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FINAL STRETCH
Roughly 3% of South Korea’s adult population got margin called last week.
These people were betting over one month’s worth of their salary on the hottest and most concentrated areas of the financial markets:
Memory, Compute, AI-related stocks
In my South Korean madness deep dive, I pointed you to increased volatility in the KOSPI and how that would soon trigger these margin calls.
Now that it’s happening…
I believe we are in the final stages of the memory and chip selloff here in the US, as roughly $600 billion of US equity collateral gets liquidated along with levered bets in South Korea.
After that happens, we will probably have a rebound in the AI trade, where I am looking to position you into machinery and electronic component stocks that are looking the best in that area.
So stay tuned, I will be structuring these trade ideas inside Offside Premium in the coming days.
Now let’s get an update on what the market likes and dislikes:
We keep seeing the acceleration of a new trade each week.
The rotation out of high-growth momentum AI stocks is fading, as you can see in the momentum factor (yellow) losing over 10% in the past two weeks.
Meaning,
Everything that has to do with momentum is starting to go into correction territory, where markets are mechanically adjusting their assumptions about the future.
No need to panic though, as so far we have remained in an orderly rotation back into factors like:
Breadth
Value
Quality
All of which can be found inside the HALO real economy names that I’ve began coverage on inside Premium.
So, as long as this rotation remains orderly, I do not expect a more than 15-20% drawdown to happen in the S&P 500 index or others.
If the speed of which this rotation is taking place accelerates beyond what liquidity can bear, then the odds of a more aggressive selloff increase.
That, or the contagion risk behind all of the accounting shenanigans from AI companies hitting the rest of the financial system all at once.
CHART OF THE DAY
A vast majority of what held the semis/memory trade together was the assumption that:
Micron, SanDisk, Samsung, Intel, SK Hynix…
Would be the only game in town for the next 3-4 years.
Now that Chinese, Japanese, Taiwanese competition has come online to expand future supply capacity,
We’re beginning to learn the meaning of low P/Es behind a cyclical industry.
ARE YOU COVERED? —>
New supply is directly affecting future margin and EPS assumptions, which is why markets have lower expectations around them.
That’s on the physical side.
On the AI model side, Chinese models have shown better economics and adoption from names like Microsoft.
IMPORTANT GAUGES
Managers saw the healthy rotation theme I mentioned and decided that’s good.
After a 14% de-risking across the board, these managers increased exposure into the S&P 500 by 14.5% instead.
While we can argue buying the S&P at these levels is not the best use of that capital, I believe these managers see it as less risky of a bet now that the rotation into HALO real economy names makes the composition less volatile.
The AI-related concentration creates whipsaw risks such as the ones Korea is experiencing, so perhaps the manager exposure boost is a vote of confidence that this rotation could last a while longer.
Also, that it is net positive for financial markets.
Now let’s cover some items for this coming week:
New Earnings:
As far as the Offside Portfolio is concerned.
We only have Domino’s Pizza reporting tomorrow before the open, so expect to see an earnings update and thesis coverage from that name if enough changes during the release.
Then, Cleveland-Cliffs on Thursday before the open for our long/short metals swing trade idea.
Then, for the AI-trade, a few very important names are coming on the table:
Google
Intel
I am particularly interested in Google, since last quarter they derived over 50% of their net income from unrealized equity gains from their Anthropic stake.
Given that Anthropic’s private valuation hasn’t gone up since, I suspect we may see a massive write-down of actual cash earnings, deflating the trade a bit further.
Some HALO names are also coming out (DHI, MMM) to provide further insight into the momentum that’s building up there.
Full House:
Not much data for this week other than housing.
After housing starts and building permits came out last week, another check on the health of the economy’s backbone is coming through:
MBA Purchase index
30-year mortgage rates
New Home Sales
As I digest the incoming data, I will likely have a new vantage point on the housing market and find potential opportunities there.
Last time I put a housing portfolio together, Buffett’s Berkshire Hathaway ended up bidding TMHC for a takeover, delivering over 50% gains in less than a quarter.
Perhaps there will be cheap opportunities again.
You’ll have to see inside Offside Premium.
A Final Note
COMING UP NEXT (Reminder for This Week)
The Hormuz closure has been five months too long, and I suspect a combination of El Nino and more expensive oil will open up trade opportunities in several sectors.
My PMI sector ideas are starting to bear some results, so other structures will be sent your way as more data comes out.
As more prescient earnings come out, I will be sure to provide an in-depth coverage for some of the most important names in the market.
In the meantime, here’s the latest from Jordi Visser, the guy who seems to be the retail authority on the AI trade.
It’s great to check up on what the other side is thinking, and know that their strongest point is still based on a story rather than solid figures:
Until next time,
OFFSIDE RESEARCH
Against the Tape, Ahead of the Curve.