Logical Thesis

Another major issue in the market is liquidity and equity oversupply. The AI trade is driving the market. The company's leading the charge with debt raises and equity issuances, alongside their free cash flow reinvestment are: $META -20% below ATH $AMZN -20% $GOOGL -29% $SPCX -37% $MSFT -2% (though it did flip green to red on good earnings after announced debt raise, first in 10Y) The market is already punishing these stocks for their depleting FCFs to negative territory. It is punishing them for potentially misguided, aggressive capital allocation. The debt markets remain open to these companies because as S&P remains at highs with tons of risks on the horizon, who wouldn't want to lock in a high yield corporate bond from one of the best companies on earth? MSFT's debt offering was 5x oversubscribed today. But alas, $1=$1, whether it is in equity markets or debt markets. Imo investors can continue to flock to bonds instead of owning the equity if they see a more favorable risk:reward. My next point: $META just announced a $95B raise. It's the first phase of one of their three scenarios they laid out in the recent 10Q (all of which require raising hundreds of billions, and in one case up to $700B). They raised $35B via a secondary offering, and are planning to raise another $60B through an ATM. They are going to flood the open market with $60B of additional equity issuance. That is a lot of equity supply. Recall, these big tech names have very highly paid employees with huge stock-based comp as part of their total comp. The SBC was historically offset nicely by their consistent buybacks. The buyback bid is no longer there to buoy the stock. So you have both employees dumping stock, no buyback to offset it, and now an additional $60B of equity supply hitting the open market (again, that's after the $35B that hit the secondary already). The bigger issue is that the lower stock price is also a self-fulfilling prophecy. The lower it goes, the more shares they need to sell to raise the necessary funds, and the more dilution it causes. Current equity holders are left holding the bag, that continuously gets dumped on them. The market is speaking clearly. It is not rewarding any of these stocks for taking this excessive risk and diluting shareholders. The shareholders are not rewarding this behavior (the stocks are down on great results). Now even Elon mentioned, SPCX remains investment grade, but otherwise the capital markets are mostly closed to smaller neoclouds. Of course, we should take his words with a grain of salt given he has a bias (they are his competitor), but to an extent there is definitely truth (see $CRWV unsecured bond yields spiking). The market is definitely becoming more selective to who it lends to. It is requiring a higher return for riskier borrowers. Do the economics even work for these neoclouds if the borrow rates are higher? I assume not. People keep talking about their financing is backed by the contracts, but the contracts were signed during a time of lower expected revenue for the neocloud, and higher expected costs since the cost of AI components have went up. They capped the upside in their business, and they need more capital to afford the costs. And the markets are not lending to them as favorably as they used to. The looser lending standards kept the party going on the way up, but really sucks the air out of the room on the way down. Anyway, most of the above hyperscalers spending on growth capex for the AI build out are now at low or negative FCF. To continue increasing their capex guides in the upcoming years, they must raise more capital. Their stocks are already down 20-30% which means the earnings yield is now higher on their share offerings. The debt markets remain open to the highest quality businesses of course, but for how long? How much capital? Maybe the party keeps going, but if they take on all that debt, who is going to own the biggest businesses in the world? The ones with lower margins, lower ROE, and questionable ROI (this part can change as we continue to make AI advancements, but I'm talking about this point in time knowing what we know today). These businesses hold up a large chunk of the index, and they have a ton of headwinds here.

We don't bottom when everyone is calling to buy the dip We bottom when they throw in the towel and log off

Never seen small cap healthcare blow ups like this before $AIRS -57% $BDSX -51% $STLN -33% $XGN -21% I was long 3 of these recently. Thankful I dodged this meltdown by going to cash due to market conditions.