‘is’, not ‘probably is’.

Many investors dismiss it as an overpriced hype stock.

Good for them. Don't make the same mistake.

Whether you own it or not, you need to be aware of what they are doing and how it impacts everything else.

Here are my takeaways from the Q3 results call.

It’s a mix of cultural and investment impressions.

#1 Elon is changing America, geographically, culturally, geopolitically.

Look at the backdrop for the SpaceX Q3 investor call. $2 trillion company webcasting from a factory in Bastrop, Texas with an American flag in the background.

What is it saying?

Austin is the new Seattle. Bill Gates and Paul Allen left New Mexico because they hated it and returned to Seattle where they grew up, changing the city forever. Gates moving home turned Seattle into a center for global tech creating the network effects which led to Bezos packing up his car and starting Amazon there as well.

Elon is doing this for Austin. In fact I’d say he is doing this for the American South. Spacex manufactures in Texas, and launches rockets from Texas. He is building a Starbase in nearby Louisiana. ‘Starbase’ & ‘Louisiana’ Can you imagine those two words together? Have you ever associated Louisiana with high-tech?

Like I said. Elon’s changing everything.

I’m also extremely excited about expanding Starship operations to Louisiana with the second Louisiana purchase. The geography of Louisiana, the community, and their work ethic are so aligned for an amazing Starship future.

Yes, launchpads need to be near the water and Louisiana makes sense geographically, but is it just me, or if you read between the lines do you sense a slight jab at California? ‘The community and the work ethic are aligned’.

Then where is Spacex building their Colossus data center?

Memphis, TN.

He’s changing the center of gravity for tech in the US.

At the top I uploaded a 24 minute Spacex documentary ‘Test how you fly’. It’s tells the development of Starship. It’s inspiring and well filmed, but notice the imagery.

Elon and SpaceX are redefining cool.

Cool is not building websites for Microsoft in Seattle with lattes, hating your country and being a pain in the ass about everything.

Cool is working as a team building nextgen starships in Texas. Cool is advanced engineering. Cool is welding. Cool is patriotic.

And this girl…..

Rocket girl.

I love her. It says everything.

She’s sitting at the launch controls of a rocket test with her headset in a tank top, bleached hair, tattoos and SpaceX baseball hat. But you know she’s insane. She does matrix math in her head. You know she wouldn’t be sitting in that seat if she wasn’t in the top 0.1% of rocket telemetry experts.

She is the new cool.

Oh and by the way, all these welders are multi-millionaires.

That’s also cool.

That’s the geographic part (Texas, Louisana, Memphis) and the cultural part (rocket girl), but consider the geopolitics.

The US is pulling ahead of the rest of the world in so many ways. And the gap is accelerating. SpaceX embodies it and is also a big reason.

Global tech already runs on US platforms; your Microsoft Office, your iPhone, your Facebook, WhatsApp, your AWS, Azure and Google Cloud. All US.

Then with the Venezuela takeover, Russian sanctions and Iran War the US emerges as the world’s reliable source of energy.

Now SpaceX dominating satellite and rocket technology with 90% market share in launch capability.

Starlink dominating global communications.

And the capital markets capabilities. VC, Private Equity, Debt Capital and Public Equity markets all coming together to fund this bold project.

Leading the world in AI, Datacenters, Space, Defence, Energy, Communications, and Capital Markets…..

I know we stress about China all day… but I don’t think it’s really that close. Yes, there was a gap in manufacturing, but you can see that industrialisation in the US is happening and that gap is closing.

I always say there are opportunities everywhere, but what SpaceX is building reinforces that the US is truly amazing.

Maybe it’s right to be over allocated to the US.

Those were my cultural takeaways.

On the business side.

#2 SpaceX is Checkmate

I’ve owned Tesla before, and as part of owning it I modelled out all their initiatives. The cars, the CyberTruck, Tesla Semi, robo-taxis and Optimus (the humanoid robot). As an analyst what has been disappointing is that Tesla has been slower than my model in ramping all these projects. I get why sell-side analysts pick at Elon.

I get annoyed with Tesla. Why hasn’t Tesla Semi launched faster? Why still the same ugly version of the CyberTruck? Why does the S-Class look the same? Why so slow on new model changes?

But with the SpaceX call I see a different picture. Potentially.

