Welcome back to the Lumida Ledger. Here’s a preview of what we cover this week:

• Macro: CPI, Overweight Energy & Financials

• Markets: Animal Spirits, IPO Market Uptick, Betting on Travel & Leisure, Direct Investing

• Company Earnings: Oracle Earnings & AI Value Capture

• AI: Tail of Two Cities, How to Play AI Investing

• Digital Assets: The Institutions are Here

We shared the stage at Permissionless with Apollo Global, JPM and Morgan Stanley in an enriching discussion on the evolving landscape of digital finance.

The paradox of a conference titled Bankless with some of the largest banks and private equity funds — as well as your humble narrator — represented on stage was not lost upon us.

_Macro

Commercial real estate is coming back into the headlines.

Despite that, big banks like JPM and MS were up 3 to 4% this week outpacing technology.

Markets are getting better at differentiating who is naked when the tide goes out.

Lumida takes an endowment style cross-asset class approach to investing.

And similar to endowments, we believe long-term investors should have a high level of exposure to real estate.

It's no surprise then that Charlie Munger’s top holding after Berkshire Hathaway consists of real estate. Like Berkshire Hathaway, these assets benefit from tax efficiency, depreciation, inflation pass through, and long-term market growth.

Attractive entry points happen rarely – usually near the top of interest rates cycles like where we are now.

We keep coming back to this thesis because very simply, public equities are far more efficient than illiquid dislocated private real estate.

In public equities, you are competing with the sharpest analysts in the world to find a variant perception. We feel very good about our calls this year, but we are also humble.

By contrast, in today’s real estate market, you have a ‘capital imbalance’. There’s too many assets and not enough cash. You don’t need a variant perception. You just need a life preserver for developers that are hanging on by their fingernails. That life preserver is called “cash”.

Simply put, we view CRE as our highest risk adjusted return thesis. We expect conservatively a 3x+ return.

Check out the thread below to learn more about what is happening in the commercial real estate market and our commentary.

Reach out if you are a qualified client and want to learn more about our preferred opportunity that is only available for a few more weeks.

We said on our 8/27 newsletter:

‘We believe there are better than even odds of a negative inflation surprise over the next 3 months’

That surprise happened this past week.

The CPI rose to 3.7% marking a reversal from the cooldown. That means inflation and rates will be ‘higher for longer’ folks. That surprise, we believe, is also what explains why the S&P 500 closed lower.

Markets expect the ‘data dependent’ Fed to tilt hawkish.

We continued to expect inflation stickiness in the coming months. Energy prices are on the rise.

(Fortunately, having an overweight on energy has helped and financials. Also, Banks like Morgan Stanley and JP Morgan were up 3 to 4% this past week). Our sector tilts are working.

Energy prices have rallied quite a bit, and we’d expect oil to start coming in now due to seasonal factors.

We don’t expect the rate cuts that the market sees next year. However, the market has come a long way in meeting us where we are.

_Markets

Animal spirits were mixed this week.

Animal spirits refer to the sentiment or the mojo among market participants.

They are a real driver of short term asset pricing.

Sentiment has cooled in the last nine weeks while the US dollar has surged for its 9th consecutive week. The USD is responding to Fed expectations. Markets continue to be driven by “macro”.

That said, this should subside. We issued a tactical underweight call on August 1st. Since then, we’ve been patiently waiting for the USD fever (and some other metrics) to break.

Crypto does appear to have bottomed. We believe crypto will bottom before equities.

Animal spirits are coming back. Here’s why.

The Softbank backed ARM IPO was very well received - the stock jumped 20%.

We wrote a recap here.

The investment bankers are giddy. Management and the banks are raising the offering price for Instacart from a valuation of $8 Bn to $10 Bn.

That’s a good sign for markets.

When IPOs stumble out of the gate that’s a bad sign. (In fact, we will look at the performance of recent IPOs, among a host of other metrics, to get a sense of sentiment.)

We continue to believe that we are in a correction within a bull market for fundamental, technical and sentiment reasons.

