Welcome back to the Lumida Ledger. Here’s a preview of what we cover this week:

• Macro: US Economy, Rates, CRE Opportunity

• Markets: Market Bottoming, Historic Bond Yields, Disinflation

• Company Earnings: Home Depot, Palantir, Walmart

• AI: Slow Takeoff, Cybersecurity, Investing Views

• Digital Assets: Liquidations, Tokenization, Coinbase, M&A

We had an exhilarating weekend in the Hamptons.

We shared a presentation to a family office audience. We also exchanged ideas with David Rubenstein.

_Macro

The US economy continues to exceed expectations - industrial production, retail sales, housing starts and consumer spending have all beat expectations. The US Consumer is Rambo, shrugging off the bazooka attacks from the Federal Reserve.

In light of the stronger economy, interest rate futures are finally pricing in a higher for longer outlook. In fact, the Fed minutes show that more rate hikes may be on the table.

All to say, it means the Fed has more work to do and we expect Powell to deliver Hawkish remarks at Jackson Hole next week.

Here’s an excerpt from David Einhorn, founder of Greenlight, that sums up how the economy has shrugged off rate hikes.

We’ve noted for some time that the terming out of US consumer and corporate debt reduces the economy’s sensitivity to interest rates.

That said, our job is to look forward.

Short-term rates slow bank credit growth as banks earn less carry from borrowing short and lending long. Higher long-term rates reduce the willingness of corporations to invest in new projects as the hurdle rate of return to beat is higher.

Higher rates also lower the value of bonds and equities - and we’re seeing that play out the month of August.

August is reminiscent of 2022 when both bonds and equities sold off in tandem. It highlights the important role of alternative investments to create diversification - and also benefit from a period of higher real rates.

To that end, we are seeing a much higher failure rate in multi-family units. A multi-family unit is like an apartment building - small or large.

Developers are struggling to refinance their debt during this. Higher rates. That’s causing these projects to go bust. Completion rates have dropped 39%. Here’s the data:

Now, these developers have already poured in the capital, improvements, completed the licensing work and have done a lot of value. They simply cannot run those units profitably after financing.

On the alternatives, that’s another reason we are most interested in the Commercial Real Estate sector. Well capitalized players are picking off operators that made bad decisions based on projections and assumptions of lower rates.

We believe the return on certain CRE managers will be 3x and these returns have been achieved in the past - even in years well after the 2008 Crisis. When you bake in the tax-equivalent returns due to the tax advantages of real estate, we believe the opportunity is compelling.

Reach out if you’d like to learn more. The expression of the opportunity we like here will not be available past September.

_Markets

We issued a tactical call on our July 30th newsletter shifting to an underweight in equities.

In hindsight, everything looks 20/20. Back then, you had excessive optimism (retail call options activity), and PE ratios had increased 4 points without a commensurate rise in earnings, and we saw in earnings that the AI narrative has not produced revenue or earnings growth for Big Tech.

Mike Wilson, Morgan Stanley’s bearish US equity strategist, also threw in the towel and published a “We Were Wrong” report after throwing in the towel. Markets have a dark sense of humor.

We also saw YOY revenue declines in stalwarts like Apple.

August and September are generally lousy for equities - so all together that call was not too hard to make although each time it takes courage to stick your neck out.

Where are we now?

Our view is markets will bottom in the next 30 to 45 days. It could be as soon as after Powell’s Jackson Hole’s speech or after the August CPI print which hits in September which we believe will show signs of inflation acceleration.

The higher 10-year bond yield adds pressure to equities. When the 10-year yields hit new 52-week highs, average forward returns are negative looking out 3-months. And stock returns also lag historical averages looking out 6 months and 1 year.

Bonds are generating yields we have not seen in decades. Now is an excellent time to accumulate quality bonds - tax-exempt municipal bonds, mortgage bonds.

Here’s a chart comparing yields on bonds vs. the earnings yield on stocks.

Markets are going through price discovery in the bond market. It could take several months to settle and a 10-year hitting 4.5 or 4.6% is possible, but in our view not sustainable.

Disinflation is happening and there are signs the economy is slowing from 120 MPH to 65 MPH (roughly where we are now). Higher long-term rates and commodity prices add to the drag on the economy. Consumers are getting hit with higher mortgage rates and gas prices.

Our headline view is we remain in a bull market - this is a correction. We believe we are heading towards a ‘hot landing’ - inflation is elevated and the economy continues to slow.

Nasdaq is still at elevated levels

The Nasdaq is down 7% from its highs but would need to fall another 11.4% to get down to its 200-DMA.

A drop to the 200-DMA would be an 18% correction (almost a new bear market). That shows just how quickly the Nasdaq has run up YTD on AI narrative which has not translated to revenue.

Nasdaq 100:

We believe Nvidia’s earnings are crucial next week. Nvidia reports on Wed August 23rd.

We fully expect Nvidia to beat on revenue and earnings. The key will be ‘Does Nvidia raise guidance?’. If yes, then semiconductors as a category should do well and that will help markets.

Semiconductors are a leading indicator for markets in this AI world. And the Silicone layer is the primary beneficiary of AI thus far - not Big Tech which is spending billions to win the fight for the next ‘form factor’.

Here’s a view into leading stocks in the Semiconductor space.

13F Season is Here

Hedge funds are required to post their holdings 45 days after quarter-end.

We’re spending time looking through hedge fund letters and holdings to extract themes.

Most hedge funds are not worth investing in, but some specialty hedge funds that focus on specific sectors sometimes have unique insights we can learn from.

Worth noting that quite a few funds have Nvidia holdings at 5 to 10%.

Appaloosa, Third Point, Point 72, and Tiger Global all added to their positions in Nvidia.

