It is looking increasingly likely that the AI bubble has a hole in it.

The SOXX Semiconductor ETF is down over 20% in the past month, and individual companies like Micron (MU) are down 30% or more.

And the decline looks to be accelerating, with many AI-related companies posting double digit losses in just the past week.

Meanwhile, sectors with tangible earnings, such as the financial sector and the software sector have started to catch the attention they deserve.

All of this is in line with our broader thesis which we have covered since June, and our book remains well positioned to take advantage of a broader decline in equities.

As of this writing, PCCM is up 5% since our inception on June 23rd, with only 60% of total capital deployed.

This healthy cash position reflects our view that there is potentially more volatility ahead, which should present ample opportunities to deploy our remaining capital at attractive prices.

If you would like to keep up with our trades and portfolio positions in real time, consider becoming a paid subscriber.

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks were down this week, driven by a rotation out of AI-adjacent stocks and into more profitable sectors. The S&P 500 fell 1.55% while the tech-heavy Nasdaq sank by 2.90%. The Dow’s drop was a bit more modest at 0.93%.

High flying semiconductor stocks like Micron (MU) were down as much as 20% for the week. Meanwhile, the big banks that drive the financial sector posted earnings beats across the board:

There are two major forces that drive bank earnings: interest rates and volatility.

The primary way banks make money is by taking in deposits at low interest rates (like a savings account) and lending out money at higher interest rates (like a mortgage). If a bank can pay 1% on $1M and lend that same $1M out at 7%, they keep the 6% spread. This spread is referred to as Net Interest Margin or NIM for short.

When interest rates go up, banks are able to lend at higher and higher rates, while maintaining control over the rates they pay on savings, leading to an increase in overall profits. Given that interest rates have been on the rise, it is no surprise that banks are posting record numbers.

Another way banks make money is through their proprietary trading operations. These are often limited to the largest investment banks; I think of Morgan Stanley or Goldman Sachs. These banks have specialized teams that develop trading strategies to profit from minute-to-minute moves in stocks.

These divisions tend to make more money when there is more volatility in the market. And 2026 has no shortage of volatility, be it from AI jitters or conflict in the Middle East.

Fixed Income

Interest rates were flat last week, with the 10-Year Treasury Yield at 4.55% compared to 4.56% a week ago.

Interest rates remain elevated in line with elevated tensions between the US and Iran, which we warned readers would be a key risk when interest rates and oil initially fell on the announcement of a “deal.”

As of this writing, the two countries continue to trade tit-for-tat strikes, resulting in the loss of at least two American troops this weekend, with one other missing.

This has driven a sharp increase in oil prices which in turn increases inflation expectations and interest rates. With respect to the Iran War, our thesis is that the United States has backed itself into a lose-lose situation. There is no diplomatic offramp—the only way out is through. Our base case is that the US resumes its blockade of the Strait, recommitting to attrition as a means to force Iran’s hand.

We are of the view that rates and inflation will be higher for longer, leading to restrictive monetary policy, meaning that the Fed would rather raise interest rates than lower them. We continue to believe being overweight fixed income at short durations is prudent in the current environment.

Commodities

Crude Oil rose to the $80/barrel range, up 10% from the low $70s last week. This jump is directly attributed to a re-escalation between the US and Iran over the past week as the two countries wrestle for control over the Strait of Hormuz.

This is in-line with our thesis which we have outlined over the past four weeks:

June 14th: Crude at $77

At current levels, we believe oil futures are attractively priced for a sharp potential rebound. Should negotiations fail or drag on, or a deal result in large concessions to Iran, or heavy fighting restart altogether, oil prices could jump sharply.

June 21st: Crude at $76

we continue to believe oil futures are attractively priced for a sharp potential rebound…Additionally, we believe the $65-$70 per barrel range is an effective floor for the foreseeable future, as countries will need to replenish their strategic reserves.

June 28th: Crude at $70

…we believe that the market is underpricing the risk of a re-escalation of the Iran War. Despite renewed tit for tat strikes over the past week, oil has continued its decline. Our stance as of this writing is that it is more likely than not that we will see a breakdown in negotiations between the US and Iran.

July 5th: Crude at $68

We have stated previously that the $65-$70 price range is a key level for two reasons:

1. We believe that the market is underpricing the risk of a re-escalation of the Iran War. A flare up in tenstions or an all-out resumption of conflict could send oil back to $100+ per barrel overnight.

2. Global strategic reserves remain depleted and at historically lo levels. Countries will need to replenish their reserves and will buy oil at any price, putting an effective floor on the market for the next 2-5 years. We estimate this floor to be in the $65-$70 range.

Barring an improbable breakthrough in diplomacy, we believe that the situation in Iran will only get worse before it gets better for the US and her citizens. In our view, it is more likely than not that this conflict will continue to escalate. As midterm elections approach in November, the Trump Administration may become increasingly frustrated with a lack of progress on oil prices and inflation, resulting in rash decision making.

While PCCM does not currently hold a position in oil, we remain bullish with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel.

Gold and Silver fell 2.96% and 6.61%, respectively, while Copper increased 0.96%. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. Our view remains unchanged: we believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

Bitcoin continued to tread water this week, trading up to just over $64,000 per coin. The cryptocurrency is currently down 45% this year as investors look to other investible assets.

The cryptocurrency scene has been relatively quiet over the last week, but we remain bearish long-term on Bitcoin and crypto-adjacent companies such as Strategy (MSTR).

Note: Pine Creek Capital does not currently hold a position in MSTR, STRC, or BTC, and our long-term intrinsic value estimate of Bitcoin is $0.

Earnings & Data

This week will be a huge week for earnings across sectors:

Earnings

• Monday, July 20: Domino’s reports before the open (consensus $4.16 EPS on $1.18B revenue), with Steel Dynamics, W.R. Berkley, and Zions after the close. Steel Dynamics is the read on steel pricing and volumes.

• Tuesday, July 21: General Motors reports before the open ($3.13 EPS on roughly $46B), with tariff costs the main question after April’s guide of $2.5B to $3.5B for the year. Northrop Grumman, 3M, Danaher, Halliburton, Novartis, D.R. Horton, Schwab, and Synchrony also report early; Capital One and Chubb follow after the close.

• Wednesday, July 22: Alphabet and Tesla both report after the close. Alphabet consensus sits near $2.88 EPS on $117B revenue, up about 21% from a year ago, with cloud growth and capital spending plans the swing factors. Tesla consensus is $0.47 EPS on $24.7B, and since Q2 deliveries of 480,126 units already beat badly, the report hinges on automotive margins and the robotaxi rollout.

• Wednesday, July 22 (continued): IBM and ServiceNow also report after the close. IBM pre-released weak numbers on July 14 and fell 25.2% in a single session, its worst day on record, so this release is about guidance and whether software budgets are genuinely shifting toward AI hardware. AT&T, Philip Morris, Texas Instruments, CSX, and GE Vernova report earlier in the day.

