Bad feeling, weak internals, confidence collapse, Nvidia breaking out | WAYT?

The Compound and Friends

The episode examines the tension between Nvidia's bullish technical breakout and the broader market's deteriorating internals. The hosts ana

Key takeaways

• Nvidia's announced $150 billion buyback plan could reduce total share count by approximately 4.3% through early 2028.
• Rising 10-year Treasury yields are being driven by a lack of demand from foreign central banks and increased competition from corporate debt issuance.

Main topics

• Nvidia technicals and buybacks
• Treasury yield trends and macro drivers

Notable quotes

The longer it knocks on that 230, 235 breakout level, the longer that testing process takes place, the more powerful I think the eventual breakout would be.

Conclusion

While market internals show signs of strain and narrowing breadth, his

Transcript preview

Speaker 4 (0:13) Yup, here we are. You asked for the best. I brought you the very best. Ladies and gentlemen. Speaker 3 (0:23) We Speaker 4 (0:23) back, people. Ladies and gentlemen, I got chart kid Matt here today. Matt, I feel like everybody left me this week except for you. Never Speaker 3 (0:33) leaving you. That's it. We're here. We got a pack dock. Let's do it. I Speaker 4 (0:36) got Michael Batnick on a flight to Austin right now. Shout out to Michael. Nicole is in Paris. Living out her shopping fantasies. Right, Speaker 3 (0:49) right. Speaker 4 (0:50) Ladies and gentlemen, we got John Grayson in the background controlling the show tonight. John's going to crush it for us because we have charts on charts on charts. For those of you listening on Spotify, two things. Number one, just click the video button and you can watch. Or don't worry about it because whatever's on the screen that you can't see, we're going to make sure you understand. the points that we're making and tonight we are going to bury you guys in insights um it's gonna it's gonna be unbelievable all right so first things first let's uh let's pay the bills huge thanks to our sponsor betterment advisor solutions the longer you wait to break away the longer someone else is building the relationship that should be yours betterment advisor solutions gets you independent faster Because someday is too far away. Starting your own RIA can be a lot until you have the right partner behind you. Betterment pairs you with transition specialists who've done this before. So the move is simple, not stressful. You get a tech staff built to scale with you so you won't quickly outgrow it. You get to offer an experience that a million customers already love. And you get a full operating platform to run your practice on. Making it easier to go from idea to independence fast. A trusted brand. platform built for growth and specialists by your side the whole time. That's how Betterment Advisor Solutions helps you break away better and build your firm today. Get started at betterment.com slash advisors. Speaker 2 (2:23) Today's show is also brought to you by Janice Henderson. At Janice Henderson Investors, we believe working together is the way to work better. Like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision. Always working in perfect harmony to find the right investment opportunities. Janice Henderson Investors, investing in a brighter future together. Visit JaniceHenderson.com. Speaker 4 (2:46) All right. I do want to say a couple of quick hellos in the chat. I got Benjamin Lupu back. Chapans is here. He gave me the strong arm emoji. Feeling that. Luis, JB bro, where's Michael? I just told you. Pay attention. He'll be back soon. What is this? Josh, when are the braids coming out? No, dude, it's not a transplant. This is my literal hair. Thanks to Dr. Keith Scheinblum of Scheinblum Medical. I'm actually, I'm growing this. Biff Greebles is here. KPS Fred says, can't wait till Josh has a man bun. It's coming, my friend. Any day now. All right. All right. So chart, let's start here. Speaker 4 (3:30) Nvidia looks like it wants to, let me phrase this correctly. Nvidia looks like it wants to break out. A couple of things struck me about the recent trading and activity in Nvidia. Let's just do the technical chart. Let's jump right to that. So I'm just going to narrate what I see here. This is a stock that had a massive run up in May when all of its customers, the hyperscalers, were reporting not only earnings, but forward guidance and their CapEx plans. And basically, they ratified what we all already know, which is that not only are they spending this coming quarter and if the rest of the year, but as far as the eye can see, because