Nvidia's Board Opened An Investigation Into Its Own CEO

Wall Street steadied on Friday after Thursday's rout, and then the weekend handed it a different kind of problem. Nvidia's board said on Sunday that it had opened an independent investigation into chief executive Jensen Huang, and the shares fell 4.7% before Monday's open, even as most of Asia rebounded, with Taiwan's Taiex closing 4.94% higher and Japan's Nikkei 225 up 2.33%. Friday's October employment report came in about 100,000 jobs above what economists expected, Treasury yields rose at nearly every maturity on that session's curve, and this week's inflation reading now carries more weight than it would have a week ago.

Fast Facts

• Oil prices fell and stayed below $100 a barrel as the president played down new strikes on Iran (Read More)
• The University of Michigan consumer sentiment index rose to 51.0 in November from 48.0, though its survey director said comments "revealed growing anxiety over a possible AI bubble" (Read More)
• OpenAI has reportedly raised another $11 billion in a round, not yet closed, that values it at $1.25 trillion (Read More)
• Shares in organic-food maker Once Upon a Farm fell nearly 40% after complaints that its toddler oat bars posed a potential choking hazard (Read More)
• Gold rose above $4,100 a troy ounce as falling oil prices eased worries about inflation (Read More)
• Tesla will wind down Cybertruck manufacturing at its Texas plant in the middle of next year, citing insufficient demand (Read More)

Global News

• Taiwan's Taiex closed 4.94% higher on Monday, the region's biggest gain, and Japan's Nikkei 225 rose 2.33%, while Seoul's KOSPI fell 0.8% (Read More)
• Mitsui Chemicals agreed to buy semiconductor materials maker JSR with the state-owned Development Bank of Japan for about $8.8 billion (Read More)
• Airbus launched the first tranche of a multi-year €5 billion programme to buy back its own shares (Read More)
• Hong Kong's Exchange Fund, the reserve the city uses to defend its currency, reported third-quarter earnings of HK$18.6 billion, down 74% from HK$70.8 billion a year earlier (Read More)

Nvidia Fell 4.7% Before The Open On A Question About One Person

Nvidia's board said Sunday it was "initiating an independent investigation in light of recent reporting that founder and CEO Jensen Huang has been the target of a foreign intelligence effort." A committee of directors who do not work for the company will run it with outside counsel. The board said it has no reason to believe national security or company secrets were compromised, and that it has "confidence in Jensen and his leadership team." In a memo released the same day, Huang apologized to Nvidia's roughly 42,000 employees, wrote that he had been unfaithful to his wife and said he had "fallen short" of his responsibility to the company he co-founded in 1993.

The shares fell 4.7% in pre-open trading Monday, the window before the 9:30am exchange open when stock still changes hands at thinner volume, quoted at $177.80. That is well below its 52-week high of $243.37, the most it has fetched in the past twelve months. What the drop is not is a second day of falling. Nvidia lost 9.26% on Thursday, November 5, in the session that carried the Nasdaq Composite into correction territory, the label markets use for a decline of 10% or more from a recent peak, and the index rose 1.09% on Friday.

So why does a question about one person move a chip company's price? A stock is a claim on profits nobody has earned yet, so the market has to hold a view on who will be running the company that earns them. Analysts call that key man risk: the chance one irreplaceable person leaves and takes part of the company's value with him. Bernstein flagged "considerable key man risk" at Nvidia, writing that Huang "IS NVIDIA" and "pulls most of the company's strings himself." Roughly 60 people report directly to him, unusually flat for a firm this size, and no successor has been groomed behind him. Citi added governance, the rules about who holds power at a company and who checks them, and compliance with U.S. export controls on advanced chips sold into China.

The counter-case starts with what has not been established. The espionage claim traces to a memo circulating among U.S. policymakers earlier this year, which said a former executive at a Singapore-based chip company had been recruited by China's intelligence service to gather information on Huang. That has not been confirmed, and Nvidia has called the interactions "not unusual." Bernstein reads the allegations as "(so far) more form than substance, though a (very) bad look." Jeffrey Sonnenfeld of the Yale School of Management is harsher, putting the odds Huang's career survives at "about a 50-50." Two dates will test it: Nvidia is expected to report earnings on November 17, and three House committee chairmen have asked Huang for a closed-door briefing on November 18.

Sources: Axios · Investing.com on the board's statement · Investing.com on Monday's share move · TechCrunch on succession · Quartz · our briefing of November 6

A Jobs Report 100,000 Better Than Expected Pushed Treasury Yields Higher

The Labor Department reported Friday that U.S. employers added 165,000 jobs in October, counting everyone on a payroll outside of farming. Economists had penciled in roughly 65,000, so the number landed about 100,000 above what the market was set up for. The unemployment rate also ticked down to 4.1%, which almost nobody had forecast. Professional and business services did most of the lifting with 70,000 added jobs, and earlier months in that category were revised upward.

