Tech shares zigzag

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0:25Rob Armstrong: Pushkin. Big tech has been having a bit of a wobble. On one day this week, Korea's tech-heavy stock market dropped 10%. In the US, it was a similar, if less dramatic story, with the super-techie Nasdaq down 2 % or so, and SpaceX, the newly listed thing from Elon Musk, struggling to cling on to its early gains. Some spectacular results from Micron, another AI biggie, seems to have got the good vibes going again, but it's been a very up and down kind of week. Today on the show, is this a random wobble or a sign that the AI trade has got a little over caffeinated? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

1:13Rob Armstrong: I'm Katie Martin, a markets columnist at the FT in London, where the current temperature is 1000 degrees Celsius. Skeletons are dotted around the streets, the city is deserted, And everyone is grumpy because it's just too hot. Joining me down the line from his bunker in New York City is that guy, Rob Armstrong. Rob, I gather it's cooler there.

1:37Katie Martin: It's very nice. And I just want to note for the record that our editor, Bryant, begged you on his knees not to talk about the weather in today's show. And you would not be stopped.

1:50Rob Armstrong: Bryant does not understand how hot it is, though, man. Like everything is bad and wrong.

1:56Katie Martin: The English do not manage the heat well.

1:58Rob Armstrong: It hits different over here. It hits different. It was nice to see you the other day in your hometown.

2:04Katie Martin: The weekend festival. Yeah, it was a great event.

2:08Rob Armstrong: And there were some unhedged podcast super fans there. So hello to all of you.

2:12Katie Martin: It's always nice to see people in real life.

2:14Rob Armstrong: I know. We have to remember that our listeners are real humans in real life. um so it has been a weird week on the tech stocks front um where should we start i think we should start with spacex yes so it was it was born onto public markets just a few days ago with like a valuation of ridiculous money 1.75 trillion dollars and then immediately the share price

2:41Katie Martin: sprang higher didn't it yeah and this is something that ipos initial public offerings are supposed to do. Indeed, the people who design them build this in as a feature. So what is an IPO? A company has a bunch of shares to sell for the first time. It's basically offering ownership in its enterprise to the public. And it goes to a bunch of bankers and they say to the bankers, please get as much money for each share of my company as possible but i need certainty in other words i can't have my ipo fail right uh and so they say you know the market will probably tolerate a hundred dollar stock price at the outside we've got some demand lined up for you but uh let's offer it at 90 or 85 just so everybody has a nice warm feeling everybody who we've sold this stock to as the initial buyers has the nice warm feeling of initial pop and there is a general aura of money-making goodness around our equities.

3:54Rob Armstrong: generally eats itself doesn't it like it doesn't it doesn't generally stick around so this stock listed at I think it was 135 dollars and then it opened at 150 dollars and then it sprang up to 220 something. And now it's basically come back down to 150 again. Charts on the radio.

4:14Katie Martin: And that's pretty, that's not unusual, right? We don't have good price discovery about a brand new stock, right? The stock market is a big, very diverse group of people trying to figure out collectively what something is worth. And everybody is kind of feeling everybody else out when a stock is new. So it's normal that a new stock should be volatile. This stock came to life at a moment of such incredible hype that it makes sense that the figuring out what the thing is really worth process should be even harder and more complicated.

4:55Rob Armstrong: Yeah, like the academic work on IPOs, on those moments when companies list for the first time, is that POPs are pretty normal, and they can often be in the range of about 18%, which is what we saw in the case of SpaceX. And they don't normally, they don't always last. The other conclusion from all the kind of data, if you go back decades and decades, is that IPOs kind of suck as investments in the first few years. Like, there's a lot of dispersion here. So it's a bit difficult to draw sort of general conclusions. but newly listed companies just don't always do that well in their first one, two, three years even.

5:33Rob Armstrong: They can trail behind the rest of the market. So it's easy to sort of point fingers and say, you know, lol, isn't it funny that Elon Musk isn't a trillionaire anymore? And don't get me wrong, I'm very happy to do that. But I don't think we can read that much into the fact that the share price has come down after the pop.

5:49Katie Martin: No, and it makes sense that IPOs should not be particularly good stocks in their first six months or a year or whatever because of the point in the life cycle that IPOs tend to be at. These are kind of nascent companies still building their business, still in the investment phase of their business rather than their sowing rather than reaping, I guess is what I'm saying. And companies in that phase are riskier. So there's a kind of lottery ticket aspect of an IPO where maybe you get a big winner, a really big winner, but you really might not. And on average, you don't probably get a very good, you probably don't get a very good product.

