Nvidia’s $500B Plan, Intel Raises Cash, Iran Digs In
Here’s my take on Intel after it taps the capital markets, that huge Nvidia plan, and the lack of a deal with Iran.
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Games Without Frontiers
Whistling tunes
We hide in the dunes by the seaside
Whistling tunes
We’re kissing baboons in the jungle
It’s a knockout
If looks could kill, they probably will
In games without frontiers, war without tears
If looks could kill, they probably will
In games without frontiers, war without tears
Games without frontiers, war without tears
– Peter Gabriel (1980)
Less Than Fun
The never-ending tale continues. Peace between Iran and literally anyone else remains more than simply elusive. Trump administration officials had given life to market optimism in recent weeks discussing a peace process that included the U.S. and Iran primarily but a number of Gulf states as well and describing that process as close to concluding. Equities rallied. Treasury debt securities rallied, thanks to a very weak Bureau of Labor Statistics jobs market report for July. Crude oil rallied. Front-month WTI crude traded with a $75 handle (per barrel) less than a week ago. I saw WTI trade with an $84 handle this morning. Less than fun.
On Monday, Pres. Donald Trump signaled that he was ready to let Iran’s economy collapse rather than launch fresh military strikes on that nation’s armed forces in an attempt to force open the Strait of Hormuz to make that passage safe for civilian commercial maritime traffic. This is a shift in strategy away from continually threatening to increase the pace and severity of those U.S. strikes. This new strategic direction is not without merit. Much of Iran’s industrial capacity has been destroyed. The U.S. Navy is preventing Iranian crude from reaching external ports. Economists estimate the current level of consumer-level inflation in Iran at roughly 77%. Iran’s currency has fallen 10% in value versus the U.S. dollar since the start of the war.
While this war-induced economic pressure does appear to be seriously damaging Iran internally, it will not quickly resolve anything outside of Iran. Iran can still launch drone and missile strikes against civilian vessels and in the mountains, and work very likely continues on Iran’s nuclear weapons program. Iran, without a navy, without an air force and without an army that can do much more than attack those not prepared to fight back refuses to accept military defeat and has hardened its demands during any peace negotiations that have occurred between itself and the U.S.
Iran is demanding the U.S. lift its naval blockade prior to any safe reopening of the Strait. Iran is demanding a release of its frozen assets held externally. Iran is also asking for compensation for damages caused by this war and that attacks on its proxies in Lebanon, Iraq, Yemen and in Gaza be permanently terminated. Pres. Trump responded to these demands on social media with a demand of his own: “I am likewise demanding compensation from Iran, for all of the people that they have killed and gravely wounded with their roadside bombs and many conflicts. Additionally, compensation should be paid to the families of the hundreds of thousands of innocent protesters that Iran has killed over the last 50 years.”
Not almost over. Less than fun.
Getting Better?
Yes. Maybe. Hmmm… Remember, the survey is a few weeks old. The Cleveland Fed released its Q3 survey (conducted in July) of CEO inflation expectations on Monday. According to the Cleveland Fed, for the year ahead, CEOs and other top executives representing a panel of companies from the manufacturing and service sectors see consumer-level inflation of 3.3%. This is down from 3.7% at the time of the Q2 (April) survey.
The Q3 SoFIE (Survey of Firm’s Inflation Expectations) also shows an expectation for wages to grow 2.8% over the year ahead, down from 2.9% in the Q2 survey. Job creation is seen up an expected 2.3% from an expected 2.2%. Very interestingly, however, R&D spending over the coming year is now seen up 2.0%, down sharply from an expected growth of 3.1% in Q2. What does that mean for the AI trade? Is that even accurate? On Monday, the news flow did seem to say something else.
Intel Raises Cash
On Monday, shares of Intel (INTC) gave back 4.1%. Those shares are trading lower overnight as well. The chip design/foundry giant announced that it would sell $15 billion in equity with an option to sell another $2.25 billion in equity to underwriters. Overnight, the size of this secondary offering was increased from $15 billion to $20 billion. While you were sleeping, Intel and its bankers priced 210,526,315 shares at $95 a piece (The stock traded above $103 on Friday). The underwriters will have 30 days to decide on purchasing an additional 31,578,974 shares at that price.
JP Morgan (JPM), Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are running the lead on this deal. Net proceeds are expected to land at about $19.7 billion (without the option being exercised). These proceeds will be used for general corporate purposes, which will almost certainly include capital expenditures directly related to the development and expansion of the firm’s AI-focused efforts. This will very likely include a buildout of the foundry to address global chip shortages.
