Magic Markets #209: AI, Trump and turnarounds

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The Finance Ghost: Welcome to episode 209 of Magic Markets. January has been and gone by the time this goes out, so we’re already one month into a new year, if you can believe it. The time goes rather quickly and it’s been a pretty frenetic start to the year.

We’ve had lots of activity on the JSE. The retail sector has been somewhat awful in terms of share prices and really interesting in terms of sales towards the end of last year, especially cash sales. Moe, I don’t know if you keep a close eye on that these days, but that seems to be where the two-pot money all went.

Lots of other stuff of course, internationally – we’re gonna talk a little bit about AI today. We’re gonna talk about some of the Trump stuff and we’re also gonna look back on one of the companies we covered literally this month in Magic Markets Premium and just talk a little bit about what’s happening with that share price.

So Moe, welcome to episode 209 and I’ll tell everyone why it’s so good to have you – it’s good to have you because earlier I asked ChatGPT, which I basically never use by the way, just for fun, what is the Magic Markets podcast? And ChatGPT said to me that it’s a financial podcast hosted by Simon Brown as part of Just One Lap! So shout out to you Simon, a very respected commentator in South Africa. Not only are you so busy with Just One Lap, but apparently you also host Magic Markets. That man is the OG ghost because 209 episodes deep, we haven’t seen him on a single one, Moe, but ChatGPT reckons it’s him. It’s great. Gotta love AI. So accurate. Sooo accurate…

 

Mohammed Nalla: Putting the artificial in artificial intelligence Ghost. Shout out to Simon. He’s a great guy. We’ve spoken to him in other guises. I think both of us have actually been on his podcast. Maybe we should actually have Simon on this podcast to lend some credence to ChatGPT’s claims. You know, I’m surprised it didn’t even say…

 

The Finance Ghost: …We should ask ChatGPT what Just One Lap is, and his Moneyweb show. Maybe it’ll say that one is hosted by you and one is hosted by me. Do you remember when we went onto Google, never mind ChatGPT, and looked for a credit rating for one of the shows on Magic Markets Premium? And then Google’s AI assistant went and read someone’s university project, basically where they pretended to be Moody’s or S&P – it doesn’t matter – and did a rating on that company. That was Google’s best result because there isn’t actually an official credit rating. So Google went and said, oh, well, here’s a university paper. You know, that must be the same thing.

Sho, AI is dangerous. Use it at own risk. My goodness.

 

Mohammed Nalla: I’m so glad we’re highlighting that because a lot of people seem to think AI is the answer to all things. And again, just highlighting this, I’ve used it a number of times and you’ve got to know your stuff back to front in order to pick up what some of the inconsistencies are.

In some instances it’s very obvious, right? I mean, Simon Brown with Magic Markets or for example, the credit rating thing. But if you’re an uninformed user, you are massively at risk in terms of just getting inaccurate information and then banking on that. And again, remember, companies like OpenAI disclaim themselves away. They say, yes, ChatGPT may make errors and so on and so forth. So again, user beware. Now, why is this relevant, Ghost? I wanna actually pivot from that directly into what I wanna talk about this week, because this week we’ve seen some massive moves as the markets open in the US in the sector, the AI exposed sector, and massive moves in large names like Nvidia. Just yesterday, Nvidia down 17%. Now, for context, that’s just over half a trillion dollars in Nvidia’s market cap gone. Yes, Nvidia is really large, so that obviously plays into it. But for context, again, half a trillion dollars. That’s the market cap of Oracle, another IT company sure, or wait for it, ExxonMobil. Nvidia yesterday wiped out an ExxonMobil’s worth of value.

 

The Finance Ghost: Where’s Trump when you need him? Billions and billions and billions and billions and billions and billions of dollars. Right, that’s – I mean no one could describe that better!

 

Mohammed Nalla: It’s more like a former president in South Africa where the number is really big and so you’re going to struggle to actually pronounce it.