• Thursday, July 23: Intel reports after the close, with Q2 revenue guided to $13.8B to $14.8B and the 18A foundry ramp under the microscope. Honeywell, Lockheed Martin, RTX, Union Pacific, T-Mobile, Blackstone, Comcast, and Thermo Fisher all report before the open. Union Pacific carries the added weight of the pending Norfolk Southern merger.

• Friday, July 24: Verizon and American Express report before the open, alongside HCA, NextEra, Charter, and Schlumberger. Amex spending and credit trends are the consumer read of the week.

Economic Data

• Monday: Leading Economic Index for June at 10:00 a.m. ET, after a 0.1% gain the prior month.

• Thursday: Initial jobless claims at 8:30 a.m. ET. The prior week came in at 208,000, a 10-week low against a 217,000 forecast, with continuing claims at 1.805 million.

• Friday: S&P Global flash PMIs for July at 9:45 a.m. ET (June: manufacturing 55.7, services 51.3, composite 52.2), followed by June new home sales at 10:00 a.m. ET. May sales dropped 7.3% to a 580,000 annual rate, so a modest rebound is the base case.

That’s all we had for you this week, let us know your thoughts by leaving a comment! You can also like this article via Substack to show your support.

Leave a comment

Last week, we talked about the pivot away from Semiconductors and towards Software, counter to the mainstream narrative that AI will decmiate Software companies. As well, we briefly discussed tensions flaring between Iran and the US, which was breaking news at the time.

This week, we will cover what is driving stocks (hint: it’s not just Semis nor Software) as well as an update on the latest in Iran and how this ties to our thesis on oil and broader markets.

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks had a pretty good week this week with most of the gains skewed towards tech. The tech-heavy Nasdaq Composite rose 1.74% while the S&P 500 rose 1.23% and the Dow Jones Industrial Average actually fell half a percent.

The big theme in the market this week was neither Semiconductors nor Software, but a third, better option: Computer Hardware.

These companies sit in between Semiconductor companies and Software companies, turning computer parts into finished products. Names like Dell and HP come to mind. Computer Hardware found itself in the limelight this week after President Donald Trump endorsed Dell from the White House during the stock market’s opening bell on July 6th.

Dell’s stock rose 7% after Trump told America to “go out and buy a Dell computer,” kicking off a weeklong rally in the entire Computer Hardware space with many stocks seeing double digit gains in their share price.

While Semiconductor companies like and certainly rallied, the broader sector was muted throughout the week with the popular ETF up a more modest 2.65%.

As investors swooned over tech stocks, a storm in the Middle East began brewing in the background, the effects of which showed through via interest rates.

Fixed Income

Interest rates continued higher last week, with the 10-Year Treasury Yield up to 4.56% compared to 4.49% a week ago, continuing a sharp upward trend after a brief dip in June.

This recent move upwards comes on the heels of renewed conflict between the US and Iran over the Strait of Hormuz.

From July 7th through July 11th, the US conducted three rounds of strikes against Iran as retaliation for the country’s strikes on ships transiting the Strait of Hormuz. By Friday, Donald Trump declared in frustration that the ceasefire between Iran and the US is over, though it was unclear whether that was his personal interpretation or our country’s official stance.

Nevertheless, talks between the two countries are set to continue, though it is unclear to what end. As of this writing, there are reports that the US continues to strike the opposing country up and down its coast, and Iran’s Islamic Revolutionary Guard Corps (IRGC) has declared the Strait is closed to transit.

What does this have to do with interest rates?

For starters, conflict in the Middle East, and especially over the Strait of Hormuz, drives up oil prices which in turn drives inflation. When inflation rises, the Federal Reserve responds by raising interest rates. So when investors anticipate that inflation will be higher, they tend to price in higher interest rates as well.

Fed Chair Kevin Warsh has also made clear in recent weeks that the Fed will respond strongly to elevated levels of inflation, leaving little room for a “wait and see approach” favored by his predecessor Jerome Powell.

It is no wonder rates are elevated.

We are of the view that rates will be higher for longer, and monetary policy will be restrictive, meaning that the Fed would rather raise interest rates than lower them. We continue to believe being overweight fixed income and underweight duration is prudent in the current environment.

Commodities

Bitcoin continued to tread water this week, trading up to just over $64,000 per coin. The cryptocurrency is currently down 45% this year as investors look to other investible assets.

We have written at length about Strategy (Ticker: ) and their dividend-paying preferred shares traded under , including our view that the company is destined for a “death spiral” as soon as Q3 of this year, which would be sometime in the next three months.

Whether or not it plays out this quarter depends heavily on whether Bitcoin can sustain or even gain in price from these levels. Nevertheless, we see no other way out for MSTR and may consider entering a short position on any near-term strength in the stock.

Note: Pine Creek Capital does not currently hold a position in MSTR, STRC, or BTC, and our long-term intrinsic value estimate of Bitcoin is $0.

Crude Oil had a strong week, rising to nearly $76/barrel before moderating to just over $71. This volatility is directly tied to volatility in the war between the US and Iran. As tensions excalate, so too does the price of oil, and vice versa.

Last week, we discussed why we believe $65-$70 price range is a key level with potential upside to $100+ per barrel in the event that the war resumes in earnest. While we were looking at opening a position for PCCM’s fund, we feel that at this time, this asset does not meet our risk-return target.

Nevertheless, our view has not changed. We continue to believe $65-$70 is an effective floor for oil, and that there is much more risk to the upside than to the downside, with the potential for a quick spike to $100. PCCM currently does not hold a position.

Gold and Copper increased 0.37% and 1.62%, respectively, while Silver fell 0.51%. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. Our view remains unchanged: we believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

Earnings & Data

This week will be a big week for earnings, with a heavy tilt towards Banking stocks as well as a few Technology Leaders:

That’s all we had for you this week, let us know your thoughts by leaving a comment! You can also like this article via Substack to show your support.

Leave a comment

This week, the United States of America turned 250 years old, and we hope you had a safe and fun time celebrating!

It was a short week for markets, with trading closed on Friday, but that didn’t stop stocks from having a strong week in the green (more on that below).

This also marks the halfway mark for the year, with stocks already up double digits. One can only wonder what the second half will look like…

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks had a great week going into the holiday, with the S&P 500 up 1.76%, coincidentally close to 1776…The Nasdaq and Dow Jones Industrial Average were slightly less “patriotic” on the other hand, gaining 2.12% and 1.97%, respectively.

The big theme in the market this week was a rotation out of semiconductors and into software, a trade that we at Pine Creek are well positioned for. Over the last week, , a popular Semiconductor ETF, fell over 8% while , a popular Software ETF, gained nearly 5%.

What is the semiconductor vs. software trade, and why is it reversing?

Throughout the year, semicondutor have rocketed to new highs as there is a continued shortage of computing chips to power AI workloads across all industries. From GPUs to CPUs to DRAM, there is simply not enough computing power, generally referred to as “compute,” to satisfy demand. When demand outstrips supply, prices go up, and when prices for chips go up, so to do the revenues of chipmakers.

