September 11, 2023

Tesla’s stock energized by AI supercomputer

Stocks did their very best in the final minutes of trade on Friday, managing a green close to top off a losing week. Already high consumer credit declined more than expected according to the latest numbers, a hint that maybe the Fed’s good work is… um, working.

Cafecito. My weekend was far from relaxing but extremely fulfilling . That is why, when I rolled out of bed this morning at 3:30 AM, I knew that this wasn’t going to be a normal morning. For most of the rest of you, this week, the week after labor day week, the unofficial last week of summer, will be an eye-opener. Some traders will turn on their screens for the first time in a few weeks, hoping, though hope is a poor trading strategy, that things have improved in their portfolios. If you have been one of the faithful and you stayed with me over these past few weeks, YOU know that those vacationers turned traders are not necessarily going to like what they find. Let’s cut to the chase and then I will finish up by explaining my tagline. Check out this next chart then keep reading.

This is a chart of 10-Year Treasury Note yields. I am referring to it for two reasons. The first reason, which you probably are aware of by now, is that yields have gone up and essentially thrown a bucket of ice water on the tech rally which helped propel all of the large cap indexes higher earlier this year. The second reason is the likely confusion that many are having with WHY EXACTLY ARE YIELDS GOING HIGHER. After all, inflation has eased off a bit, monthly unemployment just threw a weak number (Fed likes that), and the Fed has turned down its rhetoric. According to the overnight swaps market, there is a 43% probability of a +25 basis-point rate hike before the end of the year with the probability declining thereafter. On Wall Street, 43% is a bad bet, so let’s go with no more hikes… for now. So why then are 10-year Treasury yields going higher?

Remember that short-term treasury yields are impacted by the Fed and its policy, while longer-term treasury yields are impacted by traders. When traders expect a strong economy in the mid to longer term, they sell treasuries and push rates higher. In case you haven’t noticed, there have been some stronger-than-expected economic numbers recently, increasing calls for that so-called “soft landing.” While, in principle, we all want a soft landing, treasury traders view that as a reason to sell bonds. For short-termed bonds, a strong economy gives the Fed a longer runway to keep rates higher, which is why short-term treasury yields remain high. Sorry folks, this is a “good is bad” scenario for bonds, and you can see it played out for you on the chart above as yields climbed from the 3.5% range to 4.25% range from late spring through the END of summer. If you decided to go on vacation for the past few weeks, shutting your screens down with rates coming down, you will be surprised to see them nearly a quarter point higher this morning.

My regular readers know that I kickstart my morning routine with an espresso and sometimes even a quick spin-bike ride… if the markets AT 3:30 AM permit it. Well, that happened this morning, but it was still not enough. I headed to my espresso machine for a second round, but this time, I decided on a Cuban coffee. That involves lots of stirring and some sugar to make a delicious, silky, sweet cup. Now, I know that it is traditionally done using a Moka Pot, but I didn’t have time to wait for the stove to heat the coffee (I will detail that in another note in the future… sometimes, waiting is a good thing ). My espresso and aggressive stirring yielded a bit of a mess on my counter, but ultimately a tasty tacita cup of Cuban coffee which gave me the slap in the face I needed… to remind me TO REMIND YOU, that a soft landing will ultimately be good for your portfolio when it shows up in corporate earnings, WHICH IT WILL. Now I know that your heart may be racing from that Cafecito, but you need to settle down, stay focused… and get back into the grind… summer is over mis amigos ☕☕☕.

WHAT’S JITTERING IN THE MARKETS

Tesla Inc (TSLA) shares are higher by +6.00% in the premarket after Morgan Stanley raised its rating to OVERWEIGHT from EQUAL-WEIGHT citing the company’s “Dojo” supercomputer used to train its self-driving cars using AI. Morgan Stanely believes that Dojo can add $500 billion to the company’s enterprise value. Potential average analyst target upside: +8.08%.

RTX Corp (RTX) shares are lower by -4.41% in the premarket after the company lowered its full-year sales guidance below analysts' expectations. The company cited, among other things, issues from its Prat & Whitney division (they make aircraft engines ). Dividend yield: 2.82%. Potential average analyst target upside: +21.0%.

FRIDAY’S MARKETS

NEXT UP

No economic numbers today, but later this week we will get Consumer Price Index / CPI, Retail Sales, Producer Price Index / PPI, Empire Manufacturing, Industrial Production, and University of Michigan Sentiment. Check out the attached economic release calendar for details.