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

• Digital Assets: BlackRock's Ethereum ETF is a Game-Changer

• Macro: Economic outlook, job trends, Fed policy, credit market, Google's AI strategy

• Markets: Market conflicts, small caps down, bullish S&P 500, volatile commodities, balancing growth and value investing

• Company Earnings: Waymo's & Google's robo-taxis, DataDog's performance, hedging SoFi’s, Fifth Third's income trends, Wendy's consumer insights.

• AI: Investor GPT, Big Tech AI & Semiconductor layer

Ram had a nice chat with Kenny Pasternak about how he made his first million flipping used cars. We also discussed CRE. Check out the informal interview here. (The noise goes away after the first 30 seconds.)

Best quote: “"We like to be balance sheet bullies in a downturn."

Digital Assets

BlackRock announced an Ethereum ETF.

We recommend you watch this video interview with Bloomberg ETF Analyst Jeff Seyffart and Nick Rygiel an Advisor with Ironclad Financial for our perspective.

What’s interesting is the Ethereum ETF conversion was entirely telegraphed. Here are the receipts.

ETHE, a name we have talked for a while, is up 260% YTD.

We’re very proud that, as to our knowledge, we were the first to shine a light on ETHE and other Grayscale products.

It’s amazing how the Wall Street Industrial Complex missed the best performing asset class of the year.

Every major bank: JPM, Goldman, Morgan Stanley, Merrill had 0% exposure to crypto in their model portfolio*

Meanwhile GBTC and ETHE are up over 260%+ YTD.

Committees neuter creativity.

You can see how we positioned it to be long Digital Assets in multiple posts - here is one.

Stay Non-Consensus folks.

Macro

For most of 2023, we saw the economy continue to beat expectations. On non-farm payrolls that happened 13 months in a row.

For the first time, we’re not seeing that. We’re seeing beats paired with misses.

That’s a vibe change.

We want to notice changes like this. It means the expectations and the narrative may be changing.

Overall, this supports our “melting ice cube metaphor” or thesis for the US economy.

Here’s one way to see the data.

US jobs numbers have been revised lower for the 8th time in the past 9 months. We had a brief re-acceleration in September that pulled forward the numbers, and now we’re seeing a giveback and resumption of the primary trend of deceleration.

Here’s another leading indicator: trucking activity.

Trucking and freight are leading indicators. People need to ship all those Amazon packages around the country.

There’s no reason to panic. It’s something to be mindful of. A weakening economy goes on the bearish side of the ledger.

It’s a good reminder to stick to quality assets that can weather the storm should a downturn emerge. We want to be long risk assets but positioned around quality assets.

Just like last year, we have a setup where the ‘fundamentals are bearish, but the technicals (including sentiment and positioning) are bullish’.

Also, just like last year, from Aug to Oct we had the mini-echo.

Fed Rate Cuts

So far this month, market have started to price in Fed's pivot to rate cuts in 2024 (particularly in back half of year).

We don’t expect this will happen when consumer’s inflation expectations are increasing. That could disappoint markets when rates don’t lower as markets expect.

The Fed needs to anchor consumer expectations and they have no qualms about tolerating a recession if that accomplishes the goal. They would prefer a soft landing, but they can’t control that outcome.

10 Year

The 10-Year Treasury yield had one of its biggest weekly drops since the Financial Crisis last week.

This is bullish for risk assets. And semiconductors are up. Remember this excerpt from October?

We started legging into Semiconductors in Mid-October. Now Nvidia is approaching ATH. KLAC, one of the names in our model portfolio is at an all-time high.

Take a look at Broadcom - it hit a new high on large volume. There’s a big hedge fund accumulating there.

Here is where these stocks are today and their recent performance:

Consumer Credit

Total credit growth was just 1% annualized last quarter.