Take Micron () for instance, their stock is up 209% YTD and over 700% compared to a year ago. Here is what Micron management said about supply and demand for chips in their latest earnings call:

So if we look at this multiyear time horizon, even going beyond 2027 into 2028, et cetera, we are able to get very high confidence demand from our customers that is far in excess of our ability to support using our supply.

So the demand continues to be well above our supply…

…but our expectation is that the supply growth will continue to remain short of what is needed to meet the demand. We don't really see when the supply is going to be able to meet demand. That is not something we are able to project at this time.

On the other side of the trade are software stocks, which have languished compared to their semiconductor peers. Over the past year, is up 137% while is down over 15%. And the logic is simple: with the release of AI coding tools like Claude Code and Codex by OpenAI, why would anyone invest in a software company that someone with a $200/mo Claude subscription could recreate in a weekend?

Well the market seems to be coming around to the idea that:

1. One cannot, in fact, rebuild a multibillion dollar software company with the help of a large language model

2. These multibillion dollar software companies also have access to this same technological advantage, negating any kind of “head start” from competitors

3. There is no evidence of a widespread “replacement” of major software companies and their products

Why is this happening now? One can only speculate. Our belief is that the rally in AI-related chips and semicondutor stocks is overdone. These stocks are priced to perfection, and investors are now starting to look elsewhere for companies priced more reasonably compared to their fundamentals. And by any investor’s criteria, software stocks look like an obvious buy.

Fixed Income

Interest rates spiked last week, with the 10-Year Treasury Yield back to 4.49% compared to 4.36% a week ago, bucking a recent downtrend that started in mid-May.

Interest rates tend to follow expectations of growth and inflation, and this week was no exception. While there was no new inflation data released, Kevin Warsh, Chairman of the Federal Reserve, spoke at the European Central Bank’s annual policy forum in Sintra, Portugal. During the speech, Warsh stated that “prices are too high.” This signaled to the market that the Fed has high expectations for inflation, to which the bank would respond with higher rates.

Below is a visual representation of how interest rates have changed so far this year:

Over the first half of the year, interest rates have generally increased across the curve, reflecting the markets expectations that rates will remain higher for longer.

We reiterate our view that overweight fixed income and underweight duration is prudent in the current environment.

Commodities

Bitcoin regained some of its footing this week, trading up to ~$63,000 per coin. The cryptocurrency has continued to fade throughout the year as investors question its viability as either a currency or an investment asset.

Last week, we covered Strategy with a focus on their preferred shares. Our view is that Strategy is effectively caught in a death spiral through its extensive bitcoin-backed financing. This week however, the company lives to see another day.

Strategy Preferred Shares () traded higher after the company announced a board approved US Dollar reserve that is meant to cover at least 12 months of its preferred share dividend. This is good news for holders of preferred shares (at least for the next 12 months), but we should note that this only validates our thesis.

As stated in a prior newsletter:

At some point (soon it seems?), Strategy’s hands are tied and they can’t buy more Bitcoin, but they have to keep servicing their dividends and debt payments.

In order to service those payments, they’ll need to sell Bitcoin to raise cash instead of raising debt or selling shares. As Strategy sells Bitcoin, the price falls, kicking off a downward spiral. Every time Bitcoin falls in price, Strategy will need to sell more Bitcoin to get the same dollar value as before.

The reality is that Strategy cannot raise funds to cover its preferred share dividend, and must therefore sell Bitcoin to raise money to pay dividends. This can only end one of two ways: either Strategy halts its dividend completely, or it continues selling Bitcoin to raise dollars to pay the dividend on $STRC. Strategy’s hope is that Bitcoin somehow rallies in the meantime to essentially save the company. While this is not impossible, we are not holding our breath.

Note: Pine Creek Capital does not currently hold a position in MSTR, STRC, or BTC, and our long-term intrinsic value estimate of Bitcoin is $0.

Crude has started consolidating around our key level and currently trades at ~$68 per barrel. While there is no material news related to negotiations between the U.S. and Iran or shipping traffic through the Strait of Hormuz, oil prices (for now) have found support at around $67 per barrel.

We have stated previously that the $65-$70 price range is a key level for two reasons:

1. We believe that the market is underpricing the risk of a re-escalation of the Iran War. A flare up in tenstions or an all-out resumption of conflict could send oil back to $100+ per barrel overnight.

2. Global strategic reserves remain depleted and at historically lo levels. Countries will need to replenish their reserves and will buy oil at any price, putting an effective floor on the market for the next 2-5 years. We estimate this floor to be in the $65-$70 range.

Based on this logic, we are looking closely at opening a small position on crude oil for Pine Creek’s portfolio somewhere in the $65-$70 range, which we have previously stated could be an effective floor over the near term. Additionally, the asymmetric return profile of ~$100+ to the upside and ~$50-60 to the downside is attractive. If you are interested in following our trades in real-time, consider becoming a Paid Subscriber.

Gold and Silver increased 0.72% and 2.33%, respectively, while Copper fell 0.64%. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. Our view remains unchanged: we believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

Earnings & Data

On Wednesday, we will get a copy of the meeting minutes from the latest FOMC meeting. These minutes give markets an inside look at what was discussed among leaders of the Federal Reserve Banks. Investors will be parsing these notes carefully for any signs as to the likelihood of future interest rate cuts.

This will be a quiet week for earnings. No companies (!) are reporting earnings on Monday, and a smattering of consumer stocks will report throughout the week, such as Levi’s () and Delta Air Lines ().

That’s all we had for you this week, let us know your thoughts by leaving a comment! You can also like this article via Substack to show your support.

Leave a comment

This month, Pine Creek Capital was busily deploying capital into high quality value stocks that we believe the market is currently undervaluing.

In total, we invested in 12 new positions:

• 2 in Communication Services

• 5 in Consumer Discretionary

• 2 in Financials

• 1 in Healthcare

• 2 in Information Technology

Combined, these holdings have a P/E Ratio of ~18.4x compared to ~32.0x for the S&P 500.

That means we are paying over 40% LESS per $1 of earnings compared to the broader market.

And despite paying a 40% discount, our selection of stocks is forecasted to grow Revenues by 10% on average next year while EPS is expected to rise 17.4%.

It’s no wonder the average analyst is forecasting a 45.5%(!!) increase in their stock price over the next 12 months.

Next, we’ll walk you through each holding, and an overview on how we size our positions.

And who knows? You might find something you’ll want to add to your own portfolio.

Here is the full portfolio at a glance:

Read more

This week was chock full of milestones.

First, we officially launched the PCCM fund with live trade updates and daily market commentary for paid subscribers.

Below is a preview of a few of the trades made last week. As a reminder, paid subscribers get full access to live trades, portfolio positions, investment deep dives, and live Q&A sessions.

Second, we hit 4,000 subscribers on YouTube! Huge thank you to everyone that has supported the channel which has in turn led to this newsletter. Much more to come on that front!

Today also marks two weeks since the launch of this Substack and chat, and we are proud of the growth we are seeing across Free and Paid subscribers. If you have any suggestions for the newsletter, please let us know by replying to this email!

