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

• Macro: Fitch's US Downgrade, Job creation's impact, Inflation and Hot Landing, Ackman's inflation stance, Fed's rate resistance

• Markets: S&P 500's streak, Alternative investment options, Magnificent 7 analysis, Market observations

• Earnings Season: Company earnings analysis, China Consumer's significance, Big Tech and AI Capex

• Digital Assets: Affection for Ethereum's Potential, SEC-registered yield generation, Wealth management infrastructure

_Macro

In a significant turn of events, Fitch has taken a cue from S&P by downgrading the United States from AAA to AA status. To jog your memory, S&P took a similar path in the summer of 2011. One noteworthy divergence from the past, however, is that bond yields have continued their upward climb post the Fitch downgrade. This paints a different picture from 2011 when the bond market was shielded by a flight to safety amidst a global slowdown and fears of a European debt crisis.

Fitch has been catching a fair bit of flak for this downgrade, although we're inclined to differ on the public sentiment. We believe Fitch is simply playing its part as a private sector entity, bringing a necessary level of accountability to the public sector. For a deeper dive into Fitch's stance and our perspective, do check out this thread.

Shifting gears, let's talk about non-farm payrolls. Last Friday’s report revealed the creation of roughly 180,000 jobs, a figure consistent with the previous month's pace. However, it's crucial to observe that the pace of job creation is decelerating, evident from the chart linked here.

A soft landing means the pace of job creation starts to steady around current levels (say 50K to 150K new jobs per month).

Whether the Fed can smoothly navigate this economic transition hinges entirely on this chart. The US Consumer, with its penchant for outperforming expectations month after month, is no stranger to surprising us.

At the same time, we are seeing negative revisions to recent data. Non-farm payroll data from the last six months shows downward revisions to employment gains. This pattern last emerged in the run-up to the recessions of 2008 and 2000.

Yet, expectations are one thing, and the absolute level of activity is another. The US consumer is beating expectations, like corporate earnings, but both are undeniably slowing on an absolute basis. That’s what makes the current story novel: ‘The levels are good, the trend is bad’

This slowdown is helping to curb the growth of inflation - we need to see that graceful landing and will watch vigilantly. Don’t be surprised if there are disappointments in CPI this month or a new narrative in Aug/September around ‘sticky inflation, AI disillusionment, and valuations over-extended’

On the bullish side, a closer look at new orders data shows the economy is growing. The CHIPS act and Inflation Reduction Act are bolstering growth in manufacturing - offsetting to some extent the ‘restrictive policy’ stance of the Federal Reserve.

Our view? We're likely in a "hot landing scenario." That means economic growth continues to slow, while inflation stays above the Fed's 2% target (settling in at 2.5 to 3%). We expect this hampers the Fed's capacity to lower rates for 2024.

Now, let's give a warm welcome to Bill Ackman who has joined us in the "higher for longer" club. Historically, when inflation crosses 8%, it takes years, not months, before it falls back below 2%.

Here’s our counter response to Bill Ackman, which rec’d nearly 100K views.

He has splashed out on call options, wagering that interest rates on the 30-year bond will rise. While we're pleased to have Bill on board, we can't help but note his somewhat tardy arrival. When CNBC's hedge fund managers begin to align with our views, it may just be a sign that we're edging closer to the endgame.

Our forecast? We believe the Fed will resist rate reductions next year, predicting that inflation remains stubbornly persistent. However, we find it hard to envision mortgage rates surpassing the 7% or 7.5% threshold on a sustainable basis. We're of the opinion that duration is cheap right now, making it an opportune time to lock in returns for the long haul, particularly on the current income portion of your portfolio.

_Markets

US equity indices have been putting on quite a show this year. The S&P 500 is striding into a five-month winning streak, marking its 38th such streak since 1928. Past performance seems to favor an extension of this streak - 29 of the previous 37 winning streaks have made it to month six. Moreover, the average next-month gain after a five-month win streak was +1.46%, significantly higher than the average gain of 0.63% seen for all months since 1928.

Our outlook remains bullish. Indicators suggest we're still firmly seated in a bull market. However, our tactical call last weekend highlighted the increased risk associated with August and September. It seems the markets have been avidly reading our newsletter, with the S&P posting a loss 4 to 5 days this week - its first weekly loss in quite a while.

Despite this, markets have come a long way. The P/E ratio for the S&P is now north of 21. Interestingly, this gain has been propelled more by multiple expansion rather than earnings expansion. We maintain our belief that there are exceptional sectors and equities ripe for long-term ownership. However, investors need to tread carefully, being more discerning in their choice of securities - yes, even when considering stocks within the 'Magnificent 7'.

