☀️☕️ Commodities by the Billion

📊 Also: Watching Fed Weds; Model Y hike; RDDT 5x; Fisker Tanks; China construction tanks; Nvidia Ntop a while longer 🎓 Oversubscribed! And then?

📈 Market Roundup [19-March-24]

US large-cap S&P 500 closed 0.63% UP ▲

Tech-heavy Nasdaq Composite closed 0.82% UP ▲

Pan European STOXX Europe 600 closed 0.17% DOWN 🔻

HK/China’s Hang Seng Index closed 0.1% UP ▲

Japan’s broad TOPIX closed 1.92% UP ▲

📝 Focus

  • Commodities by the Billion

📊 In the Markets

  • Watching Fed Weds; Model Y hike; RDDT 5x; Fisker Tanks; China construction tanks

  • Nvidia Ntop a while longer

📖 MoneyFitt Explains

  • 🎓️ Oversubscribed! And then?

💸 Personal Finance Corner

📝 Focus

Commodities by the Billion

For companies simply buying and selling the raw materials used before other companies “add value” by turning them into the stuff used by the rest of us, the commodity trading industry’s retained earnings have ballooned by a huge $70bn to $120bn after five years of unprecedented growth and historically high profits. According to a new Oliver Wyman study, gross profits from commodities trading activities (before taxes, salaries and bonuses) by banks, hedge funds, independent traders and asset-backed businesses (e.g. BP and Shell) surged from $36bn in 2018 to a record $148bn in 2022, driven largely by fallout from the Ukraine conflict, with only a slight dip to $105bn in 2023, with gas and power trading surpassing oil trading as key profit drivers.

These enormous profits have enriched the employees and shareholders of these firms (often the same, particularly with the privately-owned, independent “merchant traders” like Vitol, Gunvor, Mercuria, Trafigura and Glencore) through bumper bonuses and dividends and huge jumps in shareholder equity. Is it any surprise that many of these companies choose to stay privately held? 

But the bursting cash coffers also offer rich reinvestment opportunities, including “for new management teams to become more impactful long-term investors in the energy ecosystem” by working more closely with governments to ensure security of energy supply and becoming a direct investor reshaping supply chains rather than just a “market broker,” such as Vitol's bid to acquire Italy's energy conglomerate Saras and Gunvor's purchase of a Spanish energy plant from BP.

..... ▷ Leaving aside allegations of sanctions busting and other dodgy practices, major commodity trading firms can generate large and consistent profits despite fierce competition and typically unpredictable and volatile markets in multiple ways.

Trading is the core profit driver, where large firms benefit from economies of scale, allowing them to execute large trades with lower transaction costs. They also employ highly sophisticated trading strategies and risk management techniques to capitalise on market movements. 

Operating across various countries with strong relationships built with producers, consumers, and transportation companies, they participate in a wider range of markets and exploit price differentials between different regions (along with, in some cases, vertical integration across the supply chain.)

..... ▷ Some firms also own and operate storage facilities and transportation infrastructure for commodities. This allows them not only to profit from storage fees but also potentially benefit from price fluctuations based on supply and demand imbalances.

And many firms also act as intermediaries, facilitating trading for producers and consumers of commodities by using their books to take opposite positions in the market, helping clients to fix supply at a price or hedge their positions (sometimes providing liquidity to the market by acting as market makers.)

..... ▷ All this in combination can also lead to information asymmetry: Major trading firms invest heavily in gathering and interpreting market pricing and data and comparing it with their own operations, data that might not be readily available to all participants, allowing them to make particularly well-informed trading decisions ahead of the curve. Large firms also employ highly complex risk management strategies to mitigate potential losses.

📊 In the Markets

Wall Street's major indexes closed higher on Monday, buoyed by megacap growth stocks like Alphabet and Tesla, helping the Nasdaq break a three session losing streak. 

Investors are eagerly waiting for the Federal Reserve's policy update when its policy meeting concludes on Wednesday, with fears of a hawkish tone. Last week’s stronger-than-expected inflation readings have reignited fears of higher-for-longer interest rates and led Futures traders to slash the probability of a June rate cut to 55% from over 70% just a week ago, according to the CME FedWatch Tool. 

Google's parent Alphabet rallied 4.6% after Bloomberg reported a potential integration of Google's Gemini AI engine into the iPhone for prompt-based genAI images and writing, though the report also noted that Apple is still in talks with ChatGPT-maker OpenAI and also planning to roll out its own AI for new features in the upcoming iOS 18. 

Super Micro Computer, having just joined the S&P 500 on Monday, was the biggest decliner, down 6.4% (but still up over 252% year-to-date) with Tesla leading both the index and, again, Mag7 with a 6.25% rally on price increases for Model Y EVs in Europe.

But premium EV startup Fisker dropped over 15% as it announced a six-week production pause and plans to raise $150 million through convertible notes after missing an interest payment. The startup had already expressed doubt about its ability to continue as a going concern in February, though Nissan is reportedly in advanced talks to invest. 