Enough about milestones…let’s talk markets!

-Brian

By the Numbers

Equities

Stocks reversed direction this week, with the S&P 500 down 1.95%, and the tech-heavy Nasdaq down a whopping 4.60%. The Dow Jones Industrial Average by comparison was up a modest 0.60%.

The downturn was primarily driven by a selloff in AI-related growth stocks. The MAG7 (Ticker: MAGS) was down 5.87% for the week and the Semiconductor sector (Ticker: SOXX) was down 7.74%. Oracle, once a darling of the AI data center buildout, fell 19% this week, marking its worst weekly selloff since the 2001 Dot Com Crash.

In focus for Oracle is a $300B agreement the company signed with OpenAI, where the chatbot provider agreed to purchase $60B in computing power from Oracle over a span of five years. This agreement is set to kick in starting in 2027, six months from now. The clock is ticking, and investors are starting to worry that time could run out for the companies at the center of the AI circular financing trade.

This adds to a broader investment trend we have documented throughout the year of a rotation from risk-on to risk-off assets. With respect to equities, this is evident in the YTD performance of Growth vs. Value indexes.

Through the middle of the year, Value stocks are outperforming Growth stocks by nearly 13%. This may come as a surprise, as the media is packed sun up to sun down with coverage of high growth companies. While Growth staged something of a comeback from April through May, the trend has resumed in earnest.

With respect to equity exposure, our position at Pine Creek Capital is that growth stocks (and much of the rest of the market) are priced to perfection. This means that even the slightest deviation from the most optimistic of forecasts could lead to languishing asset values. We believe the opportunity for today’s equity investor lies in value stocks; companies with stable and growing cash flows that have been sold off below their intrinsic value.

Fixed Income

Interest rates dropped last week, with the 10-Year Treasury Yield at 4.38% compared to 4.46% a week ago. This continues a broader down-trend from the peak of 4.66% just over a month ago.

This trend is primarily driven by medium-term expectations for inflation and growth. While inflation has kicked higher over the last few months, the latest readings have not surpassed the expectations of forecasting experts. For now, this has assuaged fears of another inflation supercycle on par with what the US experienced from 2022 to 2023.

Additionally, expectations of the Fed Funds Rate through the end of the year have moderated slightly. The odds of four hikes are now under 1% from a high of nearly 4%, and the market now prices one interest rate hike through the end of this year as the most likely scenario.

This led to a modest increase in short term interest rates, with the 3-Month T-Bill increasing 4 basis points from 3.71% to 3.75%. Additionally, options markets are now pricing in an 89.6% chance of at least one interest rate hike by December 2026, with a notable 2% chance of four interest rate hikes by the end of the year. Currently, there is a 0% chance of any rate cuts before 2027.

We reiterate our view that overweight fixed income and underweight duration is prudent in the current environment.

Commodities

Bitcoin continues to sell off, with the speculative asset now under $60,000 per coin. The cryptocurrency has continued to fade throughout the year as investors question its viability as either a currency or an investment asset.

There were two major events this week worth noting related to Bitcoin. The first is that the Strategy Saga continues to unfold in-line with our analysis in last week’s newsletter. Here is an excerpt of that analysis:

At some point (soon it seems?), Strategy’s hands are tied and they can’t buy more Bitcoin, but they have to keep servicing their dividends and debt payments.

In order to service those payments, they’ll need to sell Bitcoin to raise cash instead of raising debt or selling shares. As Strategy sells Bitcoin, the price falls, kicking off a downward spiral. Every time Bitcoin falls in price, Strategy will need to sell more Bitcoin to get the same dollar value as before.

Over the last week, Strategy’s Preferred Shares (Ticker STRC), which were the subject of our analysis, have continued to break down, reaching a new all-time low of $71.25. For an instrument that is designed to behave more like a bond than a stock, this is a “mark of death” for a company such as Strategy.

We believe that a restructuring for Strategy’s capital stack is imminent, and could be seen as soon as Q3 2026, which could result in a total loss for holders of MSTR and Strategy’s other equity-like instruments such as STRC. The only way out for the company is for fresh capital. This is likely impossible, as Strategy is now competing with the likes of SpaceX, OpenAI, Anthropic, Google, Nvidia, as these mega cap companies rush to market with new stock and bond offerings.

In this restructuring, Strategy’s assets will essentially be held in escrow during negotiations with banks and lenders, which could paradoxically lead to a supply shortage in available Bitcoin, which could in turn lead to a short-term technical pop. This is speculation, however, and such a pop will only benefit technical traders.

Coming out of the restructuring, all Strategy equity will likely be converted to equity in a new entity, potentially at a 90%+ discount to pre-restructuring equity value. Though 90% feels optimistic.

While it is tempting to attempt to bet against Strategy, the downside risk is too great at the moment. Pine Creek Capital does not currently hold a position in MSTR, STRC, or BTC, and our long-term intrinsic value estimate of Bitcoin is $0.

Crude Oil continued its decline, dropping 5.81% to settle at $71.44 per barrel. The continued decline reflects an expectation of increased market supply of oil as the US has lifted sanctions on Iran, allowing the country to sell its oil on the open market through August of this year.

As discussed over the past few weeks, we believe that the market is underpricing the risk of a re-escalation of the Iran War. Despite renewed tit for tat strikes over the past week, oil has continued its decline. Our stance as of this writing is that it is more likely than not that we will see a breakdown in negotiations between the US and Iran. We believe there is material risk that the US could strike Iran’s oil facilities on Kharg Island without warning in an act of frustration.

Based on this belief, we are looking closely at opening a small position on crude oil for Pine Creek’s portfolio somewhere in the $65-$70 range, which we have previously stated could be an effective floor over the near term. Additionally, the asymmetric return profile of ~$100+ to the upside and ~$50-60 to the downside is attractive. If you are interested in following our trades in real-time, consider becoming a Paid Subscriber.

Gold, Silver and Copper declined 4.67%, 12.95% and 4.81%, respectively. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. Our view remains unchanged: we believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

Earnings & Data

On Tuesday, we will get updated JOLTS Job Openings data, and on Thursday we will get a slew of employment data across Unemployment, Non-Farm Payrolls, Hourly Earnings, and Initial Jobless Claims. This is pivotal data that will help guide the Warsh Fed in determining whether and by how much to increase interest rates. Positive jobs data would bolster the case for higher rates, while negative jobs data could indicate the economy is not in a position to handle higher rates.

On Tuesday, Nike (Ticker: NKE) will report earnings after the close. Wall Street estimates earnings to be $0.11 per share vs. $0.14 per share a year ago. Nike is currently on our watchlist as a potential value stock to add to our portfolio.

That’s all we had for you this week, let us know your thoughts by leaving a comment! You can also like this article via Substack to show your support.

Leave a comment

This means that for every $100 invested in the S&P 500, investors would expect to see $4.66 in profits associated with their investments. This represents a 4.66% Earnings Yield. However, Earnings Yield is not the return the investor will realize.

