Today we switched it up a bit from the usual Daily Morning Brew!
With that we take a look at the world through the eyes of our relative value assessment of global markets.
Look, the basic model of a central bank is that it has a Thing, and the Thing is Money. And it has two buttons for the Money Thing: a “Make More” button and a “Make Less” button. For the last couple of years, the Federal Reserve has been enthusiastically, almost gleefully, mashing the “Make Less” button, a process otherwise known as “hiking interest rates.” This is because another Thing, called Inflation, was misbehaving, like a toddler at a fancy restaurant, and the conventional wisdom is that hitting the “Make Less Money” button eventually convinces the Inflation Thing to sit down and eat its peas.
And now, the Fed has signaled its intention to start pushing the “Make More” button. Or, to be more precise, the “Make a Little Less Less” button. The official statement was, as always, a linguistic marvel, a delicate origami of caveats and forward-looking statements folded into the shape of a shrug. But the market, which has the textual analysis skills of a hyperactive gnat, read the first three words, saw they weren't "apocalyptic hellscape," and proceeded to price in a future of free-flowing capital, endless stock buybacks, and unicorn IPOs.
There are, broadly speaking, two ways to interpret this. The first is the simple one: The Fed is cutting rates, rate cuts are good, everything goes up. Yay! This is the interpretation that has led to a multi-billion-dollar firehose of cash being directed into Cathie Wood's ARKK fund, a move that is either a profound, paradigm-shifting bet on the future of disruptive innovation or a "heartbeat trade" so gargantuan and fleeting that its main purpose is to give some poor back-office schmuck an aneurysm. One suspects it's the latter, but in this market, who can tell? Maybe the heartbeat is just really, really strong.
But then there is the second, more interesting, and frankly much weirder interpretation. The Fed is not cutting rates because the economy is a shining beacon of prosperity. It’s cutting rates because the global economic picture looks like a bizarre abstract painting that no one quite understands, but everyone agrees is vaguely unsettling. The research we’re all looking at screams “Diverging Prices, Converging Rates.” The US has sticky services inflation, but the Fed is easing. Europe has inflation near target, but the ECB is easing. China has deflation, so the PBOC is easing. Turkey’s inflation is measured in units of absurdity, and even they’re easing.
It's a synchronized global easing cycle where everyone is easing for completely different, and in some cases contradictory, reasons. This is not a finely tuned orchestra playing a harmonious symphony of monetary policy. This is a dozen different garage bands in a dozen different garages all deciding to play "Stairway to Heaven" at the same time. The result is loud, and some parts of it might even sound good, but it is not, strictly speaking, music.
So what do you do? You embrace the chaos. You accept that the market is a beautiful, nonsensical machine for turning weird macro cross-currents into money. You look for the dislocations, the absurdities, the places where the market's simple story ("rates down, stocks up!") breaks down and reveals a much more profitable truth. You hunt for value. And for that, dear reader, you have come to the right place. We have even, as is our custom, consulted our resident psychic octopus, Bartholomew. He’s been a bit moody lately—we think it’s the atmospheric pressure—but his insights remain as tentacular as ever.
Trade Idea #1: The “Buy When There’s Blood (or at Least Mild Discontent) in the Streets” SE Asia Bank Trade
The theme of synchronized easing and a potentially peaking dollar has everyone looking at emerging markets again. But buying a broad EM ETF is, let's be honest, a bit basic. It’s the financial equivalent of ordering a pumpkin spice latte. Instead, we want to find a specific spot where a temporary, headline-driven panic has created a juicy opportunity in a fundamentally sound business.
Enter Bank Central Asia (BBCA IJ).
Yes, the research notes that foreign investors are currently fleeing Indonesia with the enthusiasm of startled pigeons, thanks to some "domestic unrest." Foreign outflows from the country hit 55 trillion rupiah year-to-date, and financials, being the most liquid sector, have borne the brunt of the selling. BCA, as one of the biggest and best banks, has been hit hardest, with over 20 trillion rupiah in withdrawals this year alone.