 

The Finance Ghost: Yes, so true! Especially once you put that in Rand, then it is a lot.

 

Mohammed Nalla: Listen properly, Ghost! But it’s not just Nvidia. We also had Broadcom. That’s the stock ticker $AVGO. Broadcom down also in excess of 17%, that was another $250 billion. I haven’t done the sums in terms of the industry as a whole but I wouldn’t be surprised if we saw close on a trillion dollars just wiped off the market caps of some of these AI-exposed names.

Now why is this important? A couple of shows ago I was just talking about the hype that we’ve seen in the AI space and how I’m quite concerned about that. I’ve been positioning myself a lot more defensively and that’s kind of worked out just given what we’ve seen in some of these very what I would think over-baked valuations coming back down to earth.

But what was the catalyst? That’s the big question. The catalyst was news coming out of China of an AI startup. It’s called DeepSeek. Now it’s very new. It was founded back in 2023. It’s backed by a hedge fund called High-Flyer. This is a hedge fund that was set up way back when – they profited off the global financial crisis, then they developed a high-frequency trading algorithm. China outlawed some of those trades so they came under some hard times. But regardless of all of that, High-Flyer, they’re a hedge fund, they’ve been backing this company called DeepSeek that has managed to develop an AI model that now rivals those that have been developed by US companies.

But the main point here is that they’ve done this using chips that are less advanced and less expensive than the chips that have been used by the US competitors. This obviously set the cat amongst the pigeons because they are now concerns around if their tech is as good as they say it is – and again, a lot of comments I’ve been seeing out there of people that have used this, have shown that DeepSeek is comparable to if not better than both ChatGPT that comes from OpenAI as well as Google Gemini. We know the bar wasn’t set too high there Ghost, we’ve given some examples there. But if the Chinese can build an AI tool that is as effective, if not better, using less investment on the capex on those very expensive chips – and yes, it is still Nvidia chips. These were chips that were imported into China before the US ban. But I must also stress they were depowered. They don’t have the same kind of capabilities as the chips that the US AI providers are using. If the Chinese can do that, it really raises a big question mark around: why is the US throwing hundreds of billions of dollars into AI, into R& D and doing it so much less efficiently than the Chinese have managed to put out?

 

The Finance Ghost: First mover disadvantage. Is that what’s playing out here? That’s going to be the story here, right? It just shows you how much is baked into these valuations that Nvidia can shed that kind of value. Just ignore the percentage for a moment and just look at the value that disappeared in a day – that’s how much is baked into this thing. I’ll mention this Moe, which is an interesting one – NVIDIA, year-to-date, at the exact time of recording, Google tells me -13%. What do you reckon Palantir has done year-to-date?

 

Mohammed Nalla: Oh, I have no idea. It was another one of those hyped-up stocks. I think it spiked and then fell down. Tell me Ghost, I’m not gonna even bother guessing.

 

The Finance Ghost: Up 5%. Now, they don’t make the models, they don’t make the chips, they don’t do any of that. I mean no one really knows what they do. But what we think they do, in and amongst working for government, is they go and do all kinds of AI implementations at corporates. So, shovel, gold rush – it’s something that we’ve talked about before in Magic Markets Premium and I think on the free show. It’s why I’m a shareholder in Accenture, because sometimes it’s nice to be a shareholder where the people are, you know, the neck that turns the head in a different direction. It’s that old joke from My Big Fat Greek Wedding. “The man may be the head of the household, but the woman is the neck” and she turns him in the direction that she wants him to go – that was the joke in the movie and it was very good. You sometimes want to own the neck, right? Just change direction, that’s it, oh this is maybe the new way of doing AI. Not a problem. We have a great implementation contract with you and here’s our bill for services rendered this month. And they still make money.