6:35Rob Armstrong: No, I mean, the counterpoint to that is like these big monsters like SpaceX, they wait a long time before they list on public markets now. So they are more mature. But the point still stands that there's a reason why quite a lot of professional fund managers just do not touch IPOs. They're like, I am very happy to sit back and wait for this thing to just kind of mature for a couple of years before I decide whether to get involved or not. If you happen to be the lucky person that gets into an IPO early and then it rockets and, you know, you're one of the first investors in Amazon or Apple or something, then congrats.

7:08Rob Armstrong: But your chances of getting that right are pretty slim. But I guess the thing about the SpaceX pop and then unpop was that it came at the same time as some quite wobbly markets. You know, so like I mentioned at the top, right, the Nasdaq had a really bad day. It was down about 2%. Korean stocks got absolutely taken to the woodshed. And for like a day or so, there was this kind of thing where everyone was looking around going, oh, is the AI trade in some sort of trouble here? Like, what's going on? What do you think was going on?

7:40Katie Martin: Well, when you talk about Korea, you are in effect talking about microchips. You're talking about silicon. For all intents and purposes, that is what you are speculating on when you are speculating in the Korean market. So I think what you have seen is that trade, the semiconductor trade, which has been by far the biggest trade in the market for some months now. You know, it's the data center. Silicon trade has kind of been everything in the markets. And I think we arrived at a moment in the last week or two where people look at how far these stocks have run and the prices they're selling at and think, whoa, you know, now I'm kind of vulnerable.

8:29Rob Armstrong: Yeah, I gather, you know, particularly in Korea, there's a lot of kind of retail investors have come quite late to this rally and have jumped in and have borrowed money to get involved in this rally. So that just means that these things get quite fragile and quite subject to some quite scary, you know, downdrafts, I guess.

8:49Katie Martin: Yeah, I was looking the other day at leveraged ETFs, which are exchange traded funds that promise you a multiple of the return on a given market. So it's like the power shares, NASDAQ 100 2X ETF, and these things use options to deliver that. If it goes down, it goes down twice as much. If it goes up, it goes up twice as much. And now one of the largest and definitely the fastest growing of these things is a leveraged ETF on the Korean market.

9:24Rob Armstrong: Oh, really?

9:25Katie Martin: And there is a very fast growing semiconductor leveraged one, et cetera, et cetera. So these are things that are happening. There is leverage in this market. But I also think there is a wider thing going on here that is probably worth discussing. sometime in may the leadership that we counted on from the magnificent seven stocks really evaporated you know so a month or so ago up until a month or so ago the bull market could be kind of identified with apple alphabet uh google amazon meta tesla did i get them all there? Is there something?

10:06Rob Armstrong: I feel like a missing one, but I can't remember. It doesn't matter.

10:09Katie Martin: Microsoft, did I say the mic? Anyway, in any case, those seven stocks. And those seven stocks had led the market and in a way have led the market for five years, something like that. But that has stopped. Those stocks are actually not doing well. And the market instead is being led by these semiconductor guys. And that is a shift in leadership that happened a month, two months ago. And, you know, since I looked up, what are the best performing stocks since middle of May, the 14th of May? And you just read down the S &P 500 leading stocks, Micron, Applied Materials, Dell, you know, and it just goes in and like, you know, 13 of the top 15 stocks are microchip stocks or more broadly data center stocks.

10:57Rob Armstrong: So the Mag 7 is dead and we have not come up with a suitable little nickname for this new semis thing yet.

11:04Katie Martin: And you know what are down? Double digits. Here's some stocks that are down double digits since May. Amazon, Alphabet. Interestingly, NVIDIA, which is a chip company, came off. So that's the exception to the rule. But let me just make, I know I'm rattling on here, but let me just make one final point. This change in leadership makes total sense to me because we know that the data center boom is going to be darn good for the chip companies. What it means for Alphabet, Amazon, Microsoft, the big Mag7s, we don't know what it's going to mean for their businesses yet.

11:44Rob Armstrong: But also, I think there is a degree to which investors are a little bit nervous. They look at the decline of free cash flow among these companies and just the sheer amount of money that they're spending. And a lot of this is money that they're now borrowing from the bond markets. And there is just a bit of a sense of, look, this capex boom, this boom in spending by big companies is fun and everything, but has it gone just a little bit too far? And I think the other kind of key ingredient in all that is that we spoke about this the other day. We had a Federal Reserve meeting the other day. So the US Central Bank got together and decided on interest rates and kept them steady, but did offer a hint that they are serious about pulling inflation down, which means all things equal that you get higher interest rates.

