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Good morning partner,
A few things to cover this morning:
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Yesterday’s Session
Another rebound day for the AI complex in this tug-of-war.
What’s more interesting about this recent rotational behavior is that, compared to the previous rotations from this month, this one is turning out to be a bit more inclusive.
You will notice a lot of consumer cyclicals, real estate, and other stocks beginning to go up together with AI recently.
Which is directly tied to the broader factor performance and rotation tracked in our weekly plans, showing the market now likes a combination of:
Value, Smaller companies, and Breadth
The market’s plumbing usually works like this during rotations out of concentrated areas.
A lot of noise, and even more hidden signals that will look “obvious” once the concentration is eventually normalized.
That doesn’t mean we skip the AI trade altogether.
Not at all,
But it does mean we should play it smart if we choose to put our capital at risk among this volatile and uncertain area of the market.
Like Custom Truck One Source (CTOS.)
I pitched that stock to you back in August after a PMI breakout led me to find opportunities in the electrification corner of the AI buildout.
This company sits right in the middle of it, and yesterday’s price action proved our work was headed in the right direction, or at least a 12% rally in a single day seems to make that the case.
Let’s take a look at yesterday’s leaders and laggards:
Technology, Communications, Industrials.
This is the AI rebound at work for you, hitting all the peripheral sectors that benefit from whatever bullish narrative is lifting the heart of this trade.
I suspect the sentiment will continue to run up until the Anthropic IPO is finalized, where the hype and buildup will end up in a similar crescendo to how internet IPOs ended up in 2000.
And,
I’m not just saying it to sound trendy, I spent the entire day yesterday reviewing the S-1 prospectus for the IPO.
Needless to say there are a lot of red flags in the accounting, which directly challenge the $2 trillion valuation they are going for.
More on that in a dedicated post.
All this is to say I am more interested in what the market is rewarding outside of the AI rebound:
Cyclicals, Real Estate
Which is exactly where the factor rotations shown in the weekly plan, combined with the PMI breakouts from last month, are leading my portfolio decisions.
On a macro basis, I also believe the next decade of investing will look completely different for most people.
Like previous concentration episodes, today’s setup resembles every previous “lost decade” for the S&P 500.
This can be a frustrating time for most, and the opportunity of a lifetime for us.
Why?
Because we studied 37 markets across 50 years, all to answer the simple question of:
“Where does alpha still live?”
The initial answer to that question is inside a publication I made this week.
The rest of it is coming in November through a free webinar.
I believe this will mark the most critical decade of my investment career, and I want it to be yours too.
AI’s Crown Jewel
Anthropic Cash Flow Statement, S-1 Prospectus Filing
Finance professors are going to have a hard time explaining how a company that loses $80 billion can be valued at $2 trillion.
Especially as its revenue growth was just cut in half last quarter, with no real plan to recoup their old targets as token prices and spending keep hitting yearly lows.
One answer can be found in creative accounting in the above cash flow statement.
Anthropic managed to post a $3.9 billion operating cash flow compared to its $80 billion net loss through an item 99% of investors will not understand…
Convertible note valuations
Simply put,
As compute demand needs to be manufactured through vendor (or circular) financing through NVIDIA and the big hyperscalers,
Anthropic needs to fund these compute commitments somehow, and it won’t be with revenues or operating profits as we now know.
Rather,
They are issuing convertible bonds to these vendors in order to finance the future compute demand and its commitments.
When the value of these products changes, the company can essentially post that paper gain as a profit, not unlike the massive “other income” items being posted by NVIDIA right now.
In other words,
All of Anthropic’s hype is now riding on paper profits, which pose a major threat to the entire AI trade.
Which, again, creates a headache for most and an opportunity for us to ride the next rotation.
You see,
Most international markets, especially in Asia, are also centered on chipmaking and cloud compute companies.
Like Taiwan, South Korea, and Japan.
When those funds are liquidated and all that fresh capital needs to find a better home in Asia, I believe China will be there to absorb it all.
In fact, some funds are already doing so, and big banks like Citigroup are looking to expand their equities business in China as well.
News
Goldman’s GDP Forecasts expect the U.S. economy to grow next quarter, and their reports point to just how much of this growth will be coming from AI and its impact on the rest of the economy.
Coca-Cola Earnings show the defensive economy is still booming despite a record-low consumer sentiment reading in the United States, amplifying the factor rotation reads bidding value and quality companies.
Trump Points to More Russian Diesel to be released into the market, easing the distillate price pressures currently present in the energy sector, and a net win for an already profitable trade in this long/short diesel equity spread.
Elon Musk Comments on AI financing environments, reiterating the views we’ve been posting on the entire debt and loan structures going sour, as banks won’t lend to cloud companies anymore.
Movers & ES Levels
Royal Caribbean 📈 Rallied over 5.3% after posting a strong quarter, showing again that my “coiled springs” corner of consumer names is beginning to take off on bottoming sentiment and fuel costs.
JetBlue Airways 📈 Gained 19% after a similarly strong quarter to Royal Caribbean, reiterating the recovery strength in the consumer names and experiences brands despite sentiment and easing pressures on the Iran front.
Innodata 📉 Slipped more than 25% after posting weaker quarterly results even as the company is at the center of the AI data center complex, once a PMI pick, this name is now off our AI noise list.
Xylem 📉 Lost 14.3% after reporting another weak quarterly hit to the AI complex, this time coming from the infrastructure side to make me question whether I should keep some of those stocks in the portfolio.
Now let’s get into some ES levels for today.
Warned you of a run toward $7,750 from the aggressive buying auction from yesterday, and we rammed through that to secure a short-term bull run for now.
If we continue to see the de-escalations in the Middle East, and a less aggressive Fed commentary today, we may see $7,800 sooner than later this week.
Otherwise, I am expecting a retest of $7,750 to have it become resistance and expand the day’s range toward the major cutoff at $7,700.
For the day’s high, I could shoot for $7,815 or so if the FOMC meeting comes out as supportive for the bulls.
Portfolio
Really good day for the portfolio yesterday; we are back above the 10% mark and grinding toward a new all-time high performance since our June 2026 inception.
Last month, I planned for this recovery and dug deep to find these areas of improvement and alpha across any and all asset classes.
Looks like I’ve done my job well so far…
There will be some decisions to make this week with some of the names that are already in profit, and others that have fallen behind in price action and may need a thesis revision at this point.
What matters is that my macro and micro research has accurately pointed us to the real economy “coiled spring” areas of alpha, and I look forward to refilling that pipeline for you when next month’s PMI reports are released.
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