Now, look, I think that the Palantir valuation has also gone absolutely bananas. It’s actually quite amazing to draw it against Tesla. Basically you can just see how people jumped in and invested in anyone perceived to be on the correct side of the new Trump administration. What do Tesla and Palantir have to do with each other? Nothing, literally, in terms of what they do to make money. Absolutely squat, zero overlap. The US market is this huge place, but it’s so liquid and it’s so full of chaos that it can still dish up these crazy, crazy things that you would expect to see in small caps. And yet it happens. Some of these stocks just behave like meme coins.

 

Mohammed Nalla: Yeah, Ghost, it’s why I steer away from anything that seems hyped up on social media. Palantir is a prime example. Tesla has been a prime example in terms of the highs and the troughs of Tesla. That chaos you mentioned in US markets leads me into my second talking point, Ghost, because we saw some additional chaos come through yesterday. What is interesting here is that it was really premised on the fact that the US under the new Trump administration have gone really hard against illegal immigrants, as they call them. They put them on planes, they ship them back to where they came from. And we saw a spat between the president of Colombia. Not “Columbia” because the official press release from the White House actually misspelled this. Yes, it’s showing you that they’re not using spell check and maybe they’re using ChatGPT to put out their press releases, but they spelled it as Columbia, which is a university in the United States, not the country Colombia, which is a country in South America. And what happened is they sent this plane to South America. Colombia actually routinely accepts planes from the US of people that are being deported, but in this particular instance, they were sent on a US military plane that was unannounced, and the people that were being deported were in shackles.

The Colombian president took exception to that. He said, no, we’re not accepting these people, take them back. This led to a spat. Donald Trump then threatening Colombia with tariffs. He said, 25% tariffs applicable immediately, and we’re going to increase that to 50% within a week because you’re not accepting these people. And that then led to the Colombian president put out a very long tweet. He said, I’m not going to be bullied. But then he said, okay, fine, I’m going to send a presidential plane. We’ll accept our people with some dignity. He also, incidentally, threatened the US with tariffs, effective immediately, on key goods that Colombia sends up there. And again, what got all the rage on social media was the fact that a lot of coffee comes from Colombia. And if the US was slapped with tariffs or retaliatory tariffs from Colombia on US goods and so forth, that tariff impact is really the big question mark. That’s where the chaos is coming from, because Trump’s going out there, he’s threatening a lot of countries, Canada being one of them, Mexico as well, with tariffs.

And what does this mean for the US Consumer? The consumer eventually bears the brunt of those tariffs. Yes, it may result in more jobs coming back into the US, but it’s going to mean stickier inflation, specifically on goods where the US can’t really afford it – and that’s food and fuel. A lot of fuel comes from Canada, a lot of food comes from South America. If they slap those tariffs on, food and fuel are going to start to exhibit stickier inflation. Remember, when you look at something like core inflation, yes, that excludes food and fuel, but if you look at headline inflation, it includes that. And if we get stickier inflation, it means that interest rates may not come down as much as they should. Now, again, this doesn’t stop Trump. He said he’s just going to instruct the Fed to actually decrease interest rates and that’s not quite how it works. Let’s see how that goes.

I’m going to end off on this point. Ghost, you asked me to guess about Palantir. I’m going to ask you to guess on two commodities that are exposed to both South America and other emerging markets. Africa, again, featuring very prominently on cocoa.

Coffee and cocoa. Take a guess over the last 12 months. They’re up. What are those up by?

 

The Finance Ghost: Sho. I mean, I genuinely haven’t got a clue because I don’t watch this stuff. But I love the combo. This is very close to my heart. I’m a daily consumer. Admittedly, a very small amount of cocoa and a lot less coffee these days. But this may upset me – I’m genuinely too embarrassed to guess because I don’t even have a point of departure on this. I don’t watch those sort of commodities. So just give me the answer there, what is it?

