Memory Stocks will Collapse?
Weekly Plan 7.5.26
Hey friends—
The highlight from last week was the much softer than employment numbers which cooled off the rate hike bets (for now). Looking under the hood of employment report, there are some really bad things brewing.
While some headline metrics appear stable at first glance, I will argue that a deeper dive reveals significant worker disengagement and a highly concentrated, sluggish job market.
The Worker Disengagement Pain.
Job growth slowed considerably in June. The US economy added a mere 57,000 non-farm payrolls, falling drastically short of the 113,000 consensus estimate. This much softer growth was compounded by a downward revision of 74,000 jobs across the previous two months. The only metric behaving as expected was wage growth, which held steady at 0.3% month-over-month and 3.5% year-over-year.
Now although the official unemployment rate improved slightly—ticking down from 4.3% to 4.2%—the reason behind the drop is a major red flag. The decline was driven entirely by a mass exodus from the workforce rather than new hiring.
More than 700,000 people left the workforce in June. The number of employed individuals actually fell by 500,000, while the ranks of the unemployed shrank by 213,000.
This dynamic dragged the overall labor force participation rate down from 61.8% to 61.5%.
Most alarmingly from my perspective, the disengagement was heavily concentrated among prime-age workers (ages 25–54), where the participation rate experienced a steep drop from 83.9% to 83.3%. This is a big drop especially at a time when the economy has been holding up rather well, if you believe the official data. Our young are not only getting disenfranchised from capitalism, they are actually totally disengaging from the economic engine. A huge red flag for any nation.
Only 2 Sectors Show Any Growth Whatsoever.
Private education and healthcare services continue to single-handedly prop up the labor market, adding 69,000 jobs in June. This sector has shown a staggering level of dominance, accounting for 70% of all US job creation since December 2022.
In a major surprise, the historically reliable leisure and hospitality sector shed 61,000 jobs in June. This sharp reversal follows a gain of 44,000 in May. Given the influx of beer soaked patrons to bars and venues for the World Cup, the sudden contraction suggests that business owners likely over-hired in May, anticipating a much larger economic boost from the tournament than actually materialized. Surprisingly, this has not yet materialized in a negative factor for the airlines and hospitality stocks. Yet.
My key takeaway from this is that any talk of rate hikes, anytime soon is not grounded in reality. In fact, if anything I will expect the FED to take an extended pause on rate hikes well into end of the year, if not longer.
This week ahead is a fairly quite macro risk event week, and we would not see any major Econ data prints until the 14th when the inflation data are released. I think with a rapid fall in oil prices globally, we will see a confirmation of my take on FED not rising interest rates any time soon the following Tuesday.
Emini S&P500 levels to watch next week
In other news, the stock market last week saw one of the largest outflows with investors dumping shares in high flying AI stocks like Micron, Tesla, SanDisk to name a few.
Of late, the intraday volatility in the S&P500 and Nasdaq itself has been picking up steam. You see such moves normally in times of extreme uncertainty, not in one way up bull markets. This has many to believe that some sort of end to this bull market is near and the impulse acts as a motivation to take profit on some of these stocks which are up anywhere from 500% to a 1000% in several instances.
Personally, I think if you are too bearish here, you have to see a broader market sell off. Even if a Micron were to sell off another 30% here, if NVDA were to slip lower and if TSLA were to collapse altogether, there are enough relatively cheaper stocks to pick up the slack and keep the general market afloat, preventing an outright collapse headed into the mid terms.
Now in such an environment, will I continue to chase what has already worked exceedingly well? Not quite, unless we are going to take a significant hair cut in these major leaders. So for instance, I do like micron here at 900 to 1000 range in the short term as shared last week in my chat below.
But at the same time, a more reliable, longer time frame support in micron for me comes in at the 700 prints. These type of momentum stocks can generate many set ups for active traders — both up and down market.
With the AI stocks in particular, a reasonable doubt has been introduced in the mix that makes me question the long term profitability of these companies. It’s not that the technology isn’t revolutionary; it’s that the current valuations require these companies to achieve margins that defy historical precedent. The US stock market, measured by any valuation metric, is now more expensive than ever. Yes, it is now more expensive than the dot com peak and the 1929 bust.
We are moving past the “wow” phase of impressive large LLM powered chat bots and crashing headfirst into the messy reality of large scale enterprise integration. Building a fascinating language model is one thing but then securely and effectively integrating it into a company’s core workflow to actually save money or drive revenue is another. Companies are realizing that the deployment costs are astronomical. Furthermore, several AI companies have been deceitful and dishonest, stealing companies secrets and methodologies. Once this view takes hold, companies will rather retain human labor than trust these hallucinating, IP stealing blackboxes.
The other lingering question is the threat posed by competition. Initially, it seemed like a few mega-cap tech companies would hold all the cards and dictate prices forever. But as open-source models rapidly close the performance gap, the massive moats these early American leaders appeared to have are looking increasingly shallow. This is why you have already begun seeing some of these extremely shady companies like OpenAI now openly begging the US government to take a stake. Make no mistake, this is a glorified taxpayer funded bailout. Nothing more.
Micron is the Next NVDA fallacy
A lot of folks I talk to in financial circles are convinced that Micron is the next $5 trillion behemoth.
I beg to differ.
I personally think Micron has had its run and is now already extremely overvalued even at 1200-1300 and I think it will eventually sell down back to 200-400 range. Now this does not mean, there will not be good swing time frame set ups in Micron on the long side.
The recent run in Micron stock is nothing more than a classic “commodity cycle”.
NVDA has CUDA. MU has nothing.
Know this.
Micron has no MOAT. Micron’s Moat is Just Hardware!
