 1.7% now, they've literally jumped like six or seven places on this list this week. They've got Tesla 1.6 Berkshire Hathaway 1.6 Alphabet are in there twice with their A and B shares. So they kind of together I guess Alphabet makes up 3%. So they really are the number, Google are the number three on the list if you like, and then you're going to sell mobile and United Health Group. Okay, so these are the stocks right but it's the big tech giants. So actually, the top 10 here. And certainly the tech within that they made up 70% of the rally year to date 70% of the whole index rally is because of the top 10, and more specifically the tech stocks. They're very narrow, right the rally is being driven by a very small number of companies that are going up a lot. The majority of the companies in the S&P 500 haven't gone up this year. And so, again, there it's that's that's historically a sign that the rally is not sustainable, because it's not broad based. So if you get any kind of signal that actually people might start to book a bit of profit on tech, or then this index is coming down rapidly. Now why might there be a trigger to book some profit. Well, the rally's been about as you said, rate cuts right the fed hitting the top of their hiking cycle and starting to cut rates as the recession starts, except that that view is starting to look a little bit uniquely, right, because they were saying here we are well not far off halfway through the year and what recession. Okay, so far from are they going to cut rates I think we're edging back towards the camp that they might continue to hike. So this might be a trigger to go right you know I've had a good run here on this tech this tech stuff's been fantastic for me, but you know what, I'm going to book a bit of profit. That's where you're going to get your sell side volume increasing. And there aren't many buyers to hold up the wave of selling right because everyone's already bought. Yeah, well let's talk through a couple of the highlights on the other side then, because Mike Wilson of course has been pounding the street. He's a well known US equity strategist at Morgan Stanley, biggest bear on the street and he is actually I think the number one forecast of the S&P 500. I think it was last year so he's the most accurate for the year where the year where it went down. Yeah, for the first time in a decade was the exact right was the same twice a day but here so there's, he's got six points I'll quickly run through them and feel free to pop in on any, any one of these. The valuations are expensive. So that's the whole kind of mantra of his thing deep earnings, deep earnings recession is what he calls it as a as a total package to the view the median P multiple is 18 times and that's near the top in the last 20 years. Then second point, a healthy reacceleration is already baked into second half consensus earnings estimates. Number three, exactly what you just said, market surprising for rate cuts. They don't more than Stanley see that happening. Not unless we definitively enter into a recession or the credit market deteriorate significantly, which isn't happening as you were saying. Yeah, for the presumption that the banking crisis will not worsen or become systemic and while MS think that yes we're not going to get a rerun of the financial crisis of 1809. So if you're thinking about, they do think that this banking crisis now will accelerate the credit crunch that was scheduled to begin by this year, given loan officer surveys which they track on a regular basis. The fifth one was consumer resilience. That's been quite surprisingly strong across most areas actually in the Western world in the US as well, but there's some signs emerging that that's fading, because you can track various different discretionary spending indicators, and even those at the high end of the spectrum of wealth, they're also pulling back a little bit as a key sign. And then probably most interesting US debt default or 11th hour resolution. Their view or his view is that an actual agreement might be a bigger risk to markets. That's David in itself to be weird because you're thinking about you guys were just talking the last few weeks about how it's the end of the world and things like that if this thing actually does blow up. No, actually stock market is going to fall. If this thing goes through and this is I guess one of the things that is hard to really understand about markets until you see it until you're in it. Because at the moment stocks are rallying, partly because the deal is coming. Right. The timing thing about markets are always forward looking pricing in the future. So at the moment we're pricing in the side stepping the worst case scenario but then I guess what Mike is talking about is that what will happen here then in short, raising the price ceiling could decrease market liquidity, based on the $1.2 trillion in Treasury bill issuance that they think we'll see in the next six months. His conclusion being that while many individual stocks and sectors have traded poorly this year, the major indices are priced for simultaneous good outcomes on multiple fronts, which they think the risks are elevated and increasing in some ways. That was his. Yeah. I mean, I think if you track him and monitor, he's been calling the top of the S&P every month, 2023, and he will continue to call the top every single month, every single month so far he's been