The H.E.A.T. Formula
All The News That Isn't Fit To Print
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Please register for: The Best Investment Themes Post Election
on Nov 21, 2024 11:00 AM PST at:
https://attendee.gotowebinar.com/register/8455197581530760535
Matthew Tuttle will discuss:
Three below the radar investment themes that have nothing to do with AI.
How to design trades for asymmetric returns.
How to profit from the Fed’s stupidity.
Why bonds are a stupid investment and what to do instead.
If you would like CFP™ education credit (½ hour), please email pneville@tuttlecap.com your CFP™ID number.
If you can't make the live webinar, register and we will send are cap.
For investment pros only.
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But when they keep revising past numbers down, can you trust any of the data points?
Awful Jobs Report Aside, the Economy Is Still Strong-WSJ
The King Report.....
October NFP +12k, 100k exp; September revised 31k lower, to 223k from 254k; August revised 81k lower, to 78k from 159k. Private-sector jobs were -28k, the first negative reading since Covid! Manufacturing -46k jobs! It’s as if people at the BLS wanted to confess before the hanging judge arrives!
The Dow is a crappy index, at least they are trying to make it more reflective of what's really going on....
Nvidia to Replace Intel in Dow Jones Industrial Average. Sherwin-Williams Also Joins.-WSJ
From Stifel on Mag 7 earnings....
- META (-1%) faced the highest bar coming in and delivered a beat and raise highlighting the benefits on AI tool on engagement and monetization, though less than last qtr. While mgmt altered from typical year ahead opex/capex guide, stated that capex would again be “substantially” higher in 2025. Fundamentals remain healthy, but there is still plenty of worry that Capex growth may surpass current expectations without a measurable ROI threshold we can think through.
- GOOGL (+4%) after disappointing in 2Q, delivered $2B Rev & OI beat with upside from Search (though slow with tough Temu/Shein comp) and Cloud (GCP surprisingly accelerated 6pts to 35%), YouTube in line, and Gemini additive to both top and bottom line per mgmt. Pre mgmt, “we have lowered machine cost per query significantly. In 18 months, we reduced cost by more than 90% for these queries through hardware, engineering and technical breakthroughs while doubling the size of our custom Gemini model.” Results are likely to ease some near-term concerns, though many investors await final remedies from the DOJ/Search suit, and initial thoughts on the DOJ/AdTech suit which we view as largely immaterial.
- MSFT (-4%) typical 100bps Azure upside (34% Y/Y-cc), but was guided to slow 200-300bps in Dec qtr when acceleration was expected with mgmt pointing to supplier constraints which it expects to improve in 2H supporting stronger growth. Total Dec rev guide came up shy (mostly MPC) and OpenAI losses are expected to increase by over $1B seq. (which seemed to surprise. Shares are likely somewhat range bound in coming months until the company can post consistent Azure acceleration (2HFY25) and investors gain comfort In MSFT's ability to monetize its AI App portfolio (12% of Azure growth, unch seq). In the interim, NOW is already proving out AI monetization & CRM seems to be nearing an inflection.
- AMZN (+5%) AWS disappointed, just meeting expectations as recent 3P data suggesting upside. However, it meaningful beat OI, the key investor metric heading in, with all segments improving. Dec guide a little light on top line $185B vs St $186.3B with OI $18B ahead of $17.3B. Capex $75B in 2024 and more in 2025 (seemingly more measured than peers). Margins likely the biggest catalyst for 2025 (St overly concerned on Project Kuiper headwinds), continue to sees strong op leverage, continued high-teens to low-20% AWS to continue and continue to see long run way on advertising.
- AAPL (-4%) slight upside qtr on stronger iPhone sales (+6% vs -1% last qtr) offsetting slowing/below St Services (+12% vs +14% last qtr and “similar” growth guide); Dec guide up LSD-MSD% Y/Y below St +6.8% and seemingly consistent with recent datapoints supporting a little better iPhone unit in qtr but downside to forward builds. With downside outlook in iPhones anticipated, the Svcs miss caught investors’ attention, pressure shares.
Hedge Fund CIO: "Real Wealth Is Not Generated By Diversification, It Is Built Through Concentration"
All that matters is that you understand we’re in a massive arms race; our ability to win comes down to compute, power, AI.” We were discussing highest conviction themes, where you’d concentrate your capital if you could make only one bet. It’s a good thought experiment. Because real wealth is not generated by diversification, it is built through concentration.
