QTR’s Fringe Finance
(via ZeroHedge)
I Still Think There's More Bad News Coming
The Nvidia scandal keeps getting uglier, the questions keep getting bigger, and I think investors expecting a quick return to normal are making a serious mistake.
Quoth the Raven
23 hours ago
I’m not trying to be a “permabear” or a “hater”, only trying to objectively relay to my kind readers where it appears that we are, amidst this muck and mire in markets right now. Admittedly, I see things through a more cynical set of glasses than most when it comes to markets. But, with more than a decade of experience doing forensic investigative research on the short side of markets, I have also seen far more ugly shit than most people have.
Bearing that in mind, it is my opinion that the pain for Nvidia, the broader market, and the AI trade is far from over. In fact, I think we’re still in the early stages of a process that could take weeks, if not months, to fully play out. And with sentiment toward technology already looking increasingly fragile, I don’t think investors appreciate just how much additional damage could be waiting around the corner.
Contrary to what some may believe, I don’t just wake up every morning and write random shit on this blog to fill space. I generally have a roadmap in my mind that I come by honestly and try and share with readers. Over the last six days, as the Nvidia saga has unfolded, I’ve taken plenty of criticism for the points I’ve raised about the company, Jensen Huang, and what this scandal could mean for the market.
And while I certainly haven’t gotten every detail right, I think the broad direction of my concerns has been increasingly validated by subsequent events. Today, I want to revisit those warnings, update readers on where I stand, and reiterate and explain one important point going forward: I don’t think this story is anywhere near over, and I don’t think the market has fully priced in what could come next.
After last week’s AI-driven Nasdaq crash, I wrote a couple of pieces explaining why I thought the initial selloff might only be the beginning. In one of them, titled After The Crash, Another Wave Of Bad News, I wrote:
It’s that the market’s reaction to yesterday’s crash is not nearly as important as what yesterday’s crash may have set in motion.
I expect enormous volatility in both directions, policymakers to begin exploring ways to stabilize markets if the selling continues, and the AI industry’s increasingly questionable valuations to face more scrutiny. Most importantly, I expect the coming days to reveal financial, corporate, and political consequences that simply haven’t had enough time to become public yet.
I continued:
Because I don’t think the biggest question is whether the market can bounce. I think the biggest question is how many companies, investors, and lenders built their plans around the assumption that it would never stop going up.
Yesterday, the market finally started asking that question. Over the next several days, I suspect we’re going to start getting some answers, and I have a feeling some of them are going to be uglier than people expected.
That was my concern then, and it remains my concern today. When a market has been built around a handful of companies, enormous expectations, and the assumption that an investment boom can continue indefinitely, the first sharp selloff isn’t necessarily the whole event. Sometimes it’s just what starts exposing the problems.
And in Nvidia’s case, I think we’re watching that process unfold in real time.
On Sunday morning all we knew was a couple of allegations against Jensen Huang. There was no admission, no major board statement, no follow up reporting. There was the headline that he may have been compromised and that was it. It seemed to be something that could pass quickly. Espionage efforts during a global chip race are hardly surprising and many thought Jensen was likely just an innocent victim.
But I still asked the then uncomfortable question of whether Huang could be forced to resign. Then, just hours later on Sunday afternoon, Huang publicly acknowledged an extramarital affair amid reports involving Alice Huang, a Chinese businesswoman at the center of allegations concerning Chinese intelligence and Nvidia’s chip sales.
Those allegations have not, by themselves, established wrongdoing by Nvidia or its CEO. But I thought the potential implications for the company could be enormous, and I wrote:
What would happen if Huang stepped down? How much key-man risk is embedded in Nvidia after he almost single-handedly built it into the company it is today?
And lest we forget…I’m getting ahead of myself here, but that’s what I do….there’s also the uncomfortable reality that major executive departures can sometimes bring previously concealed problems into the open.
I added that new leadership, new scrutiny, and changing incentives can have a way of revealing things that were previously swept under the rug. That wasn’t an allegation that Nvidia was hiding anything. It was a reminder that when a company this important suddenly faces a leadership crisis, the consequences can extend well beyond the original scandal.
As a reminder, Enron began unraveling when a Fortune reporter asked a deceptively simple question: “Is Enron Overpriced?” The road to Theranos’s collapse began with basic questions about whether its blood-testing technology worked as advertised. WorldCom began coming apart when internal auditors started questioning why ordinary operating expenses were being recorded as capital investments.
In many cases like these, what initially looked like a narrow question or an isolated discrepancy eventually exposed something far bigger. I’m not saying that will happen with Nvidia. Rather, I’m alerting people to how larger issues sometimes begin…
Yesterday morning, before reports emerged of a second alleged affair involving an Nvidia employee and the board’s preparations to potentially remove Huang, I published another piece titled Why Nvidia’s Nightmare May Be Just Beginning.
Why Nvidia’s Nightmare May Be Just Beginning
Quoth the Raven
·
10 Nov
Read full story
My point was that the obvious questions now concerned Nvidia’s China business, its export-control compliance, the integrity of its customer relationships, and potentially the reliability of management’s prior representations to shareholders.
I wrote: “I think the likely outcome at this point is that Jensen Huang resigns, at a minimum.“ As of this morning, with reporting that the board is preparing to oust him, that possibility looks increasingly likely. But I ended the piece with what I thought was the more important warning: “I’m increasingly concerned about what broader scrutiny could reveal about Nvidia’s books.”
To be clear, I’m not alleging that Nvidia has committed accounting fraud or that its financial statements are inaccurate. I’m saying that when one of the world’s most important companies finds itself embroiled in a scandal involving national security, export controls, major customers, and questions about its CEO’s judgment, people are going to start examining every inch of its business with a level of skepticism that didn’t exist a week ago.
In our subscriber chat yesterday, I said I expected virtually every journalist, analyst, investor, short seller, and investigator with a pulse to start digging into this story. My guess was that more information would continue to emerge. After all, we’re talking about a scandal involving the CEO of one of the most valuable companies on the planet, at the center of the most important technology trade in the world, with potential implications for U.S.-China relations and national security.
Does anybody seriously think the financial press is going to get bored with this after a couple of days?
And last night, right on cue, the deluge continued.