While the companies in the S&P 500 are expected to earn that $4.66 per $100 invested, they will, for the most part, not return that capital to shareholders outright. Though some profits will be used for dividends or share buybacks, the majority of those profits will be held for future opportunities to reinvest in the business.

This will continue year after year until the investor eventually decides to sell their investment, at which point the return realized will be whatever the new market price of the S&P 500 is at that point in time. What will this return be? While the future is uncertain, there is much historical data to analyze the relationship between estimates of future earnings and subsequent 10-year returns.

Below is a scatterplot that has recently circulated the web, showing a clear relationship between the S&P 500 forward P/E ratio and subsequent 10-year returns:

On the left side of the chart, we see that forward P/E multiples of ~10x correspond to a ~19% annualized total return for the next 10 years. This relationship continues fairly linearly down and to the right, reaching 0% annualized 10-year returns at multiples of ~21x and higher. The gray vertical bar illustrates where the S&P 500 trades today.

Put bluntly, this is depressing. Based on historical data, investors in the S&P 500 today cannot reasonably expect much more than 0% return on their investment for the next 10 years. This seems almost too extreme to believe, so we decided to run the numbers ourselves to see if we can replicate these findings.

What we found has profound implications for today’s investor, which we will discuss below.

This research note is part of Pine Creek Capital Management’s paid research library, but we are making it available for free to all readers. Free subscribers also get access to our weekly market updates, and occassional paid posts.

Subscribe now

Part 1: Mapping the Relationship

The above chart has gone viral on social media and within investing circles, often without proper citation. While the results seem intuitive, i.e. higher valuations lead to lower long-term returns and vice versa, we at Pine Creek prefer to work from primary sources. If the source cannot be found, we find the data ourselves and create the primary source, allowing us to provide our readers and investors with proprietary insights and analysis not found elsewhere.

1.1 Trailing 12-Month P/E Multiples

First, we looked at historical trailing 12-month earnings data for the S&P 500 compared to future 10-year returns for the index. We started with trailing earnings as data is readily available spanning ~100 years, from 1926 to 2026. Below is that chart:

Here we see that the relationship is directionally similar but less strong. The linear relationship diverges, revealing low 10-year return outcomes between 10x and 20x P/E, with an interesting gap of 7%+ returns from 20x to 26x P/E, followed by low returns at 26x and up with a smattering of modestly high returns.

However, before we read into this chart too much, there is one key problem. This looks at the relationship between trailing 12-month earnings and future 10-year returns. This compares a backwards looking metric with a forward-looking one. Additionally, today’s investor is not investing on the basis of what companies earned just in the last year, but also how much they expect companies will earn over the next year (or longer!).

1.2 Forward 12-Month P/E Multiples

So let us put a pin in that chart and look now at forward 12-month earnings estimates:

Here we see the relationship is much stronger, with one important caveat. Forward earnings estimates are notoriously difficult to source without a license to specific institutional databases, which Pine Creek does not yet have access to. Above is data sourced from Capital IQ, which goes back to 1999. While this is still nearly 200 observations on a monthly basis, we would prefer to have data going back much further. That will have to wait for another time.

Nevertheless, the relationship is clear: at forward P/E multiples of 18x and higher, investors in the S&P 500 have realized 10-year annualized returns of less than 5%. At today’s level of 21.44x forward earnings, investors can reasonably expect to earn between 0% and 5% per year, inclusive of dividends, for the next 10 years. The higher the valuation, the lower the return.

Part 2: Implications for Investors

We have now independently validated the finding that there is a linear negative relationship between the S&P 500’s price to forward 12-month earnings ratio (NTM P/E) and subsequent 10-year total return. At valuations of 18x and higher, expected annualized 10-year returns are between negative 2-3% and positive 5%. Today, the S&P 500 sits at 21.44x NTM P/E, implying an expected return of 3.9% per year for the next 10-years.

The next question becomes: how should investors position themselves in light of this?

2.1 Stock Allocations

Today’s investors are divided into two camps: bulls who enthusiastically point to prior performance as evidence that stocks “always go up,” sometimes advocating for a 100% stock portfolio, and skeptics who point to historically high equity valuations as reason to reduce exposure to stocks or even short equities outright.

However, our position sits somewhere in the middle. While it is true that there is a negative relationship between forward valuation and expected returns, it is important to note that the 10 year return is almost never negative.

Additionally, while the relationship is clear, it is still a historical relationship. There is no guarantee that this relationship must hold in the future. Yet the data strongly suggests this to be the case.

Therefore, we believe today’s investor should decrease exposure to US equities while still maintaining a modest exposure. The Pine Creek Capital Model Portfolio aims to hold between 60% and 70% total equity exposure.

2.2 Bond Allocations

In contrast to equities, today’s investors hold bonds in low regard. Currently, yields on 10-Year US Treasury Bonds are ~4.5%, much lower than the long-term annualized return on US Stocks of over 7%. However, this return is a 100 year average, which is decades longer than the average lifespan in the US, and double the typical investing horizon of 40 to 50 years. While it would be admirable, and in some views “optimal,” to hold a portfolio allocation for one’s entire life, it is virtually impossible in practice.

Additionally, the data available today gives every reason to believe that stock returns over the next 10 years will be approximately 3.9%. With that return comes all the volatility that comes with stocks. On the other hand, US Treasuries of a similar maturity offer a higher return of 4.5% that is all but guaranteed for today’s investor.

Therefore, we believe today’s investor should increase exposure to fixed income. The Pine Creek Capital Model Portfolio aims to hold between 30% and 40% total bond exposure.

2.3 Expectations of a 60/40 Portfolio

We have effectively argued that today’s investor should hold a 60/40 portfolio, to which many of today’s investors may find to be a letdown. After all, the 60/40 portfolio is dead. Stocks and bonds are too correlated, and bonds have underperformed in recent years. Yet our research shows a much different story, summarized by the chart below:

This chart answers a simple question: “How does a 60/40 portfolio compare to an all stock portfolio when the S&P 500 trades at 18x NTM P/E or higher?” In other words, sure the S&P 500 may have low future expected returns, but are bonds really the answer?

Yes, and we have divided the results into three categories: 18-20x, 20-23x, and 23-28x NTM P/E. There were five periods where the S&P 500 traded between 18-20x forward earnings. For the 10 years following these periods, an all-stock portfolio beat the 60/40 portfolio four out of five times.

Contrast this with the 31 periods in which the S&P 500 traded between 20-28x (combining the latter two categories). For the 10 years following these periods, investors in a 60/40 portfolio outperformed all stock portfolios 100% of the time. At 23-28x earnings, all stock portfolios had a negative median return, compared to the 60/40 portfolio at just above 2% per year.

Part 3: Conclusion

In this research note, we have reviewed the S&P 500’s current valuation and expected future returns over the next 10 years in the context of historical data going back to 1999. We have independently validated the finding that there is a negative linear relationship between NTM P/E of the S&P 500 and forward 10-year total returns. At today’s valuation of 21.44x, the expected 10-year return for the S&P 500 is 3.9%.

