Welcome to another weekly update. I’ve received some feedback over the last few weeks that these weekly letters are too lengthy, so starting this week I am experimenting with a shorter format, similar to other newsletters.

Each section is pared down to just key market moves and what investors need to know, without the long-winded “investment thesis write ups” for each section.

I am also removing the following sections for now, as I am not sure how much real value readers get from them: Gold, Silver, Copper, Bitcoin, Earnings & Data.

As always, my goal is to create content that you will find interesting and valuable, and I am always open to experimenting with new formats. If I left something out that you would like to see back, or anything else you have in mind, let me know!

Now, on to the update!

-Brian

By the Numbers

Equities

Stocks had a good week with all three major indexes in the green. The S&P 500 rose 0.49% while the tech-heavy rose 0.85%. The Dow was between the two, up 0.53% for the week.

The gains mostly came from a few large cap tech companies, shown in green in the chart below. Meta, Microsoft, Apple, Nvidia, and Amazon led the market, with a bright spot in financial services, while the rest of the market was in the red.

This goes to show the influence that large cap technology companies have on the rest of the market. As of this writing, the top 10 stocks in the S&P 500 make up 40% of the index. And since many of these top companies are heavily invested in Artifical Intelligence, their stock tends to fluctuate based on the latest headlines around AI, and they take the rest of the market with them. If it’s a good week for AI, it’s a good week for the S&P 500, and vice versa.

Interest Rates

Interest rates were flat compared to last week, with the 10-Year Treasury Yield at 4.73% compared to 4.74% a week ago.

Interest rates have continued higher throughout the year, raising costs for consumers across all types of loans such as mortgages. As of this writing, rates on 30-year mortgage are at 6.66% while the median home in the US sits at $410,000, not far off from all time highs.

The latest news driving interest rates higher came from Kevin Warsh, the Chairman of the Federal Reserve. In a speech given at a conference in Jackson Hole, Wyoming, Warsh reiterated that inflation remains above the Federal Reserve’s target, and that the committee will deliver price stability. In other words, interest rates may be higher for longer as the Fed signals more interest rate hikes are on the way.

Commodities

Crude Oil fell to $83.53/barrel, down 4.05% from the prior week, and is listed at $83.44 as of this writing on Saturday (figure shown in screenshot). Oil prices are up 45.6% YTD and have stayed elevated as the War between the US and Iran has continued to drag on.

High oil prices remain a pain point for US consumers, with national gas prices currently at $4.09. Prices at the pump are now higher than any of the prior 4 years including the last cycle of inflation which reached as high as 9%.

That’s all I have for you this week, if you have any questions, suggestions, or just want to chat about the market, feel free to email me at brian@pinecreek.capital.

Best,

Brian

This week interest rates took center stage.

Rates on long-term yields have continued rising amid a worsening fiscal outlook for the United States, and prolonged conflict in the Middle East leading to elevated oil prices and, in turn, inflation expectations.

By the middle of the week, Treasury Secretary Scott Bessent decided enough was enough. He was going to personally lower long-term interest rates by increasing the amount of long-term bonds the Treasury buys. This increased demand is meant to push bond prices up, which in turn brings yields down.

And for a minute, it worked. Following the announcement, the 30-year Treasury Yield dropped sharply before steadily reclaiming its lost ground by the end of the week.

What Bessent is doing is known as Yield Curve Control, a process by which the government attempts to force interest rates to change at certain levels. In this case, the government wants interest rates to come down so that it can continue borrowing more and more money.

For better or for worse, it will not work, and this plan will likely backfire in uncomfortable ways. The reason this won’t work is the market is too big for the government to influence. Bessent announced an additional $2 billion in purchases of long-dated Treasuries. The total US Treasury market is ~$32 trillion. $2 billion is a drop in the bucket.

And in making this move, the government has shown their cards: they are concerned about interest rates. Attempting to intervene shows weakness, and the market will capitalize on that. This will likely lead to even higher interest rates and a weaker dollar as investors pull money away from the US.

If there were ever a time for the “Sell America” trade, it’s probably now.

On to the update!

-Brian

By the Numbers

Equities

Stocks posted their worst week in months as investors rotated out of AI-stocks and into value stocks. The S&P 500 fell 1.43% while the tech-heavy Nasdaq dropped 2.05%. The Dow on the other hand fell a more modest 0.85%.

There was no one specific piece of news that drove this decline. Throughout the week, the situation in Iran has continued to deteriorate. At the same time, U.S. total debt surpassed $40 trillion, and long-term government bond yields continued their march higher. None of these developments individually sparked the decline in equities. Rather, there seemed to be a risk-off move as investors reallocated away from high growth AI-adjacent names and into value stocks. I called this the “Michael Burry Trade” on X.

The Michael Burry trade refers to being short AI-related stocks and long value stocks. This is a general theme that I have applied in our fund here at Pine Creek Capital, and this week it has been rewarded. There is a broader trend here worth noting here though, and that is the rotation between Growth and Value stocks.

Below, I’ve posted the past 5 trading days of VUG, one of the leading Growth ETFs, and VTV, its Value counterpart. Here there is a clear divergence between the two starting on April 18th, with similar moves during the AM sessions each day since.

This trend has ebbed and flowed throughout the year, first peaking around April when it then reversed in favor of Growth, and later resuming in June. As shown in the chart below, Value stocks (as measured by the ETF VTV) are outperforming their Growth counterparts by ~11% this year.

This is a trend that has gone virtually unnoticed, and I believe it speaks to the general nature by which the AI Trade is fading. Rather than a bubble that violently pops, it’s more like a balloon that is slowly but surely losing air. More and more investors are slowly backing away from heavy AI exposure, especially after witnessing the historic collapse of the hedge fund Situational Awareness.

Increasingly, I am seeing attention (and capital) shift from high-growth and high-capex AI stocks to companies that are generating real profits and cash flows at historically low valuations. If this trend continues as I’ve described it, Pine Creek’s portfolio should continue to benefit from outsized returns across much of the long and short positions.

More broadly, my thesis with respect to equities is that:

1. Value will continue to outperform Growth, driven by investor sentiment softening on the AI buildout and higher interest rates requiring real returns on equity for shareholders (i.e. profitability > growth).

2. Ex-US will continue to outperform US, driven by continued isolationist policies stateside, leading capital that would have otherwise invested in the US to other developed (and emerging) countries.

Pine Creek remains well positioned to capitalize on this thesis, as we are generally long value, short AI, and long a number of stocks in China and Japan.

If you would like to follow Pine Creeks’s trades in real-time and view portfolio positions, consider becoming a paid subscriber at the link below.

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Interest Rates

Interest rates increased notablly with the 10-Year Treasury Yield at 4.74% compared to 4.68% a week ago, just 0.01% from notching a new high for the year.

While this trend is in-line with my longstanding thesis that interest rates will continue to be higher for longer, there were a few key developments that helped boost rates further this week.

1. Total US Public Debt crossed $40 trillion for the first time in history

2. Treasury Secretary Scott Bessent attempted to directly drive long-term interest rates lower

3. The War in Iran has continued to escalate, increasing oil prices and, in turn, inflation expectations

In this letter, I discussed interest rates and what drives them. However, one way to think about interest rates intuitively is with respect to a mortgage. If a person were to apply for a mortgage and they have a bad credit score, they will likely be charged a high interest rate. This is because the low credit score is a signal to lenders that this person does not manage their finances well. On the other hand, a borrower with a strong financial profile and therefore good credit score will qualify for a lower interest rate because they are seen as low risk. The same can be said for companies and even countries.

If a country runs a balanced budget, has strong growth, and keeps total debt in check, it will attract lots of investors, keeping interest rates low. If a country runs steep deficits, racks up lots of debt, and has a lackluster economy, investors will pull back, increasing interest rates on that countries debt.

Of course, there is more to interest rates than just fiscal profile: Japan for example has lots of debt but low interest rates, and Norway has a budget surplus but rates on par with the US. In general though, a country with a declining fiscal profile will see its rates increase to compensate investors for the additional risk that comes with deficits and high debt levels. And that is exactly what the US is experiencing today.

Between historically high total debt, a persistent fiscal deficit, and high inflation weighing on the economy, it is no wonder that interest rates on longer-term US Treasuries are at levels not seen since the Great Financial Crisis.

With respect to US interest rates and fixed income, I remain 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. I continue to believe being overweight fixed income at short durations is prudent in the current environment.

Commodities

Crude Oil increased to $86.83/barrel, up 6.58% from the prior week, and is listed at $88.15 as of this writing on Saturday (figure shown in screenshot). This increase in oil prices comes as the US and Iran have dug in their heels and escalated their War with each other over the past few weeks.

In what seems increasingly like a losing battle, the US has announced a pivot from kinetic warfare (i.e. military strikes) to economic warfare via sanctions. From the Associated Press:

Nearing the six-month mark of the Iran war and facing diminishing stockpiles of key weapons, the Trump administration is touting a crushing financial campaign against Tehran, promising an “economic D-Day” against a country that has withstood nearly five decades of punishing American sanctions.

With sparse details, President Donald Trump announced this week that the U.S. would be imposing an “unprecedented” level of economic warfare and isolation on Iran, aiming to force its leadership to cave to demands to end its nuclear program and fully reopen the crucial Strait of Hormuz to oil and natural gas tankers.

This was largely expected, as I wrote in this letter on August 9th:

As we have laid out previously, we do not see a diplomatic offramp for the US unless it comes with unprecedented concessions. The only way out is through, and it seems clear to us that President Trump is loathe to pursue further military action. For what reason is another story entirely, though many speculate that the US has depleted a large portion of its missile supply.

I believe we are now in the endgame of the Iran War, and there are two major paths:

1. Abandon / Status Quo: We have seen President Trump previously sweep uncomfortable subjects under the rug; most recently being the Epstein Files (remember those?) In this scenario, the current economic standoff becomes the new status quo, and the news cycle moves onto something new. Iran retains control of the Strait, oil prices remain persistently higher for the foreseeable future, and the global economy is forced to adapt to this new paradigm.

2. Escalate: Door #2 involves resuming a full military operation in Iran. Troops are sent into the country in an attempt to overthrow existing leaders. The US gains control of Iran and the Strait, and later transitions control to a democratically-elected government.

Both of these options are uncomfortable, and all roads lead to higher for longer oil prices. As it stands today, however, there is no evidence for a cleaner diplomatic offramp, and Iran seems to be clearly in a position of strength at this point in the war.

I reiterate my longstanding thesis: I remain bullish on oil with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel. PCCM does not hold a direct position in oil futures.

Gold and Silver increased 3.02% and 5.79%, respectively, while Copper fell 2.09%. The precious metals remain volatile as they are coming off historic highs and multiple competing pressures drive prices. My view remains unchanged: I 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 increased sharply this week, up ~22% from ~$63,000 per coin to ~$77,000 per coin.

The move comes after President Trump hosted a digital asset summit where he urged Congress to pass the Clarity Act. As part of his remarks, the President hinted that certain members of the US government “talked about” accumulating Bitcoin as part of a strategic national reserve of the cryptocurrency. This sparked renewed enthusiasm in the speculative asset and sent its price up double digits.

It has been some time since I detailed my views on Bitcoin and similar currencies, so I will summarize them here. First, let’s talk about the reasons why Bitcoin supposedly has value:

1. Fixed Scarcity: There will only ever be 21 million Bitcoins, meaning that insitutions such as the Federal Reserve cannot print additional Bitcoin thereby causing it to “devalue” like the Dollar (allegedly).

2. Financial Sovereignty: Users are in control of their own currency, and there are no middlemen. Your Bitcoin are not held at an institution like a bank that can freeze your assets.

3. Growth Potential: Bitcoin is often cited as one of the highest returning assets, making it a better investment than stocks.

