John Hook has been bullish long after I thought that was warranted (and has been right), so I took special notice when he sent this out to his clients over the weekend:

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Thursday 9/10 we went net short because of inflation, interest rate, political, geopolitical, and AI risks.

Negatives

• Inflation is above historical inflection levels. Historically, inflation has been the main inflector;
• World oil demand exceeds supply by about 1.5 to 5.5 mbpd, probably about 3-4. Inventories are low and decreasing. Oil prices, already too high, probably go higher because of Middle East and Black Sea restrictions.  Higher oil prices probably push up inflation and interest rates;
• Interest rates are near levels which have sometimes inflected the economy and stocks. Large federal, private ( especially datacenter), and world borrowing probably push interest rates higher;
• P/Es are high. Forward P/Es are within norms but based on a second year of very aggressive accounting and growth assumptions;
• Debt/GDP levels are high;
• AI token and GPU rental prices are decreasing faster than revenues are increasing;
• Stocks favor Republican pro-growth policies and will likely sell off as Democrats are perceived likely to win the mid-term or when they win the mid-terms;
• Geopolitics are unstable; and
• September to mid or late October has been the worst stock time of year, especially during mid-term elections

Positives

• Real GDP is strong. But it is partially based on heavy federal and datacenter borrowing;
• Earnings will be very strong y/y, but down q/q.  EPS will likely beat estimates.  Guidance may be mixed, very positive yet with many cautions; and
• Stocks have done well under divided government or Republican 3^rd years.

Mixed or Uncertain

• EPS accounting includes legal but Ponzi-like circular revenues and gains from companies partially capitalized by the hyperscalers from whom they buy services. Much expense is “construction in progress” and not yet depreciated but soon will be ahead.
• Republicans could win the mid-terms.
• With AI leaders (Amodei, Altman, Musk) and Democrats calling for an AI and data center slow-down, growth may slow or crash.

We evaluate the above as correction or bearish.

Hook & Co.

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