I think Elon is strategising way ahead. I think he builds capabilities piece by piece and has a plan in his mind of how this all comes together.

Look at SpaceX. We thought it was a rocket ship company and Elon was fascinated with going to Mars. Seems farfetched. But whatever.

Then we realise what that rocket technology unlocked. All of a sudden SpaceX can launch satellites cheaper than anyone else. SpaceX then takes this capability and moves into the global communication business with Starlink. Cheap launch capability was the key checkmate move. We were never sure where things were going with Starlink, but now we see once Starlink had superior launch economics it could backfill in everything else later to outcompete AT&T and Verizon. Which is why those stocks are crashing. Investors already see what is going to happen.

SpaceX is also building its own frontier model, Grok. Think about that. Every other business in the world will be renting their intelligence from Anthropic, OpenAi or Gemini. SpaceX is building their own intelligence in-house. And Grokbot use is exploding.

On the Grok Bot side, we’re seeing the fastest growth of a product that I’ve ever seen in my life for Grok Bot. I’ve never seen anything grow this fast. We’re also seeing that the usage of Grok Bot grows over time per user. It does not decline. As we make Grok bot more useful, we’re seeing users use it more per week, not less.

Companies increasingly using Grok Bot as a force multiplier across sales, marketing, IT, and engineering, treating it as an always -on teammate for complex end-to- end workflows.

SpaceX is also building their own datacenter compute. And thanks to the advanced engineering skills at SpaceX they are solving the power and cooling challenges faster than anybody else.

As I think people are starting to realize, the constraint on deployment of super intelligence is more in power and cooling and infrastructure than it is in chips. What we’ve done at SpaceX is we’ve taken a team that has been able to achieve a market share in mass to orbit that is almost 90% of all mass to orbit of Earth, where China is about, I think, roughly 6%, and the rest of the world combined, including the rest of the U.S., is about 4%.

A team that has been able to achieve results that are an order of magnitude greater than the rest of all competitors in space combined, and applied that same team to the deployment of terrestrial compute.

This is a bit like the New York Yankees playing in Little League. It’s not fair. But the net result is being able to deploy power, cooling, and infrastructure at a rate that is vastly faster than anyone else, and may at some point be faster than everyone else combined. So, just let that sink in for a minute.

With Terrafab SpaceX will also manufacture their own chips.

We do have, I think, some significant potential breakthroughs in chip fabrication, but I don’t think I should discuss that on an earnings call. Let’s not give away the shop here. But I am optimistic that we will dramaticall y accelerate chip production and that Terafab will ultimately do what the name suggests, which is to make a terawatt of super intelligence chips per year.

Oh. And one more thing on Starlink.

We expect the market for communications to grow far beyond just human communication that we traditionally think about. Connecting cars, robots, and the adoption of Super Intelligence will increase communication demands, not in percentages, but in many orders of magnitude. In the years ahead, we expect Starlink alone to represent a significant portion of global Internet traffic.

Starlink will be the AI Agent communications network.

Now bring it all together. And consider Tesla.

SpaceX runs the AI communications network.

SpaceX has it’s own super intelligence, with in-house compute and chip manufacturing.

Now merge it with Tesla.

Tesla has in house battery, automotive and robotics manufacturing.

What do you have?

You have an unbeatable autonomous platform.

Robots and cars you manufactured, powered by your own batteries, running on your own AI models, software and chips, all communicating to your own datacenters on your own in house AI communications network.

It’s a complete vertical stack.

How does anyone compete with that? It’s a monopoly in the making.

And it’s why I think Tesla has been slow walking things slightly. Elon sees how this all comes together. Why waste lots of time and effort on V2 of the Tesla cars and trucks when V3 is around the corner with fully autonomous AGI robots and cars running on Tesla chips and communicating through Starlink? To Elon changing the style and colours of the cars or Cybertruck are childs play to backfill in later. The checkmate capabilities to lock in now are the satellites, chips, datacenters and Grok intelligence.

And why spell all this out when you are trying to merge the two companies?

#3 Are we worrying unnecessarily about compute?

Elon’s comments about compute were probably the most useful part of the conference call in terms of what the market is worried about right now.

Debt capital markets are panicking that datacenter builders like Oracle and Coreweave are spending too much too fast on compute for customers who won’t be able to charge enough for their AI services, which will lead to debt defaults.

