All summer and fall, we saw market analysts claim the Fed won the war on inflation. This week, the Core PCE remained stubbornly high. Some claim we’re heading for stagflation. We should pay attention to that warning. 3Q GDP came in below last quarter. Even worse, this economic “growth” is really value-destroying government spending pushing out the productive private economy. The big tech companies have excellent quarters, and then some give disappointing guidance. Is AI doomed? $AMD guidance is weak. Are they impacted by big tech firms who want to get a return on all that AI spending, or is it just tough to compete with $NVDA? Finally, in this week’s investor education “Thing”, we address some of the misconceptions about stock buybacks.

This week, we’ll address the following topics:

• The Core PCE is telling us the Fed has not won the war against inflation. Alternatively, you could have been reading DKI’s 5 Things and known months ago.
• 3Q GDP was fueled by rising government spending again. This is a Potemkin economy.
• The mega-cap tech companies have great quarters. Guidance is mixed.
• $AMD provides weak guidance. Bad news for AI or just difficulty taking on $NVDA?
• Lots of misconceptions about stock buybacks. We set the record straight (or just offer an opinion).

Excellent work this week by DKI intern, Andrew Brown while Alex Petrou is focused on exams. This comes a few weeks after Alex took over while Andrew was on vacation. I’d love to tell you this is a result of my incredible management capabilities, but the truth is they pretty much manage themselves and the work shows up on time. Round of applause for self-starters everywhere!

Ready for a week of misleading government “data”? Let’s dive in:

1) Fed Cut and a Hot September PCE:

The personal consumption expenditures (PCE) index is the preferred inflation gauge of the Federal Reserve. The PCE for September rose 2.1% year-over-year, with the Core PCE remaining steady at 2.7%, slightly above expectations of 2.6%. That sticky core number has been at or around this elevated level since last spring. According to the report, the monthly price of goods decreased by 0.1%, services increased by 0.3%, and food prices rose by 0.4%. The most notable change was a 2.0% decline in energy prices. Sticky core CPI and lower-than-expected initial jobless claims do not present a great scenario after the Fed’s 50 bps cut in September.

The PCE is in a reasonable range due to lower energy costs. The Core PCE isn’t declining.

DKI Takeaway: Earlier this month, we reported that Core CPI came in above expectations, and now, for the third consecutive month, PCE remains sticky. On Twitter/X, some are claiming that the Fed has ‘won’ the fight against inflation. But as DKI has pointed out, are your grocery store prices any lower? Have your monthly bills stopped climbing? The answer is no. The U.S. has entered an era of higher price levels, and with Washington’s continued overspending, more price hikes are on the horizon. Congress is committed to avoiding the one thing that would help; massive cuts to government spending. DKI is positioned to make money from coming inflation. If you want some ideas on how to do that, we invite you to subscribe to a DKI premium membership.

2) What the Mainstream Media Wants You to Believe About Q3 GDP:

Q3 GDP growth of 2.8% fell short of expectations, coming in below the projected 3.1% and last quarter’s 3.0% increase. Personal consumption remains a key driver, rising 3.7% and accounting for 69% of total GDP, underscoring the resilience of the “strong consumer.” Government spending also rose by 5%, making up 17% of GDP. Exports rose 8.9%, but imports climbed 11.2%, bringing the Q3 trade deficit to -$1.08 trillion.

Consistently positive and completely fake.

DKI Takeaway: The mainstream media is celebrating the 2.8% growth figure as a huge achievement for the country. While it’s true that the U.S. is consistently a top innovator and efficiency driver, and our markets host some of the world’s strongest companies, there’s more to the story. Washington continues to overspend with government spending increases above GDP growth. Social programs and unsustainable off-balance sheet spending contributes to the “strong consumer” narrative, but it’s completely financed by debt and inflation-causing currency creation. The government keeps increasing its spending and pretending GDP growth is solely driven by genuine economic expansion.

