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

• Macro: Unemployment Claims, ISM, Buy-Side vs. Sell-Side

• Markets: VIX, China, CRE Check-In

• Company Earnings: Zscaler, Docusign, Asana, All-Weather Growth Portfolio

• AI: AI Mentions in Earnings Calls, AI Finance Transformation

• Digital Assets: Bitcoin Historically Bearish in Sept, ETH ETF, Visa Solana Stablecoin Payments

We enjoyed covering two of our favorite topics - non-consensus investing & startups - with Frank Rotman Co-Founder of QED Investments.

If you are a GP VC or an LP that invests in Venture, I strongly recommend this interview.

There are many incredible investors that are not well known to the broad public.

Our goal is to surface these investors and show non-consensus investing in action and showcase thoughtful friends in our network that we tap for specialized expertise.

n my book, Frank is one of the current generation’s greatest venture investors.

We do believe Venture as an asset class is under pressure for the foreseeable future.

However, highly specialized firms with valuation discipline, an operator/investor mindset, and a thematic approach can do well.

Ram will be speaking at Permissionless this week in Austin next week and at Mainnet the following week. Let us know if you’re around and would like to connect.

Thanks for all the referrals that came to our newsletter over the past week. We are pleased to share that Deborah Bussiere is the winner of our Permissionless ticket giveaway. Congrats!

_Macro

US unemployment claims hit the lowest point since February, with initial claims falling by 13,000 to 216,000 in the week ending September 2nd.

This marks four weeks of decline, beating economists' predictions of a rise to 234,000.

The ISM also clocked showing a strong result at 54.5% vs. expected at 52.5%.

Consequently markets believe the Fed has to do more and that rates will stay “higher for longer”. Markets are digesting what this means for public equities.

The Buy Side vs. Sell Side

There's a funny dichotomy playing out across the "sell side" and "buy side."

The "Sell Side" consists of Wall Street investment banks that provide research via their Prime brokerage desks to institutional clients. It's called the sell side because Wall Street makes money by selling ("brokering") products, including IPOs, secondary offerings, debt offerings, structured notes, and so forth.

Wall Street is in the capital-raising business; it is a sales commission business. They legally don’t have your best interest at heart. Their standard is ‘suitability’.

The "buy side" refers to fiduciaries that have a duty of care. The buy-side manages money on behalf of clients and are paid on performance and management fees. Examples of the buy side include Bridgewater, hedge funds, private equity, and Registered Investment Advisors, including us here at Lumida Wealth.

On average, the "buy side" is smarter than the "sell side."

The best sell-side analysts ultimately join the buy side or spin up private research desks, selling research to the buy side. The sell side is constantly pitching the buy side new ideas to buy, such as the upcoming ARM or Instacart IPO.

The sell side meanwhile also sell their products to their own retail wealth management divisions. Like DotCom stocks in 2000. We call that a conflict of interest.

So where do these two camps sit today?

JP Morgan has consistently held a bearish view on the economy for months, as have Morgan Stanley and Merrill Lynch.

On the other hand, Goldman Sachs has lowered their recession probability. (Here’s a tweet showing their analyses if you’re curious.)

On the other hand, Bridgewater, the world's largest asset manager, has also been offsides. Goldman Sachs' economics team, as well as various hedge funds that Lumida tracks in its 13F tracker, have been reading the situation correctly.

The point is everyone is wrong. Even the Federal Reserve is confused. (Well, that’s not a surprise.)

Uncertainty about the future direction of the economy and market is high.

It’s our job to have a market view. And we’ll share that in a moment.

However, humility plays an important role in the portfolio construction process. One needs to design portfolios that are resilient to a range of outcomes - even scenarios where we’re wrong.

Overall, we like the views and themes we see playing out - across tech, energy, financials - but it’s inevitable that those themes will shift.