“The buckets are defense, AI, the infrastructure to support it, and the commodities required for it all,” explained the same CIO. “They’re each part of a piece, the same theme.” One big trade. “The driver of AI is not improved productivity, it’s defense. And defense gets kind of lost in the debate.” No one really wants to talk about it. “But that’s why this drive to push AI to the extremes is being pushed and will continue,” he said. “So that’s long Nvidia, ARM, TSMC, Taiwanese peripherals, the major armaments companies too.”
“Trying to find the US companies that are investable with good beta to the defense theme has been difficult,” he said. “The best opportunities have come from Europe.”
Election
Great note this weekend from Stifel's Washington Policy Team.....
Even at this late stage, it is exceedingly difficult to have real conviction regarding the election's outcome. In this period of great uncertainty, all we can moor ourselves to is a firm belief that the Senate will flip to Republican control. The House will come down to a couple dozen seats, a handful of which are in California and could take time to call. As for the White House, we continue to view Trump as a very slight favorite given our read of state level data and his recent momentum in the polls, but this appears to be an exceedingly close election that could go either way. Heading into the election,we maintain our 55% odds of Trump winning, 75% odds of the Senate flipping to GOP control, and our 55% odds of the House staying under Republican control.
What Are Big Market Themes Under A Trump White House?
If President Trump returns to the White House, we would expect it to be positive for: (1) M&A and consolidation; (2) Fannie Mae (FNMA, Not Rated)and Freddie Mac (FMCC, Not Rated) as there would be a pronounced effort to end the conservatorships; (3) private prisons such as Geo Group (GEO, Not Rated)and CXW (CXW, Not Rated) given the focus on immigration enforcement; (4) fossil fuels, nuclear energy, and clean coal; and (5) companies in the digital asset ecosystem such as Coinbase (COIN, Not Rated), MicroStrategy (MSTR, Buy, $180PT; Analyst: Harte), and Riot Platforms (RIOT, Buy, $22 PT; Analyst: Lewis).The biggest negative theme for markets would be Trump's embrace of tariffs,which could lead to retaliatory tariffs, a global trade war, and an average after-tax reduction in household incomes of ~$1,800. The threat of a trade war, coupled with enhanced immigration enforcement, has led many investors to suggest that a Trump II administration could slow growth and ramp inflation.
What Are the Big Market Themes Under A Harris White House?
We do not believe that a Harris administration's policy priorities would differ materially from the Biden administration. There are arguments to be made at the margin on certain economic policies, and we would expect a different tone on foreign policy, but many Harris policies are substantively similar to Biden policies. Therefore, we would largely expect the status quo on energy,healthcare, tech, M&A, and financial services. From a market perspective, a Harris administration would mean that the IRA's clean energy tax credits are safe, the threat of a global trade war is lower, and taxes would move modestly higher for high earners and possibly businesses depending on the composition of Congress.
What Are Some Market Themes No Matter the Outcome In November?
- Manufactured Housing. We believe that policymakers on both sides of the aisle are cognizant of the nation's housing supply shortage and conceptually supportive of policies aimed at addressing that shortfall. This is likely to take the form of tax credits in next year's tax package, but we also firmly believe there will be continued financing support for manufactured housing from government agencies. As a matter of context, manufactured housing costs ~50% less to produce than site-built homes. We continue to believe that additional government support for manufactured housing should be directionally positive for companies in the space including Champion Homes (SKY, Not Rated) and Equity Life Style Properties (ELS, Not Rated).
- Defense Sector. With a Democrat in the White House, there would be far more connectivity with partnerships across the globe, and a push to support allies with military aid. With a Republican in the White House, there would be far more support for defense spending in general. There could be more of an isolationist bent, especially in a Trump II administration, but the path of least resistance is through continued and steadily increasing defense funding.
- Small Business Lending. Vice President Harris has proposed increasing the small business startup tax deduction from $5,000 to $50,000. While the ~$3B per year cost could result in some changes, we believe the odds of increasing the startup deduction during next year's tax reform effort are high no matter the outcome in November. We would view an increase in the business startup tax deduction as positive for small business lending originations, which could benefit large SBA lenders like Live Oak Bank (LOB, Not Rated) and Huntington Bank (HBAN, Not Rated).
