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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Notice the tug-of-war that continues in the AI concentration trade, widening the gap between current fundamentals and leverage ratios that keep rising.
This time we got another day of pro semis/memory at the expense of the hyperscalers and other real economy HALO names.
By association, on a day when AI wins, healthcare and communications also win as they are automatically associated with further AI applications like robotics and infrastructure.
Next time we see an AI red day, you will likely see these move in the same direction as well.
Why am I saying all this?
Because the AI trade has now spread to much more than just technology, covering roughly ~75% of all the price action in the stock market right now.
While I continue to find reasons to avoid the AI trade, I cannot be oblivious to the fact that it is one of the only things that continue to work in the market.
So I will play AI, just not in a spray and pray manner as most seem to be adopting across financial media.
Let’s take a look at yesterday’s leaders and laggers:
Basic Materials, Technology, Healthcare.
Further proof that you don’t need to be technology centric to enjoy the benefits of an AI green day.
If you are in metals - basic materials - you will be exposed to a few tailwinds happening not only around data centers, but also in the freight/trucking recovery boom and the coiled spring that is the car market.
The debasement trade is also carrying materials higher through metal miners (gold and silver mostly.)
On debasement… I’d like to point you to the fact that Bitcoin and gold futures have now started to build a negative relationship to the AI trade, a classic sign of capital rotations interestingly timed just before NVIDIA reports earnings.
While healthcare is, again, an AI robotics narrative taking place as the GLP-1 boom takes the backseat for now.
Energy and consumer names are down for different reasons. Oil crossing below $80 for the first time in a while is dragging the prospects of future cash flows lower for the energy companies.
The consumer keeps showing recession signs, this time with Dick’s Sporting Goods (DKS) having the worst day in the stock’s history after weaker earnings.
Credit Traders
From personal experience at Citi’s Delta One desk, I think credit traders are some of the smartest people in the market.
When these people have a view - and act on it - it pays a highly reliable signal to listen and try to understand why they’re doing things.
Right now,
They expect Oracle and Broadcom to pretty much default on their debts, which are 100% tied to OpenAI’s ability to pay its commitments (which are stacked up $5 trillion to <$100 billion in ARR.)
You can see the high-risk chain continues down to Meta, NVIDIA, and Alphabet.
These companies have off-balance sheet commitments to lease data centers and fill cloud usage for OpenAI and Anthropic now reaching 70-80% of company market capitalization in some cases.
While those in the high-risk zone won’t suffer as much as the distressed names, the reckoning still could correct valuations to the tune of ~30% in my view.
Again, without sounding overly bearish, I’m just interpreting what the market is showing me.
You know I have a long/short equity and options book running on AI names, which is specifically designed to admit one thing:
I don’t know what happens or when it will happen
So whenever the tape shows me direction, I can quickly pivot my long vs short exposure alike.
News
OpenAI’s Head of Data Centers Chris Malone has left the company, making that the 20th executive who jumps ship before an IPO cash out is on the table. Usually, people line up to join companies when they are expected to IPO soon.
NVIDIA Has Become known not for its chipmaking business, but for adopting a banking role for the AI financing boom, I will cover the company’s earnings tonight and update you on these accounting horrors.
Consumer Trends Turn Picky as Visa and Walmart earnings data show, leading us to seek ideas in the bottom of the K-shaped consumer economy as we already have some of the top K covered in the portfolio.
HP Continues to Choose China as it now joins Huawei to enable WiFi technology, a decision that comes after replacing American memory with cheaper (just as powerful) Chinese memory, a reiteration to my memory peak cycle thesis.
Movers & ES Levels
Bloom Energy 📈 Jumped 6.6% after reports pointed to Nancy Pelosi being an investor in the stock, if her track record serves as an expectations bar, then maybe the AI capex still has more room to run.
Navitas Semiconductor 📈 Gained nearly 2.0% after announcing intentions to acquire Claros, a power management company. The Edward Chancellor texts on the capital cycle will flash red if you are familiar with what this means for markets.
Dick’s Sporting Goods 📉 Had its worst day since it became public, losing over 30% after a bit hit from Foot Locker and other premium shoe lines like Nike. This event fortunately had no effect on our consumer apparel holdings for the Offside Portfolio.
Rubrik 📉 Lost 5.5% as investors take profit ahead of earnings, showing the rotation is hitting the cybersecurity space as AI adoption rates slow across corporates.
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
No need to panic, that change from 13% to ~9% is due to my marking options contracts after big swings in the underlying.
Yesterday happened to be a bad day to do so.
Two days ago, that marking would have resulted in a net ~15% performance on the portfolio, that’s just the nature of options.
Still,
These are mostly long/short strategies, where the longer the payoff takes, the longer we can keep rolling the short leg to finance up to 80% of the costs on the long leg.
So, while the marking reflects a hit on the P/L today, two weeks from now that marking could bring us to an all-time high.
This is how we leverage volatility while retaining a 1.8-2.5x Sharpe Ratio through the year.
Here’s the positioning update for today’s premium members:
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