For that reason, alternative investments play a role as we focus on categories that should do well regardless of the direction of the stock market. That’s the concept behind an “All Weather Portfolio”.

The goal of the UHNW and endowments is to build a portfolio that has long-run positive expectancy but low cross correlation.

Here’s a tweet that explains the concept further.

Our focus this quarter has been on Commercial Real Estate. We believe the opportunity ahead is significant and our clients should have an “anchor” position.

There’s no need to be “right” on the macro to still do well. Focus where there is an edge.

Over the next few months, we intend to create content to explain, define and share different categories of alternative investments.

We also put our money where our mouth is. We invest alongside our clients because we believe these are the best strategies to own in an uncertain world.

You can choose the game you want to play. We believe Alternatives are the “game” to play.

If endowment investing works for Harvard, maybe it works for the rest of us 🙂

Note: Our preferred CRE manager will close to subscriptions in the coming weeks. Reach out if you are a qualified purchaser to us if you want to learn more.

_Markets

The USD is down 8 weeks in a row. That means we remain in a risk-off environment.

Our market compass consists of the direction of the USD, 10-year rates, and Semiconductor ETFs.

September is seasonally also the worst month.

Big picture, however, we do believe this is a correction within the context of a bull market.

As a reminder we issued a tactical underweight call on Aug 1st.

Each week, we are re-assessing and looking to get constructive. Now is the time to do research, build watchlists, and look for evidence of “basing” or capitulation.

The VIX is relatively low suggesting complancency - so it looks like we may base via apathy or disengagement. There’s also plenty of negative news and sentiment is dour.

Markets like to climb a “wall of worry”.

But there is good news on the fundamental backdrop. The PMI numbers were solid and earnings revisions are trending up for the United States as a whole and various sectors.

If we were stuck on a desert island and could only pick two indicators one would be aggregate analyst earnings estimate revisions.

The main headline is earnings estimates are increasing. And that’s good for equities and risk assets as we head into Q4. When earnings go up, stocks tend to follow.

There are very good valuations out there, especially outside of Big Tech. We shared a summary of our investment tilts a few weeks ago - we won’t rehash that here.

But as a general idea, focusing on sectors that have been left behind from market growth is a good instinct.

Also, we remain with high conviction about energy. Not only are the fundamentals improving but the technical outlook is solid as well. There are a lot of ways to approach this: via the ETF, security selection (e.g., Camaco, Petrobras, etc.).

We’ve also been poring over 13F filings from hedge funds that specialize in the energy sector with the goal of seeking enhanced performance from undercovered names.

Commercial Real Estate Check-In

S&P reports that ‘total commercial real estate (CRE) loan net charge-offs exploded 4,138.6% year over year to $1.17 billion in the second quarter, from just $27.7 million in the 2022 second quarter".

Here’s a tweet with cool charts for more.

Our highest risk-adjusted return thesis remains Commercial Real Estate. As much as we love analyzing risk-assets, we believe the risk-adjusted return on CRE will substantially outpace equities over the next 10 years. 

The last time CRE had this level of price declines was in 1992 and 2009 - those both marked excellent times to pick up distressed assets.

Those two years also represent the first year to buy foreclosed or bank real-estate-owned (REO) assets cheaply.

Who are the losers in CRE? They are the Developers who took on short-term variable rate construction finance loans.

They can’t cover the interest charges - even if the assets are fully stabilized. We believe value is available where you can find scenarios where the issue is not the asset itself, it’s the financing and a lack of capital to refinance.

Our goal is to buy $1 for less than $1 and then sell it for $3 to $5 in 8 to 10 years with tax efficiency. Here’s a video explaining how that works.

If you are a Qualified Purchaser and interested in how we’re thinking about specific opportunities in CRE, reach out to learn more.

_{Company Earnings}

We saw several SAAS companies report earnings this week. You can find our summaries on @lumidawealth twitter for Zscaler, Asana, and Docusign.

