Mag 7 Mayhem: And Then There Were Four
All the Stars Are Aligning
We’re hitting “send” on today’s edition at exactly 2:00 p.m. EDT — coinciding with a meeting of the Federal Reserve’s Open Market Committee.
On the one hand, it’s a nothingburger: The Fed has telegraphed well in advance that it will leave the fed funds rate alone at 5.5%.
On the other hand — and as our own James Altucher has been saying for several days now — the Fed is also liable to light rocket fuel beneath a subniche of tiny stocks.
In the meantime, events over the last 24 hours continue to confirm James’ thesis. The stars seem to be aligning.
James is positioning members of his new Microcap Millionaire project to take maximum advantage of the market “rotation” that began three weeks ago — funds flowing out of the giant “Magnificent 7” companies and flowing into smaller stocks that Mr. Market has neglected for the last 2½ years.
Sure enough, the Mag 7 names are now batting 0-for-3 during earnings season.
Last week, the disappointments came from Google and Tesla. Yesterday after the closing bell, it was Microsoft’s turn.
The headline numbers were fine — revenue and earnings both beating Wall Street analysts’ expectations. But there was a minuscule miss on revenue at its Azure cloud-computing unit — which these days is both MSFT’s bread-and-butter business and the key to the company’s AI efforts.
The “expert consensus” on Wall Street was calling for 30% growth quarter-over-quarter. Instead, the number was… 29%.
That was enough for MSFT shares to take a 4% spill in after-hours trading. Checking our screens this morning, the loss compared with yesterday’s close has been trimmed to a more modest 1.1%.
Up next in the Mag 7 earnings-season demolition derby is Facebook parent Meta — which reports after the closing bell today.
Two Market Milestones
A couple of interesting info-tidbits pertaining to the current market rotation…
First: By one estimate, the Mag 7 stocks have lost $2.6 trillion in market value over the last three weeks. Nvidia alone accounts for $1 trillion of that total.
Second: We noted yesterday the outperformance of the small-cap Russell 2000 relative to the tech-intensive Nasdaq over the last three weeks.
As Bianco Research founder Jim Bianco points out on X-formerly-Twitter, the only other time the gap was this stark was in late 2000. But that was months after the dot-com bubble had already burst and the Nasdaq was down 50%. “Effectively,” he says, “this rotation is unique.”
No doubt: Checking our screens today the Nasdaq has roared 2.5% higher on the back of a strong earnings number from the semiconductor titan Advanced Micro Devices. AMD is up 6.4% as we write, and that’s lending a halo effect to the other chip stocks. (Nvidia is up 10.5%!)
The S&P 500 is up 1.7% going into today’s Fed announcement; the stodgy Dow is up a mere 0.4%.
Meanwhile, precious metals are staging a rally — although “Mr. Slammy” could easily show up and do his dirty work as soon as the Fed does its thing. Gold is up to $2,433 and silver at $28.74. The HUI index of gold stocks has pushed back above 300 for the first time in a week and a half.
Bitcoin remains mired in the $66–67K range.
It’s safe to surmise that the proverbial geopolitical tensions are driving oil prices off of seven-week lows.
The price barely budged yesterday after an Israeli airstrike in Lebanon targeting a senior Hezbollah leader (who might still be alive). But then Israel took aim overnight on the political leader of Hamas during a visit to Iran (and he’s most definitely dead).
With that, a barrel of West Texas Intermediate is up 2.5% to $76.60. It was up even more earlier in the day, but that was before the Energy Department issued its weekly inventory numbers.
We stay in the energy realm for our next two bullets…
Supply and Demand and the Electric Grid
The week brings two new reminders that electricity will be either much more costly or much less reliable — or both — for the rest of the decade.
Yesterday, PJM Interconnection conducted its annual power market auction. PJM is the regional grid operator serving nearly 20% of the country in an area stretching from the Atlantic coast west to the Mississippi. This map shows all of the nearly two dozen utilities in its domain…
At the conclusion of the auction, prices for power plants in the year starting June 1, 2025 will ring in at $269.92 per megawatt day — an 800% increase over the present figure of $28.92.
"The significantly higher prices in this auction confirm our concerns that the supply/demand balance is tightening," says PJM CEO Manu Asthana — underscoring a point we’ve been making in this space for the last two years.
It doesn’t help that the left hand frequently doesn’t know what the right is doing: By some accounts, PJM was unaware until last year that Talen Energy plans to shut down the coal-fired Brandon Shores power plant in Maryland. As we mentioned eight months ago, Brandon Shores has enough capacity to power more than a million homes; there’s no plan to replace that capacity once it’s mothballed next year.