We can clearly see the slowing of mortgage demand due to soaring rates driving weaker total consumer credit growth. The fastest growing section of debt is credit cards, up 17.9% QoQ annualized (after Bespoke seasonal adjustment) or 16.7% YoY.

Is this bad? It’s bad for lenders - you want to avoid them or maybe short them after they rip higher.

Credit today is not the binding constraint on spending.

The time to get worried is when credit is not available.

Don’t let normative judgements about ‘credit card debt is unsustainable’ get in the way of a clear analysis. Consumers are spending.

Who bears lending credit risk? The lenders. Names like Discover, SoFi, Upstart, and Affirm.

Not the S&P 500.

Macro

Consumer’s inflation expectations continue to inch-up… Even as economic data softens and as markets expect more Fed weakness.

We don’t expect the Fed to display itself in 2024 - unless there is a seizing of financial markets plumbing like we saw during COVID.

We’ll have to play the best hand we have with the data we have (e.g, valuations, positioning, technicals, fundamentals, etc.) when we get there rather than waste time trying to predict the future.

The point is that there is a sign of economic slowing. I don’t expect a recession in the immediate next few months as I’ve said - and peering beyond that is crystal ball gazing.

The fiscal and monetary authorities are facing constraints, and we see a slowing economy.

We want to scan the portfolio and ensure we’ll have assets that will do well in that time frame.

In my mind, that’s Distressed CRE, Private Credit and Energy stocks. Energy has been a strong diversifier - performing once again in the August through September time frame. And Private Credit throws off cashflows that we can use to buy dislocated securities

The Distressed CRE deals will get more attractive in 2024 leading to lower entry prices.

Thoughts on Google:

I continue to believe Google ($GOOG) offers the best risk-adjusted returns in the Mag 7.

Google, by year-end, will have more GPU capacity than all of its competitors - combined. (Google is manufacturing their own GPU chipset via the Broadcom tech stack.)

Google also owns the end-user. How?

Thru: (1) Gmail, (2) Search, and (3) Chrome.

And the Android platform.

Now, imagine how those apps will look when they are AI-enabled.

Google will be able to monetize these services with AI rather than merely advertising.

Microsoft owns the Corporate / Government segment. Google owns the long-tail.

Further, Google Gemini is not priced into Google.

What's priced into Google is the Death of Search from Open AI.

And Google's forward earnings estimates are weaker than its peer group.

I like that setup.

I have written about Google and other Mag 7 before if you want to search and read more.

My approach with Google is accumulate on weakness. I'm patient. It's on sale.

When these fundamental trends start to hit, and the stock is running up, I'm not chasing.

Markets

Here’s how we see markets today.

Like most of 2022, there is a conflict between macro and technicals.

Our synthesis of all this remain long thru Q4 and likely well beyond as well.

Quite a few stocks are on sale: Materials, Utility, Staples.

REITs like Vornado have rallied 50% since May…

Tech requires discernment - you need to pick your spots - the whole category is not on sale and never capitulated.

Note - Small caps are at levels not seen since Nov 2020. They can’t get a break. Small caps do consist largely of regional banks. The best seasonality for Nov & Dec.

We believe now is the time to do deep research in small caps. Find quality names that are trading down due to the index decline. Find names that do not have high levels of debt or are exposed to higher rates.

Large caps are not sensitive to interest rates, small caps are. So if you can find small caps that were unfairly punished with the category and can hold for a few years, now is a good time to research and pick up quality names.

The small cap category requires diligent research and there are thousands of names. The Lumida approach is to retain a sub-advisor whose names and approach we like and have performed well across multiple cycles.

Here’s a good take on small caps that we agree with.

S&P 500 Technicals Are Bullish

There have been two times in the past 40 years when the S&P 500 rose for 7 straight days following a 100-day low. The first was on March 20, 2003. It marked the end of that bear market. The other was November 7th.

Stay long folks.

Commodities

There have been 3 commodity cycle since 1933:

1933 to 1948: + 222%

1963 - 1978: +258%

1993 - 2008: +525%

In these cycles, commodities out-performed equities substantially.

