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#186: When is Good Too Good?

#186: When is Good Too Good?

micksonmatch
November 25, 2024

S2N Spotlight

There is something counterintuitive about the fact that when things are good, normally very good, the continuation of the good times becomes more uncertain. I will never forget having a conversation with my dad when I was about 10 years old. I asked him why Coca-Cola spent so much on advertising when they were the best drink by far. I said everyone knows Coke; they seem to be wasting their money. My father provided me with a simple yet profound answer that has always stuck with me. When you are number 1, the only place to move is down.

At its peak, the Roman Empire held up to 130 million people over a span of 1.5 million square miles. Rome had conquered much of the known world. The Empire built 50,000 miles of roads, as well as many aqueducts, amphitheatres, and other works that are still in use today. There were only about 1 million people in the city of Rome itself, but the Empire was enormous, and boy was it expensive to run.

Rome adopted its own form of Quantitative Easing (QE) by diluting the silver content of its coins, which in the end led to runaway inflation. We will revisit this another day. The main point I am trying to draw out is that there is no Roman Empire today; it came and went. Being the best is hard, and it becomes harder, not easier, in that strange counterintuitive way. Drawing loosely on Hyman Minsky’s instability hypothesis, the more stable an economy becomes, the more unstable it becomes.

The biggest challenge is to identify the catalyst that will be the cause of the change. It is in fact impossible to identify with certainty; the best we can do is not look but rather work within a world of probabilities. I get that this is an uncomfortable discussion for most to discuss. The economy today is seemingly tracking along nicely. Companies (the big ones) are making record profits. There are plenty of jobs. People are rich. There is plenty of money on the sidelines. What could possibly go wrong?

Let’s welcome Nvidia to the centre stage. Last week it reported earnings; I forgot the detail, but it was more than 100% growth year on year. The question is, when is good too good?

Here is one approach to looking at the probability of Nvidia continuing its current growth path. It has an average annual return of 66% going back to 1999. This year, its price has increased 203% so far. The statistical probability of the current return being repeated next year is 10.5%, according to one of the models I used.

Becoming a victim of one’s own success is part of nature. I wonder how long Nvidia will be able to fight nature before it succumbs.

S2N Observations

Here is a look at the number of S&P 500 companies making new 52-week highs & lows. Not a lot of companies making new lows, 2 to be precise.

You will see in the screener alerts below another natural gas alert. Such massive moves and at such high frequency are not normal, so I share a long-term chart of natural gas for a bit of historical context. I know nothing about the oil industry and even less about natural gas. I just know when to alert everyone when I have had a natural gas accident . I called a buy on this a few months ago due to it being extremely oversold. It looks like we are getting a second bite at the cherry as we are back in that heavily oversold territory. I have to think that this is a commodity to start acquiring.