"Someone once told me that time was a predator that stalked us all our lives. I rather believe that time is a companion who goes with us on the journey and reminds us to cherish every moment because it will never come again." Captain Jean-Luc Picard
Complicated morning — Cody had a doggy eye doctor appointment — so forgive the tardiness. I am going to forego opening thoughts other than to recognize the outstanding career of Patrick Stewart, the Shakespearean actor/Captain Jean-Luc Picard, who passed away yesterday. Well played, sir, well played.
**THE AI BUILD IS BEING PRICED ON CASH, AND THE BORROWERS ARE PAYING.**Long Microsoft, the self-funding spender. I’M WRONG IF a big spender raises 2027 capex and gets rewarded.**THE FRONT END TURNED, AND THE MONEY CENTERS ARE WHERE I OWN IT.**Long Citigroup and JPMorgan. I’M WRONG IF the committee holds on 9 December and takes the income path away.**OIL KEEPS THE INFLATION LEG ALIVE INTO THE MIDTERMS.**Long Brent upside, short gold against real rates. I’M WRONG IF a Brent settle prints at or under $110 before 5 November.
The main story is still who pays for the AI build, and overnight it stopped being one company’s problem. The second story is what the bond market did about it, and for my book that’s the more useful one this morning. Oil is the third, and it has its own section.
Alphabet on Wednesday looked like a single bad quarter.
Then Amazon showed trailing free cash flow of minus $42.4 billion against plus $14.8 billion a year ago, on roughly $77 billion of third-quarter capex, while AWS grew 39%. Intel guided the fourth quarter to $15 billion to $16 billion and is down 28%. Memory names sold off with it. The market has stopped paying for revenue growth and started charging for the cash that growth eats.
Microsoft is the control case, and it’s the reason I bought it. It covered $39.4 billion of capex out of $58.0 billion of operating cash flow. It’s still down 1.8% at $520.71 this morning, which tells me nobody is getting a free pass today.
Amazon opened near minus 7% and has clawed back to minus 3.2%. I’m unsure whether that’s conviction or short covering. Either way it’s buyers who still believe the demand story, and I’m not going to argue with AWS at 39%. I’m arguing with the funding.
BofA’s Michael Hartnett puts hyperscaler bond issuance at $182 billion this year against $17 billion in 2024, and their buybacks at a $14 billion annual pace against $105 billion two years ago. A company that used to retire its stock is now issuing paper, and I want to own the one that doesn’t have to.
Now the bonds. For most of the year, stocks and Treasuries fell together whenever the long end sold off. It’s breaking.
When that correlation goes to zero, bonds are a hedge again. It’s why I cut the duration short again at the open, and why it still has no target. I can’t build a long-end short on a day the long end is doing what it’s supposed to do.
It doesn’t make me a bond bull. The official 10-year closed 4.98% and the 30-year 5.32%, which would have looked ordinary for most of the 1990s.
The gold short is where this shows up in my P&L. Gold is down 2.9% at $3,915.80, past where I’d planned to take profits. I’m trailing it instead of taking it, because a haven bid that went to bonds and skipped gold is exactly what the line was written for.
THE CASE AGAINST.
Four misses in one week could just be timing in a strong quarter for growth. Microsoft held up, AWS accelerated, and high yield tightened to 314bp for 28 October, 26bp tighter in four prints. On that reading this is a valuation reset in a handful of names, and it fades the way most earnings gaps fade.
What tells them apart is credit.
If the next high yield print comes in over 325bp with the VIX above 20, the funding story has reached the bond market and I’m right. If it holds near 300bp while the Nasdaq steadies, I’m watching a sorting of stocks with no stress underneath, and the Microsoft long is the only part of this call that pays. I’d put it at 60/40 my way, and the tight index is what keeps it from being higher.
The 8:30 data did nothing to the front end. Employment costs rose 0.8% against 0.8% expected and 0.9% prior, with wages up 0.7% and benefits 0.9%. That leaves the 2-year where Thursday left it, at 4.61%, 4bp under the line that cut my duration short, and December hike odds near 75% after falling from about 84% on Thursday’s core PCE.
The labor number I care more about is in the cross-section. Goldman finds the industries with the most AI adoption are the ones where unemployment is running furthest above its 2015 to 2019 average, about 0.09 points for every point of adoption.
