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

• Macro: Olivon Advisors Conference, Bits + Bips: Why It’s Time to Be More Bullish on Bitcoin, Soft vs. Hard Data: A Tug of War, Current Vs. Future Conditions, Speaking of buying the dip, DOGE Cuts Less than Expected, CapEx Increasing: But Where’s the $6T?, Tariffs Are Just Corporate Taxes, Entitlement reform, not tariffs, Global Power Realignment, Buffet’s End of Era

• Markets: Earnings Season Highlights, Google’s Post-Earnings Drift, China Accelerates in the AI Race, Trouble for US shoe companies, Stocks We Watch

• AI: Meta standalone app for consumers, Visa betting on Agentic Commerce 

Lumida on the Road

Olivon Advisors Conference

This week, we had the opportunity to attend the Olivon Advisors conference in Austin to showcase our services.

If you're interested in learning more, feel free to reach out to Marc at [email protected].

Bits + Bips: Why It’s Time to Be More Bullish on Bitcoin

The market’s pushing Trump, or is it the other way around? Plus: Bitcoin treasuries might be the real driver of this cycle.

Really looking forward to Spring weather, enjoying grilling in the backyard…

Soft vs. Hard Data: A Tug of War

The S&P has put in 9 consecutive up days, something we haven’t seen since 2004. There’s a lot to get into - let’s dig in!

We received a bevy of hard data this week - and the hard data is still holding up.

The mismatch between hard and soft data continues. 

Initial jobless claims came around expectations, and non-farm payrolls crushed expectations. 

The result? Markets rallied. 

Beaten-down consumer discretionary names joined the party. The datacenter theme also rallied strongly. 

We noted about two months after the prior earnings season that all the fundamental read-outs and the Datacenter theme are strong. 

That was reiterated by Microsoft and Meta (“M & M”) reporting on Thursday and reiterating their capex investments.

Current Vs. Future Conditions

The White House admin is in full ‘talk up markets’ mode this week with multiple appearances on major media.

GDP showed a contraction this past quarter - not seen since Q1'22.

There are aberrations in the report, with businesses and consumers showing signs of accelerating demand.

As we have highlighted previously, there is a mismatch between current conditions and future conditions. 

Take a look at the import and new export orders in April. Both are declining sharply - not seen since Covid level.

Currently, retailers are selling existing inventories – so this drop-off in orders has not impacted global supply chains.

Over the next two weeks, we will start to hear more news reports around this as the reality of a global trade war unfolds.

At the same time, it does appear to be the case that the admin is focused on getting trade deals done. There is a renewed vigor in talking up markets. 

However, until we see the final policies here, we should expect markets to remain volatile.

The admin is leaning hard on trade deal wins to boost market sentiment, but the messaging across different speakers remains inconsistent.

The reporting is that there are differing factions trying to advance different views - and this syncs with David Sacks comments in his debate with Larry Summers two weeks ago.

Let’s go thru some macro.

Overall, consumer is hanging in there and spending despite PTSD like sentiment surveys.

Visa reports a brisk 8% YOY card spend.

Barclays’ read on high-frequency data suggests the economy remains resilient. Credit card spending and private job postings are tracking close to prior years.

But it might just be people front-running the pain. Consumers and small businesses are pulling purchases forward - buying ahead, then freezing budgets

On the other hand, leading indicators, including housing data remain weak.

And consumer confidence is in the dumps. 

When this ratio spikes like this, trouble usually follows.

The ratio of present to future expectations has hit levels not seen since the 2008 Great Recession.

As you can see above, similar conditions coincide with recessions.

It’s as if the Consumer is enjoying a ride in a Tesla, enjoying the tunes, and is freaking out because the Tesla is headed straight for a tree.

We remind the reader that the United States has a services economy, so should we get a recession, it should be mild. 

And a series of trade deal wins and a rational trade policy can prevent a recession or at least get us to a slowdown, followed by rate cuts.

We do note that global oil prices are dropping - suggesting weakening global demand - and especially weakness in China.

Performance Chase? Short Squeeze?

The S&P has delivered a 9-day consecutive rally not seen since 2004.

We live in truly extraordinary times.

We suggested last week that Vix decay - and also earnings season (and the resumption of buybacks) are a big part of the story.

