AFMC - 'AI' Is Hot But Don't Get Burned
2023-06-06 06:20:00 ET
Summary
- The new AI world is for real but beware of some of these recent price run-ups. It is normal to see a 50% retracement of any sharp price increases.
- The OPEC+ meeting on June 4th could be pivotal, even though no big news came out of it. Russia has been pumping increasing volumes of cheap heavy crude oil into world markets despite pledging production cuts, and that has been undermining Saudi Arabia’s efforts to boost prices.
- The best way to describe the May payroll report is “mixed,” due to rising unemployment and weak wage growth, but the May payroll growth should help convince many FOMC members to avoid raising key interest rates at its June meeting.
- The Conference Board announced that its consumer confidence index slipped to 102.3 in May, down from a revised 103.7 in April. Consumer confidence is now at a6-month low and indicative that consumers remain cautious.
Naturally, the Artificial Intelligence ((AI)) boom is contributing to technology sector strength, especially Nvidia ( NVDA ), which recently announced a wide-ranging lineup of new AI products for robotics design, gaming, advertising, and networking. Nvidia’s CEO, Jensen Huang, also unveiled an AI supercomputer platform, DGX GH200, which will help its customers create successors to ChatGPT.
Huang challenged graduating students at National Taiwan University with a series of bold statements, such as: “Agile companies will take advantage of AI and boost their position. Companies less so will perish.” Or this: “While some worry that AI may take their jobs, someone who’s expert with AI will.” Huang concluded by telling graduates, “In 40 years, we created the PC, Internet, mobile, cloud, and now the AI era. What will you create? Whatever it is, run after it like we did. Run, don’t walk.”
Sharon Zhou, co-founder and CEO of Lamini, a startup that helps companies build AI models like chatbots, said there is a chip shortage, adding, “Because there is a shortage, it’s about who you know.” Her most amusing comment compared the chip shortage to “toilet paper during the pandemic.”
One of the biggest AI bottlenecks is the speed that data moves with data centers, so Nvidia is now on a quest to upgrade the speed and efficiency of cloud computing centers. Super Micro Computer ( SMCI ) is another major AI beneficiary, since it specializes in high-performance servers that will be experiencing increasing demand to speed up cloud computing. Specifically, Super Micro Computer’s order backlog for servers featuring graphic chips is at its highest level ever, and it is now rushing to add manufacturing capacity.
The new AI world is for real but, as I said on one of my hotlines last week, beware of some of these recent price run-ups. It is normal to see a 50% retracement (between 1/3rd and 2/3rd) of any sharp price increases. In general, don’t “chase” big price jumps but wait for the normal price correction before adding positions.
The Latest Energy News
The OPEC+ meeting on June 4 th could be pivotal, even though no big news came out of the meeting; but tensions have been rising between Russia and Saudi Arabia, since Russia has been pumping increasing volumes of cheap heavy crude oil into world markets despite pledging production cuts, and that has been undermining Saudi Arabia’s efforts to boost prices. Russian Deputy Prime Minister Alexander Novak issued a statement that said Moscow was abiding by its voluntary pledge to cut oil output by 500,000 barrels a day from March until the end of 2023, but Russian crude oil exports have risen in recent weeks.
Saudi Arabia needs to see a price of $80 per barrel for their crude oil to balance its massive budget deficit. Russia is now hurting Saudi Arabia’s domestic support for its citizens. As a result, I expect to see a very assertive Saudi Arabia after the OPEC+ meeting, followed by further production cuts.
I should add that, to further infuriate Russia, Saudi Arabia recently invited Ukraine’s President Volodymyr Zelensky to attend the annual Arab League summit as a special guest. Saudi Arabia has also offered to mediate an end to the Ukraine war. For example, Saudi Arabia helped negotiate a high-profile prisoner swap last year between Russia and Ukraine, and announced $400 million in humanitarian aid for Kyiv.
China has also been striving to mediate an end of the Ukrainian war. The fact that Russia keeps losing men in a war those soldiers don’t want to fight is causing tremendous unrest within Russia, so the country remains a wildcard on the world stage. Russian drone attacks on Ukraine have escalated recently, so world outrage remains high. On the other hand, last week’s drone attacks on an upscale Moscow residential area are also rattling the NATO alliance helping Ukraine, since the weapons provided are supposed to be used for defense, not attacking Russia. Ukraine and its allies are now pushing for a summit of global leaders, excluding Russia, to discuss the terms of ending the conflict.
May Job Statistics Defy Recession Concerns
The biggest economic news last week was that the Labor Department announced on Friday that a whopping 339,000 payroll jobs were created in May, substantially more than the economists’ consensus estimate of 190,000. Furthermore, the March and April payrolls were revised up by a cumulative 93,000 jobs to 217,000 for March (up from 165,000) and 294,000 for April (from 253,000 previously estimated).
Despite this super-strong payroll report - of 850,000 new jobs in the last three months - the jobless rate rose from 3.4% to 3.7% between April and May. That’s because the labor force rose by 440,000 in May as more people were out looking for work. May’s average hourly earnings rose 0.3% (+11 cents) to $33.44 per hour. In the past 12 months, hourly earnings rose by 4.3%. Overall, the best way to describe the May payroll report is “mixed,” due to rising unemployment and weak wage growth, but the May payroll growth should help convince many FOMC members to avoid raising key interest rates at its June meeting.
In other labor news, the Labor Department announced on Thursday that weekly unemployment claims rose to 232,000, up from a revised 230,000 in the previous week. Continuing unemployment claims rose to 1.795 million in the latest week, up from a revised 1.789 million. Despite these small increases, the four-week moving averages of both new and continuing unemployment claims declined, so the Fed is not expected to be influenced by unemployment claims at its June Federal Open Market Committee meeting.
In the rival jobs report, ADP reported that private payrolls rose by 278,000 in May, substantially more than the economists’ consensus estimate of 180,000. Although the manufacturing sector shed 48,000 jobs in May, the construction sector added 64,000 jobs. In stark contrast, large companies (with 500 or more employees) lost 106,000 jobs, while smaller firms (with less than 50 workers) added 235,000 jobs.
In other economic news, the Conference Board announced that its consumer confidence index slipped to 102.3 in May, down from a revised 103.7 in April. The expectations and present situation components both declined in May and contributed to declining consumer confidence. Interestingly, the employment component also declined, which means that consumers are less confident about finding a job. Overall, consumer confidence is now at a 6-month low and indicative that consumers remain cautious.
The Institute of Supply Management (ISM) on Thursday announced that its manufacturing index declined to 46.9 in May, down from 47.1 in April, marking the seventh straight month that the ISM manufacturing index has been below 50 - the mark that indicates a contraction. The new orders component plunged to 42.6 in May, down from 45.7 in April. Even worse, the backlog component collapsed to 37.5 in May, down from 43.1 in April. The only silver lining is that the prices component plunged to 44.2 in May, down from 53.2 in April, which is indicative that wholesale prices continue to decline.
If the FOMC is looking for an excuse not to pause in hiking rates in June, the ISM manufacturing report could be cited as the reason, since only four of the 18 industries ISM surveyed reported an expansion.
Navellier & Associates owns Nvidia Corp. ((NVDA)) and Super Micro Computer, Inc. ((SMCI)) in managed accounts. Louis Navellier and his family personally own Super Micro Computer, Inc. ((SMCI)) and Nvidia Corp. ((NVDA)) via a Navellier managed account .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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'AI' Is Hot, But Don't Get Burned