US payrolls revision in focus. Gold and silver: the calmer the better?

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Today’s Links

A key listen for understanding a lot of the churn in the US market internals of late
We’ve noted the extreme divergences in the US equity market internals, and this great rundown with Nomura’s Charlie McElligott on the Odd Lots podcast (from last week) gives great insight into the kind of drivers here - for example, why poor names have outperformed and some of the key narratives that are being tested and what happens when positions get over-crowded.

Some follow up on efficiency focus in US defense contractors.
Many of the major US defense names have seen a very strong start to the year in anticipation of more defense spending and despite the Trump administration’s threats to ban dividends and buybacks and limiting executive compensation if undefined delivery requirements are not met. WSJ ran an exclusive on Monday talking up the Pentagon’s plans for “sweeping performance reviews” that could result in “noncompliance determinations” and eventual “remediation. Amazing that the shares aren’t in a more defensive stance over this.

The big fear with AI: all benefits to accrue to capital. How will our democracies cope?
WSJ’s Greg Ip with long term perspectives on the decline of labor’s share in the economy relative to capital, something that could get worst as AI spreads throughout the economy. How will our democracies cope when so much of the working class is rendered “useless” as Yuval Harari would phrase it - something he anticipated before the ChatGPT release, by the way in his book Homo Deus.

The great Mr. Craig Tindale: Fed can’t control the bulk of inflation. Also, passive investing set to hit icebergs from here?
Another great post from Craig Tindale, this one pointing out that Fed has little control of CPI when so much of it is determined by import prices it can’t in any way control in the first place and how China has gamed the system, requiring a “war mindset” for Fed policy. I noticed as well that Craig posted a thought piece on the dangers to passive investing as well on his Substack, a piece that dovetails nicely with the SMC podcast from yesterday in which Peter Garnry laid out his argument that the great profit pool of the Mag7+ are increasingly endangered.

Bitcoin miners transition to AI data centers - apparently it’s a thing.
With the price of Bitcoin dropping while the amount of power needed to mine a bitcoin as high as ever (and electricity prices rising), some crypto mining operations are looking to diversify into other uses for their hardware. And yet, “the whales” have apparently not yet given up on Bitcoin.

Chart of the Day - Adobe

Adobe stock is emblematic of the carnage in Software-as-a-service names that investors fear will be disrupted by AI. Despite the fear, the company continues to grow at a solid pace of around 10% year-on-year, yes a downshift from 20% and higher growth rates pre-pandemic when the company’s shift to its subscription model from 2011-12 started ramping results as older software packages needed replacing. EBITDA margins are still 40% and higher and have never missed a beat in recent years. In price-per-share terms, the stock first reached the current levels levels in 2018, when the company’s revenue was only a bit more than a third of its current revenue. The share count, by the way, is some 13% smaller than in 2018. The forward P/E is around 10-11 for the company. Will Adobe be disrupted as quickly as the market fears? The company sells a lot of mission critical and complex software…and unlike the Mag7 stocks or others, has not been plowing huge funds into data centers, although its AI-related product sales have disappointed. Things need to go very wrong and rather quickly for this company for the current price to look justified. Maybe they will, maybe they won’t, but the cushion looks bigger here than the value for so many other companies. Target Stores, a currently no-growth retail store with EBITDA margins in the 8-9% area, has much higher earnings multiples!