Yes, this is dilutive for equity stakeholders. No, this was not a surprise. Investors were told in late July by CFO David Zinser that it may need to “tap the capital markets” in order to meet demand for its products and services (such as the foundry). Did I sell any Intel? No. Will I add to my long position at these levels? Probably. Intel has dished out to investors quite a run since the spring. Is the equity offering worth the investment? I like it better than adding debt and my guess is that CEO Lip-Bu-Tan already knows this offering is worth it if he is making it.
On Top of That….
On Monday, rival chip designer Nvidia (NVDA) confirmed a story reported at the Financial Times that it was working with a consortium of lenders to raise $500 billion for future AI infrastructure development. Memorandums of understanding have been signed between Nvidia and Blackstone (BX), BlackRock (BLK), Brookfield (BN), Goldman Sachs (GS), KKR (KKR), and Apollo Global (APO) to establish the first compute financing platforms of this kind on a global scale. These partnerships will target the mobilization of more than $500 billion of third-party capital over time to finance the continual buildout of AI infrastructure.
Nvidia CEO Jensen Huang spoke on CNBC on Monday. Huang said, “This is really the first time that technology chips have become an investable asset class. These are revenue-generating assets now. They’re productive, they’re long-lived, they’re fungible, they’re flexible.”
Of course, he’s basically taking his book. (Don’t we all?) That doesn’t make him wrong. Huang added, “Fundamentally, what’s different about this industry and this way of doing computing is that the computer is now part of the infrastructure, like electricity, like the internet, and so you have to think about it like it’s infrastructure.”
On that note, I don’t think he is incorrect at all. Does circular financing bother me? This isn’t really that. Oh, and it’s not like the kids running Blackstone, and BlackRock and the like are a bunch of morons.
Marketplace
Sure, stocks traded slightly lower on Monday. The real takeaway though was how quiet Monday was. I am not sure that very much that transpired on Monday in equity markets counted for very much. It’s as if the algorithms that currently run the price discovery process don’t believe in the higher yields and higher energy prices that have hit markets in recent days. I do know that the Irish, Italian and Jewish kids from the outer boroughs of New York City that used to run things before the algos took over probably would be. How do I know that? I was one of the Irish kids from those boroughs. That was a fun job. Really fun.
On Monday, the S&P 500 gave back just 0.06% while the Nasdaq Composite surrendered 0.32%. The small to mid-cap indexes were hit a little harder and gave back between 0.36% and 0.67%. The Dow Transports lost 0.67% on the day, but at the index level, the Philadelphia Semiconductors were hit hardest, suffering a loss of 2.94%. Those losses were paced by GlobalFoundries (GFS) as Intel made plans to expand on its foundry business. While Intel and Nvidia posted “own” days on news on Monday, Arm Holdings (ARM) and Marvell Technology (MRVL) had worse days.
For the day on Monday, five of the 11 S&P sector SPDR ETFs posted green daily candles. Energy (XLE) led the way for obvious reasons with health care (XLV) close behind. Despite the positive day for health care, cyclicals and growth both outperformed defensives for the session as the utilities (XLU) and the REITs (XLRE) duked it out for last place.
Losers beat winners by a rough three to two at the NYSE and by about seven to five at the Nasdaq. Advancing volume took a 47.3% share of composite Nasdaq-listed activity but a surprising 51.1% share of composite NYSE-listed trade. The takeaway for me, was the 6.2% day-over-day contraction in aggregate Nasdaq-listed trading volume and the 2.8% contraction in aggregate NYSE-listed volume. Trading activity across the membership of the S&P 500 contracted from the prior trading session for a fourth consecutive day on Monday.
Quiet before the storm? Maybe. Dog days of summer? Probably. Investors exhausted? Certainly. Then again, algorithms don’t get tired, don’t have to eat and don’t have to run to the restroom. Expect some price overshoot on reduced volume. At least until the consumer price index hits the tape tomorrow. The keyword readers will be fired up.
Economics (All Times Eastern)
06:00 – BFIB Small Biz Optimism Index (July): Expecting 97.8, Last 97.4.
08:15 – ADP Employment Change (Weekly): Last +15K.
08:55 – Redbook (Weekly): Last 8.7% y/y.
10:00 – Existing Home Sales (July): Expecting 4.06M, Last 4.09M SAAR.
4:30 p.m. – API Oil Inventories (Weekly): Last +2.69M.
The Fed (All Times Eastern)
No public appearances scheduled.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: CAH (2.42)
After the Close: CRWV (-1.21), EVLV (-.02), LITE (2.97), VELO (-.27)
At the time of publication, Guilfoyle was long EVLV, VELO, INTC equity.
