Charting the Morning Percent Movers
Positions: None.
The Changing of the Guard
Position: None
Chips Take a Dive, Oil Slides, SpaceX Burns Off … a Trillion
The good news is Iran and the U.S. seem to be talking again. The not-so-good news is the AI tech trade and all its parts are falling fast. Let’s dig in.
My Tweet of the Day
Position: None
More Divergences
Yesterday was an extreme example of divergence within the market and in the tech space.
Memory and chips were an unmitigated disaster as the hyperscalers (e.g. $MSFT, $GOOGL) flourished.
Meanwhile, the consumer staples (defensive) ripped higher in a sea of market red.
I see Monday’s action as another example of potential market structure risks in which, in a market where so many worship at the altar of price, they all want to get in (and out!) at the same time.
Look out below?
Position: Long PEP (VS), KMB (VS), PG (VS), MSFT (VS), GOOGL (VS)
4 Problems Converge on the AI Sector as Investors Await Earnings
Four issues have arrived at the same time. But they are not the same problem. Here’s what to know.
More Tales From Nvidia: Fitch Warns About AI Credit Risks/GAAP Is Meant for a Reason (Issue #227)
Circular Deals
For nearly a year I have been warning about the circular AI financing deals.
When company A (e.g. Nvidia ($NVDA)) is funding company B (e.g. OpenAI) to buy product from them they are basically “creating” a huge discount on chip purchases and should be treated that way from an accounting perspective and amortized into the expense side of the P&L.
The company A is simply moving the discount from the P&L to the balance sheet and cash flow: The balance sheet and cash flow tell a very different story than reported earnings.
And we are not even seeing the entire balance sheets with all the off-balance sheet commitments.
Said another way, revenue and earnings are massively over-stated especially given all the operating leverage companies like Nvidia have. Buying your own revenue should have consequences for the P&L, but since it doesn’t, the grossly irresponsible behavior continues.
GAAP is meant to exist for a reason. This industry is exploiting every loophole in GAAP with these deals, off balance sheet structures, and depreciation schedules that do not reflect reality.
Meanwhile, the cost of insuring debt at Nvidia and the hyperscalers (credit default swaps) speak volumes and underscores the perception of rising AI credit risk:
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and
Position: None
Premarket Trading
I have taken a trading long rental in the Nasdaq (6:30 AM):
* $QQQ $676.74
Position: Long QQQ (S)