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Good morning partner,
A few things to cover this morning:
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Yesterday’s Session
Most of the AI complex has now fallen into correction territory (10% off the highs) among the large and mega-caps, while smaller companies have fallen straight into a bear market (20% of more off the highs.)
Yesterday was one such day of de-risking, where only defensives and real economy sectors saw the benefits of this rotation away from all of the AI financing risks.
The warnings were clearly laid out in this newsletter, from Oracle’s data center delays, to Anthropic’s financials showing trillions in compute and GPU-backed loans are sure to go under.
To the untrained investor, these low P/E multiples among the AI companies would seem like the best deal of the year…
Nothing could be further from the truth.
When markets suddenly are unwilling to pay up for the most exciting and fastest-growing companies in the world,
There’s a problem.
Think about it this way:
NVIDIA trades at 18.4x forward P/E
Costco trades at 43.7x forward P/E
Why?
Because NVIDIA’s growth has turned into a massive balance sheet and debt risk, and no matter what they tell you this is still a very cyclical business.
Unlike Costco for example, which is not cyclical at all.
The fact markets are now rotating into defensive businesses and even willing to pay up premiums for them is the strongest signal you can take away from all this.
Five days without stop, AI trades have been unwinding…
This is why I’m buying one of the easiest “no-brainers” for this year in a defensive business.
It’s EV/EBITDA multiple? A premium to its competitors.
For a good reason.
Let’s take a look at Yesterday’s leaders and laggards:
Energy, Defensives, Healthcare.
The mix of leaders pointing to an economic “growth shock” is getting more aggressive now.
What gives me confidence in still looking for buying opportunities is the fact that this hasn’t become a broad market de-grossing, but rather a rotation.
It makes sense,
From my GDP print analysis this month, you would have seen that the economy is not going in the gutter.
It’s simply shifting where it gets its growth from.
AI-related contributions slowed down significantly, letting a defensive consumer and defensive business investments take its place.
Then, the PMI reports confirmed that view entirely, calling me to shift the portfolio holdings.
Of all things, wood product companies were bought (to much critique online) only for them to outperform the S&P 500 by 6%+ since opening those positions.
Interestingly enough, even through slower housing data this month, real estate is among the leading sectors outside of the top defensives.
The reason is because of the wood products industry breakout in the PMI reports, leading those stock picks straight into profit.
Your Backlog is My IPO
The leading AI labs in the United States (OpenAI, Anthropic) have racked up trillions of cloud commitments against top-tier tenants.
Google, Microsoft, Amazon
Together they hold over $1.6 trillion in obligations from these labs, which is significant enough compared to their market caps, though not big enough to be a cause of major concern.
Still, markets have been trading these stocks sideways for a reason…
They can’t decide how big this thing will get, and management teams know this is starting to kill their momentum.
It’s the reason why you see the big three develop their own AI capabilities, data centers, and compute facilities.
A hard reckoning just took place, letting the world know you can’t trust these AI labs to repay they commitments as their own financials are now failing.
Other names, like Oracle and CoreWeave, weren’t so lucky.
They bet upwards of 80-100%+ of their market caps in these commitments, essentially bankrupting their businesses.
You know where this isn’t happening?
In a country that owns 45% of the global AI market share, and one that is about to turn its capital cycle upside down just like:
South Korea in the 2000s
Japan in the 1980s
Both of which saw 500%+ rallies in their stock markets over the next decade.
China is preparing to do the same, and lots of “smart money” have already been talking about this.
News
Anthropic Racked Up $600 billion worth of the same cloud commitments that spiked credit risk at the big tech firms. Why? The company only reported $16.1 billion in revenue for the first half of the year.
Sovereign Wealth Funds Pour back into Chinese equities, as the broader macro thesis I posted this week begins to find traction sooner than expected, will have to dig deeper and quicker for Premium members.
Citadel’s Ken Griffin Calls AI a Bubble after breaking down some of the financial nonsense, specifically tackling the obscene spending against nothing to show for it in terms of returns or capital efficiency.
Trump Pushes Back on Iran Negotiations until after the midterms, I would have expected these to take place before the elections, but nonetheless keeps supporting my thesis in this diesel long/short equity trade.
Movers & ES Levels
United Airlines 📈 Gained 4% after stronger than expected bookings, despite a depressed and tight-budgeted consumer coupled with rising fuel costs, the company is showing how resilient some spending categories are right now.
Capital One 📈 Rose by 2.5% after posting decent profit growth, though their credit profile seems to be deteriorating a bit as credit card delinquencies continue to rise.
Netflix 📉 Lost 5.3% after posting weaker viewership numbers and revenue guidance, historically this is a recession indicator as people don’t even have the time to watch entertainment as they are having to work on fixing their finances.
Lam Research 📉 Slipped over 5% after posting a thin quarter, showing that the risks I’ve been pointing to you in the AI space are only accelerating and spreading beyond AI labs.
Now let’s get into some ES levels for today.
Yesterday I told buyers to wait for a dip toward $7,700-$7,715.
We just got to that range and it seems the “trapped” aggressive buyers around that area are starting to react again.
However,
This time the reaction seems a bit more passive compared to how sellers took over aggressively toward the highs of $7,800.
If you’re a buyer in this dip, I would tread lightly as the auction is turning into a sort of “sell the rallies” structure, with passive support here at the $7,700-$7,715 range.
I would say the odds are in the seller’s favor, where a retracement back to $7,750 could be the best short entry, otherwise an aggressive break and ram below this $7,700-$7,715 mark.
Either way, watch the CoreWeave action today, as it seems the entire sentiment and news cycle is centered around what that stock does and how it can impact the broader market.
Portfolio
Being willing to look wrong in the short-term to make profits in the long-term is at the heart of most great investors.
After adding some of the names I mentioned above, that’s how we look right now…
Wrong.
But, as the market rotation begins to move into some of those contrarian names, more people are recognizing the power behind data-driven investment choices.
And especially why I always attribute 80% of my ideas to the PMI reports backed by other economic data.
Those are the “bunts” the portfolio is relying on for now while the table gets hot again and shows us some home runs.
I believe the next wave of opportunity will be in AI-proof businesses in this rotation, especially the ones institutions can’t touch yet.
That’s why most of my energy this week has gone toward finding these setups, and providing you with reasons to look into them.
More of those coming your way, let’s keep chugging along with the bunts meanwhile!
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