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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
Over 100 points lost in the S&P 500 yesterday, yet the heat map would have you think this was a day where the equity indexes pushed higher altogether.
However,
This wasn’t the case, and we have now breached a very important level on the futures market that significantly raises the probability of a further drawdown into the rotations I’ve been pointing out to you for a month now.
The tug-of-war continues, with yesterday being a clear win for the HALO real economy names sleeve of our portfolio.
Specifically, there is the specific spread trade beginning to realize in software.
Workday, Adobe, Microsoft, all up a large amount as capital unwinds from the AI-related concentrations of the market.
Let’s take a look at yesterday’s leaders and laggers:
Technology, Cyclicals, Real Estate.
These rotations are even happening within the hottest sector of all, in technology.
However,
It’s a very specific type of technology stock that is being bid right now.
Apple, Microsoft, Amazon
Arguably some of the best balance sheets with little to no involvement in the AI shenanigans, which is exactly what the market prefers in this rotation.
Now for cyclicals, I am seeing good numbers out of Chipotle last night as a follow up to Coca-Cola’s strong earnings.
The portfolio has increased exposure into these areas accordingly, and recent positions are already doing well so far.
Real estate is more nuanced here. I think it has a lot to do with the fact that Warsh held rates yesterday, and long-term bonds have pushed higher (like 5.2% for the 30yr.)
Meaning, a proper growth shock could be around the corner for the economy, breaking the finance plumbing behind the area that’s pushing over 50% of GDP growth right now.
This fact will probably guide our portfolio decisions in the coming weeks, so stay tuned.
Policy Error
The bond market didn’t like the fact that Warsh held rates, as the consensus view points to the conclusion that he should have hiked.
Because accommodative real rates (yield minus inflation) are still low enough to fuel the euphoria in financial markets…
I don’t think inflation is going to be under control any time soon here.
The K-shaped economy keeps widening, with the top spenders doing most of the heavy lifting as an addition to GDP.
Then, massive AI capex drives the rest of GDP to also boost the S&P 500 and its obscene valuations.
All this to say,
Markets are bidding yields higher as they believe the current state of affairs will continue to drive inflation higher (never mind Hormuz for now.)
With the US already paying half a trillion of interest payments a month, a rising long yield could break the system as we know it.
I am a bond bull, but I am still waiting for the right time to buy.
News
Private Equity Firms start hunting for software companies again, as the Saaspocalypse proves to be nothing more than an excuse to hide short hedges in the AI levered mania. Our overweight software thesis is paying us well now.
Waymo Robotaxis rack up over $10,000 in parking tickets within its biggest market. The decision for Uber to drop out of this relationship may be more regulatory than economic, there’s a reason several congress members are buying the stock (Pelosi included.)
The US Resumes Iran strikes, which is interesting given the timing of market selloffs right now. Perhaps we are set up for a new TACO trade just as the AI bubble begins to draw the most scrutiny since the trade started.
Caterpillar Gets a Downgrade as analysts begin to weigh in on the data center construction slowdowns, a bet that the company has become overly exposed to recently.
Movers & ES Levels
Microsoft 📈 Jumped over 8% overnight as the company reported strong growth, demand, and disciplined capital allocation even as capex continues to grow along with backlogs.
Mondelez 📈 Pops 4% on strong earnings as a follow up to Coca-Cola. This should spill over onto our Pepsi position today, lifting the Offside Portfolio to a new record high.
Meta 📉 Lost close to 10% last night as markets punished its overspending path with no clear monetization proof or plan just yet. Out of the hyperscalers, I believe this is going to be the better risk/reward once FCF normalizes, just not yet.
Vertiv 📉 Fell over 17% as the latest AI supply chain victim fails to fulfill on overly aggressive expectations. What started with OpenAI’s bailout money has now trickled through the entire sector as a bullwhip effect takes place.
Now let’s get into some ES levels for today.
As explained yesterday, aggressive sellers were reserving their dry powder for a break below $7,450.
Specifically on good MSFT earnings and bad META results, pushing the rotation out of aggressive AI valuation narratives and back toward real economy names.
What we see now is a clear break below $7,400 to confirm business is being done well below the $7,500 cutoff for the previous “P” shaped profile.
Meaning,
We are returning to an older distribution that cuts off at $7,375 (we are there as of 5am this morning.)
If we continue to close at or below this level, I suspect we may be thrown into the opposite extreme of this distribution, which happens to be around $6,600 - $6,700.
Big stretch, but that’s just the nature of these “P” reversals in the volume auction.
For now, buyers want to avoid losing $7,375 at all costs, and so far they’ve begun to try at $7,350 with some luck.
Sellers are trapped at $7,400 even, so if there is more dry powder left to keep the downward pressure, that’s where you want to see these bears waking up again today.
Otherwise, they really need to step on the gas and take out the trapped buyers at $7,350.
Tight range today, but that’s all I have for you.
50 points today, and which one breaks, will decide the next few months of price action for the S&P 500.
Portfolio
We have reached a new high of 8.3%, with a close at 7.9% yesterday.
I suspect the open will give us another all-time high for the portfolio once Microsoft opens for trading and it’s rally is reflected in our P/L.
The latest mid-cap has been added all the way at the bottom, delivering a small but appreciated 0.6% to the portfolio so far.
Expectations are for this name to return well into the double digits.
Cash remains over 50% of the portfolio as we ramp up new positioning ideas for next quarter, so I’m pretty comfortable with the way things look right now.
Now let’s get real for a minute….
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Here’s the positioning update for today’s premium members:
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