June Market Commentary: Space X and the Technology Shift — A Rational Approach

I think recent market weakness can be explained by several factors, not the least of which is the upcoming Space X IPO. It will be the largest IPO is history, and the money to pay for purchased shares must come from somewhere. The recent weakness in the red-hot stocks of the A.I. trade is a great source of funds. Folks have made some very easy money in these names and, recognizing the parabolic nature of the rally in these stocks, they are choosing to take profits. Perfectly understandable.

The market has become increasingly momentum driven. Buy what is hot regardless of the fundamentals, ride it for a while, then sell and move to the next momentum idea. I guess this would still qualify as “investing,” but it feels more like gambling. When then fundamentals do not support the stock price, that stock price is vulnerable to a sharp correction. It is hard to resist jumping in when all you hear is how everyone is making crazy returns, but experienced investors know that these frenzies end badly. Always.

We also are experiencing seasonal summer weakness. During summer, investors’ attention wanders. People are more consumed with vacations and outside activities than with being stuck in an office watching stocks. When stocks drift, they usually drift lower.

Iran. Inflation. Midterms. These all are political issues. It matters, but investors are treating these issues more as background noise than as real worries. In a normal market, these issues would be more than enough to derail any momentum, but we are not in a normal market. The A.I. hype has trumped (for the time being) all these concerns.

Let me say this. We needed to let some air out of the balloon. It is not normal for stocks to gain 100, 50, or even 30% in a year, but we have plenty of stocks that are established companies with real earnings that have rallied several hundred percent this year already. Micron Technology, which makes boring old memory chips, has found itself in the middle of the A.I. infrastructure buildout frenzy. The stock is up more than 200% this year and more than 700% in the past 52 weeks. Not. Normal.

We could be experiencing the most seismic technology shift of our lifetimes. Or maybe we aren’t. We won’t know for some time yet. The tug of war between the bulls and bears over this very issue is causing and will continue to cause some extreme price volatility in stocks. We will choose our spots and attempt to put you into advantageous positions without exposing you to undue risk. All investing involves risk, of course, but some situations warrant more caution than others.

For the record, I think Space X is overvalued at its current valuation. That doesn’t mean I don’t think it’s a great company, but I think a lot will need to go right for the company to deserve its current $1.75 trillion dollar valuation. I understand that investors care more about the company’s potential than anything else and are willing to buy now in the hope that in five or ten years their investment will be worth substantially more, but it is my opinion that Space X will be available at a lower price in the future than it will be tomorrow.

Best regards,

Seward

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