i f**k'd up

Key Concepts

• Disinflationary/Deflationary Regime: The belief that long-term economic trends point toward lower inflation, despite short-term market volatility.
• Japanese Yen Carry Trade: A strategy where investors borrow in low-interest Yen to invest in higher-yielding assets; unwinding this trade creates selling pressure on US tech stocks.
• Hardware vs. Software Cycle: The transition of market leadership from AI hardware (Nvidia, Micron) to software and cybersecurity.
• Pricing Power: The ability of a company to maintain margins while growing revenue; a key metric for evaluating AI-exposed firms.
• Short Squeeze: A rapid increase in a stock's price caused by short sellers being forced to buy back shares to cover their positions.
• Capital Expenditure (CapEx): Funds used by companies to acquire or upgrade physical assets; high CapEx in AI firms (Meta, Microsoft) is contrasted with the lower CapEx of cybersecurity firms.

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1. Analysis of Recent Market Miscalculations

The speaker acknowledges being overly optimistic regarding the short-term performance of the Nasdaq 100 (QQQ). He identifies several factors that converged to create a "bearish confluence" for tech stocks:

• Kevin Warsh’s Stance: While the speaker maintains that Warsh is a long-term "deflation dove" who will eventually favor low interest rates, his recent silence was interpreted by the market as hawkish, triggering a sell-off.
• Japanese Yen Intervention Risk: As the Yen approached 162 against the USD, hedge funds liquidated US tech positions to pay off Yen-denominated debt before potential central bank intervention.
• SpaceX IPO/Bond Dynamics: The rapid peak of SpaceX stock (sooner than expected) and a bond sale with a 50-basis-point premium over Intel signaled a lack of market confidence and a demand for higher risk compensation.
• Micron and Apple: Despite strong earnings, Micron experienced a pre- and post-earnings sell-off, indicating a liquidity crunch. Apple’s price hikes (16–20%) also negatively impacted its stock performance.

2. Sector Shifts: Cybersecurity and Software

The market is currently rotating from hardware to software, though the speaker urges caution:

• Short Squeeze Warning: Recent gains in Microsoft, Meta, Intuit, and Palantir are attributed partly to short covering rather than fundamental shifts.
• Cybersecurity Skepticism: While cybersecurity is a clear beneficiary of AI, the speaker notes that many firms (e.g., Palo Alto Networks, CrowdStrike, Cloudflare) have high valuations despite low earnings and intense competition.
• Operational Analysis (Palo Alto Networks): The speaker highlights that while revenue grew 31%, gross profit only grew 21%, and sales/marketing expenses surged 46%. This suggests shrinking pricing power and high customer acquisition costs.
• Stock Selection: The speaker prefers companies with "moats" and proprietary data, such as Axon (policing/D-drone) and Intuit (business data), over companies he deems "AI-replaceable," such as Adobe, Service Now, and Salesforce.

3. Methodologies and Frameworks

• Valuation Discipline: The speaker emphasizes waiting for specific entry points (e.g., Palantir at $89) rather than chasing momentum.
• Financial Statement Review: The speaker utilizes cash flow statements to identify "skeletons in the closet," specifically looking for the divergence between top-line revenue growth and net income/gross profit margins.
• Liquidity Assessment: Monitoring bond spreads and currency fluctuations (Yen) to gauge institutional risk appetite.

4. Notable Quotes

• "Kevin Warsh basically chose violence by choosing silence." (Regarding the market's reaction to Warsh's lack of communication).
• "I think the software bottom will come in the third or fourth quarter, but I don't know exactly where."
• "I don't like IGV because I don't like a lot of their holdings... I'd rather pick the names that I like."

5. Synthesis and Conclusion

The speaker concludes that while his long-term thesis regarding a disinflationary regime and the potential of AI hardware remains intact, the timing of the recent market movement was misjudged due to a confluence of macroeconomic and technical factors. He advises investors to be highly selective, avoiding "falling knives" and overvalued cybersecurity stocks that lack strong earnings. The primary takeaway is to prioritize companies with defensible moats and pricing power while maintaining a cautious, cash-heavy stance until a clearer bottom for the software sector emerges.