Thoughts around AI 1) Given AI is the largest technology revolution in history at roughly 3.5% of GPD (larger than electrification, highways & internet combined); there is overinvestment due to the potential rewards for the eventual winners. 2) But much like during the Internet buildout, which had several large drawdowns including in 1997 (Asian currency crisis) and 1998 (Russian bond default), and then ripped higher, the question is whether this is THE TOP. 3) AI had 3 separate investment waves: training, inference and now Agentic a. Agentic demands 10-100x more tokens than inference and started with OpenClaw in January for the tech savvy followed by Muse in late September for the rest of us. 4) Currently, the market is repricing two things a. Financing costs are higher in both debt & equity mkts i. Debt- $CRWV unsecured debt trading at 15% ii. Equity- expected timing for AI related IPOs like OpenAI, Anthropic delayed earlier this year while filed IPOs of Firmus, AirTrunk, NScale, SB Energy delayed/ pulled iii. Meta 8K “timing is important to secure capital before competitors saturate various funding options… in an increasingly challenging environment for raising capital.” b. AI native growth rates slowing i. Anthropic revs 145% q/q in Q2 to 45% in Q3 ii. Openweight driving ASPs down ~50% since May 5) Datacenter moratoriums seem to be the only thing both parties agree on a. This could get worse after the mid-terms with a less AI-friendly political climate In summary, because of the advent of Agentic, I do not believe this is THE TOP. But having higher cash levels and being circumspect as the market reprices has been important. This has been my advice for the past several weeks. Unfortunately, my belief that it was time to start putting money to work for at least a short-term rally this past week due to oversold conditions in areas like semiconductors has been early so far. The SOX was down 3.2% last week vs the S&P down 0.5% but time will tell. $MSFT $AMZN $GOOGL earnings this upcoming wk 1) I think much like with $Meta earnings this past week where I previewed concerns, the stock reactions for the above three will have a lot more to do with their comments around future capex investments, expenses, cash flow and financing needs. 2) I worry whether a datacenter moratorium causes an issue with cloud growth guidance for the December quarter despite very strong growth in the September quarter. NextDC in Australia cut their rev guide by 22% for CY27 due to local community pushback and the stock was hit for 39% last week. Microsoft seems committed to being cash flow positive and I see them being an ultimate winner in enterprise AI. 1. They provide a safe environment to run Co-Pilot AI applications given almost all S&P companies run M365 already. Co-Pilot seats were 30M+ in the June quarter up from 20M+ in March and 15M in December. 2. One potential risk is their high margin PC business being impacted by the large declines being caused by surging memory prices. 3. Azure expectations vs their guidance of 45% y/y for September vs 43% in June have also picked up given the share gains being seen by OpenAI against Anthropic recently in enterprise. Google should see accelerating cloud growth & be an ultimate winner in consumer AI through their Android distribution on smartphones. My short-term concerns are the following: 1. Cash flow was negative for the first time since being a public company in the June quarter. 2. A slight miss in search revs in the June quarter raise concerns around AI Agents not looking at ads. 3. More aggressive analysts expect GCP growth of ~100% y/y for CQ3 y/y (but this includes TPU sales) up from 82% in CQ2 and 63% in Q1. This is more than double the growth rate expected for AWS and Azure so I worry that these datacenter moratoriums may on the margin impact the revenue growth possible at GCP. 4. Google needs to get out their consumer Agentic AI product. This should be a catalyst for their stock given it should integrate with the 14 Google products that have over 1B users each. Amazon should benefit from physical AI improving efficiency in their heavy asset e-commerce business. 1. I also think their e-commerce demand is solid as shown by them hiring more seasonal workers (+20% y/y) for the first time since 2023. 2. But as the biggest public cloud vendor and the one with the most capex, could they be too big to escape the data-center moratorium impact on their December quarter? As an example, Amazon last week abandoned its plans for a large 4 building datacenter in Loudoun County Virginia which has been dubbed "Data Center Alley." AWS grew 28% in Q1 an accelerated to 37% in Q2 with no formal guidance but hopes for a slight acceleration in Q3. 3. However, Amazon reports on Thursday so their AWS expectations will be reset by whatever results are from Microsoft Azure and Google GCP on Wednesday. Best of luck in the week ahead.