At the end of last year, Fisker had already dropped 94% from its 2021 all time highs. Anyone buying at the start of this year thinking “how much worse could it get?” would, after today, now be down 91%. 

The Reddit IPO was reportedly up to five times oversubscribed🎓 by the weekend, raising the chances of reaching its targeted $6.5 billion valuation. The social media platform plans to price between $31 and $34 per share and raise up to $748 million. Despite a deeply loyal user base, Reddit has failed to turn a profit since its launch back in 2005, seriously trailing contemporaries like Meta and X (formerly Facebook and Twitter.) The company's reliance on volunteer moderators and niche content has been both a strength and a challenge for the advertising dollar, but its communities, like "wallstreetbets," remain influential and a valuable source of expertise for users, search engines and AI training data. [MFM: Seen it, Heard it, RDDT]

Japan's stock market surged as investors awaited the central bank's decision on interest rates. The Topix index rose 1.9%, nearing a multi-decade high, while the exporter-focused Nikkei 225 climbed 2.7%. Despite a slight weakening of the yen against the dollar, Japan's recent wage increases, the largest in over three decades, strengthened the case for rate hikes by the Bank of Japan.

In mainland China, the CSI 300 index edged up, led by gains in tech, following official data showing growth in industrial production for the first two months of the year. Fixed-asset investment in high-tech manufacturing rose by 10%, reflecting China's focus on bolstering its semiconductor industry amidst US export controls on leading-edge chips.

China continues to grapple with deflation, low consumer confidence and a cash crunch among major property developers. Despite some success in stimulating growth and investment in key sectors like technology, sustaining economic momentum remains a challenge. Property investment dropped 9% year on year in January and February, while new construction starts plummeted 30%. [MFM: China’s “new productive forces" vs 5% Growth; “Uninvestable” China?]

Nvidia Ntop a while longer

Nvidia unveiled its latest flagship AI chip, the Blackwell B200, at its annual GTC developer conference, with speeds up to 30 times faster than its predecessor. CEO Jensen Huang also introduced a suite of software tools, a central part of the strategy to keep businesses using Nvidia technology and maintaining its position as the dominant AI equipment seller, currently with an 80% share of the data centre AI chip market.

..... ▷ The B200 combines two chips from Nvidia's previous offering into a single unit, boasting 208 billion transistors (vs the previous single chip's 80 billion) allowing all transistors to simultaneously access the attached memory. Nvidia continues to add to its robust portfolio of software products with new microservices tools to improve system efficiency and simplify the integration of Nvidia-powered AI models into business operations.

..... ▷ The GTC, or GPU Technology Conference, is a global event focusing on AI, computer graphics, data science, and machine learning. Initially centred around GPU computing challenges in 2009, GTC now covers diverse applications of AI and deep learning, including self-driving cars, healthcare, and high-performance computing. With keynotes from Nvidia CEO Jensen Huang and sessions led by experts worldwide, GTC serves as a platform for developers, engineers, researchers, and IT professionals to exchange insights and advancements in AI.

..... ▷ The announcement of its new AI chip boosted shares of tech companies like Applied Digital, Ansys, Cadence, and Synopsys, which will utilise the Blackwell B200 processors. Major players like Amazon, Alphabet, Microsoft, and Oracle are also set to adopt Blackwell in their cloud services. 

Additionally, Nvidia revealed partnerships with Taiwan Semiconductor Manufacturing Company and Synopsys for advanced chip manufacturing. 

After all that, Nvidia's shares rose by a quite modest 0.7%, suggesting that the B200 chip was largely as anticipated. Market expectations have set a high bar. 

All that for 0.7% - Image credit: Olympics via Tenor

📖 MoneyFitt Explains

🎓️ IPO Subscription Levels

When an IPO's "book is covered multiple times" it means demand for shares offered in an IPO is more than the number of shares being offered to investors, both the general public and institutional investors.

Here's how it works and what really happens:

1) Institutional investors tell underwriting banks how much they want at a given price in the range. With that info, banks find a price to match demand with supply. (With strong demand, deals can be priced at or above the top of the range, and the deal size may be increased.)

2) Being subscribed several times is a positive signal to markets, which assume investors who are given less than what they asked for will buy in the open market at higher and higher prices until they get the amount they want.

3) You can guess what then happens: If a deal is "known" to be hot (covered many times), investors tend to want more of it and tell the banks they want more than they originally wanted. (Not “inflating” so they get "scaled back" to what they actually want, since that’s illegal.) And if everyone does that, the book will be covered even more times. And then investors may want to increase their "demand" even more.

4) The banks talk to the press about the book coverage while a portion of the IPO is offered to public retail investors, who will then get whipped into a speculative buying frenzy.

(“Flipping” or “Stagging” an IPO is a strategy where investors buy shares of a newly listed company with the intention of selling them shortly after the stock begins trading, typically on the first day of trading.)

💸 Personal Finance Corner

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