Don't Be Left Holding the Bag

Just another day in the nation's capital... Signs of 'trade war' expectations... More Big Tech earnings... The latest 'Pelosi trade'... Of course, it's AI-related... Don't be left holding the bag...

The news from Washington never stops...

As soon as we published the words "trade war" at the top of yesterday's Digest, in came another blast of news from Washington...

At a joint press conference with Israeli Prime Minister Benjamin Netanyahu, President Donald Trump said he wants the U.S. to "take over" the bombed-out Gaza Strip to lead what sounds like a real estate development.

It's a "very bold new plan" to "temporarily relocate" Gazans, new White House spokesperson Karoline Leavitt contextualized to reporters today. "We will continue to keep you apprised of updates as we receive them," she said. OK then...

It's also another sign of the kinds of surprises we perhaps should expect during Trump's second White House term. But the market didn't appear to pay the story any mind at all today.

Each of the major U.S. stock indexes finished higher, with the small-cap Russell 2000 Index leading with a roughly 1% gain.

Beneath the surface, though, it looked like concerns about the potential start of another global trade war – which I (Corey McLaughlin) wrote about yesterday – and a slowing economy are showing up in parts of the markets.

Signs of 'trade war' expectations...

The "chaos" hedge of gold made an all-time high for the fifth straight day, up another 1% to near $2,860 per ounce.

Meantime, longer-term U.S. yields continued to fall. Perhaps bond investors are expecting lower longer-term growth in part because of a tariff tit for tat. The 10-year Treasury yield fell about 10 basis points to around 4.4%, down from 4.8% less than a month ago.

The newly implemented Trump tariffs are already making an impact on investors in China, the world's second-largest economy. As our friend Brendan Ahern of KraneShares wrote today in his free daily newsletter, China Last Night...

Locals resembled traders rather than investors, taking quick profits, including Mainland investors, with a rare net sell of -$680 million, mainly the Hong Kong Tracker ETF via Southbound Stock Connect. News that the Chinese government might investigate Apple is a subtle reminder that they have levers that can hurt the US government and, unfortunately, US investors. We have long stated that there are about ~$376 billion worth of US goods made and sold in China, according to the NY Federal Reserve Bank, that are not by definition "exports", though those revenues and profits flow to the US.

Apple (AAPL) shares traded slightly lower today. And benchmarks like the iShares China Large-Cap Fund (FXI) were down more than 1.5%. We'll keep our eyes open for more potential trade-war expectations filtering through the market.

This 'bad news' was 'good' though...

A weaker-than-expected economic report about service-sector activity last month also played a factor in today's action.

The Institute for Supply Management Services Purchasing Managers' Index – a monthly measure culled from surveys about economic conditions and performance of more than 400 services firms – dipped to 52.8 in January, below expectations of 54.3.

While anything above 50 is considered "expansion," this report indicated a weaker services sector than expected. This metric also fell from December, when it read 54. Other economic reports lately have shown a pace of inflation decreasing and the labor market holding steady.

Perversely, this is "good" market news because it could be fodder for another Federal Reserve rate cut sooner than later. Around midmorning when this report came out, stock indexes moved higher and Treasury yields moved lower.

Earnings were also back in the spotlight today...

This week is the biggest for earnings updates on the previous quarter, with 131 companies from the S&P 500 Index releasing results.

And this morning, disappointing Big Tech earnings dragged on the Nasdaq Composite Index and the S&P 500.

Let's start with Alphabet (GOOGL)...

After yesterday's close, the Internet giant reported a mixed fourth quarter, with earnings topping Wall Street's estimates but revenue falling short. And, like Microsoft (MSFT) last week, investors keyed in on cloud revenue that came in below expectations.

Alphabet is also investing heavily in artificial intelligence ("AI"). CEO Sundar Pichai said the company expects to invest $75 billion in AI infrastructure in 2025. Not only was that well above the Wall Street estimate of about $60 billion, but it's also above plans from competitor Meta Platforms (META) to spend up to $65 billion.

The surprisingly high AI spending, coupled with disappointing cloud revenue, spooked enough investors. Alphabet's shares tumbled in premarket trading and closed 7% lower.

The recent DeepSeek developments are still fresh in investors' minds, too. If AI models can be built at a fraction of the cost that they previously were, why do Big Tech companies need to spend so much for AI infrastructure?

Of course, we won't know the answer to that question today. But this new background uncertainty is part of what has pushed Alphabet's shares lower as well. Either way, Alphabet and the rest of Big Tech are planning to spend big to gain an advantage in AI.

Given Alphabet's standing in the major indexes (a 4.29% weighting in the S&P 500 and 5.86% in the Nasdaq 100), a big haircut to its stock can pull down the markets alongside it, and a significant one-day drop in its stock price makes headlines.

But this pullback could be a great long-term buying opportunity, as our colleague and Stansberry's Investment Advisory lead editor Whitney Tilson wrote about Alphabet in his free daily newsletter today...

At this morning's price around $191, the stock trades at 21.4 times this year's earnings estimates of $8.94 per share, which is slightly below the 22.2 times forward multiple of the S&P 500 today.

It makes no sense that one of the greatest businesses of all time trades at a lower multiple than the average large U.S. business.

Whitney's view, as it has been for more than five years, is that "Alphabet is a great stock for conservative, long-term-oriented investors." He says shares are worth a look today given the company's valuation.

Advanced Micro Devices (AMD) disappointed, too...

Chipmaker AMD makes up more than 1% of the Nasdaq 100, making it the 19th-largest weighting in the index. While AMD's headline earnings and revenue came in above Wall Street projections, it brought in less data-center revenue than expected. And that's the segment that includes its AI chips.

