Microsoft vs. Microstrategy
Here’s a preview of what we’ll cover this week:
Macro: Don’t Bet Against The US Consumer
Markets: The Rotation Is Not Over; What Would Cause Me To Go Bearish; Consumer Discretionary: The Worst Is Priced In; Microsoft Is Cutting Out the AI Middleman; What Living Longer Implies For Investments; The Next 10 Years
Lumida Curations: Gavin Baker On The Real AI Bubble; Ken Griffin On The Productivity Boom; Jensen Huang On Nvidia’s Expansion Beyond Chips
Spotlight
This week, I was invited to CoinDesk’s Public Keys at the New York Stock Exchange. We talked about markets, and more.
Watch the show here.
Did AI Say Buy The Dip?
One of the themes we come back to again and again is how AI is poised to transform investing.
Over the past few months, we’ve invested in growing our quant team to make available to the public the strategies that have been available at elite quant funds.
Here’s one signal that triggered.
Background:
When the S&P sells off, sometimes there is a “positive divergence” in net breadth.
That means more stocks are rising than falling, even as the major indices have dropped.
The chart above shows the performance conditional on that event vs. the unconditional returns (e.g, versus us all other time periods).
The recent firings section in the chart shows the prior times this signal has triggered and the subsequent returns over the next 20 days.
Out of 7 prior instances, we have had six positive ones, with almost 50% of the positives, producing a ~10% forward return against a baseline return of 1.2%.
Here’s how net breadth looked in the last 1 month.
Notice the leadership in healthcare, financials, real estate and utilities.
What’s novel about this approach is we are not using traditional A/D metrics.
Instead, we are having an LLM “manually” read hundreds of charts to look for certain characteristics of breadth.
The LLM is reading the chart and assessing the trend of the chart. That’s a novel approach.
In the coming weeks, we’ll add this trigger to the Market Color feature of the Lumida Invest app so you can decide how to position.
You should download the app to experience the future of wealth management. It’s available in both playstore, and appstore. Click here for more: www.lumidainvest.com.
In recent months, we have created a politician leaderboard, ranking politicians on their yearly returns.
It tracks what the leading politicians are buying, or selling.
Here’s how the leaderboard looks now.
You can also explore each politician’s holdings to see how they are positioning.
(Congressman Keith Shelf has gotten a pretty good return on his Nvidia investment.)
This tracker can be a great assist for idea generation, but we don’t leave you there.
A simple click on any stock in their portfolio will take you to its bull/bear summary, where our AI analyzes hundreds of reports and transcripts to curate the opportunities and risks associated with that stock.
Our AI also shares a technical view of the stock, and which themes it is a part of.
Macro
Don’t Bet Against The US Consumer
Over the last few weeks, we have shared various data points indicating the US consumer is stronger than the prevailing narrative suggests.
The latest data continues to support that view.
The Same-Store Sales Index rose 10.1% YoY during the week of June 26, the strongest reading since September 2022.
Some of that strength may have been helped by World Cup-related spending, but the broader trend is difficult to dismiss.
June and July retail sales are tracking toward another strong period.
The strength is particularly visible at the lower end of the income spectrum.
Sales at discount stores rose 11.9% year over year. These retailers should report strong results in both the second and third quarters.
(You can read our thesis on Dollartree here)
Consumer credit data tells a similar story.
Fed estimates show that total consumer borrowing fell in May, coming in well below economist expectations.
Consumer credit is now growing at one of the slowest rates in decades.
That is a very different picture from the heavily indebted consumer often described in the financial media.
Households are spending higher than before, but they are not relying on debt to fund their spending.
We are also seeing stronger data coming from the bottom half of the US consumer, which negates all worries on the K-shaped consumer.
Despite higher spending, lower-income households’ share of total credit stays below historical highs, and in line with averages.
This highlights the increase in spending is coming from better wages rather than depleting savings, or rising credit.
Zooming out, we have resilient consumer spending, healthy credit levels, and double digit sales growth for retailers.
If consumer demand remains healthy while borrowing stays disciplined, the economy has more room to expand than the consensus currently assumes.
Markets
The Rotation Is Not Over
It keeps getting greener. The Nasdaq was up 1.7% this week, outperforming the S&P 500’s 1.2% advance.
With this week’s gains, Nasdaq is now up ~19% in the last 3M, while SPY has gained about 12%.