3) Mega Tech Earnings Week:

This past week has been significant for five of the “Magnificent 7” stocks. Google ($GOOG) kicked things off with strong revenue of $88.3 billion, surpassing expectations. On Wednesday, both Meta ($META) and Microsoft ($MSFT) beat earnings estimates; however, Meta’s substantial increase in AI capital expenditures raised concerns among investors, while Microsoft faced challenges in meeting the demand for its AI products. On Thursday, Apple ($AAPL) and Amazon ($AMZN) also exceeded estimates. iPhone sales increased 6% year over year reversing prior declines, and Amazon’s focus on efficiency and AI expansion was well-received by investors.

AI expenses meeting AI dreams. 5 of 7 fall despite good earnings.

DKI Takeaway: DKI has pointed this out before, and we’re seeing it play out once again, the “Magnificent 7” stocks are priced for perfection. While they all surpassed estimates, even minor guidance disappointments can trigger market-wide declines. Given these stocks’ high valuations, any adjustment in guidance can drive substantial market swings, which has been evident this week. A key takeaway from these earnings reports is the notable increase in capital expenditures directed toward AI investments. With chip supplies limited, these companies are competing fiercely to secure them, potentially leading to a demand crunch that could drive prices higher. AI is capable of incredible things, but these companies are going to need to figure out a business model that justifies all the spending on Nvidia $NVDA chips.

4) AMD’s Earnings:

On Tuesday, Advanced Micro Devices, Inc. $AMD reported revenue of $6.8 billion, surpassing analyst expectations of $6.7 billion. However, the stock traded down after providing lower-than-expected guidance. Data center revenue reached $3.5 billion, comprising 52% of total revenue. This month, AMD also announced its new Instinct MI325X chip, designed specifically for AI applications, positioning it as a key competitor to Nvidia’s ($NVDA) Blackwell chip.

$AMD has taken share from $INTC. Aiming at $NVDA now.

DKI Takeaway: AMD’s decision to cut guidance, even as the “Magnificent 7” continue ramping up capital expenditures, presents an interesting contrast. Companies like Microsoft, Meta, and Amazon are aggressively trying to secure as many chips as possible. There are two potential reasons for AMD’s conservative guidance. First, the company may be grappling with capacity constraints, an issue CEO, Lisa Su, acknowledged. Another factor could be the heightened competition from Nvidia’s $NVDA Blackwell chip, which is currently leading the market. This could signal potential challenges for $AMD in competing with Nvidia’s dominant position.

5) What are Stock Buybacks and Why Do They Matter?:

This week, a DKI subscriber asked us about stock buybacks and whether they should affect investment decisions. Stock buybacks, or share repurchases, occur when a company buys its own stock, reducing the total number of shares outstanding. This often leads to an increase in stock prices. You can think of stock buybacks like dividends:  They are another way for companies to return capital to shareholders. Instead of cash going directly into your bank account, buybacks increase the percentage of the company you own. This is more tax efficient as it allows investors to recognize gains at a time of their choosing, and also allows some investors to take advantage of capital gains tax rates that may be below the rate for ordinary income.

Sometimes controversial, but we generally like it.

DKI Takeaway: As investors, we generally view buybacks positively because they often indicate that a company is in a strong financial position to distribute income. At DKI, we don’t specifically target companies that buy back shares, but one of our favorite companies, Las Vegas Sands $LVS, has always been very shareholder-friendly through dividends and buybacks. Buybacks have faced some criticism, notably from politicians like Elizabeth Warren, who has called them “paper manipulation” used mainly to boost executive pay. Others claim there’s no long-term benefit from these “one-time” transactions. We disagree with both claims. There’s no paper manipulation favoring executives over individual shareholders. If the buyback leads to a higher stock price, it does so for everyone. And the repurchased shares are retired permanently. A dividend is a single payment to shareholders, but if companies buy back their shares at a discount to intrinsic value, that benefit is perpetual.

Here’s the video version: https://youtu.be/u4eoq9HGDuA

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