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Good morning partner,
Few things to cover this morning:
** PREMIUM MEMBER REMINDER (If you haven’t yet) ‼
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Yesterday’s Session
The session was, to say the least, heavily influenced by the bank earnings, which gave the AI financing boom another leg to run on.
However,
That’s not what the numbers suggest once you dig through them, so I would much rather lean on the signals given by the decline in the financial sector alongside other cyclical areas of the economy.
More specifically, Goldman Sachs’ earnings demonstrated the bank wants nothing to do with AI exposure or projects, as they are applying a similar playbook compared to the subprime mortgage bonds in 2008.
Structure the AI loans, package them and sell them for a fee, and then go bet against them as soon as they are out the door.
It’s become very clear, and their massive gains in investment banking fees show it.
I also dug through their derivatives trading desk data and landed on that hedging activity going on in all AI-related debt products.
So yes, rest assured that this reaction in the AI complex may be shorter-lived than we thought.
Let’s take a look at Friday’s leaders and laggards:
Energy, Communications, Utilities.
Further escalations out of the Middle East have kept diesel and other distillate fuel prices higher despite an easing of shipping volumes around the Strait of Hormuz.
That’s helping the energy sector gain ground at the moment, but I believe we are entering the later stages of that trade right now.
Communications (through hyperscalers and a chipmaking rebound) along with utilities were part of the banking earnings rally we saw across the AI trade.
Since, after all, strong banks will lead to available supply of bonds to continue building data centers and calling on more energy demand.
However,
This is where the laggards come to tell you what’s actually happening…
Industrials and basic materials, some of the first in line to get paid when new data center projects are financed and approved, fell on the day.
Meaning, the initial take from the bank earnings wasn’t as strong as it seemed, and that’s exactly what I walked you through in last night’s newsletter.
At the end of the day, these data centers and AI-related companies are struggling with a twofold storm right now in:
Collapsing token prices (companies need 2.5x more volume just to keep old revenue targets)
Customer migration into cheaper Chinese open-source models (50% of U.S. tech firms have made the switch)
That is the bigger issue at play here, which explains why the AI complex has become so sensitive to the news cycle and some macro movements lately.
Quiet Markets
Premium members know that I took a hedge in the futures market last Friday, and that position is still open in the portfolio for now.
I’ve been refreshing all of my time series models, and seeing more takes like the one above, all pointing to a much-needed spike in volatility for the S&P 500.
You may have noticed this week has been quiet, in the same 50 to 100-point trading range in the S&P 500 without much excitement to speak of.
That’s a reason to keep a hedge on, and definitely not a reason to sell and wait on the sidelines.
Because, as useful and powerful as these models are, this is not a normal market.
60% of the S&P is now in some way, shape, or form related to whatever the AI basket does that day.
So most tools that were useful for a normally functioning market go out the window quickly.
Which is why I’m undertaking a deep study to find less “crowded” markets where retail traders like you and me may still have an easier time finding an edge.
There are several candidates in the works, and I’m excited to be presenting that opportunity to Premium members once my studies are through.
For now though, we still have to deal with the market we’ve inherited.
News
Existing Home Sales Grew slightly this month despite all the headwinds currently present in housing, a massive win for the stocks we’ve selected around this “coiled spring”, such as this wood supplier with over 90% upside.
Kroger Will Sack 3,000 Jobs in the corporate realm and replace them with AI, a big test for the technology and its adoption potential across the real economy and a bull case for mid-cap businesses.
Blackstone’s Data Center Debt Shakes on weak foundations, the same foundations I broke down last night from Goldman’s derivatives desk very clearly dumping AI-related bonds and even insuring against them.
Anthropic Will Report New Financials under an updated S-1 filing to investors, looking to redeem itself after its “80% operating margin” mistake, let’s see how they will choose to mislead the public this time.
Movers & ES Levels
Fermi 📈 Rallied over 14% after announcing a new agreement with AMD to cover its data center infrastructure business, I would like to see how this turns out as yesterday’s Goldman earnings showed a fragile state of data center loans.
Meta 📈 Gained just under 3% after announcing Muse Wonder, a leading AI model that is supposed to rival the leading offers now positioned across the world in OpenAI and Anthropic.
Memory Stocks 📉 Fell 6% on average after the CXMT news of flooding the market with new chips by the end of the year and a further collapse in the South Korean KOSPI index.
Johnson & Johnson 📉 Slipped by 5.7% after its medical technology business failed to meet expectations, disproving yet another one of the AI narratives around medical robotics and applications.
Now let’s get into some ES levels for today.
We sustain just as tight a level on the index with a lack of proper volatility, with the $7,800-$7,900 range becoming even narrower by the day.
I still lean on $7,865 as potential overhead resistance and will look to $7,815 as potential support for an initial balance in the first half hour of trading today.
If you’re part of Premium, you know that we have had a hedge on futures since last Friday, and I intend to hold it through these ranges and consider closing out at a profit before the inflation print comes out later today.
For now,
Keep in mind CPI and options expiration Friday can act as the sort of catalyst to break us out of the current trading ranges, if you have no positions on right now, I would personally close the screens until next week.
Portfolio
Just like the market has been quiet, so has our portfolio.
Remaining along the 7-9% performance line for now while we continue to build the pipeline of ideas to carry us into new all-time highs for the watermark.
Still, over $10,000 of realized profits for 10% cash returns is not bad given we only got started in June of this year…
Anyway, I will tell you that the current drivers of the portfolio (in terms of betas) are the rising bond yields and persistently high diesel prices.
Both of which are in late stages before normalizing, it seems, especially diesel, as oil prices and shipping volumes have reportedly normalized to pre-war levels.
That being said,
I am very excited to present to you the next memory options spread trade this week, as options expiry Friday will essentially force me to roll both long/short legs of current trades.
If my thesis is right (so far it is) on memory, this will allow us a few more months to let this play out and score a big payout for the portfolio.
Here’s the positioning update for today’s premium members:
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