Each of these arguments is problematic, with one core contradiction to the bull case for Bitcoin:

1. The evidence that currency supply leads to devaluation is unclear, at best. This might sound counterinuitive, but printing more dollars doesn’t inherently make dollars worth less, primarily because of growth. Imagine you have an economy with 100 people and there is $100,000 of dollars in existence. $1,000 per person. If the central bank prints $100,000 and now there is $200,000, the curerncy has been “devalued,” right? There is now $500 per person. But what if the population has grown to 200 people, say through births and immigration? Well then there is still $1,000 per person. There are more dollars, but the economy is bigger. On the other hand, having a fixed supply of currency would cause problems. As the population grows, there is less and less currency to go around. New entrants to the economy find it hard to get the money they need to start businesses and create value, and growth is hindered. So Bitcoin having a “fixed supply” is not necessarily a good thing.

   1. Also, who cares about Bitcoin’s supply of 21,000,000 when a) Bitcoins can be divided into incredibly small fractions, and b) there are countless other cryptocurrencies now in existence with varying amounts of supply? Supply is not, in fact, limited with respect to cryptocurrencies.

2. It might sound nice to not have your money in a bank, until you need the protections and services that a bank offers. Every few months we read about how millions of dollars in Bitcoin has been siphoned out of the digital wallets of unsuspecting people. In these instances, there is no recourse, no accountability. There is no FDIC insurance or 3rd party to be held responsible. Cryptocurrency is the wild west. Sure, legislation such as the Clarity Act could add much needed consumer protections, but that drives Bitcoin closer to become like the Dollar. A regulated asset that can be tracked, controlled, seized, revoked at any time.

3. The ultimate contradiction is the notion that Bitcoin is a good investment. The figures that are often cited are the appreciation of Bitcoin as measured in Dollars. I encourage you to read that sentence again, because it is easy to miss. If Bitcoin is supposed to have all this value that a “useless fiat currency” like the Dollar doesn’t have, why does it’s Dollar value mean anything? Is the plan to convert the world to Bitcoin, or is it to just hold Bitcoin, pump up the price, and exchange it for more Dollars in the future? The fact that Bitcoin is priced and measured in Dollars is the ultimate self-contradiction.

Therefore, my view is that Bitcoin is ultimately worthless and should really be viewed as a collectible. I believe it may retain some value as a piece of digital history, but with so many in existence and no differentiation between individual coins, it is unlikely that value will be very high.

Pine Creek Capital does not currently hold a position in BTC, or related cryptocurrency assets and stocks, and my long-term intrinsic value estimate of Bitcoin is $0.

Earnings & Data

This week brings Nvidia earnings, July PCE inflation, and the Jackson Hole symposium, where Chair Warsh delivers his first keynote Friday morning.

Earnings

• Monday, (8/24):

  • AM: PDD, XPeng.

• Tuesday, (8/25):

  • AM: Bank of Montreal, Scotiabank, Dick’s Sporting Goods.

  • PM: Intuit, Zoom, HEICO, Semtech.

• Wednesday, (8/26):

  • AM: Abercrombie & Fitch, Kohl’s, Li Auto, Williams-Sonoma, J.M. Smucker.

  • PM: Nvidia, Salesforce, CrowdStrike, HP, Synopsys, Okta, Veeva.

• Thursday, (8/27):

  • AM: Best Buy, Dollar General, Dollar Tree, Burlington, Royal Bank of Canada, TD.

  • PM: Marvell, Workday, Autodesk, Ulta, Affirm, Gap.

• Friday, (8/28):

  • AM: Miniso.

Economic Data

• Wednesday (8/26): July PCE inflation, personal income and spending, and the second estimate of Q2 GDP

• Thursday (8/27): Initial jobless claims, Jackson Hole symposium begins.

• Friday (8/28): Chair Warsh’s Jackson Hole keynote in the morning, University of Michigan final August sentiment and inflation expectations at 10:00 a.m. ET.

That’s all I 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 was fairly quietfor public markets.

There were no major developments with the war in Iran, Software stocks caught a bid after it was reported that private equity investor Silver Lake is in talks to buy Workday, and the big inflation report of the week came and went without much notice.

This is because the inflation reading of 3.4% was expected by forecasters on Wall Street, and since the numbers came in as expected, the market celebrated.

Many outlets even called this a “good” inflation report.

In my view, this is a mistake, which I outlined in the video below:

When thinking about inflation, I come back to this chart.

This shows what inflation has done to consumer prices coming out of the COVID Pandemic, compared to what prices would have been if the Fed were able to hit their 2% target.

The fact of the matter is that prices have risen double what they should have, and merely getting back to 2% will not reduce prices; it will just lock in this difference.

As it stands, we are far from our goal with respect to inflation. However, as I mentioned in the video, the Fed is not the only one with their hands on the wheel. If the Fed continues to stand by and let inflation fester, the bond market will raise rates themselves at the long end of the curve.

As with stocks, prices don’t matter until they do.

On to the update!

-Brian

By the Numbers

Equities

Stocks notched new all-time highs this week after the Consumer Price Index came in as analysts expected. The S&P 500 and Nasdaq rose 0.36% and 0.14%, respectively, while the Dow fell 0.56%.

The big news this week came in the form of reports that private equity firm Silver Lake is in talks to buy Workday ($WDAY).

The stock rose 18% on the news, and sent the rest of the Software sector flying. Here is a chart showing Workday as well as a few other notable Software companies.

Prior to this week, many investors believed Software stocks were left for dead. The rationale is that AI threatens to disrupt, commoditize, or completely replace legacy software. “Why pay for Photoshop when AI can create any image I want?”

Now the biggest baddest software investors like Silver Lake and Thoma Bravo are stepping into the ring to counter this narrative. In fact, these investors are probably looking at the same numbers I am with respect to Software companies and asking, “where is the disruption?”

Here is Workday’s stock price vs. their revenue:

This does not look like a company that is being disrupted by AI, and Silver Lake knows it. While I do not own Workday in the PCCM portfolio, I am long similar Software stocks and short AI-related stocks on a similar thesis.

Interest Rates

Interest rates increased slightly with the 10-Year Treasury Yield at 4.68% compared to 4.65% a week ago

As mentioned in the intro, this past week’s inflation data was framed as relatively benign. Both core and headline inflation came in right at expectations, and the market interpreted this as a sign that the Fed may raise interest rates more slowly than anticipated.

However, the data itself is not promising. The softening of inflation month over month was driven primarily by energy prices. While they did decline slightly in July, the conflict in Iran has continued to drag on and with it, oil prices remain elevated.

Excluding energy, many core components of CPI actually increased month over month, implying that the underlying trend of inflation is getting worse, not better. If you are interested in the full analysis, check out the video here.

With respect to US interest rates and fixed income, I remain 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. I continue to believe being overweight fixed income at short durations is prudent in the current environment.

Commodities

Crude Oil increased to $80.44/barrel, up 2.89% from the prior week, and is trading at $82.40 as of this writing on Sunday. This increase in oil prices comes as the US continues to drag on the war with Iran with no end in sight.

I have written about the war in Iran at length.

In general, there is a distinct pattern throughout this conflict:

1. The Trump Administration and/or third party countries signal there is a deal.

2. Oil prices go down.

3. Iran remains silent or completely denies that negotiations are ongoing.

4. The US and third parties insist there is some kind of deal about to happen.

5. Oil drops some more.

6. We learn that there was never in fact a deal.

7. Oil goes back up.

This has repeated week after week for months, throughout which I have expressed my skepticism that any diplomatic offramp is possible in the current situation. In my words, “the only way out is through.”

However, I also noted last week that Trump is loathe to return to a full-scale conflict, despite repeated threats to “wipe Iran out.” I specifically noted reports that the US is low on missile supplies, which may be a driving factor behind the US now pivoting to a war of attrition over direct combat.

I reiterate my longstanding thesis: I remain bullish on oil with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel, though I do not hold a direct position in oil futures.

Gold and Silver increased 0.47% and 2.35%, respectively, while Copper increased 1.82%. The precious metals remain volatile as they are coming off historic highs and multiple competing pressures drive prices. My view remains unchanged: I 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 has continued to languish, trading in the $63,000 per coin range. The cryptocurrency is currently down ~28% this year as investors look to other investible assets.

The cryptocurrency scene has been relatively quiet over the past few weeks, but I remain bearish long-term on Bitcoin and crypto-adjacent companies such as Strategy (MSTR) and its preferred stock STRC.

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

Earnings & Data

This week retail takes center stage with Walmart, Home Depot, and Target, and the Fed releases minutes from the July meeting.

Earnings

• Monday, (8/17):

  • PM: Fabrinet, XP.

• Tuesday, (8/18):

  • AM: Home Depot, Baidu, Amer Sports, Klarna.

  • PM: Keysight, Toll Brothers.

• Wednesday, (8/19):

  • AM: Target, Lowe’s, TJX, Estee Lauder, Analog Devices.

  • PM: Coty, Nordson.

• Thursday, (8/20):

  • AM: Walmart, Alibaba, Deere, NetEase, Futu.

  • PM: Ross Stores.

• Friday, (8/21):

  • AM: BJ’s Wholesale.

Economic Data

• Tuesday (8/18): July housing starts and building permits at 8:30 a.m. ET, industrial production at 9:15 a.m. ET.

• Wednesday (8/19): FOMC minutes from the July meeting at 2:00 p.m. ET, the first under Chair Warsh, following a hold with three hawkish dissents.

• Thursday (8/20): Initial jobless claims and the Philadelphia Fed index at 8:30 a.m. ET.

• Friday (8/21): S&P Global flash PMIs for August at 9:45 a.m. ET.

That’s all I 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 saw the market notch new all-time highs as the Trump administration signaled a deal with Iran would arrive as soon as Wednesday.

Wednesday came and went with no mention of this alleged deal.

In the meantime, the BLS reported jobs numbers well below analyst estimates, and CDS spreads for some of the largest AI-related companies sit near 2008 levels.

We believe that when equity markets are this frothy while bond markets are bracing for impact, investors should take caution.

In today’s update:

• The earnings growth driving markets to fresh all-time highs are not what they seem.

• The jobs market is cooling, which is pushing investors to pare down the probability of a rate hike in September.

• Where the US and Iran stand today, and what this means for oil prices.

Also, a warm welcome to our newest subscribers! I hope that you find our content to be valuable to your investment process.

If you have any feedback about how we can improve our research, please shoot an email over to brian@pinecreek.capital

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks were up massively this week, initially sparked by the US cancelling planned strikes on Iran in hopes of reaching a peace deal. The S&P 500 and Dow rose 3.58% and 2.96%, respectively, while the tech-heavy Nasdaq soared 5.19%. Additionally, a softer than expected jobs report seemed to add to the momentum, as the market reduced its probability of future interest rate hikes from the Federal Reserve.

Yet the tide that has lifted all boats over the past two weeks has been earnings. According to Factset, 440 companies in the S&P 500 have reported earnings for Q2 2026 so far, and 86% of them have reported EPS above analyst expectations, and 76% reported a revenue surprise.

This follows an inflection point in corporate earnings growth that began around Q1 2025 that has lifted the stock market higher. In March 2025, aggregate earnings per share for the S&P 500 was $275. Today, less than one and a half years later, it is now over $375, a more than 36% increase.

However, this is somewhat of an illusion. The above chart is forward 12-month earnings per share, which is always an estimate into the future. And these estimates are often optimistic. The picture changes when we look at trailing 12-month earnings, which are the profits that companies actually realize.

Here the picture is less rosy, more realistic. Trailing 12-month earnings grew from ~$220 in March 2025 to ~$275 today, a still strong 25% increase. However, even this number is not the real picture.