People woke up and realized names like Meta and Google are cheap and continue to grow earnings. (We still like these names and Nvidia and prefer them in Mag 7 over the rest).

Here’s another factor.

Many, many hedge funds have very low ‘net exposures’ right now. Bridgewater, the largest hedge fund in the world, is a good example. They are looking at the policy max and are not taking significant equity risk.

But, here’s the thing.

These hedge funds have significant equity index shorts - especially in the IWM and small-cap market.

Notice that the IWM index rallied strongly on Friday.

We believe the combination of an index rally AND benchmarked-managers is creating a performance chase.

The hedge funds already have high ‘gross long’ exposure. That means they already own what they want to own. They can’t add more to what they want to own. Gross long is near highs from a historical basis.

All they can do is trim their short exposure. And they need to trim shorts in junk stocks and the small-cap index.

That can create a self-reflexive rally. We believe we are seeing that in recent days.

(That said, given that so many names are now extended across their short term moving averages, a pullback early this week - especially on Monday would be expected.)

This isn’t something new.

We noted that in 2023 that market bottoms were often punctuated with major short squeeze rallies. They can happen in a bull market, and a bear market.

The Dot Com bust also featured massive multi-week or multi-month rallies despite negative stock price returns.

These technical dynamics - how hedge funds are positioned vs their benchmark - and the deteriorating macro are in opposition.

We would also note another point in the bull camp.

The market has exhibited a change in character.

What we see now is a market that is no longer rolling over when in contact with its descending moving average. Further, the market is overbought and staying overbought. 

That’s bullish.

We saw this change in behavior in January 2023 as well.

The point here is not to be dogmatic and overly bullish and overly bearish.

It’s quite possible that greater liquidity reveals itself at higher prices. CTAs and trend followers are also buying into the market due to purely technical reasons.

We also increased our net exposure this week, but are focusing on a bias to quality healthcare and small-cap value, where we see significant mispricing, and our favorites in Mag 7. (Consumer discretionary also is interesting from a value perspective).

Our short-term outlook is that the market will deal maximum frustration to bulls and bears.

The rally can continue until the short covering is done. Then markets will drop.

We believe buying the next dip is a good opportunity inside this 90-day window of trade deals and positive newsflow.

Buying the next dip is a reasonable way to approach this from a risk-adjusted return perspective rather than chasing at current levels.

Speaking of buying the dip - Retail investors are back at it—buying the dip with near-record intensity, just like every other volatility spike since 2020. 

It is really remarkable. Retail investors are essentially inducing a short squeeze on big institutional investors. We believe they are following the bullish tone from the White House over the last two weeks

If retail investors are still in the game, then the bull market can continue.

Had retail investors given up the ghost, then we would be in a bear market now.

We noted before how social media and retail trading in the post-Covid world has transformed investing. This is a great example of this.

Another thought - if you see a great asset at a great price with some basing and bid - we think it makes sense to buy it. There are bargains out there. 

The post-liberation washout should create an intermediate-term rally that gets us through June or mid-July.

We won’t know if this is a bear market or not until we have clarity on policy, and we’ll need to see how the next non-farm payrolls report presents in early June. 

It’s quite possible markets de-risk ahead of that and the news cycle around ‘empty shelves’ in the coming weeks.

If you are trying to figure out whether markets will go up or down, the answer is likely ‘Both.’

Markets are perhaps the only classical object that somehow seems to manifest the properties of quantum mechanics.

DOGE Cuts Less than Expected

One of the big unknowns was the size of Doge cuts. The initial expectation was $2 Tn in cuts – those kinds of cuts would be enough austerity to make a monk sell their robes on eBay.

Relatively modest cuts only $160 Bn — far short of the $2 Tn expected – creates confidence for markets. We are also seeing a double-digit increase in Defense spending, despite earlier talk of potentially 50% in cuts.

(Mr. Market apparently already knows this and the XAR - Aerospace and Defense ETF is already up sharply.)

CapEx Increasing: But Where’s the $6T? 

One of the persistent claims we are hearing from the admin is the resurgence of manufacturing.

There are examples with Taiwan Semiconductor and Kimberly Clark - but we really don’t see that in the ISM data thus far.

We’re all for creating advanced manufacturing in the United States - in a rational way.