We then compared this return profile with 10-Year US Treasury Bonds which currently offer approximately 4.5%, advocating for a portfolio allocation between 60/40 and 70/30 stocks to bonds. This allocation is strongly supported by the available data, which shows that a 60/40 portfolio historically outperformed an all-stock portfolio for 100% of the 10 year periods following a valuation of 20x NTM P/E or more.

If you found this research valuable and would like to discuss its contents or investment implications further, you can reach us via email at brian@pinecreek.capital.

Disclaimer

This research note is published by Pine Creek Capital Management LLC for informational and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any security. The analysis and opinions expressed herein are those of the author and are based on sources believed to be reliable, but accuracy and completeness are not guaranteed.

Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. The historical relationships described in this note may not persist in the future. Forward-looking statements are inherently uncertain and actual outcomes may differ materially from those implied by this analysis.

The “Pine Creek Capital Model Portfolio” referenced herein is a hypothetical allocation framework and does not represent an actual managed account or fund. Pine Creek Capital Management LLC is not a registered investment adviser. Readers should consult a qualified financial advisor before making investment decisions.

Data sources: S&P Capital IQ (forward earnings estimates), Robert Shiller / Yale (historical S&P 500 prices, dividends, and earnings), Federal Reserve H.15 (Treasury yields). Charts and analysis are original work by Pine Creek Capital Management.

This week was a roller coaster between the lows of a hawkish Fed and the highs of a Memorandum of Understanding between the US and Iran (more on that below).

Here at Pine Creek, we have been busy working on a few investment write-ups featuring opportunities we believe to have enormous upside.

The first is an insurance company that currently trades under 14x P/E and ~4x P/B, the lowest multiples in the company’s history. The stock is down over 40% from its all-time high, yet EPS continues to grow.

The second writeup will focus on a software company that the market has fallen out of love with. The stock currently trades at ~7.5x Forward Earnings, and an incredible 8x EV/EBITDA. I never thought I would see such a high quality asset at such an amazing price during my investing career.

Disclaimer: Pine Creek Capital currently holds positions in both companies.

If you are interested in these writeups, they will be going out to Paid Subscribers first, and will be available to Free Subscribers in the future.

In the meantime, let’s take a tour of what else is moving markets. And as always, if you have any questions or suggestions for the newsletter, please don’t hesitate to reach out to brian@pinecreek.capital.

-Brian

By the Numbers

Equities

Stocks continued their YTD run this week, with the S&P 500 up 0.93%. The Dow Jones Industrial Average followed modestly, up 0.71%, and the tech-heavy Nasdaq rocketed 2.43% higher.

The momentum was largely driven by optimism about a peace deal rumored by President Trump to be finalized and imminently signed. On Monday, Iran had confirmed that a deal had been struck, and by midweek this was revealed to be a thirteen point Memorandum of Understanding, or “MOU” for short, which is a fancy term for a list of ground rules for further negotiations. By Thursday, Iran declared the Strait of Hormuz open, and markets rallied.

As noted in last week’s letter, we believe this MOU to simply be an extension of negotiations, not an outright end to the war. Equities and Oil markets, however, are priced as if all hostilities have ended, the Strait of Hormuz is completely open, and shipping traffic through the waterway has resumed pre-war levels. None of these are true at the moment, and we remain cautious of the risk of an escalation of tensions or resumption of direct conflict with Iran.

UPDATE: Since writing this newsletter, Iran has announced that the Strait of Hormuz is now closed again, citing continued conflict between Israel and Hezbollah in Lebanon. While it is too early to tell how markets react, we expect equities to fall and oil to jump on Monday if this continues through the weekend. This development is a case in point of our position that much risk remains and is currently underappreciated by public markets.

Fixed Income

Interest rates remained roughly unchanged over the week, with the 10-Year Treasury Yield at 4.46% compared to 4.48% a week ago. This week, the Federal Reserve held their first meeting under the leadership of new Fed Chair Kevin Warsh. Coming out of this meeting, the Fed held their key interest rate steady at 3.50%-3.75%, though commentary from Fed Warsh was notably more hawkish than expected.

This led to a modest increase in short term interest rates, with the 3-Month T-Bill increasing 4 basis points from 3.71% to 3.75%. Additionally, options markets are now pricing in an 89.6% chance of at least one interest rate hike by December 2026, with a notable 2% chance of four interest rate hikes by the end of the year. Currently, there is a 0% chance of any rate cuts before 2027.

We reiterate our view that overweight fixed income and underweight duration is prudent in the current environment.

Commodities

Bitcoin continued lower this week, falling 1.04% to 62,879.02. The cryptocurrency has continued to fade throughout the year as investors question its viability as either a currency or an investment asset.

The Strategy Saga continued this week, this time with respect to the company’s Perpetual Preferred Shares which trade under the ticker STRC, which are trading at an all-time low in the high $80’s. Let’s briefly talk about what this is and why it matters.

STRC is a preferred stock, which means that it has certain benefits above the company’s normal stock. In this case, STRC was issued at a face value of $100/share, offers an adjustable dividend (currently 11.5%), and in the event of bankruptcy, STRC holders have priority over common stock (MSTR) holders.

The strategy that Strategy is going for here is they try to issue shares of STRC for $100/share and then use those proceeds to buy more bitcoin. However, each of those shares comes with a hefty dividend that Strategy needs to pay STRC holders. Additionally, that dividend is not guaranteed. Strategy can change it, pause it, or cancel it if they need to.

With STRC trading at a discount to its face value, this is a signal that investors are getting nervous about Strategy’s ability to pay the dividend on STRC. And if Strategy can’t issue shares at $100, it becomes more difficult to raise money to buy more Bitcoin. At some point (soon it seems?), Strategy’s hands are tied and they can’t buy more Bitcoin, but they have to keep servicing their dividends and debt payments.

In order to service those payments, they’ll need to sell Bitcoin to raise cash instead of raising debt or selling shares. As Strategy sells Bitcoin, the price falls, kicking off a downward spiral. Every time Bitcoin falls in price, Strategy will need to sell more Bitcoin to get the same dollar value as before. The more Bitcoin Strategy sells, the further the price falls, and so on until Strategy’s bankers step in and force a restructuring, likely through bankruptcy proceedings and liquidation.

We continue to hold our view that the long-term intrinsic value of Bitcoin is $0.

Crude Oil continued its decline, dropping 2.02% to settle at $75.85 per barrel. The continued decline reflects investor optimism surrounding the signing of a Memorandum of Understanding between the US and Iran, with hopes of a return to normal flows of traffic through the Strait of Hormuz.

As stated in last week’s letter, we continue to believe oil futures are attractively priced for a sharp potential rebound. Should negotiations fail or drag on, or a deal result in large concessions to Iran, or heavy fighting restart altogether, oil prices could jump sharply. Additionally, we believe the $65-$70 per barrel range is an effective floor for the foreseeable future, as countries will need to replenish their strategic reserves.

