Twitter fight, S&P 500 inclusion, and NFP reaction
Week in review:
NFP beat on Friday. By about 15k jobs. Honestly the actual job number is going to matter less and less over the next three years while Trump is still in office. Instead the bigger number will be the unemployment (UE) rate. This is because Trump is a lot stronger on the border than Biden was. Without the stream of illegals into the country domestic workers are going to be in higher demand.
This has two major effects. First, job growth itself will not be as strong under Trump as it was under Biden. That isn’t a big deal, as a chunk of Biden’s job growth was worker permits or worker visa part time employees. That chunk is now gone. Second, wage growth on the low end will start be pressured to move higher, which is bullish the American consumer. Maybe not bullish companies like Amazon near term as they have to raise their hourly rate, but once that pressure is passed through the lower end, which spend the highest percentage of their income on consumption, will have more to spend. This is a good thing.
The beat had the desired effect. Bonds on the long end got smashed, a trend that will continue as the recessionary trade continues to get removed from the curve. I expect we’ll be seeing a 5.25% 30y sometime within the next six ish weeks. Possibly a peak above that higher before falling back to 5% and then picking a direction, but 5.25% seems like its on deck.
Cyclicals and commodities started to run, Energy was a very strong sector on Friday, so was consumer discretionary, banks did okay as well. It was a strong, risk on because of the economy, day. One that will have legs until ADP decides to say only 10k people got hired next month. Even what is expected to be a very cool CPI next week shouldn’t disrupt this risk on sentiment for very long.
What could affect things is the fight between Trump and Musk. For those that have followed the stock much for the last half decade plus, Musk being a known user of drugs has been more than just whispered about. In the Washington Post this weekend they did a deep dive into the Musk/Trump fight, saying Musk basically flamed out of the inner circle the last few weeks, somewhat related to drug use. In fact at one point he even got into a fight with Scott Bassinet, who from all reports is about as even keel of a person as is possible.
One political point before we talk about the market effects. Musk didn’t win Trump PA. Trump lost PA to Biden by 1%. If 1% of Biden voters switched to Trump from 2020 in 2024, Trump would have won the state. The margin in the past election was that small. Trump was polling ahead well before Musk came aboard. That comment by Musk is rated as ‘false’.
What might also be false, and much more damaging to the market, is Musk saying Trump is all over the Epstein files. Which is why they haven’t been released.
Listen Trump tolerates a lot of crap thrown at him by people who become allies. Cruz, Paul Ryan, Rubio, the list of people he formerly crossed swords with that are now friendlies is a mile long. He doesn’t take much personally. I’m pretty sure implying having sex with children is a bridge too far. Musk clearly thinks so, as while I’m finishing editing this he deleted the tweet.
Listen the market risk to this fight is seismic. On both the long and short side. Musk INC, which isn’t just Tesla, but also Boring company, SpaceX, Starlink, the neuralink, and TESLA, all need a friendly government to continue growing at a lightning fast rate or at least maintaining market share.
The risk to Musk Inc is huge, because the government doesn’t even need to be outright antagonistic towards his companies to be a huge problem and drastically reduce the valuations of them. Without looking anything up here’s a few examples that came to me when I writing out the outline.
SpaceX has a ton of debris that has fallen off of their rockets and due to failed launches. They have shown little interest in cleaning it up, even though legally they’re supposed to. The US government not approving any more launches until they clean it up could cause a huge new cost outflow to SpaceX forcing them to raise money faster and delaying their product upgrades.
Tesla is currently at war with both state and federal agencies to keep records of their self driving car crashes under wraps. A neutral white house could give some of those alphabet agencies the space to make their own decisions, aka release the records. This would be a headline problem for Tesla.
Musk has very high security clearance with the USG, something that is supposed to require you to be clean and not use drugs. He could easily start getting randomly tested now or even have his clearance removed because of the *possible* unapproved drug usages.
These are literally only things I’m aware of due to reading the news. I’m sure there’s ten or more reasons why a less friendly government is very bad across the board for Musk inc. This will trickle down to other high beta names. As Tesla is patient zero for bs valuations. If it finally breaks, and I’m not sure it does immediately, but if it does, a lot of other high beta names will be smoked alongside it. Given that WASHPO, WSJ, and NYT, all have pieces out this weekend about…..well how insane Musk was acting the last few weeks in various forms, collective wisdom is now going to pivot Musk from a unique visionary to a drug user who might cut his life in half like Elvis.
I’m not sure what this means for the valuation of Tesla, but I imagine it doesn’t do great things.
On the flip side, all other space stocks need to be at least considered as longs. I’m going to be very clear here that I know absolutely nothing about this space, like negative about this space, but if SpaceX isn’t going to be the very clear and obvious winner then its possible that ASTS or RKLB will become the company the government picks. All of which means they could 10x quickly. Keep an eye here, I know these companies have already run hard over the past few months, but that might just be a preview.
