Tech rebounds, but AI spending worries remain

00:00:00: Technology sucks rebounded yesterday as Anthropics IPO filing revived appetite for AI enablers, but the concerns behind a recent sell-off remain.

00:00:10: Investors are questioning the scale of infrastructure spending.

00:00:14: They're questioning their rising financing needs, they're questioning the circular deals and whether AI revenues will ultimately justify these investments.

00:00:22: So in the coming days Microsoft, Alphabet & Amazon The three cloud providers will be announcing their earnings And a letter will provide an excess confidence in the AI trade.

00:00:33: But again even strong results won't do if they don't rate an exploding spending.

00:00:38: So welcome to Swiss scouts.

00:00:40: Daily market talk is Tuesday, the twenty seventh of October.

00:00:45: I'm a picker Scottish pair and before we move forward with this discussion please keep in mind that opinions are my own And This Is Not Financial Advice.

00:01:02: So this new week started on a surprisingly, though cautiously optimistic note ahead of series of major central bank decisions and big company earnings are waiting for us.

00:01:12: First off the French ten-year yield drop below the five percent level all the way down to four point ninety per cent yesterday despite a weekend of heavy protests in France.

00:01:22: Woody's surprise decision not to downgrade France' credit rating on Friday played bigger role than the impasse in French politics and the French streets.

00:01:33: That's because ratings do impact a collateral value of investments and higher the rating.

00:01:39: The bigger percentage of value holdings that you have could be invested elsewhere, and latter would bring extra returns.

00:01:45: so it's very important for investors And full now stable ratings for our friends.

00:01:50: though with a negative outlook attached mind you somehow help.

00:01:54: cooling down side pressure in French bonds yesterday also narrowing the spread versus German bond yields to one hundred fifty three basis points from up to one-hundred seventy six basis point spread reached last week.

00:02:07: Kat Kjahand also jumped along with other major European indices Across the Atlantic Ocean, US indices also gained yesterday that on both sides of the Atlantic ocean are companies with exposure to Brazilian assets underperformed big time as MSCI Brazil ETF tanked upto twenty-seven percent pre market.

00:02:28: Yes!

00:02:28: Twenty seven percent and finished today over a twenty per cent loss.

00:02:32: ladies and gentlemen following Lula's surprise victory in weekend presidential election in Brazil The drought was mostly driven by worries about fiscal discipline under Lula and the reversal of the bullish trade building ahead off this election when investors were heavily betting for a victory by his opponents.

00:02:51: Flavio Bolsonaro, the son of former President J.O.

00:02:55: Bolsonaro on expectations of tighter fiscal discipline and more market-friendly policies.

00:03:00: However, the letter refused to consider and said he would seek to annul all results bringing back uncomfortable memories of contested elections and raising questions about what could go wrong around upcoming U.S.

00:03:13: midterms next week.

00:03:14: And anyway, this technology heavy now is like a hundred rebounded more than one percent in yesterday's trading session.

00:03:39: So Mike's reaction was positive.

00:03:46: There is no doubt about it, but concerns leading to the latest AI sell-off room remain well intact and live.

00:03:52: Investors worry about huge massive investments being thrown at AI infrastructure, they worry about massive commitments.

00:04:00: They worry the possibility that the return on these AI investments will take more time than previously thought or never come while technology investments are quick to become obsolete monitoring keeping need for more investment in future and more spanning.

00:04:16: Investors also worry about rising leverage and financing.

00:04:19: These investments when interest rates are expected to rise, they worry all these funding needs coming our way meta-announced yesterday to raise as much of the US dollar in equity.

00:04:30: Roadcom announced a US dollar worth of financing deal to buy chips and lease them to Enthropec, and SpaceX announced an AUD USD worth of equipment finance lease deal.

00:04:43: Holy, these are big numbers!

00:04:45: And last but not least investors continue to worry about this.

00:04:47: circular deals obviously.

00:04:49: So speaking off the letter, the latest news also suggested yesterday that NVIDIA AMD and Brode come.

00:04:57: These companies are interested to buy up to five billion US dollars of Metastock combined.

00:05:02: In other words, Meta's chip suppliers are also interested in buying the stock off their own customer!

00:05:08: The economic logic is quite simple.