Gold rose 0.17%, while Silver and Copper declined 1.72% and 0.92%, respectively. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. Our view from last week’s letter remains unchanged: we believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

Earnings & Data

Another relatively quiet week coming up, though not as quiet as this past week.

On Wednesday, Micron (Ticker: MU) will report earnings after the close. Wall Street estimates earnings to be $19.54 per share vs. $1.73 per share a year ago, an 11x increase. No wonder the stock is up over 800% in the last year.

On Thursday, we will get updated data on Personal Income and Consumption as well as GDP. This will include the PCE index, which is a measure of inflation preferred by the Federal Reserve.

Investors will be watching these updates from Micron and macroeconomic data closely for signal as to whether the AI buildout is holding as well as health of the broader economy. Weakness in either could lead to increased near-term volatility.

That’s all we had for you this week, let us know your thoughts by leaving a comment! You can also like this article via Substack to show your support.

Leave a comment

This week SpaceX, the space-exploration-turned-AI-company founded by Elon Musk, completed the largest initial public offering in history. Though that wasn’t the only historical moment, as SpaceX’s valuation propelled Musk’s net worth to a new record of $1.1 Trillion.

This instagram post here does a really great job visualizing just how much a trillion dollars is (it’s a lot). Here is a chart of the 25 biggest public offerings in history. It’s not even close.

Many investors, including myself, wondered if there would be enough market demand to soak up nearly $80B worth of SpaceX, regardless of whether or not it’s a “good investment.” Over the week, I was flooded with questions and anecdotes from friends and family and their friends and family. Everyone seemed eager to know, “where can I get in on the SpaceX IPO?”

And this unprecedented demand showed up on Friday to buy SpaceX stock. The company initially priced at $135/share on Thursday night, and by early friday there were indications that it could open at $175. Demand moderated slightly from there, and by midday the stock finally opened for trading at $150. Throughout the day it continued upward, reaching a high of $176.52 before settling at $161.11.

Full disclosure: PCCM does not hold a position in SpaceX. However, we will be publishing a deep dive on the company including a valuation of the stock and what price we would consider investing in the company.

In the meantime, let’s take a tour of what else is moving markets. And as always, if you have any questions or suggestions for the newsletter, please don’t hesitate to reach out to brian@pinecreek.capital.

-Brian

By the Numbers

Equities

After a week of losses, stocks staged something of a comeback this past week. S&P 500 ended the week up 0.65% while the tech-heavy Nasdaq and the Dow Jones Industrial Average saw similar gains of 0.70% and 0.66%, respectively.

Much of the turnaround was driven by President Trump’s announcement during the week that a peace deal has been reached with Iran and would be signed shortly. A further clarification from the President claimed the deal would be signed on Sunday, June 14th.

Iran quickly denied these claims, and Isreal continued to conduct strikes in the region, leaving investors confused about what if any progress to end the war in Iran would be made this weekend. That ambiguity has continued through the time of this writing, though both sides are indicating some sort of agreement is close. The terms of such a deal will be a primary driver of this market this week.

UPDATE: Since writing this newsletter, the U.S. and Iran have announced a memorandum of understanding to end hostilities. We will cover this in more as information becomes available. Our flash take is that this “deal” looks to effectively be another 60-day extension of negotiations. Equity futures are up over 1% and Oil prices are falling on the news.

Fixed Income

Along with the rise in equities, interest rates moderated, with the 10 Year Treasury falling from 4.54% to 4.48%. This led to a broad increase in fixed income, as bond prices rise when rates fall. AGG, an ETF that tracks a broad basket of Investment Grade US Corporate Bonds, rose 0.60%.

As of this writing, investors are pricing in a 57% chance that the Federal Reserve increases interest rates a quarter point or more by the end of the year, and a near zero (0.6%) chance of rate cuts. We continue to believe long fixed income and underweight duration is an attractive position in this rate environment.

Commodities

Bitcoin staged a modest rebound after a rough week prior, rising 4.29% through the end of the week. Despite the rally, the speculative cryptocurrency remains nearly 50% off its highs 8 months ago and is down 27% this year.

The most recent selloff came after Strategy (formerly known as MicroStrategy), ticker MSTR, recently sold $2.5 million of its bitcoin holdings, equivalent to 32 Bitcoins. This led followers of the company to question CEO Michael Saylor’s stance to never sell Bitcoin, who has posted sage advice such as:

During a conference this week, Saylor clarified what he meant, saying “I said to you, never sell your Bitcoin. I never said that the company wouldn’t sell its Bitcoin.” We continue to hold our view that the long-term intrinsic value of Bitcoin is $0.

Crude Oil continued its decline, dropping 2.58% to settle at $77.41 per barrel. The broader decline reflects investor optimism that the war in Iran will come to a close and cargo ships will again be free to transit the Strait of Hormuz.

At current levels, we believe oil futures are attractively priced for a sharp potential rebound. Should negotiations fail or drag on, or a deal result in large concessions to Iran, or heavy fighting restart altogether, oil prices could jump sharply. Additionally, we believe the $65-$70 per barrel range is an effective floor for the foreseeable future, as countries will need to replenish their strategic reserves.

Gold and Silver declined 2.90% and 1.64%, respectively, while Copper rose 3.66%. The precious metals remain volatile as they are coming off of historic highs and multiple competing pressures drive prices. We believe Gold and Silver remain too volatile to hold exposure to, while Copper remains attractive as a critical metal for supply chains. PCCM does not hold a position in any of the three metals.

AI Pricing Wars on the Horizon

If you have used a major LLM, such as ChatGPT or Gemini or Claude, you may have marvelled at how much value they deliver for as little as $20 per month. The answer is that they can’t. LLM providers run on surprisingly thin margins, and despite unprecedented growth in users and revenue, these companies burn through billions of dollars per year.

One would logically expect that, in order to succeed and become profitable, these money losing companies would at some point have to increase prices. However, OpenAI has different plans. Per the Wall Street Journal:

OpenAI is considering drastically lowering the prices it charges users as it seeks to win customers from its rival Anthropic.

The company is weighing significant cuts to what it charges for tokens, the unit of measurement artificial-intelligence firms use to bill for their products, according to people familiar with the matter. The move would be in anticipation of similar cuts the company expects at Anthropic, the people said.

Business executives have begun to balk at the high prices for AI usage. OpenAI Chief Executive Sam Altman said at a recent event that costs had become “a huge issue.”

Drastic price cuts could potentially erode the profit margins of both companies, which already lose billions of dollars because of the enormous cost for computing resources needed for AI systems to process queries and carry out tasks.

This situation, where competing companies lower their prices to win over customers, is also known as a “race to the bottom.” And it is a long way to the bottom for both of these companies.

For starters, both OpenAI and Anthropic offer largely the same product: a chatbot that can help with coding, writing, and everyday questions. This means that switching costs between the platforms is very small. There is nothing embedded in either of these platforms that creates a feeling of being “locked in,” and they do roughly the same thing. Therefore, from a pricing perspective, there is no “bottom.” At some point, the two companies will need to differentiate on product.