I personally believe Musk has only one path out of this mess, three months at a rehab clinic, no twitter either, and gets himself clean. USA loves itself a good clean yourself up and go story, Musk could easily play that card, but for that to happen he needs to get clean and stay clean. And do so publicly. I’m not sure he’s interested though. Either way, this jilted lovers spat between two men was a great celebration of pride month. One that I don’t think we’ve seen the entire fall out of it just yet.
Pivoting to more fun topics, Circle had an extremely successful IPO on Thursday, over subscribed at the IPO level, pushing the price up to the 30s, then barely trading in the 60s for a hot second before settling between 80 - 100 the rest of the day. I bought shares on the secondary, at 83. 50 shares as a tracking position. That at some point on Friday I was 50% on. Insanity.
I’ve made it very clear via my Circle piece earlier this week as well as on twitter I think that Circle is a decent way to play crypto, which is one of the reasons I think being long it if you are a crypto doubter is worthwhile. Its a hedge that you’re wrong, and crypto wins. I’m not sure of that, nor am I such that crypto goes to zero, but Circle if bought cheap enough is a way to make money if crypto wins and if it goes to zero? Well then fiat stocks/bonds/trading won and I’m very long that. Maybe not at 110~ or whatever its trading at right now, but if it falls down to earth somewhat its worth having a few shares tucked away.
To use a historic example, no amount of put buying or call selling was a good hedge for a position in Yahoo. That’s because the bleed down was slow and steady. No the best way to hedge Yahoo was to buy the Google IPO. As they were the ones who were taking share. If google won, you owned some already and wouldn’t lose as much money, if google lost and yahoo stayed dominate? Well then great, you already own Yahoo.
Another more recent example of this is also in the fins space, as if you’re heavily long Visa/MasterCard you should own Capital One as a hedge now that they’ve completed their merger with Discover. Ex-stupidity out of DC Capital One growth and market share take over is the biggest risk to Visa/MA. I put the odds at significant disruption by COF to V/MA around 20 - 25%, that means if I had 20% of my account in one or the other, I would put 4%~ of my account in COF. On the off chance they win.
Circling back to Circle, there is one big near term bear case for Circle, Trump. He’s not a fan of Jpow and wants to create a shadow fed by nominating his new fed chair within the next few weeks. That way the market will start pricing in rate cuts basically the moment (he- its likely Warsh) gets put into the position. Circle makes money from the high short term deposit rate. If that decreases they will make less. That’s ungood.
At 31 dollars this isn’t really an issue. At 62 dollars this gives you pause but its probably still a buy due to growth. North of the 80s? This is a real risk to valuation and Circle should only be bought as a hedge against fiat. In the 100s? Ehh I think there’s real risk to downside when Warsh get his ‘nomination’ in a few weeks and then immediately says he wants STIRs around 2%. Keep that in mind if you’re very long Circle. It’ll have an effect.
CrowdStrike reported on Tuesday and their numbers were great. Less great is that growth is looking to be around 20 - 25% for the next year, and they’re trading at a huge premium on whatever metric you want to use. The last time they trading at 25x forward sales and 100x forward EPS, the company was expecting to grow at close to 70%, which it hit.
Listen Crowdstrike is a good company. Its a huge winner in the AI/cyber security space, but at 470 the moment the market stumbles even a second its heading back to the 380 - 400 zone. Meanwhile there’s a real seller up at the 490 level. The short term risk is decidedly pointed to the downside here. Much like when I was talking about Meta back in February, if you’ve been long Crowdstrike for years, ignore this, a year ish of sideways price action isn’t worth selling the stock and booking the gains. Its still a fantastic company. But if you’re looking to get long some cyber security stocks, look elsewhere right now, though at 380 this at least somewhat interesting. Especially if growth somehow starts growing again.
Broadcom reported earnings on Thursday and they were in line with estimates and guided to….in line with estimates. Their AI chip set division was growing fast, faster then the overall company, but its such a small part of the company that it barely moves the needle right now. Going into the earnings print it was at an all time high of 261~. Given that the explosive growth of the AI division is again small and will be for the next handful of years analysts seem to have a pretty solid handle on what earnings growth for AVGO looks like the next few years.
The street doesn’t have them cresting over $10 per share in EPS until FY 2028, on a P/S multiple, they don’t have it under 10x P/S at <$250 a share until the same year. I know AI and semis are the hot place to be, but at a certain point some of these names, especially the larger ones that don’t already have huge share like Nvidia, need to be looked at heavily and asked, what are we even doing here.
Not since SMCI or AMD in Februry/March 2024 have there been a bigger divorce between priced in expectations for a company, and actual results. Can Broadcom accelerate growth and pull EPS and revenue forward? 100%, but its a 1.2 trillion~ dollar company right. Its a lot harder to go from 60b in revenue to 120b than it is to go from 6b to 12b. Just because of sheer size. If you want to hedge any semi exposure I think broadcom is asking to die down to 200, really probably 160 - 180, but I think at least 200. A short here against long other positions makes sense.