Back in 2016, official accounting rules changed requiring companies to report their unrealized investment gains as part of their earnings by 2018. Before 2018, if a company earned $100M in profits selling widgets, it reported net income of $100M. After 2018, if a company earned $100M in profits selling widgets, and it also owns stocks that went up $50M in value, then its net income is now $150M. If the following quarter, that same company earns $110M in profits from selling widgets, but its investments went back down $50M, then it’s net income is now $60M ($110M less $50M).

This complicates things…take Alphabet for example.

In Q2 2025, the company earned $33.9B in pre-tax income. In Q2 2026, that figure increased just over four times to $138.8B. However, $99.0B of that Q2 2026 pre-tax earnings comes from investments in other companies, primarily from SpaceX.

In Alphabet’s case, roughly 70% of their reported income comes from investments in other companies. According to Edward Jones, nearly half of earnings growth in the past quarter was driven by investment gains from Alphabet and Amazon alone.

Many of these investments are in companies that are also business partners of the investing firm. Take Alphabet and SpaceX for instance. As SpaceX went to market, it was announced that Alphabet agreed to a massive $30B deal to rent computing power from SpaceX. No doubt, this deal helped boost investor optimism in SpaceX which opened above it’s IPO range and traded from $150 per share up to $170 per share on June 30th, the end of the Q2 reporting period.

Many of these investments are also in private companies, the values of which do not fluctuate with the public markets. When stocks are down 20%, Anthropic’s and OpenAI’s valuations do not also fall 20%. This insulates publicly traded investors in private companies from taking a hit to earnings during volatile times, such as now. So it is almost no wonder that 86% of companies have exceeded analysts’ earnings expectations for Q2 2026.

With that said, the padding of earnings with mark to market investment gains is not, by itself, a bomb waiting to go off. Many companies are seeing real and durable returns to growth after years of malaise. Our view, however, is that the average investor today does not realize that the earnings they are investing in are not all as they seem.

Interest Rates

Interest rates decreased slightly with the 10-Year Treasury Yield at 4.65% compared to 4.75% a week ago.

This was primarily driven by the release of the latest jobs data which showed that the economy lost 23,000 jobs in July. This came as a surprise as forecasters were expecting an increase of 80,000 jobs.

Interest rate expectations for the Federal Reserve’s September meeting reacted sharply. Before the report, the market was estimating an 88% probability of at least a 0.25% increase, with a 26.64% chance of a larger sized 0.50% hike. After the jobs data, markets now see a near coin flip between a hold and a 0.25% increase and a 0% chance of a half percentage hike.

This is because the Federal Reserve is typically hesitant to raise rates on a soft economy and risk sparking a recession. In this case though, we do not believe the Fed should be hesitant at all. We are talking about a quarter of a percent after all…

As with our thesis ahead of the July Fed meeting, we would like to believe that this is a mistake in that the Fed should raise at least 0.25%. However, as discussed in our July Performance Update, we made the mistake of conflating what we believe the Fed should do with what they likely would do. We will not make that mistake again.

For now, we are aligned with the market: it seems to be nearly a coin toss whether or not the Fed will hike rates.

We will also get a fresh reading of inflation from the Consumer Price Index this week which will influence the likelihood of an interest rate change. If CPI comes in lower than expected, then the Fed may hold rates steady. If CPI is hotter than expected, then the Fed may raise rates.

We do not have a view on which way CPI will break, so we will have to wait and see.

With respect to US interest rates and fixed income, we remain 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 fell to $77.29/barrel, down 8.72% from the prior week. This decline in oil prices comes as US continues to delay striking Iran in hopes of reaching a deal to reopen the Strait of Hormuz.

The President Who Cried “Deal!”

Last week, we provided our views on the breaking news that the US had backed down from planned strikes on Iran, with President Trump announcing that peace talks with Iran would begin Monday.

From the letter:

Based on all available information, a few things seem clear:

• There are no active negotiations between the US and Iran.

• The current headlines describe a framework of a potential deal created by third party countries.

• The US has revealed that it will back down from striking Iran on any hopes of making a deal, revealing our desperation for a deal.

As of this week, the situation has not changed. Despite the Trump Administration and Treasury Secretary Scott Bessent claiming that a deal would be struck as soon as Wednesday, the week came to a close with no news of any talks between the US and Iran. While it does seem like there are talks between mediators, they have come to a standstill. From the Wall Street Journal:

President Trump last weekend called off a wave of U.S. attacks aimed at breaking the deadlock, citing progress in talks. He and other administration officials have said a deal to reopen the strait was close. But mediators say it has stalled in recent days amid Iranian demands for financial relief and a U.S. insistence that shipping traffic not be impeded.

As we have laid out previously, we do not see a diplomatic offramp for the US unless it comes with unprecedented concessions. The only way out is through, and it seems clear to us that President Trump is loathe to pursue further military action. For what reason is another story entirely, though many speculate that the US has depleted a large portion of its missile supply.

We reiterate our longstanding thesis: we remain bullish on oil with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel, though we do not hold a direct position in oil futures.

Gold and Silver increased 4.69% and 6.61%, respectively, while Copper increased 3.71%. The precious metals remain volatile as they are coming off 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 has continued to languish, trading up to the high $64,000 per coin range. The cryptocurrency is currently down ~26% this year as investors look to other investible assets.

The cryptocurrency scene has been relatively quiet over the past few weeks, but we remain bearish long-term on Bitcoin and crypto-adjacent companies such as Strategy (MSTR) and its preferred stock STRC.

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 we will round out earnings season and get a fresh reading on CPI.

Earnings

• Monday, (8/10):

  • AM: monday.com, Ferguson, and Barrick Mining.

  • PM: Hims & Hers, Rocket Lab, Simon Property Group, AST SpaceMobile, Archer Aviation, and Plug Power.

• Tuesday, (8/11):

  • AM: Cardinal Health, Sea Limited, On Holding, Aramark, Tencent Music, Smithfield Foods, and eToro.

  • PM: CoreWeave, Super Micro, CAVA, Lumentum, Franco-Nevada, and H&R Block.

• Wednesday, (8/12):

  • AM: Nebius.

  • PM: Cisco.

• Thursday, (8/13):

  • AM: JD.com, Tapestry.

  • PM: Applied Materials.

Economic Data

• Wednesday (8/12): July CPI at 8:30 a.m. ET. Consensus is for headline inflation to ease to 3.4% year over year from 3.5%, with core down to 2.5% from 2.6%, after June’s headline index fell 0.4% on the month on lower gasoline prices.

• Thursday (8/13): July PPI and initial jobless claims, both at 8:30 a.m. ET.

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.

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July 2026 marks the first full month of Pine Creek Capital Management’s track record, and we are off to a good start.

For the month, the fund was up 7.62% while the S&P 500 was down 0.10% over the same period. While we are very pleased with this performance, it was not without at least one learning experience that negatively impacted an otherwise flawless month of execution.

In last month’s update, we had just opened the fund and shared our opening positions. However, PCCM was not yet approved for a margin account with Interactive Brokers. Approval finally came during the last week of July, at which point we started aggressively deploying capital across our short book.

As of July 31, the fund held 17.3% of net assets in short positions, resulting in 77.1% gross exposure. Our target gross exposure is between 110% and 150%, which would typically comprise of ~100% long equities and ~10% to ~50% short equities. We have also implemented a small options overlay, which stood at 2.7% of our short book for the end of the month.

This means that going into August, we have a comfortable cushion of 33%+ that we are looking to deploy. However, we will not deploy capital for the sake of putting it to work. We will only invest when we have deemed an investment meets or exceeds our targeted rate of return of at least 15% per year. There is no guarantee that our estimates are accurate or that we realize this return, but it is a strong standard that forces us to have patience for truly great investment opportunities.

If you are interested in following our trades in real-time, you can start a free 30-day trial at the link below.

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Market Commentary

July was a sleepy month for passive investors, with the S&P 500 and Dow Jones roughly flat. Things were more dramatic for Tech and AI investors, as the Nasdaq closed down 3.2% and the darlings of the AI trade were hammered, with some semiconductor stocks down as much as 37%.

This was driven by a broader rotation within and out of AI stocks as investors have begun focusing on which companies within the AI trade are driving the most value. This is aligned with our commentary from early June that the AI Bubble has popped, and our follow up coverage in July that the rotation out of AI is accelerating (link below).

As such, our portfolio is designed to capitalize on this thesis playing out. We are generally long Value and Software stocks, and we are generally short Semiconductors. However, this does not mean we are totally against AI—we have long positions in both Meta and Microsoft for example.

The Federal Reserve also met in July and decided to leave interest rates unchanged. In the lead up to this meeting, we took the view that the Fed should start increasing rates given that inflation is elevated and the economy is well positioned to handle a 0.25% increase.

While the options market correctly priced in a rate hold, the bond market cast its vote that rates should be higher. Immediately following their meeting, the 10 year and 30 year treasury rates increased substantially. There were also three dissenting votes on the Fed committee, all in favor of a 0.25% increase.

Our view coming out of that meeting is that we were correct in our assessment that rates should be higher, but we incorrectly assumed that Fed Chair Kevin Warsh would favor a hold. We backed this conviction with our dollars and paid accordingly, which we will discuss in the next section on Portfolio Commentary.

First, a note on performance. 7.62% in a single month where the S&P fell 0.10% with only 77.1% of our assets exposed to the market is extraordinary. We certainly benefitted from good timing on many of our investments, and it is more than reasonable to wonder how much of this past month’s performance is due to luck, and how much risk we are taking on to earn such a high return.

We are well aware that this is only our first month in business, and we do not expect this type of performance to continue for any length of time. Our goal is to provide consistency in our approach, not in our performance. There may be periods where our investing process does not work, and there may be others, like now, where it works wonderfully.

Regardless of daily or monthly fluctuations, we believe in this process, and that, as long as we do not deviate, we can achieve above average returns.

Portfolio Commentary

As mentioned above, we earned a 7.62% return with gross exposure of 77.1%. Let us now decompose what drove this performance.

Performance Attribution

Within our portfolio, the majority of our performance came from our exposure to international equities. Our top three performing positions were Chinese-based companies: JD.com, BYD, and Alibaba. As explained in last month’s update, we believe that the Chinese market has a massive dislocation in value. Many of these stocks are trading at or near all-time lows despite earning revenue multiple times higher than when they last traded this low.

Our performance was dragged down by a loss in our interest rate futures position ZQ. This is a special type of futures instrument that derives its value based on the Federal Funds Rate as of a specific date. As mentioned above, we felt a high level of conviction that the Fed should raise rates. But we did not share the same level of conviction that they would raise rates. After all, the market was only pricing a ~30% chance of a rate hike.

For this reason, we positioned the trade accordingly. Since these investments can behave like binary bets—either the Fed hikes or it doesn’t—we lost 0.87% of NAV with no opportunity for recovery. Thanks to our conservative sizing however, the drag on our overall performance was minimal. This was also our first time trading interest rate futures, so we gathered valuable learnings with respect to execution and performance of these types of investments.

On top of ZQ, we also took a small position in short-dated Puts on QQQ, a Nasdaq ETF. Our thesis was that if the Fed hiked rates, the market would correct sharply, resulting in a very nice gain. After the rate hold was announced however, the market rallied. Ultimately, the market did correct sharply as we were hoping, but given the interest rate decision negated our original thesis, we exited the position early at a small loss. Although we could have held through the day for a very nice gain to offset our ZQ loss, we simply were not comfortable with how the situation was evolving.

We will note that these trades should be considered a special situation. We do not expect to trade interest rate futures and short-dated options in the future.

Our long US Equities and Short Equities positions also drove notable gains, with ADBE (long), KNSL (long), CAT (short), and SOXX (short) our top performing holdings for the month.