Eliant Capital called it Warsh’s dream scenario, and I can see why: wage pressure eases without a recession in the headline. It’s also the path on which Citigroup’s 5.3% unemployment reserve stops looking conservative, so it cuts both ways for my bank longs. The 6 November payroll report is the first test.
The consumer data from Thursday matter more to my Progressive short than anything printed this morning. September real spending was flat, real disposable income fell 0.3%, and the saving rate dropped to 3.8%.
Income outside government transfers is running 3.4% under trend, and people are spending out of savings to keep up. Cheaper auto insurance is one of the few places a stretched household can push back. Progressive’s policies in force came in under forecast last quarter, and I think this is why.
The fiscal side moved the other way. Publicly held debt reached 100.03% of annual GDP for the fiscal year, the first triple-digit year since 1946 (WSJ).
Variant Perception’s piece this morning frames it as guns, butter or sound money, pick two, and their trade is long physical constraints and short nominal claims. Gold is about as physical as it gets, so I take that as the honest case against my gold short. I’d still rather be short it while the haven money goes to bonds.
The week ahead is crowded: refunding documents on 2 and 4 November, the midterms on the 3rd, payrolls on the 6th and CPI on the 10th. Exxon and Chevron reported before the open on stronger refining margins.
THE REST OF THE TAPE.
Adm. Brad Cooper, with Hegseth and Gen. Caine, briefed the president at the White House on Thursday after a Wednesday session with Vance. Gulf states have been told to prepare for a short, intense campaign after the midterms (
WSJ).Reuters found more than 5,000 agencies under names beginning MOD that have imported at least $2 billion of hardware, explosives and heavy trucks since January 2025 around the blockade and sanctions (
Reuters). It goes some way to explaining how the Revolutionary Guard keeps firing missiles by the thousand.Ukraine hit the Novokuibyshevsk refinery in Samara, its first refinery strike since 15 October, after two weeks of US pressure to stop (
WSJ).Israel’s final count leaves Netanyahu’s bloc at 53 seats and Eisenkot’s at 48, short of 61 either way, with Arab parties at a record 19. Herzog picks who tries first (
NYT).Binance suspended deposits and withdrawals after a hack it puts at about $6.3 billion, with $3 billion frozen; TRM Labs ties it to North Korea’s TraderTraitor unit, which would make it the largest crypto theft on record (
FT).WIRED reports an Accenture contractor connected a multi-agency Defense Department system to a personal Claude Code account, and the agent sent system details, including login credentials, to a high-risk third-party site (
WIRED).The labor share of income fell to 52.8% earlier this year, the lowest in records back to 1947 (
BLS).
The Iran items are the ones I trade. A post-midterm campaign is the case for the Brent spread, and Brent at $113.66 has $3.66 of room over the clock’s line today.
**INTEL.**Down 28% at $66.12 on a guide of $15 billion to $16 billion and $0.25 of adjusted earnings. Management is saying AI costs are squeezing PC demand into the first half of 2027, a second channel for the funding story: the build doesn’t only cost the builders. I have no position, and I wouldn’t try to catch a gap that big before the Nvidia print.**ALPHABET AND THE GROUP.**Alphabet closed down 12.64% at $283.82 on Thursday, and the sector it sits in has now given back a fifth of its value.
A 20% drawdown in the sector that led the market is a bear market by the usual definition, and it took about three weeks. I’m long Microsoft against it in spirit, if not as a pair: the self-funder should hold up better than the borrowers, and today it’s holding up only a little better. Its lead over the Nasdaq this morning is under a point, which isn’t much, and I’m giving it room.
Behind the wall this morning:
THE BOOK: 8 live lines, 3 new today, each with the factor it monetizes, its size and the condition that kills it.
FLOWS AND POSITIONING: the macro funds that re-levered right before the drop, why index volatility is still cheap, and the cash cushion that isn’t there.
FINANCIALS: why I own two money centers and pulled the short on the third, and where the AI funding stress could reach a balance sheet.
Everything above this line stays free. Below it is where my own capital goes, $450 a year at marketmusing.com.
Disclaimer: Opinions are mine alone and may change. It does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any security, loan or asset or to participate in any trading strategy. It is not intended to form the basis of any investment decision, should not be considered a recommendation, and does not constitute an offer or solicitation with respect to the purchase or sale of any investment, nor is it a confirmation of such terms.
