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Good morning partner,
Few things to cover this morning:
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Yesterday’s Session
A rough day for the AI trade, and a great day for the rotation back into the real economy themes we’ve been covering recently.
The aggressive selling across the AI complex can be credited to news out of China, where CXMT is now set to significantly boost HBM chip output.
Which means everyone that relies on pricing power, like chipmakers in the United States, will likely see their margins suffer a little bit.
But,
There’s a much more important development at play here, and it is that recent market studies by Morgan Stanley and KPMG revealed an even darker truth.
Up to 80% of U.S. small businesses, and ~50% of all technology companies, now use Chinese AI models instead of American ones.
More than that…
AI-related debt is now so risky that issuance volume halved over the past month, and is down nearly 90% from two months ago.
Meaning, investors are not buying any more AI debt, and companies that used to rely on available financing will likely pull back on their previously committed backlogs.
As expected, all this capital is now flowing back to those who don’t rely on pricing power or token market share (like hyperscalers)
That makes our PMI ideas watchlist the hottest commodity in the market this month, and yesterday’s price action shows it.
Let’s take a look at Friday’s leaders and laggards:
Energy, Defensives, Communications.
Good news and bad news for the Offside portfolio, let’s start with the bad news:
The rally in energy was due to new escalations between Russia and Ukraine (though that confirms the Middle East is back in control for now.)
As you will see from yesterday’s post on energy, we are now in phase two of the diesel spread trade, where it is only a matter of time before refinery volumes kick back up and throw our long/short equity trade into a steep profit.
Defensives and communications rallying have to do with the de-risking prospects of a rotation out of the AI complex, where defensive stocks become more attractive, and communications benefit from the hyperscalers reacting.
That one is simple, so let’s get back to the interesting ones.
Real estate, one of my favorite “coiled springs” that showed up at the top of my PMI reads this month.
So far since that signal was given, the stocks selected to play the real estate spring release have shown encouraging price action and reiterated my thoughts on institutional accumulation.
Just a matter of time before Wall Street upgrades come in is my take, this is the third consecutive auction where real estate makes it to the top of the leaderboard.
Come Back Later
AI-Linked Debt Issuance & Activity, Offside Capital
Last night I broke down some of the most important shifts taking place in the market right now.
One of which is the state of AI credit in the United States, where three simple characteristics stood out as hard to ignore:
AI debt issuance had skyrocketed from an average of $35 billion to $132 billion so far this year alone.
That volume brought AI debt’s share of total investment-grade issuance to a record of ~12%, creating concerns around the sector’s sustainability.
From June to September of 2026, volumes had dropped more than 80% to signal a rapidly declining interest in the asset class and issuers.
When you zoom out, it all begins to make sense.
Token prices are down over 60% this year, forcing American AI companies to more than 2.5x their volumes just to keep up with old revenue targets.
Under older growth rates, that would have been no problem.
Today though, China has taken the majority of the U.S. AI market by the horns, and roughly 45% of the global AI market share.
Meaning,
These companies are no longer starting to fight with falling token prices but also with customer migration to Chinese models instead.
What we decide to do next is covered in the twofold view of long/short equity strategies for both American and Chinese tech stocks in that post.
News
CXMT Makes Key Progress on new chips to be released at the end of 2026, directly threatening Micron’s position in the industry when giants like Apple have already shifted their memory chip suppliers on rising costs.
China’s XPeng Plans to overtake Ford and Opel across European vehicle markets as new government-set quotas seem to favor Chinese cars above all other brands, perhaps a new idea theme to keep an eye on.
Trump Stands by His Diesel export call from Russia, even after pushback from local government and Ukraine. At the end of the day, this is part of our diesel spread thesis to lower prices before midterm elections.
Microsoft Joins the Chip Race to cut reliance on NVIDIA’s chip mafia and circular financing, the company announced it will use their own chips instead and undercut the rest of the ecosystem found in memory.
Movers & ES Levels
T-Mobile US 📈 Rose 2.2% after analysts at Raymond James upgraded its price target, citing that the fears of SpaceX competition on telecom market share were overblown, too early to tell is my take.
Accenture 📉 Gained just over 3% after announcing a new partnership with Dell Technologies aimed at boosting AI infrastructure monetization for enterprises, showing again that software is the toll booth to AI’s success.
Chipotle 📉 Fell near 4% after Starbucks said it will no longer buy the company, I do believe that something like CAVA makes a lot more sense to be added into the company’s portfolio.
AI Optical & Material Companies 📉 Lost over 10% on average after Broadcom’s CEO commented on a casino-like spending spree over AI financing, a comment that comes just as we have raised red flags over the credit risk and default chances from shady financial practices.
Now let’s get into some ES levels for today.
$7,850 is back to being the cutoff level between a run back to $7,900 or a selloff to $7,800 or less.
The low volume and tight range on the session was to be expected due to the partial holiday in markets and banks, but that didn’t stop me from watching the order flow for you.
Turns out, a lot of big sellers were stepping right in at that $7,850 mark and will likely show their hand and intent in today’s initial balance from 9:30am to 10:00am or so.
In any case, I am still watching that 100-point range cutting off in the middle at $7,850.
If you’re a trader today, lean on those extremes and think of that cutoff as your exit rather than entry unless we are coming from a sharp move into it from above/below to mark a larger swing into the extremes.
Portfolio
Not much happened yesterday during the lower volume and liquidity session on the half holiday.
The only thing worth noting is that the long/shorts in AI have been holding up well in their structure, and I expect them to give a decent swing this week when ASML and TSMC report their earnings.
Diesel news, and a pending spread collapse, will likely send the rest of the long/short plays and other recent additions somewhat exposed to fuel costs into a deep profit.
There is still a hedge on the futures market since Friday night, in profit and expected to be offloaded tomorrow morning, where Premium members will be alerted first via Telegram.
Options roll day is approaching as well, where you will experience the beauty of spread trading.
Here’s the positioning update for today’s premium members:
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