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Good morning partner,
A few things to cover this morning:
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Yesterday’s Session
Busy day for the AI complex as two of the most important hyperscalers in the mix reported their latest quarterly figures.
Microsoft rallied initially, while Alphabet lost some ground.
Both are equally important in my view as far as capex, AI monetization, and the broader state (health) of the debt structuring around this technology.
As you know,
There are about $3.7 trillion floating around attached to these loans, whose yields are - on average - above the 10% mark to classify them as junk bonds.
You do not assign a junk status to money that is being lent to the fastest-growing and potentially most profitable technology in the world!
So either the credit market knows something we don’t, or the equity market is up for a big correction in their valuation assumptions.
Anyways, I will dig through the GOOGL and MSFT numbers to end the week and provide you with a weekend update on what I think about them and whether there’s anything new to say about the entire sector.
In other news,
One of our most recent long-term positions (and one with very high conviction) has just crossed a key structure level to continue building on its accumulation pattern.
All as management takes the right steps to mitigate the financial risks spotted, and all just days before the next quarter is announced.
Given the amount of negativity we’ve gotten from our social media posts on the company, I believe a run is close to being made.
Let’s take a look at yesterday’s leaders and laggards:
Technology, Energy, Healthcare.
These leaders have everything to do with a couple of outstanding themes we’re currently following across the market.
First is the obvious tug-of-war between the AI race and those with high-quality cash flows on the other end.
That’s self-explanatory.
What is more interesting is the second theme presenting itself in the energy and healthcare rallies.
You’ve heard me mention the growth shock to the economy, which comes from:
Revised GDP growth rates as AI’s contribution gets replaced by more defensive areas
I broke that down in a recent GDP analysis for you, demonstrating how the economic growth contributions are beginning to shift away from AI and into defensives/consumer areas.
During environments like these, a growth shock, it is the sectors who can protect their margins and economic moats the most.
Energy keeps doing so with the help of the ongoing Middle East supply disruptions, though I suspect a resolution will come right after November’s midterm elections.
Healthcare is another game entirely, the purest form of a defensive rotation during an uncertain economy.
So I will take that as a message, a trend, to keep an eye on.
If it develops enough to show up in factor performance spreads, or shifting sector valuation multiples…
Then so will our portfolio.
While that happens, I recommend you catch up on my analysis pointing to where I will be investing during the next decade.
A decade that could be “lost” according to several investment legends, essentially saying the S&P 500 will go nowhere.
Market Laws
One of my biggest “a-ha” moments during my Goldman Sachs analyst training program was this.
To untrained investors and traders, a lower Forward P/E multiple - or any valuation multiple for that matter - will always look like the best deal.
I’m here to tell you that, unless you’re investing in:
Non-cyclicals, or Large/Mega-cap companies
You will almost always find that these become “cheap” for a reason, no matter how good the fundamentals or growth rates may seem.
Right now, there’s the misconception that semiconductors as an industry are no longer cyclical.
That there will be a nonstop demand cycle without supply catching up to it.
These people forget chips, AI, and most LLM models are commodities.
And,
Commodity volumes go to those who can offer the best price or quality, everything else being equal.
Why am I saying all this?
Because there’s a reason why markets are now collectively choosing to pay less for tomorrow’s AI earnings.
Whether it be over earnings growth or quality concerns (I believe it is a mix of both) it doesn’t matter…
What matters is there is now less confidence about whatever these companies have previously promised.
Why wouldn’t there be?
There are up to $3.7 trillion dollars in AI loans about to go under, and it’s exactly why NVIDIA has just recruited insurance companies and alternative asset managers to carry the risks for them.
News
The Fed Holds Rates and points to more data needed ahead for better decision-making, keep in mind they are saying this as inflation remains at double their target rate, markets are safe for now.
Marvell Considers Buying Lumentum in the latest AI dealmaking scene, though to me it signals that valuations may be nearing an euphoric peak where these sort of deals begin to show up everywhere.
Constellation Energy Gets Government backing to begin building out its nuclear capacity, citing that AI data centers are now eating away most of the grid.
Bank of America Clients Dumped communication (mostly AI) stocks at a record pace, joining Goldman Sachs in their recent prime brokerage book data reports, it seems the “smart money” or at least those with bank preferential treatment are getting the call first.
Movers & ES Levels
Wingstop 📈 Rallied by 12.2% after topping revenue and earnings estimates from Wall Street analysts, showing once again that the consumer “coiled spring” is an area to keep an eye on, lucky for you we already own a high-growth name in this industry.
Stellantis 📈 Gained over 13% after a strong quarterly report, justifying my previous exit from a domestic carmaker short play just in time to take a profit. Goes to show the power of reading PMI surveys.
Enphase Energy 📉 Lost 16% on a quarterly miss, showing just how bad it can get for companies operating in solar energy, a space that is now flooded with enough supply to bypass the AI energy narrative.
Alphabet 📉 Slipped over 5% after its recent quarter showed even more non-cash items making up a significant share of its operating earnings, topped by slowing sales despite massive AI investments, not a good look.
Now let’s get into some ES levels for today.
Astonishing, we got to the $7,815 level given yesterday only to spend a few points above it and come right back down to my lower range level.
$7,750 is where the price chose to find a bid, and that sets up the stage for the rest of the week.
Aggressive buyers now have to defend $7,750 or otherwise retreat passively to set up a massive buying trap at the $7,700 cutoff.
The problem is sellers came in strong to end the session and grab control of the overnight auction, sending us down 65 points or so from above $7,800.
It looks tough to be a bull/buyer unless we manage to hold and find some aggressive buyers to respond at $7,750.
That leaves us with $7,750 and $7,825 as my working range for now; a breakaway from those will give us an entirely new distribution for the quarter, most likely.
Portfolio
We remain above the 10% mark with lots of opportunities to deploy cash coming up next week.
With fresh PMI data coming out, and another options expiration Friday underway, I am confident the pipeline will be filled up with top ideas to begin digging into and deploying for you.
It is my belief that we will reach a new all-time high on the portfolio’s performance record with the last quarterly batch of ideas, not assuming that our latest conviction buy in the micro-cap space gives us a pleasant multi-bagger surprise.
And as always,
The options portfolio is doing its “passive thing” for now, providing a bit of a cash return boost to the mix.
Here’s the positioning update for today’s premium members:
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