In Nasdaq’s history, there are 44 instances of an 18% gain within 3 months.
Forward returns after the trigger are positive across all time frames with a positive ratio of approximately 75%.
However, we do see a peak in the next three months.
In terms of industries, Semiconductors (SMH) finally attracted some buying after several weeks of selling.
Semis ETFs had entered the week close to their 50 DMAs, creating room for the rebound we saw.
SMH gained 3.2%, making it the strongest-performing group on our list this week.
Last week’s winners saw some selling after war headlines re-emerged. Homebuilders and airlines lost over 3% on fears of inflation and higher rates driven by oil prices.
The above chart might suggest that rotation reversed this week.
It did not.
Semiconductors remain the worst-performing group on our list month to date. This week’s move looks more like a rebound from oversold levels than the beginning of a sustained run.
And, semis are getting under narrative pressure.
China continues to pivot away from Nvidia, and have spent over $2T in developing alternates. Deepseek is building its own chip to power its LLMs.
If history is an evidence, they might eventually make a cheap copy, and succeed in pressuring prices.
We are already seeing this at LLM layer, where Open source chinese models are taking share away from Anthropic and OpenAI.
Moreover, BoFA is projecting average selling prices for memory chips might decelerate from here.
Since the momentum of the semis trade was driven by memory, any news that’s a chip away from perfect, can cause a dent in the rally.
The broader rotation remains visible beneath the surface.
The 20 strongest S&P 500 stocks during the first half have declined an average of 14.7% in July.
Eighteen of the 20 are in the red.
The six stocks that gained more than 250% during the first half have all declined this month, with an average loss of more than 16%.
The opposite is happening among the former laggards.
The 20 worst-performing S&P 500 stocks have gained an average of 7.5% in July.
Nineteen of the 20 are higher.
Investors are selling the winners and buying the losers.
This is what mean reversion looks like.
Interestingly, you can also trace a seasonal pattern here that has come a few days earlier this time.
Markets usually see a momentum unwind appear in the second half of July, as traders book their profits and head off to the beach. This is what we saw in 2024, and 2023.
This time, the momentum unwind started almost immediately after the second half began. (Efficient market pricing in the expected?)
We also see long-short managers have been reducing AI exposure and lowering gross leverage.
This is adding to the pressure on momentum names.
However, overall, we see the bull run running longer.
Earnings came in solid for Q1. Analysts have revised their estimates higher on improving economy, stronger customers, and higher capex.
Index level multiples stay reasonable, and below major tops.
There is also plenty of capital waiting on the sidelines.
Assets held in money-market funds have reached a record $7.9 trillion.
That’s money waiting on the sidelines for an entry. And this is what can drive markets higher as conditions stabilize.
Earnings season is starting next week, with major banks first to report.
The setup for bank earnings appears constructive.
Capital markets and deal-making activity have accelerated, which should support investment-banking and trading revenue. Recent loan growth and expanding net interest margins could provide another source of strength.
We added Citi as a strategic buy before earnings. They have a history of delivering better-than-expected earnings, with EPS coming higher than analysts’ estimates 84% of the time in last 19 quarters.
The stock averages about 1.7% in weekly returns post earnings over the last 5 years.
Note: After July, typically we see weakness in momentum names and animal spirits. We continue to believe that the rotation to quality continues.
What Would Cause Me To Go Bearish
Bull markets end in euphoria.
Everyone goes all in at peak valuations and there is no one left to buy.
1) The chart below shows you what euphoria looked like in 2021.
We are far from that.
(Incidentally, we built this with AI and will add it to the Market Color tab on Lumida Invest app. Download now if you haven’t)
2) A major influx of IPOs
Too much new issuance at bad valuations can spoil the market.
The SpaceX IPO likely adds a drag on the QQQ ETF, especially as unlocks approach.
The bankers delaying the OpenAI IPO are essentially extending the bull market.
(Why they delay the IPO is something a journalist should focus on.)
3) Deepseek
China is closing the gap on closed source models.
DeepSeek has largely weaned itself off of Nvidia. (I’m not sure that export controls were the best idea.)
China would like to see DeepSeek undercut OpenAI and Anthropic on price.
And the strategy is working.
Their share of the inference market is growing. The cost of tokens is dropping.
Still, this won’t stop the datacenter build out from the hyperscalers.
What it can do is tank the IPO market for frontier lab LLMs.
