Morning Digest 11/06

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Good morning partner,

A few things to cover this morning:

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Yesterday’s Session

I’m sorry, but I warned you.

The tug-of-war kept getting more aggressive each day, and the system itself needed ample supply of cheap money to keep that battle going.

Otherwise, the system would break regardless of fundamentals or the AI narrative working or not.

It’s simple market mechanics, you can’t have trillions of dollars swinging back and forth between sectors every week and not see a systematic unwind like yesterday.

News of Leopold Aschenbrenner’s fund blowing up again came up too, and I suspect a lot more liquidations will begin as we potentially go into a correction/bear market for the indexes.

At the end of the day,

I warned you about the whole thing as little as a month ago when Micron reported its earnings results.

Click here to see that analysis.

Then came the other half of the equation through the hyperscalers, and the fact that Google was keeping a massive earnings liability from you.

Most saw it as a great report, I saw it for what it really was…

A wolf in sheep’s clothing hiding a few hundred billion dollars in wasted AI capex.

Here are the details behind that report.

Of all things yesterday, one thing went up in our portfolio of long positions,

And it probably was what nobody expected to go up at the end of the day.

Alibaba, as part of our China recovery thesis for the next decade.

No longer a thesis, but a reality.

Click here to see what the next decade holds for Chinese stocks.

Let’s take a look at yesterday’s leaders and laggards:

No sectors caught a bid, but here are the ones that “led” by losing the least:

Defensives, Utilities, Communications.

Which is exactly what a broader de-risking of the equity markets looks like.

Am I concerned with the current portfolio holdings?

I would be lying to you if I told you I wasn’t, but we are still over 50% cash and up 22% since June thanks to a huge put options payoff we collected yesterday in our Micron trade.

More than that, while the market sold off by 3 standard deviations…

Most of our names lost less than 2% on the day.

With this leadership I am also reminded of where capital is choosing to rotate into while the rest of light capital gets liquidated out of lower conviction assets.

This focus toward defensive real economy names sounds boring, but prudent and successful management of your account sometimes has to feel that way.

The next round of ideas for this month is coming your way as soon as tomorrow, as this month’s PMI print pointed us straight in the direction of where short-term returns may be driven from.

I expect these ideas to continue carrying our portfolio into new highs to end the year while we await the “home runs” to show up.

Click here to see the PMI industries I will be filtering through for ideas.

Don’t Be Fooled

I’ve seen this image floating around Twitter lately, and honestly the takes around it are horrendous.

You see, to the untrained investor, the cheapest forward P/E multiples since COVID may sound like a heck of an opportunity to buy.

But,

That can only be the case IF you’re investing in non-cyclical stocks, or if the reason for the discount suggests the entire market is wrong.

I like to think (and admit) that the market is a lot smarter than I am and will ever be.

So I pay attention when cyclical stocks fall out of favor this much.

Essentially, semiconductors became cheap for a reason.

We are now beginning to understand what that reason is, and if you’ve been with me for a while, you know what it is as well.

Now the only other way this could be wrong is if semiconductors suddenly stopped being cyclical.

I understand that orders are “sold out” until 2030, but that doesn’t mean cancellations or discounts can’t happen.

That doesn’t mean a new (better) competing chip cannot hit the market overnight and keep semis under a commodity status.

Therefore, I would not easily assume that chips stopped being cyclical.

And therefore, I would not ignore the fact they are cheap for a reason.

$3.7 trillion worth of AI debt blowing up is one such reason.

News

Goldman’s Trading Business saw an influx of client calls all day asking about what was going on yesterday, so if you think the day was tough, just wait until these people are told to sell their AI exposure.
Anonymous Seller Wants $500 Million of data center loans gone from the balance sheet, and so the dumping of private credit and insurance money begins to let the rest of the market feel the pain.
Top Democrat Leaders Call for a national moratorium of data centers as a top priority, essentially curbing the growth spurt the industry has had over the past year, and realizing some our previous market calls on this issue.
Leopold Aschenbrenner’s Fund blows up again, so my best guess here is that a new buyout of his positions will come along if not already during the early hours of the morning, and give us a relief (though short-lived) type of rally.

Movers & ES Levels

AppLovin 📈 Gained more than 31% after its earnings quarter demonstrated software is not all that threatened by AI, and today of all days was the best way to show that.
Alibaba 📈 Brushed off the selloff with a 2.8% gain as the rotational forces during “lost decade” scenarios fly toward the best of kin emerging markets. Click here to read more on this lost decade.
Micron 📉 Plunged over 17% as the probabilities of a data center hard stop puts the oversupply thesis on chips at play, a dynamic I warned you about a month ago.
Qualcomm 📉 Lost nearly 10% despite a revenue growth beat and a strong quarter, goes to show markets are always more concerned about tomorrow’s trajectory rather than today’s.

Now let’s get into some ES levels for today.

When I told you $7,650 was my low target yesterday, I honestly had no idea that things could get this ugly this quick.

But, here we are.

What I can tell you is that $7,330 can be the new support level as it represents the liquidity cutoff point from the past three months.

And, unlike most days…

That’s pretty much everything I can say right now, I don’t want to mislead anyone into thinking this market may have any sort of normal structure for now.

Before, we could have gotten a TACO to save the day, but those days are gone.

An organic market in panic is not the place to be if you’re a trader, you must now become a portfolio manager and protect your capital - and ideas - at all costs.

Portfolio