And that, my friends, is what we call an entry point.
The Investment Thesis: You are buying a best-in-class, dominant banking franchise at a discount because some foreign fund managers got spooked by headlines. BCA is the JPMorgan of Indonesia, a high-quality compounder that is deeply plugged into the country's domestic consumption story. While foreigners are panic-selling, the research shows that local investors have stepped in, supporting the broader market. This tells you the people who actually live there aren't freaking out. The macroeconomic backdrop is also lovely: "benign inflation" keeps the door wide open for Bank Indonesia to keep cutting rates, which is great for bank profitability.
Catalysts:
The Noise Fades: The political situation stabilizes, the headlines move on, and the tourist-like foreign money realizes it overreacted and comes trickling back in.
Rate Cut Goodness: As Bank Indonesia continues to ease policy, BCA's net interest margins should get a nice little boost. Lower rates also stimulate loan demand in an already growing economy.
Valuation Re-rating: The stock is currently under pressure from forced selling. As that pressure abates, the market will go back to appreciating it for what it is: a high-quality growth stock that happens to be a bank.
Risks:
The Noise Gets Louder: The domestic unrest could escalate, turning what looks like a temporary squall into a full-blown political crisis. This is the biggest risk.
Currency Woes: A sharp, unexpected depreciation in the rupiah would hurt foreign-denominated returns, even if the local-currency thesis is sound.
Global Contagion: A severe global recession would eventually hit Indonesia's economy, leading to higher credit losses for BCA.
Trade Idea #2: The “Boring Is Beautiful” Pair Trade
The market is currently obsessed with narratives. AI, disruptive tech, the metaverse—you name it. This has driven a colossal valuation wedge between the sexy story stocks and the boring-but-profitable workhorses of the global economy. We're going to trade that gap.
The Long: Siemens AG (SIE GY). Does Siemens make your heart race? No. Does it feature in breathless CNBC segments about changing the world? Rarely. What it does do is manufacture a vast array of things that are absolutely critical to modern life: factory automation systems, high-speed trains, power grid technology, MRI machines. It is the sensible Volvo of your portfolio: safe, reliable, and surprisingly well-engineered. European industrials are trading at a steep discount to their US peers, and Siemens is the best of the bunch.
The Short: ARK Innovation ETF (ARKK US). This isn't a knock on any single company in the fund. It's a bet against a style of investing. ARKK is the platonic ideal of a high-beta, narrative-driven, concentrated bet on the future. The research file highlights its recent massive—and possibly transient—inflows. It's the poster child for the speculative fever we want to bet against. Shorting the ETF is cleaner than shorting a single name like Tesla (which has its own cult-like following) and gives us a broad hedge against the "growth at any price" mania.
The Investment Thesis: You are betting on a simple, powerful force: mean reversion. The valuation gap between a profitable, reasonably-priced industrial giant like Siemens and a basket of speculative, high-duration tech stocks like ARKK is at an unsustainable extreme. You're long tangible cash flows and short hopeful narratives. By pairing the trades, you hedge out broad market risk. If the whole market goes up, Siemens should participate while the ARKK short acts as a drag. If the market crashes, the speculative air should come out of ARKK much faster than the solid valuation of Siemens deflates.
Catalysts:
A Shift in Leadership: Any sign of a market rotation from "growth" to "value" will light a fire under this trade.
Reality Bites: If any of the grand promises of the ARKK components fail to materialize, or if their cash burn becomes a serious concern in a slowing economy, the fund will suffer.
European Stability Premium: As global investors look for havens, the relative political and economic stability of Germany could lead to a re-rating of assets like Siemens.
Risks:
The Bubble Inflates Further: The main risk is that the market's appetite for speculation remains insatiable, and the valuation gap widens even further before it snaps back.
Operational Miss: Siemens could suffer a major project failure or issue a profit warning, hurting our long leg of the trade.