We also earned 0.49% from our Currency and Options overlays. Recently, we discussed the Yen Carry Trade and shared our view that the Yen looks attractive at current levels. As a result, we have about 5% of our net asset value held in Yen, and have begun opening positions in Japanese-listed companies, such as Japan Airlines. These positions have worked well so far and were added only recently.

With respect to options, we overlay our portfolio with strategic income-generating positions—primarily selling cash-secured puts—to enhance our overall returns.

Let us turn now to the composition of our portfolio.

Sector Exposure

We hold relatively concentrated sector exposure, with 21.2% in Consumer Cyclicals, and fairly evenly distributed exposure across other industries. On a net basis, we have 2.6% exposure to the Technology sector, which is comprised of notable and somewhat offsetting long and short exposure.

However, there should be no illusion that we have small exposure to Technology, primarily because we are long Software and short AI, which is a correlated trade. When AI stocks go up, Software tends to go down, and vice versa. This leaves us exposed in both directions, though our combined long and short exposure is held at 27.2% of the portfolio assuming 100% correlation.

We should note that we are generally Sector agnostic, but given our experience in the Technology field and as evidenced below, we have a strong bias towards Technology stocks. It’s what we know best

Geographic Exposure

Including cash, we ended the month with about 75.6% of US exposure, which we believe is too much. While the United States has had arguably the strongest economic run in modern history, we believe that the stateside market is very crowded. Many international markets offer opportunities just as attractive as the United States, and in many cases more so, with less analyst coverage and investor dollars to compete with.

Additionally, with the US adopting what we see as an isolationist stance on the world stage, many international companies have the rare opportunity to partner together and find new growth excluding the United States. The next Amazon or Netflix or Apple to dominate its respective global market share may very well emerge from outside the US.

In an expression of this view, we have already deployed capital in China and Japan, and continue to evaluate other international markets where we can find opportunities that fit our criteria. As of July 2026, 14.9% of our capital is exposed to China, with 8.7% to Japan.

Closing Thoughts

July 2026 was Pine Creek Capital Management’s first full month of investing, and it exceeded my expectations. Between performance, execution, and lessons learned, I am very optimistic about the future of this fund. And as of this writing on August 7th, I can tell you that the momentum has only continued.

I am also grateful to all 42 newsletter subscribers here on Substack, and anyone else reading these updates and following along on our journey, whether or not you are subscribed. Every visit, click, and share is immensely helpful. And if you would like to get access to our trade updates and investment research, please consider becoming a paid subscriber.

Until next time,

Brian

Disclaimer

This publication is strictly for informational purposes and is not advice of any kind. Nothing in this publication should be interpreted, explicitly or implicitly, as a recommendation, a solicitation, or an offer to buy, sell, or otherwise transact in any security or financial instrument.

Pine Creek Capital Management, its owners, investors, and any affiliated parties may or may not hold positions in the securities mentioned in this publication and may transact in such securities at any time without notice.

The information presented represents Pine Creek Capital Management’s views as of the publishing date and may change at any time. Past performance is not indicative of future results, and all investments carry risk and the potential for loss of capital.

Pine Creek Capital Management has made a best effort to source information from sources believed to be reliable and makes no guarantee as to the accuracy or completeness of the information presented.

Readers should do their own due diligence and speak with a qualified finance, legal, or tax advisor before making investment decisions.

Not only was this the largest IPO in stock market history, but it is also the most popular IPO we have personally experienced. During the week leading up to the IPO, we received numerous messages asking about whether SpaceX is a good investment at the IPO.

We shared the above in our newsletter published shortly after the offering, and disclosed that while we did not hold a position, we would publish a deep dive with a price at which we would be interested in starting a position in SPCX. We decided to hold off on publishing this report as the stock price was sent into the stratosphere.

We believed the company was well overvalued, so much so that our thesis would be pretty much useless unless one was looking to short the company. Even then, shorting a newly listed company is impossible during its first few days of trading, and prohibitively expensive even as shares become available to borrow.

This is likely the environment that enabled SPCX to close its first day at $161, and hit $225.64 four days later.

As of this writing on August 3rd, the stock now trades at ~$110/share, down 50% from its high and 18.5% from its IPO price of $135.

Tomorrow, August 4th, SpaceX is set to report earnings results for its first quarter as a public company. Additionally, on August 6th, shares of employees and early investors will become eligible for sale on the public markets. It is against this backdrop that we decided to answer the million dollar question we have been asked since June: what is SpaceX actually worth?

In this IPO Spotlight, we will cover:

1. A Brief History of SpaceX

2. How SpaceX Makes Money

3. Our Valuation of SPCX Stock

SpaceX: A Brief History

Elon Musk founded the company Space Exploration Technologies in 2002, contributing ~$100 million of his own capital via proceeds from the sale of PayPal. His goal with launching SpaceX was to dramatically reduce the cost of reaching orbit.

In the biography “Elon Musk” by Walter Isaacson, there is a fascinating excerpt about how Elon ran the numbers of what it would cost to build a rocket from scratch in an Excel spreadsheet. At the time, rocket launches were primarily done by government contractors with no incentive to compete on price, and each launch could cost upwards of $100 million or more.

Musk noticed this and concluded that the industry was wildly inefficient, estimating that with the right team, he could build a functioning rocket for a fraction of the cost. And with that, SpaceX was born.

SpaceX’s first product was Falcon 1, a small two-stage rocket set to launch in 2005.

After multiple delays, Falcon’s inaugural launch took place on March 24th, 2006 from Omelek Island. Below is a video of the rocket’s short-lived flight.

Falcon 1 failed to reach orbit, and failed subsequent launch attempts in 2007 and 2008.

After three failed launch attempts and a global financial crisis unfolding in real time, SpaceX had enough money for just one more launch. On September 28th, 2008, at 4:15pm local time, the countdown started.

“Five…..” White fumes emanate from the launch pad as excess liquid oxygen boils through the rocket’s release vents. In a split second, the valves close. Helium is flooded into the tanks and the rocket stiffens like a skyscraper-sized aluminum balloon.

“Four….” The launch computer sends a simple command:

vehicle: startup

Control of the rocket has been passed from the SpaceX team to the flight computer on board. There is nothing any human on Earth can do now. She is on her own.

“Three...” The massive Merlin 1C engine’s turbine starts spinning at hundreds of times per second, preparing to move a metric ton of propellant in seconds. The engine’s main fuel valve opens. Triethylaluminum and triethylborane, a mixture so eager to burn that air alone sets it off, is injected into the chamber a heartbeat before the propellants arrive. It ignites on contact with the atmosphere, creating an emerald green flash. But it needs more.

“Two..” Rocket fuel and liquid oxygen rush in to meet the ignition, and in a moment the launch pad is engulfed in flames reaching over 2,000 degrees celsius. The rocket is now pushing against the ground with 78,000 pounds of thrust. She wants to fly, but massive steel clamps are holding her in place. They won’t let go until the onboard runs its checks and gives the green light.

“One.” Falcon 1 is at full thrust. The computer is still checking. The launch crew is watching the webcast feed, their careers on the line. Time seems to stand still.

And then the computer sends a final pre-flight message:

engine: healthy

commit.

“Zero.” The clamps release. Umbilical cords fall away. And 90,000 pounds of propellant-filled aluminum accelerate towards the sky.

Approximately nine minutes later, Falcon 1 became the first privately developed liquid-fueled rocket to reach orbit.

Three months later, NASA announced a $1.6 billion contract for SpaceX to deliver 20,000kg of cargo to the International Space Station.

The story of the Falcon 1 encapsulates the theme of SpaceX’s history: improbable success.

In 2012, SpaceX successfully docked its Dragon spacecraft to the International Space Station. As with Falcon 1, they were the first private company to reach this milestone.

In 2015, SpaceX successfully landed the first stage of its Falcon 9 rocket after launching to space. This was the first time any launch vehicle of its kind landed itself, and it became a proof of concept that they could be reused. The booster was relaunched in 2017.

In 2019, SpaceX began deploying a broadband constellation of satellites in low Earth orbit which became what is now Starlink.

In 2020, NASA astronauts flew to the International Space Station via SpaceX’s Crew Dragon craft.

By 2025, SpaceX was launching 170 times per year, delivering 2,213 metric tons to orbit. At 9,600 satellites, SpaceX makes up roughly 75% of all active maneuverable satellites in orbit.

In 2025, Musk began consolidating various companies under SpaceX. In March 2025, xAI acquired X (formerly Twitter), and SpaceX later acquired the consolidated xAI in February 2026. While the consolidated company is still called SpaceX, there is now much more to the business than just launching rockets.

So what exactly are investors in SPCX getting themselves into? Let’s break it down:

The Business Model

SpaceX reports three segments: Space, Connectivity, and AI.

In 2025, these business lines generated a combined $18.7 billion in revenue, up 33% Y/Y. As readers will notice in the above chart, substantially all of this growth comes from the Connectivity segment, with modest growth in Space and more volatile growth in AI.

While Connectivity is by far the most interesting segment by revenue performance, we will pay homage to SpaceX’s roots by starting with a walkthrough of the Space segment.

Business 1 | Space (The Launch Business)

Since we have already discussed SpaceX’s history in detail, we will keep this section brief. This segment generates money through contracts with customers that need to transport stuff into space; usually satellites.

In 2025, the Space seegment generated $4.1 billion in revenue, with ~$2.6 billion of “Launch Services” (LS) revenue, and ~$1.5 billion in “Launch and Development” (L&D) revenue.

LS revenue is primarily commercial and government customers that need to get payloads into space, while L&D revenue represents more complex missions that require bespoke spacecraft, such as getting astronauts to the International Space Station.

Compared to the combined company’s $18.7 billion in revenue, $4.1 billion seems very small for the segment the company was built on and that has the widest moat. The reason for this is that of the 170 flights SpaceX carried out in 2025, the marjority were missions carrying the company’s own Starlink satellites.

Another way to think about this is that SpaceX has made spaceflight so cheap and efficient that there is now an oversupply of available launches. Instead of grounding its rockets, the company decided to find something productive to do with them: launching batches of internet satellites into orbit, which is the Connectivity segment.

Business 2 | Connectivity (Starlink)

The Connectivity segment sells internet service, similar to other Internet Service Providers (ISPs) such as Cox, AT&T, and Verizon, to consumers, companies, and gevernments.

Consumers buy a Starlink Kit which allows them to connect to Starlink satellites and pay a monthly subscription for access, While commercial customers install Starlink equipment in aircraft, ships, rigs, and remote sites to enable high speed internet where it is otherwise inaccessible. Governments also use Starlink for secure and reliable connections that cannot be sabotaged as easily as physical infrastructure down here on Earth.

SpaceX has also launched a newer constellation called Starlink Mobile, which connects ordinary phones directly from orbit, serving ~7.4 million monthly devices across ~30 countries as of Q1 2026. Currently, this service only supports low-bandwidth activity such as emergency services, bridge-coverage for select carriers when customers have no signal, and standard text messaging. Future constellations are planned to enable higher speed voice and data capabilities.

In total, the Connectivity segment generated $11.4 billion of revenue in 2025, up 50% from 2024 Connectivity revenue of $7.6 billion. This growth is driven two vectors: Subscribers, and Average Revenue Per User (ARPU).

• Subscribers: Starlink ended Q1 2026 with 10.3 million subscribers across 164 countries, a 2x increase from 5 million in Q1 2025.

• ARPU: Monthly revenue per subscriber fell from $86 to $66 over the same year, down from $99 in 2023. This is intentional, as Starlink expands into markets outside North America which command lower prices in USD, with the trend expected to continue.

With Subscribers doubling every year while ARPU only marginally softens, Connectivity is, in our view, the crown jewel of SpaceX. As it stands, the company is a hypergrowth internet service provider with a massive opportunity to displace the existing global communications market in nearly the same way it reinvented space transportation. There is no other company on Earth that can launch communications satellites into orbit as cheaply, frequently, and efficiently as SpaceX.

