One thing I’ve always found interesting about the financial press is the reasons they give for market volatility tend to work in both directions. I was watching the futures market Tuesday evening (Wednesday morning in Tokyo) and as it became clear the Democrats were going to take control of Congress, prices started to fall. This makes sense. Much of Democratic messaging was openly anti-capitalist and anti-business. Candidates for team blue were calling for more regulation and less construction. Many were advocating for communism. All of this would be good reasons for stock prices to fall.
Then, when the market opened on Wednesday morning, the stock market skyrocketed. The explanation given by commentators was ALSO the election. This time the narrative was that people had hedged their portfolios (bought insurance) ahead of uncertainty (the election) and now that the event had passed, they could unwind their hedges and get back to their normal long exposure. This reasoning makes sense as well. Note that Democratic messaging hadn’t changed or softened overnight. The same facts and the same political outcome led to explanations for both a falling and a rising market.
Last night in Tokyo, I was writing this week’s 5 Things, reading the morning news in New York, and watching the market. Shortly after the open, the DKI portfolio was up about 2%. That’s great. $TPL was up and the call options I bought the day before had doubled. (Even better – nice to look smart!). By the time I had brushed my teeth and gotten into bed, those gains were gone. By the time I turned out the lights, my portfolio was red, and $TPL was down. (Not great – now I feel dumb!).
I woke up 2 hours later at 3am (1pm in NY) and saw the portfolio was down about 1% while the S&P 500 and the NASDAQ were down 3% – 6%. Wondering what had happened, I started checking the news, my email, and X (formerly Twitter). There was nothing. No explanation. Eventually, I realized no one really knew.
The story today explaining Thursday’s market action came in two parts. One was that concerns about the Democrats’ negative view on data centers meant the AI trade was unwinding. The other was that leveraged hedge funds were unwinding positions. It’s all true.
On the data centers, I don’t think Democrats actually hate them. I think their voters have a reasonable hatred for rising electric bills. Google and Amazon can outbid any municipality or homeowner for power and have been doing so. There’s nothing wrong with politicians trying to ensure a regulated and protected utility serve the people in their market. (I’d like to see more of a free market in energy, but given the system we have, the political response is appropriate.) The solution is easy: The hyperscalers should build their own power generation. They really should do this on $TPL land where there are no neighbors and they can pay for a private source of energy and water.
Today, I saw someone write about how crazy it is that Nvidia is trading at 13x earnings. The writer is correct, but is missing the point. Nvidia is trading at 13x earnings estimates that assume continued hyper-growth. That company has been growing the top line by more than 100%/year with improving margins. If the next data center that requires millions of Nvidia chips doesn’t get built, that growth rate falls to something good instead of spectacular, margins don’t continue improving, and analysts start to lower EPS estimates. If/when that happens, yesterday’s price action will seem tame. This is why I’ve kept the market hedge on even though it’s been a money-loser in recent years.
There was also a correct but misleading story on Intel. It was reported that a Chinese company had built a PC using only Chinese parts. No CPU from $INTC or $AMD and no memory from $MU. China is trying to eliminate its tech reliance on the US. There were constant stories about how this was terrible for Intel, and most of those stories ignored Advanced Micro Devices. This was despite the fact that $AMD was down twice as much as $INTC. Were the writers biased, incorrect, had a paired trade on, or not paying attention? I don’t know.
I don’t think this was the reason Intel was down yesterday. The entire tech sector got crushed with $AMD and $ARM down much more than $INTC. $TSM had a horrible day as well. The US hyperscalers were down big as was $NVDA. I looked deeper into this issue, and it turns out that this Chinese manufacturer was banned from using Intel chips back in 2023. On top of that, the CPU chips they’re using are 7nm which is technology that’s years old. The Chinese think they can get to 1.4nm in five years. That’s where Intel and Taiwan Semiconductor are now. A Chinese competitor in your market is never good, but this was a non-customer that is years behind.
I’m reading credible reports that funds have been calling trading desks non-stop asking what everyone else is doing. There’s more checking on the competition than actual trading. People are nervous which is understandable. The key issue here is non-discretionary deleveraging. Some of the largest hedge funds are “pod shops” where dozens of groups manage tens of billions of dollars of capital. Because these funds use huge amounts of leverage, even small losses can be catastrophic. As a result, they keep very tight risk parameters. If positions are down as little as 5%, the pod managers may have to liquidate the position. Buying more of a falling stock isn’t an option for them, nor is arguing that the stock is cheaper. The selling is non-discretionary and happens immediately.
If a pod is performing poorly, or if the risk management department thinks the pod might perform poorly, capital can get pulled. One pod might be down 5%, but if they’re using 5 to 1 leverage, that’s the same as being down 25% on actual capital. If that pod manages $2B, that can lead to $10B of long positions that get vomited out without regard to price. That’s why trading desks are calling trading desks. Everyone is afraid that a large fund will sell so much that stock fall to the point where the next one has to sell. As these levered funds unwind, stock prices can hit distressed levels.
In the stock market, fear of losses can cause people to sell creating the exact losses everyone hoped to avoid. If you’re feeling uncertain, upset, or anxious, that’s normal. The reason I’m checking stock prices and news at 3am is because I feel worried. But…I’ve given this advice before and will reiterate it now: Just because you feel a certain way doesn’t mean you need to act on those feelings. The market is swinging wildly because people are acting on feelings or acting on what they fear others will do.
The market hedge exists so I don’t need to sell positions like Intel when I think the narrative is misleading. I’d still own Texas Pacific Land even if Democrats in Austin insisted there would be no data centers even on private land with private sources of power and water. Higher energy prices are leading to fears of more inflation which is leading to fears of a more hawkish Federal Reserve. That’s leading to lower prices for gold and Bitcoin. The one thing I know is that both team red and team blue are going to overspend in Washington. More printed dollars means less purchasing power for those dollars which means higher dollar prices for hard assets.
Try to stay calm, or absent that, don’t act on temporary negative emotions. Reach out if you need help: IR@DeepKnowledgeInvesting.com .
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