 

Mohammed Nalla: So for all of you mocha lovers out there, because that’s both coffee and cocoa, coffee is up 89% over the last 12 months. That is savage! But it’s not as savage as cocoa. Cocoa up 160%. Now this is obviously largely led by environmental change, climate change, droughts in certain key-producing regions, so it’s more than just tariffs. But if you superimpose tariffs on top of that, that’s going to really, really hurt.

At this point in time, it’s partially mitigated by my very last point, and that is the US dollar has been strong. A strong US dollar – it was around, if you look at the dollar index, around 105 at the time of the election. It then rallied all the way up to 110, so call it around a 5% rally there and thereabouts. Then on the announcement of all of these executive orders, the tariffs, it actually weakened down to around 107. So it’s still strong, but the biggest question mark for me is: what direction? What is the neck here? You mentioned the head and neck – the dollar is really the neck. What direction does the dollar start to steer markets and valuations and inflation and rates – in which direction does that go? I think a lot of people out there are just trying to digest this very erratic policy response from the US to try and ascertain what is the outlook for not just the US economy, but for the world economy following that.

 

The Finance Ghost: It tells you how non-price sensitive I am to coffee and chocolate that I didn’t know that. It’s just one of those things where I’d have to work harder to afford it or just cut something else really, if it feels like it’s too much money. Although now that you say that, there have been some absolutely bonkers prices on the shelf for chocolate in particular. It is really scary what some of that costs. So yeah, that is pretty chaotic.

And that is the theme of the markets this year – it’s going to be chaos. I think Trump coming in was always going to be that. And that’s why you have to be very, very careful with equity exposure. Because if you’re going to go and sit in perfectly priced things, you’re looking for serious trouble. However, if you go and you try and buy turnarounds that then go wrong, you are also looking for trouble. So, if equity investing was easy, then everyone would be wealthy, but everyone is not, so equity investing is hard. But we’ve done three companies in the past few weeks in Magic Markets Premium that are good turnaround candidates. I think a lot of the inspiration for this came from doing Abercrombie & Fitch last year, which was one of those really annoying ones where you kind of look back and say, wow, I wish I’d known about this years prior. Because that turnaround story has been spectacular.

But, of course, there’s serious survivorship bias there. You can’t go and look at one great turnaround and then say, oh, that’s how they all go, let me go and buy every turnaround I can find! You will probably lose money. The market’s not going to get that wrong in aggregate. I would imagine if you buy a huge basket of turnarounds without doing any other work, you’re probably going to lose money. So you’ve got to do the work – it would be fun if there’s any academic research on that, actually, I can’t say I’ve looked, but if there is, it would be great if someone’s checked that out, send it through!

The three we’ve covered this month in premium though were Nike – amazing to have that in a turnaround basket, right? To be talking about Nike in that context. Their investor relations page on their website starts by saying “Nike Inc. is a growth company” – unfortunately, they are not currently a growth company. So, they very much protest too much there. The other one is Walgreens, which is the pharmacy group, and then Burberry, which is the UK based iconic fashion house. We’ve done all three this month.

Over the past 12 months, just to give you an idea of where the share price trajectory has been on these, Nike’s down 27%, Walgreens is down 51% and Burberry is down 20%. So that is really, really, really rough. Now I’ll give you the year-to-date, which admittedly is only four weeks, and you would think, okay, cool, there’s so much chaos in the market, wow, my NVIDIA is terrible, I can just imagine how bad these risk shares have done.

Well, here’s the year-to-date. Okay, so Nike flat, fine. Walgreens up 17%, Burberry up 15%. That’s in one month. Now, we’re definitely not saying that (1) all of these are good choices, you need to do your research, obviously, and what you should really be doing is subscribing to Premium to get a proper understanding of these opportunities and then making your own decision, and (2) you can’t extrapolate that, you can’t say, great 17% in a month times 12 and there’s my annual. That’s not how it works.

