Want your investment to mean something? You didn’t land on this ad by accident. DIT AgTech is helping the people who feed the world produce more with less. At $1 a share, this is your sign.
TIME TO GO HOME?
Prime brokerage data from several investment banks in the market have all converged around the same type of signal.
Goldman Sachs, Bank of America, and now Morgan Stanley…
All show a record pace of de-grossing AI portfolios around their client base (mostly hedge funds and high net worth individuals.)
Even through this record dumping of AI positions, the same data suggests leverage and positions are also near record highs, as cash positions now hit a historical low as well.
My biggest thing with this is this:
Most AI stocks are now in a bear market (20% off the highs)
And more than three-quarters of outstanding AI positions have yet to be unwound during this new volatility episode.
Naturally, I’m wondering what the market will look like if the selling really begins, considering that the S&P 500 is now ~65% tied to the AI complex.
Speaking of which, last week was the cleanest representation of how those companies (and their ecosystem) are doing.
Google and Microsoft reported their quarterly results, and immediately triggered double-digit selloffs in several technology names.
Like Intel, which had its worst day in history after a one-day 30% crash.
From this, it would be foolish to fight the market, especially when evidence continues to build up and unveil several risks circling the AI basket.
Specifically, the shadow balance sheets now carrying ~60x more debt than the headline financials suggest right now.
Now let’s get an update on what the market likes and dislikes:
For the second consecutive week: Value, Size, Breadth.
Combining these three factors will directly lead you to a basket of smaller real economy names.
Now think about what some of the “coiled springs” of the economy are right now:
Consumer goods, defensives, housing
It’s not hard to figure out where all this AI liquidation money will end up, especially as momentum and growth are about to turn negative for the year.
Again,
Fighting these broader market forces is going to be a painful endeavor, specifically because these are the “invisible hands” that put market rotations into place.
GDP and PMI data confirm this, with tomorrow’s manufacturing PMI being another check on this developing trend.
For now, I will continue to hunt within these factors and sectors that make a good fit.
While that’s done…
You can begin your rotational work with this small, defensive, and deeply undervalued company in the food industry.
Upside potential is more than 200%, confirmed by Wall Street analysts.
CHART OF THE DAY
One of the strongest messages markets send gets passed through valuation multiples.
Especially the forward P/E, since it’s the market’s way to communicate how it feels about tomorrow’s earnings.
Now think of the current setup…
65% of the S&P is made up of AI companies, most of which are cyclical in nature (chips, infrastructure, capex waves.)
Cyclical industries are most exposed to the shifts in forward P/E trends, and when they become cheap,
They become cheap for a good reason.
ARE YOU COVERED? —>
The market’s multiple has just fallen to its lowest level in more than 12 months.
Essentially,
The expectation is that earnings growth/quality is going to significantly decline from here.
Which begs the question… Where should I invest my money next?
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:
Very hectic week for the Offside portfolio and the AI trade.
Let’s begin with Tuesday, where Vital Farms reports to either prove or dismantle my entire thesis on the company.
I have been talking to management recently to gain further insights into expectations, and will be tuning into the live earnings call to deliver a proper deep dive and update for Premium members on this portfolio holding.
Super Micro Computer, Apollo, Eaton will also provide further insight into the infrastructure and financing end of the AI trade all on the same day.
Wednesday is another packed day for the Offside Portfolio, as Uber and CAVA will be released to update my theses on the companies and their current stance in the holdings mix.
Thursday gives us AAOI and Lumentum for another take on the AI complex, which I expect to be challenged as more bearish data is released to threaten the structure of these baskets.
Manufacturing PMI - Monday:
Most of our current ideas pipeline, and a majority of portfolio holdings, will be determined by this PMI report.
An updated publication on what the results mean and imply for the market and the economy will be sent to you, with a follow up watchlist update from these ideas likely by the following week or weekend.
This is where 80% of my ideas come from, and if you’ve been with me long enough, you know how those turn out.
Services PMI - Wednesday:
As a follow up to the manufacturing data, we’re getting the second half of the equation through services.
With the complete picture of the industries that are breaking out to drive economic activity, we’ll be set to refill our watchlist completely and leave respective thesis work and executions for Offside premium in the coming days and weeks.
NFP & Unemployment - Friday:
We finish off the week with an update on jobs and the employment situation summary.
Combined with the latest PMI data, this will guide us directly to a renewed economic macro view.
Which is ultimately what determines our filtering and screening process for the type of businesses we’ll look into for future opportunities.
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.
Several reports on the economic data and specific company deep dives after earnings will be provided to you on separate publications.
Broader themes like China, AI, and the energy crisis will be postponed until this wave of information is delivered, unless majorly important developments hit the tape to package several topics in one.
Meanwhile, here is the latest from Goldman Sachs covering the view behind AI trading flows and setups in several trading books.
According to their view (and ours) this is no longer a one-way trade but rather a mix of several hedges and outcomes:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.