This combination of scale and efficiency enables Connectivity to post incredibly high profit margins, with Segment Adjusted EBITDA Margin in the mid-60% range in the past year.

However, some would argue that Connectivity is actually the most “boring” piece of SpaceX’s business, and that the real crown jewel is the AI segment.

Business 3 | AI (LLMs, Data Centers, and Twitter)

The AI segment is the combined operations of xAI and X (formerly Twitter), and it has two primary ways of generating revenue:

1. Advertising on X (aka Advertising)

2. Subscriptions to Grok and renting out data center capacity (aka AI solutions and infrastructure)

In 2025, these businesses generated $3.2 billion in revenue. Despite the hype behind AI and data centers, the majority of this revenue came from selling advertising space on X to the tune of $1.8 billion in 2025. The other $1.4 billion came from AI solutions and infrastructure.

Here we find a wrinkle in SpaceX’s S-1 disclosures. How much of AI Solutions & Infrastructure are consumer subscriptions to Grok and X Premium, and how much comes from actually renting out data center capacity?

From 2024 to 2025, AI Solutions & Infrastructure revenue grew $465 million. The S-1 explains what is driving this:

The increase in AI solutions and infrastructure revenue is mainly due to an increase in X and Grok subscription revenue of $365 million and an increase in revenue from data licensing arrangements of $88 million.

Put another way, SpaceX’s revenue grew ~$4.7 billion from 2024 to 2025. Of that, $0.088 billion came from AI-related data licensing arrangements. Normally this would not be an issue, it is completely normal for companies to invest in small, fast-growing new business lines. In SpaceX’s case however, AI is the primary driver of the company’s record shattering valuation.

According to the S-1, SpaceX’s Total Addressable Market (TAM) is $28.5 trillion, or about 25% of global GDP. $26.5 trillion of this figure, or 93%, is “Enterprise Applications” which just another way of saying “AI.”

The filing elaborates:

Consumer and Enterprise Applications. We leverage our leading frontier models and compute infrastructure to deliver consumer and enterprise applications. In under six months, we developed Grok Voice, a real-time speech engine, including in multilingual performance. Our image and video generation system, Imagine, produced approximately 10 billion images and over 2 billion videos per month, on average, for the quarter ending March 31, 2026. Together with Tesla, we are also developing Macrohard, an agentic AI platform designed to be capable of fully emulating digital workflows and augmenting human operation of computers—from coding and product development to management and entire business processes—using sophisticated autonomous agents. We believe Macrohard will have the potential to fundamentally transform how companies are structured and operate, thereby allowing dramatic increases in human productivity. In addition, we believe our existing government relationships and track record as large government contractors are a structural advantage as governments become significant consumers of AI applications.

In summary, SpaceX would have investors believe that it is chasing a $26.5 trillion market opportunity which last year added $0.000088 trillion of revenue.

Of course, we are ignoring some real AI revenue, which are Grok subscriptions. But SpaceX makes it impossible to distinguish how much of AI Solutions & Infrastructure revenue is from these subscriptions. They do, however, provide the total number of Grok and X Premium subscribers.

In our view, this is likely because a portion of this revenue is padded with X Premium subscriptions, whose users pay a monthly subscription to eliminate ads from their social media experience. Since these subscriptions are in lieu of advertising revenue, they should be included in Advertising revenue, not in AI Solutions & Infrastructure.

Of course, SpaceX is likely aware of the optics of claiming a massive global TAM driven by AI while having very little AI revenues. So it makes sense that the company would announce multiple AI-related deals as it came to market.

Anthropic

Five weeks before trading began, SpaceX announced a deal with Anthropic which it disclosed in the S-1. From the filing:

…in May 2026, we entered into Cloud Services Agreements with Anthropic…capacity provided includes approximately 325,000 NVIDIA GPUs, backed by hyperscale-class CPUs…[Anthropic] has agreed to pay us $1.25 billion per month through May 2029…the agreements may be terminated by either party upon 90 days’ notice.

Now that’s more like it; however, the standout is the 90-day termination policy. While $1.25 billion per month is incremental, this revenue is nowhere near as sticky as space launch contracts up to 14 years in duration.

Google

SpaceX must have realized that wasn’t enough, so one week before trading, the company announced a similar deal with Google.

From the disclosure filed with the SEC:

“On June 5, 2026, we entered into a Cloud Service Agreement with Google LLC…capacity provided includes approximately 110,000 NVIDIA GPUs…the customer has agreed to pay us $920 million per month from October 2026 through June 2029…After December 31, 2026, the agreement may be terminated by either party upon 90 days’ notice.

As with the Anthropic agreement, we can see that these revenues are not sticky, and SpaceX will have to compete with every other hyperscaler and neocloud company building data centers with the latest generations of GPUs and related hardware.

Cursor

Finally, we have the Cursor acquisition, which has a pre- and post-IPO development. From the S-1, in a section titled “Collaboration with Cursor:”

In April 2026, we entered into a compute and option agreement with…Cursor…Under the compute agreement, we will provide Cursor with certain GPU cluster compute capacity…With the option agreement, we have the right, but not the obligation to acquire Cursor at a predetermined price or pay a fee.

Wait, wait… “pay a fee?” This does not sound like a typical “option” or a true “collaboration.” This is structured like an in-flight acquisition agreement with a breakup fee. The filing elaborates:

If either (i) we decide to terminate the option agreement or (ii) Cursor is eligible to and decides to terminate due to our material breach of the option agreement (subject to notice and cure provisions), Cursor is entitled to a $1.5 billion termination fee under the option agreement and an $8.5 billion deferred services fee under the compute agreement.

A $10 billion breakup fee if either side walked away from this deal…that is more than all of SpaceX’s AI segment revenue from 2023 through 2025. This is definitely not much of an “option” or a “collaboration,” it really is an acquisition deal.

It was no surprise then when SpaceX announced they would be exercising their “option” to acquire Cursor at the predetermined $60 billion valuation. Kudos to Cursor for the deal of the decade!

While it is admirable that SpaceX is doing something AI-related by shoving $90 billion worth of deals in at the 1 yard line, keep in mind that $60 billion of that is an outflow to purchase an AI-coding tool! Granted, the purchase is in stock, but in the grand scheme of things SpaceX dug themselves a $30 billion AI hole right as it went to the public markets.

We have spent some time discussing SpaceX’s AI segment, and there is much more to discuss. However, their earnings drop imminently, and we will inevitably have to update our thesis based on what SpaceX reports this week.

By now, we have developed a comprehensive understanding of SpaceX as a company: where it came from, how it has evolved over time, its three major business lines, how they make money, and our thoughts and analysis with respect to the AI business specifically.

Let’s now answer the million dollar question: Given the information we have from the IPO, how much is SpaceX worth?

Read more

This week saw a flurry of action from earnings to interest rates to currency, culminating in the liquidation of a fledgling hedge fund, marking the first major victim of the AI trade (so far).

In today’s update:

• Microsoft, Meta, Apple, and Amazon all reported earnings this week, resulting in a mix of double digit gains and losses for each.

• A hedge fund called "Situational Awareness” was liquidated after losing 67% of its value with Citadel Securities purchasing the entire portfolio.

• The Federal Reserve chose to keep their key interest rate steady, sending shockwaves through the bond market.

• The US and Japan coordinated multiple currency interventions to support the Yen.

Also, a warm welcome to our newest subscribers! I hope that you find our content to be valuable to your investment process.

If you have any feedback about how we can improve our research, please shoot an email over to brian@pinecreek.capital

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks were up this week, as the rotation out of AI found a small but sharp reversal. The S&P 500 and Dow rose 1.05% and 1.04%, respectively, while the tech-heavy Nasdaq rose by 1.59%. In the spotlight were four of the so-called “magnificent seven” which reported earnings this week.

Magnificent Microsoft | Maleficent Meta

Microsoft and Meta both reported earnings on Wednesday, with Microsoft delivering an exceptionally strong quarter, beating Wall Street estimates on both Revenue and Earnings. Microsoft stock was up nearly 20% for the week.

Microsoft Earnings Highlights:

• Azure reacceleration: Azure revenue grew 43% year over year, beating the 39-40% target range. This was Azure’s fastest quarterly growth since early 2022.

• Backlog as capex justification: Commercial remaining performance obligations grew 84% to $678 billion. Excluding OpenAI commitments, RPO still grew 25%. Microsoft’s surge was widely attributed to pairing 43% Azure growth with an unchanged capex forecast, implying a return on its AI investment, in direct contrast to Alphabet and Meta.

• Headline beats: Revenue of $90.01 billion came in 2.7% above $87.63 billion estimated, with non-GAAP EPS of $4.74 vs. $4.24 est.

• Copilot monetization: Microsoft 365 Copilot passed 30 million paid seats, with net seat adds more than doubling quarter over quarter. Paid Copilot seats were 20 million as of April.

• Guidance: Management guided FY27 to double-digit revenue and operating income growth.

Meta, on the other hand, delivered Revenue roughly in line with expectations and badly missed on Earnings, with the stock down 7.7% on the week.

Meta Earnings Highlights:

• EPS miss: EPS of $6.18 missed consensus by about 14%, driven by $2.4 billion in legal proceedings charges and $1.18 billion in severance from an 8,000-employee workforce reduction. Revenue itself was fine: $60.8 billion, up 28% and above the $60.19 billion consensus.

• Free cash flow collapse: Free cash flow fell from $8.5 billion to $784 million as capex surged to $31.1 billion, and analysts cited this as the main concern.

• Second capex raise of the year: Full-year capex guidance moved to $130-145 billion, raising the low end from the prior $125-145 billion range. The market read this as spending without a clear return story: investors remain concerned about both the ROI (or lack thereof) and the potential for further increases in capex.

• Confusion on the compute strategy: Analysts on the call pressed Zuckerberg on why Meta is simultaneously buying third-party compute capacity while making moves to sell its own excess compute.

• Soft guidance : Q3 revenue guidance came in below market expectations, and the company raised its expected tax rate for the rest of 2026 from 13-16% to 15-17%.

Disclaimer: PCCM holds positions in both Microsoft and Meta.

Amazing Amazon | Awful Apple

Amazon and Apple both reported earnings on Thursday, with Amazon handily beating Wall Street estimates. Investors rewarded Amazon with a 15.64% gain through the week.

Amazon Earnings Highlights

• AWS acceleration: AWS revenue was $42.2 billion vs. an estimated $40.6 billion, with growth at 37% vs. estimates of 31%. This marked the fastest growth for AWS since 2021.

• Record revenue: Total net sales up 20% to $200.6 billion vs. expectations for $196.47 billion.

• Operating leverage: Operating income rose 43% to $27.5 billion. Operating income for the AWS segment reached $16.6 billion, up from $10.2 billion a year earlier.

• Backlog and demand: AWS disclosed a $496 billion backlog and increased 2026 capex guidance to $220 billion from $200 billion. Higher memory costs were the primary reason for the increased capex guidance.

Apple also beat on both top and bottom lines, but missed expectations for revenue in Greater China along with soft guidance from management, sending the stock down 7.9% for the week. This was also Tim Cook’s final quarter as CEO.

Apple Earnings Highlights:

• Revenue and Earnings Beat: EPS of $2.02 on revenue of $109.4 billion beat the $1.89 and $108.8 billion expected, on strong iPhone sales.

• Services shortfall: Services revenue of $30.7 billion missed the $31.3 billion projection.

• China shortfall: Greater China revenue of $18.8 billion came in below the $19.5 billion estimate, against a backdrop of Huawei and other domestic brands continuing to gain share.

