The market sold off hard to finish the week. The S&P 500 fell 1.09% on Friday to 7,659.44, closing the week down 1.95%, its worst week since June. The Nasdaq Composite fared worse, dropping 2.15% Friday and 4.48% for the week. Meanwhile, the Dow eked out a 0.67% weekly gain, and the Russell 2000 lost 3.05%. That split tells you most of what you need to know about what happened: there was a continued rotation from growth and risk to value and safety. The selling was concentrated and professional. The trigger was a scare about how the AI buildout would be financed. CoreWeave lost a quarter of its value this week, with its bonds yielding above 15%, and that gave investors an excuse to dump anything “AI-adjacent.” The semiconductor ETF (SMH) fell 10.5% on the week. Lam Research dropped 17.2%, Micron 14.6% and Intel 14.2%. Per  Goldman Sachs prime brokerage data , hedge funds net sold global AI stocks for five straight sessions, unwinding every dollar of net buying since early 2025.  Long sales outpaced short sales roughly 3.5 to 1, so this was “de-risking,” not a new bet against the market. The macro backdrop didn’t help. Hotter consumer and producer inflation reports pushed the odds of a December rate hike to 74.3%, as Fed Chair Warsh argued that a spending surge (read: Capex) is fueling inflation. Brent crude jumped 3.7% on Friday to $109.86 with no deal in sight on Iran. The VIX climbed to 20.16 from 14.84 a week ago. Of course, when dollars look for safety, there is nothing as good as Treasury bonds. The rotation from risk to safety showed up in the 10-year yield falling to 5.09% from 5.24%. Here is the part the headlines missed. It was NOT a liquidation of everything. Staples rose 5.0%, energy 4.9%, and health care 3.5%, and the equal-weight S&P 500 actually gained 0.5% while the cap-weighted index fell 2.0%. As we warned in  last week’s Bull Bear Report , technology was extremely extended above its long-term mean, and a growth-to-value rotation looked likely into year-end. That rotation arrived faster than expected. Bob Farrell’s Rule #2 says excesses in one direction lead to an opposite excess in the other, and a crowded AI trade is unwinding the way crowded trades always do. Does that set up a rally? Possibly. Positioning is…
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CoreWeave shares have fallen by nearly 50% since April, including a 15% decline on Wednesday. More concerning, its 9.625% notes maturing in 2032 traded for less than 80 cents on the dollar. That equates to a yield of nearly 15%. For context, the yield was below 10% earlier this week. Its five-year credit default swap spreads nearly doubled in a week, from 368 basis points on October 6 to 643. Based on its CDS spread, the market implies an approximate 35% chance the company defaults within five years. The timing of the sharp increase in its funding costs is very problematic. CoreWeave carried roughly $35 billion in debt and $5.5 billion in cash at the end of June, with combined debt and lease obligations near $52 billion. It has $4.4 billion of debt maturing through this year, and $6.2 billion in 2027. Refinancing at 15% is likely not economically feasible. Issuing new shares is also problematic given its recent downward trend. CEO Mike Intrator recently told his employees the company is “ confident in our backlog which more than supports all of our debt obligations, ” pointing to $104.2 billion of contracted revenue. Its order backlog is a strong source of revenue, but it probably isn’t immediate enough to fund its current needs. Gartner, an IT advisory firm, drove recent concern with its claim that more than 80% of neocloud providers, including Coreweave, will cease independent operations by 2030. Will a white knight like Nvidia come to Coreweave’s rescue? What To Watch Today Earnings Economy Market Trading Update Yesterday, we discussed  the split in bank earnings  between trading desks and lenders. We also noted that narrow leadership had left equal weight near a three-year relative low. Today, let’s ask whether fundamentals can carry the equal-weight rotation that started last week. Citadel’s Scott Rubner tackled that question in his October update, “Fundamentals in Focus, ” and his answer cuts both ways. Start with the good news. Consensus expects roughly 27% S&P 500 earnings growth for Q3, the third-highest bar entering a reporting season since 2010. Companies have beaten pre-season estimates in 19 of the last 20 quarters. Estimates rose 1.6% into the season. The buyback window is also about to reopen. Only 24% of index weight sits…
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The economy is running bad inflation, and the bad kind is the temporary kind, which is precisely why the bond market refuses to panic. Most of the argument about inflation right now is a fight between people using the same word for two completely different things. One side sees a 3.7% headline print and starts sketching a repeat of 1979. The other sees core running more than a point below it and declares the problem solved. Both are reading the same release. The distinction that matters is not how big the number is, but whether anybody’s income is financing it. That is the line between “good” inflation and bad inflation , and almost nobody draws it. Good Inflation, Bad Inflation, And The Difference Nobody Makes There is a general framework to inflation, and it is older than any of us. Prices can rise because buyers are bidding for scarce goods with money they’ve actually earned. Or prices can rise because the cost of producing something has jumped for reasons unrelated to demand. An oil embargo will do it, as we saw in the 1970s. So does a shuttered Strait of Hormuz, a new tariff schedule, or a pandemic that takes half the world’s shipping capacity offline for