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

• AI: How to Invest in AI - Our Silicon Layer thesis

• Markets: 13F insights, Where are We; Over-valued Meme Stocks

• Macro: No recession in sight; Leading Indicators

• Company Earnings: Black Friday Sale: What stocks to buy?; Earnings season themes

• Digital Assets: RNDR Token and low liquidity in altcoins

A belated Happy Thanksgiving to all!

Here’s an exercise to create a present feeling of Gratitude from our latest ‘What’s on your mind’:

‘What are you grateful for now that you could not be grateful for 3 years ago?’

‘What are you grateful for now, that you can’t be grateful for 20 years from now?’

You asked and we executed, Non Consensus Investing Podcast is now available in audio on your favorite streaming platforms.

Tune in to listen in on EP1: How the top 1% invests in AI, Digital Assets and Real Estate

AI

The Lumida Wealth Semiconductor “CapEx Receiver” Thesis

We’ve shared in podcasts our semiconductor thesis.

Time to renew it here in the context of Nvidia.

Backdrop:

The largest tech companies in the world - Google, Microsoft, Amazon, Apple - and others are in a race to win the next “UI Form Factor”.

Every 10 years or so the primary means by which consumers access information changes.

Mobile was the last “platform shift” starting with the BlackBerry and culminating in the iPhone.

A new platform shift is unfolding now of AI centric devices. This is why Sam Altman is teaming up with Apple’s John Ivey to re-imagine the future of personal devices…

The stakes are massive.

The #1 leader in any category captures the lion’s share of the revenue.

And the race is on to ‘discover’ the next form factor. There are hypotheses - ranging from Apple’s Vision Pro to Meta’s Ray Ban glasses - but no one is quite sure.

Losing this battle means earnings growth drops. And that means multiple compression.

We are talking about several multi-trillion dollar companies here with high PE ratios.

These firms are going to spend tens of billions of dollars on capital expenditures ‘capex’ - in the form of GPU chips and other gear to attempt to win the next secular platform shift.

Betting on the “Application Layer” is the same mistake as trying to guess which search engine will win - Lycos, Alta Vista, Excite, and so forth.

In fact, the winner (Google) didn’t appear on the scene until years later due to the Page Rank tech breakthrough.

The better bet is to focus on “picks and shovels” - the Silicon Layer.

They are the recipient of massive amounts of CapEx spending from price-insensitive big tech companies.

In consulting, there are two big lessons we learned:

(1) Your business quality is as good as the quality of your customer;

(2) If your business is not a top 3 priority, the customer won’t care.

Silicon layer players benefit from both.

Big Tech firms are the best customers in the world to have. And they are paranoid about losing the AI arms race. AI is priority #1, #2, and #3.

It gets better.

Sovereigns have more cash than Corporates. They are also price insensitive (if not wasteful).

And they will perceive competitive advantage in AI as a requirement for national success. What percentage of Defense spending will go into AI? How much of that will flow to Datacenter plays and the Silicon Layer?

That’s why China is importing more semiconductors than oil, or why China has more semiconductor startup venture funding and deals than the United States!

When you add up these facts together, the inescapable conclusion is Invest in the Silicon Layer. Specifically, those names that are indexed to growth in AI and GPU compute.

Are the valuations reasonable? Yes. In fact they are mostly cheaper than Mag 7 names.

Nvidia has the same forward PE as Apple…and it is growing real earnings much, much more quickly. (Note: We believe there are other compelling opportunities besides Nvidia which is becoming more and more consensus and have a model portfolio consisting of our best semiconductor ideas for Lumida clients.)

Having shared that backdrop, take a look at Nvidia’s CEO Jensen’s commentary with our remarks:

1. "Sovereign AI clouds are coming up all over the world as they realize they cannot afford to export their country’s culture and knowledge for another country to re-export back to them. They need to build up their national AI cloud."

2. “Companies can’t afford to outsource their intelligence to someone else. They need domain specific co-pilots and assistants"

   This is a dig at Microsoft, which is building its own GPU chips away from Nvidia. Nvidia is directly competing with the ‘hyperscalers’ - Microsoft, Google, and Amazon to win growing data center growth.

