Transcription
All right, we're continuing. Uh, I didn't figure I'd have to do a uh midweek update every week during the summertime, but before I head out for the day, I just wanted to get one done early this morning because we still have people reaching out and obviously a lot of questions.
So, um, this chart I've shown for well over a month now. Uh, and I want to make sure that you guys see it because this month ends this week and this is the bulk of what is going on in the market right now. Um, the headline indices are not moving. We're making new all-time highs in equal weight. Um, credit's not really moving much. It's moving a little bit, but the panic is setting in because prices are forcing narratives and the reality is volatility just continues to explode. uh in technology and in industrials and this is all related to the AI trade and I just want to make this clear because um when I've done the scarcity verse abundance thing which at the beginning of the year was out of software into hardware uh that trade in my opinion is still going to continue but when you get people positioned in it uh you know for those of you who've read my papers on handicapping horse races The stock market is a paramutual system which means the odds in the market are implied by whatever you want the PEG ratio but it's about positioning and the AI midcycle slowdown was not something about how AI was going to stop. It was all a sentiment based thing based on positioning.
So, here we are in the middle of earnings and starting really in late June, every single time an earnings report comes out, whether it started with Samsung or whether it was um Micron, these stocks have not performed well. And that has everything to do with a combination of positioning, but also this. So, I really want to focus the attention on something that I definitely know a lot about and that for some of you this is not there. And this is really more about the leverage that exists in hedge funds and how difficult it is for people to keep positions on while this kind of volatility is going on.
So I've shown this chart many times. This is the Morgan Stanley Tech Momentum V. This is the 30-day realized which is still making new highs as of yesterday, as of Tuesday. The 60-day still going higher. This is impossible for long short funds to keep on especially ones that have draw down limits. So we're seeing force deleveraging. There's no question about it. Um here is the sector neutralized one. So this is actually the broad one. This is also now not only at all-time highs in terms of the white line going back to 1999. I mean this is a this is very very high. And this is the way if you're stripping out all your factor risk. This is a sector neutralized momentum factor. We're still making new highs on this. So the daily P&L of a portfolio that is even factor neutral is at all-time highs. So leverage has to come down to deal with draw down risk.
Here is the high beta momentum Goldman Sachs uh uh factor. This is the monthly returns guys. So again, you see this this is during the great financial crisis. This is during the dotcom bubble. So we're at unprecedented levels. In both of these cases, you've got the markets going down. In this case, the market's not going down. This is the monthly returns for that Morgan Stanley tech momentum factor. So when you have a historic thing and you're running a hedge fund book, the month performance matters a lot. Now I will highlight that we had also the biggest upside. That's why this is the positioning going into the long side of it that worked phenomenally. And then the unwind gives back almost the entire year for the month. Here is industrials. This is worse than any month. Now this only goes back to 2014. That's all the data they have. But again the a lot of the positions are in mu are in industrials and again we're unwinding what happened here. So positioning was just offsides and when you take it to the overall momentum factor and this is not sector neutralized. So this allows for sector tilts which again is going to impact because of tech but you're still talking about stuff that hasn't happened in here. Now, we didn't have a recession here yet, but we did have a recession here going forward. I just the main point of this is that if you're a hedge fund running a book that is has any factor momentum risk and momentum has worked exceptionally well. I'll go through some other factors that are much more important. You're dealing with problems and again this is the one that is the most important. This is not the one that gets shown much uh in X. This is the sector neutralized performance for the momentum factor. So if you're really good quant strategy or you work at a multistraat and you've got a centralized risk book that's stripping out the factor risk, this is a historic month down 23%.