the investments they've already made demand. that they continue to spend and we've talked at length about replacement cycles and you know you build the data center 50 of the expenses the chips um nvidia although there are other chips available for data centers there are other components there are asics there are cpus um the gpu clusters are still going to be the the workhorses for the data centers for as far as the eye can see and back to the chart So basically, it ran up in May as those reports were coming out. And then we sort of had like, I think, a pretty orderly pullback to the 200-day moving average, which at that time was 199,200. Bounced off of that level twice, came right back into the 200s, and then has been biding its time, pretty much consolidating below that 235 breakout level. Today, the stock closed around 228. And the longer it knocks on that 230, 235 breakout level, the longer that testing process takes place, the more powerful I think the eventual breakout would be. Just at a glance, what are your thoughts on the technicals for NVIDIA? Speaker 3 (5:34) So when I look at the chart, I see an ascending 50-day moving average, ascending 200-day moving average. Speaker 3 (5:41) dipped right below the 50 day and surged right back up after Muse came out and shocked immediately. And I think it's a great price reaction to that news. And obviously we'll talk about the buyback and we'll get into that and what that means for the stock. I have thoughts there, but just purely on the chart, if you hit the name, this is a buy to me. Speaker 4 (6:04) Yeah. Last thing on the chart. That bottom pane is relative strength, RSI. And we're not going to get into like the calculation that goes into it. But effectively, what we're looking at is momentum for the stock relative. And, you know. Speaker 4 (6:22) People, it's not science. Like people have this shorthand where they're like, okay, 60s is perfect. When you have a stock making a new high, you want relative strength to be at least in the 60s, which tells you like momentum is confirming the move. And then people think about 70 plus as sort of overbought. Like it's a technical term. It's not overbought like, oh, I feel like it went up too much. They will look at a momentum reading at 72, 74, 76 and say, okay, not a great entry point. This thing has to cool off. We're at 58. Like, I don't, I can't think of a bet. If in fact this stock is going to make a new high. I can't think of a better momentum reading to go along with that than an RSI moving from the high 50s into the 60s. It just gives you so much space for that eventual breakout to take place in. You following me on that? Speaker 3 (7:16) Yeah, I'm following you. And I'm looking at the volume too. It's not like it's a super low volume move. I'm always looking at RSI divergence. So when the stock is making a high and the RSI is not making a high, that is always something that I'm looking to see. Oh, hold on a second. Why isn't... momentum confirming the move. But here, you see a lot of relative strength in the name. Again, purely based just on the chart, it looks like it's ready. Speaker 4 (7:40) Yeah, and we don't have that divergence. We have confirmation. And at a new high, if we can get RSI coming along for the ride, which obviously would probably happen if it really breaks out with conviction, that's what technicians are waiting for. They're looking for... those moments. I also want to show a 10 year chart, Matt. So like this is just price and I pulled out there's no volume. There's no moving averages. There's no bullshit this is like so people like oh Nvidia is boring or You know the stock doesn't like poking the meme where you're poking it with a stick do something guys This like split adjusted. This was a $10 stock at the beginning of 2023 It's 228 like relax. Give it give it a minute Speaker 3 (8:30) Right, right. And the insane thing is that if I charted the forward P ratio on top of this, it would literally be making 2016 lows. And I know we could talk about forward earnings and the estimates being wrong, and we can speculate on that. But I went back and looked. The actual forward earnings tend to be very close to the actuals. And it's not my opinion. It just is what it is. Speaker 4 (8:55) This is a company that... This fiscal year is going to do something like 96 or 98 billion dollars in free cash flow. Next year, it could be 360 billion dollars in free cash flow on 680 billion in revenue. Again, not just based on the company's own guidance, but like based on the CapEx plans and NVIDIA's share of that CapEx spend that we're getting from 50 other sources. You think