Elon’s message is the opposite. Datacenter capacity is a scarce asset getting more valuable by the day. It can be rented out many times over. Compute rental rates are rising, not falling and the payback is less than 1 year.

Stop freaking out about whether these datacenters will get monetised.

In his own words:

Our belief is that the value of compute per watt will increase over time, not decrease. And the reason for that, I think, should be obvious to people, really, is that as you improve the AI software, as the models get better and better, you get more useful intelligence per watt. And the value of that compute is proportionate to the useful intelligence per watt.

And that’s why you see things like even old computers, like H100s, renting for more than they rented when they were new. And I think that’s likely to continue. I think we’re going to face a shortage of super intelligence compute. And that shortage is going to remain for a long time. I think the smart move is to do short-term contracts and essentially to place the bet on useful intelligence per watt increasing rapidly, which it obviously has done.

And also, if you look at, say, how are our short-term contracts renewing? Are they renewing at higher dollars per watt or lower? And we see them renewing at higher dollars per watt, not lower dollars per watt. We are also, frankly, hounded relentlessly by every hyperscaler and by dozens of smaller companies to rent more of our compute.

We could rent out our compute several times over if we said yes to everyone. That’s just the situation here.

That’s why I posted that sort of video of me, of the Monty Python cheese shop sketch, where the guy goes into a cheese shop to get some cheese and they actually have no cheese. And so he goes like, what about this kind of cheese? What about that kind of cheese? And they really just don’t have any cheese.

So we’ve actually tried to offload some of our inference compute to other cloud providers so that we can use more compute for training. And we get the cheese shop sketch.

We’ll ask them about, what about some GB300s?

Don’t have any of those.

What about some GB200s?

Don’t have any of those.

What about some TPUs?

No.

What about some Trains?

No.

What about some — okay, how about some H100s?

And like, well, we might have some overseas somewhere, and then they’ll check and come back and say, no, we don’t have that either.

It’s ridiculous.

I don’t think we’re going to have a demand issue here.

And it’s not impossible. I’m not saying this will happen. It’s not impossible that we will have a six-month payback period for compute next year.

Summary:

Elon’s cheese shop sketch on how hard it is to get compute should calm us about AI spend. Guys in the business with capacity are guarding it closely and careful about offering compute to 3rd party customers. And if they do it’s only on short-term contracts.

It also makes me wonder if Tesla is an attractive way into a monopoly in the making.

The index hasn’t moved much, but AI names are getting crushed.

Tech investors are questioning everything.

Has the trend changed? Is it time to capitulate?

Yes, the technology is great and in the future we will all use AI, but in the meantime do rising bond yields and credit spreads crash the party?

Do we go down another 40% before we go up?

Is this 1999 all over again?

That’s the question. Right?

Let’s go over highlights from this month’s 58 slide chart pack.

We will do a health check and come to a conclusion.

October’s Killer Charts include sections on:

• S&P 500 Earnings Estimates

• Positioning

• US Housing

• Coatue Public Markets Update

• Ramp AI data

A link to the full chart pack is at the bottom of the post.

Let’s build this up piece by piece.

We review S&P 500 earnings estimates every month. Like a doctor checking your heart rate and blood pressure.

Earnings estimates show strong growth and positive revisions.

EPS growth for the market is accelerating. Earnings are going to grow 32% in 2026! That is amazing.

Earnings are growing rapidly, while the market goes sideways, which means valuations are compressing. This is a positive set up.

What about the real economy? Aren’t rising interest rates crashing the real estate market. In the US housing section we review the Zillow data.

Overall, the picture is stable. Some markets doing OK, like LA and Boston (strangely), but some a bit weak, like Florida and Austin.

Lots of horror stories on X about multi-family rents crashing, but the Zillow data says rents are still rising 1-2%/year.

But housing isn’t what you’re really worried about.

It’s not the reason the AI stocks are crashing.

Investors are worried OpenAI and Anthropic aren’t profitable, can’t pay for their 1GW datacenter lease obligations in 2028 and everything downstream from chips, to photonics to gas turbines will come to a complete stop.

Will Anthropic and OpenAI have the money to pay Coreweave and Oracle when the data centers are completed? Will underlying corporate AI spend grow enough over the next 2 years to cover the all the revenue purchase obligations these frontier models signed up for? Does it work out or did they massively overestimate everything?