Post all the negative AI related news recently, $SPCX revs beat by 14% w/ AI beating by 19%. Q4 capex guide almost 90% above consensus while Q1 revs guided 57% above. Also $SMCI +pre w/ revs 27% above consensus. My conviction of a near-term AI rally continues to grow. As I posted on 10/15 on the overall AI trade following the bludgeoning in the Kospi, “The bottom line is even if we have seen THE TOP, the odds based on history are high for at least a short-term rally.” As opposed to repeating the stats from my 10/15 post on the Kospi (Korean stock market dominated by memory) or this past Sunday on the SOX (semiconductor index), I think the following is worthwhile. Assume I am wrong about Agentic AI driving infrastructure growth into at least 2027. The funding issues for the neo-clouds, slowing revenue growth at OAI/Anthropic and bi-partisan pushback against datacenters has to be considered. Assume THE TOP in the AI trade was on 6/22 which was the peak in the SOX. Looking at the performance from the peak of internet bubble on 3/24/00 to its bottom on 10/9/22, the S&P decline was 49% with the SOX down a staggering 83%! But even during that punishing decline during the bursting of the internet bubble, the S&P saw 7 rallies that averaged 14% each while the SOX using those same dates saw rallies of 28%! During each of those advances most investors wanted to believe we had seen the bottom. The problem was the 8 declines averaged 17% for the S&P and 34% for the SOX. If I use the more recent decline during the GFC from 10/9/07-3/9/09, the S&P fell 57% while the SOX dropped 66%. But this also had 11 rallies that averaged 10% each for the S&P and 11% for the SOX. The problem was the twelve declines averaged 15% for the S&P and 19% for the SOX using the same dates. In summary whether you are an AI bull or bear, I do not believe it makes a difference for positioning in the near-term. The AI infrastructure trade by the metrics discussed on 10/15 or 10/18 around the semis looks oversold. In addition, a good bearish investor is open to the idea that they may be early, just wrong or about to have a bear market rally. Maybe the SpaceX earnings and Super Micro positive pre-announcement today are the trigger to start the next AI related rally regardless of whether we have seen THE TOP or not.

Last wk, $KBWB -1% despite low bank earnings expectations. AI was hit despite beat/raise from $ASML -8%, $TSM -9% due to AI financing concerns w/ AirTrunk IPO delayed, debt getting hit w/ $CRWV -25%, Anthropic rev growth slowing & valuation looking ~$1.5T vs $2T. Last Sunday I wrote that I was circumspect on the market. The KBWB (bank ETF) was sending a very different message than the S&P. “Any further sell-off despite trading at oversold levels last week would not be a great sign.” On Tuesday I posted on the KBWB getting hit despite these low expectations on mixed earnings results and therefore remaining circumspect. The Magnificent 7 eventually closed the week down 3.2% with the SOX Index (Semiconductors) down 11.4% driving the S&P down 1.9%. There was rising angst on the financing part of the AI trade later in the week. This was despite 5/10/30yr yields going down 15-17 bps last week despite hotter than expected CPI/PPI. After yields initially surged, this large drop was unexpected but this also coincided with the equity market sell-off from Wednesday through Friday. Massive external capital is needed to fund the AI infrastructure buildout. Therefore AI stocks got clobbered last week on questions around: 1) ability to raise AI public equity – Airtrunk IPO delayed till 2027 following the pulling of Firmus IPO last week 2) cost of AI debt increasing- CDS costs surging and face value of debt getting hit driving the yield to 15% for Coreweave debt 3) AI revenue growth slowing from ~145% q/q in Q2 to ~45% in Q3 for Anthropic 4) AI valuation now seen at closer to $1.5 trillion vs $2.0 trillion for some investors following Anthropic’s investor day 5) Gartner stating they expect greater than 80% of neoclouds to fold or face restructuring by 2030 6) Chinese DRAM company CXMT (-12% last week) ramping 4F technology before year-end being a threat to the current big 3 of $MU -15% last week, Samsung -18% and Hynix -24%. As for other important macro moves last week, US Oil was +10% last week with the US dollar down 37 cents but Gold declined 1% anyway. Thursday I posted the details around the historical precedent for a rally in the Korean Kospi Index over the following day and week given its extremely oversold levels. While the Kospi did rally on Friday +2.0%, the SOX Index was hit for 3.8% anyway and was down 11.4% for the week vs the Kospi -14.5%. While the Kospi, driven by the declines in memory stocks, is now down 40% from its 52 week high and is up 34% year-to-date, the SOX is down only 24% from its 52wh and is up 57% ytd. Looking forward, the first two of the Magnificent 7 report CQ3 earnings next week on Wednesday. For $META, while I see a beat and raise quarter, the stock is probably going to react to initial expense and capex guidance for 2027 coming in high, especially given the strong recent stock performance. The costs needed to support their hit Agentic product Muse and their recently released frontier LLM models, is likely to occur before their monetization. For $TSLA, the videos of their new “flying” Roadster were mind blowing. This is just a reminder why engineering god Elon gets mind blowing valuations for his companies. I also believe the Roadster is a physical example of why $SPCX (which also reports next week) buying Tesla makes sense. In summary, the recent correction made sense for reconciling some of the discrepancies between the bond market and equity markets. But I believe there is still a lot of infrastructure growth ahead to support the proliferation of personal Agents. As a result, I think it makes sense to invest some of the excess cash levels that I have been recommending. The SOX is now down 8 days in a row for a loss of 15.7% through Friday. The last time the index fell for 8 or more consecutive trading days ended on Friday October 10th 2008 for a loss of 19.8%, during the Global Financial Crisis. It then bounced for just one day the following Monday for 9.7% before continuing to much lower levels. The AI trade may be having some funding concerns today but it is not as bad as during the GFC. All the best in the week ahead.

