Here’s a preview of what we’ll cover this week: 

Macro: Should You Trust The NFP Print?

Markets: Markets Keep Absorbing The Bad News; Software Is Back; Collegium: Bad Earnings Day, Interesting Price; Semis: Easy To Mark The Bottom; Vistra Corp: AI Needs Power; Gold Finally Got A Treat; The Bear Case Is Always Attractive; How Not To Use AI

Lumida Curations: Gavin Baker On Nvidia; Steven Tananbaum On Lessons From The Past

Many institutional investors remain on the sidelines. 

Last year, Howard Marks wrote an essay called ‘Bubble Watch’. 

And, Cliff Asness wrote an interesting piece as if living ten years in the future. 

Jeremy Grantham sounded another alarm. 

Warren Buffett raised cash. 

In the meantime, the market has digested a massively overpriced IPO, a SoH soft war, and ‘higher for longer’ inflation. 

Earnings growth expectations are 20%+. 

Inflation is receding, albeit slowly. 

Loan growth is increasing, and credit quality is stable. 

There is no mass unemployment.  

AI is creating more work, not less. 

Coders are in demand. 

Small business formation is at record levels. 

The useful lives of GPUs are extending. 

The useful lives of people are also extending (GLP-1s.)

tl;dr Humans figured out how to make sand productive.

From a big picture point of view, the transformation and promise of AI is real.

On a side note, Lumida will be in San Francisco in the week of August 20th. Feel free to ping me if you'd like to get together. You can also reply to this newsletter if you’re reading this on email.

Yesterday’s market rally got a push from the NFP jobs report.

July NFP came in at -23K, missing the 85K expected. Markets rallied on the report as negative new jobs meant the Fed is less likely to hike. 

But, should you trust this number?

Well, Kevin Warsh surely doesn’t. 

Here’s his quote from his first conference as Fed chair: 

“Some of the data that we receive… the payroll index … [is] quite useful on its third revision.” 

So, is the labor market really weak?

We think it’s actually stronger than last year.

Here’s the data to support the claim. 

Initial unemployment claims came in at 199K last week, staying below 200K for the third consecutive week. 

More importantly, the four-week moving average has fallen to its lowest level since October 2022 - trend is more important than the number.

Layoff announcements also tell the same story.

U.S. employers announced ~33,500 job cuts in July, which is the lowest monthly total in two years.

That does not look like an economy where companies are rushing to fire people.

There are signs of hiring underneath the surface too.

Manufacturing hires recently rose to their highest level since September 2024.

Hiring is strong because the engine underneath is working. 

Historically, corporate profitability tends to lead employment numbers. 

When profits are rising, companies have very little reason to cut payrolls, and are more inclined to hire.

We have corporate profit margins reaching their highest levels since 2021, which suggests hiring strength should continue.

So yes, the headline payroll number wasn’t exciting.

But claims are falling. Layoffs are low. And, corporate margins are strong.

I spoke with a business that employs 2,500 people and sells Broadway tickets. They are using AI to get a lot more done. They aren’t laying off staff. They are tackling projects that were always on the backlog. Productivity is rising, so are earnings.

We're glad to see BlackRock shares the view we've been sharing.

BlackRock CIO, Rick Rieder, spoke this week, discussing how strong nominal GDP and earnings alongside slower hiring point to rising productivity.

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The NFP numbers are likely noise. That said, we did see some softness in tax receipts.

If we see a August to September seasonal summer swoon, that would create a reset to sentiment.

With most of the S&P 500 now through reporting season, 86% of companies have beaten EPS expectations and 76% have beaten on revenue. 

Blended earnings growth is running around 50% YoY in this quarter.

If we end at the same level, it will mark the highest earnings growth rate reported by the index since Q2 2021 (91.6%).

The difference between now and 2021?

2021 was fueled by extraordinary trillion-dollar back-to-back stimulus packages.

This time we are seeing earnings momentum driven by capex and productivity growth. The earnings isn’t driven solely by AI Capex either — software names posted strong earnings, for example.

Price action only reflects the move in fundamentals. See the chart below.

However, there is one thing we would watch here.

Sentiment has gone from cautious to almost euphoric (in some pockets) very quickly.

BofA’s Bull & Bear Indicator is now at 9.7, its highest reading year-to-date.

When the bull/bear indicator gets this hot, markets have historically needed to cool off.

We saw it earlier this year just ahead of the Strait of Hormuz blockade.

The indicator reached an extreme in February. The S&P subsequently corrected roughly 9%.

The same correction happened after the October extreme. It was followed by a 6% pullback in November.

