Welcome back to the Lumida Ledger.

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

• Macro: Tech Goes Nuclear, Fed Cuts

• Markets: Growth vs Value, Negative Momentum, Market Positioning

• Company Earnings: Lumida Earnings Review

• AI: SK Hynix, AI Analysts

• Digital Assets: BTC as a reserve asset?

We are at the halfway mark for 2024, and the market is at crossroads with the Presidential Elections coming soon.

We had an interesting conversation on the topic with Mike McGlone, a senior commodity strategist at Bloomberg Intelligence who specializes in commodities and cryptocurrencies.

Mike creates monthly outlooks for Bloomberg markets and has over 25 years of experience in trading and investing. 

Tune in below to understand his views on how the elections will shape the Macro, Commodities, and Crypto markets.

Check out the full video here. Don’t forget to subscribe!

Spotify | Apple

This week, we also discussed markets in depth on our ‘What’s on your Mind’ podcast with Nick Rygiel (Founder of Ironclad Financial) and Quinn Thompson (founder and CIO of Lekker Capital).

We discussed the impact of trends emerging from current events on macro, digital assets, small caps, emerging markets, and AI.

Don’t forget to subscribe!

Spotify | Apple Podcast | Youtube

Timestamps:

00:27 Market Overview and Key Themes 

01:34 Deep Dive into Market Indicators 

02:14 Insights on US Dollar and Commodities 

02:47 Bitcoin and MAG7 Analysis

03:23 Seasonal Trends and Market Sentiment 

05:27 Impact of Political Events on Markets 

06:31 Brazil Market Analysis and Fed Rate Cuts 

15:41 Small Caps and Economic Outlook 

16:40 NVIDIA's Market Influence 

17:32 Boomer Spending and Market Trends

27:00 ETFs and Tax Strategies 

35:20 Innovative Risk-Defined ETFs 

36:38 Introducing LumidaETF 

36:52 Investment Strategies and Market Conditions 

37:13 The Art of Selling and Buying 

37:36 Challenges of Buying the Dip 

38:41 Case Studies: Lululemon and Abercrombie & Fitch 

39:59 PayPal vs. PaySafe 

47:37 Tesla: A Deep Dive 

52:34 Energy and Utility Investments 

01:03:23 Final Thoughts and Future Outlook

This week’s newsletter will be short as we are focused on closing a private deal. We think it’s our next CoreWeave.

Lumida Clients should expect a communication this week.

This is not an offer to buy or sell securities.

We may have found our ‘next Coreweave’ - In terms of the asymmetry of risk and reward.

Here is the outline for educational purposes; I can’t get to the specifics due to NDA.

The setup is that there is an asset that trades at two different prices in two markets.

The liquid version of the asset trades is expensive.

The illiquid version of the asset is cheap (20% greater than liquidation/book value).

The liquid version is worth 5 to 7x the price of the illiquid asset.

There is a legal mechanism to transform an illiquid asset into a liquid asset.

The mispricing occurs because the demand for the liquid asset is high, and access to the illiquid asset is capacity-constrained.

This happens now and then… for example TSMC shares were 20% more expensive than locally listed shares.

So, the edge is ‘access’ to the illiquid asset and the mechanism for transforming it to its liquid version.

There is no arbitrage because the liquid version of the asset cannot be borrowed, and there is no derivatives market.

The price difference between the two assets is 5 to 7x.

The thesis is that you can transform (‘flip’) the illiquid asset into the liquid before the spread compresses.

The spread has been wide for about 7 months or so, and it is gradually compressing.

The time to transform the illiquid asset into a liquid variation is about a day or two.

Then, you need to sell in the liquid market.

The main risk is a price decline in the liquid market during the holding/transformation period.

I like to approach this by modeling it using a conservative underwrite (e.g., assuming the exit price is 50% less than the prevailing price).

Then, measure the liquidity vs. shares for sale.

One similar type of deal was the GBTC and ETHE.

Hedge funds were buying Bitcoin and Ethereum in the spot market.

Then, they would deliver forward and seek to capture a 20 to 50% premium.

The main flaw with that strategy is the holding period is 6 months on a highly volatile asset, the parties engaged in carry trades with a mismatch in assets and liabilities, and the spreads widened.

Also, you need to pay short-term capital gains (unless you are in Puerto Rico Act 60, etc).

Here, there is a floor on the price of the illiquid asset.

I believe my NDA expires in a year, and I can tell you more about it and how it all played out.

I am penciling a reasonable probability of a 2x in a 30-day holding period.

We’ll see how it plays out.

There is no arbitrage, but the odds and risk/reward are attractive.

Lumida clients should email [email protected] with the subject line “Next Coreweave”. Closing is July 15th.

Wishing all our readers a Happy Independence Day!

You were dealt pocket aces if you were born in the United States. 