• Soft guidance: Apple guided current-quarter revenue growth to 9-11% versus expectations of 12%, with the CFO citing foreign exchange headwinds and supply constraints on iPhone.

PCCM does not hold a position in Amazon or Apple.

Situational Awareness

Leopold Aschenbrenner’s hedge fund Situational Awareness made headlines this week as the fund faced heavy losses on both its long and short positions. According to reports, the fund lost 67% of its value in the month of July and took steps to protect investor capital by offloading substantially all of its public stock holdings. The block trade was made with Citadel Securities, a hedge fund led by Ken Griffin.

If you have never heard of Situational Awareness, here is a brief history of the fund and its founder. Leopold joined OpenAI as a researcher in 2023 and was subsequently fired from the company in 2024 after leaking confidential information, though he contests this characterization.

The 22 year-old then turned this brief experience into a grand vision documented in a short manifesto titled “Situational Awareness.” In it, the unemployed former researcher made bold predictions, including that we would reach AGI by 2027 and that the world’s governments are not prepared. This extended blog post was widely shared among venture capitalists which led to $225 million in seed funding from the co-founders of Stripe along with additional investors.

The newly minted hedge fund manager then began investing in what he described as “obvious bets,” high momentum semiconducter and AI-adjacent stocks with an estimated 4x leverage on the portfolio. At its peak, the fund managed ~$45 billion in assets. The fund also sought to short sale software stocks as part of a broader thesis that AI is the future and software stocks will go to zero or at minimum decline massively.

Coincidentally, this is the exact opposite of our thesis here at PCCM.

This trade, as many momentum trades do, worked incredibly well with the fund posting gains in excess of a thousand percent. Until it didn’t. In July, the trade reversed, which we benefitted from: the market started rotating out of the risky AI momentum trade and into software and broader value stocks.

This reversal nearly took Situational Awareness out completely. To save the fund, Leopold sought a buyer for his leveraged positions, and was able to make a market with Ken Griffin of Citadel. When the dust settled, Situational Awareness had a 67% drawdown and lost over $20 billion of investor money. Despite this, the fund remains up 80% for the year, though we suspect much of this gain is via private market investments which are not marked to market when their publicly-traded counterparts face a steep decline.

Leopold has vowed to learn valuable lessons from this experience and continue investing in public equities. Perhaps some of these lessons may include “what is a stop limit order,” or “Long Term Capital Management case study,” or perhaps “how to reduce portfolio correlation.”

Interest Rates

Interest rates increased across the board with the 10-Year Treasury Yield at 4.75% compared to 4.69% a week ago.

Interest rates continued their increase through the end of July, marking new highs for 2026. While the Federal Reserve declined to raise their key interest rate, the bond market has now taken the reins and decided to increase interest rates across the curve. Below is a chart showing what the US Treasury Curve looked like at the beginning of the year in orange vs. today in blue.

This chart illustrates the trend clearly: the 1-month maturity, which is what the Federal Reserve controls, has barely budged, while all other maturities have increased substantially. A note on how to interpret this chart.

Shorter term interest rates, like the 3-month to 2-year maturities, represent market expectations of what the Fed will do. At the start of the year, the market was expecting the Fed to cut interest rates, with yields falling through the 2-year maturity. Today, the market is now pricing in a much higher interest rate for the 2-year, reflecting the expectation now of interest rate increases.

The 3-year to the 7-year segment represent what is called the “belly” of the curve, and changes in this portion reflect the market’s expectations of the “steady state” Federal Funds rate. At the beginning of the year, the market was basically saying that the Fed Funds rate was in a good spot, and would likely stay there for the foreseeable future, give or take a quarter point.

The 10-year through the end is called the “long-end” of the curve, and this portion represents the market’s long-term expectations for growth and inflation. There is also “term premium” at this end of the curve, as investors will demand a higher yield to compensate for the uncertainty of locking their money up for decades at a time.

The long-end of the curve is one of the biggest drivers of the economy, as these yields drive lending rates for both consumers and the government. The higher these rates go, the more expensive it is to get a mortgage, since they are priced as a spread to the 10-year rate, and the more expensive it is for the government to borrow money.

Today, these rates are hovering near levels not seen since 2007, just before the Great Financial Crisis.

These higher interest rates lead to higher interest payments from the government, with net interest costs currently comprising 3.3% of GDP which is higher than the previous high of 3.2% set in 1991.

Between now and the next election cycle in 2028, we expect national debt to become a potential flashpoint among political discourse. We have more to say on this topic, which we will save for a deeper macro note in the future.

With respect to US interest rates and fixed income, we remain 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 fell to the low $80/barrel range, down ~10% from the low $90s last week. This moderation in oil prices comes as the US continues to delay striking Iran in hopes of reaching a deal to reopen the Strait of Hormuz.

Desperate for a Deal

Last week, we analyzed an article from the Wall Street Journal which provided an inside look as to Trump’s posture towards Iran. According to staff, the President has become increasingly frsutrated with Iran and is now in “revenge mode.” This falls in line with our view outlined two weeks ago. From that market update:

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.

On Friday, it was reported that Trump ordered new strikes on Iran. While oil prices jumped ~6% on the news, they remained below their high of ~$92/barrel from the week prior. We found this puzzling, as this was the sharpest signal of escalation yet in the months-long conflict, and logically should send oil to to the mid-$90s. As of this writing, we know why:

As with the muted jump in prices following the announcement of fresh strikes on Iran, oil prices fell somewhat but remain in the low $80/barrel range following the news that Trump has called off the strikes and negotiations with Iran will begin Monday.

We have seen this before, and so has the market. The above rhetoric would have investors believe that the US and Iran will negotiate directly with the goal of reopening the Strait of Hormuz and ending Iran’s nuclear threat. However, we have found that it is much more instructive to read past headlines and look at the verifiable facts. Here is where we see gaps:

1. “Talks begin Monday.” Between whom? About what? Anyone can talk about anything, including having talks about having talks. Are the US and Iran meeting directly to negotiate over the Strait and nuclear weapons? Or is some combination of third parties meeting to “strategize” about next steps.

2. If a deal, or deal to make a deal, is reached, will either side honor it? According to reports, Trump has “always known a deal with Iran wasn’t going to work.”

   

3. Is a deal even possible? President Trump’s interpretation of this “emerging deal” is a “Complete and Total OPENING OF THE HORMUZ STRAIT, and an end to Iran’s nuclear threat.” Iran’s stance is that the Strait of Hormuz “will in no way return to the status is was before February 28th.”

   

Based on all available information, a few things seem clear:

• There are no active negotiations between the US and Iran.

• The current headlines describe a framework of a potential deal created by third party countries.

• The US has revealed that it will back down from striking Iran on any hopes of making a deal, revealing our desperation for a deal.

We reiterate our prior thesis: we remain bullish on oil with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel, though we do not hold a direct position in oil futures.

Gold and Silver increased 2.21% and 0.19%, respectively, while Copper increased 1.73%. The precious metals remain volatile as they are coming off 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 has continued to languish, trading down to the $63,000 per coin range. The cryptocurrency is currently down ~28% this year as investors look to other investible assets.

The cryptocurrency scene has been relatively quiet over the past few weeks, but we remain bearish long-term on Bitcoin and crypto-adjacent companies such as Strategy (MSTR) and its preferred stock STRC.

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 round out earnings season with a final hurrah of companies reporting. Most of the exciting names are earlier in the week. On the data front, we will get a mix of jobs related data with a few PMI readings.

Earnings

• Monday, (8/3):

  • AM: Marriott, Tyson Foods.

  • PM: Palantir, Vertex, ON Semiconductor, Clorox, Snap, Diamondback Energy.

• Tuesday, (8/4):

  • AM: Caterpillar, Pfizer, McDonald’s, Merck, BP, Spotify.

  • PM: AMD, SpaceX, Arista Networks, SanDisk, Booking Holdings, Amgen.

• Wednesday, (8/5):

  • AM: Eli Lilly, Disney, Uber, Shopify.

  • PM: AppLovin.

• Thursday, (8/6):

  • AM: ConocoPhillips, Datadog, Zoetis.

  • PM: Airbnb, MercadoLibre, DraftKings, Axon.

Economic Data

• Monday (8/3): ISM Manufacturing PMI

• Tuesday (8/4): JOLTS Job Openings

• Wednesday (8/5): ISM Services PMI

• Thursday (8/6): Initial Jobless Claims

• Friday (8/7): Nonfarm Payrolls, Unemployment Rate

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

We believe this is a mispricing for three reasons:

1. Kevin Warsh is a career hawk, which the market has not come to terms with

2. Current inflation levels demand interest rate hikes

3. The economy is well positioned to handle a quarter percent increase in rates

1. Kevin Warsh

Many believe that Kevin Warsh was hand picked by President Trump to lower interest rates. Warsh himself seemed to allude to a lower rate bias by making the case in media interviews that technological advancements could lead to deflation. The market was surprised then, when Kevin Warsh kicked off his first press conference as Fed Chair with a very hawkish tone. From the June 2026 transcript:

We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal of 2 percent that’s been going on for more than five years. Persistently high prices are a burden for the American people. But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.

…we have the capability and commitment to deliver on our price-stability objective of 2 percent. That’s exactly what we’re going to do. In the Fed’s review of its strategy over the last any number of years—in January, the Fed—including the strategy that we’re still bound by—the Fed statement says that inflation is primarily determined by monetary policy. You bet it is. I’ve said for years inflation is a choice. You bet it is. And today I’m announcing that this Committee, unambiguously and unanimously, have decided we are going to deliver on that.

…let me restate it. Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. That paragraph goes on to say, but to be clear, the Fed’ll deliver price stability. My own judgment is the Committee spent quite a bit of time, not just in two days but over iterations of a couple weeks. That’s what we’re prepared to say about inflation, but the commitment to deliver is strong, unanimous, and unambiguous. And that’s, I think, an important message we’ve missed for five years, and, and we’re going to fix that.

Chair Warsh did not mince words. Inflation is above target, the Fed has failed to control inflation for over 5 years, and the Warsh Fed will not make the same mistake.

The market acted like it just got kicked in the mouth, with the S&P 500 and Nasdaq both falling over 1%.

For those that have studied the Fed, this language was not a surprise. Below is a chart from Anna Wong, Chief Economist for Bloomberg US. It shows Unemployment Rate and PCE Inflation during Warsh’s tenure as a Fed Governor from 2005 through 2011. If you have not seen this before, or did not know Warsh previously served on the Fed, please pause and read through it.

There are two clear takeaways from this chart in our view:

1. Kevin Warsh is a hawk.

2. Kevin Warsh is consistent (some may say stubborn) in his views.

Throughout this period, Warsh was very vocal about his concerns with respect to monetary policy and inflation. His longstanding commentary culminated in an op-ed in the Wall Street Journal in which he made his final case that monetary policy is not a substitute for real economic growth.

When others see Kevin Warsh, they may see a Trump appointed nominee who is open to pontificating about the potential impacts of widespread AI adoption. Who isn’t these days. When we look at Kevin Warsh, we see a consistent thesis that monetary policy is a tool for controlling (and losing control of) inflation, independent of economic growth. Under this thesis, growth and productivity gains driven by AI are exactly what Warsh would be looking to hike rates into. Let the economy handle growth, and let the Fed handle prices.

Inflation never materialized in the way Warsh feared, and the economy was able to recover. Warsh ultimately resigned from the Fed in 2011. Sometime around 2023, however, he must have felt a cathartic vindication.

2. Inflation

In 2020, the Federal Reserve pre-emptively lowered interest rates to 0% in response to the pandemic. Their rationale at the time was that it is better to be as accommodative as possible to mitigate the economic fallout of the Covid-19 pandemic.

What the Federal Reserve did not count on was that, as Warsh believed a decade prior, the economy took care of itself with respect to growth. Despite a global pandemic, we found ways to continue working remotely. The streets and buildings were empty, but the economy kept growing.

