May 28th, 2023

Global equity markets entered this past week still beholden to headlines coming out of Washington DC. Debt ceiling talks were said to be making progress after disappointment was expressed over the weekend. Sentiment swung on several occasions as both sides expressed frustration, though the negotiations continued without a deal. By Friday the S&P climbed back above 4200 helped in part by a growing belief a deal to raise the debt ceiling through 2024 will be put to a vote next week. Unlike equity markets, T-bill yields continued to climb along with rates and spreads in general, suggesting bond markets are still positioning for potential issues related to the debt ceiling. Ratings agencies Fitch and DBRS both cut their outlooks for the United States sovereign bond ratings to negative. Wall Street spent considerable brain power on re-examining the playbook from the 2011 U.S. downgrade by S&P, and on developing strategies for clients to hedge portfolios in a similar scenario. Wednesday’s release of the FOMC minutes did little to change the entrenched narrative that the June meeting is still a close call on whether Fed Reserve officials will decide to pause or skip another 25 basis point rate hike. Friday’s April personal spending and PCE inflation data was notably hotter than expected. The data is likely to support a cadre of Fed hawks who have expressed progress on inflation remains too slow. Those officials have been vocal in messaging that if the Fed chooses to hold off on hiking at next month’s meeting it is not a signal they are done. In their view rates are likely to need to go a little higher from here to reach a sufficiently restrictive level. Nevertheless, stock markets continued to look past the hotter than expected inflation data and its implications for rates heading into the long holiday U.S. weekend. Semiconductors and the NASDAQ led the way higher basking in the AI glow of an incredible Nvidia quarterly earnings report. For the week, the S&P gained 0.3%, the 50/50 Nasdaq/Russell benchmark rose 1.25%, European bourses retreated ~2%, and Asia Pacific stock markets were either side of the flatline, with Japan advancing 0.4% and Hong Kong’s Hang Seng slumping 3.6%. Your BSD Global Tech Hedge Fund’s YTD returns continued to rise, with a gain of 2% last week. In corporate news small caps opened the week with a bid after FTSE Russel provided an initial look at expected index additions and subtractions for 2023. MU shares were under scrutiny when management estimated the combined direct and indirect impact on sales from a newly issued China ban could be around 25% of revenue. Toll Brothers posted strong earnings results and talked about how the present landscape is a boon for homebuilders with high rates keeping people locked in their homes, buoying demand for new construction. A host of retailers submitted results and managements that stood out positively included Abercrombie & Fitch, Urban Outfitters, Ralph Lauren, Elf Beauty, and Guess. Best Buy, Costco, Gap, Kohls and Lowe’s results were not quite as stellar, but perhaps better than many had feared. But by a wide margin Nvidia’s earnings guidance captivated investors’ imaginations in a way that could only be compared to a select few Apple quarters. The juggernaut saw its market cap surge an astonishing $200B+ towards the $1T mark after the company guided Q2 revenue more than 50% above current consensus. AI talk consumed the street after CEO Huang said he believes we are at the beginning of a ten year mega-cycle referring to AI advancements calling it an “iPhone moment”. The very next day Marvell Technology guided FY24 AI segment Rev ‘to at least double’ y/y and shares surged 30%.

Investors head into this coming week positioned as if the U.S. debt ceiling crisis will be resolved one way or another. If that is the case, the tech sector could be a major focus after Nvidia recorded the single biggest one-day market cap rise in the history of the market with its post-earnings surge in share price of more than 25%. The major economic release of the week will be the May jobs report on Friday, June 2. A drop in monthly payroll additions to 180K from 253K in April is anticipated and the unemployment rate is seen inching up to 3.5% from 3.4%. Average hourly earnings are forecast to decline to a +0.3% pace from +0.5% in April. The jobs report will arrive less than two weeks before the next FOMC meeting and is likely to kick off more debate on if the Fed will raise rates again. Technically, continuation of the rally looks likely and as the S&P 4300 area remains the next major target; 4363 is the next potential target, so 4300 is not necessarily a place to close longs and go short.

Our BSD Global Tech Hedge Fund is positioned for both a stock market break up or a break down, with 12% cash and 88% invested across a couple dozen tech vendors and tech end-users, thereby allowing the Fund to participate if this stock market moves higher, and a 35% short equity indice hedge on the notional value of the invested stock portfolio that will incrementally grow (from the laddered Nasdaq put options strategy) if the market deteriorates.