The American Republic is one of the most successful startup experiments ever. 

The Founders read a lot of philosophy - Locke, Adam Smith, and the Classics - the ‘enlightenment tradition.’

(They also read ‘The Leviathan’, the totalitarian equivalent of George Orwell’s 1984.)

They had late-night debates on resolving the paradox of having a strong Executive branch and a Commander.

while guarding against the principle that ‘absolute power corrupts absolutely.’

They wrote a mission statement called the Declaration of Independence. 

The core idea was that legitimate power and authority don’t flow from bloodlines or the Divine Right of Kings; but instead from first principles…

‘We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.’

The Founders signed the Declaration with their names - putting their own life & liberty at risk…

In exchange for the life, liberty, and pursuit of happiness for generations to come. 

Heroes, all of them. 

Macro 

Tech Industry Wants to Lock Up Nuclear Power for AI

This week, WSJ highlighted the growing interest of the tech sector in nuclear power. 

Data centers can now be built faster with nuclear power because little to no new grid infrastructure is needed. 

Data centers could also avoid transmission and distribution charges that comprise a large share of utility bills.

The new interest in nuclear power is part of a reversal of fortune for companies that own power plants in competitive power markets. 

That business has been difficult for two decades following overbuilding in the 1990s. Nuclear plants struggled to compete with wind, solar, and natural gas, prompting closures.

Constellation Energy, which owns 14 U.S. nuclear power plants and produces more than a fifth of the nation’s nuclear power, has seen its shares rise more than 70% this year.

> The world needs small modular reactors and an abundant locally sourced supply of HALEU

Lumida Curation of the Week:

In case you missed it, here are some of the best curations from Lumida Wealth on Twitter.

Be sure to follow Lumida Wealth on Twitter, and on Youtube, where you can get more such curations. Instead of watching hour-long market podcasts - we distill the key insights in 1 min shorts and serve them in threads. 

The goal is to maximize insight per unit of time.

NVDA, Elections, Macro Opportunities & China.

Fed Rate Cuts, Inflation & Labor markets

Morgan Stanley does a Fast Follow on Lumida:

Markets 

Guess one of the best ways to lose money?

You find the stocks that have the highest analyst earnings expectations going 5 years out. 

You buy that basket.

Then you short the stocks that have the worst analyst earnings expectations over the same time frame.

You'll lose money.

I first learned this as a freshman in college during the DotCom era.

I said "Gee, why don't I just buy the Most Buy Rated stocks?"

That didn't work. 

Later, I did some backtesting on this strategy and confirmed.

Lesson #1: Consensus is priced in.

(That's why your CELH is lagging)

Lesson #2: Contrarian / Non-Consensus ideas lead to out-performance.

Lesson #3: It doesn't take that much good news to turn a non-consensus stock into a winner... 

...provided the fundamentals are intact 

You need to make sure it's not a value trap.

Good examples of these non-consensus ideas are: 

GOOGL, CVS, GM, LNG, SMCI, MPC, ASPI, TNK, STNG

Good examples of Value Traps:

MED, WW, NKE, WBA

Good examples of Growth to Value Traps:

CELH, SNOW, LULU, TSLA, AAPL

The Negative Momentum Rally

Seeing quite a few stocks with this pattern:

(1) Was a retail 'story stock' favorite

(2) Stock shellacked in the last few months

(3) And yet, Earnings Revisions and Fundamentals continue to improve

LULU is a classic example of this.

As I noted before, many of these folks woke up in May, decided to sell their pet growth stock, and bought NVDA.

But, now, the valuations of the names people are selling look attractive. 

And Nvidia is no longer 'go go go' (at least for now). 

Take a look at these two charts, for example. 

The blue line shows a stock price for a medtech company. 

The red line is the lower limit of analyst estimates.

(This is a loose and imperfect way to get a handle on valuations.)

Whenever the stock has been this cheap it has a snapback rally.

This business has had a 40%+ revenue growth for 6+ years. 

It has a gross profit margin of 80% - as high as Nvidia.

It was a darling.

The stock has experienced multiple compressions.

There are quite a few names that have a similar pattern.

Also, look at the second chart. You can see EPS/share increasing even as the price is decreasing.

That means it's not a value trap. Fundamentals are improving.

What's my point?

A. We have gone from a market of stocks - where each stock has its own unique story - to a market of themes.

And there are a handful of themes driving this market.

(1) Semiconductors (AI)

(2) GLP1s

(3) Utilities (and now Energy)

B. I expect other people are out there like me looking at names like this and saying 'Gee, that looks cheap' and stuff I own is getting pricey.

That observation will drive breadth expansion. 

We saw that again this week.

We are also seeing some recovery in SaaS software (although I continue to believe SaaS is a tough neighborhood since now this group has to spend on capex when they were 'capital light').

