Bearish Outlook Breaks Consensus

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1:15Do that with Acrobat. Need to level up your presentation design? Do that with Acrobat. You have 30-plus documents that need to be simplified into a proposal. Do that. Do that. Do that with Acrobat. Learn more at adobe.com slash do that with Acrobat. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. As Alex Seminova reminded all of us yesterday, bears have had a tough time over the last few weeks. this epic rally, 17 % in the S &P 500 since the end of March. One of those bears is Thomas Thornton. He's president of Hedge Fund Telemetry.

2:02He joins us here in the Bloomberg Businessweek studio. Also with us is Alexandra Seminova. She's Bloomberg News stocks reporter. Good to have you both with us. Tom, I just want to start with you. First of all, thank you for coming on. I love the IVs you send me all the time with the technicals, pointing out what you're seeing in the market. So it's good to have you on set. You see a lot of risks out there right now. What are you seeing that you think other people are ignoring? Well, I think the biggest risk right now is positioning clearly. And I'll start at the top. The Bank of America Global Fund Manager Survey came out yesterday and it showed that equity exposure is at the highest level ever.

2:43I mean, we're going back to 2000. So we then drill down and say, well, where's everybody? in this market. Technology versus the S &P made a new relative high with the S &P. Okay, great. No other index did, or sector did. That's a troubling first clue right there. And then if you run the semiconductor index versus the XLK, which is the technology ETF, you see that semis have clearly done it in magnificent form since the beginning of the quarter. Then if you think about Goldman Sachs, they just, their prime brokerage business, they put out great data and they said that almost 20 % of their clients, hedge funds, institutional investors, are weighted towards semiconductors.

3:37Okay, that's a lot. Now, if you think about the DRAM ETF, it's$10 billion apparently today, and maybe it's a little bit bit more today. But in six weeks,$10 billion is a record. Now, this is not necessarily normal behavior. And these are not necessarily normal long-term ETFs being set up. Now, Korea. I'm reading about Koreans ages 50 to 60 plus that are turning in their life insurance policies to buy the Korean market that has gone parabolic. 50 % of the Korean market are two stocks. They're memory stocks, Samsung and SK Hynix. Now, the Koreans, the leverage ratios are off the charts. So not only are they speculating in their markets after a big run, it's very narrow.

4:37And to me, I think positioning trumps fundamentals right now. The fundamentals, every semiconductor technician or CEO will say, oh, everything's great. You know, we've got a long lead time. They say that every cycle. Maybe this cycle's gone a little longer. I'm guilty of thinking that it would end. So that's where people are. The boat is a great boat, but everybody's on one side and it can still tip over. You mentioned, Tom, all these areas of the market where things are getting euphoric, the DRAM ETF, Korean equities. We're also getting SpaceX going public at a time where things are already looking a little bit too enthusiastic.

5:23What does this add to that existing euphoria, and does that make you more concerned? We also have a pipeline of other mega IPOs, OpenAI, Anthropic. What is that telling you? Well, a lot of the valuations are sort of made up. And if you think about they made up the XAI,$250 billion. They merged it with SpaceX. Of course, Elon Musk is the largest holder of both, so he gets more power. You had 11 of the partners at XAI leave. You had 80 programmers leave. I'm not quite sure what is there for$250 billion. But the IPO will probably work. It's a small float, and the small float IPOs tend to go up. Everybody gets excited about it.

6:11But the valuation doesn't make any sense to me in this decade. So I'm not going to be buying it at all. And it could go up. Everybody loves Elon. They'll probably merge with Tesla. Tesla's business is starting to falter. So it all just sort of makes sense for Elon. on. You were talking about positioning and how that's driving a lot of the equity market gains that we've seen. And I'm curious how you kind of see that ending, because it seems like what you're saying is the reason why stocks have kind of shrugged off the rate rise, the volatility in oil, is because people are continuing to pile into the market.

6:51How do we know when people will stop doing that? One of the things that is actually gives me a little hope is that we're starting to see a lot of stocks hit new 52-week lows. And again, the technician nerds that I'm talking with, like the Jonathan Krinsky's out there, we're all looking at seeing more new 52-week lows than highs. And that's remarkable because the S &P is up around 24 % year over year. So if you're seeing new 52-week lows, things underneath are really a little shaky. So I think there's going to be some sectors and ideas that make sense to buy that the valuations get to levels that you can do.

7:36We're going to get a read on NVIDIA after the close today, and I think that will set a big part of the conversation moving forward for a lot of these companies. But if we go and utter those words that nobody should ever utter, which is, is this time different? Then maybe we think about it in the context of productivity gains and productivity increases as a result of this technology, which some have called a new industrial revolution. Is that wrong? No, I think that AI is here. It's fascinating. It's getting better. But it's overvalued. I think there are certain places that show overvaluation. And I think the biggest bottleneck for this, well, there's a couple, funding all the buildouts.

8:21There's a lot of circular stuff. A lot of people have talked about that. But I think the main one is powering the data centers. And I still think that that is going to be the difficult thing to turn on the lights. You can build out the data center, but you really need more power. And power plants take time to build, take time for approvals. So I think that if anything starts to wobble in this, you might see some pushouts as far as when the data centers are going to get built. Again, the funding issues, higher rates, that's not helping. Private credit stuff is still out there as a risk. So that would be the one thing I'm watching right now.

9:01It feels like people continue to be unanimously bullish despite all these risks that we're all very aware of. What has it felt like for you to be a contrarian? How painful has it been? I've aged 20 years in the last six weeks. I can say that my P &L has not benefited. It's really suffered. but I also know that since I've been in the markets a long time I've seen these things happen they tend to stretch a little longer like this one but when you see the narrowness of where people are you see the type of people that are buying these things late after a big move I have confidence that I'll be proven right and you know it's not that I'm you know overly bearish all the time i do find times where i get overly bullish what does right look like to you what do you mean by that like you said you you'll be proven right over time um well what is that does the s p 500 have to fall to a certain level for you to feel like you've been proven right does nvidia's valuation have to fall where does that manifest well i think that just because of the positioning right now i think there could be a catch down to where the rest of the market is And it's not necessarily saying the businesses are under, you know, are bad or something really bad is happening.

10:28I just think that people will see and maybe panic and sell and they're levered again. So I think that's kind of where I see things. And, you know, I was covering part of my Nvidia short at the lows. I covered, you know, some of my technology stuff, semiconductors. I didn't cover enough. Let's just, you know, I want to boom. But, you know, it's been rather extraordinary. When you had 18 days in a row of the semiconductors going up, I seriously was, you know, questioning things myself, life, you know. You're getting philosophical. Look, I don't think you're the only one. Right now there are certainly a lot of vocal bulls out there, and we appreciate the way you're thinking about things and you sharing it with us on Bloomberg Businessweek daily.

11:18A big thank you to Thomas Thornton, president of Hedge Fund Telemetry. Also, Alexandra Semenova, Bloomberg News, U.S. stocks reporter.

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