Here is why a jobs report shows up first in the bond market. The Federal Reserve sets a short-term policy interest rate, and it cuts that rate when the job market looks like it needs help; a hiring month that strong makes a cut soon look less likely. A government bond's yield, meaning the annual return an investor earns for holding it, tracks what investors expect that Fed rate to average over the life of the bond, so stronger hiring pushes yields up. Yields rose at every maturity the Treasury publishes on Friday, November 6, except the very shortest. The two-year note, the one that moves most on Fed expectations, finished at 4.51%, up 5 hundredths of a percentage point from Thursday, what traders call 5 basis points. Friday's stock session split along the same seam: the S&P 500 rose 0.31% to 7,376.86 while the Dow Jones Industrial Average fell 0.46% to 51,285.73.

For a student who graduates into this labor market, the number that lands closer to home is not how many jobs got added but how long it takes to land one. The median spell of unemployment ran 11.9 weeks in October and the average ran 27.1 weeks, both the longest in roughly a decade once you set the COVID-19 spike aside. Hiring sped up and the line did not move faster. Michael Pearce, chief U.S. economist at Oxford Economics, said "the most AI-exposed sectors, information and finance, continued to struggle and have shed jobs on a trend basis." Nearly three months out of work at the median, more than six at the average. A strong headline and a long job search arrived in the same report.

Sources: Reuters via Investing.com · NPR · The Star on Friday's close · U.S. Treasury

China's Factory Prices Jumped 5.7% While Shoppers Barely Paid More

China's National Bureau of Statistics reported Monday that the producer price index, which tracks what factories charge for their output, rose 5.7% in October from a year earlier. Economists polled by Reuters had expected 5.3%, and September's reading was 5.0%. That is the strongest reading since June 2022, more than four years ago, and statisticians pointed to higher oil prices tied to Middle East tensions and to demand from newer industries including artificial intelligence. The other half of the release went the other way: the consumer price index, which tracks what shoppers pay, rose just 0.7% from a year earlier, short of the 0.8% economists expected and below September's 0.9%.

The gap between those two numbers is where the lesson sits. Factory costs climbing 5.7% while shop prices climb 0.7% means Chinese manufacturers are absorbing higher input costs instead of passing them on, which squeezes their margin, the slice of each sale left over once costs are paid. That makes this a demand story at home rather than a cost story, and Capital Economics tied the weak consumer figure to subdued domestic demand, noting that "prices in other consumer-goods categories were still falling." It matters well outside China too, because China is where a large share of the world's manufactured goods is made, and a producer who cannot charge more at home has more reason to compete on price abroad.

Sources: Investing.com · Reuters via Yahoo Finance · SCMP

What To Watch

Reporting today:

• 241 companies are scheduled to report, 67 of them worth more than $2 billion.
• KKR (KKR), before the open. Analysts' average estimate is $1.41 in earnings per share against $1.22 a year ago.
• Constellation Energy (CEG), before the open, at $3.90 against $3.04; Occidental Petroleum (OXY), after the close, at $1.43 against $0.64; Take-Two Interactive (TTWO), after the close, at $0.49 against $1.04.

Later this week:

• Tuesday brings 177 reporters. CoreWeave (CRWV) is expected after the close at an average estimate of a $1.45 loss per share against a $0.31 loss a year ago.
• Thursday brings 358, the heaviest day of the week. Cisco Systems (CSCO) is expected after the close at $1.15 against $0.81, and Applied Materials (AMAT) at $4.06 against $2.17.
• The October consumer inflation report is expected this week.

Fed speakers:

• Vice Chair for Supervision Michelle Bowman is scheduled to discuss community banking today and the economic outlook twice on Tuesday, and Governor Christopher Waller to speak on the outlook early Tuesday from a Bank of England conference in London.

Further out:

• Minutes of the Fed's October 27-28 meeting are scheduled for November 18, the Beige Book for November 25, and the Bureau of Economic Analysis publishes gross domestic product and corporate profits the same day.
• Every earnings figure above is an average of analyst estimates rather than a result.

The Classroom Takeaway

Two of today's three stories are nothing more than numbers somebody published on a schedule: a jobs report on Friday morning, Chinese price data on Monday morning. Neither needed anyone's forecast to be useful and each moved a price within hours, so a student watching our live market data as the next release lands is reading the day the way the market reads it.