Trader In Chief

Once upon a time, the Republican party stood for free markets, limited government, a strong defense, and a laisse faire approach to the economy. Whether the party really held to those beliefs is a matter of debate, but that was essentially what you signed on to if you were a Republican.

As in so many other areas, President Trump has turned this on its head. Government intervention to support certain industries in the name of national defense or some other goal is now the name of the game. Look no further than what’s been going on with Intel and Nvidia over the last few weeks to see what US industrial policy has turned into and the different risks and uncertainties that investors now face.

Intel. Despite once being the world’s largest manufacturer of chips, it failed to catch the two largest tech trends of this century, mobile computing and AI. By revenue, it has now dropped to fifth place in the sector, and its problems are multiplying. The last time Intel made a new high was 25 years ago, way back in 2000. Over the last 5 years, INTC has lost 50.1% while the S&P 500 has gained 84.1%. Not exactly stellar performance.

Intel does have one thing in its favor, however: it designs and manufactures its chips domestically. Revitalizing the US domestic manufacturing base, and in particular those items deemed crucial for national security, has been promoted by both the Biden and Trump administrations. Intel was the largest beneficiary of the 2022 CHIPS Act and received $7.86 billion in direct funding. Along with another $3.2 billion from the Department of Defense, the federal government agreed to provide $11.1 billion to the company. Just last week, the President and Intel agreed to convert the funding to a stock swap (after publicly calling on the CEO to resign), with Intel agreeing to sell 9.9% of the company to the government. This came after SoftBank’s $2 billion investment earlier in the month.

This isn’t the first time the current administration has done a chip trade. Earlier this month, it traded easier export restrictions for 15% of Nvidia’s revenue derived from sales of its H20 chips to China.

Apparently, the US government is now an active and aggressive investor in the chip business, something that past Republican administrations would have resisted (at least publicly). Past interventions focused on large institutions that were deemed “too big to fail,” such as Wall Street banks in 2008, or those already in bankruptcy, such as GM in 2009. Intel was neither of these, but if you believe that it is in the best long-term interests of the US to manufacture chips domestically, then the investment makes sense. Regardless, direct investment in individual companies, with the President as the de facto portfolio manager, seems to be the new industrial policy for the moment.

Is the government picking winners and losers? Of course it is, and critics were quick to bring up Solyndra, the Obama administration darling that went down in flames (despite many supporting it at the time), and the government’s less than great track record in picking investments in specific companies. Notice I use the term “specific companies.” Stepping back, the government has funded ground breaking investments in some of the most significant technological breakthroughs of the last two centuries. Radar, atomic energy, space exploration, the internet, search engines, GPS, and biotech were all funded by the government when they first began. Although that’s very different from picking investments in specific companies in each sector, the government’s track record in supporting new technologies isn’t as bad as critics portray.

So now that Intel seems to have the support of the President, who now has a stake in its success and will presumably be a cheerleader for the company (is there now a “Trump put?”), what should we make of INTC options?

Unsurprisingly, INTC implied volatilty started increasing in mid-2024 when it became apparent that it was facing multiple threats. Its latest interactions with the President increased uncertainty even further, but the fireworks seem to be over, or at least in hiatus, for the time being. As INTC fades from public view, its implied volatilty should decline back to the mid-30’s level. That is, if the President, who is notorious for changing his mind, maintains his support. Since direct corporate investment seems to be on his agenda, I suspect it will in the short to medium term.

Nvidia options merit a short discussion. The company’s Q2 announcement is due after the bell this Wednesday. As I have written several times, NVDA displays prominent vol crush, or the tendency of its implied volatilty to spike before earnings calls and then to decline sharply after results are known. True to form, NVDA is currently displaying the usual pattern, with its implied volatilty increasing from the low-40’s to the mid-50’s over the last two weeks. If you are playing NVDA options on the long volatilty side against its earnings, keep this in mind – the vol crush effect can be significant. Don’t overstay your welcome!