It has been a brutal quarter to trade. Fundamentally, though, I believe most of our big bets will work:
Long the energy complex
Short overvalued tech
Long a rotation into blue chips
Long idiosyncratic healthcare plays
But paths matter as much as predictions, and in this environment how we play each theme will drive a lot of our performance.
Our long energy position has shifted towards the futures ETFs. Our short on overvalued tech, which until now was just Nvidia (and has paid handsomely), is expanding into more positions. And our blue-chip rotation needs more names after we took early gains in 3M and Waste Management.
This week I’ll publish four reports covering the changes going into the portfolio today, and the more rigorous methodology I want to apply to our investing over the coming quarters.
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End of marketing interlude. Back to the research.
On Thursday, the iShares Semiconductor ETF lost 12.1% in a single session, its worst day in five years. Nvidia fell 9.3% on no particular news.
The headline, of course, is that the AI buildout met the Democrats, who have taken both chambers of Congress. But I doubt their candidates’ promises to pause data center construction are the real reason behind the sell-off. These are themes I’ve been writing about for a while.
Back in June, I wrote a piece on Meta arguing it was starting to show the cracks in the AI buildout. More recently, I went short Nvidia, because I believed it would be the bellwether for tech and the wider market.
Last Thursday, in “When It All Falls Down,” I made the case that the money behind the AI buildout is circular, and that a virtuous circle on the way up quickly becomes a vicious circle on the way down.
In the third quarter, Microsoft, Alphabet, Amazon and Meta spent over $200 billion between them on property and equipment, more than double last year. In the same quarter, Nvidia reported revenue of $96 billion.
The problem is that the cash coming in no longer covers the capex. These companies are filling the gap in the financial markets with debt, convertibles, preferred securities and equity issuance.
When that isn’t enough, Nvidia steps in as financier of last resort, providing supplier finance to its customers. (Not so much the hyperscalers, but the CoreWeaves of this world.)
I argued that price action would lead the fundamentals, and that Nvidia was showing signs of breaking down. That pushed me into the short.
The Chinese spygate announcements that came afterwards only confirmed what buyers and sellers were already telling us.
But with Nvidia down 14% from where we shorted it last week (I had shorted it higher earlier, but covered straight after), I believe the next legs lower will come from somewhere else.
At the bottom of this report you’ll find a summary of:
The trades discussed today
The trades executed today but covered in the next three reports this week
The changes to stop levels across the portfolio
Ideally, the next three reports come out on Wednesday, Thursday and Friday, though it may take me until Sunday to get them all out.