8x Kospi has declined 5%+ in 1 day w/ closing 14 day RSI <23. It has gained on avg 3.4% the next day and been up 88% of the time. Over 5 days, it has gained 10.0% on avg and been up every time. This includes 3x during 2000-2002 internet bust, 1x during GFC and 2x during Covid. As a reminder, nearly 50% of the Kospi (the Korean stock market) is Samsung Electronics and SK Hynix, two of the three biggest memory companies in the world with $MU in the US being the third. My longer-term concern remains that China is on a path to get to at least 20-30% market share in memory over the course of the next several years and that the current market leaders are being much too optimistic. I continue to believe that China will do to the memory markets what Japan did to the US companies in the early 1980s and the Koreans did to the Japanese companies in the early 2000s. But even if that is the case, history would suggest at least a near-term rally is coming in the semiconductor sector. This would seem to be true even if we have seen THE TOP in the overall AI trade much like during the bursting of the internet bubble in 2000-2002. To be clear, I do not think we have seen THE TOP in the overall AI trade. I believe the advent of Agentic AI in January with formalization of OpenClaw and the follow on innovations should give the overall AI trade room to run into 2027. Call it Agentic AI for the non-techies. That started in September with Muse from $META followed by Dots from OpenAI and the Co-Pilot revamp by $MSFT in October for enterprise. I expect most LLM vendors to have their own easy to use Agent out before too long. The bottom line is even if we have seen THE TOP, the odds based on history are high for at least a short-term rally.

$KBWB (bank ETF) -12.4% from 8/14 through yesterday while S&P +0.3%. Expectations were low. But despite mixed results, $JPM -0.9%; $WFC -3.1%; $C -5.6%; $GS -0.2% all fell today w/ KBWB -1.4%. I remain circumspect into Q3 earnings given the poor start from this important sector.

Last wk, S&P +1.2% & hit new ATH. 10/30yr ylds down 2-3bps despite WTI +1%. Impressive given semis -4% w/ $MU -4% despite solid earnings. Negatives were OAI actual ARR rev of $50B vs prior $70B belief & pulling of $NVDA backed Firmus neocloud IPO. USD +$0.23. Breadth remained poor with just 35% of the S&P above its 50dma (though this was up from 25% at the end of the prior week.) The heavy weight Magnificent 7 did their part up 1.6% on average during the week. But their small cap brethren in the R2K declined 0.9%. Different asset classes and different segments of the equity markets are sending mixed messages. On the positive side, the 10-year auction cleared at a lower 5.30% than the 5.32% it was trading at right before it closed. Dealers took only 2.5%. There was real demand at this rate which makes me more bullish on the sectors of the market that reached oversold levels earlier in October on the move higher in yields. This brings me to bank earnings that start on Tuesday morning. The $KBWB (Bank ETF) is down 12.1% since its closing peak on August 14th. This is a very different message compared to the S&P up slightly (+0.3%) over that time. I am a big believer that credit is the lifeblood of the economy. Any further sell-off despite trading at oversold levels last week would not be a great sign. For those that believe strong upcoming AI related earnings results will continue to drive the market higher, the 4% decline in Micron Technology last week is a strong counterpoint. As for the AI trade, $GOOGL is finally getting themselves back into the conversation. This belief is why I wrote optimistically on the stock in late September. After roughly 10 months without releasing a new frontier model, two weeks ago they announced Argon which put them back into the frontier LLM conversation. Then last week Google announced the Gemini agent, a "single, universal agent for work." Google’s stock gained 2.4% this past week despite this being more of an enterprise product. Given Google already has 14 products with over 1B users each, a personal assistant product that competes with Muse from $Meta is what I am really waiting for. I continue to like Google in anticipation of such an event. I also continue to like NVidia in semiconductors, especially when paired with shorts in the space. The stock declined 2.0% last week but this was far better than the 4.3% decline in the semiconductor index. Nvidia believes that given access to power is becoming a bigger issue, their higher token production per watt will enable them to gain share going forward. The market, however, is anticipating further share loss to ASICs which is partly why the stock has a 15x CY27 PE. It would not take much of a sentiment shift to see the multiple expand much like with Meta in September. I continue to see Nvidia's stock outperforming the overall semiconductor sector between now and their earnings release on November 19th. For the overall market, an optimist could say that the bond market was not priced correctly and now has closed that gap given the solid 10 year treasury auction to end the week. There is a rule of thumb that over the medium term, when there is no financial manipulation (for example QE), that 10 year bond yields (currently 5.25%) should equal nominal GDP. With real Q2 GDP at 2.2% plus recent core PCE at 3.0%, 10 year bond yields after their recent rise could finally be at appropriate levels. While trailing PE multiples are high, so is S&P earnings growth at roughly 35% y/y for Q3. I broached the possibility last week that this could be the new normal for bond yields vs the stock market PE and US dollar. While I am not there yet, I have to respect the new all-time record high set in the S&P last week in the face of rising bond yields and a rising dollar with a backdrop of high oil prices. Is this the new normal or the calm before the equity storm? I look forward to the market reaction to bank earnings this upcoming week to add more facts to the equation. As John Maynard Keynes once said, “When the facts change, I change my mind. What do you do, sir?” In summary, I prefer to remain circumspect at the portfolio level given what I view as mixed messages on a shorter-term basis. That means being more selective in stock selection (such as AI infrastructure), having smaller position sizes and a greater than normal amount of cash. Playing for at least some short-term reversion to the mean in stocks that were hurt by rising bond yields is also interesting.

Last wk, oil fell 1% w/ lower than expected JOLTS, PCE & NFP. But bonds sold off even more driving 10/30yr ylds to 2002 levels. Equity mkts though were flattish driven by AI infrastructure w/ SOX +3.7%. Breadth worsened to just 25% of the S&P above the 50dma. The market action on Friday bothered me. Non-farm payrolls came in at 29K vs 90K expected. Bonds initially rallied from oversold levels at the open but ended the day down across the curve from the 3-month to 30 year driving yields higher. The dollar did close lower by $0.16 on Friday but it was still up $0.96 during the week. The USD has surged by over $3 in less than a month and broke above $102 on Thursday. As I wrote about in my post last Sunday, I am concerned that the Fed is raising, while inflation has remained higher than target with oil prices remaining high. There have been five episodes of ~20%-50% S&P sell-offs since the early 1970s on this combination. I can now add to that list of concerns a sovereign debt crisis like in 2010 or an LTCM event like in 1998 driven by the combination of a strengthening US dollar and global bond market sell-off. On the positive side, the AI infrastructure trade added more demand drivers last week. OpenAI introduced their Muse by $META competitor called Dots. $GOOGL previewed their new LLM model Argon that ranks higher than Anthropic and OpenAI on most benchmarks. At the company level, $NVDA, sounded great during their marketing in NYC. The stock trades at a 15x CY27 PE for guided 70% revenue growth which I think could be revised higher when they report results in mid-November. To me, Nvidia is the best risk adjusted AI trade in the market now that Meta gained 27% in September. In this vein, while the SOX Index is down 10% from 6/22 which was the peak of the momentum trade, Nvidia is up 12%. On the negative side, I have been watching the Ramp Index of total token spend by businesses for some time to make sure that token growth is outpacing the ASP decline. But after increasing by 9.1x year-to-date through August 2nd, it has been roughly flat to down since then. There has been a 11% combined decline in Anthropic plus OpenAI spend from 8/2-9/27. Meanwhile on a token basis, there was a 11x year-to-date increase through August 2nd with a further 28% increase from Anthropic plus OpenAI since then. Is this the impact of open-weight model pricing? Finally, the current bi-partisan (amazing they agree on anything) pushback on datacenters could get worse after November 3rd mid-terms if there is a blue wave which is what the current polling data leans towards. On July 29th, I turned bullish again: “In summary, my view is that we could have seen at least a short-term bottom today with a strong rally ahead of us in the sectors most caught in the latest speedbump.” On August 23rd, I started to get more cautious again on the overall market with my post, James Carville: “as the bond market. You can intimidate everybody.” But since then, despite a 54 bps surge in 10yr bond yields, the Fed resuming hiking after 3 years, a 3.2% increase in the USD, the equal-weighted S&P down 5.4% and breadth returning to levels last seen in March, the overall S&P has gained 0.6%. In summary, I feel like either the bond market (and now the currency markets) are not priced correctly or the stock market isn’t. As a result, I believe in extra prudence. That means being more selective (such as AI infrastructure), having smaller position sizes and a greater than normal amount of cash. Maybe this is the new normal for bond yields vs the stock market PE, but that is not my base case. Best of luck in the week ahead.

Last wk, Muse from $Meta (+12.9%) & co-Pilot overhaul by $MSFT (+4.5%) drove AI infrastructure strength (SOX Index +6.3%) led by processor vendors, $INTC/$AMD/$ARM all +13%. Agentic AI flips GPU:CPU ratio from ~8:1 to ~1:4. SOX+Meta+Microsoft was all the S&P gain. WTI dropped 7.9% last wk while Brent was +0.4% but bond yields surged 10-17 bps across the 3m/30yr curve hitting levels not seen since July-2007 for the 10 year and June-2004 for the 30 year. Yield drivers included: 1) multiple Fed governors messaging higher-for-longer, 2) strong economic data like PMI & capital goods, 3) AI financing concerns following $ORCL (-7% last week) invoking force majeure for their New Mexico datacenter for OpenAI, and 5) weak treasury auction. One of the big use cases for Muse seems to be in cutting monthly bills. This renewed disruption fear for businesses with friction or inertia including telecom $VZ ( -2% last week), insurance $KIE -4%, banking $KBWB -2%, wealth management $SCHW -6%, shopping comparison platforms $AMZN -2% and banned Muse, travel $BKNG -2%, ride-share $UBER -1%, fitness memberships $PLNT -14%, ticket resale $STUB -8% and digital advertising- $GOOGL -2%. These names above have a median return of -1% year-to-date with half of them down ytd. In the disruption fears category above, Google is the one that I am most bullish on. I believe they are very close to launching a new model that will challenge the frontier leaders of Anthropic and OpenAI. In addition I believe all LLM companies will launch their own competitor to Meta Muse including Google. OpenAI DevDay 2026, is taking place on Tuesday. I ultimately believe that consumers will use an AI agent sitting on their smartphone from $AAPL or the Android ecosystem from Google while enterprises will default to the "safety" of co-Pilot on M365 from Microsoft. I believe the AI agent will pick the underlying LLM most suited for the task and commoditize that layer with the value accruing to the infrastructure layer. On a fundamental basis, CQ3 earnings appear solid, especially for AI infrastructure companies. Implied S&P revenue/EPS for Q3 remains strong at 14%/35% y/y with the Atlanta Fed GDPNow forecast at 5%. The question will be how companies react to widely expected beat and raise quarters. Q2 results were not taken well with the Nasdaq -3% and Semi Index -21% during the month of July. The stock reaction to widely expected strong quarterly results/guidance from $MU on Wednesday should give us some clues. From a bigger picture standpoint, the R2K, which is the most sensitive to rates, was down 0.8% last week. While I am impressed by the S&P, the gains were narrow and powered by the AI infrastructure names I am particularly bullish on: microprocessors within semiconductors on the advent of Agentic AI (see initial post on 3/31) and Meta (see initial post on 9/7.) Microsoft which I posted about last Sunday is also a favored name as a “safe” way for corporations to access AI though their 27% OpenAI ownership concerns me. Looking back at history, 20% or greater drawdowns in the S&P have been preceded by or accompanied by the combination of 1) surging bond yields, 2) surging oil prices and 3) Fed tightening cycle. This includes: 1) 1973–1974 OPEC Oil Embargo and Stagflation, 2) 1980–1982 Volcker Rate Shock, 3) 1990 Gulf War, 4) 2007–2009 Global Financial Crisis, and 5) 2022 Post-Pandemic Inflation Crisis. It is possible that the massive AI infrastructure spend & resultant S&P EPS growth of 35% y/y can offset this. It certainly has so far. However, the three middle episodes above had the following positive technological developments as well: 1) the PC revolution started in the late 1970s, 2) the Internet in the mid-1990s and 3) smartphones in the late 2000s. As a result, until bond yields stop their surge, I am remaining very selective on the individual names & sectors I favor. I am therefore watching closely the datacenter pushouts, the developments in Iran and the impact on oil prices. All the best in the week ahead.

Per @JamesCarville “as the bond market. You can intimidate everybody.” Entire Yld curve from 3m to 30yr hit new 52wk or multi-decade highs. 10yr +15 bps to 5.11%. I continue to advocate not fighting the Fed, bond mkt or seasonality, especially leading up to mid-terms on Nov 3rd.

While oil & equity mkts were flattish last wk, bond ylds hit multi-decade highs in different countries as central banks raised rates. While AI frontier model pacing was initially a concern, that faded by Friday. I expect the upcoming wk to be challenging. I have some simple portfolio rules including: 1) Don’t Fight the Fed: hiking cycle seems to have begun 2) Don’t Fight the Bond Mkt: Multi-decade highs in ylds 3) Don’t Fight Seasonality: Sept is worst month for hit rate & returns with mid-term yrs even worse These rules influence how I think about leverage, the ratio of long positions versus short positions, and individual position sizing. Investing is hard enough without fighting headwinds. As Warren Buffett (a remarkable 61 year run came to an end last week) has said, the market has to keep pitching but you do not need to swing. For AI, the battle lines seem to be drawn. OpenAI and Anthropic are pushing for regulatory capture while $NVDA & $MSFT are pushing for better testing before models are released. I’m in the latter camp. No product from any company should be released before it is safe. AI related companies focused on the potential bullish implications in case there was model innovation pacing including: 1) Focus on security 2) Resources deployed for testing 3) Potential for any training slowdown offset by limited hardware capacity being deployed to the infrastructure layer The SOX index, a representation of the infrastructure layer, rallied 0.8% last week with $IGV (the software ETF) also up 2.8%. Software was led by the security names, the $HACK ETF was up 8.0%, despite the 0.1% decline in the S&P. Longer-term, my view is that companies do not need the most advanced models for 90% of their workflow and usage will increasingly go towards open weight models. I believe that ultimately the LLM layer is likely to become commoditized. As an example, the ASP per token peaked in late May and has gone down ~50% since then while the number of tokens produced has gone up by ~4x. This is Jevons paradox in action. This should also be supportive of the infrastructure layer. As the model layer becomes increasingly commoditized, I believe the winners will be those that have the following attributes: 1) strong open weight models 2) distribution capability 3) training data 4) base business that is highly cash flow generative I believe the following companies have the attributes above to varying degrees: 1) $META (Muse from Meta is the #1 free app on the Apple app store with ChatGPT #2), 2) $GOOGL (I expect a new frontier level model soon that should help the stock) 3) $MSFT (Co-pilot might be the "safe" way ~450M M365 enterprise users choose to access AI. But their 27% ownership of OpenAI does concern me and they do not have the wealth of training data that Meta and Google have.) Earlier this year, the advent of Agentic AI increased token production by 10-100x. This should keep demand strong for the semiconductor portion of the infrastructure layer. Given the escalating geopolitical tensions over the weekend and its potential impact on oil/bond yields, this could prove to be a challenging week: 1) Ukraine fired over 1,000 drones at Russia, including "largest ever" attack on Moscow 2) There was a missile attack on Riyadh for the first time since July On a positive geopolitical note, hopefully something constructive comes from the meeting between Presidents Trump, Xi and the attending business leaders on Wednesday. All the best in the week ahead.

Former OpenAI researcher Diogo Almeida @CompleteSkeptic just released a model that 1) uses parallel processing to cut costs by ~450x & improves speed by ~200x, and 2) provides confidence scores on the answer. This should be another big advancement in Agentic workflows.

Last wk, oil +9% & ylds +11-26 bps across 2/30 curve w/ S&P/Nas/R2K -0.3%/-0.7%/-2.4%. This wk, I am watching reaction to 1) oil/rates, 2) calls to slow down AI development & 3) Fed on 9/16. I remain on the cautious side till US mid-terms on 11/3. This weekend, the CEO of Anthropic called for a slowing of frontier model development over safety concerns. This follows comments along similar lines by the CEO of OpenAI to employees last week if other companies were willing to do the same thing. The fundamental issues I have with this is 1) foreign adversaries would welcome the US slowing down AI development, 2) I view this as an attempt to slow down open-weight model development which would help the market dominance of OpenAI and Anthropic which are currently in the lead and 3) I do not see other companies agreeing to anything that slows down progress catching up to these two market leaders. Having said that, I could see 3rd party evaluators to limit liability risk going forward and some sort of executive order from the White House. But I hope the longer-term result of these actions is broadly distributed personal AI capabilities for all individuals versus having it become concentrated in the hands of a few companies. Along this vein of AI competition, after releasing their paid API of Muse Spark 1.3 two weeks ago with open-weight versions coming later, $Meta launched their personal AI agent Muse last week with the stock gaining 5%. With 3.6 billion daily active users, a hit product could yield large results. Meta is increasingly showing other ways they can monetize their AI capex spend. This should help the stock to re-rate from a 17x CY27 PE to a multiple closer to peers trading in the low 20s. Meta Connect on September 23–24 is another potential catalyst given their leading frontier model Watermelon should be coming at the latest by October. On the front of broadly distributed AI capabilities, $AAPL stock gained 4% last week on their new product launch. The foldable Duo will provide a personalized AI agent in your pocket with a 50% larger screen than a Pro Max. I continue to see a big upgrade cycle next year. The change from a 4” screen to 5.5” screen with the iPhone 6 drove revenue growth from 7% in FY14 to 28% in FY15. The Android ecosystem has had a foldable Samsung phone since 2019. As for the Fed on Wednesday, I believe Warsh will raise by 25 bps and echo his hawkish statements from Jackson Hole on August 28th that “Price stability is not self-executing… 65 months of sustained, elevated inflation sits squarely with the Central Bank.” The ECB statement last week when they hiked might provide some hints: “For inflation excluding energy and food, the baseline foresees 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028. Compared with June, the baseline projection for inflation in 2026 is unchanged, while it has been revised up for 2027 and 2028… The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.” In summary, my caution between now and the US mid-terms on 11/3 remains for reasons I have fleshed out in prior posts including: 1. Don’t fight the Fed: The market historically under-performs during a hiking cycle with the bond market discounting 2 raises by year-end and 3.5 raises by mid-June of 2027. 2. Seasonal headwinds: September is down -0.5% on average and up only 48% of the time since 1957. 3. Historical volatility: S&P drawdowns of 10% between 7/31 and 11/9 have occurred in the lead-up to mid-terms since 1990. 4. Regulatory friction: There is bipartisan pushback against datacenter expansion that could hurt the AI buildout in the near-term. 5. Geopolitical risk: Despite US efforts to de-escalate, I believe Iran drags out hostilities at least through the 11/3 US mid-terms, keeping oil prices elevated. 6. Macroeconomic pressure: Long-term government bond yields are hitting multi-decade highs for several countries, slowing down growth and providing a reasonable alternative to stocks. I believe in not fighting the Fed, the bond market or seasonality. I like the odds stacked in my favor which should improve at least seasonally following the mid-terms.

CPI has likely changed the debate from if Fed will raise to how many times. Last “one & done” was during internet buildout in Mar-1997 to 5.5% vs only 3.75% today. Bonds now pricing in 2 hikes this yr & 3.5 by Jun-2027. But W.H. wants rates lower. No win situation for Fed nxt wk.

S&P resilience has been impressive given Iran w/ Brent back over $100. But US Treasury buying back only $6B today in long-dated bonds after threatening to use TGA which has ~$900B has sent 5/10yr bond ylds to new 52wk highs & 30yr threatening multi-decade highs. Straw meet camel?

Last wk despite WTI +10% & ylds +2-7 bps across the curve, S&P/Nas/R2K +0.1%/+0.4%/+0.1%. $NVDA acquisition of Hugging Face & $Meta release of Muse Spark 1.3 last wk make both names more attractive into year-end. My view is that LLMs increasingly bifurcate into 90%+ usage of open-source/ open-weight models in the future as companies optimize the right models for the right task. Since the focus on controlling AI expenditures, the Silicon Data token cost has fallen over 50% since late May but the weekly usage of tokens in models across OpenRouter has increased by 3.6x over this same time. In addition, enterprises are increasingly focused on making sure their own proprietary data does not leak out when they use third party closed frontier LLMs. Hugging Face is the premier central collaborative platform, repository, and toolkit for open-source and open-weight AI with over 18 million developers. Nvidia has three customers that accounted for 44% of their revenues over the past six months and their largest customers are increasingly designing their own ASICs and in some cases selling them externally. A more diversified customer base that owns their own AI compute stack instead of renting from the big cloud service providers would help Nvidia with both of these issues. With this acquisition, Nvidia is in an even better position to sell enterprises a complete alternative AI stack (from the model to chips) where the customer will own their own data. Valuation is also compelling. Nvidia trades at a 15x CY27 PE versus their own guidance for 70% revenue growth and the Big 3 public cloud service providers at 21-23x for 15-26% total revenue growth. The S&P trades at 19x for 9% revenue growth for comparison. Nvidia is also up “just”24% versus the Semiconductor Index up 66% following underperformance last year at up 39% versus 42%. As for Meta, the stock is down 7% year-to-date after being up just 13% last year driven largely by concerns that 1) they can only monetize their near doubling in AI capex spend through efficiencies in their own business and 2) they were falling behind in the AI model race. The launch of the Muse Spark 1.3 API last week, catapulted Meta back to near frontier status (Top four in the Artificial Analysis Intelligence Index out of 10 models) but with aggressive token pricing (Bottom four in Cost per Task.) Open-weight versions of the Muse Spark lineup are coming soon. This will give the company another way to monetize their aggressive capex plans. This follows Meta's settlement in late August with state AGs on their youth addiction trial which was another overhang on the stock. Trading at 16x CY27 PE for 20% revenue growth is compelling with the settlement and Spark 1.3 launch as catalysts. From a broader market perspective, I recommend caution between now and the US mid-terms for reasons I have fleshed out in prior posts including: 1) Don’t Fight the Fed given I believe a 9/16 hike is likely 2) September -0.5% on avg & up only 48% of the time 3) S&P drawdowns of 10% in lead-up to mid-terms 4) Bipartisan pushback against datacenter expansion 5) Iran dragging out hostilities through US mid-terms

August NFP 162k vs 55K expected & 2m revision of +55K. IMO, odds favor Fed hike on 9/16 as a result. Even if CPI on 9/11 lower than expectations, inflation has been above 2% target for 65 months. Hike could also help cap rising 10/30y ylds which is long-term more important. To me, it is hard to argue that 2% inflation is in fact is a hard target when it has not been there in over 5 years and the last six rate changes have been to cut rates starting 2 years ago. A rate hike is likely to help the Fed’s credibility going forward. Finally, I doubt the Fed wants to risk having to raise rates on 10/28 given US mid-terms are only a few days later on 11/3. Given the political pressure on Fed independence, risking the need to do a rate hike that close to the election is probably something they would like to avoid given the likely political backlash.

Last wk, SPX/Nas/R2K +0.5%/+0.8%/-1.5% w/ oil -4%. But a hawkish Warsh on Friday led to a bear flattening of the yield curve. Despite $NVDA guide of 70% CY27 rev growth vs consensus of 47%, SOX Index -2.3% while software $IGV +5.9% on solid earnings. In general, many AI investors have been bullish on semiconductors and bearish on software on the belief that AI will displace many point solution software companies. This is why the SOX index is up 62% YTD and IGV is still only up 4% YTD versus the S&P +13%. Situational Awareness was the poster child for this type of positioning. But since the unwinding of the Momentum trade which started on 6/22 (I wrote about these concerns on 6/20), IGV has rallied 25% while the SOX Index has declined 22% through 8/28. For perspective, the Morgan Stanley Momentum index (momentum long performance minus momentum short performance) from 6/22-8/28 is down 36% while their more concentrated TMT index is down 54%. But a bullish twist on AI for the software sector introduced recently is that AI agents will access software tools ~10-100x more often than humans. On 8/6, $TEAM, which was in the bucket of software names widely considered at risk of being replaced by AI, rallied 35% the next day in reaction to solid earnings & outlook. Then on 8/13, $WDAY rallied 18% on the news that private equity firm Silverlake might be pursuing an acquisition which I wrote probably put a floor underneath software. Workday was also supposed to be in the AI crosshairs and private equity has higher bars to clear given their use of leverage and holding period than a typical investor. Then on 8/26, $CRM reported solid results, guidance and a deal with Anthropic (in which they also first invested in May of 2023.) The stock was up 23% in reaction the next day. This seemed to be a strong counterpoint to the SaaS-pocalypse worries. This strategic alliance allows users to execute actions natively inside Claude without needing to open traditional software screens. Salesforce also seems to be changing how they charge customers with fees more related to customer use and benefits to their business. Then on 8/27, Workday reported results which were good enough but arguably acquisition prospects drove more of the stock reaction of +6% the next day from the slightly down opening price. Historically, system of record, security and gaming software have been the only three areas I have liked within software. I now wonder whether the fundamental implications of Atlassian, Workday and Salesforce are supportive of the technical reactions in the software stocks as a group as agentic AI continues to ramp. So how do I square this with my concerns that the rapidly escalating amounts spent on AI by corporations has to come from somewhere? Annualized revenue run-rates for Anthropic and OpenAI have ramped from $29B to start the year to $105B just 7 months later. Software spending globally excluding AI was roughly $1 trillion in 2025. But IT services at $1.7 trillion is a bigger category which I believe still has risk. And finally, knowledge worker compensation is an even bigger category where disruption would be even less noticeable at an estimated $35-50 trillion in 2025 or roughly 30% of the global workforce. Looking forward, the deal on Friday for Venezuelan oil fields that hold the largest crude reserves in the world at 17-18% should get us off to a positive start to the week with declining oil prices. But a bit further out: 1) “Don’t Fight the Fed” given I believe a hike is likely on 9/16 because the 10/28 mtg is right before mid-terms, 2) September has the poorest seasonality of all months, 3) there is even worse seasonality than normal during mid-term election years (see prior posts for more detail) and 4) recent bipartisan pushback against datacenter expansion (one of the few things both sides seem to agree on though I believe this is wrong and hope it will change with more education) puts pressure on the AI infrastructure names. As Warren Buffett says, the market has to keep pitching but you do not need to swing.