This growth, combined with both monetary and fiscal stimulus, led to a generational run-up in consumer prices. Below we plot a chart of actual inflation as measured by PCE compared to the Federal Reserve’s 2% target.

This time, there is only one takeaway from this chart: Kevin Warsh was right.

While it may be near impossible to argue that there should have been no loosening of monetary policy, they certainly seem to have been far too loose, too quickly, and for far too long.

This has culminated in a 2x divergence between where prices should be according to the Federal Reserve’s stated 2% target, and the prices we consumers pay today. Let there be no doubt, incomes have risen during this period, and spending remains strong…but the disparity between the victims of inflation and the beneficiaries of economic growth remains wide.

3a. Growth

Economic growth is a major constraint on monetary policy. Raising interest rates too quickly risks denting or collapsing economic growth. However, growth as measured by Nominal GDP Growth has not been stronger in decades. Below we show a chart plotting Nominal GDP growth from Q1 2016 to Q1 2026.

We are back to two takeaways for our last chart:

1. Despite rising interest rates, Nominal GDP growth never fell below 4.5%, which was already considered a high level before the 2020 pandemic and ensuing period of zero percent interest rates.

2. Growth has actually started accelerating, from 4.6% a year ago to 6.1% in the most recent quarter.

While we should applaud an acceleration in growth, we should also recognize that an economy that grows too quickly can overheat, leading to further increases in inflation.

Readers may notice that we have mentioned nothing here of supply chain disruptions, of food and energy costs, or of the wars between Russia and Ukraine, or between the US and Iran. This is intentional, and is a recognition of the fact that Kevin Warsh acknowledged the impact of supply shocks, but refuses to use them as an excuse for the gap in inflation or as an out for not hiking rates.

From before, in his own words on the matter:

…let me restate it. Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. That paragraph goes on to say, but to be clear, the Fed’ll deliver price stability.

However, there is one additional data point we have left to cover, and that is unemployment.

3b. Unemployment

Along with growth, unemployment is another constraint to tightening monetary policy. Again, as with GDP, the US economy has never been in a better position to weather higher interest rates. Below we plot the headline unemployment rate from June 2016 through June 2026.

This chart needs little analysis: the unemployment rate currently stands at 4.2%, despite warnings from AI executives to the contrary. Throughout the previous rate hike cycle from 2022 to 2024, the Fed Funds rate rose from 0% to over 5%(!), while unemployment failed to breach 4.5%, still lower than much of the pre-pandemic period. In fact, unemployment has come down since then.

Conclusion

No matter where one looks, the case is clear: inflation has been too high for too long, and the economy is well positioned for higher rates. The new Fed chair, Kevin Warsh, has stated explicitly, in no uncertain terms, that the “…FOMC are unambiguous and unanimous: This Committee will deliver price stability.”

In fact, based on all we have discussed, it would seem inconsistent for the Warsh Fed to not increase rates at this July 2026 meeting. At the same time, the market is pricing in a mere 20% to 30% chance of a quarter percent hike in rates. Granted, the market may know something we don’t. Perhaps Warsh truly has changed his feathers and is now a dove, and the rhetoric from June’s meeting was meant to avoid any explicit criticism that the Chair is now an extension of the President.

In any case, we believe the market has this wrong, and should at minimum be priced closer to 60% or higher. This probability reflects our uncertainty as to whether or not rates will in fact be raised at this meeting. Another plausible path is a rate hold with further hawkish rhetoric, in which case we would still expect a steeper rate path than what the market is pricing in over the next 6-12 months.

For this reason, we have opened a small position in short ZQ futures at the August and September expiry.

This past week we saw a surge in volatility in every corner of the market.

Donald Trump has become increasingly frustrated with the Iran War and is reportedly in “revenge mode,” according to the Wall Street Journal.

The market drove Google’s shares off a cliff after the company reported a strong top-line earnings report, sparking a broader sell-off through the back half of the week.

The 10-year Treasury yield reached a new high for the year near 4.7% as expectations for inflation and long-term interest rates increase against a volatile macro backdrop.

We will cover each of these topics and a bit more in this week’s market update.

Before we jump in I want to give a quick thank you and welcome to our new subscribers this week!

I hope that you find our content to be valuable and differentiated to your investment process.

If you have any feedback about how we can improve our research, please shoot an email over to brian@pinecreek.capital

Let’s dive in!

-Brian

By the Numbers

Equities

Stocks were down this week, as last week’s rotation out of AI-adjacent stocks continued despite what looked to be strong earnings from major tech companies. The S&P 500 fell 0.61% while the tech-heavy Nasdaq sank by 2.13%. The Dow was much calmer, falling just 0.38% in comparison.

Google Earnings

Patient zero was Google which reported earnings this week, and at face value, their numbers came in very strong. Google Cloud quarterly revenue grew 82% from last year, with a $514B backlog. AI product usage is up across the board, with monthly Gemini app users nearing 1 billion, and Tokens Per Minute up roughly 38% compared to last quarter. And total business revenue for the quarter grew 24% versus last year.

The slide above was shared across Substack and YouTube investing circles as proof of Google’s stellar performance. However, it’s important to keep in mind that this is a company-provided slide. It’s been carefully curated by management to portray the best story possible, and should be taken with a massive grain of salt (if at all).

The real story lies in Google’s capital expenditures and cash flows. How much is the company spending on AI, and what is their return on investment for this spending? Below is a chart we put together showing exactly that.

Since Google began aggressively spending on AI-related infrastructure in 2023, the company has increased spend by roughly four times. Over the same period, Operating Cash Flow has only increased two times, resulting in negative free cash flow of nearly $6 billion.

Put another way, for every $2 Google has invested since 2023, they have only seen $1 worth of additional Operating Cash Flow. This of course assumes that 100% of that growth comes from the growth in capex. One can easily argue, however, that the long-term trajectory of Operating Cash Flow has not changed.

From September 2020 to June 2023 (12 quarters total), average annual growth in Operating Cash Flow was 25% on $80 billion in capital expenditures. During the following 12 quarters, capex totaled $244 billion to achieve average annual growth of 27%.

While freelance and professional analysts alike shared management’s slides and applauded Google’s top-line numbers, the market saw straight through to the only question that matters for Google and the rest of the so-called hyperscalers: what is hundreds of billions in additional investment adding in value? Is it adding anything at all?

The answer, for the last three years at least, is that a quarter trillion dollars in additional investment buys Google two percentage points of additional growth (if that). It should be no surprise then that Google shares fell off a cliff shortly after posting these results, sparking the broader tech sell-off into the back half of the week.

While PCCM does not hold a direct position in Google, we did begin entering short positions in line with our view that the AI bubble has popped and the rotation out of AI has started to accelerate.

Interest Rates

Interest rates increased across the board with the 10-Year Treasury Yield at 4.68% compared to 4.56% a week ago.

Interest rates have increased substantially since the beginning of the year, driven primarily by the continued war between the US and Iran. As the war and its resulting supply chain disruptions drag on, the risk of an inflation supercycle such as we saw in 2022-2023 increases. These higher inflation expectations feed directly into higher interest rates, starting at the short end of the curve and percolating into longer-term maturities.

There are many implications of higher interest rates, including higher borrowing costs on government debt, downward pressure on the housing market via higher mortgage rates, and downward pressure on equities via higher discount rates. Each of these is its own concern. Yet, there is one downstream effect from higher US rates that seems to be getting little attention: The Yen Carry Trade.

The Yen Carry Trade

A carry trade happens when two currencies offer widely different interest rates. For example, short-term rates here in the US are about 3.5%, vs. 1.0% in Japan. Investors can capture the difference between these interest rates by borrowing Yen at 1%, and investing that money into Dollars earnings 3.5%. The result is a gross return of 2.5%.

To execute this trade, Yen is effectively sold to buy Dollars, putting downward pressure on the Yen and upward pressure on the Dollar. This may be a key phenomenon driving the Yen to 40-year lows vs. the Dollar.

Whatever the case may be, depressed currencies often provide asymmetric setups, as currency-based trades such as the Yen Carry Trade can lead to violent short-term unwinds. We are looking closely at increasing our exposure to Yen, and this week we added a new position in a Japanese company that is trading at 1x book value and 3x EV/EBITDA while Revenue is up 9% Y/Y and EBITDA is up 18% Y/Y.

With respect to US interest rates and fixed income, we remain 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 $90/barrel range, up another 12.7% from the low $80s last week. This jump is directly attributed to continued escalation between the US and Iran over the past week as the two countries wrestle for control over the Strait of Hormuz.

Trump is in “Revenge Mode.”

In last week’s newsletter, we summarized our thesis to date on the Iran War, ending with the following:

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.

This week, the Wall Street Journal reported that the scene from inside the White House seemed to follow our note as if it were a script:

The article continues…

The president in recent days has grown skeptical that negotiations with Iran can produce a lasting peace, according to people familiar with the matter. A senior administration official said Trump believes that the only thing Iran understands is military force, adding that he was in “revenge mode” against Tehran. The president, the official said, sees few good options besides continuing strikes.

Surprisingly, this article came and went without much coverage as investors were glued to their Bloomberg Terminals monitoring a busy week of earnings. While oil prices did increase 12.7% on the week, the impact for the rest of the market seemed relatively muted.

We believe this is a mistake.

Despite the recent rise in oil prices, we believe oil remains structurally underpriced and equities overpriced given the level of risk implied by oil markets and the very real potential for a drastic escalation by the US in an attempt to deliver a “final blow” to Iran. Such a move, such as a full-scale bombing campaign or a ground invasion, could result in widespread collateral damage with long-lasting supply chain constraints.

For this reason, we entered positions this week based on our thesis with respect to the Iran War, including short selling stocks we believe are relatively overvalued compared to their fundamentals and exposure to a prolonged conflict. On oil, we remain bullish with a near-term target price of $100+ and a longer term floor of $65-$70 per barrel, though we do not hold a direct position in oil futures.

Gold and Silver increased 0.78% and 3.05%, respectively, while Copper increased 1.12%. The precious metals remain volatile as they are coming off 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.

Although we have yet to cover metals in detail, we highly recommend this deep dive by our friends at Aurelion Research.

Aurelion Research

Commodity Memo: Navigating the Mining Cycle

The past few months have been challenging for the commodity sector, with weakness in mining spot prices weighing on mining equities…

Read more

a month ago · 31 likes · 5 comments · Aurelion Research

PCCM does not hold a position in any of the three metals.

Bitcoin has continued to languish, trading sideways in the $64,000 per coin range. The cryptocurrency is currently down ~27% 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

We are heading into week two of earnings with 971(!) companies reporting through Friday. For the full list, please visit earningsxray.com, a portfolio site of PCCM.

Earnings

• Monday, (7/27): AstraZeneca and Baker Hughes report before the open, with Nucor, Whirlpool, Welltower, Celestica, F5, and Amkor after the close. Nucor is the follow-through read on steel pricing after Steel Dynamics last week, and Baker Hughes is the first look at whether triple-digit crude is pulling through to service pricing and rig activity.

• Tuesday, (7/28): Boeing, Coca-Cola, UPS, and PayPal report before the open, alongside Sherwin-Williams, Paccar, Illinois Tool Works, Carrier, S&P Global, Hilton, and Royal Caribbean. Visa, Ford, Mondelez, Waste Management, KLA, NXP, Skyworks, Seagate, and Enphase follow after the close. UPS parcel volumes and Visa payment volumes are the two cleanest consumer reads of the day.

• Wednesday, (7/29): Microsoft and Meta both report after the close. Microsoft consensus sits at $4.24 EPS on roughly $87.6B revenue, up about 15%, but the number that matters is fiscal 2027 capital spending after the roughly $190B calendar 2026 guide. Meta consensus is near $7.18 EPS on about $60.2B, against company guidance of $58B to $61B, and its $125B to $145B capex range implies roughly $38B per quarter for the rest of the year, about double the first quarter pace.