Here is the long side of MO. This is the one that I've historically used. Um sorry, techmo. This is the one I've historically used looking for bottoms. We hit the 200 day moving average. This is just the long side of tech mode. This is the one. So if you're looking for what's gone on, this looks a lot like the thematic portfolio with inside AI. It's outperformed, but it looks a lot like this. So the long side of momentum basically has given back the majority of the returns for the year, but not completely. And the 200 day is still moving higher. So that's the long side of it. This is it overlaid with the Goldman Sachs crowded hedge fund index relative to the S&P. That's the white line. The orange line here is that tech momentum long side of the basket. So, there's two things about the white line is is a relative trade, meaning this is the crowded hedge fund position relative to the S&P. Uh, this one is just an absolute trade. This is the long side of most. So, you can see two things. Hedge funds basically live on momentum, meaning they're throwing out the losers and keeping with the winners. And secondly, uh there's a beta component to this with the long side of this. So, uh you can see that this has been hurting performance and it's been leading to force liquidations from Goldman Sachs. Hedge funds just sold more tech than any point in Goldman's 10-year record. Momentum factor volatility its highest in 45 years. I only have data going back 26. This goes back 45. Gross and net exposure are off the fiveyear and four-year highs. Now, middle of the pack, six weeks of that, and hedge funds are still up 9% through June. That is an important part of this. This is what I call the chip stack. The chip stack is still strong. And the reason is hedge funds post one of their best first halves in nearly three decades. So, they are not going from 0 to minus 5 or 10. They are going from 10 to 15 down to 5 to 10. that has a big difference because they're still playing with the chip stack. And the reason this is all important and again this is the most important factor for hedge fund returns. This is the most important factor that I care about for a market and how it's acting. This is the threemonth estimate revision factor long short. So, as long as the market's making sense, meaning the stocks that are outperforming on a revision basis or the ones that are seeing revisions go higher versus revisions going lower, we're still seeing that right now there's been no change. When you start to get into more dangerous periods, you start to see this go down where they start building in a recession. We saw that with Iran. This is the blue line. This is that same factor, but this is now just the long only side. It's not the long short. So, it does track the S&P. Um, and then this side, the reason I put this yellow line here, this is that long side of MO. So, the long side of MO is coming down sharply, but the estimate revisions are not going up. The reason this is important is most, if not all of these names and the long side of tech related to the AI trade, they're seeing the revisions go higher. So, overall, the market just acts fine. Um, it's just this one area where we're seeing a reduction in price. So, the odds on the taupe board, again, to use the same thing, they're going the other direction now. Meaning, you're getting better odds on the AI trade than you were before. I know that makes sense to people, but the problem is you can never ignore when things go up on a rate of change that is historic. You have to separate some things. I'll get into that with Corning to give you guys some idea. This video is meant more to calm people down and just realize none of the things you're hearing with Kimmy K 3.0 with all of these debates with the bond stuff going higher. The AI progress continues. The need for compute continues. That's not going away. I can show the videos every single week. This is more about market performance and force deleveraging which has happened.
Here's the S&P still trading in the range despite all of this going on. And here's equal weight S&P breaking out again to new all-time highs. Crude, after everyone focused and worried about this, I just want to go through the worry portion of this um because I don't think it's getting enough attention. Crude is basically unchanged since mid-Marchch. Okay, this is the December crude. So, we had this move higher on the beginning of the war again, then we pulled back. This is a nothing burger, guys. Don't get sitting there caught in this whole trap and how it's leading to this. And if you don't believe me, here's the sixth contract of crude. This is the year-over-year change. You can't even tell that anything is going on. Nothing. We're up 11% year-over-year. This will not translate into core inflation. So, despite I mean, there's still people talking about double-digit inflation on podcasts that I look at every week. There's nothing going on.
Here's an important thing. And again, you look for areas where the market is not focused on things. Not only this is 10-year swap rates relative to 10-year yields. So, as we go into Kevin Worsh and people telling me that, well, he's going to fight inflation. Here are the inflation swaps. This is where they were when he took over. Here's where they are now. We're close to three-year lows on 10-year inflation swaps. Even with this little backup in the war, we went right back down. Here's 10-year yields. That's why real yields have gone higher. Here is the chart that I'll just keep showing. And this is using one year and two-year swaps rates. They've broken to new lows. So, they just continue to move lower. They are at five-year lows right now. And here is year-over-year CPI, which has tracked it. This has led. Inflation is not an issue.
Here is Google. the amount of people who reached out saying, "You're wrong on Google for showing this positive stuff. The backlog doesn't matter. You guys are nuts. The backlog does matter." And as I said and went through with Fable 5, yes, there's a chance 25% that this ends up being bad spending and they never get their backlog because anthropic and OpenAI never get their money. Yes, that's part of it and that could happen. That is not a high probability. And more importantly, Google has a lot of reasons for being fine in this, but they held the 200 day as of now and we've already made back half of what happened last week on numbers that were good and their capex is higher. So all of this fear on the cap hyperscalers and all this, I think that this has had an impact because I think people their reaction to things like Google and their fear is that someone's going to cut capex in a meaningful way. I don't care if someone cap cuts capex except for the fact that the market would respond badly to it at this point as we've seen because right now good news is bad news. Bad news is certainly bad news until we start to see a change.
Here is another reason why not to worry on the credit side. You guys should start following um this if you can. BKLN is the senior loan manager. This is what uh senior loan portfolio uh ETF. So BKLN this is the total return of it the yellow line we just made new highs again this is overlaid with that threemonth revision factor. So when the revision factor is moving lower and we have the BKLN BKLN moving lower mean people putting hedges on in credit I I'll get worried until then we don't have anything.
