Morning Digest 08/21

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Good morning partner,

Few things to cover this morning:

Yesterday’s Session

The semis/memory trade pushed up at the expense of some hyperscalers and software, reiterating the divergence spread I pointed out to you yesterday.

A tug-of-war that keeps expanding, faking us all out after the Situational Awareness bailout (when I thought that leverage in the system would normalize.)

Boy was I wrong…

Leverage is still alive and well, especially now that South Korean retail traders are bringing their gambling habits over to US stocks, specifically memory and other AI-related names.

With this shift of geography, I believe the Nasdaq 100 could be setting itself up for a potential repeat of what happened to the South Korean Kospi madness.

Though not at the same scale, the Kospi was 98% concentrated while the Nasdaq is ~70%, I would still beware of the amount of short interest that has built up on the index over the quarter.

Especially now that we seem to have lost $7,700 on the S&P.

Let’s take a look at yesterday’s leaders and laggers:

Basic Materials, Communications, Technology.

The Treasury decision to enact bond buybacks indefinitely has caused some hard assets to react in a bullish way, mistakenly thinking that this is a net bid of liquidity in the system.

I would say it’s more of a drowning kick, which is why the debasement trade continued to run.

Gold and silver drove the materials trade yesterday, with most mining names up over 20% on the week already…

Communications were part of this bid as well, considering that whatever is good for risk-on assets is good for the broader tech stack surrounding AI (also why hyperscalers were down on the day for the most part.)

Technology - being communications’ cousin - also went up on the day, though very selectively.

Software, hyperscalers, and other non-AI technology went down in this tug-of-war thematic we have going on.

Part of this sentiment can be attributed to SK Hynix and its $28.3 billion buyback announcement.

After reading yesterday’s capital supply analysis on that decision, you too would begin asking questions rather than blindly believe what the media is telling you.

Wrong Choice

What started with SK Hynix yesterday has spread around the rest of the memory industry.

Which by the way is one of the most sensitive to the capital cycle along with the neoclouds…

Here’s what happened this week alone, pointing to a potential peak and turn of the capital cycle in this very delicate industry:

My question is simple.

If the sold-out inventory and bottlenecks around memory are so problematic, then why aren’t these companies investing more into capacity rather than “rewarding” shareholders?

I suspect it is because over $1 trillion worth of inventory is about to hit the market in bulk, which is why memory carries the lowest capex intensity multiple out of all the AI space.

These buybacks, done at over 5.0x P/B, will need to deliver 20% returns per year just to make economic sense.

That also tells you how overconfident - or oblivious - management teams are, destroying shareholder value as long as they can keep pumping the stock.

News

Movers & ES Levels

Now let’s get into some ES levels for today.

** Due to low volatility, yesterday’s take on the index remains the same for today

Note that $7,655 was hit to validate our lower-level of the current range, with no aggressive reaction yet, meaning we could hit it again and lose it most likely. **

$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

A bit of a pullback in our largest winners yesterday, courtesy of the Treasury buyback and tug-of-war outlined above.

As far as our memory long/short options trade, the rebound is making the setup more attractive in terms of financing our long leg for another round next month.

Because my bet on that trade leans on inventory hitting the market by November, I have structured it so we have roughly three months of roll opportunities and finance over 60% of the long put side, significantly reducing our risk and boosting our potential return.

Just like a real Goldman Sachs trader would.

There are a few names in the pipeline waiting confirmation to be put on the portfolio as well, and I suspect next week will give us the chance to pull the trigger on them.

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.

For $2/day, you won’t find the same quality elsewhere (believe me, I’ve looked.)

Here’s the positioning update for today’s premium members: