Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTFeb 07, 2025

There are always surprises, as you can see by the price action :)  Yes, MSFT did well, while the last 2, 3, 4 earnings have been terrible. They got their act together. They know how to phrase things for the audience to show how they're monetizing the AI infrastructure buildout. 

Whereas META, he doesn't know. Perhaps it's hard to get out of being a true advertiser. They're trying to monetize. But the market wants to know what the plan is.

The hyperscalers are doing great, as are the connectors. The whole infrastructure buildout is doing well. That's sort of the bullseye, and then around them you have tools like the large language models. And then the applications surround all that. 

Most of the large language models are private. Anthropic, Grok, and OpenAI. It's difficult to get all the information. Hopefully they'll go public and they'll have to be a lot more transparent, as that's the "glue" between the infrastructure and the applications for the end users.

They stick to their knitting on stock portfolios. They know where they want to enter and where they want to exit. There's a farm league of other companies that they'd like to put into the portfolio when they exit something.

Some of the magic they add is on the hedging. Sometimes it works, sometimes it doesn't. With the recent volatility in the market, they're finding that the hedge can actually contribute profits (rather than just acting as an insurance policy). They had dialled up the hedge to 80-90% of the notional value of stock portfolios (last time they did that, was in Spring 2020 going into Covid). This past Tuesday, they took almost all of it back.

In today's environment, you see a lot of the market whipsawing back and forth and different sectors come into favour based on speculation (and Trump's statements). A lot of companies, that aren't involved on a headline basis, grind along and get overlooked.

We do know that Trump won't be president in 2.5 years, and businesses will move on. Perhaps in the midterms Donald will be neutered a bit more and won't be as, let's say, aggressive.

He doesn't own any. There's been a huge capital expansion, and that has to do with AI. At first, some of the chipmakers went crazy. Then the likes of CLS, MU and DELL got a lot of orders to build these data centres. 

So what's happening right now is that people are asking will this continue? It'll continue, but at some point the capital expansion in the AI sector will slow down and roll over. There's only so much money. The way the sector is being priced is reminiscent of 1999.

Any inflation today is really just caused by geopolitical events (oil prices) that can go away at any moment. Core inflation seems to be dissipating a bit in the States. You have a new Fed chair, who came in under Trump, so Tim can't see him raising rates.

If they raise, it's to choke off a hot economy. But the economy's just hot in certain sectors. It's moving along pretty well in the States, but it's not overheating.

A lot of companies in the sector were bid up quite a bit about a year ago. It's now a question of valuation. 

AMRZ is one of his infrastructure stocks. You can also play infrastructure via the big private credit/equity firms like BN, BX, and KKR.

It's all just noise. But noise sometimes allows us to sell at a great level or to buy at a great level. Noise is what makes a market. Over the long term, most of the company's we've covered today are going to do well.

In summer, markets are thinner. And when there's not a lot of volume, prices can swing more than usual. September/October taking us into the US midterms will really show us the direction of the market. Keep an eye on company earnings, what they're guiding to, and how the economy's doing. 

In the US, the economy is doing fairly well. In Canada we're in a technical recession, but looks as though we're starting to come out of it. He's fairly optimistic on the economy for the next 2-3 years.

The US Fed disappointed the market today by not raising or commenting on raising interest rates, even though it's clear that inflation is here to stay and needs to be taken seriously. Markets sank, with the Dow down 2.19%. The 30-year bond yield topped 5.212%, not this high since 2007. The bond market was telling Fed Chief Warsh, "Show more gumption." The bond market fears an inflation comeback. The President isn't concerned with inflation. Warsh should have promised to tighten rates today to battle inflation. Meanwhile, we're stuck in an intractable war Iran that keeps raising the price of oil--and inflation.

His signals point to a market peak. Momentum is coming into defensive stocks, signalling new highs today. Growth is breaking down vs. value. The tech trade this week could be front-running the Fed meeting later this week where they could raise interest rates. If so, this would contract liquidity and hurt cyclical and growth stocks. Insider selling is elevated and margin debt is high. The indices aren't doing much, but there is a large momentum blow-off and rotation. There could be more insider selling later this year. Margin interest by investors is extreme; extremes happen close to market peaks. The rotation into defence could continue. The Mag 7 has powered the market, but their giant free cash flows have gone into investing in AI. CDS's are expanding to names like Nvidia and Broadcom. If inflation returns, tech and growth stocks will be most harmed. The risk of an oil spike, to the US-Iran war, is abnormally high and oil prices could be more damaging than in spring. Energy and healthcare are sectors that could do well. Healthcare has been out of favour, generates a lot of free cash flow and not effected by oil prices; also is driven by aging demographics.

October highs and relative performance resembled the peak of the Tech Bubble. Now, we're breaking down from critical levels where the tech bubble cracked. Moving has been and will rotate into growth and value. He's looking at the beneficiaries of AI like biotech, which has lagged but is overperforming this year. AI tools are benefiting their R&D.

Q3 is off to a shaky start. Q1 was good and Q2 great. Everybody is excited by earnings growth with the S&P up 30%+ based on Google's report last week of $98 billion of profit, but that came from Spacex shares. Investors ask what is the AI picture for the next 12-18 months? Uncertainty over the Fed's interest rate policy (will they hike and when?) is concerning investors. What's driving that is the uncertain US-Iran war. So, investors are stepping back from the momentum trade of the last 3 years to wait. AI is half the US GDP growth, but meanwhile, China is building new AI models that will drop the pricing of AI.

He'd be very surprised if they raise rates. If you really look into it, what's driving inflationary issues today is largely linked to the spike in energy prices because of what's happening in the Middle East. Beyond that, he doesn't see a broad-based worry about inflation.

The Middle East conflict will be elongated (we thought peace was imminent, now maybe not), and inflation concerns will be with us for a while. For him, that means the Fed can't cut rates. But they're certainly not going to raise rates, because raising rates is not going to fix the issue in the Middle East.