But, we just don’t see the $6 Tn in committed capital investment when you do the math?

The biggest check is Softbank. 

Softbank is writing a $100 Bn check over 4 years. A significant part of that will go to Project Stargate.

After that - you have Taiwan Semiconductor and Apple. 

Apple put out a press release saying they would ‘spend and invest’ $500 Bn. 

But, consider Apple’s capex in 2024 was $10 Bn. If Apple were to actually invest $500 Bn, it would destroy their earnings. Recall, capital expenditures are an expense that flows through the P&L via depreciation.

Apple is also the master of capital management and the most shrewd in Mag 7. There’s a reason they are slow to the punch on AI and abandoned their autonomous car project.

We will not see $ 500 Bn coming from Apple. 

Not even close. 

Apple is counting its expenses - the ‘spend’ in ‘spend and invest’.

What about Taiwan Semiconductor?

TSMCs capex in ‘24 was $32 Bn.

Expenses are a drag on earnings. 

These CEOs are playing along with the theater and make-believe accounting. 

Economics is about opportunity cost. 

It’s all accounting identities. 

There is no free lunch. 

If you squeeze here, there’s a cost there. 

Tariffs lead to:  capex goes up, input costs go up, prices go up, and demand goes down. 

That means less profits and lower real income. 

If tariffs generate $300 Bn in revenue (eg, tax receipts), the policy is charging small businesses and consumers. 

So, the tariff policy is still muddled.

Our hope here and a likely path is as follows: The Trump White House executes trade deals and lowers tariff barriers. The capex doesn’t materialize - and that would actually be good for markets.

As always, we’ll need to listen to what is said.

If Trump continues to read the trade deficit as a P&L statement as opposed to a source of financing and digs in his heels, then we may get a re-test. 

The way the economy works is this… Apple creates the trade deficit. They do this by importing low-cost components overseas. Then Apple high value-added services to Americans. 

Apple's margins are much higher than the margins of its commodity suppliers. The wages it pays are much higher. And the stock price growth and multiple is much higher.

Actually, one could argue it is Apple - not foreign countries - ripping Americans off if you want to play out the logic consistently. 

One could argue that the Vietnamese are not getting their ‘fair share’ and should participate more in profits.

Now, we are free market capitalists and support free trade (and recognize the need for a tariff wall around China), so those two statements aren’t our views. 

We’re just showing how institutions read the inconsistencies in the policy messaging. That, in turn, is what creates limited market liquidity.

There is no 3D chess here. 

Tariffs Are Just Corporate Taxes

Here's the CFO of 3M during their earnings call, citing the hit to earnings from the import duties they are paying.

"These flows at the current tariff rates of 125% imports into China from the US, and 145% from China into the US, will equate to approximately $675 million of potential annualized tariff impact after anticipated exemptions."

All corporate taxes are ultimately borne by individuals - shareholders, workers, and consumers.

It's borne in the form of lower earnings, lower incomes, or higher prices.

Entitlement reform, not tariffs

Why are we pretending tariffs will fix the economy?

We’ve surpassed Smoot-Hawley levels on some duties — all because politicians don’t want to talk about Social Security.

Boomers are retiring, and no one wants to say the hard part out loud: entitlement reform is overdue.

We've got duties higher than Smoot-Hawley, and it feels like financial chemo instead of a much-needed diet.

Global Power Realignment

Musing:

What are the odds that within 90 days of the Chinese moving to seize Taiwan, the US ‘secures’ or annexes Greenland?

There are many hints that the Trump admin sees the future of policy as the rise of the G2: great power competition between the United States and China, where Europe is not relevant. 

Isn’t the future about the rise of the G2? By tha,t I mean the United States and China carving up spheres of influence.

What is your asset allocation in this more volatile world path?

We believe alternative investments have a crucial role in the modern portfolio - not 60/40.

Reach out to [email protected] to learn more about our alternative offerings for accredited investors.

Buffet’s End of Era

Buffett's imminent retiring truly is an end of an era.

The thing is - Quality is overpriced.

Buffett is priced into the market.

See the valuations of Costco or Walmart for example or FICO. Those valuations are limiting future returns.

Or, look at Berkshire itself which is pricey considering a big chunk of what you own is cash and t-bills.

