A New Week 08/02

The 30-year bond yield has crossed 5% this week, and is a quarter of the way there to reaching 6.0% for the first time since the great financial crisis.

Most will tell you this is bad for the system (it is), but I am here to tell you why it is the case exactly.

Our long bond thesis is getting more interesting at this point.

But,

I cannot buy bonds yet until the three triggers get pulled from our report, especially as we may still have a capitulation in our hands.

It’s interesting to see, as expected, our mid-cap watchlist outperform for the week during a time when the AI concentration sold off on this yield risk.

Happy to say the Offside Portfolio is now up 8.5% this quarter for an all-time high.

Now let’s get an update on what the market likes and dislikes:

Momentum is still officially in a bear market.

The result is seen across the semiconductor/memory trade, with individual names selling off and remaining in a bear market even after the Citadel bailout of Situational Awareness’ assets.

On the other end,

You see breadth, value, and quality starting to steepen upward in an attempt to break out and match the other factors in the economy.

This has everything to do with my HALO thesis in real economy stocks, where the most upside seems to be centered for the S&P 500.

As we continue to see the rotation, I suspect the Offside Portfolio will continue to outperform all the AI-centered “advisors” out there.

At this point, it has become clear that leverage and valuation excess is present all across the space, and it is my goal to steer you clear of these dangers.

Note, I am not bearish on AI’s future capabilities, though we first have to see the retail excess get wiped out so that the real winners are revealed (see 1999’s opportunity set vs 2002’s.)

Two ways you can keep up with my idea-generation and stock selection:

Leveraged money (hedge funds and prime brokers) sold a massive chunk of S&P 500 futures last week.

At the same time, the managers (pensions, mutual funds, and index funds) bought what these alpha shops were selling.

Historically, this has always led to a decline in the future price action of the index, as hedge funds start to hunt for opportunities elsewhere.

As we saw from Goldman Sachs, their prime brokerage data shows hedge funds are dumping the semiconductor/memory trade at the fastest pace since 2022, with roughly 14% more of the book in liquidation pipelines.

This tells me that last week’s selloff in the AI trade is not over, even if we get these bear market rallies along the way.

Combined with a factor rotation back to the breadth and value side of the market, I believe the evidence is clear as to where we should be investing right now.

Now let’s cover some items for this coming week:

New Earnings:

Palantir reports tomorrow after the bell.

This will represent the latest - and one of the most important - view on the chip and memory trade, where Michael Burry’s short position will be put to the test.

Tuesday brings another back-to-back test with Caterpillar reporting, all eyes will be on their backlog for data center construction projects (which have slowed down significantly now.)

Some traders have sold Caterpillar down on the view that their valuation and expectations have centered too aggressively on that construction growth, and I believe the company might deliver a rude awakening to the rest of the AI supply chain.

AMD comes after the bell, acting as another challenge to the memory trade and the supposed bottlenecks everyone is gambling their net worths on.

SanDisk on Wednesday will be arguably the most important report before Micron hits the tape.

For the Offside portfolio, we get Celsius on Thursday as well, I expect a good swing reaction to back our consumer sleeve of the portfolio that day.

I will deliver my earnings coverage for the following names accordingly:

There are other themes in the mid-cap space I am doing deep dives on, so stay tuned for that view this week.

Monday - Manufacturing PMI:

As you know, this is one of the strongest signals for the mid-caps trade we’ve been building.

It is also where I drive most of my trade ideas from along with the Services PMI, a proper breakdown and analysis will be sent your way as the report comes out.

Wednesday - Services PMI:

This is the second half of the picture after manufacturing.

I suspect a new round of trade ideas, like our successful Cleveland-Cliffs trade (returning 20%+), will come out of the PMIs this week.

Services specifically will tell us where the software and AI trade spread may be headed next, a deep dive analysis that will come later in the week as well.

Friday - NFP:

The labor market is not on the Fed’s mind as it used to be in past cycles.

Warsh has explicitly said that the labor market is “strong” and he would rather focus on price stability via controlling inflation.

So,

I don’t expect the market will react much to the NFP number this Friday.

However, it can be a great tell as far as the jobs AI is supposed to replace, a narrative that has failed miserably as no AI replacement is being felt so far in the data.

For our real economy trade, I want to see outlier growth in areas that could point to further upside in our watchlist.

Stay tuned.

Meanwhile, here’s the latest from Goldman Sachs, where client questions are addressed about the market and current risks to be on watch for.

We’re halfway through the year, and VIX seasonality could be around the corner as a surprise to the next leg of the index’s price action:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.