4) Surprise rate hikes and inflation comeback / Warsh comes out hawkish in substance not just tone.
Hard to see that happening.
We are living in a transformational period, and the optimism is nothing like in the DotCom era.
The bull market is alive and well.
Consumer Discretionary: The Worst Is Priced In
The chart above captures one of the largest disconnects in the market.
Equal-weight consumer discretionary stocks have fallen below their COVID-era relative low against the S&P 500.
During COVID, people were losing jobs, businesses were closed, and households had no visibility into the future. Consumers had a legitimate reason to stop spending.
Today, the picture is entirely different.
The labor market remains healthy, consumer spending is resilient, and retail sales growth has reached its highest level since 2022.
Households continue to spend, particularly on travel and experiences.
Yet consumer discretionary stocks keep getting sold as though another recession has already arrived.
Consumer discretionary should benefit in near term rotation, as the value in the sector stands out.
Strong businesses with growing earnings and substantial free cash flow are being treated the same as companies with deteriorating fundamentals.
Here are four names that we have bought.
Hilton Grand Vacations (HGV)
HGV trades at approximately 9.2 times forward earnings with an 8.3% free-cash-flow yield.
Revenue is expected to grow more than 12%, while earnings are compounding every year at almost double digits.
Sales grew 10% in Q1 with EBIT doubling from last year. The company has raised its full-year EBITDA outlook and repurchased $150 million of stock.
Affluent households and older consumers continue to prioritize vacations and experiences, giving HGV exposure to one of the strongest areas of discretionary spending.
Expedia (EXPE)
Investors have begun to realize the potential here, and why shouldn’t they.
Expedia is growing bookings faster than Booking (BKNG) and Airbnb (ABNB), and trades at lower relative valuations with double-digit FCF yield.
EXPE trades at approximately 13.2 times forward earnings with a 12.6% free-cash-flow yield.
Revenue is expected to grow ~10%, while next-year earnings are projected to increase nearly 25%.
The fundamental momentum is already visible.
First-quarter gross bookings grew 13%, revenue increased 15%, and adjusted EBITDA rose 83%.
Expedia’s share price has started to recognize the improvement, but the valuation still leaves room for further upside as earnings continue to compound.
QXO
Brad Jacobs is a serial entrepreneur, and we had invested in QXO during its private raise, coming out with a triple-digit return.
The value has gotten better over time, while the share price has stalled.
QXO’s forward earnings multiple has fallen to the lowest level in its short public history after the stock declined more than 30% over the past three months.
The company is building a technology-enabled distribution platform in the highly fragmented building-products market.
QXO is already the largest publicly traded distributor of roofing and related products in North America and is targeting $50 billion in annual revenue through acquisitions and organic growth.
This is not the cheapest stock based on current free cash flow. The opportunity comes from scale, consolidation and future earnings power as acquired businesses are integrated.
What are we not buying in consumer discretionary?
Restaurants – the increased use of GLP-1s is seeing restaurant traffic decrease. Mcdonalds saw their traffic decrease about 4% in Q1. It was worse for KFC and Wendy’s with an 8% and 18% dip.
Also, other segments do offer higher value. The market is pricing consumer discretionary as though the consumer has already broken.
The data keeps telling us the opposite.
Microsoft Is Cutting Out the AI Middleman
Microsoft has started replacing OpenAI and Anthropic models with its own AI models for certain tasks in Excel and Outlook.
Microsoft’s in-house models are already processing tens of thousands of prompts each week, as per Bloomberg.
This matters for margins and earnings because Copilot usage is scaling quickly.
In Microsoft’s latest quarter, the 365 Copilot paid users had passed 20 million, while seat additions were growing 250%.
As that usage grows, the cost of every prompt matters.
Routing more routine workloads through Microsoft’s own models should reduce its reliance on expensive third-party inference and allow the company to retain more of Copilot’s economics.
We are bullish on Microsoft. The stock is trading below market multiple with fundamentals detached from the price. It won’t stay the same way, and we believe the spread can cover soon.
What Living Longer Implies For Your Investment Strategy?
I did an FSD with Matt Goldstein (Exit Wealth RIA) on Thursday, titled “Peptides,” discussing how portfolios should change as average age increases, and what themes are poised to benefit. Watch the stream here.
The latest developments in health and medicine mean the average age continues to rise. GLP-1s are helping people with obesity, heart attacks, cancer, and more. People are staying healthy for longer.