The point isn't that 9.7 magically causes stocks to fall.

It tells you something about positioning. One other notable point — SanDisk reported strong numbers. Yet, the name also fell.

That does suggest people have enough of their fill on crowded semi themes.

Fund-managers are fully positioned with almost no-cash left. Their positioning is now sitting in the 99th percentile of the survey’s history.

Similarly, BofA’s private-client cash allocations have fallen to roughly 10% of assets, around the lowest levels we have seen in years.

Everyone has their cash in markets.

So, where does the additional capital to create demand come from?

Options markets speak the same sentiment even louder.

Call-option volume hit a record this week at roughly 4 million contracts, almost twice the recent daily average.

That’s contrarian bearish.

We saw almost the exact same behavior in Summer 2024. The bull market didn't end there.

But speculative positioning became too one-sided, the calls expired worthless, and the market had to shake people out before moving higher again.

See my post from that time.

We have added Lumida's exclusive investor sentiment indicator in the Lumida Invest App. It analyzes numerous proprietary tools to produce a sentiment reading. 

Notice how the bottom in the sentiment score at the end of July marked the immediate bottom for the index. 

You buy when markets are bearish, and sell when markets are euphoric.

This helps me visualize how AI disrupts traditional advisors. 

Try the app today.

Long term, we are still bullish on equities.

Earnings are strong. The economy is holding up. Corporate margins are healthy. Those are the things that ultimately sustain a bull market.

We see ROI on Google and Microsoft Capex.

Notice how hyperscalers’ cloud growth is already reaching ~50% YoY, and estimates continue to be revised higher.

That said, owning crowded semiconductor names such as photonics doesn’t strike us as sensible.

We’ll share some ideas and themes later in the newsletter…

Last week, we mentioned how software was rising from the ruins after its valuations had compressed during the semis trade.

We saw its dominance this week.

Software ETF (IGV) led markets, outperforming all other industries on our list, gaining about 9%.

But this wasn't a blanket software rally.

Earnings drove the outperformance in select stocks, while others were punished.

HubSpot (HUBS) and The Tradedesk (TTD) were both down roughly 20% after results. 

Meanwhile, names that had basically been left for dead, like Atlassian (TEAM), ripped around 35% in a single day.

Palantir, and Cloudflare also helped IGV’s outperformance. 

The name that stood out for us? AppLovin (APP).

We bought AppLovin (APP) after the stock fell roughly 20% on earnings day despite strong results.

Revenue still grew 53% YoY, while EBITDA grew even faster at 58%.

To put it into perspective, Atlassian (TEAM), which went up almost 35% on its earnings day, had revenue growth of 32%, with negative earnings. 

APP has 1.7x that growth at a cheaper earnings multiple. 

APP’s revenue miss wasn’t anything fundamental. Management gave a quasi-apology on the earnings call. It was quite strange.

Adam Foroughi (CEO): “We’ve always managed this business with the goal of outperforming our own expectations. And this quarter, we fell short of that standard.”

My suspicion is they may have wanted to talk down the stock so their newly issued share based comp package has an attractive strike price.

Management says Q3 has already reaccelerated.

More interesting is consumer advertising. 

Advertising spend is already running well above last year's holiday peak during what should be a seasonally weaker period. 

Now, APP trades at roughly 17x forward earnings for a business still growing revenues around 50%.

That is a PEG ratio below 0.5x versus roughly 1.5x for the sector.

We believe AppLovin is an overweight.

Collegium Pharmaceutical (COLL) was another earnings drop where we took the opportunity to add.

Collegium is part of the discounted health-care basket that markets seem to have forgotten about despite growth and solid fundamentals.

Their ADHD drug- Jornay PM- is the only ADHD stimulant dosed in the evening, with patent runways into late 2030s.

We had been bullish on the stock since May, when we first wrote about it. 

The stock fell roughly 13% after revenue came in lower than analysts’ expectations and management trimmed full-year guidance.

The cut in guidance was largely because pricing on the NUCYNTA (opioid pain medicine) came in below expectations.

But, the part of the business we care about is still working.

Jornay PM (ADHD segment) revenue grew 41% YoY. Prescriptions and prescribers both hit new highs, and management kept its full-year double-digit growth outlook intact. 

The recently acquired Azstarys is also tracking better than expected, enough for management to raise its revenue outlook for the drug.

On the problem that caused the guidance cut, CFO Colleen Tupper said: “We do believe the net price has stabilized at this point.”

That matters.

The legacy pain portfolio still throws off cash, while Collegium is using that cash to build a faster-growing ADHD franchise. 

