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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
Once again, most stocks failed to rally as the majority got dragged lower by the broader S&P 500 pullback past one of our key levels.
Notice one very interesting dynamic here though:
This wasn’t a definite risk-off event for equities
Yes, most sectors declined in tandem, led by semis and memory as part of the high-beta AI trade.
But, defensive areas like healthcare and the consumer saw some of that capital flight head to them instead.
That is the real economy rotation I have been talking about here, a secondary theme from the tug-of-war between semis/memory and hyperscalers.
Recall I told you to zoom out and make that theme a much simpler one like:
Cash flow quality vs growth at any cost
Yesterday, I rotated some of the Offside Portfolio’s holdings to add more of the former in cash flow quality.
Let’s take a look at Friday’s leaders and laggers:
Utilities, Healthcare, Defensives.
This is the defensive rotation back to the real economy as a result of a capital flight out of AI-related trades overall.
Surprisingly, not all consumers benefited from this rotation, as investors specifically chose defensives rather than cyclicals.
Understanding these daily flows is extremely important, because they reveal most (if not all) of the themes you will eventually see show up in the mainstream financial media.
One of them, seen in the defensives vs cyclicals spread above, is the potential for an economic “growth shock.”
Looking at the yield curve action over the past month, where a 2-year rallies to meet and pass the 10-year, there is definitely a rising probability of this growth shock trade coming up.
Which is exactly why I’m reiterating my buy on these two defensive names, which benefit from the government’s knee-jerk reaction to spend each time we have one of these shocks:
Druckenmiller’s Diary
Stanley Druckenmiller, arguably the best investor in history (outside of Buffett) gave Scott Bessent a direct critique of his buyback efforts on the Treasuries.
Simply put, they won’t work as intended to artificially lower yields in the short-term.
The gap between swaps and Treasury yields narrowed to show one thing:
Yields need to become more attractive in order to remain competitive
When you consider things like a 3% Japanese 10-year (which costs 3.7% to hedge in the carry trade), it would now make more sense to buy Japanese bonds over U.S. ones.
Or, zoom in domestically…
It now pays over 7% to invest in data center bonds “secured” by giants like NVIDIA, Meta, Google, and Amazon.
Why in the world would anyone be buying Treasuries at this point?
This isn’t something a $4 billion buyback can fix, as there are hundreds of billions flying out the window.
I believe the extremism in Japan is soon to turn, or at least that’s what the USDJPY tells me.
And when that happens, lots of equities will have a reaction, which is why I’ve built the perfect long/short spread to take on that trade.
My research on Japan and its effects is coming out this week, but you can get the live trade alert if I decide to take it before sending out my paper:
And if you want to buy bond ETFs like the TLT,
At least get familiar with what actually drives bonds, so you can keep a scoreboard handy and keep yourself from buying too early.
News
NVIDIA Seeks $14 Billion deal to buy Hugging Face, the company that OpenAI hacked twice last month, I’m sure there’s no conflict of interest here or an attempt to hide further hacks. Also, this now marks over $125 billion in total financing this week alone.
Conflict Intensifies in Iran as both the U.S. and Iran escalate retaliations along with Israel and Lebanon, it seems like the classic setup for a new ceasefire announcement should we see the S&P below $7,500.
GoPro Jumps Big after a takeover was announced, the stock almost got to $2 a share after I pitched it publicly on Twitter at roughly $0.70.
Crude Tops $90 again after escalations in the Middle East continue, the inflation effects and expectations from this will likely push the bond yield rally further.
Movers & ES Levels
Duolingo 📈 Gained over 7% after Evercore upgraded the stock, translation? Wall Street is realizing the “AI will kill software” narrative is done and over with, AI has moved onto the next narrative which is now physical in robotics.
Medtronic 📈 Rose by 1.5% after announcing a $700 million investment into surgery robotics, reiterating the fact that the AI narrative has now changed, there are several healthcare robotics names in our pipeline ready to go now.
Micron 📉 Lost over 2.5% as reports suggest workers are planning to strike, I remember this happened at Samsung just weeks before the huge KOSPI selloff, will history repeat itself?
NVIDIA 📉 Fell by 1.5% as the market critiqued its latest wave of stakes in Lambda being part of a much larger circular financing scheme. Will markets come back to their senses and punish these accounting shenanigans?
Now let’s get into some ES levels for today.
We are finally out of the range-bound woods on the S&P, it’s been nearly a month hasn’t it?
Let’s begin with the main cutoff level in this “P” shape distribution, set at $7,700.
We are repeatedly closing below this level, as broader market participants believe that the concept of “fair” value for the index could be found lower.
If we close the week below this cutoff, there’s no saying where we may settle next.
What I can tell you is this:
Bulls got rammed at $7,650 and have sought revenge at the $7,620 - $7,630 range
The fact that the reaction after being taken out happened just 20-30 points away from the last liquidation tells me the buyers are desperate to seek exposure on any dip possible, even if it’s this small.
Bears on the other hand are mostly present at $7,675 and still holding a bulk of their dealt positions there, making it a target for bulls to hit and potentially ram through.
They became aggressive again when they sold at $7,650 knowing that’s where buyers were trapped, and have now become passive sellers around the $7,650-$7,640 range.
This shift to passive happens as bulls are now becoming aggressive at the lower $7,620-$7,630 level, so I expect some fighting to happen at these passive/aggressive marks.
If we break lower, I see $7,550 as a next potential level.
Breaking higher could lead us to $7,700 as the cutoff again, where I want to see the ultimate market reaction for direction.
Portfolio
A judgment call was made yesterday in a live trade alert for the portfolio.
What are becoming our biggest losers in the AI infrastructure trade have been reinforced by recent PMI data.
Shortages in the key components these companies operate with continue to worsen, which can be a good thing for demand but a bad thing for margins.
I will let the market decide which of the two they want to back for these names, and if they cross key levels I will get rid of them right away, profiting from the short hedge on them too.
Our short options leg on memory is about to go into 75-80% profit, allowing for a rollover and finance up to 50% of the long leg cost so far, significantly reducing the P/L impact and bringing us back toward the previous highs.
What’s more important about all this is the market’s message:
AI is not working as it should
It seems like the “your capex is my gain” thesis is now dead.
That brings me to my next picks in a much bigger theme coming out of Japan, coming out this week for Premium members, so stay tuned.
Here’s the positioning update for today’s premium members:
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