Matrix Capital was non-consensus (and early to Nvidia) and reduced their position.

_AI

Our view has been that we are in ‘slow take-off’ thesis for AI. The lackluster revenue growth in Cloud Center AI across Big Tech supports that.

We do believe there are good opportunities in AI - but you need to find non-consensus ways to bet on them. For example, investing in Cybersecurity early-stage venture or Value Venture. We don’t have managers linked to this thesis yet, but we are on the hunt…

Also, we have a nice education piece on our thoughts on AI in this video. It’s entertaining and also shows how we see AI transforming our experience as Consumer, Enterprise, and Government.

Company Earnings

• Home Depot beats expectations. Consumers are spending less on big ticket items. Revenue declines 2% and earnings fell 9%.

• Walmart beats expectations, while Target stumbled. This suggests consumers are ‘trading down’ to conserve costs. Walmart same-store sales that rose 6.30%, more than the 4.04% expected. Target saw a 5.4% drop in sales and shared a dreary outlook for the rest of the year.

• The broader point here is stock selection matters now unlike the QE-infinity 2010s. Factor tilts matter (we like energy and financials if you have a 3+ year horizon)

• Palantir’s highlights deserve their own thread so we made one here. Excerpt: On AI “Unprecedented interest from customers in just the first ten weeks since launch”. Given the stock’s 165% YTD gain and a weak overall market tape, shares fell roughly 5% in reaction to the earnings report as revenue and customer count YoY growth was strong but met expectations.

_{Digital Assets}

Risk assets are correlated. We are waiting for equity markets to settle, but are eyeing accumulation of quality digital assets.

We expect digital assets will bottom before equity markets much like they did in Q4 due to negative headlines and liquidations.

Liquidations are generally a good time to consider deploying, and we’re deploying a tranche now.

At the same time, we also don’t expect a judge to rule decisively in a way that opens up a Grayscale ETF conversion.

Our view is, at best, the deciding judge orders the SEC to re-consider the matter and act consistently.

Also, we don’t believe equity markets will settle this week until after we get past Jackson Hole. So we’re also keeping dry powder in case crypto markets dip further. Equities and crypto assets are correlated so a cross-asset class view helps.

We should note that a Trend Following strategy for Bitcoin and Ethereum would be ‘short’ here. So if you are conservative, you’d want to see those indices turn up. The risk to trend following strategies is you experience chop.

Both strategies (accumulate for the long-term, and trend follow) have a role to play in a portfolio.

We would characterize prices today, given a 3 year outlook, as ‘attractive’. This is not a ‘fat pitch’. The latter could happen if for instance we saw a Vix spike in the equities market and negative court rulings which would price in bad news.

If Bitcoin and Ethereum were to drop 20% from here, and that is not our forecast, we would consider that ‘very attractive’. You have to play the best hand you can with the odds you have.

It’s also another reason why we recommend having cashflow generating assets in your portfolio - like real estate - so you can take advantage of times like this. Crypto also diversifies well with bond strategies or private credit that can generate 12 to 16% coupon.

The discount to NAV trades continue to be attractive. In fact, the discounts have held up quite well. We picked up exposure at the close this Friday on our favorites.

Here’s a Bitcoin MVRV chart to get a big picture sense of where we are in the pendulum swing:

Tokenization

US Housing hit its worst point in 4 decades (since the 1980s).

Here’s a thread where we explain how tokenization can enable portable mortgages. The unlock is not the technology - it’s the legal frameworks as these transactions all trigger securities laws.

Coinbase

Coinbase won approval to sell crypto futures in the US. We don’t believe this will be a big money maker (how many retail investors trade futures?), but we need to learn more here. It is a symbolic win against the SEC however.

Also, we have a thread breaking down Base. We believe this could be a major development for Coinbase and folks are not taking notice of it.

Coinbase also launched FriendTech - a social network competing against Twitter. You can buy tokens betting on whether the price of a friend’s token will rise. The price algorithm uses quadratic voting.

We’ll write more about Base in September. Markets are ignoring good news anyway!

Also, keep an eye on Mastercard which may be competing with Base in the international remittances market. Mastercard is rolling out a capability to let developers move money. That’s a use-case Base is designed for.

The two parties have different strengths and weaknesses - and it’s a big market. Mastercard will be shy about disrupting its own card issuer customers. Coinbase should have no qualms about aiming to build the digital version of Square’s ‘dongle’

Bitgo raises raises $100MM at $1.75B valuation and is eyeing acquisition targets. Expect continued consolidation in the space.

Securitize also made an acquisition - buying Crypto Wealth Manager On-Ramp. Recall, Coinbase acquired a crypto wealth manager a few months ago.

Bankrupt crypto lender Celsius is holding a vote on its plan to sell assets. A judge approved disclosures that suggest creditors will receive 67-85% of their holdings. We’ll be monitoring the resolution.

Opportunity: What’s the best acquisition to make today? A bank. Banks are cheap and have extraordinary privilege. Buying a bank requires a syndicate of 10+ investors. Let us know if you’d like to learn more about this opportunity.

Content update: We tested this fireside chat format live on LinkedIn and Twitter. Let us know what you think.

Work with us: we are are looking for a junior offshore analyst to help us build more analytically-informed content. Send referrals here.

Meme of the Week

The digital assets space has been filled with seemingly endless bad news: company going background, getting hacked and founders placed in jail.

All jokes aside, digital assets are non-consensus.

They are the top performing asset class through the first half of the year.. Digital assets are hated right now - much like banks coming out of ‘08. We see this as an opportunity.

Quote of the Week

“Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios which frequently appear downright imprudent in the eyes of conventional wisdom.” Howard Marks

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