C. I believe the extremes we are seeing—the overbought getting more overbought and the oversold getting more oversold—will set up a mean reversion.

We are seeing this 'negative momentum rally' take place in TSLA and AAPL

D. This bull market has been marked by 'trends'. 

Either your stock is on an up trend, or it's on a downtrend.

Simply owning stocks in an up-trend would have led to outperformance.

But, there is a limit to just how far stocks can crash and burn on the downtrend.

We are seeing them start to bottom and turn.

Something to keep an eye on...

On Portfolio Positioning:

There are 3 questions you should always ask to guide positioning

The answers don’t change much, these are slow moving…

But when they change, you should change.

Here are the questions and how to incorporate them:

1) What theme has the most momentum? 

In July, that is AI, Datacenters and Nvidia (really, semiconductors)

Another way to ask this is: Which asset are people afraid not to own for fear of missing out?

2) What are retail speculators chasing? Where are they hiding?

Last year it was ARKK. This year, I believe it is TSLA and NVDA, and maybe PLTR

> When this asset peaks, usually animal spirits roll over - a useful market timing tool

> Look at how ARKK marked all the peaks in 2023

3) What are the totally bombed-out sectors that everyone hates?

Candidates: SNOW PARA WBD WW ON LCID RIVN FXI

Streaming, pre-GLP1 Weight loss, EVs, China, cable… ARKK

> When these rally, we go from momentum to mean reversion

Company Earnings 

As Q1 earnings wrap up & we gear up for Q2, we've curated the key trends & insights across themes that emerged this earnings season.

Here’s the link if you’re new or missed out:

Lumida Earnings Review Q1 2024

AI 

On 3/27: We mentioned that the Best way to bet on Memory is SK Hynix

July: GS and Citi Predict More Gains for Hynix

Sadly, there is no ADR for SK Hynix

AI is going to disrupt investing. 

Lumida Wealth is at the forefront.

In case you missed it, below is a link to our first Agentic AI that knows more about a specific stock than any human. 

The AI is trained on 100 pages of research from Lumida Wealth

And a dozen interviews with the CEO of ASPI

Try it out!

(It’s proof of concept, still iterating…)

Now imagine if we bolt on AI Avatar

Goldman, Morgan Stanley, JP Morgan…

How did we beat them to the punch?

If you are looking for a wealth management partner, Lumida is now welcoming a limited number of new clients.

We offer a range of services, alternative investments (such as our CoreWeave deal), white-glove crypto management, to public equity management, and high-touch family office services, including trust, tax, and estate planning.

Ready to explore? Click here to fill out our form to start the discovery process.

Interested but not ready to commit? Build a relationship with Lumida and stay informed. Click on the poll below if you want our advisors to reach out.

Quote of the Week

"Volatility is not your enemy, ignorance is." - Warren Buffett

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Disclaimer: Lumida Wealth Management LLC (‘Lumida”) is located in New York, NY, and is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Lumida only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Any direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

The information in this material has been obtained from sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated in this material are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable, Lumida, Inc. and Lumida Wealth Management LLC (collectively Lumida) make no representations or warranties whatsoever the completeness or accuracy of the material provided, except with respect to any disclosures relative to Lumida. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this material. Any data discrepancies in this material could be the result of different calculations and/or adjustments. Lumida accepts no liability whatsoever for any loss arising from any use of this material or its contents, and neither Lumida nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof, apart from the liabilities and responsibilities that may be imposed on them by the relevant regulatory authority in the jurisdiction in question, or the regulatory regime thereunder. Opinions,forecasts or projections contained in this material represent Lumida’s current opinions or judgment as of the day of the material only and are therefore subject to change without notice. Periodic updates may be provided on companies/industries based on company-specific developments or announcements, market conditions or any other publicly available information. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections, which represent only one possible outcome. Furthermore, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified, and future actual results or events could differ materially. The value of, or income from, any investments referred to in this material may fluctuate and/or be affected by changes in exchange rates. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Past performance is not indicative of future results. Accordingly, investors may receive back less than originally invested. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipients of this material must make their own independent decisions regarding any securities or financial instruments mentioned herein and should seek advice from such independent financial, legal, tax or other adviser as they deem necessary. Lumida may trade as a principal on the basis of its views and research, and it may also engage in transactions for its own account or for its clients’ accounts in a manner inconsistent with the views taken in this material, and Lumida is under no obligation to ensure that such other communication is brought to the attention of any recipient of this material. Others within Lumida may take views that are inconsistent with those taken in this material. Employees of Lumida not involved in the preparation of this material may have investments in the financial instruments or securities (or derivatives of such financial instruments or securities) mentioned in this material and may trade them in ways different from those discussed in this material. This material is not an advertisement for or marketing of any issuer, its products or services, or its securities in any jurisdiction.