A simple recap
What I’m watching
This past week we had CPI and PPI, both came in lower than or in line with expectation. Additionally, we had retail sales and UMich consumer sentiments on Friday, with both showing a worse than expected consumer situation.
The totality of these three data points should have eased the market expectation for rate hikes in the Sep meeting, which it initially did after CPI and PPI and the retail sales. But soon after the retail sales yields went back up higher with the curve steepening. On the week, the short end yields such as the 2 year dropped while 10 year and up yields ended higher. This continues to track with the story that the Fed is between a rock and an incredibly hard place. The market is saying that the Fed should not raise rates (and should even cut rates) in the short term but the long term outlook on getting inflation in check is not good. Another related observation is that gold is up on the week, alongside long term yields, while the dollar index is down.
There were also a few notable developments in the AI space this week.
First is the NVDA 500B deal with 6 wall street institutions to effectively securitize compute and AI data center buildout. The goal of this is apparently so that the capex in building out AI can continue unimpeded with more sources of funding, which obviously is a good thing for NVDA and other beneficiaries in this cycle, at least in the short term.
On Thursday SNDK revealed on their investor day that their growth estimates continue to be extremely strong as well as very strong margins, and pledged to redistribute all of the excess free cash flow back to stockholders in the form of dividends or stock buybacks. This pushed the stock higher and came with various analyst upgrades.
Then on Friday, there was an article about AVGO having potentially 370B in off-balance-sheet financing vehicles to help its customers, mainly OpenAI and Anthropic and other neoclouds, purchase computing equipment. This apparently stoked some fear in their potential liability if things went south and then AVGO would be left holding the bag. The stock dropped nearly 6% on Friday.
So really nothing new. Just the same old dynamic of there are still some concerns around circular financing and these kinds of loan guarantees by the equipment sellers themselves, but the problem is there are currently no storms or clouds on the horizon, and it is really hard to stay out of these prime equities, let alone shorting these names.
A position or thesis
Due to this dynamic, I currently view it more likely that the chips and neoclouds and AI hyperscalers and in general all stocks might resume its climb higher with the potential of inciting strong FOMO and ultimately lead to a blown off top over the coming months. The circular financing deal will only start to become a problem when every ordinary Joe is onboard and complacent that it will not be a problem. It might happen when participation of these financing deals reach retail investors, which we are seeing signs of in NVDA partnering with wall street institutions to securitize AI capex.
Another thesis that I continue to hold is that the dollar and the US debt will likely be a problem and could be catastrophic. However, it is not immediate and there is no way to guess what will be the trigger. But I suspect this will be in some ways intertwined with the AI financial issue when it comes to a head.
This is not a bearish take on the stock market. Far from it. In a sense, it is impossible to bet on the demise of a system from within. Plus, if really the fiat coin is going to be worth less, wouldn’t you want to be holding quality assets instead of holding cash or government bonds?
What I got wrong or updated
I was in SOXS going into the week. After seeing signs of SOXX strength above the 21 day EMA, I promptly exited the position. This also coincided with my revision of view on the AI circular financing that it is probably too early to be betting on the idea. I currently have no real position in the sector. I will be looking to buy select names in the SOXX and IGV space.
The Ephemeral Tourist 