Nvidia Breaks $3.6 Trillion and There's Something Absurd Going on
The challenges of trying to make money while waiting for the market to finally embrace rationality.
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I have to give a shoutout to Doug Kass today. While most financial pundits and talking heads on financial television supply little more than 24/7 "happy talk," Kass consistently points out the absurdity of some parts of the market while providing actionable trading ideas from his perch on the Daily Diary.
On Thursday, he posted a tweet noting that MicroStrategy Incorporated MSTR had achieved north of a $100 billion market capitalization, despite its bitcoin holdings being worth some $30 billon and the company also holding some $4 billion in debt. He disclosed that he was shorting the shares on their big pre-market advance on Thursday. It was a solid and profitable call.
There are so many absurdities in the current market, it is hard to know where to begin. NVIDIA Corporation NVDA has now achieved a $3.6 trillion market capitalization. To put in perspective, the GDP of the United Kingdom, with over 60 million citizens, is around $3.4 trillion. The overall market cap versus U.S. GDP ratio is now over two times and is in unchartered territory.
The S&P 500 price-to-sales ratio is right at three times. The only other time that the index has hit this threshold was late in 2021, before the big market flush in 2022. This ratio was right at two times at the tail end of the internet boom, for comparison purposes. A good factoid on MarketWatch came out earlier this week: If the S&P 500 had grown in line with earnings growth of the past five years, the index would be trading around the 4,500 mark compared to the approximate 5,950 level it is now. Keep in mind that the yield on the 10-year treasury was around half what it is now late in 2019. The bottom line is that there is little to no equity risk premium in the market right now.
Then we have the fast-deteriorating commercial real estate (CRE) sector. Another big office property in the capital found itself in a world of hurt this week, a common theme in 2024. This time, it was a 580,000 square-foot office building in Washington, D.C. heading to foreclosure. The property was last purchased for $421 million in 2021, with $302 million in financing still outstanding. The equity will be completely wiped out and some lenders are likely to take a significant haircut too, based on recent foreclosure sales. Moody's recently posted the delinquency rate in October topped 10% (10.35%) for commercial mortgage-backed securities (CMBS) tied to office properties. I did not see the 10% threshold being breached until early 2025.
Meanwhile, the 525,000 square-foot Santa Monica Place shopping mall was just appraised at $255 million, 59% lower than where it was seven years ago and below the $300 million outstanding on the loan against it. The delinquency rate for CMBS tied to retail properties has now also broached 7%. Eventually, the "extend and pretend" phase of the deterioration in CRE loans will end. This will result in significantly increased losses on banks' loan books, especially at the regional bank level.
I am managing to continue to churn out solid returns within my portfolio in this overbought market by using covered call positions on the few names in the market I believe sport reasonable values. One of the holdings, Jazz Pharmaceuticals JAZZ, got a key FDA approval yesterday. It will be the focus of my weekend trade idea column on Sunday.
At the time of publication, Jensen was long JAZZ.