12:32Rob Armstrong: Now, again, you and I were talking to Rishi Sharma about this on the last pod that we did in New York. Like, that is the thing that pops bubbles is much more expensive money and rising interest rates. And so there is just a sense that, okay, tech companies are kind of running too fast, and they are spending money too fast. And there's a lot of leverage money and retail money in this. And it all feels a bit overexcitable. If that were to combine, still an if, but with a big rise in interest rates, that's where this can go belly up.

13:06Katie Martin: That is no question about it. The easiest to imagine nightmare scenario right now. We did have the personal consumptions expenditures inflation report this morning. It's very hot if you include energy up above 4%. And it's still above three if you strip energy out. So, I mean, the way I see inflation is that we're fortunate it's not getting worse, but it is just plain old above target, right? And I think we can kind of live. I don't think inflation at this level, even if the fed has to do a little bit to fight it pops a bubble but if we get another shock or another leg up who that's scary i don't think that's i and i just want to emphasize i don't think that's especially likely i don't even i don't even know why that would happen why inflation would get worse from here but that's the scariest scenario there's no question in my mind well let me tell you the saving grace here is the market has decided that the war in iran is just over

14:13Rob Armstrong: it's just we are finished yeah like that whole thing is just done you know so as we said in in the newsletter this morning they think it's oil over like that i know father's day was just the day and you've just made a dad joke well done katie so the oil price has come right down yeah so there's there's you know there's still a lot of haggling and arguing to be done between the u.s and Iran over the terms of this supposed deal to end the conflict. But whatever, markets just moved on. The oil price is closer to$70 now than anything else. That whole spike that we had up to$120 is like ancient history.

14:56Rob Armstrong: And the good thing about that, in terms of what it means for stocks in general and tech stocks in particular, is that this has pulled down bond yields. So it supported bond prices and pulled down the yields on government bonds from the US, UK, you know, everywhere really. And that helps because when yields are really high, then investors think, hmm, do I want to bother buying SpaceX or should I just take like 5 % on this US government security that's not going to default? You know, maybe this would be the easier thing to do. So it helps that yields have been tracking lower over the past few days.

15:35Katie Martin: I have two comments to make. Comment number one is that the lower yields at the long end of the rate curve, longer term bonds being down. I think Kevin Warsh's hawkish performance actually helps there.

15:52Rob Armstrong: like he gets up the new fed chair right yeah the new fed chair the new guy and he came in at this

15:57Katie Martin: meeting and he pounded his chest a little bit and said you know we're going to get price stability no matter what and that i mean that might bring short-term interest rates up a little bit because people think the fed is more likely to tighten than to stand still where it is but on a long-term bond if you think you have a credible fed who's really serious about fighting inflation that can bring the long end down a little bit. And if he does that, that's, of course, exactly what Kevin Warsh wants, is to scare the long end of the rate curve down. I'm not sure that's the real Kevin Warsh. We're going to find out.

16:35Katie Martin: He's had one meeting. He's done one performance. There are several other performances to come this year. When the real Kevin Warsh stands up, we'll know something.

16:44Rob Armstrong: So what we're saying here, Rob, basically, is that an aggressive rise in interest rates are for tech stocks the wash case scenario is that what we're saying it's certainly not i think i feel like we've um exceeded our quota of dad jokes today so we are going to be back in just one second with long short

17:15markets move fast get the insights you need in 10 minutes with barclays brief a podcast from barclays investment bank each week our experts analyze market themes helping you anticipate what's next listen to barclays brief wherever you get your podcasts okie doke it is time for long

17:33Rob Armstrong: short that part of the show where we go long a thing we love or short a thing we hate rob what What are you saying?

17:39Katie Martin: So Katie, I have a challenge for you. You will have noticed that the two assets which we like the least and are most often wrong about, Bitcoin and gold, have both been falling together for the last month or so. They've both had quite bad months. And the challenge is, in the next month, which of those two assets is going to do worse?

18:03Rob Armstrong: It's a slam dunk for me. It's Bitcoin. I mean, based on nothing but a hunch, I think that, yes, I don't like Bitcoin very much. And I think it's going to do worse.

18:12Katie Martin: Okay, I will take the other side, not because I like Bitcoin, but because I think the shadowy cabal of frauds, villains and weirdos who support this asset are going to do what they can to stop this run downwards. So you've got gold. I've got Bitcoin. See you in a month.

18:37Rob Armstrong: Okay, Rob is a Bitcoin bro now, boys and girls. You heard it here first. He's going to put laser eyes in his little avatars. It's exciting times for the Unhedged podcast. Let us know what you think. Which is the worst asset, gold or Bitcoin? Unhedged at FT.com. In the meantime, we'll be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30-day free trial is available to everyone else.

19:17Rob Armstrong: Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

19:38We'll see you next time.