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

• Crypto: Blockbusters, Holograms, and Blockchain

• Markets: Earnings season, Morgan Stanley vs Goldman Sachs, Tesla's Earnings Report, Statistics

• Economy: Investor Alert. Unmasking the Inflation Decline and the CPI Puzzle

• BigTech & AI: Bulls, Bears, and Bots. A Deep Dive into the Slow Take-off of AI

• Look Ahead: Ken Pasternak on the Pulse of Real Estate. An Exclusive Interview

Dinner with KKR & Securitize

Tokenization is a theme we're actively focused on. We had an enlightening dinner with KKR and the Securitize team last week.

KKR partnered with Securitize to issue LP interests on-chain.

It's a big deal, and Larry Fink knows it. The primary obstacle here? Not tech, but a need for revamped legal frameworks. We're talking about frameworks that facilitate public offerings of security tokens, like commercial real estate debt, mortgage-backed securities, and treasuries on-chain. We've got programmable money, now we need programmable assets.

A money market on-chain would improve upon zero-yielding stablecoins. We wouldn’t be surprised to see a money market on-chain by year-end.

Podcast with Jason Choi: Will BTC ETFs Kickstart the Next Bull Run? - Ram Ahluwalia, Lumida, Ep. 245

What’s BlackRock’s larger motivation beyond a Bitcoin ETF?

Ram joins BlockCrunch podcast with Jason Choi. Ram breaks down the 1984-esque sounding ‘shared surveillance agreement’ and shares the “recipe” to secure approval.

Also explains the important role of the Singapore Monetary Authority in influencing Blackrock's interest in Tokenization.

We recommend this thread if you want short clips and experts from the interview.

Crypto: Blockbusters, Holograms, and Blockchain

From Popcorn to Crypto

A personal note on the side, I took Mrs. to a movie day.

It's been an age since we last did that. The flick of choice? Mission Impossible. Not giving away spoilers, but the movie echoed themes of a sinister AGI, crypto, private keys lost on a boat, and the ever-changing concept of truth. Art imitates life.

The theaters were packed, but the experience remained comfortable. All the seats offer full recline and you can book your tickets in advance to skip the line. On the way out, the theatre resembled a Gen Z social scene. It was the hip place to be for the trend-setting younger generation.

One of our themes is that Americans are continuing to stretch their legs and are yearning for pre-Covid normalcy. Leisure & hospitality is where we see demand and wage inflation.

Just like cruise stocks enjoyed a significant upswing this year, my hunch is that movie chains will beat on earnings. The pendulum for a fully digital metaverse life is swinging back hard to real-world experience.

There is a demand for nostalgia and normalcy. I’m speculating, but I wouldn’t be surprised to see AMC exceed expectations when they release earnings in August. And the modern experience is worth sharing with the next generation.

From Popcorn to Crypto

Did you spot that headline about George Michael returning as a hologram?

This headline is a crypto builders dream case-study. Consider the possibilities when you mix NFTs, direct fan engagement, metaverse and the ability to syndicate royalties.

There is a need to update Regulation CF (crowdfunding securities laws) and copyright frameworks. It's a win-win for both creators and fans, yet it seems to be an area of neglect among crypto policy organizations. This topic has zero focus in market structure bill discussions. The constraint on Digital Assets technology isn’t scaling solutions or tooling - it’s the legal ability to issue programmable assets on-chain. That’s an unlock that would propel the NFT, Gaming, and RWA product cycles.

On the crypto front, the Grayscale Bitcoin trust NAV discounts continue to shrink to around 25%. This is close to the level when 3AC and DCG put on their initial Grayscale Carry trade which we discussed on the Odd Lots podcast.

We're focused on the Ethereum discount – it's a wider, so there's a greater upside. If a Bitcoin ETF is approved than an Ethereum one will follow.

Further, Ripple's ruling (which we expect the SEC to appeal) opens the door to alt-coin season. We're now broadening our digital asset allocation approach to other quality names. We are prioritizing deploying for our clients now, and down the road will share some of our ideas.

One final note: big tech firms have come together and submitted to self-regulation. The big tech firms are sharp and savvy. They are pre-empting regulatory over-reach on a fast and dynamic category agreeing to their own industry standards.

This is the kind of proactive step the crypto sector needs, including investors, exchanges, and infrastructure companies. If not, prepare for more regulation by enforcement and judiciary-led outcomes. It's high time for policy groups to lay the groundwork for an SRO framework.

We shared previously how the NASD, creator Nasdaq, started and remains today (as FINRA) a self-regulatory organization for the securities industry.

Lastly, in case you missed it, ETHCC in Paris wrapped up this week. Tech Crunch has a summary of some notable findings.

Markets: Earnings season, Morgan Stanley vs Goldman Sachs, Tesla's Earnings Report, Trends in the Post-2022 Market Landscape

Earnings season

Big picture, the earnings and revenue beat rates are higher than the 5-year averages.

That’s a good sign - equity asset prices are about beating expectations and earnings growth.

Historical Comparisons: Morgan Stanley vs Goldman Sachs

Notice how the 2022 decline in beat rates coincided with the bear market. Markets are more disciplined now vs. the DotCom era. Manias end when stocks don’t deliver against expectations (remember 3D printing, Biotech in 2000, etc.).

