Down to Earth

Now that the 'Sound of Trumpets' sell-off has gained steam, investors can go back to doing what they should have been doing all along - buying good stocks at reasonable prices. The mania over AI, like all fevers, has finally broken. In a classic case of "emperor has no clothes," the SpaceX bond prospectus has completely spooked stockholders into selling. I can just imagine what its "Material Risk" section contains. It must read like a science fiction novel - or maybe a Shakespearean tragicomedy. I've seen a lot of hockey-stick projections in company pitch decks over the years, but none with a 30-year X-axis.

But this smacks of a classic sell-the-news event that was long overdue. When you get such an egregious overvaluation on an IPO, you just know the game is almost over. But it was fun while it lasted.

At the same time, while this was going on, Fed Chair Kevin Warsh's perceived 'hawkish' tone in his post-meeting presser caused a dislocation in fixed-income land. You would think he's turned all Paul Volcker on us! I guess he has shaken the last few rate-cut bagholders out of their dovish fever dreams. Although a tempest in a teapot, the Warsh rope-a-dope has increased risks for investors already spooked by the SpaceX fizzle. Monetary conditions have tightened due to the twin threats: rising 2Yr yields, and now the breakout in the US dollar index. And given the volatility engendered by institutional portfolios' half-yearly rebalancing, it's no wonder the exit door has been crowded this week.

But fear not, market bulls: all this fear and loathing will probably just bring another buying opportunity for the FOMO fans. Short, sharp corrections are the hallmark of bull-market setbacks. And if you think that a few lost dollars - $600 Bn for SpaceX alone - will derail this AI freight train, think again. But after last week's Tuesat11 argument that poor breadth is signalling the end of the advance, I'm enjoying the action here now, just the same.

Meanwhile, some geopolitical headwinds have begun to subside. Trump's Iran gambit has failed miserably, and with record-low approval ratings, he needs to turn his microscopic attention span to domestic issues - like the algae in the Lincoln Memorial reflecting pool. Although, in fairness, he did a campaign on "draining the swamp," so I guess he had to create one first.

Last week, I also advanced the thesis that real assets should have greater emphasis in investors' portfolios. That advice now seems somewhat premature given the US dollar's newfound strength and the seasonal lows for commodities still ahead. The sell-off in hard assets may have further to run in the short term, but ultimately offers a good entry point for asset allocators to rebalance away from the tech-heavy broad averages. Small-cap fans have been rewarded this week by a return to favour and new highs, but that might be fleeting unless the Fed rate-hike fears are finally put to rest and the economy reaccelerates in the fall.

The spike in the 2-year bond yields seems disproportionate now that oil prices have round-tripped. Shouldn't the December futures price returning to pre-Iran-conflict levels serve to quell those inflationary expectations responsible for the back-up in yields? I guess Bernanke's "transitory inflation" concept has been so vilified that markets can't cope with it. Until U.S. gas prices actually drop back in a month or so, it seems markets can't price in the deflationary effects of Hormuz's reopening without actual proof.

The inflation that should matter to the Fed will emerge once the energy shock subsides. Lower energy costs will boost consumer and business confidence, ultimately leading to true overheating down the road. With a laissez-faire Fed and profligate government spending ahead of an election, inflation should make a comeback, but it is more likely a 2027 event. Stay tuned.

So don't shed any tears for Elon Musk, our humble SpaceX Cadet. Like the novel of the same name, he may be the man who fell to earth, but he's still a trillionaire!

Risk Model: 4/5 - Risk On

Although the model has been performing well lately, it often struggles to identify inflection points without lagging. Could it be that the reversal we are seeing in the markets since the SpaceX IPO is not being picked up by the Model until the sell-off gains steam? Or could today see a quick Tuesat11-type bottom for Tech stocks? Place your bets.

Copper is under pressure today, as the red metal has been a bit extended by bullish AI-related hype amid data center demand. I'm taking some profits here as a trader. When I said I liked Teck over Tech recently, I didn't think they would be the same play!

The downtrend versus gold seems to be holding at key resistance, and a secular reversal will take more time. Take the summer off, bulls. Remember, I began my career as a trader, so no perma-bulls allowed here at Tuesat11!

Copper/Gold Ratio

Copper Seasonality