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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
The S&P broke below major levels in the futures auction given in the morning, driven by what seems to be the winning side of this massive tug-of-war that’s taking over the equity markets.
The rotation back into value, quality, and real economy stocks has gotten a lot of attention as of late, especially as the AI trade continues to see its bull case debunked.
NVIDIA’s $500 billion bailout to OpenAI
A new $750 billion round of equity stakes in other companies so they keep buying their chips
Chinese competition and token price wars
It’s all weighing on the narrative that AI will continue to work for now, but I am not dismissing the possibility of a last rebound or another short bull run as of yet.
However,
I think a better use of your time - and capital - can be dedicated to finding the next set of opportunities rather than trying to chase a potential rebound in a crowded trade.
Mid-caps could be one such area as I’ve broken down extensively…
Let’s take a look at yesterday’s leaders and laggers:
Energy, Defensives, Real Estate.
This is again a bid for a risk-off inflation shock in the markets.
A new round of escalations around Iran sparked a buying spree for energy stocks again, while Coca-Cola’s earnings have delivered a massive home run to boost defensives.
On the real estate side, this risk-off inflation shock - a growth scare if you will - boosts the prospects for property and rental prices.
This growth shock can also have the desired effects I’m looking for in the yield curve for my long bonds thesis.
On Coca-Cola’s earnings, I believe the spike after earnings can have a positive effect on a peer like PepsiCo, which is part of our portfolio.
SAP’s earnings managed to send Workday (another portfolio name) higher by 20% in a week.
So yes, our HALO real economy thesis is managing to outperform the AI trade.
FOMC Day
Markets bake in a 30% chance the Fed will hike rates today.
And,
That outlook goes up to almost 60% by September’s meeting, where traders across the market are no longer calling for rate cuts but instead think rates should be higher.
I personally don’t have a view on rates, as the landscape does look a bit foggy.
On the one hand, you have runaway inflation in asset prices, AI-related materials and components, topped with food and energy uncertainty coming out of Hormuz.
The labor market seems just fine, apart from a healthy seasonality effect with no signs of AI disruption.
That’s why Warsh has explicitly placed his attention on price stability rather than the labor market.
Hormuz we can fix, but the only way to stop the euphoria in asset prices and AI debt bonanza is by raising rates and cutting all funding short.
Break the market now? Or risk a global recession later.
News
SK Hynix reported earnings yesterday, with profits jumping over 500%. However, the market looked past this figure and rather focused on the $31 billion of additional capacity investment, worrying - as I’ve pointed out before - that the sector may be overinvesting and destroying future margins.
The KOSPI has pulled some emergency strings after the recent selloffs and millions in margin calls issued. After a 40% drawdown from the highs, the institutional capital pool has been forced to step in and rescue the market.
Apple Tops $5 trillion market cap for the first time, passing NVIDIA to become the most valuable company in the world. Goes to show you markets now prefer cash flows over massive capex uncertainty.
73 Leveraged ETFs have failed after the recent spike in volatility forced managers and investors to liquidate entire holdings, euphoria is beginning to bite into market mechanics.
Movers & ES Levels
Sherwin-Williams 📈 Pops over 8% on a stronger than expected quarter, another name to add to the winning list of HALO real economy names. As these factors continue to outperform, you’ll likely see more constituents in our portfolio.
Coca-Cola 📈 Posted its best day in over five years with a 5% jump, earnings were thought to have some inflation and GLP-1 demand impact, though the good old Coke seems just fine. Watch PepsiCo for a similar earnings run.
Corning 📉 Fell over 12% after disappointing earnings, I remember when people were all over this stock as it was one of the “bottleneck” companies in the AI buildout, NVIDIA even bought a massive stake in it.
Memory Stocks 📉 Lost double digits yesterday as the oversupply worries took over the price action in these names, some of which lost over 10% and are now in deep bear markets.
Now let’s get into some ES levels for today.
A range-bound market around my levels yesterday, giving us a clear footprint of where these participants are looking to take the index.
For good reason, buyers were willing to show their hand and place aggressive orders around $7,450 while sellers returned the favor at $7,500.
The most important part of the story is that we closed below $7,500 yet again, below the cutoff point for this current “P” shaped volume profile.
As Microsoft and Meta report earnings today after the bell, I could see a sort of repeat of Google’s earnings, only in the opposite direction.
If these two decide to lower capex guidance or language around AI investments, we could have another big rotational day tomorrow.
Where we close or see buyer/seller reactions can give us a bit of insight into that outcome.
I want to see lots of passive sellers at $7,500 and none at the lower $7,450 ranges, as bears reserve their aggressive buying power for a rotation upon good MSFT and META numbers.
If we fail to see this behavior, I would think that the expectation lies upon expanding capex guidance and language, sending both stocks lower and creating another AI concentration day tomorrow.
Portfolio
Another consecutive day of large rallies in our positions (all of which are in profit by the way.)
A new high watermark was made at around 7.2% yesterday, outperforming every other major benchmark as we close our first full month of operations.
All while being in more than 50% cash nonetheless…
Goes to show, the quality of our expectations investing framework pays the greatest risk/reward.
Speaking of R/R, I have given you the setup in the mid-caps rotation I’m currently watching, up next you will receive my curated watchlist for that asset class with individual deep dives to follow.
Here’s the positioning update for today’s premium members:
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