Overall the earnings reports were disappointing. Earnings growth for the S&P overall ticked up for the first time in a year - at a platry 1%.

Consider the following…

Amazon did a 50X if you had invested after the 2008 crisis.

Other BigTech firms - whether Apple of Nvidia - did a 10X+ or far more.

But that’s in the rear view mirror now.

Rather than own “low-growth high PE multiple stocks”, we believe focusing on high-growth stocks where the valuations are reasonable.

Over the next few months, we are building an equal-weight model portfolio that will consist of a basket of tech stocks that may have the potential to generate strong performance.

It’s easier to do a 10X or a 50X on a small market cap company than it is to do that with a large cap. Apple is (or was) at a $3 Tn valuation.

They aren’t going to $30 Tn and dwarfing the US economy.

We have called out the geriatric nature of high multiple growth stocks.

It’s important to think critically about what you are paying for, and if you’re paying for past performance only to watch your investment decline (like Apple the last two months).

Some of the names we would consider putting in this model portfolio might be companies such as Snowflake, Broadcom, ASML, Novo Nordisk, AstraZeneca, Yeti, Activision, Shopify, Palo Alto networks, WorkDay, and DataDog.

Each of these businesses link to a theme - cybersecurity, AI, infrastructure, longevity, e-commerce - and we believe they may be leaders in their categories.

We want to stress we are still early in our analysis, we are simply sharing our thought process.

An investor can then allocate, say, [ 5% ] to this strategy for long-term growth with the hopes of snaring a couple 10x baggers.

We’re excited to share more in the coming months.

_AI

Guess what the most cited word in earnings transcripts was this past season?

You guessed it.

Artificial intelligence.

Check out this chart.

Expect to set a new record the quarter after this. Expect more CapEx spend on the “Silicone Layer”.

Very few businesses have figured out how to make money on AI…but the spending on AI is obvious. And the stakes are high, so it’s an enduring trend.

Let’s see how that breaks out by industry:

Everyone knows Technology firms have to bet on AI.

But the number two industry? Financials.

We have thought a lot about how AI can transform Finance. This goes beyond the topics of transformation of compliance, call center customer service, and research.

But there are non-obvious ways AI can transform portfolio, risk management, and direct investing.

For example, AI can advance upon traditional ‘covariance matrix’ driven portfolio construction by introducing qualitative views that are not expressible mathematically (such as ‘we expect rates will be higher for longer’).

We’re also excited about Healthcare and AI. We’ll interview a seed stage healthcare AI fund in the coming months…and they manage to get decent valuations to boot.

Lastly - ChatGPT traffic is down 3 months in a row through August - let's see if it picks up with kids back in school

_{Digital Assets}

Visa is enabling settlement of payments and stablecoins via Solana.

The institutions never left. They just move slowly - like elephants. But they can clear the jungle. And there’s more to come.

We expect a large asset manager such as BlackRock to issue a money-market fund on-chain by year end.

The sentiment is dour in crypto. That’s contrary bullish. We believe we need to get past September and we see the current period as “base building”.

Here’s an interview Ram did with Pio on digital assets. It also covered Tesla, Value vs. Growth stocks, and a broad range of topics. Definitely check it out - we cover a lot of ground we can’t fit in the newsletter!

We also joined our friend Guy at Coinbureau for a discussion about Crypto Markets. Here’s the recording in case you missed it.

We also saw the first filing for an Ethereum ETF.

Conference Calendar: We’ll be speaking at Permissionless and Mainnet. We have promo codes for discounted tickets. Reach out to us if you are attending and would like to connect.

• Permissionless Sept 11-13 in Austin. Use code LUMIDA30 for 30% off your ticket

• Messari Mainnet Sept 20-22 in NYC. Use code MAINET-SPKR for $300 off your ticket.

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

Quote of the Week

"In the short run, the market is a voting machine, but in the long run, it is a weighing machine." - Benjamin Graham

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