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Our Next Webinar:

Topic: How to Determine the Best Potential Investment Themes.

When: Oct 24,2024 11:00 AM Pacific Time

Register in advance for this webinar:

https://zoom.us/webinar/register/WN_nicbiSSlTwqTDXqOmfd1cA

Why Things Like Factors, Asset Classes, Styles, and Market Cap Diversification are Stupid.

Why most thematic ETFs suck.

How to use first-order, second-order, and third-order thinking to pick stocks and ETFs with the best potential upside.

One below-the-radar theme that could end up being extremely relevant regardless of who wins the election.

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There will be a recording sent out to those who register

 For Investment Pros Only

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Hedges

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Ended up being a pretty nice trade yesterday. Remember, this is a system that looks to short (puts) extended stocks. What I have found is that if you run a short system you are better off counter trend than trend. I am a huge believer in being agnostic between being short and long, but realize any short system won't have the same win rate or results as a good long system. This system also takes profits quickly so I will be selling my puts today. Even though this was a system trade, you could have seen this play out, and played both sides, if you trade discretionarily, which I no longer have time to do.

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This is an election play plain and simple as I have often talked to the media about, and am talking to couple more reporters today. It sold off when she was surging in the polls, and is now rallying as he looks to be doing better. Moves like this, in stocks like this, often get influenced by two things: Short squeezes and gamma squeezes. When you short a stock you are borrowing something you don't own, then you sell it in the hopes of buying it back lower later and returning it. For that you have to post margin with your broker. If the trade moves against you, then you need to post more margin. If it moves way against you, then you are forced to buy it back. Bloomberg says the short interest is 13.5% of the float and on average it should take .7 days for a short seller to cover. Bloomberg doesn't always have the most up to date info here though. In a short squeeze you have a ton of short sellers being forced to buy their stock back and ever higher prices in a panic. This is what happened to Melvin Capital when they got wiped out by retail traders.

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A gamma squeeze is similar but it comes from the options. When you buy a call option on a stock someone has to sell it to you. The seller of that call gets a premium, which they get to keep if the stock goes down. If the stock goes up they have unlimited losses. Assuming most sellers are not speculators, they will then go out and buy the stock to hedge. Similar to a short squeeze, when you have tons of traders buying calls that forces the option sellers to keep buying stock to hedge. This can turn into a gamma squeeze.

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Not sure if either of these things happened to DJT yesterday, I'm not tapped into that world anymore, but it seems likely based on the move that something happened. These types of moves often don't last all day, and the smarter traders know the adage, "take your profits or someone will take them from you". So these trades often peter out at some point. That happened to DJT when it failed at the 200 day moving average.

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Another way you could have played this, and my colleague on The Watchlist podcast Jeremy Vreeland did, is with sympathies. The main sympathy to DJT is PHUN. I forget exactly why, but at this point it doesn't really matter, when DJT runs they are going to run PHUN. PHUN only has a 61M market cap so it's much easier for retail traders to move. It did the same thing yesterday, big run up and then finished well off the highs.

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The one I'm kicking myself a bit about is GEO, that's a real Trump play. I got out of the name when they switched out Biden for Harris and should have been watching closer. Nice undercut and rally at a bunch of moving averages could have gotten you in at 13ish. Not sure whether I will chase or not. If Trump wins this will be a great stock, but he could still do or say something that changes the tide here. Maybe better to wait until the results are known.

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Themes

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AI

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The news of the day was ASMLs earnings accidentally being released at 10:30am, and the numbers weren't good.

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“While there continue to be strong developments and upside potential in AI, other market segments are taking longer to recover. It now appears the recovery is more gradual than previously expected. This is expected to continue in 2025, which is leading to customer cautiousness.”

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I bought the dip when it rallied back above the early September lows. It then closed back below and is down so far this morning. Longer term I still think you need to own this name, you can't have AI without their products.

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Microsoft Azure CTO: US data centers will soon hit size limits-Semafor

But as Microsoft and its rivals compete to build the world’s most powerful AI models, several factors, including America’s aging energy grid, will create a de facto cap on the size of a single data center, which soon could consume multiple gigawatts of power, equivalent to hundreds of thousands of homes.

Given their AI ambitions, a solution could be building data centers in multiple locations to avoid overloading any one region’s power grid. It would be technically challenging, but it may be necessary, Russinovich told Semafor.

“I think it’s inevitable, especially when you get to the kind of scale that these things are getting to,” he said. “In some cases, that might be the only feasible way to train them is to go across data centers, or even across regions,” he said.

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Google’s Nuclear Deal Points to a Promising New Group of Stocks-Barron's

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Now, a new group of nuclear stocks is beginning to rise—companies that are designing, building, and fueling new kinds of reactors. That includes NuScale Power, Oklo, BWX Technologies, and Centrus Energy, and their ascent may just be getting under way

“This is the next industrial renaissance. Artificial intelligence will not happen without nuclear power,” Underhill said. He thinks the trend is just in “the first inning.”

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IBM is an below the radar AI name that I have been looking to add. It has earnings on 10/23 so I'll wait. Stifel came out with a positive note on them yesterday. Last line is my thinking also....

• 3Q     seasonally weak, so expecting largely in-line revenue with potential EPS     upside from F/X, which we estimate moved 140bp more favorably over last 90     days (3Q impact, though still impactful in out quarters).

• 2H     software revenue benefits from inorganic growth and easier compares (4Q);     consulting/infrastructure likely to remain weak.

2025     set-up remains favorable

• Mainframe: new      product should ship 2Q25 providing growth tailwind through 1H26

• Consulting: 2024      could be cyclical bottom

• Margins: known      cost actions, consulting gross margin, better FX and mix key y/y      tailwinds

• Software:      
   
  • Acquisitions       add 4 points to 2025 software growth and ~2% to IBM total revenue       growth.
   
  • ELA       cycle tailwind to both revenue growth and margins.
   

• 5%     revenue/EPS growth in 2025 (consensus) should support ~$13bn in FCF (+7-9%     y/y), before HCP dilution some text
   
  • we      estimate $0.15-$0.20 EPS/~$200mn FCF dilution, or ~1.5%

 Stock has re-rated significantly last 15 months and is trading at 17x UFCF, up from 13xpreviously, reflecting better execution/growth, market rotation and recognition of 2025 set-up among other factors.  While still a solid defensive growth stock with an attractive dividend, we don’t view the report as a specific catalyst given 3Q seasonality. Stock feels a little stretched going into report and would wait for more opportunistic entry point.

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European Defense

EUAD launches next week.......

Why Europe Is Unprepared to Defend Itself

For decades, European NATO members curbed defense spending to fund other priorities. What remains, in the view of some US military experts, is a “Potemkin Army” that couldn’t stand up to an invader without American support.

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