wrong. So, is he wrong again? I would say in my opinion, I'm not a believer in this rally in 2023 and I'm kind of quite staggered it's still happening so as the year rolls on, I do think it's more likely that he becomes right. But with the debt ceiling thing, if you're so biased towards a view, you will take any scenario you want and you will fabricate an argument that matches your view, right? There's a little bit of that in his assessment here that if a debt deal, a debt ceiling deal gets done, stock markets sell off. And I guess his point technically could be right because he's saying like this will mean then issuance of new treasuries. So you're going to get a lot of new financial assets coming to market, new supply. And these treasuries are at decent yields now, certainly based on like the last 10 years, right? So you might find if you've got portfolio managers that have been long tech, they've got a lot of profit. But you know what? Yeah, the Fed might hike again. So you know what? I'm going to book profit on my tech stocks and I'm going to buy some of this new supply of treasuries that have come online. So it could trigger a rotation of assets out of stocks and into these new bonds. So technically, I mean, I kind of see what he's saying, but it does stink a little bit of him just, you know, being a slave to his own bias. But that being said, you know, back to the fact it's a narrow market rally that's incredibly narrow. Anything, anything, anything, anything that hints that tech is at the top, then fine, you're going to get this rally coming off quite sharply. I guess that was his takeaway point that the market is pricing perfection on a number of points. Yeah, and that never ends well. And we're not talking about, you know, catastrophic fall in markets, just an end. It's an end to the bear market rally. Right. Well, no quick summary then just to wrap up last few minutes on the debt ceiling. So the latest I as of Friday the 26th of May we're recording this Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years that's according to people familiar with the matter. Under the terms of the emerging agreement defense spending would be permitted to rise 3% next year in line with Biden's budget request. The accord would also include a measure to upgrade the nation's electric grid to accommodate renewable energy, which is a key climate goal so win for the administration, but on the flip side. So we're going to speed up permits for pipelines and other fossil fuel projects, which the GOP favor. Yeah, that's just laughable. I mean, anyway, so should it deal be reached soon, I guess some of the key points here is timing. So Tuesday is emerging as a likely day for a house vote so obviously they've got to make an agreement first. We're going to be very close to this and if that is the case they've got quite a pressurized schedule that they need to hit. So Tuesday is emerging as likely day for the House vote, the Senate would then have to act quickly because it has to go through both chambers of Congress, land on Biden's desk for the first of June. And that's the date by which Janet Yellen Treasury Secretary said her department will basically run out of money. So the following day after so second of June, that sees a payment due to millions of social security beneficiaries. So this is what's putting the bit of the pressure on the to resolve the impasse at the moment. Yeah, the noise is coming out of the rose garden yesterday. You've got to say it's deal looks like it's pretty much done. It's very positive. Like, if you were going to have a government shut down, then you would need the two parties to still be a long way apart. And what they were talking about yesterday seems like seems like they're actually pretty much there. So, you know, obviously the litmus test comes when it tries to get through, when the bill tries to get passed through most likely they're not going to attempt to pass the bill unless they know they've got the numbers to get the votes. Right. So, yeah, I don't know at the moment it looks looks like they're pretty much there. It's a little bit boring isn't it. Yeah. Oh, come on. I would have been like, you got to throw a trumpet at this point and just blow up the deal. But you could say my final point, you could say a deal being done is negative for stocks, because it means spending increases, which is inflationary you could say government spending has been at control and that's why we got inflation in the first place. And here's Biden wanting to spend more and spend more and spend more. So you could say the deal getting done without any problems is inflationary, which means the Fed can't cut and maybe need to continue to continue to hike so maybe there is a negative argument to be the farmer of a deal getting done here. Yeah, Mike was speed dialing his hit man on you about 10 minutes ago and now he's calmed down a little bit it's okay Mike, just chill. He's fine. All right, so that's it for this week. Thanks very much for listening. As we said before, we'll have the global markets wrap up as per noise was piercing myself every Friday. We have more of a corporate finance spin with Steven coming at you on Wednesday every week. So remember to follow the channel hit the bell icon. So you get notified when the new episodes come out but have a wonderful weekend if you are in the UK it's a long one again. So, enjoy the sun. Thanks. Take care. Have a good weekend.