   
   Nvidia has partnered with integrators such as Dell and VmWare (now owned by Broadcom) to sell into corporates.

   
   You wouldn’t ordinarily think of Nvidia as a competitor to Microsoft - but that’s exactly the case. Microsoft’s story is “Use our cloud solution. And use our co-pilot to improve your productivity”

   
   Nvidia’s story is “Your data is proprietary. You can’t trust outsourcing the AI to anyone else, much less using Microsoft’s co-pilot. Every company and government needs its own co-pilot.”

   
   Remember how JP Morgan stopped employee access to Open AI? It’s exactly that debate that is playing out now. The two firms are articulating very different futures.

   
   We do believe that Sovereigns, which have a lot of budget, will spend on Nvidia’s Datacenter. Firms that value convenience over security will go with Microsoft.
   

3. "We want to enable every company to build their own custom AI. There will be 10s or 100s of custom AI models in our companies. Nvidia is essentially an AI Foundry"
   

   This is a direct dig at Open AI. Open AI had rolled out only days before the ability for a startup to train their own Custom AI. OpenAI was an AI foundry.
   
   On the thesis, we fully agree. Before the dawn of AGI - which is 4 to 5 years away at best in our view - we are going to see a proliferation of niche horizontal and verticalized AIs:

• Legal GPT

• Finance GPT (Bloomberg on AI)

• HR GPT

• Expert Interviewer GPT

• Genomics GPT

• Defense Swarm GPT

• Medical GPT

• VC Analyst GPT

If you enjoy this perspective, we recommend listening to our AI thesis from the summer which gets into this at a deeper cut and has supporting slides.

We also identify adjacent themes (such as Cybersecurity) that will benefit from the rise of AI.

4. "There is a glaring opportunity in the world for AI Foundry.

They can’t afford to outsource their data and their flywheel. So they come to us."

Nvidia’s Jensen is making another dig here. He’s also alluding to the idea that Amazon or Microsoft can reverse engineer their own LLMs based on what is successful. That precedent isn’t new.

Before MS Office, there was Word Perfect. Word Perfect is gone.

Before Excel there was Borland and Visicalc. Those two are gone.

Amazon is notorious for identifying top-sellers and then building their own white-label products and other anti-competitive behavior.

Now, Nvidia is not offering direct cloud AI hosting service. Nvidia is working with players like CoreWeave and Oracle to deliver the compute to the end-user.

For the same reason we like CoreWeave and Oracle. Note: Nvidia has an equity investment in CoreWeave and appears to be prioritizing GPU deliveries to these firms.

This is forcing Microsoft, which is starving for compute, to ink partnerships with its competitor, Oracle.

There’s quite a dynamic playing out on the Silicon Layer and the competition is fierce.

Markets

Lumida is pleased to release the Lumida 13F Tracker.

Hedge funds are required to publish their long positions and report them to the SEC 45 days after quarter-end.

We study the moves of the 30 most iconic hedge funds: Druckenmiller, Soros, BridgeWater, Michael Burry and more.

Our 13F tracker includes lesser known names we like, and well known names - including names we don’t like in terms of investment performance.

So don’t go replicate a hedge fund’s portfolio. Also, the 13F does not include short positions.

These are great for idea generation, spotting new trends, and detecting overcrowding.

Here is the 13F tracker, and sample insights we’ve extracted from studying this:

Highlights:

1. Most Popular Stocks:

   • NVDA, MSFT the most favored stock in the top positions

   • Retail investors meanwhile prefer Tesla. We think hedge funds are correct here.

2. Nvidia: 4 hedge funds reduced positions. Some HFs are selling into strength. China export controls are

3. In Semiconductors, NVDA, TSM, AMD, AMAT, major players in the semiconductor industry, is among the top holdings, held by 12 funds

4. No real sign of Tesla as a top position...

5. David Tepper capitulated in China (sold BABA and BIDU) and reduced semiconductors. Contrarian bullish?

6. Meanwhile, Druckenmiller, Michael Burry, and Tiger Global picked up BABA.

7. Michael Burry sold Expedia, a top position, and profited. He also picked up BIDU wich Tepper is selling.

8. GOOGL has the most reduced positions (5), but also the most 'New' Positions' (4). It's a 'high view dispersion view.'

(@LumidaWealth we believe Google is the best risk-adjusted return in Mag 7.)