Here the section in the presentation with charts from Ramp AI are useful. Ramp AI is business accounting software which gives them access to company level AI spending data which they roll up and anonymise.

Below is the key chart which worries people.

Token spend flatlined over the last 3 months. Token volumes are still making new highs, but spend is flat because token prices have fallen.

Average token prices fell from $1.30 on average to 60 cts starting July. This lurch lower stalled out revenue growth and is causing panic in the market. A broader trend since April 2025 has been Anthropic coming down to match OpenAI pricing.

Where does token pricing go from here?

My prediction is price moves will be more gradual from here.

The stress we are seeing in credit markets are a signal to OpenAI and Anthropic that investors care less about usage growth and want to see more revenue growth. OpenAI and Anthropic will get the message. They don’t need to have a price war right before their IPO’s and when they have looming lease obligations. They are a duopoly. They can call a truce. For all the talk of Chinese models Deep Seek and Moonshot’s share of business spend is 0.3%.

It has made sense up to this point to keep the models cheap and grow the user base. It has worked. 56% of US firms use AI. Now is the time to stabilise pricing and increase the spend per employee, which has a lot of room to grow.

The median spend per employee is $15/month. Back in January that was $6. Firms in the top 10% are spending $813/month/employee.

We all see what AI can do. We see how useful it is. We see how it cranks out documents, presentations and spreadsheets. Can you even go back to the old days anymore? I can’t.

When you look at what you do with AI all day, and how productive it makes you, couldn’t it be worth $100/month to a company? VC’s think it’s worth $10,000/month/employee.

And yet the median spend is $15/month/employee. That looks really low for something this important. In fact there is probably something wrong with your firm if you are only spending $15/month/employee.

Another great chart. Guess how much companies are spending on AI as a % of overall expenses?

5.7%! 5.7% on super intelligence. Crikey. Companies are spending more cleaning the bathrooms than they are on AI. There is so much headroom to raise these numbers.

So it makes sense that corporate AI spend can grow dramatically from here.

Let’s put our health check together.

Corporate earnings are strong and growing.

S&P 500 valuations at the index level are back to below average.

Housing looks sleepy, but basically fine.

AI spend had 3 flat months and everyone is panicking.

But AI spend is super low amongst companies and can grow 10x without much imagination.

It’s hard to say companies are spending too much on AI. In fact it looks the opposite.

So the health check seems encouraging.

But what about the market?

Can we get a rally into year end?

Or do we crash lower?

And this is where we get the two key charts which indicate which way this is likely to go.

Read more

Disclaimer: this is not financial advice!

This summer Korean retail trades were margined to the max buying SK Hynix shares.

4 months later these same traders are selling their shares down 56%.

It is sad. And I feel bad for them.

But maybe it is an opportunity for everyone else..

The opportunity in memory is unique and still the same trade. (Most) investors don’t see the broader trend. That the center of gravity in AI computing is shifting to memory.

Memory is the future.

Let’s start with forward P/E ratios of the most important AI companies.

Does something look weird here?

I get there are concerns about AI and whether it’s a bubble and whether there will be funding for datacenters in the future and on and on. But isn’t that a problem for everyone on this list?

An AI bubble crash would kill everyone from Nvidia to ASML, to TSMC, Micron and SK Hynix.

And yet the valuations are hugely skewed against memory.

Maybe memory earnings estimate are crashing?

Nope. Earnings estimates for SK Hynix and Micron look fine so far.

The problem is investors still see memory stocks as a commodity product. A commodity product always on the verge of crashing, which is why the sector is so reactive to any news from Chinese memory company CXMT.

We are fighting that old adage.

“When China walks into a room. Profits walk out.”

Except, I would argue CXMT is not in the most important room, and may never be.

Investors are also missing where this sector is going and how the center of gravity in AI is shifting from GPU’s to memory.

Let’s go back.

What was the story of Nvidia?

I’m simplifying, but what Jensen saw first is that a GPU could be more than just a graphics chip. A GPU could also be used for processing, and was especially good for AI applications. This was the game changer. Investors in Nvida caught the shift in relative importance from the CPU to the GPU, and got rich.

I see the same thing happening with memory.