M&A: One of ARKK's top holdings could get acquired at a massive premium, causing a painful squeeze on the short side.
Trade Idea #3: The “AI Arms Dealers” Basket
Everyone is trying to figure out which company will build Skynet. Will it be OpenAI? Google? Some startup you’ve never heard of? Trying to pick the winner is a fool's errand. Instead, we're going to invest in the companies that are selling weapons to all the armies. We’re buying the AI arms dealers.
These are the companies providing the hyper-advanced, ridiculously complex, and nearly impossible-to-replicate hardware that underpins the entire AI revolution.
The Investment Thesis: You are buying a stake in the essential, non-negotiable infrastructure of the AI boom. No matter who wins the AI race, they will need more and more powerful chips. And to make those chips, they need the companies in our basket. This isn't a bet on a single algorithm; it's a bet on the relentless march of computational demand.
The Basket:
TSMC (2330 TT): The undisputed king of semiconductor manufacturing. The research note from Semicon Taiwan says it all: they are creating a "deeply integrated platform" with a 3D stacking roadmap that is "exceedingly difficult for Samsung, Intel and other rivals to replicate." They have a technological moat patrolled by fire-breathing dragons.
ASML (ASML NA): If TSMC is the king, ASML is the kingmaker. They have a global monopoly on the EUV lithography machines required to print the most advanced chips. You literally cannot build a cutting-edge fab without their gear. It’s the ultimate pick-and-shovel play.
Advantest (6857 JP): The AI boom in Japan is real, and Advantest is at the center of it. The research notes they gained 68% after upgrading guidance on "strong demand for AI chip testers." As chips get more complex (thanks, 3D stacking!), the need for sophisticated testing equipment explodes. Every chip TSMC makes needs to be tested, and Advantest sells the testers.
BE Semiconductor (BESI NA): This is a more esoteric one, straight from the deep-dive research. The future of AI chips is "3D hybrid bonding"—stacking chips on top of each other. This requires insane precision. BESI is a key player in the "ultra-precision assembly equipment" needed to do this. As AMD and others move to "3.5D packaging," the demand for BESI's specialized bonders is set to skyrocket.
Catalysts:
The Capex Cycle: Every announcement of a new fab or a new AI chip is a direct catalyst. The AI arms race requires constant, massive capital expenditure.
Technological Inflections: The industry's shift towards "chiplets" and 3D stacking makes the specialized equipment from these companies even more critical.
Risks:
Geopolitics for Dummies: TSMC is in Taiwan. This is, to put it mildly, a geopolitical hotspot. An escalation of tensions with China is the single biggest risk to this entire thesis.
Cyclicality: The semiconductor industry is notoriously cyclical. If the AI-driven demand turns out to be a bubble and capital spending dries up, these stocks will get hammered.
Execution Risk: Building this stuff is mind-bogglingly hard. A delay in a next-generation machine from ASML or a yield problem at TSMC could have major ripple effects.
Parting Shot: The Ballad of Bartholomew the Octopus
As we were wrapping up this week's newsletter, a process that involves more arguing and whiteboard scribbling than you might imagine, we decided to pay one last visit to our old friend, Bartholomew the psychic octopus. We presented him with our three trade ideas, carefully printed and laminated for underwater viewing. He floated thoughtfully for a moment, his eight arms waving gently in the current, his ancient, wise eyes seeming to pierce through the very fabric of space-time. Then, with a sudden, decisive movement, he reached out a tentacle and slapped it firmly on the "AI Arms Dealers" basket.
Now, we're not saying you should base your entire investment strategy on the whims of a cephalopod with a penchant for dramatic gestures. But we will say this: Bartholomew has been right more often than he's been wrong. And in this crazy, mixed-up world of converging rates and diverging prices, sometimes you just have to trust your gut... or, in this case, your octopus.
Until next time, happy hunting.
Love the Indonesia trade. Love the Siemens trade. Love the Ai picks and shovels trade. Who gave you access to my portfolio?