9. TSLA, NFLX, not among top holdings among funds. These are crowded retail stocks in our view.

10. No sign of crowding in semiconductors and energy themes. But: AMD, INTC, and TSM getting some love.

11. Brevan Howard established a position in Disney. Other activitsts are investing in Disney.

Drop in your other takeaways here.

Also, research the tickers no one talks about.

Non-Consensus Investing

Take a look at this WSJ Article. It highlights several of the names leading the current rally.

Real estate, utilities, materials and financials are beating technology stocks handily.

On our 10/29 newsletter we wrote: “we have seen capitulation in sectors such as Utilities, REITs, and even Staples. Those first two are rate-sensitive. That’s why they capitulated first.”

Capitulation is when investors throw in the towel. They can’t take the pain of the drawdown. It’s usually accompanied by a spike in volume. When that happens, the sellers hand shares to stronger hands.

Energy is the weakest performer. We noted in October that energy will underperform when tech outperforms. Energy stocks are the new bonds. Energy is what you want to own in a risk-off.

We’re not surprised at all about the performance of Energy. We wrote in October about Energy: “

Now, these names have run-up quite a bit and it looks like the category may be going parabolic. We caution against chasing.

Focus on cheaper, old energy alternatives in the meanwhile and wait for a pullback.”

If we should be so lucky to see energy and nuclear renaissance names sell-off, we’ll want to buy them. And we’ll want to sell the tech names that we expect will rally strong and eventually get overbought.

We want to ebb and flow around our core positions taking advantage of tactical opportunities.

Markets

The Q4 rally we’ve been shouting about is here.

If you recall, we went underweight on the 1st week of August. Then we were ‘twiddling our thumbs' in August and September.

We started to deploy back into semiconductors at the onset of earnings season.

Then we spotted the capitulation in a wide variety of sectors at end of October - everything but tech.

Where are we now?

Our market compass shows: the 10-year is around 4.4%. Semiconductors are up. USD is weak.

And we have some terrific seasonality in store now thru the rest of the year. We continue to expect equities to rally and risk aversion to drop.

That said, this is the time during the rally where we are mostly watching our gains from buys in October and sitting back.

Markets are not excessively overbought, but they are maybe a week or two away from that.

That doesn’t mean sell - in a bull market, overbought markets stay overbought. You want to stay on the ride.

But, it means now is not the best time to deploy risk capital in broad-based strategies.

You want to be tactical here. In late October, everything was on sale.

Now, there are still stocks on sale, and we highlight several below.

We bought Ali Baba, Google, and other names. When stocks we like tank on the date we release earnings, those are great opportunities to buy.

Stay bullish, but be discerning on where you deploy the capital now.

Macro 

The Conference Board’s leading indicator is showing signs of bottoming.

If that’s the case, that’s quite bullish for risk assets.

Per Goldman, aggregate household balance sheets remain strong, with the net-worth-to-disposable personal income ratio remaining near its all-time high.

Initial claims are declining. It’s hard to get a recession without job losses folks.

The world’s most telegraphed recession has caused consumers and corporates to adjust behaviors.

We don’t see a recession in the near future.

Company Earnings

Overvalued Meme Stocks: Tesla, Snowflake, and Palantir

Tesla is a consensus retail favorite stock.

If tech stocks go up, as we expect, Tesla will follow.

But, we’re no fans of Tesla on account of the valuation and headwinds from rates.

Tesla’s main advantage is that it can capture retail margins. But higher financing costs hurts that

Take a look at this data… Why own Tesla when you can own so many other wonderful companies?

Relatedly, Snowflake (SNOW) and Palantir (PLTR) are highly overvalued.

The numbers are just bananas compared to their peer group - or any group.

Overvalued stocks can continue to get over-valued in a bull market.

But, in a thru cycle investment period, we believe they will underperform.

If you want SAAS Tech, why not own DataDog, Palo Alto Networks, Service Now instead?

