The Spender's Dilemma

00:00:00: Hi and welcome to Swisscodes, daily market talk.

00:00:03: It's Friday the twenty-fourth of July.

00:00:05: nearly eight hundred billion US dollars were wiped out off the market yesterday as evaporating free cash flow at.

00:00:12: Alphabet & Tesla remind investors that financing this AI raise is becoming increasingly expensive for the big technology companies as borrowing costs rise in parallel.

00:00:25: Meanwhile escalating Middle East tensions are pushing oil prices above key levels, fueling inflation expectations around the globe lifting the bond yields and strengthening US dollar.

00:00:36: And together these forces are creating what I now call The Spender's Dilemma.

00:00:40: Invest heavily or risk falling behind until you hit the wall.

00:00:44: So I will explain in detail how and why the big technology companies are now stuck.

00:01:10: So this MP-Five Hundred hat is worst day yet in July.

00:01:13: as a first sight of the earnings announcements from big technology companies to hyperscalers.

00:01:20: Alphabet and Tesla didn't go down, the market strode smoothly last week!

00:01:25: The earning was not problem per se but spending and evaporating free cash flow where?

00:01:31: Both Alphabet and Tesla stood by their capital investment plans.

00:01:35: Alphabet actually increased its own K-PAC's outlook to buy US dollars up negative in the second quarter of this year.

00:01:50: Now for the latter, for Tesla it is not a big deal.

00:01:54: It's used to these free cash flow variations.

00:01:57: but For the former for Alphabet it Is A Big Deal because it actually means that Broder Big Tech That Used To Be Capital Light And Cash Heavy Is now Turning Capital Heavy and Cash Lights Increasingly Relying on Stock & Bond Isurances To Finance The Additional AI Spending.

00:02:15: And That Comes At Time One Inch where expectations are rising.

00:02:19: The short end of the U.S.

00:02:21: yield curve is being pushed higher by mounting inflation expectations and rising hawkish Fed expectations due to the Middle East's war on the rising energy prices, And long-end of the US field curve which has a more important benchmark for big technologies.

00:02:36: longer maturity financing plans pushing higher on the expectation of structurally higher inflation in coming years.

00:02:46: debts, but also due to this competition from the big technology bond sales.

00:02:51: The letter has inundated the market with Big Bond Sales over the past year.

00:02:55: and you know what happens when supply explodes right?

00:02:57: The prices fall!

00:02:59: And In the case of bonds ,the lower bond prices mean higher bond yields.

00:03:03: So the US thirty-year yield for example is about a five percent psychological mark since fourteen straight days now and is testing the five point twenty percent level to the upside.

00:03:15: that's near the peak.

00:03:16: Level reached back in May, in the first weeks of the Iranian war.

00:03:20: The rising oil prices sure play an important role here pushing this yield higher.

00:03:25: but AI spending outlook with big technologies cash flow levels turning negative it clearly not helping.

00:03:31: As a result, the S&P five hundred dropped one point twenty-one percent in the wake of Tesla and Alphabet earnings.

00:03:37: Nasdaq hundred fell one point eighty seven percent.

00:03:40: on Thursday The Magnificent Seven led losses with four points sixty three percent decline.

00:03:46: as Alphabet tank.

00:03:47: nearly seven percent straight below is two hundred day moving average.

00:03:51: it closed the session more than twenty percent below its May peak hinting that alphabet.

00:03:59: While Tesla knows dive fourteen and a half percent in the single session, The company lost more than third of its value since last December peak level.

00:04:08: And the bears have room to do some more catch up here as Tesla's peer ratio stands near three hundred twenty levels today showing that pricing is more driven by hype around Elon Musk.

00:04:19: futuristic dreams then companies own fundamentals.

00:04:23: As I keep repeating Tesla and SpaceX are not traditional investments if you go that direction the craziest dreams of an out-of-control man.