about you think about a company that is Growing earnings at this rate. It would be shocking if the earnings multiple were going up If it were flat, it would be understandable. It's actually plunging the multiple on the earnings. And let's go back to the buyback thing. So Matt, you have a chart here. Tell us what's going on. Yeah. Speaker 3 (9:51) All right, guys. So NVIDIA announced that $150 billion buyback. Jensen dropped this like two weeks after Dario came out and said to slow the pace. So like, LOL, he essentially turned around and said, I'll do the opposite. and so let's just all right so there's some assumptions baked in here but let's just say nvidia's price stays flat for the next year and a half okay i got to make it simple when i'm doing the chart so it stays flat okay if you take 150 billion dollars and you add the 85 billion dollars that it already has in its buyback plan you get 235 billion dollars of buybacks through q1 2028 so that would theoretically reduce the shares by 4.3 percent And I guess we could chart off. Like if you just went down the laundry list of things that you would want to see as an Nvidia bull, as a market bull, as an AI bull, I think at the top would be the most important CEO in the world at the most important company in the world saying, screw slowing. Let's buy back $150 billion of stock. I'm not going to go speculate buying a company. Let's use the capital to reduce our share count. Speaker 4 (10:51) Yeah. Turn down for what? So most important CEO, I think is accurate at the present moment. There's nobody more important. And also, but he's not important and then hiding in a bunker. This guy is literally everywhere. He's popping on podcasts. Like he's, he, I, I saw the seating chart for the AI dinner or meeting or whatever it was at the white house. He was next to Trump. Like think about all the people that were there that theoretically could have been next to Trump. It's Jensen one, right? Speaker 3 (11:25) He knows how to manage the relationship It's like how Tim Cook was, you know, he knows what he's doing and I think that it's overall you want the administration on your side It's like it's like a double thumbs up. You need that Yeah, Speaker 4 (11:36) he's uh, he's a pot on top of being a genius and out innovating everyone and seeing the machine learning trend turn into augmented reality turn into virtual reality turn into oh wait actually we should be using these for um um llms and ai like having done all of that in his time since founding the company uh nobody i don't think people should be second guessing his instincts his public statements scrutinizing his capital allocation um one of the big things is like oh nvidia's like giving money to their customers and then the customers are turning around and buying more chips with that. What do you want him to do? Did you hear the number I just trotted out? $360 billion in cash flow, potentially, over the next year. You want him to throw pizza parties for his employees? You want him to buy back $500 billion worth of stock between now and 2030? I mean, he might. It's possible if margins hold up and revenue continues to grow. But he's supposed to be making these investments into the ecosystem. Speaker 3 (12:50) And Georgie D in the chat is saying now he sucks up to the orange man. It's not about that. It's what's best for the shareholders. He needs legislation on his side to do what he wants to do. And is that something that's baked into the price? Sure. Can that change? Absolutely. But right now, he's managing the relationship well. It's another reason why you want to bet on Jensen. I mean, he's a complete, he's Speaker 4 (13:12) a Speaker 3 (13:12) badass. Speaker 4 (13:13) Yeah, it sucks up to the orange man or understands that Trump is a mercantilist. So this is very important, actually, for the audience. Speaker 4 (13:25) It's not fascism. It's not really capitalism, the way the Trump administration thinks about the intersection of government and business. It's mercantilism. And for any of you who remember social studies in high school, mercantilism is a economic system where companies are given a high degree of free reign so long as their aims are in concert with what the government wants. And obviously the most prominent examples of that are things like the Dutch East India Company, the South Sea Company. And I know some of these didn't end well. But like just this idea of like, yes, we're going to allow corporations or what they used to call joint stock companies to pursue their goals of dominating trade around the world and producing profits for their shareholders. Speaker 4 (14:18) Those