Investing Tip

Earnings Season is putting great stocks on sale.

1) Google announced earnings and the stock dropped 8%.

That negative news event, and the volume climax, was a sign to buy the stock.

The stock has fully recovered, and is testing new highs.

2) Palo Alto Networks announced and it dropped ~8%.

Same story.

3) Baba dropped ~8% on earnings. It's recovering.

(On Monday, I issued a tweet suggesting BABA could be a buy over a 3-year timeframe. We can get into the why later)

4) Nvidia announced and it dropped 4%... What do you expect will happen next?

Taking the other side of investor over-reactions adds a couple points of performance.

You want to do the opposite of what the news might imply. For example, when Affirm is ringing the opening bell on the Nasdaq last week, that’s a sign of excessive enthusiasm.

No one is left to buy.

Stocks are the only product where people don't want to buy them when they are on sale.

This is also another source of value from professional wealth management.

People don't have the time to scoop up those names when they are temporarily on sale.

Sadly, most wealth managers don't actually take advantage of tactical opportunities.

That leaves performance on the table.

Nvidia vs. Apple

Nvidia’s revenue grew 206% YOY on ~80% profit margins. The stock is up 226%.

There is a clear link between fundamentals and stock price appreciation is driven by revenue.

Forward PE is ~30x.

Guess what Apple's forward PE is ~30x.

This highlights our critique of Apple. Apple has a great moat. It has an ecosystem. I upgrade my phone every cycle. However, the primary driver of a stock’s market cap is future earnings growth.

If Apple is growing earnings at less than 1% per year and experiencing revenue declines, why would you own Apple?

Note, Apple, along with a broad variety of stocks are all rallying this quarter. If you didn’t get off the Apple ship and want an opportunity, now is a good time 🙂

Markets will often give investors one shot to get off the train after a correction.

The stock is rallying on lower volume and is overbought.

Make sure you front-run Warren Buffett on this one.

Stock Market Black Friday Sale:

If you are a conservative value investor and want dividends, here are the stocks that are currently on sale in public markets.

I specifically filtered for those stocks that are down the most this year but have sound business models.

These stocks also pass the Buffett test of ‘Which of these will be here in 50 years?’.

The dividend yields are quite attractive and they are consumer staples - meaning they are exposed to less downside risk in a recession.

JNJ: Johnson & Johnson

HSY: Hershey's

ACI: Albertson's (owner of Safeway)

WBA: Walgreens

MBBY: Mercedes Benz

MAA: Mid America REIT

I do believe most investors should own both value & growth stocks.

Multi-decade empirical studies show that value stocks do outperform growth stocks.

When investors overpay for growth stocks, it shows up in future under-performance.

Each week, we select names that represent different sectors of the economy to build a mental model of what’s happening in the world.

What do we see below:

• Travel and Leisure is strong (TCOM crushes, DKS is solid)

• High-end consumer products in decline (Lowe’s, Best Buy)

• Ath Leisure is strong (Ambercrombie, LuluLemon)

• Big box retail department stores continue to disappoint (Macy’s, Kohl’s, Nordstrom).

Read below for more, Click to view the spreadsheet.

Digital Assets

We remain excited about opportunities in the Digital Assets space. We believe 2024 will be a strong up year for Bitcoin and Digital Assets more generally.

We believe we are in Phase II. Bitcoin is in contango in futures markets. We are in ‘buy the dip’ mode. And certain altcoins with viable models are going to do very well.

The easy money has been made from Phase 1: non-consensus positioning.

We are reluctant to call out specific names as we’re in full-on accumulation mode.

Hyper tactically, we believe we are near-term overbought (risk assets of all strips have had a great rally, and we’re grateful for that!)

It may take us a few weeks or months to fully get into the positions we like.

The issue is if we write about something here, the token gets bid up. Take a look at the Render token.

It’s up 100% since our September interview with Kyle Samani. And it’s up nearly 3X from our first mention in the Spring.

That said, we do believe there are good 2 to 3x moves ahead in 2023 for select assets.

Work with us: we are are looking for a client associate to help us with sales and client service support. Send referrals here.

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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