Kevin Duffy on investing during the Magnificent 7 bubble

We’re in a strange time because we’re in this Magnificent 7 bubble (witness the move in NVDA last week).  We’re also dealing with a lot of economic problems in the U.S. which are yet to be resolved, imo.  On top of that, retail investors are excited and margin debt is at precarious levels.  That tells me the opportunity set is likely to get a lot better sometime in the near future, i.e., I want to hold some cash and/or portfolio insurance so that I’m prepared (both financially and emotionally). 

At the same time, the opportunity set outside the Mag 7 bubble is exceptional.  This is typical of bubbles: they create anti-bubbles.  Stocks in China, Asia and emerging markets are a great example.  As bullish as retail investors are in the U.S., they’re just as bearish in China.  It’s practically a mirror image.  So I think it’s time to get aggressive in those areas.  I’d also add gold mining stocks (cheap!), energy/commodity stocks and a lot of small cap stocks in the U.S.  That’s the balancing act we’re trying to pull off as investors. 

On the one hand, investing is easy: just look for the best businesses at the best prices.  Don’t try to time the market, don’t hold too much cash.  Sell stocks when the crowd falls in love with them.  On the other hand, it’s a bit like 3-D chess.  Keep one eye on the retail investor.  If he’s all-in and excited, don’t be surprised if he gets disappointed at some point and panics.  Likewise, keep another eye on the economic picture.  That might be the catalyst that scares the retail investor.

~ Kevin Duffy, "Mailbag," The Coffee Can Portfolio, April 15, 2024

Larry McDonald on the AI capital spending binge

Yesterday, we had an interesting chat where, it was a private conversation with a guy in the Valley [Silicon Valley] that is really good friends with all of the CFOs of the Mag 7.  He's been out to dinner with them hundreds of times, he's been in the Valley for over 30 years and he's run hedge fund money...  And we had another guy who's been trading semiconductors for 20 years professionally and they were having this conversation around artificial intelligence.  And the one thing they both said... it's like the Manhattan Project where if you're a CFO in the Valley and you're not doubling or tripling your capex the last year and a half in artificial intelligence, you're fired.  They're so terrified to be, two years from now, left on the outside.  So what's fascinating is... the capex has gone from like $30 billion a year to $160 billion a year with no visibility...  There's zero visibility on return on capital.  So this is capital expenditures just being deployed at a sick, aggressive, insane pace.  He called it a "Reagan-Gorbachev arms race" where the CFOs have a gun to their head.  They have to invest...  It's created these distortions where Wall Street analysts are falling all over themselves to upgrade Nvidia, but this capex trajectory is just not sustainable.  And the market's starting to figure it out now.

~ Larry McDonald, "Buy What Wall Street Hates," Stansberry Investor Hour, 26:40 mark, July 29, 2024