things have to work hand in hand with what the government wants. In the case of the Trump administration, they want massive GDP growth. They want to onshore industries that are currently manufacturing or hosting their facilities outside of the United States. They want the first hiring inclination to be toward hiring people right here at home rather than somewhere else. That's the aim of the Trump administration and Besant and like all of their policies. And so Jensen has found a way, like Tim Cook before him, to ingratiate himself with the administration and say, OK, I get it. You want to build fabs here. You want to make semiconductors here. You want USAI to dominate the world and not Chinese AI. Of course, we wouldn't want that. Like, OK, we can we can do business. We can work that way. That's mercantilism. That's the. the nature of the administration. I'm not telling you it's good, it's bad. I'm just explaining to you the mindset. If you're a shareholder of Nvidia, what do you want them to fucking be? An enemy of the people who control both houses of Congress, the Supreme Court, the military? Like, are you kidding yourself? Like, this is about making money in today's day and age. This is how you make money. It'll change. This is where we are. Speaker 3 (15:34) He's aligning with the administration. They want it. Okay, they need it. They need to place jobs in areas around the country, and he's helping with that. NVIDIA is trailing 12-month operating earnings, okay? Forget the private investments, okay? The operating earnings are now above Apple's. It's legitimate actual earnings. These are not estimates. This happened over the past 12 months. Speaker 4 (15:56) Right. Right. So Speaker 3 (15:58) can we talk about treasuries? Speaker 4 (15:59) Let's go. Speaker 3 (16:00) Let's go. Okay. So yields are ripping higher. It feels like literally every day. I brought this chart. 75 % of the last 24 trading days saw a higher 10-year yield. I don't know if you feel this way, Josh, but I check every day the CNBC 10-year yield. Speaker 4 (16:19) Explain that one more time. Speaker 3 (16:20) Okay. So, all right. 18 out of the last 24 trading days, the 10-year yield had a one-day change that was positive. Speaker 4 (16:30) So it's and this it's going up almost all the time almost Speaker 3 (16:33) all the time and also by the way this has happened 11 times since 1965 I went back and counted it doesn't happen very often. Okay, I built the table. I didn't add it I can paraphrase it The idea is what happens to yields after and I could tell you that 80 % after they Speaker 4 (16:51) march higher to like like this often on a daily basis Yes, Speaker 3 (16:56) correct when that happens 80 % of the time over the next 12 months, you see yields that are lower. And obviously we've lived since 1965, we did have a run up in yields, but we've lived in like a descending yield environment for a long time. So there's a caveat there. But it's like 90 basis points on average that the 10-year yield falls one year after you have this many positive, you know, up days in the 10-year yield. And all right, so then my question is, why is this happening? And I think I found at least part of the reason why in this Odd Lots episode. John, can we play this? Speaker 1 (17:34) Foreign central banks have had all that they need and they're not buying more. And it's mostly domestic discretionary investors that are being asked to take this additional supply and they just need more compensation. Speaker 3 (17:48) So that's Darryl Duffy. He's a professor of finance at Stanford. We hope Speaker 4 (17:51) that's the reason why. Speaker 3 (17:53) Okay. That would be the Speaker 4 (17:54) best, right? Of all the reasons people are floating, that one would be the best case scenario. It's just an asset allocation thing. Speaker 3 (18:03) It's the idea that foreign central banks own too many treasuries, so there's no bid from them. Who's the next buyer? The next buyer is a pension fund or an endowment or a macro hedge fund. But how are they going to explain away the macro hedge fund to their clients that they just, you know, slide a $10 billion of the 10-year treasury on their balance sheet when Nvidia just announced a $150 billion buyback? It's like, you know, that's not why we're paying you. And so, you know, treasuries, it's a stretch to say they've gone no bid. But there's just, according to Daryl, not enough buyers in the system at this level. They would require higher yields. Speaker 4 (18:40) So Ed Yardeni is a friend of the show. We've had him on recently, and he's the guy that coined the term bond vigilantes. I think