“Don’t Fight the Fed.” Warsh at Jackson Hole: “Price stability is not self-executing… 65 months of sustained, elevated inflation sits squarely with the Central Bank.” Probability of rate hikes just went up going into mid-terms which historically see more than avg downside risk.

Given my concerns on Treasury trying to set bond prices, everyone should read Stanley Druckenmiller @WSJ op-ed: "Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak." wsj.com/opinion/let-the-bond…

James Carville: “as the bond market. You can intimidate everybody.” Despite Bessent’s efforts, bond ylds increased last wk 1-7 bps while S&P/Nas/SOX (AI proxy) -1.4%/-2.1%/-5.4%. Next wk has Iran sanctions (Mon), $NVDA earnings (Wed) & Warsh at Jackson Hole (Fri.) On Monday, the US is likely to put financial sanctions on Iran and any country supporting them in lieu of further military action going forward. The polling numbers in the US for support of the war are poor. But given China, who buys the most Iranian oil, will most likely be exempt from sanctions, I doubt this will have much impact other than what Iran does to retaliate. I believe Iran will try to keep the Straits hostage through at least the mid-terms. The US hostages in Iran were held for 444 days despite financial sanctions. They were released just hours into the inauguration of President Reagan in 1980. The “Gipper” (Knute Rockne, All American is a good nostalgic sports movie but I am a sucker for most of them) crushed the re-election attempt by President Carter by winning 489 electoral votes to 49 due to high inflation, interest rates and gas prices compounded with the foreign policy issues. On Wednesday after the market close, Nvidia reports results. Despite solid results, the stock has been down the next day in reaction for the past four quarters and declined from open to close the past eight quarters (and been down for the full day for six of them.) But trading at just a PE of 17x CY27 vs the S&P at 19x and with the stock down 4% over the past two weeks versus just a 1% decline in the S&P, I think the risk vs reward is good. However, the public (& therefore political) sentiment against datacenters continues to grow going into mid-terms which is likely to restrain multiple expansion. From a fundamental perspective for Nvidia, hyperscaler capex grew 92% y/y and 29% q/q in Q2 which is the fastest ever since launch of ChatGPT in late 2022. Public cloud revenue growth at the Big 3 vendors accelerated to the fastest pace ever at 43% y/y and 15% q/q in Q2 and arguably more importantly their operating margins expanded by 2% to a record 39% in aggregate. This compares to consensus estimates for Nvidia revenue growth decelerating to 13% q/q growth in Q2 from 20% or greater in each of the past 3 quarters. With regards to the AI infrastructure names, the roughly 50% decline in token costs driven by open-weight models since late May is being more than offset by the ~2.5x increase in token production during that time and increase in operating margins. But datacenters need to be put somewhere. When Gallup polling numbers for those opposing their construction locally are worse at 71% than for nuclear reactors at 53%, that is not good. Politicians want to keep their jobs also. On Friday at 10am, Fed Chair Kevin Warsh will speak at the central bankers meeting at Jackson Hole. The S&P declined 1.2% and 1.5% during his last two press conferences following FOMC meetings. The financial picture is even more complicated today: 1) the Iran situation looks likely to drag on for longer, 2) global bond yields are higher, 3) there is intervention in Japanese currency markets, and 4) the actions by the US Treasury to try and lower bond yields is putting downward pressure on the US dollar and upward pressure on inflation. In summary, despite strong S&P earnings growth, I am wary of further declines given the typical season drawdown of 10% from peak to trough during mid-term years since 1990 from 7/31-11/9. I gave more detailed stats last Sunday. Best of luck in the week ahead.