• Wednesday, (7/29 continued): Qualcomm, Arm, Lam Research, Fortinet, Robinhood, Starbucks, Chipotle, O’Reilly, Carvana, and Electronic Arts also report after the close. Procter & Gamble, General Dynamics, Boston Scientific, ADP, Amphenol, Humana, Garmin, Vertiv, and Old Dominion report before the open.

• Thursday, (7/30): Apple and Amazon both report after the close. Apple consensus is $1.89 EPS on roughly $108.8B to $110B, with management guiding to 14% to 17% growth, so a print at the low end reads as a miss. This is also expected to be Tim Cook’s last call as CEO before John Ternus takes over. Amazon consensus is $1.82 EPS on about $196.7B, with AWS under the magnifying glass after 28% growth in the first quarter. Bank of America has moved its AWS growth estimate to 33% from 31%.

• Thursday, (7/30 continued): Mastercard, McDonald’s, Bristol-Myers, Cigna, Altria, Hershey, Regeneron, ICE, KKR, Shell, Valero, Trane, and Yum report before the open. Coinbase, Reddit, Roblox, Rivian, Stryker, First Solar, and Illumina follow after the close.

• Friday, (7/31): Exxon Mobil and Chevron report before the open, alongside AbbVie, Linde, Colgate, Eaton, Cboe, T. Rowe Price, Cameco, and Moderna. With crude topping $100 a barrel on Thursday, upstream realizations and any change to buyback pace will be key data points.

Economic Data

• Monday (7/27): Durable goods orders for June at 8:30 a.m. ET, with core capital goods the piece that matters for business investment. Dallas Fed manufacturing for July follows at 10:30 a.m., and Treasury sells $69B in 2-year and $70B in 5-year notes at 1:00 p.m.

• Tuesday (7/28): Conference Board consumer confidence for July at 10:00 a.m. ET, after two straight monthly gains. Case-Shiller 20-city home prices for May land at 9:00 a.m.

• Wednesday (7/29): FOMC decision at 2:00 p.m. ET, with Chair Warsh’s press conference at 2:30. Economists polled by FactSet expect a fifth straight hold at 3.5% to 3.75%, but CME FedWatch now puts hike odds at 38%, up from 12% a week earlier. No projections accompany this meeting, so the statement language carries the weight.

• Thursday (7/30): Q2 GDP advance estimate and June personal income and spending, both at 8:30 a.m. ET. Q1 grew 2.1% annualized on the third estimate. May PCE ran 0.4% on the month and 4.1% year over year, with core at 0.3% and 3.4%, and forecasters look for June core near 0.1%, which would pull the annual core rate toward 3.2% and headline toward 3.7%. Initial jobless claims come at the same time, off a print of 187,000, the lowest since 1969, with continuing claims at 1.796 million.

• Friday (7/31): Employment cost index for Q2 at 8:30 a.m. ET, followed by Chicago PMI for July at 9:45 a.m. and final July Michigan sentiment with 1-year and 5-year inflation expectations at 10:00 a.m.

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.

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The shares are expected to start trading on Thursday, July 30th, and are currently priced in a range of $21 to $25 per share.

This is a very interesting time for a sandwich company to IPO. While equity markets are certainly hot, new issuances are dominated by technology and AI platforms. So why is Jersey Mike’s, of all companies, filing for a public offering?

And, more importantly, is $21 to $25 a fair price for the stock?

Mike’s Way

Jersey Mike’s began in 1956 as a family owned and operated sandwich shop, one of the first to specialize in what would become an American staple: the sub sandwich.

Mike’s became a favorite local restaurant over the next twenty years, at which point the original owner decided it was time to sell.

Peter Cancro was 17 at the time and had been working for Mike’s since he was 14. He was a senior in high school and had plans to study law and political science. But one night, his mom suggested that he buy the sandwich shop that he was working for.

Peter brushed off the idea. At 17 he wasn’t even legally allowed to cut meat let alone buy a business. But then Peter called the owner and pitched him on buying the shop. Mike said he had a week to find $125,000.

Luckily, Cancro played football in high school, and his coach happened to also be a banker. By the end of the week, Peter had the $125,000 loan he needed to buy Mike’s Sandwiches.

Nearly 50 years later in 2024, Peter had grown Jersey Mike’s from a local sub sandwich shop to a national franchise with nearly 3,000 locations that collectively brought in $3.7 billion in systemwide sales.

This time, it was Peter’s turn to hand over the reins. He sold to a private equity firm called Blackstone in 2025 for a reported $8 billion.

Just 18 months later, Blackstone is bringing Jersey Mike’s back to the public markets at a ~$9 billion valuation in a range of $21 to $25 per share. Let’s take a look at what investors are getting in exchange for this price.

The Business Model

When most people think of Jersey Mike’s, they think of it as a chain of restaurants, which is a very capital intensive, low margin business model. In fact, many restaurant and fast food companies are comparable to real estate holding companies, simply due to the fact that a large portion of operating a restaurant is servicing the buildings they operate in.

This is not “Mike’s way,” however. Jersey Mike’s is a Franchisor, which means that the company itself doesn’t own the physical stores. Instead, Jersey Mike’s “rents out” its business model for others to operate. This allows the sandwich company to sidestep the low profit margins that come with hiring and training retail staff, buying and servicing real estate, and managing inventory. Mike’s provides their brand name and logo, recipes, and a proven system for operating a successful sandwich shop in exchange for royalties from franchise owners.

This has allowed Jersey Mike’s to more than double its total locations over the past ten years.

Over that same time, Average Unit Volume (AUV), which is a measure of sales per location, has increased 67% from $825,000 in 2016 to $1,376,000 in 2026.

This shows that Jersey Mike’s has demonstrated strong brand growth and quality. Over the past 10 years, there has been a steady stream of new locations opened by franchisees, and those new locations are bringing in higher total revenue per store. Jersey Mike’s measures the total sales across all locations using a metric called Systemwide Sales, which more than doubled from $1.6 billion in FY2020 to $4.2 billion in FY2025.

We must keep in mind, however, that this is a high level view of Jersey Mike’s business model. Next, let’s take a look at the company’s financials.

Financial Profile

When reviewing a potential public company, it is important to review their financials closely. For this analysis, we will examine each financial statement presented in the S-1 and provide our own analysis.

Income Statement

Below is a screenshot of Jersey Mike’s income statement. One point of interest worth noting is that the company is going through a restructuring as part of this transaction, which is why you see so many columns in the below screenshot. For this section, we will focus on pro forma numbers and will revisit some of the mechanics causing the restructuring in a later section.

These numbers paint a different story from what we’ve seen so far. In Q1 of 2026, Jersey Mike’s lost $21 million compared to $185 million in total revenue on a pro forma basis. This puts EPS at negative $0.09 for the quarter, or negative $0.36 annualized. However, income statements can be misleading when reviewing a business’s performance.

Below is a table that reconciles Net Income to EBITDA. We should be upfront that EBITDA should never be taken at face value. But the line items in this table provide valuable context.

In the above table, we can see three major items that drag on net income: interest expense, depreciation and amortization, and Area Director buyouts. We also see an item with only one entry called "loss on extinguishment of debt.”

Interest expense is a normal expense of doing business and should absolutely be counted against net income. However, as shown below, the company plans to pay down $295 million worth of debt using money received from the IPO.

Surprisingly, this debt has a very low interest rate of 4.952%, almost 2% lower than the current rate on a 30 year mortgage. By paying down $295 million of this debt, Jersey Mike’s will save approximately $15 million per year going forward.

Area Director buyouts are the next major line item dragging down net income, and these expenses have ramped up in the last two quarters. This expense represents an intentional one-time refinement in Jersey Mike’s franchise model.

Previously, the company relied partially on established Franchisees to help grow locations in a specific area. In exchange, these franchisees would receive 2% of gross sales from all locations in that region. This is not an expensive model at scale, as revenue share is arguably the most expensive form of corporate ownership or partnership.

Jersey Mike’s realizes this, and is finalizing the process of buying these Area Directors out of their 2% revenue share, replacing them with salaried Regional Vice Presidents. This will reduce the company’s operating costs going forward, as both the 2% revenue share and the $80 million in recent buyouts will not recur in a meaningful way.

Lastly, we see that depreciation and amortization has dragged on net income by about $25 million per quarter since January 2025. This is unusual given that Jersey Mike's is a franchise-based operation and therefore has little to no property to depreciate.

The reason this line item exists is because of the transaction by Blackstone to buy the company in 2025. Under GAAP accounting rules this $8 billion transaction created an asset on the balance sheet of a roughly similar value, broken down into trade name and franchise agreements.

While the $5.7 billion trade name does not amortize, the $1.7 billion in franchise agreements do, creating a 20 year straight-line drag on net income of about $21.25 million per quarter. Though there are valid technical reasons the accounting is presented this way, this amortization figure simply does not represent the expense of ongoing operations of the underlying business.

If one were to ignore the items we have mentioned above, the true economic profit of Jersey Mike’s is closer to positive $41 million as opposed to the reported pro forma figure of negative $21 million, a $62 million delta.

In summary, the net income statement as it stands is a poor gauge of Jersey Mike's health as a business, and our estimated valuation for this company is based on an EBITDA multiple rather than an analysis of owner’s earnings. Before we look at the valuation, however, let us move on to the balance sheet and then the cash flow statement.

Balance Sheet

Below is the company’s unaudited pro forma balance sheet as of Q1 2026, and it is about as benign as they come. In fact, we have already discussed intangibles which are the company’s largest listed asset.

The primary concern with any company under private equity ownership is its level of debt compared to its ability to service that debt. At first glance, Jersey Mike's looks like it has a lot of debt compared to its current assets with $330 million in total current assets and $3.7 billion in total liabilities.

However, much of the $3.7 billion is made up of a $1.4 billion line item called “TRA liability.” This is an agreement between Jersey Mike’s and its previous owners, Peter Cancro and Blackstone, where Jersey Mike’s will pay them 90% of its future tax savings.

This agreement exists because Peter and Blackstone will realize taxable gains as they exchange their partnership units for public shares over time, and each exchange steps up the company’s tax basis, allowing it to claim higher deductions. This TRA structure is meant to give a majority of those savings back to the sellers (Peter and Blackstone).

What is important about this line item is that it is not like normal debt, which demands interest payments whether or not the company is making money. The TRA simply sits there on the balance sheet, and the owners of that liability only get paid when Jersey Mike’s realizes tax savings.

As we discussed previously, the other half of this debt is fixed interest at a very low rate, and based on its most recent income statement, the company makes more than enough in revenues to service the interest payments on this debt. We can see this even more clearly when looking at Jersey Mike’s cash flow statement.

Cash Flow Statement

Below is the latest statement of cash flows from the Jersey Mike’s S-1 for Q1 ‘26. We should note that this is not a pro forma cash flow statement, which is why the net income here of negative $24 million does not quite tie to the pro forma net income we covered above at negative $21 million.

As we look through the company’s cash flow from operations, we can see quite clearly that there is ample cash flow to service Jersey Mike’s ongoing interest expenses.

While net income was negative $24 million, cash flow from operations comes out to $86 million, driven by $26 million in depreciation and amortization and $68 million from increases in accounts payable and similar liabilities, thanks to working capital timing. Plenty enough to continue funding growth even after paying interest expense. But there is more to valuing a stock than just having a “good enough” financial profile.

Let’s answer the question of whether Jersey Mike’s is a buy in the $21 to $25 per share range, and if not, at what price we would invest.

Valuation

Read more

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.

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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.

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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.

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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.

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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.

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