Even though that business grew sales 69% year over year, Wall Street was expecting even stronger performance from one of the largest AI-chip suppliers. AMD shares fell 6% today.

The drag AMD and Alphabet put on the market this morning shows that AI is still a huge driver for stocks – in both directions – even if some of the "hype" has slowed down recently.

A 'Pelosi trade' meets the AI trend...

A health-tech company – with AI in its name, of course – has gotten the "Pelosi bump"...

You might be aware that former Speaker of the House Nancy Pelosi (or really her husband, Paul, who runs a venture-capital firm) has gained a following in finance circles for their timely stock trades.

In fact, there are even AI-powered portfolios that scrape through congressional filings to find the latest investments. Members of Congress are required to disclose trades they or their spouses make within 45 days.

An account on the social platform X called the "Nancy Pelosi Stock Tracker" provides steady updates on the former House speaker's investments, and it indicates a "Pelosi Portfolio" return of 54% in 2024. That's more than double the return of the S&P 500 last year.

With returns like that, it's not hard to see why retail traders like to piggyback on her recent investments.

A company from the latest batch of Pelosi trades has been red-hot since news broke of her investment. On January 14, Pelosi purchased call options on health-tech company Tempus AI (TEM).

When that trade was disclosed to the public on January 21, the stock jumped 36%.

And it has continued to rise. All told, the stock has soared by more than 110% since Pelosi's trade on January 14. And according to Unusual Whales, a platform and newsletter that tracks congressional trades, Pelosi's call options are up by more than 235% in just a few weeks.

The higher share price is disconnected from Tempus AI's fundamentals. Nothing about the company's revenue, profitability, or outlook led the stock to double in a few weeks. It now trades at nearly 180 times book value.

One Tempus insider is taking advantage of the share-price spike...

In previous Digests, we've covered the recent trend of insider selling outweighing buying. And in the case of Tempus AI, executives are locking in profits from the recent spike in the share price.

According to financial-data firm FinViz, insiders sold more than $110 million in shares in January. These trades were led by CEO Eric Lefkofsky, who sold more than $75 million in stock. And all of those trades occurred after Pelosi's trade became public, shown here by the red arrows that represent all of Lefkofsky's recent sells.

Now, there's no reason to think there's anything "wrong" with these trades. As we've written before, company insiders can sell for a variety of reasons – like tax planning and personal expenses.

Insider buys, though, tend to be a more telling indicator of management's outlook on a company... and something you'd like to see in a company you're invested in for the long term.

And Tempus hasn't seen any insider buys since August. During a 50% drawdown at the end of 2024 (which coincided with the end of the company's post-IPO share lockup), no insiders decided it was a good entry point to increase their positions.

But with the stock at a two-month high and more than doubling in less than a month, Tempus' insiders are using the rally to lock in profits. We're willing to bet the insider selling continues if retail investors keep piling into this latest "Pelosi trade." (And we presume we'll see the disclosure of Pelosi or her husband closing out this trade in the not-too-distant future – but maybe not for another 45 days from now, since that's all that's legally required.)

As we've seen with stocks like cryptocurrency play MicroStrategy (MSTR), company leadership is passing the risk on to individual investors. When it comes to their own money, this stock isn't a bet they want to make.

As always, we caution against taking outsized short-term risks – especially in "hot" retail stocks that are overvalued by any measure. At some point, investors who think nothing can go wrong today will be left holding the bag.

New 52-week highs (as of 2/4/25): Agnico Eagle Mines (AEM), Alamos Gold (AGI), Amazon (AMZN), AutoZone (AZO), Alpha Architect 1-3 Month Box Fund (BOXX), Costco Wholesale (COST), CyberArk Software (CYBR), Viant Technology (DSP), Equinox Gold (EQX), Franco-Nevada (FNV), Fortinet (FTNT), SPDR Gold Shares (GLD), Alphabet (GOOGL), HealthEquity (HQY), Grand Canyon Education (LOPE), Lonza (LZAGY), Meta Platforms (META), Markel (MKL), Paychex (PAYX), Sprott Physical Gold Trust (PHYS), Roper Technologies (ROP), Starbucks (SBUX), Sprouts Farmers Market (SFM), Skeena Resources (SKE), Spotify Technology (SPOT), ProShares Ultra Gold (UGL), VeriSign (VRSN), and Westlake Chemical Partners (WLKP).

In today's mailbag, thoughts on a renewed "trade war"... and feedback on Part I of our annual Report Card. Stay tuned for Part II, which we expect to publish by the end of the week... Do you have comments or questions? As always, e-mail us at [email protected].

"Canadians are struggling to understand Trump's intentions. He has stated that America doesn't need anything from Canada – so why does he want Canada to become the 51st state and why isn't he suggesting the same to Mexico? (Hint: Canada is rich in resources such as energy, minerals, lumber, and water!)

"Canadians are already retaliating by threatening tariffs on American imports, curtailing tourist and shopping visits to the US, boycotting American products, and organizing 'Buy Canadian' campaigns.

"Canada and the US have a long history as friendly neighbors and allies. (Example: firefighters from all over Canada went to California's aid during the recent wildfires.) Being told that Canada is not a 'viable country' [without a trade surplus] is an insufferable insult!" – Subscriber Bill M.

"Somebody should tell [Trump] that 'we'll see what happens' is not a brilliant strategy for the president of the U.S. Imagine FDR saying, 'Yesterday, Dec. 7, a day which will live in infamy, we were attacked by the Empire of Japan, so we'll see what happens.'" – Subscriber Michael S.

"You are to be lauded for publishing your performance and comparing it to real world benchmarks – rarely done unfortunately!" – Subscriber Dwight M.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
February 5, 2025

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