Memory is inherently a hardware play. If Micron’s HBM chip meets the required speed, power, and capacity metrics, NVIDIA or a cloud provider (like Microsoft or Google) will buy it and will probably buy it at any price in case of shortages. But if a SK Hynix or a Samsung or a Chinese supplier builds an identical or slightly cheaper memory chip that meets those exact same specifications, the customer can swap Micron out without changing a single line of code. There is no software ecosystem locking customers into Micron. The closest analogy to current Micron run is the recent silver run or the crude oil rush. None of those trades ended well for someone paying the top prices. Micron being an American company suffers from delusions of its own inflated pricing power. The asians are cutthroat competition when it comes to pricing and I think Samsung will soon aggressively undercut them on pricing.
I personally do not think micron will even be a trillion dollar stock at end of the year. But for now, as we open for business after the long weekend, I am sure there will be many bidders on Micron sending it to 1100-1200 again, only to later see prices cut by half or more.
The sum total of my analysis in this moment of time is that while the markets may not crash altogether, there are a few important takeaways—
I will definitely not chase these unprofitable companies when they finally bring their companies public via IPOs. Whether that is Open AI or Anthropic. Whatever IPO price they launch at, I will say it has already priced in everything to perfection and it will only create a generation of bagholders.
My focus should be on finding undervalued companies and ideas rather than continue to pile into the crowded trade.
This leaves us with potentially a balancing market in run up to the inflation data next week.
Scenario 1: We can lean on 7600 as potential weekly resistance for a move down into 7460 or so.
Scenario 2: 7460 can remain supported in the weekly time frame.
If you are too bearish here on the general market, I will like to see a weekly close below 7460. Else I think we can balance here for an eventual move higher into 7700s.
To summarize: right now I think dips into 7460 can be supported with range like conditions for next few days. To get a clear trend, I think we need a break above 7600 or below 7460. We last traded about 7560 at time of this post. These are emini September levels. For S&P500 SPOT index or SPX, please subtract about 50 from these prices.
Other themes
Until we see a clear resolution to where these high flying AI stocks launch, I think some of the non AI stocks offer clearly defined setups which can do well.
One such name is Boeing.
Please see below for my original thesis on Boeing from October.
This stock is now up handsomely from these levels and is now trading 225.
I think this is undervalued and I think this is probably headed to 350 and I furthermore think any dips could be supported into 180-200.
MCD
With McDonalds, the 2 of the biggest headwinds for the company can abate in next few months to year.
Globally high beef prices. Beef price surge in part has been driven by previous administration’s policies when it comes to the livestock and animal husbandry. Now it has been almost 3 years since most drastic of these measures were put in place. This is about the length of time it takes to bring new cattle to the market. The calfs get mature in 2-3 years are primed to bring to the market. This along with the Trump admin push to import more meat, can materially impact beef prices. If you look at cattle prices, there is a nice triple top and if live cattle sheds even another 10% from there, it is a huge relief for the likes of McDonalds.
McDonalds has a heavy debt burden. If long term rates stay flat or better if they come down, it is a relief too.
At any rate, I think the stock looks primed for a move into 320s. It is now 279.
These 20 or 25 Delta January $330 CALLS on MCD, if the stock pushes lower into 270 and the option can be had for $4 or so can make a lot of sense from risk to reward.
With a 20 DELTA call I hope our friends realize that it is an 80% chance that the option will expire worthless. This is why premium paid is so important. Do not chase low delta calls unless the stock comes down to fair support levels.
We need more consultants. No seriously.
Accenture stock has been cut in half this year. While no one knows when the turnaround comes, I believe this stock is at a deep discount.
It has several tailwinds going for it. Far from being destroyed by AI, I submit based on my own past life experiences working for such companies that the Fortune 500 companies cannot implement enterprise-grade, secure AI systems on their own.
This is especially true for the government sector. Several ill timed and frankly disastrous decisions by Musk led DOGE cut federal spending for ACN and contributed to the rout. I think these dollars will soon flow back to ACN.
The other thing going for ACN is that due to Trump policies it has been just hard for companies to hire foreign workers. This also helps Accenture. This will help them the same way Trump policies helped the truck companies raise their prices when foreign drivers lost their licenses to drive commercial trucks.
I think anyone with a 2-3 year time frame on ACN will probably do well though I expect there may be volatility in days and weeks ahead. It is 137 or so right now. Let me know what you think. I assign a fair value of $300 to ACN at the moment based on current conditions.
Speculative/Lottos
In terms of just sheer lotto ideas without any fundamental factor whatsoever, take a look at OPEN.
I think is in same league as CLOV which I shared at 80 cents before the stock ripped to almost 6 dollars.
At 5 bucks, can OPEN go to 0?
Yes. But at the same time, I like these January 5 dollars calls which are now just about a dollar as pure lotto.
Big tech
If you recall, I have been an AAPL bull since 190s on this stock and most recently this stock dipped lower but was quickly bought back up above 300.
This is an attractive set up and furthermore I think if you are too bearish on AAPL above 280, you will taste frustration.
The market is rewarding AAPL because the visionary Tim Cook was playing 7 dimensional chess while everyone else was playing checkers.
Cook, with his strategic alliances with Google, Samsung, China, India and the White House can be amply rewarded for his foresight and shrewdness.
I think AAPL is headed much higher into 350. In my estimation, the AI fairytale has peaked. The market could soon reprice the entire industry as nothing more than a hardware commodity business and I think these dollars end up flowing to AAPL, sending the stock above 350.
What do you think?
This is it for now.
Have a great week ahead!
These posts can take me 2-3 days of research poring over orderflow data and related markets to craft these themes. Share and like if you get value out of these.
~ tic
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