The issue is that this isn’t really possible with large language models. An LLM is an LLM. Any feature one LLM adds can be easily added to another, either through research and training, or via distillation. While there are some differences that can be applied to the look and feel of the product, or the user experience, these are superficial, easily replicable, and do not create any real competitive advantage.

And then there’s the “end game.” Let’s say OpenAI wins the pricing war, bankrupting Anthropic in the process and capturing all their users. What next? Well, if the company was losing money at its original prices, it will need to at least get prices back to where they were, and probably much, much higher, while likely decreasing the quality of the product to reduce costs. This scenario is known as “enshittification,” a process by which digital products decline in quality over time.

While this hypothetical could very well end up with OpenAI succeeding as the “winner,” we can’t ignore the impact that a company like Anthropic failing would have on the global economy. After all, the company is currently valued at close to $1 Trillion dollars. A failure of a company this size is unprecedented, and would have downstream impacts on the rest of the economy, potentially taking OpenAI down with it.

The reality is that the AI incumbents have backed themselves, and the rest of the industry, into a corner. They are out of VC money and are turning to public markets to raise money and cover their cash burn. And based on their burn rate, an $80 billion raise from public investors would just be a short term solution. Since they can’t differentiate their product from competitors, the only option is to lower prices. And since they are already money-losing, this is not a real option.

It’s impossible to look at the AI industry as it stands today and not see a house of cards ready to fall.

Coming Up This Week

This week is expected to be relatively quiet.

On Wednesday, the Federal Reserve will announce their decision on whether or not to adjust interest rates. This will be the first Fed press conference under the leadership of Kevin Warsh, and the market is pricing in no change in rates. Investors will instead be watching Chair Warsh closely to better understand how he will change the Fed’s relationship with public markets.

While many companies are reporting earnings, none on the docket are expected to move markets based on their results or commentary. We will also get a smattering of macroeconomic data primarily relevant to the housing market.

Leave a comment

Each update will include a short situation overview directly from our Chief Investment Officer covering the most important news as we head into a new week for financial markets. Additionally, we will have a quick flash of important numbers such as interest rates and index levels, followed by a few short write-ups covering updates from last week and what to look forward to for the week ahead. Regular readers will find themselves developing a working memory of what is going on in the market, where major assets are generally trading, and what it all means for their portfolios.

I hope you enjoy these updates as much as I enjoy writing them. And as always, if you have any questions or suggestions for the newsletter, please don’t hesitate to reach out to brian@pinecreek.capital.

-Brian

By the Numbers

Equities

Just about every investment was down last week. Let’s start with equities. The S&P 500 ended the week down 2.59% while the tech-heavy Nasdaq sold off an incredible 4.68%.

Keep in mind that most of this decline happened on Friday, and much of the decline in equities was attributed to weakness in stocks heavily tied to AI. This narrative started to develop after Broadcom, ticker AVGO, reported earnings and affirmed their previously stated revenue goal for the year.

While the forecast is massive (“in excess of $100 billion), investors were expecting revenue guidance to be revised upwards even higher. This disappointment sent the stock down 20% and kicked off some hard questions about how sustainable AI revenue growth really is. We expect this topic to dominate headlines going into this week.

Fixed Income

Interest rates have been on the rise this year, with the 10-Year Treasury yield up eight basis points (0.08%) this week. The benchmark asset now trades at 4.53% and is now up 0.38% for the year, close to half a percent. This drove a decline in bond prices, with the US Corporate Bond ETF, ticker AGG, falling 0.90%.

While the market consensus was that Fed Chair Kevin Warsh would work to lower interest rates, our position over the past ~6 months has been that interest rates are more likely to increase than decrease. This upward pressure on interest rates is driven by persisitently high inflation as measure by Headline and Core CPI. The Iran War and its resulting impacts on global trade have only exacerbated a problem that already existed and showed no signs of resolving anytime soon.

When interest rates rise bond prices fall. Well, most of them. As explained in a series of videos here, not all bonds are created equal. The longer the Duration of a bond (you can think of Duration as similar to Maturity), the more sensitive it is to interest rates. Therefore, in our view, investors should be reducing their overall portfolio duration. In this environment, we find ETFs like SGOV and BOXX to be particularly attractive.

Commodities

Bitcoin suffered the worst decline of all the assets we are covering today, down 16.96% for the week and 30.34% for the year.

This selloff was triggered shortly after Strategy (formerly known as MicroStrategy), ticker MSTR, sold $2.5 million of its bitcoin holdings, equivalent to 32 Bitcoins. While this is a small fraction of the company’s 843,706 total Bitcoins, this represents a sharp pivot from the CEO’s prior stance of “never sell” with respect to Bitcoin.

We do not cover crypto extensively, and our position is that Bitcoin’s long-term intrinsic value is $0.

Crude Oil fell 9.04% over the past week to $79.43 per barrel as investors continue assessing what the future will hold for the Strait of Hormuz. Transit through the waterway remains restricted, and despite many warnings about a global oil shock, the impact so far has been notable but muted.

Gold, Silver, and Copper also saw similar declines of between 1% and 9%. As these commodities are used heavily throughout supply chains involving chips and semiconductors, the precious metals have started to follow the broader AI trade, which as discussed came under pressure this past week.

A Healthy Jobs Market

On Friday, the Bureau of Labor Statistics (BLS) released its most recent report on employment in the US. While experts predicted a gain of 80,000 jobs, the number came in much higher at 172,000. This would normally be a positive development, but in this environment, it likely added to the selloff on Friday.

That is because a healthy labor economy gives the Federal Reserve more reason to increase interest rates to combat inflation. The conern with rising rates is that the increase in borrowing costs could send consumers into a recession. However, if consumers are healthy and able to find work, then this gives the Fed plenty of room to hike rates.

Investors tend to not like higher interest rates. High flying companies that are losing money find it more expensive to borrow money to fuel growth, leading to decreased valuations across the board. It’s also worth noting the contradictory nature of a strong jobs market against the notion that AI will displace or replace a large portion of today’s workforce.

Coming Up This Week

On Wednesday, we will get an updated release of inflation as measure by the Consumer Price Index, CPI for short. The market is currently expecting a 2.9% annual rate of inflation, slightly higher than the last reading at 2.8%. If CPI comes in higher than 2.9%, or the underlying data shows signs of a building inflation shock, we may see interest rates continue to climb along with another hit to the equity market.

Wednesday will also see Oracle (ORCL) report earnings after the close. Oracle is another large player in AI trade, and many investors will be looking to their numbers and management commentary as an AI bubble barometer. As with Broadcom (AVGO), even a not-positive-enough quarter could send the company and broader market into a further spiral.

Adobe (ADBE) will report earnings on Thursday. This company has become something of a value stock, as investors seem to believe that the release of advanced AI coding tools will be the death of software. This is sometimes called the “SaaSpocalypse,” SaaS standing for Software-as-a-Service. We have maintained throughout the year that this logic is flawed and the selloff across the entire Software sector is overdone. We are bullish on Adobe and the broader sector as a whole, with some quality companies even trading at single digit P/E ratios.

Leave a comment