But what it does show you is that the market is still open to these opportunities this year. So even though there’s upheaval in tech, for example, or a sector of tech, that doesn’t mean that people are not prepared to buy a Walgreens recovery story or a Burberry recovery story. In fact, sometimes it actually helps because you have people looking for value elsewhere. Oh, tech has grown too much, it’s too hot, it’s not safe to go and say, okay, I’ll just go on Magnificent Seven this year. So then people start to look elsewhere, and then some of these other stocks become more and more interesting.

And the one that I particularly want to talk about is Walgreens. So when we covered it earlier this month, and I won’t give anything away here from our premium report, so if you are a subscriber, don’t feel bad. We’re not about to lift the lid on that, and you haven’t wasted your money. But when we covered it, it was $11.40 spot price. Then it got going really quickly. It got all the way up to $12.93. A nice big move up there. Then, bang, out came some bad news. Legal action, all kinds of regulatory risk, all the stuff we raised in our Bear Box in the report. Back down we went to $11. 37. So pretty much back to where we started. Then it started to run again. Then more news reports – oh, now a private equity deal isn’t going to happen. Lots of noise, share price drops to where it was at time of recording, $11.34. So basically back where it was when we covered it earlier in the month and it had already done a bit of a run by then. that’s why it’s up year-to-date.

It just keeps going back down to that level, even though you have two pretty bad pieces of news. It really shows you how depressed that level is. And when we did the valuation work that was confirmed for us, if you look at their earnings guidance, even if they just get close to guidance, the current valuation is really, really compelling. So the point is, in a year like this, in any year, actually doing the detailed research works out. These turnarounds – it’s very cool that we’ve covered three of them in a month, because you can obviously choose to get none of them, or you can choose a favourite, or you can choose to buy the basket and kind of spread the risk.

I’m still not 100% sure which of the three is my favourite. It’s interesting that Nike is flat, right? The market is saying Nike’s got the hottest valuation of the three, even though it’s so depressed. So that’s the one that has the least room to run up, but it’s also the lowest risk. Walgreens, Burberry, very depressed valuations, good chance of a recovery for very different reasons, and away they go.

This is what makes stock picking fun. I’m looking forward to tracking these three. We’ll see which other turnaround stories we can sort of try and pick up this year. If anyone listening has any turnaround stories that you think we should consider adding to that little basket to track, please do send it through because for me, it’s a personal favourite for our research.

 

Mohammed Nalla: Yeah, Ghost, I think it’s so interesting. And another point I just want to land on is that quite often, people think we just agree on stuff and that’s not the case. I’m not going to give anything away again in terms of Walgreens, but I know that you were certainly a lot more optimistic than I was. Again, that’s why we put in both a fundamental analysis, a technical analysis is in there as well, so that you get a well-rounded view. Some people are traders, some people are investors – everyone’s strategy is different. I know at this point in time you’re liking this turnaround strategy and I think it’s really quite interesting.

Something we mentioned on the free show last week was that if you look at geographical exposures, for me, the valuation mismatch between certain European listed companies and the US counterparts, maybe is just a ripe and fertile ground for potential corporate action acquisition targets, the search for asymmetric returns. Potentially that’s where we should also be focusing a little bit more of our energies.

This week we’re covering Burberry. That is actually a London-listed stock. We have also had requests from some of our listeners to say, where can we get exposure to some of these stocks if we like the ideas that you’re putting on the table? Again, there are a whole range of brokers down in South Africa that will be able to facilitate offshore investments for you. We’re not going to give them any direct punt on that, but again, just do your research. There are lots of places for you to get exposure to some of these very interesting global ideas that we talk about.

Unfortunately, that’s all we have time for this week. So that’s where we’re going to have to leave it. Hit us up on social media. it’s @magicmarketspod, @financeghost, @mohammednalla, all on X or go and find us on LinkedIn. Pop us a note on there. We hope you’ve enjoyed this. Until next week, same time, same place. Thanks and cheers.

 

The Finance Ghost: Ciao.

 

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