The megabanks we highlighted last week performed well. Wealth management-focused banks like Morgan Stanley beat the odds, while Goldman Sachs lagged.

Check out this thread for a closer look at why we favor Morgan Stanley over Goldman Sachs. We also explain the different post-2008 choices that put Morgan Stanley way ahead of its once neck-and-neck rival Goldman Sachs.

Tesla's Earnings Report

Tesla's earnings report brought mixed feelings. The stock was down nearly 10% on the report. Tesla delivered an EPS beat but fell short on revenue and offered less than half the expected free cash flow. Tesla’s margins are also coming in from 20% to 10% to move the cars.

While the Inflation Reduction Act's $7,500 per new vehicle tax credit helps Tesla, higher rates are making it more expensive for consumers to buy Tesla.

Until regulators approve fully autonomous driving cars, we'll curb our excitement. Tesla has an expensive valuation - we believe there are cheaper ways to bet on the ‘electrification of everything’ thesis: nuclear energy renaissance, semiconductors foundries, data centers, etc.

Riding the Bull, Bracing for the Bear: Unpacking Trends in the Post-2022 Market Landscape

Fun Fact: We're over nine months past the bear market low since October 2022. History tells us that, post World War II, the S&P has been higher a year later 12 out of 13 times once we cross that nine-month threshold.

The NASDAQ is now in an overbought state - 20% above its long-term 200-day moving average. This kind of rally and relative strength is a rarity outside a bull market. When the NASDAQ got this extended against the backdrop of a bull market, it saw gains the next year - every single time (13 out of 13).

There are a few cautionary notes.

We are, however, entering a seasonally weak period for stocks, and we see early signs of AI disillusionment. We believe now is not the time to add to technology exposure, but quality names in other sectors are worth considering.

On the bright side, we're seeing the rally's participation broaden to sectors that have lagged this year, including smaller banks. We maintain that there are quality picks in energy, financials, and semiconductors.

The S&P 500 earnings yield dipping below the three-month treasury bill is a first since the early 2000s, a period that ended with the DotCom bust.

Valuations remain high, with the S&P P/E ratio in the 20+. In the short-run, valuations don’t matter. But over a longer horizon, say 10 years, valuations do matter. The ultimate test is ‘did the stocks deliver the earnings priced into valuations?’

Economy: Investor Alert. Unmasking the Inflation Decline and the CPI Puzzle

Inflation has taken a tumble over the past year as 2 out of 3 pillars (good and shelter prices) improve.

The large month-over-month increases in CPI we saw in early 2022 are now exiting the year-over-year CPI calculations. This means without an outright deflation, it will be tougher for CPI to continue dropping in the upcoming months. This is called the ‘base effects’ phenomenon.

Any investors banking on the year-over-year CPI number to dip below 3% might be in for a bit of a shock.

Come August, we'll also have to contend with Jerome Powell's speech at Jackson Hole. It's likely that the Fed Chair will signal more work needs to be done, adding to the headwinds.

Switching our gaze to housing – a leading indicator we're particularly fond of – DR Horton's earnings release offers some key insights. Their net sales orders have shot up 37% year-over-year, while their inventory has fallen 22% from a year ago. They also broke ground on 23,000 homes in the June quarter, marking an uptick from the March quarter.

BigTech & AI: Bulls, Bears, and Bots. A Deep Dive into the Slow Take-off of AI

Don’t expect the AGI anytime in the next few years. We’ve reviewed the Meta LLama-2 whitepaper closely… This thread shares several highlights such as the trade-off between ‘value’ and ‘safety’.

LLMs are experiencing diminishing returns to output. You can’t throw more hardware and parameters to get a step-function improvement.

Our thesis earlier this year was that we are in the ‘slow take-off’ phase for AI.

We’re more convinced now than ever of that view and expect to see some disillusionment creep in.

We’re long-term bulls on AI, but it’s going to take time. We’ve spent a considerable amount of time researching how to approach AI in public and private markets. We are doing a preso at the 1640 Society in August and will share how we are positioning after that conference.

This week, Big Tech firms report earnings on Tue the 25th & Wed the 26th. Here are some thoughts on the Magnificent 7.

Here are some thoughts on Nvidia and Netflix.

Look Ahead: Ken Pasternak on the Pulse of Real Estate. An Exclusive Interview

Keep an eye out this week for our exclusive interview with Ken Pasternak, former CEO of Knight Capital Group and partner at Goldman Sachs back when GS was top of the mountain.

Ken invested in distressed real estate during the S&L crisis (Resolution Trust Corp). He was short the banks in 2008. And he scooped up distressed real estate post-crisis as well. It’s around that time that Ram first met Ken and his team. It’s a relationship going back 10+ years now.

Ken is a legend.

We're pleased to release a series of public videos of our interview with Ken on all things real estate. We also have a set of private videos for our clients and those who have a direct relationship with us.

If you're an accredited investor interested in Ken's private insights on the commercial real estate market, don't hesitate to reach out.

Ken’s fund is one of Lumida Wealth’s highest conviction opportunities. Real estate is one of the ways to grow wealth tax-efficiently and for the long haul. This strategy fits our ‘high risk adjusted return’ category. We believe we can beat the S&P tax efficiently, and have an inflation hedge as well.

Quote of the Week

“Invest for the long haul. Don’t get too greedy and don’t get too scared.” Shelby M.C. Davis

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