eighteen months. This is an important point for the “debasement” crowd, whose narrative overlooks the underlying fundamentals. “The following economic illustration is taught in every ‘Econ 101’ class. Unsurprisingly, inflation is the consequence if supply is restricted and demand increases via monetary interventions.” However, there is a very important distinction to be made about inflation. The first type is the “good” kind of inflation, and it is genuinely good. Demand pushes prices up; firms book wider margins; tight labor markets funnel those margins into paychecks, and the higher paychecks fund the higher prices. The loop closes and becomes self-reinforcing because every leg of it is paid for by real output. The second kind, the “bad” kind of inflation, closes nothing. A tariff is a tax, just like an oil shock is a tax. Somebody’s cost went up, and the money has to come out of a budget that did not grow. Every dollar of that price increase is a dollar not spent somewhere else. Bad inflation doesn’t create the income that pays for it, so it destroys the demand that supports it. Such is the…
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As we noted in prior commentaries, last month’s softer-than-expected CPI and PCE reports, along with weak labor data, gave the Fed room to wait on further rate hikes. Yesterday’s CPI data takes some of it back. September headline CPI rose 0.6% for the month, matching expectations, and 3.7% over twelve months against 3.6% expected. Core CPI, more closely followed by the Fed, rose 0.3% versus a 0.2% estimate, lifting the annual rate to 2.6% from 2.4%. The energy contribution was large and widely expected. Gasoline rose 9.1% in September and accounted for more than half of the headline CPI increase. The energy index rose 5.2% in the month and is up 20.4% year over year. Food was unchanged. Strip out energy and prices still rose 0.3%. The BLS report showed price increases across recreation, used cars and trucks, education, airline fares, medical care and apparel, with communication among the few categories that declined. Shelter rose 0.4% after 0.3% in August. That breadth of the data will concern the Fed. The Fed can look through headline inflation driven by a gasoline supply shock. Gains spread across services, goods, and shelter will be tougher to ignore. Two things stand out in the report. The year-over-year core CPI at 2.6% is moving in the wrong direction after August’s 2.4% marked the lowest reading since March 2021. And the monthly chart shows headline CPI at 0.3%, 0.4%, 0.6% over the last three months, an acceleration rather than a plateau. For the October 28 FOMC meeting, this data will reopen the hike question the market had seemingly closed. Odds of a hike sat near 20% after the September jobs report, down from roughly 70%. The September minutes showed most participants expecting another increase by year-end, and Lorie Logan, Beth Hammack, and others have argued for 50 basis points or more. The graphic below shows the knee-jerk reaction to the CPI data in the Kalshi betting markets. What To Watch Today Earnings Economy Market Trading Update Yesterday , we used a gutsy fourth-down call in Tampa to argue that protecting a lead beats running up the score. Today, there’s another reason to think about that lead. An equity supply surge is headed for Wall Street, and history has something to say about it. Goldman’s Ben Snider estimates U.S.…
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Think interest rates are peaking? If so, agency mortgage-backed securities (MBS) deserve a look. Think rates have further to climb? MBS may still earn a place in your fixed-income allocation, potentially offering more yield than Treasuries and essentially no credit risk. Here is the twist. In 2022 and 2023, MBS investors learned a painful lesson. As rates surged, homeowners stopped refinancing, and MBS durations rose at the worst possible time. Today, that dynamic has largely run its course. With 30-year mortgage rates at 7.25% and nearly 80% of homeowners holding a rate below 6%, refinancing has all but stopped, leaving MBS durations little room to extend further. The feature that hurt MBS investors in 2022 and 2023 has little room for further harm. MBS are a unique type of bond because mortgagees can prepay part or all of their mortgage at any time without penalty. Thus, MBS investors, who have essentially lent mortgagees money, are, inherently, short a prepayment option. The prepayment option accounts for much of the extra yield MBS offer over Treasuries, as well as their greater interest rate risk. But when the risks are limited, MBS holders are often in an advantageous position. In this article, we weigh the pros and cons of MBS at current yields, explain what will drive future returns, and share how individual investors can gain exposure. Setting The Stage Mortgage rates and Treasury yields have moved sharply higher over the last six months. Per Freddie Mac, the average 30-year fixed mortgage rate was 7.28% as of October 1, the highest since November 2023, and up from 6.34% a year ago. The graph above shows that virtually all mortgages originated from the early 2000s have a rate below the current rate. Accordingly, refinancing activity has dried up. To wit, the Mortgage Bankers Association (MBA) reported that its refinance index is over 50% below the same level a year ago. Per Joel Kan of the MBA: Mortgage rates jumped to their highest level in almost three years, pushing borrowers to the sidelines. The iShares MBS ETF (MBB), a reasonable proxy for the agency MBS index, holds securities with a weighted average coupon of 3.63%, roughly 3.50% below the current mortgage rate. With most mortgages at least 2% below current rates, very few…
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