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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Big turn out of the AI components yesterday, some of which are beginning to rebound this morning in what could be a normal retracement before continuing a move lower.
What’s becoming more accentuated by the day is the fact that the Situational Awareness bailout did nothing to fix the concentration levels now present in today’s market.
I say this because the S&P 500 declined on the day even though most sectors pushed higher as you can see in the heat map.
But,
Just because AI-related players declined, they dragged the rest of the market lower with them.
Recall there are two main themes happening in the market now, each day adding fuel to either depending on the price action we get:
Tug-of-war between AI concentration and real economy HALO names
Growth shock de-risking across the board (like we saw on Monday)
Both of these cases are welcome in my book, since we could actually work to fix the levels of concentration and leverage in the market right now in an orderly fashion.
Though it is probably too late for that now given how much we’ve gone into the extremes…
Let’s take a look at yesterday’s leaders and laggers:
Basic Materials, Energy, Industrials.
Very much focused on AI, despite the selloffs in memory and chipmakers throughout the day.
On the materials side I’m willing to bet this has all to do with the AI supply chain buildout bids, as the market confidence for continued capex continues to rise.
Energy is a twofold story, with Iran bottlenecks keeping the price of crude above $80/barrel, and the AI energy drag boosting other energy sources higher as well.
Now look at the laggards…
Communications, Real Estate, Financials.
The comms side was enough to drag the market lower the materials required for routers, memory, and chips leading the way lower.
With real estate and banks coming off, I have to put the blame on higher yields dimming the outlooks for these rate-sensitive areas of the market.
A bit of a growth shock on that end, but mostly an AI concentration day to boost the tail risks further.
For now, we play it as it goes, as we have some AI long/short positions still running.
Overconfident?
SK Hynix just announced a $28.3 billion buyback program to “boost shareholder returns.”
This couldn’t be more of an insult even if they tried…
Everyone with some market knowledge knows that buybacks above 1.0x P/B doesn’t create any shareholder value, it actually destroys it as the cost of capital increases for future projects and financing.
SK Hynix now trades at ~5.0x P/B.
Through capital cycles, you will typically see massive buyback volumes just before margins and valuations peak, especially as these are enacted at higher P/B multiples.
Look at the 2007 episode for homebuilder and mortgage originators buying back expensive stock
Or 2015 with shale and oil companies enacting aggressive buybacks
Even before the 2022 bear market…
So no, I am not going to tell you that this buyback announcement is bullish for SK Hynix or the memory space.
If anything, it can create a “sell the rallies” behavior from broader market participants.
News
Trump Pauses Canadian Tariffs for three days as a new deal with Ottawa is reached according to reports, this could be a net win for the trucking and lumber industry if we manage to actually keep these tariffs at bay for longer.
The UAE Cuts Economic Ties with Iran completely after an alleged strike on their vessels in the Strait. The UAE has also threatened to remove US military presence and strengthen ties with Turkey.
Google’s 7% Bond Issuance in Australia shows just how expensive and risky financing AI is getting, this is a big spread above the high-yield corporates at ~5%.
Anthropic Asks Top Banks to lend them $1.25 billion each, with another $1 billion ask from smaller banks. Admitting insolvency while touting record revenue (which missed targets by over 150%) doesn’t really make sense does it?
Movers & ES Levels
Duolingo 📈 Rose by 7% after DA Davidson upgraded the stock, citing continued monetization and fundamental growth to challenge the “AI will kill software” narrative further.
Targa Resources 📈 Gained over 7.1% after posting a strong EBITDA backdrop as a result of the broader energy rally, a result of sustained high oil prices likely to spread across other peers in the sector.
Nebius & Neoclouds 📉 Lost over 10% altogether as my thesis on capital cycles begin to play out, where neoclouds and memory are some of the most exposed to downside tail risks on diminishing margins and competition.
Carvana 📉 Fell by 7.0% after two company directors reportedly sold some stock, pointing to a potential peak in the growth momentum for the company and broader tech.
Now let’s get into some ES levels for today.
$7,650 - $7,800 remains the base to trade for now, until we see the potential September effect on volatility (which so far is right on schedule.)
We continue to see a “sell the rally” behavior currently, with the latest evidence shown at $7,740 and $7,720.
Should be see more aggressive selling activity at or below $7,700 and I suspect we may as well reach the lower end of the current base at $7,650.
What happens after that will be up to the momentum factor (AI) and how the components around memory and neoclouds continue to behave.
For now I wouldn’t have too strong of a view on the index unless these levels break on renewed aggressive offering from the sellers.
More importantly, we should continue to see passive bidding from the buyers in order to keep prices below that $7,800 turn distribution I mentioned on Monday.
Know that we are at an extremely important cutoff here at $7,700.
Below that we find a 150-point distribution running from $7,400 to $7,550 which I believe could trade and consolidate should we see that aggressive offer from sellers come in.
Portfolio
New all-time high for the portfolio at 14.0% on the quarter.
We remain over 50% in cash as I begin to structure some favorable option spread setups to take advantage of my views on the memory and neocloud cycles, packaged with my expectations for a September VIX breakout.
If I were to mark-to-market my recent put option spread trade that I put on yesterday, the portfolio would look more like 16-17%.
However,
It’s more responsible to keep those paper gains at bay until I decide to deal out of them, so as to not mislead you on the benefits of options trading.
Equity positions continue to benefit us overall, especially in software, consumer, and Chinese names.
I will be announcing a new deal from the pipeline soon, especially now that the price action is beginning to be constructive overall.
This is a name designed to win when government spending comes to save the day if/when rising bond yields put a stop to the AI investment wave.
By the way, there’s over 100% upside underwritten for this company.
Most members have 15x their membership costs to Offside Premium over the past quarter.
Financial growth starts at finding these compounding deals and letting the system run.
Here’s the positioning update for today’s premium members:
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