At times like this, we increase our exposure to alternative investments - both liquid and illiquid. Here’s a thread describing some of the alternative investments.

From a long-term tax efficient wealth creation perspective, we are excited about the distressed CRE opportunity and expect a 3x+ MOIC. The benefit is higher for those subject to high income tax due to the tax benefits of owning real estate.

Speaking of the 'Magnificent 7', stay tuned for a thread where we delve into earnings and offer our insights. Among these highfliers, Amazon, Meta, and Nvidia seem to be flexing their muscles. Meanwhile, others, like Apple and Netflix, might face an uphill battle with earnings growth. Google looks like it is poised to beat analyst expectations and has the best relative valuation.

We'll also discuss how Apple has several avenues to spur earnings growth. However, these come with the need for bold bets, be it taking on Tesla with an Apple car or broadening their spectrum of banking services. All of these would require dipping into their hefty $150 billion cash reserve.

Investors, take note: small-cap stocks, particularly those with value, are outpacing technology. Also, energy prices are on the rise. Take a glance at the chart below, highlighting the revenue, earnings growth, and valuation statistics for several big tech stocks. This shows the rationale behind markets rewarding certain stocks.

As we scan the markets, some trends are worth watching. Firstly, the top one percent luxury segment appears to be pulling back the reins on spending. Anecdotal data from Ritz Carlton sales performance suggests this slowdown. Although Marriott recently posted impressive earnings, those figures look back, not forward. Therefore, it's a trend to monitor.

Secondly, the lithium market continues its strong performance. We believe specific commodities like lithium and uranium will not only serve as robust inflation hedges but also stand to benefit from global secular growth trends such as the rise in electrification and the nuclear renaissance.

Next week, we will present at the 1640 society, including an in-depth exploration of other investment themes we've developed, like energy, biotech, AI, and semiconductors. Stay tuned, as we look forward to sharing more of this research with you in the coming weeks and months.

_{Earnings Season: Company Earnings Highlights}

We have several write-ups on company earnings including Coinbase, Tesla, Meta and Apple from this past week. Click below to learn more.

Meta:

Coinbase:

Apple:

Tesla:

We have 3 big takes from Earnings:

1. The rise of the China Consumer. Tesla, Apple, Louis Vuitton, and Netflix all cite the importance of the China Consumer. Tesla is cranking out 1MM vehicles per year in China…

2. On Big Tech - MSFT, Google, and Amazon - are all betting on AI driving growth in their data center business. The data center business is the fastest growing segment (about 20 to 25% revenue growth). But the rate of growth is slowing. And these businesses are already massive (Amazon has $80 Bn+ in data center revenue). Amazon discussed for instance how customers are focused on cost optimization.

3. AI Demand has not materialized in a material way at the Data Center level. It remains a ‘bet’ to see if AI will accelerate end-user demand. We’d rather focus on the “sure thing” which is the silicone layer - Nvidia and semiconductors at this point in time. That demand has already materialized - it’s called ‘Capex of Big Tech firms and Sovereigns’

_{Digital Assets}

Turning our attention to the crypto-verse, we maintain our affection for Ethereum (ETH). However, the crypto landscape is vast and we believe we've spotted a promising publicly traded name that might even outperform ETH. Don't worry, we won't keep you in suspense for long. A grand reveal is planned in a month or two. However, we deem it crucial to prioritize our Limited Wealth clients first to mitigate any front running while we implement this new strategy.

Adding a dose of excitement to our crypto endeavors, we're thrilled about the prospect of becoming the first SEC-registered investment advisor to enable clients to generate yield by providing liquidity on Uniswap pools, in full compliance with regulations. The return potential here is significant, ranging from five to forty percent. The exact figures will, of course, depend on what pairs an investor chooses to provide liquidity on, based on our research and insights.

While we gear up for this ambitious undertaking, we ask for a dash of patience. Building out the required infrastructure will take a month or two. But the anticipation is palpable as we are eager to play a pivotal role in shaping modern wealth management's contours. Thank you all for your unwavering support and here's to staying ahead in this dynamic world of digital assets.

Lastly, Ram is testing an account on Tiktok.

We’re going to test a short form format with quick snippets, ‘bull / bear’ takes on stocks and crypto assets, and insta-takes on company and macro data. The goal is to get 1 or 2 videos a day.

It should be a lot of fun and will be designed for a broader more accessible content.

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

Quote of the Week

"The best investment you can make is in yourself." - Warren Buffett

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