More to come on Broadcom and TPUs later this week.
S&P 500 inclusion discussion:
Speaking of SMCI lets talk about the second twitter mess of the week, no S&P 500 inclusion this quarter. This was an absolute stunner to most of the fin twit gurus who only just realized you could chase S&P inclusion to generate returns in the last six or so months. The committee has done the no inclusion thing in the past whenever there’s a lot of market instability. They won’t want to kick out companies because their market cap is low only to see them instantly rebound. They don’t do this every time the market goes down but have a history of doing this occasionally.
Further making you go hmm, the committee clearly has been trying to send a message to the people and funds trying to min max on inclusion by yesterday’s no action. This is after letting in four names last quarter, none of which were AppLovin which the one everyone thought was getting in, and putting in COIN (coinbase) over every other fin name when DFS got removed because of the merger with Capital one. Coin wasn’t on anyone’s radar. People were not long EXE or William Sonoma to try to capture the upside of inclusion, at least the average punter wasn’t.
It was because of the chaos of last inclusion that I didn’t write a primer this time.
The committee has seen three high profile blow ups happen due to high prices paid at inclusion in the last year. SMCI had a 90% draw down from its inclusion price to its low. CrowdStrike got cut in half within months of inclusion. Apollo saw close to a 50% haircut from its inclusion price within four months. Lululemon is now down 55% since it was included to replace ActivisionBlizzard over the last 18~ months. TPL is down 40% in six months. The list goes on and on and on. As betting on inclusion becomes more common, and more profitable as the companies coming in get bigger, the downside drawdowns when those traders unload their stocks en masse after the index funds start buying make the committee look worse and worse.
This also makes the index weaker. The committee likes having high profile names with growth in it, replacing boring dying/slow growth companies, but the constant pay high prices for the stock, immediate draw down does act has a headwind to continues S&P 500 points go up game plan. The committee is trying to curb this behavior. Because of yesterday’s actions Robinhood, Carvana, Applovin, Veeva, and probably a few others are going to get hit on Monday and into next week. If the committee comes out next quarter and picks a bunch of stocks that are just over the 20b line that don’t have the heat of the bigger names, something like TradeWeb, or LPL, or maybe even a consumer staple like Sprout, the stock punters on twitter will lose their ever loving minds, as they’ll be wrong again. Burning tons of call premium in the process.
If the committee does it for two quarters in a row, the lesson might finally be learned. Its not like there aren’t 50ish names that could go in at any given moment, the committee has a lot to pick from. They just need to pick less sexy names for two quarters to kill lower the interest in index betting, and keep the S&P on track, aka going up and to the right.
Expect weirdness next quarter, and don’t waste a lot of time or money trying to game out the included names. I don’t think it’ll be worth the effort until December at the earliest.
Commodity Corner:
On Friday we got NFP which helped energy names record, but more importantly we see the continue collapse of domestic rigs based on the Baker Hughes numbers.
US shale is dying. What was once a slow death is speeding up. The market is only starting to take note of this as WTI crude was up almost 2.5% on Friday. WTI looks like its heading back to the 70s, due to lack of recession near term with the UE rate at 4.2%, and soon to be lack of drilling. The question becomes, does it stall out in the 70s or race higher. If the rig count keeps going down it will not stall out there and likely be in the mid 80s by EOY/early next year and heading higher until rigs start coming back online.
All of this points to a market that should be very supportive of energy equities ex-midstream (as that has barely moved down because its defensive) starting in the next few weeks and lasting through the back half of the year.
The European names have held up better than the domestic and Canadian ones, but I like all the majors, XOM, BP, SHEL, CNQ, SU, PBR are all holdings of mine. Given that domestic rigs are down and quality of new holes in the ground is getting worse, you probably want to stay away from the domestic only O&G plays excluding FANG, which is best in class. OFS both onshore and off shore might actually start running as well, though I’m less sure of that, and have limited exposure to that space because of it.
Even moving energy back to levels they were at pre-liberation day would be significant upside. Xom would be up another 14%~, CVX about the same, the euro names up about 5% and the Canadian names up about 10%. That doesn’t even speak to again, the market is getting tighter. If you’re looking for a space that should do well in H2 without needing to go far out on the risk curve, the energy space looks solid.
In the metals space, both copper looks good from a technical point of view and FCX might be considered as a long for those that want exposure. Any heat in the commodity space and this likely heads to 50 pretty quickly. Above 55 and this thing breaks out to new all time highs. You probably don’t want to bank on that given that its threatened to do that multiple times in the last half decade but if it starts running up there get excited.
Speaking of breakouts, silver looks like it might finally be breaking out for real. Highest close in more than a decade and no real volume between here and the prior all time high. It likely will trade sideways for a few days given how strong the thrust out of the decade long range was the past few sessions, but this is one you probably want to go on dips.
Hard asset summer is looking to be hot.
Stocks that look good to go:
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