Jornay is gaining share, Azstarys gives them another differentiated asset, and the same salesforce can sell both.

COLL’s stock trades at roughly 4.1x earnings, with a 35% free-cash-flow yield, around an all-time high.

Those numbers are kind of bonkers. We have seen names like this, such as HALO, that are cheap but growing - and the market eventually catches on.

At that valuation, you don't need everything to go right.

At all-time peak free cashflow yields, we believe the name is attractive.

Last week, we said the washout in semis after Leopold’s liquidation looked like the bottom.

The call played out this week.

SMH rallied roughly 8% this week, finishing only behind software among the major groups we track.

We read that Leopold is back and has raised $400 MM or so.

(I thought there were no wedding gifts? :)

Ken Griffin, allegedly, took notice…

Now, how can you get the same insights on factor performance before this newsletter gets published?

We saw a sharp rebound in Animal Spirits names - that’s visible by using the Lumida App and sorting on returns.

Here’s a screenshot of the top performing long strategies for this week. Overall, ‘animal spirits’ and junk stocks re-bounded together with semis.  

Incidentally, this Tuesday we are rolling out an upgrade to the ‘Feed’ on the app.

It will share a continuous stream of market insights and research - including transcript analysis, capex trends, quotes from management.

I’m enjoying the curated insight very much. Do check it out.

The AI buildout has a very physical constraint that sometimes gets lost in the GPU discussion.

Power.

A data center full of GPUs needs electricity 24/7.

And the companies that already own large fleets of gas and nuclear generation effectively become toll booths on that buildout.

That is why we added to our Vistra (VST) position this week. The entry at these levels is quite attractive.

Vistra grew quarterly adjusted EBITDA by more than 30% in Q2, and sees more than $10 billion of available cash across 2026–27 to fund growth and buy back stock.

The fundamental drivers are only just starting. 

Why is it on sale?

Both of VST’s regional grids (PJM and ERCOT) hit new all-time summer peak loads in July. 

Vistra further expects annual load growth of 4–6% in ERCOT and 2–3% in PJM through 2030. 

Data centers are becoming an increasingly important piece of that demand.

Management: “Data center development activity remains strong, and we continue to be in active negotiations with large load customers.”

And later: “We continue to see really high interest in both of our largest markets, ERCOT and PJM.”

CEO Jim Burke noted large-load customers are already “contracting at a premium with existing” generation because it will still be cheaper than what a new build requires.

Vistra is also widening the funnel through Helix, its partnership with KKR, NVIDIA and the Kuwait Investment Authority, where Vistra becomes the preferred power partner for new digital-infrastructure projects.

However, the stock has gone the other way.

VST's price has rolled over while earnings power has continued higher.

That is the disconnect we like.

When Trump nominated Kevin Warsh to lead the FOMC, that was the top for Gold.

When Bessent, together with Japan, intervened in the currency market, that was the bottom for gold.

Gold finally got a treat this week.

Put GDX (Gold miners ETF) next to the other two best-performing groups, software and semis, and it’d make the latter two look pretty ordinary. 

Gold miners were up more than 20% in the week, versus roughly 9% for IGV and 8% for SMH.

We see similar rallies in the commodities complex including silver and copper miners.

We did add Silver which is linked to the memory demand story.

Our preferred way to gain exposure to Gold has been Newmont (NEM).

It operates at 55%+ gross margins, with net margins around 35%, ahead of a sector median closer to 31%. 

More importantly, Newmont is getting more out of the assets it already owns. 

Underground productivity at Cerro Negro, major production site, is up roughly 15% per shift in Q2, and milling efficiency is also improving across sites. 

Their all-in costs for gold is projected to be $1680/oz in 2026 compared to current Gold price of ~$4,300. 

See the black line of the following chart — that is how much Gold would have to fall for it to be unprofitable for Newmont to produce more. (Precisely, 61%)

That matters because higher gold prices on top of an already efficient cost base create serious operating leverage.

Newmont is also returning capital, with $4.3 billion remaining on its $6 billion buyback authorization.

Goldman’s review of SanDisk and Western Digital are nearly identical. 

‘We expect the stock to trade lower following a strong quarter…high investor expectations’

Claude is running Goldman research.

That’s an example of how you shouldn’t be using AI. 

Gavin Baker argues Nvidia’s growing leverage across compute, financing, and infrastructure is pushing its business model beyond semiconductors and toward something closer to a cloud platform.

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GoldenTree’s Steven Tananbaum reflects on how the painful lessons of 2008 forced the firm to tighten risk management, setting up 2010 as one of the best years of his career.

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