Tesla Tanks, Google Gasps… Now What?
Not Looking So “Magnificent”
The heart of earnings season is underway — and stumbling out of the gate.
After the closing bell yesterday, two of the “Magnificent 7” companies reported their quarterly numbers.
Tesla’s net profit tumbled 45%. Revenue and free cash flow also missed the consensus guess of Wall Street analysts. “Slower demand and stiffer competition,” says The Wall Street Journal. At last check, TSLA shares are down nearly 12% on the day — zeroing out all of their July rally.
Meanwhile, Google parent Alphabet reported slowing ad revenue — especially from YouTube — at a time the company is plowing its capital into AI projects. That’ll leave a mark on the bottom line. GOOG is down 3.75% at last check — and 8.2% off its record high notched earlier this month.
Those numbers are casting a pall over the major U.S. indexes. Checking our screens, the Nasdaq is down nearly 2.5% on the day and the S&P 500 has slipped over 1.5%.
As a reminder, it’s the Mag 7 that have been propping up the stock market as a whole for much of its 2023–24 rally.
Through mid-July the S&P 500 was up 19% on the year. But if you take out the Mag 7, the gain of the other 493 stocks combined is only 8%.
When a handful of companies dominate the market this way, it’s great on the way up — and really painful on the way down.
No one remembers now, but those seven high-flying tech-adjacent companies were a severe drag on the market during 2022. Together, their market value was nearly cut in half. The overall S&P 500 was down “only” 19%.
In recent weeks we’ve been giving you a heads-up about the “rotation” out of the Mag 7 and into less buzzy sectors of the market. The mainstream is starting to pick up on this trend as well.
Important point: A rotation does not necessarily mean a rerun of 2022. More likely It means that the Mag 7 are due for a rest while other companies pick up the baton.
For a risk-averse investor who’s got a substantial amount of money in SPY or another S&P 500 index fund, the way to play it is to get into an equal-weighted S&P 500 fund. The biggest is the Invesco S&P 500 Equal Weight ETF (RSP).
As you likely know, the S&P 500 is weighted by market cap. Bigger companies like the Mag 7 dominate the index; out of every dollar you put in SPY, 31 cents goes into the Mag 7.
An equal-weight ETF like RSP assigns the same weight to every company in the index. Microsoft, the biggest company, gets the same 0.2% weighting as Rupert Murdoch’s News Corporation, the smallest.
During the big 2022 sell-off, SPY took a 19% tumble — while RSP fell a more modest 13%. Meanwhile, in a scenario where the S&P 500 holds steady or keeps rising while the Mag 7 names fall, RSP’s gains will outperform SPY’s.
Ethereum ETF Elation?
For the record: On the heels of Bitcoin ETFs launching in January, Ethereum ETFs launched yesterday.
In contrast to the months-long drama over whether the Securities and Exchange Commission would approve Bitcoin ETFs (it did in January), the Ethereum ETF decision came with little fanfare. All the usual suspects including BlackRock and Fidelity launched yesterday on approval, generating about $1 billion in trading volume.
But that was Day One: What happens from here will do much to determine Ethereum’s price trajectory from here. (As we write, it trades for $3,424. The launch did little to move the needle.)
“The predictions for these ETF inflows are all over the map,” says Paradigm crypto analyst Chris Campbell.
It’s inflows that matter more than trading volume. Yesterday, the ETFs amassed about $107 million in inflows.
“Estimates range from a conservative $1–3 billion on the low end,” Chris tells us, “to an optimistic $7–9 billion on the high end. A middle-ground projection sits at around $4–6 billion.
“Translating these projections into price predictions, we're looking at a range of outcomes by the end of 2024:
- Conservative scenario: ETH around $4,400
- Moderate scenario: ETH around $5,300
- Optimistic scenario: ETH around $6,700”
One thing that might curb investor enthusiasm is that the SEC did not approve staking for Ethereum ETFs. Staking is a source of additional gain that you can get only from holding Ethereum on a crypto exchange or in a crypto wallet.
But even here, the SEC might rethink: Staking is “open for reconsideration as far as I’m concerned,” says Hester Peirce — one of two Republicans on the five-member SEC.
Elsewhere in the cryptoverse, Vice President Harris has turned down an invite to speak at the Bitcoin 2024 conference in Nashville.
Throughout much of yesterday, there was chatter that she might show up; Donald Trump and Robert F. Kennedy Jr. are both booked. Conference organizer David Bailey said it would be "very savvy of her to reset the Democrat positioning on the fastest-growing voter block in the country."
But in the end, Bailey’s people and Harris’ people couldn’t get on the same page…
Not that any of it is making a difference to Bitcoin’s price. At $66,240, it’s more or less where it was 24 hours earlier.
As for the commodity complex, it’s a mostly green day.
Gold is up about $15 to $2,424. Silver has rallied a dime to $29.29. Crude has rebounded nearly 1% after the Energy Department’s weekly inventory numbers, now $77.65.
Economic numbers today include the “flash PMI” snapshot of the economy’s performance in July. No real change here — manufacturing is still in the dumps while services are still hot. Meanwhile, sales of newly built homes came in way under expectations — down 0.6% from May to June. The median price of new construction is $417,300, little changed from a year ago.