- Wells Fargo Asset Cap. We continue to believe that Wells Fargo (WFC, Not Rated) is moving closer to having its asset cap lifted. The firm has continued to make steady progress on resolving legacy issues, and we believe the Fed's $1.95T asset cap on the bank could be lifted next year no matter the outcome of November's election. Our view is informed by 3 key points: (1) the bank has made meaningful progress in resolving issues as evidenced by 6 consent orders being lifted under CEO Charlie Scharf's tenure; (2) for an asset cap to become a viable tool in the regulatory toolbox, logic suggests that it must eventually be lifted or else it is little more than permanent purgatory; and (3) press reports suggest that the bank is steadily moving through the Fed's regulatory checklist. We don't view the Wells Fargo asset cap as being a political issue, but rather an ongoing process that could end next year.
- No One Is Going to Tackle the Deficit. From our seat, deficit hawks are the most endangered species in the nation’s capital. With over $4.6T in tax cuts expiring at the end of 2025, one would think that policymakers would use the opportunity to have a serious and sober discussion about the nation’s fiscal predicament. We firmly believe, however, that Washington will continue its deficit-financed spending next year no matter who wins in November. Policymakers are either unwilling or unable to act to alter the nation's unsustainable fiscal trajectory. This is due in large part to policymakers being unwilling to make tough choices carrying political consequences, but there is also an overarching comfort due to the centrality and importance of the U.S. dollar and the U.S. Treasury market. Ultimately, with elected officials unlikely to act, we believe only the bond market can force Washington to accept any modicum of fiscal discipline.
Themes
Politically Neutral
This dovetails somewhat with our research on politically neutral companies outperforming....
Sparkline Capital - Partisan Investing
AI Power
On Friday the Federal Energy Regulatory Commission (FERC) rejected the interconnection service agreement between Susquehanna Nuclear, PJM Interconnection, and PPL. This is going to impact a lot of the nuclear stocks today.
From nuclear to quantum computing, how Big Tech intends to power AI’s insatiable thirst for energy-CNBC.com
U.S. tech behemoths Microsoft, Google and Amazon have all secured nuclear energy deals worth billions of dollars in recent months as they seek to bring additional energy capacity online to train and run the massive generative AI models behind today’s applications.
The upsurge of generative AI demand has coincided with a push to find more efficient cooling solutions in data centers, particularly liquid cooling — a process in which water is used to lower the temperatures of servers and other electronic equipment.
Weight Loss Drugs
Hoping for a weight-loss pill? It could get closer to reality next week.-MarketWatch
Viking Therapeutics Inc.’s stock was up up as much as 3.8% early Friday as excitement continued to build about data on the oral weight-loss drug the company will present at the upcoming Obesity Week event.
The stock, which enjoys the unusual position of having all buy ratings from the 13 analysts offering coverage on FactSet, has been on a tear this year, gaining almost 300% to date in 2024.
Novo’s New Obesity Drug Is Targeting the Most Dramatic Weight Loss Yet-Bloomberg
To stay ahead, Novo is turning to a compound called cagrilintide. Together with semaglutide, which slows the movement of food through the digestive system by mimicking a hormone called GLP-1, cagrilintide forms a hybrid the company calls CagriSema. Novo is betting the duo will be greater than the sum of its parts, predicting it will help patients lose at least 25% of their body weight. That would make it the most effective treatment yet, in terms of pounds lost in a large clinical trial — potentially without causing more side effects than Wegovy alone.
VKTX, NVO, and LLY are the three names I own in the weight loss theme. Volatile chart, but it's making higher highs and higher lows....
Meanwhile, I added to my LLY last week on the hopes the 200 day would hold, it didn't...
NVO pretty much doing nothing. Would like to see it break above the October low of 113.79.
Still holding on to all three but will revisit the theme if Trump wins and let's RFK Jr. have free reign. He is not a fan of the weight loss drugs, but not sure how much damage he can do yet.
Politically Neutral
Election 2024: Harris, Trump present ‘diametrically opposed’ impacts on ESG-ESG Dive
“A Harris administration would be more favorable for the interests of ESG investors whereas a Trump administration would be antagonistic,” according to Morningstar Indexes’ head of strategy
Bingo. Which is one reason why we believe that investing in companies that are politically neutral will provide an edge.
ShareholdersfirstETF.com
