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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
We now have the potential of a broader equity rally in the making, even after markets were disappointed about the GDP and PCE prints this week.
Manufacturing PMI data also reiterated some of the rotational work that is taking place in the market right now, with the AI trade becoming more selective than ever before as most of the bullish theories come under pressure.
In a rare occurrence, we now have semis/memory names rallying together with hyperscalers and other real economy sectors to give the tug-of-war a break.
Do I think the tug-of-war is now a thing of the past? Not really, as these trends become weaker with every piece of data that comes out, I don’t see a world where markets remain complacent rather than selective.
In our own portfolio, we have seen this happen with some AI angles rallying while others lag behind due to the sole reason that earnings will not be shared by all of AI.
You also can’t have as much certainty in this trade as there was before now that Anthropic has released its financial prospectus, and it shows that over $518 billion in compute commitments are likely to go unpaid.
With that, other instruments like GPU-backed loans are also at risk of default, a major risk markets are blindly moving past while credit markets continue to price in more aggressively.
Only one can be right, and it usually is the credit market.
Let’s take a look at yesterday’s leaders and laggards:
Technology, Materials, Communications.
This is beginning to look like a mix of several narratives going on right now, especially as the price of crude oil has now fallen below $90 on the latest set of news.
That automatically have a positive effect on inflation expectations and yields, therefore making it easier for these AI giants to continue taking on debt and expand.
Which explains the materials and communications rally, as they are the ones who benefit in isolation of everyone else once the hyperscalers roll out their next capex plan.
For technology (hyperscalers) I believe the rally comes from the same inflation/yield outlook, especially now that these companies have become leveraged with debt and directly exposed to where interest rates are headed.
Everything else outside of the three leaders can be explained by the decline in crude, which should give me evidence behind the coiled springs in the economy ready to be released.
More importantly though…
Laws of Capital
MU Capex/EBITDA vs Gross Margin Relationship, Offside Capital
Narratives are noise, and they usually follow the stock price.
A company in a bull run will always see positive news from management and talking heads in financial media.
Stocks in a bear trend will typically see more conservative and reserved management comments about the future, the same going for financial media talking heads.
Last night, I covered Micron earnings, and the above chart may be the most important take from the entire report:
50% of moves in Micron’s gross margins are explained by where the capex/depreciation ratio goes
A rising ratio results in lower gross margins 6-8 quarters later, and that can be explained through very simple capital laws.
The more you invest above your replacement rate, the more capacity you will have, and the more exposed to changes in demand you become.
Because Micron, SK Hynix, Samsung, and most of the memory complex are investing at this intensity…
I believe the peak may soon be here, especially as Micron hits a call wall at $1,100 this morning.
News
Broadcom Puts Together $60 Billion to fund chips for Anthropic, have they run out of sponsors after their prospectus showed nobody is going to get paid? I am interested in the details of this funding and how keen Broadcom is to protect their downside.
Additional Crude/Diesel Releases help bring prices lower for now, a short-term win for the diesel spread trade we have on, but not an all out victory just yet. We must see a definitive resolution to this problem before calling more shots.
Brazilian Elections will take place this weekend, where I will determine the likelihood of buying an ETF or individual stocks there, after all Brazil has the largest real rates in the world, perfect for a compression and risk-on assets.
Anthropic Moves IPO Deadline to Thanksgiving this year, something must be happening in the industry that forces a rushed capital raise now, and it aligns with every previous market cycle before it. I am interested to see the roadshow from investment banks once they come out.
Movers & ES Levels
Enerflex 📈 Popped 12% after signing a new deal to provide generators for a North American data center operator, reiterating the views we saw in the PMI yesterday for the electrical equipment industry.
Fair Isaac 📈 Rose 11.7% even after its worst quarter on record, potentially signaling the worst is already priced in and housing is in fact the “coiled spring” I pointed to in my GDP breakdown.
McCormick 📉 Fell 5% after posting weaker margins despite stronger sales, this is the direct effect shipping and packaging costs are having on these sort of companies across the economy.
Foghorn Therapeutics 📉 Lost 18.2% after ending a development relationship with Eli Lilly and also cutting over 40% of its workforce, this reminds me of the Hims & Hers episode where they sold down after ending a relationship with Novo only to rally back up again.
Now let’s get into some ES levels for today.
Yesterday, I mentioned if you were a buyer then that $7,700-$7,725 range was a great place to be buying up the index.
We’re seeing the fruits of that call this morning, even after the sudden whipsaw below it by about 20 points as a failed attempt from aggressive sellers.
What I am concerned with, and will likely prompt any positions to be sold, is that the rally was mostly due to the Anthropic IPO timeline push to November, creating a risk-on sentiment for a potential last push toward the end of the year.
It was also fueled by the decline in crude.
Both of which are extremely sensitive narratives that could turn on a dime just as quickly as they came out.
I would lean on $7,770 as the level to take out today for buyers, otherwise we will effectively make a lower high with lower lows for the week for a break of structure.
Sellers know this, and will look to attack there just as they did yesterday, and I expect it to happen with aggressive offers.
For today, NFP will likely lead us to that $7,770-$7,780 range before we really see the sellers react and show who wins the auction there.
A failed auction at those higher levels could lead us lower toward the $7,725-$7,700 range again, where a lower low could be had around $7,650 in that case.
That’s the range I am looking for today if I were trading it.
Portfolio
We remain rangebound between 7-9% in the net portfolio performance since June 2026.
I do think it’s time to begin considering some of the “coiled springs” in the economy that I broke down in my GDP analysis, backed by yesterday’s PMI data which will be sent to you shortly.
The reason I say that is because some of the current plays in AI and its supply chain have gone sort of cold now, leading me to think maybe the theme is moving to a handful of popular names rather than benefiting those who are supposed to benefit.
Because there’s no more money splashing around…
For the diesel spreads, I expect today to be a good whipsaw to profit as the price of crude declines, where I may add risk to that idea later today.
As we begin October, a portfolio review is due and I will take part of the weekend to work on it and deliver it next week so stay tuned for that.
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