Follow-up: “Clean Power Plan 2.0” Emergency Appeal
The fight over the Biden administration’s “Clean Power Plan 2.0” might be headed to the U.S. Supreme Court. The stability of the electric grid hinges on it.
Under Clean Power Plan 2.0, the EPA will require coal-fired power plants to capture 90% of their carbon emissions by 2032 — effectively forcing many of them to shut down. The same requirement will apply to newly built gas-fired plants.
A coalition of “red state” attorneys general is suing to put a stop to the rules — along with NRECA, the National Rural Electric Cooperative Association.
Last week, a federal appeals court refused to temporarily pause the rules while the case makes its way through the court system. Now the attorneys general of Indiana and West Virginia have filed an emergency appeal to the Supreme Court.
“This rule poses a significant threat to affordable and reliable electricity for millions of Americans, especially as power demand skyrockets across the nation,” says NRECA CEO Jim Matheson. “A Supreme Court stay is necessary to prevent immediate harm to the nation’s electric grid and the American economy.”
We can’t say it often enough: The U.S. electric grid has no more capacity now than it did a decade ago. New wind and solar capacity isn’t enough to replace coal and nuclear plants that are being shut down. And all of this is happening at a time when the growth of EVs and especially AI will bring the grid under enormous stress.
To be continued…
When “Return to Office” Goes Awry
It seems that back-to-the-office isn’t working out too well for Philadelphia city government…
Last May, Philadelphia Mayor Cherelle Parker ordered all 26,000 city employees to report to work in person full-time starting July 15.
The first week did not go well. “Everybody was pissed,” one worker tells the city’s NPR outlet.
The problem is that too much has changed in the four-plus years since COVID lockdowns made “work from home” a thing.
Thus, the radio station describes the experience of someone given the pseudonym Lewis…
Instead of using the city’s desk hoteling system, where hybrid workers shared desks on different days of the week, he was assigned to a cramped conference room in City Hall.
There were six electrical outlets along the walls, faraway from where workers were expected to sit. And nine people from different teams were assigned to the room.
When Lewis arrived, there were no places to plug in his laptop, so he ended up working on a couch hunched over his computer for hours. For his role, he typically uses at least one computer monitor, which was not available in the office.
If you’re tempted to brush off this story as typical government dysfunction, the private sector experiences it too — as many of my colleagues know first-hand.
Today happens to be “Work From Work Wednesday” for the bulk of the Paradigm Press crew who live in metro Baltimore — a once-a-month opportunity to see colleagues in meatspace and not via Slack and Zoom.
Pre-2020, our operations were scattered across a couple of restored historic mansions in midtown Baltimore. Today we occupy more conventional office space in Baltimore’s northern ’burbs, closer to where many of our staff live.
Yes, there were glitches today: “I couldn't get into the office because my key card was never properly updated,” Emily tells me. “I buzzed three–four times before I walked to a window and motioned for a co-worker to let me in. Good thing our office is on the ground level!”
To be sure we have an excuse Philly city government does not: We still have no return-to-the-office mandate. That makes logistics a little more challenging as more folks show up more often, and not always predictably.
But there’s an undeniable upside today (and your editor, who left Baltimore for the Upper Midwest long before 2020, is missing out)…
“Work From Work Wednesday” incentive!
Publisher Matt Insley brought in a food truck — with eats provided by the company. That surely makes the logistical headaches go over easier!
Mailbag: Calling out Jim Rickards
After a reader wrote in yesterday with praise for Jim Rickards, we heard a cautionary note from someone else…
“Jim’s been much better as a political soothsayer than a market one. If his readers had followed his advice they would have missed all of the 2023 and 2024 rally.
“Bill Simon had it right — never let an economist into the trading room.”
Dave responds: On deadline we can’t track down the veracity of the quote you attribute to William Simon, Treasury secretary under Nixon and Ford. But we’ll take your word for it.
By invoking that quote, you make it sound as if Jim is an egghead academic like — well, the current Treasury Secretary Janet Yellen.
In reality, he spent a long time on Wall Street — long enough to be completely jaded by Wall Street firms’ relentless pressure on their clients to buy stocks. That’s just how he rolls.
Even before he joined our firm, I remember sitting in a Vancouver hotel conference room in 2013 watching him describe his preferred asset mix — gold, cash, land, fine art, private equity.
Notice that stocks are absent. Unlike most entry-level newsletters, there’s no portfolio on the back page of Strategic Intelligence, and there never has been.
Jim is always on alert for something to go wrong in the stock market because it is inextricably linked to the banks and the financial system. You would be too if you had a front-row seat to the near-calamity that was the collapse of Long Term Capital Management in 1998. It’s a lived experience and a worldview that commands a loyal following.
In line with the name of our firm, we ask that all of our editors bring a rigorous paradigm to their work — a model of how the markets and the economy operate.
They don’t have to agree — as anyone who’s witnessed one of our rollicking Whiskey Bar panel discussions can attest — but they have to have a systematic outlook and the ability to defend it.
That’s how they can build a following — and we can maintain a sustainable business.
It’s not easy — but with informed and engaged readers, it’s more than worthwhile!
