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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
We had another day of a broader equity de-risking, as all the macro market forces acted against risk-taking in the equity asset class.
Mainly rising bond yields and spiking oil prices, topped by the release of a 9.8% increase in PPI for all commodities, the most aggressive expansion rate since COVID and the great financial crisis before it.
The tug-of-war was seen at its most extreme expression yesterday as only the hyperscalers and some defensive areas like healthcare and staples held their ground.
As I’ve been covering these daily auctions, it is impossible not to notice the tug-of-war becoming more and more aggressive, requiring more liquidity to be present and keep this back-and-forth from becoming a larger market mess.
Perhaps that’s why Trump is promising a $1.3 trillion stimulus package upon Republicans winning the midterms, and why Bessent has taken the role of “the house” in the bond market by injecting an additional $10 billion of buybacks this week.
Don’t be fooled, this has nothing to do with helping yields or the average American.
If these measures continue, it will only make inflation worse for everyone.
They need to do this so that liquidity and relative yields are attractive enough to keep the AI mania going for a little while longer (until OpenAI / Anthropic see their IPOs.)
Otherwise, the entire market goes down.
Click here to read how the AI concentration is not only found in the S&P, but in the economy itself.
Let’s take a look at the leaders and laggers:
Financials, Real Estate, Industrials.
If I had to take a guess as to what this leadership means this morning, it is a yield curve control trade.
Financials benefit from yield curve swings, real estate (being one of the coiled springs) will also gain from normalizing mortgage rates, and industrials ex. AI will likely benefit from the government spending aspect of a yield curve control package.
Overall, a defensive take from the market after a day of broader de-risking.
This is also the mirror image to yesterday’s auction where energy led as a result of escalating Middle East conflicts, becoming the laggard today as everything else rebounds.
These rebound leaders matter as they tell you where the market is willing to race back into first…
And it’s not AI.
Keeping track of these auctions, and broader factor performance, has allowed me to spot the key risks and clustered drivers in the Offside Portfolio.
Because picking stocks isn’t enough to compound your returns, you must also know when you’re going “hot” or “cold”, and there are specific tools you can use to do so.
Like correlations, volatility, factor beta performance and much more.
Back in the Saddle
Uber’s CEO just bought $10 million worth of stock, and he’s not alone.
Other prominent investors (and speculators) like Bill Ackman, Andrew Macdonald, and Nancy Pelosi are behind this stock as well.
I’ll be the first to tell you that the future of robotaxis and autonomous vehicles creates a lot of uncertainty around Uber’s value proposition, but the beautiful thing is I don’t have to be right on that outcome to make a profit.
In fact, anything below $75 on the stock is fair game to me, since Uber must then deliver 1.5% revenue growth for the next decade in order to justify that price tag.
That’s the market’s quantified expectation, versus a historical average closer to 9.3% revenue growth.
And,
The recent layoffs are only part of what I broke down in my initial pitch, as mobility employees strike to receive full-time work benefits and the like, raising the cost of labor and hurting Uber’s cash flows.
Instead, the company has focused on its delivery business, which has now become more profitable and legally doesn’t require these full-time benefits for drivers.
Genius IQ moves all over from management, while still keeping FCF at double-digit growth for buyback funding… what’s not to like?
News
Diesel Hits $6/Gallon for the first time in history, amplifying the views around an ensuing energy crisis around the world, involving the primary inputs to manufacturing and transportation.
U.S. 10-year Treasuries flirt with 5.0% yields for the first time since the great financial crisis, sending the S&P 500 toward correction territory (though we are still ~500 points away from a correction in reality.)
PPI Inflation Comes in Hot at a rate of 9.8% for all commodities compared to last year, there is absolutely no way the Fed can still have second thoughts about a rate hike, because inflation is still there even when you remove oil spikes.
Copper Tariffs Stall and send the metal’s price lower to potentially end all of the speculation currently going on in the commodities market, surely it won’t stop the narrative of AI sucking down a ton of copper supply.
Movers & ES Levels
Apple 📈 Gained nearly 4% after debuting its first product overhaul in a while, with a foldable iPhone priced at $1,999. Honestly, I just see this as an opportunity to get better deals on the previous model.
Elevance Health 📈 Spiked over 5% after posting better than expected quarterly figures and raised guidance, showing just how much healthcare benefits from persistently higher inflation.
Intel 📉 Slipped by 5.6% after Piper Sandler downgraded the stock, citing that it is now fully priced in. I would expect this to be the first of several waves of AI-related downgrades to come.
TSMC 📉 Lost just under 2% even after posting record August revenue and orders growth, there comes a point where high valuations command impossible to meet targets, and such is the lay of the land in AI.
Now let’s get into some ES levels for today.
We got to the lower end of the range given yesterday at $7,590 only to see a recovery rally back to the upper range at $7,650.
As we continue to hover near the highs on the overnight session, it looks like passive selling is starting to come in at these highs, with most of the aggressive buyers “trapped” at $7,620 and then the initial bulk of the move at that $7,590 level.
Those are two areas sellers want to tackle today, and conversely the ones buyers will look to defend.
If buyers succeed, then I can see us going back to $7,700 to retest the distribution’s volume cutoff level.
Were sellers to win the day, I think it’s reasonable to expect $7,550-$7,525 as the closing range for the week.
Perhaps CPI will get us there if the action in bonds continues to pressure equities, otherwise another leg higher on WTI past $100 again could do the job.
As we broke structure higher, and have had several closes below $7,700, I am leaning more on the downside for now.
Portfolio
After yesterday’s September portfolio review, you may now have a better idea of what the plans for Q4 are on the portfolio.
It is more about calling the bunts than hunting for home runs right now, as the market structure breaks away from all other factors driving it.
Despite strong data out of the PMIs last week, and a clear lead to the industries that should see earnings momentum, it seems the market is discounting some of those stories and headed back to actual fundamentals.
Because truly, 60% of the market, and 90% of its price action, has become reliant on those growth narratives and not actual numbers.
That’s why we see continued equity de-risking across the board, with extremely selective price action across sectors.
Long/short equity and options strategies are recommended for such times, allowing us to cash flow the portfolio while significantly compressing its volatility.
Here’s the positioning update for today’s premium members:
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