00:04:32: It could pay off, yes it could but it could not pay off as well!

00:04:36: But anyway coming back to the broader market... The side of negative cash flow from two big AI spenders rattled a major US indices yesterday But the Semi Conductors had a positive session with Van Aks.

00:04:48: Semi conductor ETF posting at one point fifteen percent gain yesterday, then Intel announced strong results and a strong guidance yesterday after the bell and stock price rallied up to thirteen percent in the after-hours trading.

00:05:02: yet gains there were rapidly given back on.

00:05:05: the Korean Cosby Index which has become the bellwether of the heated chip trade is posting more than five percent decline this morning at the time I'm talking here, meaning that some investors now look beyond AI spending plans into how these companies will actually finance their spending and whether they Next week Microsoft, Meta, Amazon and Apple will go into the earnings confessional or I would call it rather The Spending Confessional.

00:05:37: Investor will be far less interested in headline earnings than how much these companies plan to spend And How Much Pre-Cash Flow They Have Left In Their Hands After Quarters Of Pouring billions of US dollars into AI to stay in this AI race.

00:05:53: The bigger the spanning plans, the stronger detail went for chipmakers and a broader AI ecosystem from data center operators and server manufacturers to power suppliers and construction companies that are building infrastructure behind AI boom.

00:06:08: Now, the good news is that if you can collect good news at this point in time.

00:06:12: The game becomes clearer.

00:06:14: none of the big technology names can actually afford to scale back investment plans because AI isn't extraordinarily capital intensive business.

00:06:23: before you cancel AI services You first have to build infrastructure.

00:06:28: So that means you have to be able to data centers by the chips building it's working and power capacity around a system And that infrastructure comes with an enormous price tag.

00:06:38: But fall behind in building it and customers will migrate to competitors.

00:06:42: that didn't!

00:06:43: As such, Building AI infrastructure has now become a race against the clock.

00:06:47: It is classic prisoner's dilemma or perhaps more fittingly for big tech today The great spander's Dilemma Spend aggressively and risk upsetting investors with shrinking free cash flows but spend too little And risk falling irreversibly behind In this game.

00:07:07: Keep spending, keep spending even if it is becoming the least bad option.

00:07:12: And even if does come with a heavy price tag for all of their players and do that until you hit the wall meaning until investors say enough.

00:07:22: Now on the macroeconomic front, The Middle East tensions continue to escalate pushing oil prices higher.

00:07:28: U.S.

00:07:28: crude supply passed a ninety six dollar per barrel level yesterday while Brands crude soared past one hundred dollars per barrel psychological level and is consolidating gains near that level this morning.

00:07:40: The rising oil prices feel inflation expectations around globe and fuel the central bank hawks in this context.

00:07:47: European Central Bank announced no change to its rate policy but Chief Kristen Lagarde left the door wide open for September rate hike if energy prices proved persistent enough to feed through the brother inflation in the euro area.

00:08:01: As a reaction, The EURUSD actually fell below the one-fourteen level after an announcement as a Euro Area.

00:08:07: Rate Hike will further hammer the euro areas' already murky growth prospects limiting its upside potential earlier this week elsewhere.

00:08:17: The Fed is also expected to maintain it's interest rates unchanged next.

00:08:21: hawkish fit expectations are mounting along with the rising energy prices and the latter favors a further upside move in U.S.

00:08:29: dollar against most majors until the dust in the Middle East settles.

00:08:33: So this is all for the crazy week of trading.

00:08:36: I'm Ipeco Skardishkaya and thank you for joining me, And Thank You For All Your Beautiful And Supportive And Interesting Commands!

00:08:44: I hope This Episode Of Market Talk Has Been Helpful And It Has Been Insightful To You so Please Do Not Hesitate to Leave Your Comments, Your Reactions And Your Questions Below As Usual.

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00:09:14: So I will meet again next week.

00:09:17: Until then good day trading and have a lovely weekend.

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