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Good morning partner,
A few things to cover this morning:
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Yesterday’s Session
After a couple of days led by AI in this tug-of-war, we finally saw the opposite end of this struggle get a chance to shine.
As Google and Microsoft reported their quarterly earnings, it became clear to most that the AI trade is beginning to head into some hard times.
Yesterday’s assumptions are being challenged amid higher costs of capital, excess leverage, and an economic model that simply does not hold up.
Does that mean it’s all over?
Not yet, I believe it simply means you should be more careful when picking the winning side of whatever is left of the AI race.
Electrification is still a thing, for example, which is why names like Custom Truck One Source (CTOS) is up double-digits this week despite the big spenders now proving they will have to slow things down eventually.
It also means you should expect to see more of these whipsaws in the tug-of-war names, as the market continues to struggle to move an overly concentrated bet on whatever the day’s sentiment is.
Very rarely do you see a company like Google move 12-15% in a single day, as a lot of eyeballs are usually glued to whatever this company does and few surprises like this one should come about.
The problem right now is different…
You not only have to track what Google does, but how its off balance sheet deals are doing.
Over 100% of the company’s operating income came from “other income” items directly tied to how Anthropic’s convertible securities are valued in the secondary market.
People like you and me have no access to this type of information.
All I can tell you, from Anthropic’s S-1 filing, is that these convertible securities are about to go deep underwater as more than $800 billion in cloud commitments are being priced for default.
Yes, there were some positive things inside the company’s figures, but it wasn’t enough for me to justify the $2 trillion IPO valuation target.
In fact, I believe the “fair value” of the company is much closer to half that amount (even less.)
I will let you come to your own conclusions after you read the details of my financial analysis.
Let’s take a look at yesterday’s leaders and laggards:
Real Estate, Healthcare, Defensives.
The leadership choices by the market during the first day of a non-AI pull in this tug-of-war say a lot about the underlying state of affairs.
Recall the “growth shock” theme that is developing as mentioned this week, that is the very same outside force bidding these sectors right now.
Real estate does well during shocks as property prices (and rents) can sustain economic shocks better than most, while still passing down any leftover inflation implications to consumers.
The same mechanics go for healthcare and consumer defensives, essentially the trifecta I’ve spotted for you in my previous GDP analysis work.
PMI data reiterated this view when the reports were released at the beginning of October, and next week a new batch of data will either confirm or challenge this view.
All told,
I am beginning to grow more confident on my recent picks from that PMI, especially the wood products breakout as real estate gets chosen as a primary bid in this rotation.
Earnings were released for those picks this week, and honestly I couldn’t be happier with what came out.
Then there’s my big bet in a micro-cap defensive company suffering from the price inefficiencies only a retail crowd can bring along.
Goldman is Out
Goldman Sachs Prime Brokerage Positioning Data, Offside Capital
Prime brokerage businesses at the biggest investment banks can tell you a lot about what the “smart money” in the market is thinking.
From hedge funds to high-net-worth individuals, the most recent data from Goldman Sachs shows the same trend…
Short positioning for AI equity baskets are near all-time highs, while leveraged longs are also near all-time highs.
The result is a completely hedged book of business, and conviction, when it comes to the AI trade.
In other words,
While these participants continue to sell AI baskets at the most aggressive pace in the bank’s prime history, it still isn’t quick enough.
They still hold near record long exposure, and that created the need to hedge these bets and allow proper flexibility and timing while they continue to dump exposure.
Why should you care?
Because wherever the American AI basket goes, South Korea and Taiwan will follow in an amplified manner.
When hundreds of billions are forced to liquidate in Asian markets due to AI drawdowns, this fresh capital will be searching for a new home to go into.
Right now, I believe that is China.
The best ideas are often misunderstood and badly critiqued, and that’s just how I like them.
China is one of those ideas, where bears don’t seem to understand that this country is doing exactly what Japan and South Korea did before their stock markets went on to rally by over 200%.
If history repeats itself in China, you’ll want to be a part of that market once the AI unwind accelerates.
I will be there to give Premium members my China watchlist and alert them when I begin buying into my selections.
News
Ares CEO Steps Away from AI financing even as peers like KKR, Apollo, and even AIG chose to jump into the debt wave packages which are now reaching junk status, another confirmation of how bad the setup really is.
Mortgage Rates Come Off from their monthly highs, definitely not enough to celebrate, but still a great push forward in my wood product stock picks to continue delivering upside in November.
Renewed Peace Talks send oil prices lower, with gasoline and diesel futures prices hitting a new monthly low and creating the perfect environment for my long/short diesel spread trade to take off.
PCE Inflation Picks Up Again to challenge the decisions made at the recent FOMC meeting, as inflation remains well above the 2% target set by the Fed, most (including me) are still having a hard time figuring out why rates aren’t higher.
Movers & ES Levels
Carvana 📈 Gained over 15% after posting a massive sales beat this quarter, reiterating the reason why I decided to cover my Ford shorts after the PMI data confirmed domestic car sales are going up from here.
Crocs 📈 Spiked more than 25% on renewed sales growth, a bid that’s riding the rotation back into value and quality cash flow companies as the AI trade continues to unwind this week.
Amazon 📉 Joined the hyperscaler selloff by losing 4.2% on missed revenue and continued compromise of its cash flow and balance sheet through more aggressive AI capex spending ahead.
Sprouts Farmers Market 📉 Slipped over 20% after weaker same-store sales and net earnings this quarter, a new concern for my Vital Farms position which will prompt me to dig into chain store contracts once again.
Now let’s get into some ES levels for today.
Most excellent day for our levels yesterday, as the break below $7,750 was taken and got us closer to the cutoff at $7,700.
I will then reiterate what I had to say yesterday and give you the following levels given we are still within the same range and action:
$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 are well underway to meet the all-time high targets on the portfolio performance we had set for the last quarter of this year.
As the situation in the Middle East, the AI rotation, and more economic data come to prove our picks right…
I expect not only higher highs in the performance, but a refreshed pipeline of ideas to be sent your way next week when the PMIs are reviewed.
Meanwhile, I will let the current structure chug along unless some price structures are broken and require taking action against them.
Here’s the positioning update for today’s premium members:
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