Also, China markets are in ascent and old-school businesses like insurance aren't.

That said, I do see Buffett 'quality ROE' type strategies working in small caps.

That area has plenty of mispriced assets including in the Insurance category and small banks.

Here's one example: RNR

Renaissance RE Holdings an small insurance company.

Buyback yield: 9%

Price to Freecash flow: 3 to 4x [ ! ]

FCF / Market Cap: 30%

Book Value growth YOY: 26%

Their edge is they provide insurance to niche area that traditional investors have exited.

The main bear case would be losses due to hurricane exposure. The firm has reinsurance, like all insurers, but it's a risk nonetheless.

The bet is that the firm is enjoying premiums on hurrican insurance well in excess of the realized risks.

Attached is a bull bear case snippet from our AI tool.

Historically, when FCF Yield is this high you get a rally. 

If this were to drop below $232 (6% loss), I would exit.

 I like this b/c my risk is defined and if they execute the stock price should increase approximately at the rate of book value compounding.

There are many Buffett ideas out there in small cap land if you poke around.

http://lumidaai.com to join waitlist

Read more here

Market

Earnings Season Highlights

The datacenter theme is back.

Stocks of datacenter ideas such as CoreWeave, Nvidia, and semis cranked higher on reports that hyperscalars Meta and Google, and Amazon are investing more in Capex.

Here are highlights from Amazon, Meta, and Apple.

• Amazon: Amazon’s $155.7 billion revenue beat expectations, but tariff fears and Bezos selling ~$5 billion in stock signal caution, with Q2 guidance below consensus

• Apple: Apple hit a record $124.3 billion in revenue despite $900 million in tariff costs, with no clear path to “save and invest” its $500 billion cash hoard amid economic uncertainty

• Meta: Meta’s $42.31 billion revenue and AI growth impressed, but higher capex for AI infrastructure and tariff-related ad shifts in Asia highlight challenges ahead

Google’s Post-Earnings Drift

China Accelerates in the AI Race

There is reporting of China having a breakthrough in EUV light source tech.

This would be a breakthrough in the semiconductor race.

EUV - a lithography technique used in chip fabrication - has long been the crown jewel controlled by ASML — a choke point in Western export controls.

Cracking it could weaken one of the last leverage points the U.S. holds in semiconductor containment.

Trouble for US shoe companies 

China’s businesses are responding to tariffs by going direct.

Manufacturer are starting to go direct. companies are an emerging threat to big brands. 

AliExpress undercutting premium U.S. footwear brands with near-identical designs at a fraction of the price — $36 vs. $160+. 

For companies like Nike, On, and Lululemon, this isn’t just margin pressure; it’s a brand erosion threat. The copycats aren’t trying to compete on innovation — just speed, price, and scale. 

And right now, that’s working.

Stocks We Watch 

We like medical devices here: MDT and DVA for example, own both

A quick thesis on why we like MDT here. 

The company's recent U.S. Food and Drug Administration approvals should allow it to continue its operating momentum. Its A-level balance sheet and financial health remain vigorous. Lastly, shares are still trading at a bargain-bin level.

Organic growth continues at the segment-level, a 3% dividend yield, and a 4% buyback yield with a low valuation sealed the deal for us. 

Visa Embraces AI Agents

H/T Michael Parekh 

“Driving the news: Visa on Wednesday announced a push to embed its payment network into AI systems, including chatbots and agents.”

• “The effort is in the early testing stage, with Visa listing OpenAI, Anthropic, Microsoft, Mistral and Perplexity among its partners.”

• "We think the shift could rival the level of impact that e-commerce and mobile commerce themselves have [had]," Visa chief product and strategy officer Jack Forestell said at an event in San Francisco on Wednesday.”

• “Mastercard and PayPal also announced agentic commerce efforts this week.”

Meta unveils standalone smartphone app 

H/T Michael Parekh 

“Meta Platforms kicked off its first-ever LlamaCon, a conference for AI developers, on Tuesday, unveiling a fleet of new products. They included a standalone smartphone app for its Meta AI assistant and a preview of an application programming interface for developers to access its large language model Llama. The releases put Meta on par with its competitors, but the question remains: What took so long?”

Biden–Trump Cycle

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