Many years ago I met a short only fund manager at a conference. He was a highly strung character, who constantly checked his phone. Someone asked what do you do when someone acquires a company you are short. It was a good question I thought - you would be surprised how often this happens, often by a company you are long off. His comment - which has stayed with me all these years - is that when this happens, it is “an axe to the forehead - an occupational hazard”.
Now I don’t believe in relative trading in a single industry, for exactly the reason above. I see industries as either thriving or dying. Which is why I think neo-clouds make very tough shorts. Why? Neo-clouds looks like potential axes to foreheads.
Amazon and Elon Musk have confirmed demand is strong. If we take Coreweave - their main customer is Microsoft. Now they could let Coreweave go bust and then come in and buy good assets at knockdown prices. But what happens if a competitor comes in early to bid. xAI is one. Private equity is another - especially if they can reissue debt at lower yields. For Microsoft, a cloud leader, would allowing competitors to build up capacity be wise? I think not. In fact, I thought we would come into markets today, with some resolution. Maybe the 12% interday swing is a sign.
I have said to pretty much anyone who asks me - I am neither bullish or bearish on equities. What I see is revenue growth offset by rising costs and rising interest rates/yields. Coreweave is an example. For the longest time - it seemed that rising yields had only temporary effect on asset markets. We did have the sell off in 2022. We have also seen various “yield led” blow-ups. Silicon Valley Bank blew up not on bad loans - but lack of deposits. And now we see NeoClouds blowing up - not on falling revenue (rental rates are up!) but on large unfunded capex plans. To avoid “an axe to the forehead” you want the whole industry to be in trouble - and I don't see it. Not yet anyway. The time to get mega bearish would be if Microsoft bonds were falling They have rallied this month.
Why are markets so tricky? The pro-labour trade makes you want to own cyclical assets over defensive assets - in complete reversal of what has been correct for the past 40 years. GLD/TLT is an expression of that. And this month, it has been an axe to the forehead in a way. Suddenly bonds have rallied, but gold has not done anything.
But the biggest axe to the forehead has been Brazil. A surprising good result for Bolsonaro in the first round saw Brazilian assets leap higher. But when Lula actually won, assets have fallen below where they were trading before the first round result. EWZ US - is a USD ETF for Brazil. Axe to forehead indeed.
But the axes have been flying this year. Remember when software companies were going to default, and you needed all your money in HALO stocks? That trade has roundtripped.
From what I hear, the whole active management community is struggling this month. And for good reason. US bonds were literally telling you the cycle would continue, before suddenly deciding actually its deflation again.
I have had plenty of axe to forehead moments in my career. Sometimes its because there is a market surprise, and everyone is positioned the same way, and they trip over themselves to liquidate. But sometimes its because something more fundamental has changed. My analysis, for what its worth, is that it is the first kind. I think calling an end to the AI trade, when Elon Musk and Amazon are saying demand is surging and pricing is improving is very risky. Just as it was it was risky to claim that Brazil was definitely moving right wing. Ultimately, everything I look at suggests we are still in a inflationary left wing move. Its just markets decided everyone needed an axe to the forehead.