Granted, this 800% increase in auction rates does not translate to 800% higher electric bills; state regulators impose caps on rate increases. Thus, the share price of Exelon (EXC) — owner of a half dozen utilities on that map — is little moved today.
But nuclear-plant operators like Talen (TLN) and Vistra (VST) are rallying hard — up 12-14% at last check.
Meanwhile, the grid operator in Texas is scrambling to come up with new sources of power to keep the lights on.
At present, CPS Energy — the city-owned electric company in San Antonio — plans to shut down three of its oldest natural gas-fired power plants by next spring. Too expensive to keep operating, the company says.
But ERCOT, the grid operator for the state of Texas, says the shutdown would have a “material impact” far beyond San Antonio on the grid and its reliability. This is true; the three plants put together have the capacity to power 620,000 homes.
Long story short, ERCOT might have to eat the costs of keeping the plants running — $129 million by its estimate.
To avoid this outcome, ERCOT “has issued a request for proposals for must-run alternatives such as other generation, storage or demand-response resources,” says a story posted at S&P Global. Interested parties have until Sept. 9 to respond.
Will anyone step up? We’ll see…
An AI Energy Breakthrough
At least there’s hope that AI might not be the enormous energy suck it’s shaping up to be right now.
Paradigm’s tech-investing whiz Ray Blanco tipped us off to the phenomenon at the start of the year, and we’ve been sounding the alarm ever since: Data centers are forecast to take up 8% of global electricity demand by 2030, an eightfold increase over the present moment. Now tech giants like Amazon are signing exclusive deals with utility companies for access to the power from nuclear plants.
Now Ray tells us that scientists at the University of Minnesota are onto a potential solution that would slash AI’s energy demands by 1,000 times or more.
“Computational random-access memory” or CRAM, they call it.
Granted, this solution would involve junking the entire model of computing going back to the 1940s.
“Traditional computing,” says the TechSpot website, “relies on the decades-old von Neumann architecture of separate processor and memory units, which requires constantly moving data back and forth in an energy-intensive process.
“The Minnesota team's CRAM completely upends that model by performing computations directly within the memory itself using spintronic devices called magnetic tunnel junctions (MTJs).
“Rather than relying on electrical charges to store data, spintronic devices leverage the spin of electrons, offering a more efficient substitute for traditional transistor-based chips.”
AI’s prodigious energy demands come at the moment that data is transferred between logic and memory. Take that transfer out of the equation and the energy demands collapse.
All sounds great in theory. “The researchers still need to tackle challenges around scalability, manufacturing and integration with existing silicon,” says TechSpot.
Yeah, that last part sounds like the most challenging. But it’s an intriguing prospect — one we’ll stay on top of.
Mailbag: Sky-High Gas Taxes, Filthy-Low Water Quality
“Hey Dave,” a reader writes, “your Gov. Whitmer isn’t the only wackadoodle governor out there pushing the Green New Scam’ (thanks, Jim Rickards 😊).
“Our governor here in Washington (the state, not D.C.) Inslee, as his lame-duck governorship begins to set, has signed a bunch of legislation on carbon tax and reduction of gas appliances, to take place as soon as he exits, next year.
“His gasoline ‘carbon tax’ has already kicked in, adding 45 cents a gallon, to our gas tax, which is already one of the highest in the country. Mind you, no state income tax, yet…
“Thank God some organizers have got two initiatives in this upcoming election. One to back off this ridiculous carbon tax on gasoline and the other that overturns this gas appliance restrictions for current users and builders of new construction.
“Hope this bunch of liberal voters in this state overturns both!”
Dave responds: Wow — as of summer last year, the Tax Foundation ranked Washington’s gasoline tax of 49.4 cents a gallon as fifth-highest in the country. Another 45 cents (!) would easily vault the Evergreen State into first place past California.
These referenda will definitely be worth watching — thanks for the heads-up.
“Historical note on Seine water quality,” says the subject line of an email following up from last Friday’s edition
“The Mongols invaded Western Europe several times. Each time they destroyed all opposition until they reached Paris.
“The citizens of Paris forted up on the island. The Mongols camped along the Seine while laying siege to Paris. Living on the steppes of Asia, the Mongols had no resistance to diseases in polluted water. After enough Mongols died of dysentery, typhoid. etc.,they went back to Asia.
“The filthy Seine water is the reason we do not live in the Greater Mongolian Empire. Vive la France.”
Dave: Interesting. Meanwhile, we see that the water in the Seine is now clean enough for some of the Olympic swimming events to begin.
But the organizers’ obsession with “clean energy” is such that it seems that they opted not to install air conditioning in the Olympic Village. Thus, many athletes are trying to get hotel rooms instead — good luck with that!
