Dear Reader,
Happy Monday!
Happy turkey month.
I love this time of year. Who doesn’t love Halloween? Thanksgiving?
Christmas, Hanukkah, all the holidays - lights and trees, happy children?
Everyone seems 10% nicer this time of year. It’s just great.
Anyway, today I want to talk about last week’s Fed’s decision.
We had quite a split-screen week.
Putting aside the President’s China truce we talked about Friday…
On Wednesday, we saw the Fed cut rates by a quarter point.
But also saw Fed Chairman Jerome Powell throw a wrench into the December rate cut, saying it is far from assured.
What the Fed is really looking at here is this split screen where on one hand you have economic growth…
You have massive investment by major companies building out this AI revolution - this infrastructure to power AI, which is a big deal and a lot of money, and it’s creating a lot of jobs and opportunity.
On the other end of the spectrum, you’re starting to see AI bite into the job market.
Amazon laid off upwards of 30,000 people… UPS cut over 30,000 - these are not blue-collar jobs.
Remember in the 1980s and ‘90s when blue-collar jobs were getting tossed out?
Well, these are white-collar jobs.
It’s going to be interesting to see what populism looks like when white collar workers go through what the blue collar workers did 30, 40, 50 years ago.
So, anyway, we have an AI investment boom on one hand, and then we have inflation, and the Trump tariffs starting to bite.
Inflation has been pushed closer to 3% than the Fed’s 2% goal.
This is a real thing - purchasing power goes down.
Look at how expensive everything is.
This is inflation, and it hurts people.
So we see the AI boom exploding - great.
But we also see AI starting to bite into white collar jobs…
We see inflation at 3%...
And historically inflation that degrades a currency at 3% or more creates volatile political situations, which is not good for anybody, really.
This is why the Fed’s goal is 2%. That means the value of a dollar on January 1st will be 98 cents at the end of a year.
So we have Powell saying we’re cutting interest rates a quarter point today, but we want to see what things look like before we decide to cut again in December.
That kind of sobered up the market.
We saw the two-year treasury yield jump from 3.5% to 3.6% in minutes.
We saw the S&P cash index bounce back, but short-term treasuries had their biggest jolt in several months.
On the other side of that, one of the reasons for optimism, which is the AI spend, is also the reason some Mag 7 stocks got hammered.
Microsoft, Google, Meta put up great numbers - AI is working…
But after telling Wall Street what they’re going to spend to build out AI…
Microsoft - $120 billion…
Alphabet/Google - $91 billion…
Meta - over $70 billion…
Shareholders want to know, “will I get a return on that investment?”
Meta, one of my core long-term holdings, sold off 10%...
Meta investors are saying, whoa - maybe you’re getting a little ahead of your skis here…
You’re talking about spending $70 billion dollars…
We’re not seeing the math on the return yet.
Microsoft sold off.
Google actually went higher because their spend projection came in less than people expected, and their cloud business just grew revenues by 34% - way above expectations.
That headline overshadowed the $91 billion capital spending projection for the year.
These Mag 7s are spending tens of billions of dollars building out the future - what we call the E.I. era.
A lot of that is going to Nvidia…
A lot of that is going to data centers, energy companies - many of which we have recommended in our model portfolios.
A lot is already reflected in the stock market.
So we have a mixed bag.
Wall Street is a little unhappy Powell didn’t promise December rate cuts…
A little unhappy with all the capital spending - investors want to see returns outlined.
If Meta is going to spend $70 billion, we want to see the path to profitability…
We want to see there is a plan to spend $70 billion and turn that into $120 billion back to the business, for instance.
Return on investment.
We want to make sure when these companies are taking our money as shareholders, that they are being good stewards of that money. That they are spending with a plan and a path to deliver returns on our capital.
So Wall Street didn’t get the rate cut guidance they hoped for. Companies are spending a lot of money. So markets wobbled last week.
We are moving toward the “show me” stage of this cycle.
There’s a lot fewer bargains out there right now in the market.
I’m looking every day.
One sector where you can still find them is biotech.
I really like one A.I. biotech stock trading under $7 that Nvidia bought 7 million shares of…
Catherine Wood bought 30 million shares…
And Bayer signed a $1.5 billion deal with them.
Get the name of this A.I. stock while shares are still cheap.
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