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Good morning partner,
A few things to cover this morning:
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Yesterday’s Session
After an entire week of unwinding the AI trade and seeing capital go back to defensives and other real economy names…
I really thought we’d begin to see a sort of relief (or bear market) rally here for the AI complex.
But,
What we ended up getting was another day where the tug-of-war went to the real economy, AI-proof antithesis.
This can be explained by both market mechanics and economic developments currently taking place.
And as they say, don’t fight the macro.
For a second consecutive month, the manufacturing PMI index (a gauge into the cyclical economy) demonstrated a continuation of the defensive theme and away from the cyclical industries of the market.
In reality, this has been going on since last quarter when my GDP breakdown spotted a similar rotation out of AI and into defensive real economy names.
This is great news for the current portfolio makeup, as you’ll see we are now trending higher into a new all-time high as we are confirmed our selection process is on the right track.
More importantly,
That PMI gave us a list of long and short industries to consider our month’s stock selection.
Last month, the PMI led us to wood products and food items…
Since then:
Three out of three picks hit.
Now it’s time to go for the next successful batch and outperform the market during this AI unwinding process.
Let’s take a look at yesterday’s leaders and laggards:
Energy, Defensives, Real Estate.
We continue to expand on the growth shock theme in the economy.
The leaders over the past month are clearly the sectors that offer a non-cyclical product or service, and have a superior ability to pass down costs to their consumers without much consequence.
Except for energy of course, which is 100% tied to whatever happens in the Middle East.
As this stops becoming a belief, and starts being more of a reality…
I think we should revisit what’s on the table right now:
4.9% 10-year bond yield
3.7% inflation
S&P 500 2.8% to 3.5% earnings yield
~65% concentration into technology
All of which matches a few historical analogs, the ones that ended up in a “lost decade” for the index and its investors.
Look at 2000 to 2010 for the most recent episode.
Nobody wants to admit this because they truly have no idea of what they will do during the next 10 years if the market effectively goes nowhere.
And that’s exactly why I’m on the opposite end, I’m excited for this because it will change my entire financial career.
After studying 36 markets over 50 years, I’ve found two places to invest in for this decade with a coupon for outperforming the S&P 500 over this decade.
Why You Pay Me
Energy Commodity Futures Prices, Offside Capital
We are right on schedule to take significant profits out of the midterm elections.
About a month ago, I started to analyze the spreads between crude oil and distillate fuels like diesel and gasoline, finding that the extremes would have to be corrected soon.
Adding to that excitement is the cleanest catalyst I could find, which is the midterm elections.
Whether it is a Republican or Democrat win, it doesn’t really matter as both outcomes will likely end up in the fixing of fuel inflation for everyday Americans.
Why?
Psychologically, people will be attaching their thoughts to the recent election results, and blaming everything that happens to them on that outcome.
So it is in the best interest of whoever wins to lower gas and diesel prices.
Which is exactly why I put on a long/short diesel spread trade through Valvoline versus Valero.
So far, the thesis has been right as to who would benefit and suffer from falling diesel spreads.
There is also a second implication from the elections.
If Democrats win, I believe the AI trade will eventually be over as they have explicitly stated their pushback against further data center construction.
More importantly,
There will be no bailouts allowed for AI labs or anyone that goes under due to their excessive AI debts.
Judging by how the bond market, credit spreads, and the AI complex itself have moved…
I believe markets have cast their vote on who they think will win the election.
News
Pimco Warns AI Financing is becoming too much now, citing some of the risks behind the rising yields offered on that debt, which are now beginning to reach “junk” status.
South Korea Plans a new massive AI investment to create a new competing AI model, creating even more pressure to my view that overly aggressive investments will create a downward price and margin spiral.
Marvell’s Plan to Buy Lumentum gets a very cold reaction from the market, with the stock down over 12% from the news, reiterating the fact that valuations and fundamentals have reached an extreme level of speculation.
Anthropic Revised its S-1 Again to present a new accounting loop explaining why it lost over $80 billion so far this year. After digging through the financials, I’ve found the one number that could blow it up.
Movers & ES Levels
Weyerhaeuser 📈 Gained nearly 5% after a manufacturing PMI print reiterated the wood products momentum may still be at play here, Premium members are happy to see a 12% gain this month.
Construction Partners 📈 Rallied just under 10% as the diesel spread trade begins to trend in the right direction, creating a lower input cost environment within a defensive rotation across the economy.
Oracle 📉 Lost over 8% after announcing a new $20 billion equity and debt raise to continue financing its losing AI investments, effectively betting over 100% of its market capitalization on a black hole.
Micron 📉 Slipped 6% with Asian competition heating up during the peak of the chipmaking cycle, exactly what I warned about during my earnings deep dive pointing you to the one number that broke the thesis.
Now let’s get into some ES levels for today.
$7,550 was once again tested and rejected with aggressive buyers stepping in.
However,
The ask-hitters were not enough to get us back above the $7,600-$7,625 range to at least consider a reversal or settlement away from a bearish breakdown.
Which means we could potentially shoot lower to $7,500 and even $7,450 before we begin to see either consolidations or sharp rebounds from the aggressive buyers.
I do believe a Republican win could bring us into $8,000 as the administration is hyper-focused on letting the AI complex run as wild as it can get, given there are a lot of vested interests in its success.
Democrats on the other hand, while they also have vested interests, are leaning on the public’s need to curb fuel and utility inflation caused by Iran and AI buildouts.
Which could then accelerate the unwinding of AI, and therefore creating a bear market.
If you’re a trader, I would sit this market out until the elections are over because of that uncertainty.
Portfolio
Yesterday’s PMI print helped boost our current defensive selections even further.
While most of the AI “experts” are going back to selling Bitcoin scams, we are making our way to a new all-time high in the portfolio’s performance.
All since June…
This month will also be extremely important, especially with the elections catalyst in place as an AI threat.
That will prompt me to restructure and expand on my put option spread portfolio centered on the memory chipmakers.
Then,
My defensive small/micro-cap picks will continue to generate the monthly cash flows we bought it for, paying us while the underwritten 200% upside materializes.
This is part of our next decade opportunity set.
Here’s the positioning update for today’s premium members:
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