At the same time Case Shiller P/E is elevated suggesting weaker forward equity returns.

And commodities are an inflation hedge.

How to position?

Overweight commodities:

Bitcoin, Uranium, Uranium Miners, Rare Earth minerals...

[ One can have a big debate around Lithium & Copper ]

Commodities are volatile. Maintain a diversified portfolio.

Investing Tip: Growth Vs. Value Investing

Value investors read history.

They study market cycles, and interest rates. They view the world as fundamentally risky. They are skeptical and take a half-glass full approach to assessing opportunities.

Value investors look for investments that 'compound' - meaning the earnings of a company can be plowed back into the firm and earn a return on the invested capital for a long time.

Growth investors are SciFi lovers.

They are Vision oriented. They love a disruption story.

They like charts with lines going up and to the right. They are top-down (market & thesis) oriented.

Be conscious of what hat you are wearing. There are different tools in the toolbox. Develop both toolkits.

Stay mentally flexible.

Company Earnings

Waymo

Company: Long Google

Waymo self-driving cars already appear to be much safer than human drivers: 1/4 the accident rate of the average person insured by SwissRe. 

Google owns Waymo. How many reasons do we need to own Google friends? Google will beat Tesla at autonomous robo-taxis. Tesla isn’t even focused on that in substance. Tesla is focused on narrative to justify the valuation.

DataDog

DataDog with double beat and strong guidance. CEO: "We were pleased with our execution in the third quarter, with 25% year-over-year revenue growth, robust new logo bookings, and a continued focus on solving our customers' DevSecOps pain points" 

SOFI

We think SoFi represents one of the cheapest asymmetrical hedges against risks from macroeconomic credit and liquidity risk deterioration.

We also believe SoFi has a built in liquidity time bomb that will manifest in three quarters give or take.

The best way to play it - hope that SoFi participates in the Q4 rally.

So far, it is lagging.

SoFi is due for a bounce now and seasonality is bullish.

You can see our criticism of SoFi here which received 117K views on Twitter.

This is called accidental alpha leakage.

Fifth Third Bank

Fifth Third sees a gradual slow down in disposable income. That fits our ‘the US economy is a melting ice cube’ theory.

Wendy’s

Wendy's CEO: "if you look at the consumer, it's really the tale of two sides. The over 75,000 consumer continues to be healthy...We're holding our share in that segment. Under 75,000 consumers a little more stressed, esp as you go down the income core, it gets even more stressed"

AI

GPT Update

“I made a GPT to teach me anything as efficiently as possible.”

There is an opportunity to build Investor GPT.

First step is to train it on mental methodologies. 

In our view, here are some of the most legendary investors. Each investor has a different contribution to make.

If you’re a VC and wants to throw $5 MM at us to build Investor GPT let us know 🙂

It will be trained on the following content:

- Competitive Strategy: Michael Porter

- Buffett’s Annual Letters & transcripts

- Charlie Munger’s Business Adventures & transcripts

- Peter Lynch: Stock picking

- David Dreman: The role of market expectations

- Jim O’Shaugnessy: What Works on Wall Street

- Technicals: @CryptoCred & DeMark

- Soros’s Theory of Reflexivity

- Howard Marks (OakTree) letters

- Seth Klarman (Baupost) letters

- Julian Robertson interview / transcripts

- Jim Chanos (short selling)

- Ken Fisher (role of sentiment)

- Peter Thiel’s ‘Zero to One’

Big tech is investing more in AI:

META CEO: "AI will be our biggest investment area in 2024" 

AMZN CFO: "...increased infrastructure CapEx, support growth of our AWS business, including additional investments related to generative AI and large language model efforts"

What’s the inference from greater CapEx? Focus on investments in the Semiconductor layer.

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Quote of the Week

 "I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over." — Warren Buffett

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