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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Markets are really quiet overall to start the week.
No clear leaders nor laggards became present yesterday.
Volatility has compressed significantly for the past few days, almost as if the market shifted to waiting for further news.
News that may come out of the inflation print this week, or perhaps the next round of AI earnings to be released.
The truth is, VIX seasonality should make the second half of the year a more difficult one for bulls.
But,
This year may be different, as we experience an all-time high dispersion trade reading, keeping traders short the VIX and long VIXEQ to boost the top 10 names of the S&P and raising the index even if nobody is buying the highs.
I believe we will see a VIX breakout soon, markets cannot stay this quiet for long.
Last night’s NVIDIA team up with Wall Street may be the root of it, we shall see.
Just remember, volatility can go both ways.
Let’s take a look at yesterday’s leaders and laggers:
Real Estate, Energy, Utilities.
In this low volatility environment, what matters is where markets are willing to raise exposure as nothing else sounds promising to them.
Yesterday’s leaders sent what I think is a very clear message to the rest of the market.
They took over as part of an inflationary “growth shock”, a thematic I’ve been spotting more often in these digests.
Otherwise, why would cyclicals and materials go down together on the day?
These leaders benefit from growth shocks driven by inflation, and their products and services receive an automatic price and margin boost from these underlying conditions.
Inflationary growth shocks are still part of my long bond thesis, seeing them come along is encouraging, but there are still three important indicators that need to align.
Spheric Financing
We all saw what Jensen Huang did last night live on CNBC.
Major asset managers and investment banks (like BlackRock and Goldman) agreed to put together a $500 billion pool to finance further AI infrastructure growth.
Sounds bullish, until you zoom in on the facts:
This is less than ~3% of their combined AUM
NVIDIA only needs this money as they burned through that same amount in the OpenAI backstop deal last month
This half a trillion will be used to expand the circular financing and artificial GPU demand
NVIDIA is saying this is not circular financing.
It’s just a pool of debt customers can access, where NVIDIA will guarantee 25% of the collateral (through GPUs) so that these customers can use the debt and buy more NVIDIA GPUs.
Not circular, it’s spherical…
I plugged that chart above because this isn’t’ the first time such a deal gets made.
In the internet bubble, leading companies like Lucent and Nortel did the exact same thing.
Look where they ended up as collateral values dropped and they couldn’t repay their debts.
News
Zuckerberg’s AI Manifesto includes over 6,500 words, all focused on making AI an open-source service for all. This is going to create a further decline in token prices I reckon, whether or not it creates new compute demand is up for debate.
Crypto Bros Become AI Bros as Bitcoin continues to slump in volatility and narratives, so these former gurus are shifting to take over AI stocks. As far as social sentiment goes, this is the classic cocktail party analogy.
MorningStar’s 3 Stocks to buy and sell are out for the week, I’m surprised to see them turn relatively bearish on some of AI’s hottest names right now.
Anthropic Lands a $9 billion Cloud deal with Riot Platforms, reiterating the social shift away from crypto and into AI plays, an indicator to keep track of in terms of euphoria.
Movers & ES Levels
Microsoft 📈 Gained 1.2% after announcing it will ramp up production of its own AI chips, another introduction to the supply equation most weren’t accounting for.
Sunrise Energy Metals 📈 Spiked 9.5% after announcing a $400 million US investment for its Australian scandium project, looks like rare earth metals could be back in play as the AI trade received fresh new funding.
Intel 📉 Lost 4% as the company announced it will raise $15 billion through stock issuance. I will cover the capital cycle in a deeper way this week to show you just how much money is being injected to the AI mania.
Apple📉 Fell just under 2% as Jefferies downgraded the stock, citing production and margin difficulties as the input costs for memory and other components keep spiking.
Now let’s get into some ES levels for today.
Low volatility on Friday has kept the outlook identical for today **
^ This is the second consecutive day I say this, goes to show how much we need a breakout.
$7,750 was taken and supported as expected from yesterday’s take.
It now seems that a lot of passive buyers have come in at $7,725 as well to continue to support the move higher, understanding that volatility is overdue to creep in for the market soon.
Which is why these buyers were so passive, understanding that a volatility breakout could quickly bring them to the below distribution starting at $7,620 or so.
This is preemptive risk management on their part, but also gives sellers the opening they would need if they truly want to step in with some aggressive selling.
As we’re prepared to get the NFP print here in a few, I believe this is the volatility that is being anticipated (at least in the short term.)
I believe $7,780 remains the cutoff point on the upside where business is just not getting done, drawing price away from that print.
On the downside, things become a bit nuanced here as the market seems to be in some disagreement.
$7,630 - $7,620 marks the mid-point between a “P” shaped profile running up to $7,750 and a “b” shaped profile running down to $7,450.
Very rarely do we get these symmetrical double distributions, and it typically signals the markets are “okay” with either move as conviction remains low.
Based on everything we’ve covered above, I would also think there’s lack of conviction here.
Portfolio
The portfolio remains near its all-time highs.
Right now, we still carry less than 6% annualized volatility with a net return of 11.5% so far into our first quarter.
That’s nearly a 2.0x Sharpe Ratio.
Believe me, keeping your volatility under control will be paramount in the second half of this year, lest you want to end up like most Twitter investors celebrating a ~30% swing on their accounts last week due to AI rebounds.
That’s not something to celebrate, it’s a symptom of overleverage and concentration.
I obsess over risk so that my portfolios (and yours) never blow up.
It’s what keeps you in the long game.
For $2/day, you can see firsthand how an Ex. Goldman Sachs analyst approaches each trade and idea, and more importantly how they are implemented in a portfolio.
Due diligence is close to being sent on our next big acquisition.
Two of our portfolio companies report earnings today, so I suspect we will be able to exit some call options supplementing our equity in peers at a hefty profit.
Let’s line up the day.
Here’s the positioning update for today’s premium members:
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