I believe we can reach a stage where people live well over over 100+ years.
Some, like Ray Kurzweil, speculate we may be hitting an inflection point where the biological age stops going up – and reverses. This crowd believes we are 5 years away from that.
If someone expects to fund another 30, 40 or even 50 years of spending, they need assets capable of compounding across that same period.
The two assets that immediately come to mind are equities and real estate.
Stocks represent ownership in businesses that can grow revenue, raise prices and reinvest capital over decades.
Real estate can generate income, benefit from constrained supply and increase rents as nominal prices rise.
Both are long-duration assets that can help match the increasingly long-duration liabilities created by longer lifespans.
The chart above shows why equities are a good fit.
Stocks have outpaced inflation in nearly every decade since the 1960s.
Over full investment cycles, productive assets have generally compounded faster than the cost of living.
A fixed coupon payment may look safe today.
But the real value of bonds can decline materially over 30 or 40 years.
This is one reason longer lifespans could push investors further out on the risk curve and make the traditional 60/40 portfolio less suitable for many households.
Longevity also creates several investment themes beyond asset allocation.
People living longer active lives should spend more on healthcare, travel, leisure, hospitality, senior living and wellness.
Older households already control a significant share of wealth and are increasingly directing their marginal dollars toward experiences and better health.
We have been bullish on travel and leisure for the same reason.
Insurance is another important theme.
Life insurers could benefit if mortality improves and claims are paid later than current actuarial assumptions suggest.
That would give them more time to invest premiums before paying benefits.
However, insurers with large lifetime-income and annuity obligations could face pressure if policyholders live much longer than expected.
The impact will not be equal across the industry. The winners should be companies with disciplined underwriting, flexible pricing and a favorable mix of liabilities.
Longevity is usually discussed as a healthcare story.
It may also become one of the most important asset-allocation and investment stories of the next several decades.
The Next 10 Years
Amanda Orson did an interesting tweet this week on how she sees the next 10 years. Her ideas paint a good picture of what we should expect in the future.
In the next ten year, we believe technology will keep moving faster, but human needs around health, convenience, trust and affordability should remain stable.
The best businesses are built around these enduring customer demands rather than temporary trends.
Everything gets rebuilt faster and cheaper. The enduring value sits in the invariants.
Digital Assets
Highlights From My Coindesk Appearance
Our talk was focused on what future has in it for Bitcoin.
And, my take was simple.
To understand Bitcoin, we have to focus on the biggest whale in the room: MicroStrategy.
MicroStrategy went from being the marginal buyer of Bitcoin to the marginal seller.
Over the last several years, MicroStrategy has launched different products, including STRC and STRF.
These are perpetual debt securities that carry a coupon.
The company has been issuing these securities to generate cash and then using that cash to buy Bitcoin.
The problem now is that both of those products are trading below par value. This means MicroStrategy cannot continue issuing more of those securities to create a bid for Bitcoin.
At the same time, the company has a contractual obligation to repay billions of dollars in coupons in coming years.
There are only two ways it can generate that cash.
The first is to sell its Bitcoin, which is what it has started to do.
The second is to issue new securities, which, at current NAV, would mean further dilution.
A year ago, Michael Saylor said that if you must sell your kidney, do it, but whatever you do, do not sell your Bitcoin.
Well, now he is selling Bitcoin.
So, amongst other things, that selling will create price pressure for crypto. There will be sharp short-covering rallies from time-to-time, but those are likely to be sold.
Add to that the ‘Four Year Cycle’ and you have a self-fulfilling prophecy.
I also discussed the Fed, rates, markets, and how semis trade has created various discount opportunities.
Watch the full show here.
Lumida Curations
Gavin Baker: The Real AI Bubble Isn’t Where Investors Think
Gavin Baker argues that AI valuations remain defensible, while the greater risk lies in debt-funded infrastructure spending outpacing near-term demand and cash flows.
Ken Griffin: The Productivity Boom Is Bigger Than AI
Ken Griffin says companies are often labeling broader gains from automation, digitization, and machine learning as “AI,” obscuring the true scale of the productivity transformation.
Jensen Huang: Nvidia Is Building the Operating System for Enterprise AI
Jensen Huang explains how Nvidia’s new agent-building stack could embed its technology across the enterprise, extending its position far beyond simply supplying chips.
Meme
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