00:05:10: Meta raises equity to support its AI investment.

00:05:13: Chip suppliers potentially contribute capital And Metas infrastructure spending supports demand for the supplier products.

00:05:20: What a wonderful world.

00:05:21: Now note that the circular nature of the money.

00:05:23: turning hands among big technology companies doesn't mean that their revenues are artificial.

00:05:28: Meta will buy chips, and chip makers will make real revenue out it!

00:05:31: But the concern is that supplier funding helps sustain demand without answering whether the ultimate AI revenues justify this spending.

00:05:42: I came across an Axis chart showing that spending growth stalled in August & September.

00:05:49: Now despite the worries that led to a technology sell-off in recent weeks, the latest round of stock and bond issuances saw strong demand still.

00:05:57: And as I can't respond with PE ratio sets at around twenty two twenty one times based on recent consensus earnings estimates which equals to an earning yielded for around four point eight to five percent.

00:06:11: expensive but not necessarily much better than the US ten year yield of around five percent with a higher risk for Nasdaq hundred companies however.

00:06:20: Now last week Meta said that its AI tools are paying off.

00:06:24: finally their advertisement targets are more efficient hands.

00:06:27: businesses are willing to pay more for advertising on Meta's platforms, what does revenue growth at meta justify?

00:06:34: The amount of investment.

00:06:35: so if you do the math We will say, not just yet.

00:06:38: Because Meta's operating cash flow increased by just nine percent to thirty-eight billion US dollars in the latest quarter while Capital Expenditure reached thirty four point nine billion US Dollars leaving free cashflow at a negative two point twelve billion US dollar.

00:06:53: Fuller K-Pax guidance on the other hand now sits at one hundred and thirty five to one hundred forty five billion US dollars.

00:06:59: So even though the business is growing strongly, I admit her investment will be upsworing more than all of the cash generated by operations.

00:07:07: Now that doesn't say investments won't pay off in the future.

00:07:11: Infrastructure generates returns over several years obviously And not all K-packs are exclusively for AI.

00:07:17: But Meta doesnt disclose enough to eyes like AIs incremental profits against its investment costs.

00:07:22: It just says AI is helping revenue and it leaves investors to argue about whether the company earns enough revenue.

00:07:32: And that's the problem.

00:07:33: Now, starting from Wednesdays market close we will have more data regarding how other big technology companies did last quarter Google Microsoft and Amazon cloud growth film matter for The Brother AI complex.

00:07:46: I'm moving a step further.

00:07:48: i was saying since last year That the ai portfolio should be complemented with energy and cyber security players.

00:07:55: remember as AI is very Energy hungry and it also increases in need for online security.

00:08:01: In the last week's website SecurityScare, I'm sure you heard about Swankthon.

00:08:06: The case for cybersecurity spending as critical flaws were discovered in PHP.

00:08:12: PHP being a programming language using around seventy percent of websites around the world including those from well-known providers like WordPress Drupal, Jumla as well media wiki which is the software behind Wikipedia.

00:08:27: The latter incident prompted some operators to take size offline as a precaution As AI apparently helped uncover vulnerabilities and develop working exploits Showing how technology can strengthen defenses but also lower the barriers for attackers.

00:08:43: As a result, an unsurprising these cybersecurity names including Palo Alto Networks Crowdstrike and Zetscaler rallied on news first.

00:08:52: trust to Cybersecurity ETF gained more than six percent in just two trading sessions And more then eighty per cent since April when these companies The cyber security companies were sold in tandem with software stocks.

00:09:06: Now moving forward, cybersecurity could capture growing share of AR related budgets, even as investors question spending.

00:09:14: elsewhere.

00:09:14: That partly explains why cyber security rebound has been stronger than the brother's software recovery over the past few months, but a larger security budget doesn't guarantee that today's providers will capture it because there is a major risk.

00:09:29: and as that what if AI models become increasingly capable of finding vulnerabilities in building defenses themselves?

00:09:35: Would they take business away from traditional cybersecurity providers that customers need beyond the one embedded in AI models themselves.

00:09:47: So I'm leaving you with these questions and saying goodbye for today!

00:10:12: What's Up?

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00:10:26: So I will meet again tomorrow….

00:10:28: Until then, good day

00:10:31: trading!

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