Earnings expectations are growing, albeit slowly. And sentiment is not euphoric. That’s what you expect when you are near market tops. The inverted yield curve will slow down the economy - but the terming out of debt has blunted its effects.

If you are a long-term investor, we believe the next few weeks are a good time to accumulate.

Within equities, we are starting to see compelling valuations in value stocks. Stocks that are considered “quality” - which we have focused on YTD - have rallied sharply.

We expect a broadening to other categories now. Value stocks are quite compelling, especially for conservative investors that are looking for income with an inflation hedge.

Consider Citigroup. Citi is a “too big to fail” mega bank. It can borrow short-term at virtually nothing. It is well capitalized. The stock has gone nowhere since 2009. The bank’s price to tangible book value is around .4. It is not over-exposed to CRE. Citi issues a dividend yield of nearly 5%

Now Citi is no JP Morgan or Morgan Stanley. It has no wealth management business (which we like) and its ROE is lousy.

So why are we focused on it? Citi’s CEO Jane Fraser this week announced a set of sweeping restructuring fixes which should cut costs and improve the banks ROE. That sets up a turnaround opportunity.

If they make deep cuts and fix the ship, it can unlock value over a 3 to 5 year timeframe. Bank stocks cycle from low price-to-tangible book to high price-to-tangible book. The pendulum on Citi is to the far left and it’s swinging back now.

This is classic value investing in a nutshell. Don’t expect big numbers in the near term, but over a 3 year period we could see strong performance.

While we’re highlighting the performance Citi to showcase value investing principles, it’s essential to remember that past performance doesn’t guarantee future results. This insight isn’t a recommendation to buy or sell, so always consult with a financial professional before making investment decisions.

Betting on Leisure and Travel

At Lumida, we combine our top-down thematic views while pouring over research from the buyside and sellside.

Unlike the banks who are stuck making decisions based on their own research, at Lumida we have access to volumes of research from the buyside and the sellside.

We can “look up and around” and test our hypothesis or see if we are missing anything.

Here’s one.

Deutsche Bank has a thesis that we like.

They are “‘overweight services over goods” and “overweight travel and leisure”.

We like this theme and have discussed it regularly here - we call it “Americans are stretching their legs again”.

What makes this thesis ‘non consensus’ is that equity portfolio managers generally construct portfolios in terms of “sector weights” (e.g., energy, financials, etc.) or “factors” (e.g., quality, value, momentum, etc.)

This thesis expression makes intuitive sense but breaks the traditional framework. Nevertheless, it’s a common sense way of making sense of the world.

You can take a look at their thesis here:

Here’s the double-click on Travel & Leisure - a theme we like. (Apparently so does Michael Burry who has made Expedia his number one holding per our 13F analysis.)

Finally, if you want to dig further into market positioning, take a look at this thread where we breakdown the Global Fund Manager Survey.

Direct Investing

Around 2/3 of stocks in the S&P 500 and Eurozone are in the red.

With an ETF you can't tax loss harvest that. (The ETFs are up b/c of Mega Caps).

With direct indexing you can tax loss harvest. That creates material outperformance.

This is why Direct Investing will kill BlackRock and State Street's Equity ETF business.

If your wealth manager has you investing in ETFs you are leaving money on the table.

_{Company Earnings}

Oracle reported 66% YOY growth in Cloud AI. Pipeline doubled to $4 Bn QoQ. The stock was down 13%. Why? The prior quarter growth was 76%

‘Oracle has far more demand than we can fulfill.’ - CEO Larry Ellison

Oracle is continued evidence that AI value capture continues to accrue at the infrastructure layer.

_AI

AI is a tale of two cities.

We believe investing on the infrastructure layer — where you can see the demand via capex spend — is wise.

We remain skeptical on the end-user layer. Tech firms are testing new form factors in search for product market fit.

This week you can see that play out in the earnings of Adobe.

As you know, we believe the bet in AI is focusing on the silicone layer.

The silicone layer means focusing on those companies that provide infrastructure, whether chips fabrication or Cloud infrastructure, rather than the customer layer.

