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

• Macro: The Fed's Market Challenge

• Markets: Short-Term and 1-Year outlook; Energy…

• Economic Momentum: Decoding the Illusion

• Digital Assets: The Twists and Turns of the FinTech Bill

• Earnings Season Highlights: Pivotal Takeaways from Meta and Alphabet

We had a nice lunch with Kenny Pasternak, pioneer of electronic trading and founder of Knight Trading Group. Kenny invested in the S&L crisis, shorted the banks in 2008, and scooped up distressed real estate after the financial crisis.

We discussed how to approach the distressed CRE market with a large owner of NYC commercial real estate.

Read more about Kenny Pasternak here. Reach out if you are an accredited investor and want to learn more. 

There’s a lot in common between the investing strategy of Warren Buffett and investing in distressed real estate. This thread shows the connections.

Macro: The Fed's Market Challenge

The Fed continues its tightening phase with another 25 basis points hike.

There’s a lot of data between now and the September FOMC - two jobs reports and two CPI reports. The data will determine if we’re done or more rate hikes are on the horizon.

2 out of the 3 inflation pillars - goods and shelter are coming down. The last leg - wages (especially in leisure & hospitality) - will take at least another year.

Markets expect ~6 rate cuts next year, that’s a bit much in our view. We don’t expect the Fed to cut until the Fed sees ‘the whites of their eyes’ on the CPI returning to 2%. The Fed needs confirmation, not a trend.

Note: If the Fed can (1) engineer a soft landing, (2) return to 2% inflation, (3) keep interest rates normalized, and (4) unwind QE gracefully - Powell will go down as a legend in the history books.

This is the markets ‘base case’. (Look at 10-year breakeven inflation rates.)

This is not our view.

The Fed is like an over-loaded juggler shuffling its feet around to keep the act going. The Fed is prone to over-steering and will face hard choices in the years ahead.

The Fed doesn’t have the same freedom as it had in the past given the current Debt/GDP level, pressures on banking sector NIM, and inflation amidst decades-low unemployment.

Markets: Strategic Investments for Uncertain Times

Investing is like poker. No one really know what the future holds. But some hands are pricier than others. Consensus bets are fairly priced.

Defensives - healthcare and utilities are flat to down, YTD. Healthcare was a crowded defensive trade - at the 99th percentile of its historical valuation. Buying into healthcare stocks at the end of last year would have been like buying into a crowded pot.

Non-Consensus bets may mean less downside and potential for upside should the idea become consensus.

Case in point: Energy, small caps, and financials are quietly beating the Nasdaq 100 by 2x this month.

This is a continuation of a trend we saw last month. And no one is talking about it.

Energy and financials are two sectors we’ve been highlighting for several months. Those poker hands were cheap because ‘recession’ was already impounded into prices, and yet these sectors had solid earnings prospects.

Within energy, one thesis I’d highlight for you is the renaissance of nuclear energy.

The nuclear pendulum was ice cold after Fukushima. Now, we have dozens of reactors going online around in Europe. Even the US is opening a reactor for the first time in decades. We have a preso at the 1640 Society detailing this thesis in mid-August. And the demands for energy, including boring old hydrocarbons, are only increasing.

We’ll share more soon…

(Read this thread for more.)

One other tactic: consider buying Mortgage Backed Securities for the Income portion of your portfolio. Mortgages are at ~7% and nearly at all-time wides relative to Treasuries. Unless you believe mortgage rates are going higher, these look appealing.

Ram will be speaking with co-founder of the Family Office Association live this Tuesday at 11am ET in a ‘no holds barred’ interview on a range of topics. Save the date - it will be broadcast on Youtube and LinkedIn.

Economic Momentum: Decoding the Illusion

By and large, the economy continues to surprise on the upside. New orders, a key leading indicator, continue to improve.

The US consumer is spending. Movie theaters are packed and airlines are full (and it shows in revenue).

I expect AMC earnings to beat estimates this week, and we’ll learn more from earnings out of Apple and Amazon.

One key idea to bear in mind… What’s happening is the economy is beating expectations. The economy is in a low-growth mode - and you can see this in subdued housing starts and very little YOY earnings growth in the S&P or Nasdaq 100.

It’s the US consumer, not corporate earnings, that is strong. Consumers have shifted spending from goods to services (like restaurants, movies, cruising, airlines, etc.) as consumer confidence continues to improve.

Overall, market technicals continue to show compelling evidence of a bull market. We have a record winning streak in the Dow Jones and a record number of consecutive up months, and no real drawdowns.

Statistically these are all indicia of a bull market. Here’s one study.

We’re returning to a more normal markets rather than the ‘crowded defensive short in fetal position’ condition from Q4 ‘22.

Over the next two months, however, we do want to highlight a ‘yellow light’.

We’re entering a period of weak seasonality. August and September are the worst. Our friend, the 10-year is now touching 4%. Higher yields mean higher discount rates for equity valuations. Economic surprises should mean revert soon.

Powell’s speech is coming up at Jackson Hole in late August, which will likely reiterate the campaign to squash inflation above all else.

Also, the average stock has dropped 85 basis points on their earnings release dates - on pace for the worst result in 20 years. That suggests expectations are a bit ahead of reality.

Sentiment is also just touching hot. (It can stay ‘hotter for longer’ though.)

Retail traders are also chasing the rally with extreme levels of call options activity.

All together, this suggests markets are due for a breather.

The takeaway from all of this is (1) trends continue to run longer - don’t fade or fight the rally; (2) now is not the best time to add index exposure or chase the hottest names; and (3) consider tilts to financials, energy or overlooked narratives.

For example, in AI, we have talked about Nvidia quite a bit. Now we like adding to adjacent names (the silicone layer, data center, AI infra) that have less attention, better valuations, but compelling growth stories.

With the S&P at a PE of 20+, now is an excellent time to focus on Alternative Investments.

Valuations do catch-up in the long-run. The S&P has a long-run average return of 9 to 12%. We believe Distressed CRE alternatives can outperform the market and generate tax efficient returns.

Digital Assets: The Twists and Turns of the FinTech Bill

The Financial Information Technology bill (a rebrand of the Crypto Market Structure Bill) is making headway. It passed committee and is advancing towards a vote in the House.

However, its current form might hit a roadblock as it requires 60 votes in the Senate. Don’t expect much here - but a Stablecoin bill is possible.

There is nothing in the bill for Tokenization - the true unlock for ‘cultural relevance’.

We elaborate on the bill and what we want to see here.

We do expect a broadening of participation in the Digital Assets rally. Tokens with sound fundamental drivers and tokeneconomic models - including both BlueChip DeFi and new protocols should do well. That said, we recommend maintaining discipline and focusing on the very best protocols with real traction rather than speculating.

Earnings Season Highlights: Pivotal Takeaways from Meta and Alphabet

Meta (META): “The two technological waves that we're riding are AI in the near-term and the Metaverse over the longer-term.” – Mark Zuckerberg, CEO.

Check our thread on Meta here. There are good insights around how Meta is taking share from TikTok (Reels Revenue is up 3X YOY). People are consuming video at a faster growth rate than text…

Alphabet (GOOGL): “We are in a period of incredible innovation for Search... This quarter saw our next major evolution with the launch of the Search Generative Experience..." – Sundar Pichai, CEO.

Quote of the Week

“The key is not to prioritize what’s on your schedule, but to schedule your priorities.” ― Stephen Covey

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