A New Week 08/23

The Treasury made a huge commitment to keep buying back bonds in perpetuity, helping fix the run in global yields that threaten the equity rally and all this AI financing.

Interestingly, the knee-jerk reaction rally to the announcement ended up being short-lived, resulting in yields that are now higher than before the buyback announcement.

One of the reasons this is the case is that the intensity of buybacks compared to issuance is minuscule.

The other is more important,

One agent cannot effectively fight against hundreds of others participating in the bond market, governments and sovereign funds included.

A vast majority of these participants are choosing to sell bonds, and drive term premiums higher as a result of no confidence in the fiscal path for the United States.

Not only is this a view on the fiscal side, it’s also a view on how a continued AI financing campaign will end up driving inflation higher for longer.

In other words,

Stocks will need to be sacrificed in order to save bonds.

Now let’s get an update on what the market likes and dislikes:

A week led by Value, Quality, and Breadth.

Even though most of the AI trade pushed higher earlier in the week, the latter half drove a lot of participants lower showing signs of exhaustion near the highs.

Memory and select chipmakers included.

Simply put,

We had a rotation week back into the real economy HALO names as these factors took the lead.

Momentum (the AI trade) is still in a correction as several participants see their growth and valuation assumptions change around incoming news and market shifts.

Especially out of the bond market, capital cycle signals, and net selling.

Yes, even Citadel sold 80% of their AI holdings after rescuing Situational Awareness’ assets.

An even stronger sign of exhaustion and incentive for capital to flow into the real economy is where management capital allocation decisions are headed…

Last week alone, over $800 billion worth of new capital entered the mix in new buybacks, capacity expansion, and circular deals with lots of leverage.

Oversupply doesn’t just have to mean physical supply, it can also mean excess capital.

Here’s how the current cycle looks like, and how it has pointed to previous turns in history.

Another consecutive week where the S&P 500 futures book converges into one opinion.

Both managers and leveraged money have decided to sell down their exposure in the index, a newfound sentiment just as their historical participation comes off a decade high.

In other words,

These participants had run their books to the maximum allowance, and see no further reason to keep holding in such high conviction.

This is especially so as the 10-year TIPS yield continues to go up on:

Which is synonymous with a growth shock across the US economy and deteriorating growth prospects for most of the S&P 500.

We can get into this with a monthly macro update later this week so stay tuned for that.

There is an especially important read on the artificial compression in high-yield credit spreads.

Reserved for Offside Premium members, included in your 7-day free trial by signing up today.

Now let’s cover some items for this coming week:

New Earnings:

We’ve got the battle of the two giants this week.

The 20-30% rebound from the lows in software came to challenge the “AI will kill software” narrative, and we are about to see the fundamental side of this fight.

On the AI side:

On the Software side:

I am giving SanDisk and NVIDIA priority for earnings coverage this week for obvious reasons.

SanDisk will give me a new gauge on the memory cycle, which I’ve already assessed as shaky and toppy last week in a previous post.

NVIDIA, on the other hand, will likely demonstrate just how bloated its balance sheet has gotten after another few hundred-billion deal rounds happened over the past quarter.

All accretive to the circular financing scheme, where I suspect a widening cash flow to income gap will be reported.

Wednesday - PCE Inflation:

There’s an argument beginning to surface around the market, a theme pointing to a “growth shock” scenario already taking place.

This is not stagflation; it’s quite the opposite…

Cooling inflation with rising bond yields to pressure the Fed into a hiking path.

I believe this has a lot to do with the bond vigilantes trying to fix inflation at the root cause, which is continued AI capex debt financing.

The longer this bout of debt issuing and supply drawdowns headed to AI infrastructure, the longer we’ll continue to see inflation across the system.

Friday - NFP Revision & Warsh Speech:

Most of the unemployed in the United States quote “completing seasonal work” as the reason for unemployment.

This is happening as more than 85% of all jobs created since COVID were seasonal or part-time in nature, not an accretive trend to the overall economy.

Whenever this happens, chances increase for downward revisions as these created jobs will have to be scratched off the board.

Economists expect a new record downward revision of 923,000 jobs this Friday.

Last year’s revision was roughly 805,000 to set a new record, making Friday’s a lot worse.

Again, growth shock as we continue to lose jobs and see higher bond yields.

Meanwhile, here’s the latest take from Goldman Sachs’ equity strategy desk, covering the thematic rotation within the S&P 500 that closely resembles the HALO and real economy bids we’ve called for in our factor read:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.