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NOT YOUR FATHER’S MARKET
“Where Alpha Still Lives” Research Pack, Offside Capital
The stock market is a trap for the middle class.
65-75% of all participation in U.S. equities is not coming from your average investors, but rather from hedge funds and other institutional players.
Which weakens the old advice we all grew up on:
Save a % of your income and invest into index funds
Let compounding do the work for you over forty years
Half of that is still true, and I will never tell you to stop saving to invest.
However,
It matters what you invest into, as your returns are directly connected to how many inefficiencies you can find (and correct) in any given market or asset class.
If the majority of participation in stocks is coming from large institutions with thousands of analysts and cutting-edge technology at their disposal…
The chances of you even finding those efficiencies decline significantly.
So here’s what I am offering you:
Completely free.
Because there are still markets where more than 50% of all participation is coming from retail investors like you and me.
Places where institutions can’t really go into and wipe those inefficiencies away.
Because of its current valuation and concentration, the S&P 500 is set to deliver a “lost decade” scenario for its buyers.
Just look at the chart above and see what 2000 through 2010 looked like…
Meanwhile,
Our decade will look a lot different, as the markets I’m talking about have historically outperformed during times like these.
In fact,
Our latest buy in that space is already up over 12% while the S&P and NASDAQ shook some people out last week.
Now let’s get an update on what the market likes and dislikes:
Value, Size, and Breadth.
The trifecta of the real economy coming back to play in a very specific way.
As these factors rotate out of growth and momentum (the AI trade), it is the companies that provide a margin of safety in their valuations that are set to outperform.
Add on top of that the size factor, where smaller companies are most benefited, and then breadth to force you to include businesses that participate in broader economic activity.
And it all leads you to the areas I’ve spotted for you in my previous GDP and PMI analysis work.
It’s the reason why seemingly boring companies have outperformed the S&P and the AI complex this entire month.
What does this say about the market?
Capital is no longer interested in the empty growth promises rooted in insane backlog growth and compute commitments.
We know from the credit market that these are not going to get repaid.
More importantly,
It is now forcing Wall Street and most of the participants who got caught up in this mania to dump their risk onto unsuspecting customers.
Customers like:
Pension funds, savings, and insurance floats
To me, this is the greatest risk transfer since 2008, now running a $3.7 trillion-dollar tab.
And where you land on that transfer will determine how the next ten years of your journey to wealth construction looks like.
CHART OF THE DAY
This rotation isn’t limited to the U.S. stock market.
In Asia, markets like South Korea and Taiwan are ridden with the same (or worse) levels of concentration into the AI trade.
Which means,
When and if this rotation begins to accelerate from here, all of that money will be out in the cold and looking for a new home.
So it pays to understand what money likes.
ARE YOU COVERED? —>
I ran a study of over 36 countries over the past 70 years, and found:
Nations that had invested aggressively tended to underperform other stock markets in the world, a phenomenon called “capital deepening.”
Those who cut investment and focused on the shareholder economy went on to rally by 500%+ on average for the next decade.
I.E. Japan and South Korea.
IMPORTANT GAUGES
In this relative risk model, I aimed to measure the breakout points of volatility in the S&P 500.
By taking the daily market volatility vs the daily VIX volatility, you can land at the spread above, and see when the good times to buy/sell are.
Right now, S&P 500 volatility is beginning to cross above the VIX volatility, forcing some systematic asset managers to cut down their exposure to the index.
Again, that money is finding more stable and defensive areas to be put to work in, hence the factor rotations we’ve covered above.
Here’s the important part:
Volatility breaches tend to lead to 20-30 day clusters
Considering we’ve only been above these breach points for only two days, chances are the VIX will remain above $20 and rising into mid-November.
Which coincides with the midterm elections as a catalyst for volatility, as well as the next round of big AI company earnings.
It is during this cluster that I expect our recent portfolio picks to continue to outperform and reach their target valuations.
From there, when the dust settles, we’ll decide whether buying the AI dip is worth it, or whether the market has effectively moved on from that idea.
Now let’s cover some items for this coming week:
New Earnings:
Busy week for the AI trade.
We begin Tuesday with SK Hynix and Corning reporting on the “beneficiaries” of the AI capex boom.
I am most interested in covering the SK Hynix release as an update to my bearish memory chip thesis, all founded on the oversupply scenario I covered during Micron’s earnings last quarter.
Depending on how much changes materially during that release, I will cover the numbers in a dedicated post for SK Hynix.
Same thing goes for Microsoft on Wednesday, where I will cover it if enough is given in terms of their OpenAI concentration risk and all the compute backlogs seeing their default probability rise.
On Thursday, we get an even bigger day:
Caterpillar on the infrastructure side, Intel on the chip supply and demand side, and Reddit on the “AI will kill software” challenging side.
Again, due to capacity constraints, I will do an earnings coverage on the names that offer enough material change to the broader market themes and risks.
FOMC Rate Decision - Wednesday:
Markets are really divided on whether the Fed will continue to raise interest rates, especially given the recent market “selloff.”
Folks, we are only ~3% off the highs in the index, this is not a reason for the Fed to even consider changing the rates path.
What I am seeing is an easing of the pressure push in the 10-year bond yield, falling from 5.3% to below 5.0% for the first time in a while.
That in itself could be a positive sign for the Fed to change its language around future rate decisions.
However,
With the recent CPI and PPI inflation data from this month, I find it hard to believe the Fed will make a hard turn on the recent decision to hike.
Speaking of which:
PCE Inflation - Thursday:
We are back to 2008 inflation levels, excluding the spikes in 2022.
Given how messed up supply chains are from the AI demand sucking down most inventories in several areas, coupled with the ongoing disruptions in the Middle East.
I am most interested in seeing which items and areas in the PCE report push/lag the most for overall inflation trends.
Specifically eggs.
It will make me go back to the modeling work for this micro-cap egg company that’s already up more than 12% this week alone.
A Final Note
COMING UP NEXT (Reminder for This Week)
I have prepared a few studies in this “Where Alpha Still Lives” hunt, which will be covered over the span of a few weeks running up to our live webinar in November.
A deeper look into some of our recent deals will be provided, as well as a concrete thesis in the Chinese capital reversal opportunity set, where I’m finding more and more evidence of money to be made.
A new price divergence in the energy crisis and the semiconductor industry could warrant a dedicated post to what is happening in this space, and how we can take advantage of it.
Meanwhile, here is the latest from Goldman Sachs covering their prime brokerage and equities business trends.
All in all, it looks like customers (hedge funds and individual wealthy clients) are dumping their AI exposure at the most aggressive pace since 2022:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.