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Good morning partner,
Few things to cover this morning:
Yesterday’s Session
The story shifted yesterday as markets seem to be back to their old tug-of-war between AI concentration and real economy stocks bidding.
Yesterday, technology and semiconductor stocks gave up most of their gains, dragging the rest of the S&P 500 off the day’s high.
Notice how every other sector in the market went up in a strong bid for breadth across the economy, yet the index went the other way.
Look, I thought that the Citadel bailout of Situational Awareness and most semis/memory names going into bear markets would wipe out the excess leverage and concentration in the indexes.
Turns out it wasn’t enough, as the concentration is still very much present and felt in sessions like yesterday’s.
In fact, Situational Awareness made a comeback with a fresh $400 million injection running at the same leverage as it did before.
Forget the cleansing event I mentioned…
We’re back to the old tail risks.
Let’s take a look at yesterday’s leaders and laggers:
Energy, Healthcare, Defensives.
Most of the energy rallies were centered in oil and gas drilling services, with another spike in the nuclear space (uranium, reactors.)
Oil didn’t spike on any Iran news though, so this is an interesting move in terms of what the market may be expecting out of the next potential TACO.
Healthcare, on the other hand, can be seen as another inflation bet for the defensive end of the market.
In other words, the “growth shock” trade that I mentioned a couple of weeks ago is back on the table. Same thing goes for the defensives also leading on the day, a growth shock bid for sectors that benefit from inflation.
Overall,
This inflation bid for the growth shock scenario also acts as a potential confirmation for our long bonds thesis, since these growth shocks are what usually tend to move the yield curve the most.
Winners and Losers
Token prices have crashed ~40% since their May highs.
This splits the bull and bear case into two - just as valid - schools of thought.
On the one hand, the bulls say that lower token costs will boost volumes as more users and small to medium-sized companies begin to adopt the technology.
Due to that affordability and volume spike, compute demand will push bottlenecks out further and accelerate the pace of which data centers (and their components) get bought and built.
The bears argue that lower token costs will destroy the economics behind OpenAI and Anthropic altogether.
Because their private valuations rely on overly aggressive revenue growth assumptions, any change in this growth trajectory could not only hurt their valuations (and wipe out equity gains held by names like Google and Amazon.)
Missed revenue targets also suggest that remaining commitments (over $5 trillion now) won’t be repaid in the timeline these companies suggest.
Which is why Oracle’s debt is now expected to fall into default as CDS continue to spike from here.
News
OpenAI tries to toss the mounting lawsuits against it as more hacking instances get reported. From Apple to Hugging Face and a handful of others, a direct headwind to the enterprise adoption argument in the AI race.
SK Hynix opened 30% lower in the pre-market session as the recent bout of leverage sparks a record level of volatility for South Korea’s KOSPI, a theme that could reignite dumping of margin collateral held in the US market.
Google Suffers another high executive departure from their AI department, a private source at one of the hyperscalers has confirmed some people are fed up with the current “vision” which is to rack as much token spending as possible regardless of which project consumes it.
Microsoft Revealed the majority of its revenue and backlog is tied to OpenAI, a new piece of information that makes me want to trim the position for the Offside Portfolio, more on this later after I properly look this over.
Movers & ES Levels
Shopify 📈 Surged 17% after reporting a strong quarter, easing some of the AI disruption fears around its software, I suspect the same feeling could spill over onto other names in the sector.
Dine Brands Global 📈 Gained 2.6% after reporting stronger demand for the quarter, helping our real economy thesis around consumer names. This tailwind could help boost my latest addition to the mid-caps portfolio thesis.
Uber 📉 Lost 5.3% after reporting earnings, I believe the company is an even stronger buy after the numbers they reported, misguided by one accounting decision. Click here to read my Uber earnings analysis.
AMD 📉 Fell by 7.0% on its earnings report, giving the AI race a direct hit when it comes to CPU demand, the bears see this as the negative effect resulting from increased competition and supply.
Now let’s get into some ES levels for today.
The same levels from yesterday apply today.
Especially as the auction has demonstrated both buyers and sellers agree on the $7,750 - $7,800 range being where they agree on “fair value” for now.
Buyers have accumulated at the $7,750 level, mostly passive with some aggressive bidders positioned here. Not enough for the sellers to successfully take out unless they really step on the gas here.
Taking out these buyers would get us to the $7,625 area where the previous distribution was shaped in the profile. This level is also the cutoff point in this new “b” shaped distribution.
In other words,
Closing below $7,625 is the ultimate task for the sellers looking to reverse this recent breakout. It is also where the aggressive buyers who did not show up at $7,750 could finally show their hand to bring us back toward $7,800.
I think this is where the auction may focus on today (or whenever volatility resurfaces) to give us a nice 125-point range of trading before direction is decided upon new information.
Portfolio
Another rotation may come to the portfolio today, so stay tuned.
We remain above the 10% milestone while carrying less than 6% annualized volatility, everything an investor wants to see in their portfolio.
I’ve seen several posts this week from people celebrating a recovery back to former highs on their accounts (after previously losing over 30% of value.)
That’s a recipe for disaster, and it shows just how much risk they are taking without even knowing it…
This week is likely to bring a new change to the portfolio’s makeup.
After spotting how institutions are playing the AI rebound here, I may end up adding my screened candidates to the mix and boost our growth from here.
All of these structures will be sent to Offside Premium members by the way, so consider what $2/day will get you as far as overall returns like the ones you’ve seen from our portfolio in just one quarter.
Here’s the positioning update for today’s premium members:
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