So here's the AI thing. We've now given back 50% of the trade since the Opus 4.5. I've talked when we got to here, I said, could it go down to here? Sure. Could it go down the 200 day? Yes, it could. And we've seen that with some of the names. So, I'm not saying this is over. I'm just saying the odds on the toe board are changing. You want to see signs that this is going through it. As we go through earnings, you want to start seeing if we start seeing some company act better. This morning, we've got Bloom Energy, which is up. We'll see how it trades on the day. But you have to look at these earnings as they come out and start seeing if they're trading better.
Here is the Goldman Sachs uh crowded hedge fund white line relative to the S&P overlaid with the thematic portfolio. So again, you can see that hedge funds are long this trade and that's been the issue and we've seen this this deleveraging. Corning reported I just want to take you through Corning very quickly here. Jan 27th the announcement with Meta. I've highlighted the fact that the amount of fiber needed on the $6 billion agreement is equivalent to about a h 100red million home new homes. On May 6th, Nvidia and Corning announced long-term partnership. So, Meta and Nvidia are both using most of the capacity or all of the capacity of them. Here's what happened to the earnings projections out to 2028. They went from about $4 and they're now currently at 583. So, we're talking about a more than almost a 50% rise in earnings estimates out two years. The stock after at yesterday's low was barely up from that first announcement, barely up from the first one. So, we've given back the entire move in Corning that happened since we got new news. Here's what they said on their earnings report. If we could make more, we could sell more. This makes capacity not customer appetite the principal near-term constraint. Meaningful scale up connectivity. We haven't even gotten to the phutonics part yet. This is the fiber part that suggests the current optical growth cycle may still be in the early phase. AI demand is shifting towards denser. This gets into Vera Rubin and all of the Vera Rubin parts which are far more opticalheavy. The ones for 2028 are the big step up function. The reason Corning has traded down again here is the year-over-year stock performance of Corning over the last 20 years. We got up to a fourbagger in terms of year-over-year performance. So coming back to here, even with where we are, we are basically at the highest level year-over-year we've been. So these things matter. Year-over-year rate of change matters in terms of what you should expect. That is what the AI uh midcycle slowdown is. We have news that'll come out, bottlenecks, all types of things. They're saying their capacity is keeping them back. Well, that's the bottleneck thing that I've talked about repeatedly. Bottlenecks slow things down. Is the AI trade still on? Yes. Is Meta still going to see the earnings grow? Yes. So, you're getting it at a better level. It's still year-over-year historic, but some of this is related to the massive change that's happened. So, I don't expect it to go down more from here, but I also not sure when we're going to start to see the catalyst. Maybe it'll take it until the fourth quarter. We get through the midterms. We're not getting through this worry uh portion very very quickly. Earnings matter.
Here we are with SMH. Uh, looking for signs that maybe we've hit a bottom. The great thing is with the SMH, this absolutely is a corrective move. So I've talked about these head and fake head and shoulders. Well, we'll see what happens that if you can break back above, we've got a very slow moving. This is impulsive from an IoT wave perspective. This is corrected. We'll see how we trade. We had the highest volume uh during this move this week. Usually a good sign. And it wasn't just one day. So this is taking the 2hour trading volume. So from 9:30 to 11:30. I've talked before why I use this. I use this to look for change where the quant strategies or where forced deleveraging has happened at the hedge fund side. I used this first two hours. This was enormous volume. It dropped off dramatically after this. This was yesterday. So, this was the biggest volume so far this year. We got a reversal sign on that in the two hours. So, we saw a lot of selling yesterday in the first two hours of trading in SMH and then it traded back up. Uh you saw a similar thing in Micron. This is the 60-minute chart. Uh again, we broke down. By the way, this is the VWAP. We traded above the VWOP yesterday after the morning, which is another good sign that we've seen it. I do think that this has a lot to do again with the month. But to finish it up here, just remember we're in a very important week. We have the hyperscalers that we're reporting. This is from UBS. RPB data over the last two sessions shows hedge funds beginning to put on tactical shorts in US semis ahead of this hyperscaler capex estimates due to tomorrow and Thursday night. At the same point, we've got Wars. At the same point, you've had this. The chip stack was low this month. Monthly performance matters. If you're going into the end of the month and you've already been hit hard, there is a high likelihood you take risk off into this week. We'll see what happens. But it would not surprise me if as we get through the earnings report and as we get through the Fed, unless we get something surprising on the negative side, I think the risk- takingaking is going to shift from this point because of the timing.
All right, guys. That's it for me today. I'll see you on