Adobe reported this Friday. The stock was down 4% after earnings.

The bear case on Adobe is really simple. Adobe is facing the classic Innovator’s Dilemma.

Generative AI makes designers productive.

That means you need fewer designers for the same amount of work. This reduces the TAM (e.g., the number of customers) for Adobe.

And Adobe cannot capture the value it creates through price increases. Longer-term, the proliferation of generative AI apps reduces the need for using Adobe.

Adobe management is as AI forward as it gets.

But that really doesn’t matter if AI is breaching the moat around Adobe. Further, Adobe’s acquisition of Figma at top-of-the-market prices gives me pause. Compare Adobe’s track record with Microsoft - MSFT is far more accurate (LinkedIn, GitHub, Activision, etc).

We expect Adobe will underperform relative to other names that are true beneficiaries of AI.

Thus, we believe underweighting “CapEx Payers” such Adobe and overweighting other names that benefit from the AI trend can control our sector and factor exposure.

Other overweights could include Nvidia, TSM, ASML and others.

We expect the spread between Nvidia (“CapEx Receiver”) and Adobe (“CapEx Payer”) to continue to widen.

_{Digital Assets}

Here are some of our highlights from Permissionless

Multi-point founder Kyle Samani made the provocative point that L2s may seek to refactor and build their own L1s.

His point is that L2s are not loyal to their settlement chains.

DYDX is evidence of that.

Tune into our video spaces for more here.

We sat down with Kyle for an hour long interview on a range of topics including his personal journey, his top research resources, the multi-coin approach to investment decisioning, their views on RNDR token, Solana, AI and crypto and so much more.

Stay tuned for more this week

Other highlights:

The institutions are here.

Ram moderated a panel with JP Morgan, Franklin Templeton, Morgan Stanley and Apollo.

All of the panelists except Franklin Templeton believe that we will not see a Bitcoin ETF approved under chair Gensler this year. (Franklin Templeton filed an ETF on the day of the panel.)

At the protocol layer, the new narrative is that value capture will take place at the L1 layer which provides security and settlement and also at the application layer.

The layer 2s don't control the customer and there is increased competition. For example, Arbitrum which was in the spotlight earlier this year is losing focus to optimism. Coinbase's Base was built on optimism technology

On the infrastructure side, wallet as a service is coming. Fireblocks and startup Portal (backed by Haun Ventures) both announced new WAAS offerings.

You can read more about what it is here.

Avichal, GP at $1 Bn venture fund Electric made the insightful observation that up to 25% of the world's billionaires may come from digital assets should Bitcoin achieve parity with gold. Politicians that are challenging incumbents see that Trend and are front running it by aligning with crypto.

Whether you believe those price targets are not, clearly the political dynamic is shifting and that is constructive for digital assets.

On markets, we noticed ETHE a few Fridays ago at $10. We continue to believe this is one of the better risk adjusted return opportunities in the category vs holding spot.

We expect higher returns investing in early stage crypto venture funds which have valuation discipline and a thesis-based approach. We continue to canvas the category to identify the venture firms that may be able to do the next 10x.

On corporate news, DCG & Genesis offered an ‘Agreement In Principle’. We don’t think this goes anywhere as creditors likely reject the deal.

Also, Genesis shut down its Derivatives business. We view this as old news.

Lastly, FTX plans to sell around $1.5B to potentially $2.5B of crypto assets in the coming months, including yet-to-be-approved trusts.

This could cause weakness for ETHE and GBTC in the near-term since markets have low liquidity. However, at least some of this is priced in. We believe weakness would represent accumulation opportunities.

Conference Calendar: We’ll be speaking at Mainnet next week. Reach out to us if you are attending and would like to connect.

• Messari Mainnet Sept 20-22 in NYC. Use code MAINET-SPKR for $300 off your ticket.

Work with us: we are are looking for a junior offshore analyst to help us build more analytically-informed content. Send referrals here.

Meme of the Week

Quote of the Week

"The secret of change is to focus all of your energy not on fighting the old, but on building the new." - Socrates

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