We’ve talked before about the Memory Wall; that memory chips are unable to keep up with the speed of the GPU. Memory chips cannot feed data to the GPU fast enough. The GPU does its computations then sits around twiddling its thumbs waiting for more data. The memory chip, but also getting the data through the network to the memory chip is the constraint. Memory is the big bottleneck and where all the great technical minds are focused.

The memory bottleneck is expected to get worse along two dimensions.

First, conversation length and context windows are growing. These longer context windows are shipped to the LLM in every message and increase the memory requirement.

The second dimension is agent runtime. AI Agents are working on tasks for longer, using more tools, and holding memory state while they work.

The solution so far has been two fold. SK Hynix invented HBM (high bandwidth memory); the 12 story tall DRAM memory chips (HBM) which have been incredibly profitable. The other solution has been on the software side in finding ways to compact context.

HBM is working for now, but the memory problem will get worse from here as AI agents increase in use and complexity. We see this with Meta Muse and Grok bots which are taking off in popularity. These are not chat bots answering questions. They are always on agents with their own server. Meta Muse Agents and Grok Bots are a growing workforce slaving away all day returning things to Amazon, finding the highest interest bank account or trading shares on IBKR (Asset Management as a Service).

How do we handle millions of agents running all day?

The solution from here might not be an even taller HBM chip, because the problem is increasingly not just the speed of the HBM chip. It’s the data network connections all the way to the GPU.

What if catching up to the GPU’s means rethinking everything?

What if the solution from here is something totally different?

And what if SK Hynix is changing the game again?

Same way they did with HBM.

Memory Centric AI Rack System (MARS)

SK Hynix has a culture of crazy engineering.

They were inventing HBM chips when there was no practical use for a memory chip that fast. But they thought it was cool and some use case would eventually come along. That use case was AI. It’s why they have 55% market share in HBM and are the first in each new generation.

I say this to point out their culture is unique and why I’ve been keeping tabs on their press releases around the future of memory.

SK Hynix has been hinting that solving the memory bottleneck from here requires thinking everything from first principles.

When they looked at the problem from every angle it was hard to avoid an obvious conclusion. Too much energy and time was being spent moving data to the GPU. Ideally, energy should be spent on purely on computing, not data movement.

What if instead of trying to move the data faster to the GPU the solution was bringing the GPU closer to the data? And also possibly do some early computation within the memory itself?

Maybe instead of all the memory chips clustered around the GPU there could be a memory server rack where all the GPU’s go to get a pooled memory resource.

As I said SK Hynix has been hinting at this concept before, but last week presented it for the first time at the OCP Global Summit in San Jose. They call it MARS (a memory centric AI rack system).

At this demo, the company presented the results of validating—at the PoC level—whether a KV cache*-sharing solution in an agentic AI environment and an embedding-sharing solution in ‘OmniServe’, an omni-modal service, actually work. Having analyzed real customer systems and workloads to confirm the applicability of its CXL-based solutions, SK hynix has laid the groundwork for a full-scale expansion of these solutions.

Why do I find this so interesting even if I don’t really understand KV-cache sharing?

Because I like where this is going. Especially, the ‘memory centric’ part.

A memory server where GPU’s go to get their data sounds like SK Hynix shifting from a component supplier to an AI systems architect. Sounds Nvidia’ish. It sounds like SK Hynix changing the relative importance of memory and potentially where the value accrues. It also sounds like SK Hynix is extending the number of years they can make these super normal profits.

Memory centric AI rack systems sounds like a 15x P/E business, not 3x.

It also makes me not care if a recently IPO’d Chinese memory company is working on a new DRAM chip. The future of memory is moving to a complex interplay of high bandwidth NAND (HBF), High bandwidth DRAM (HBM), and pooled memory. It’s whole system not a chip.

What you also notice is the technical partnerships. The memory rack was developed together with AMD, Penguin, Xcena, and Arcee. These AI memory technologies require tight working relationships. The whole enterprise AI server is designed together.

It’s also a long development pipeline. Next generation AI servers are co-designed years in advance by AMD and Nvidia with SK Hynix and will for national security reasons not be designed with Chinese chips. These close-knit technical partnerships and all the data sensitivities around AI make it really hard for a Chinese player to muscle in and smash the AI enterprise party. It’s an AI version of the Japanese keiretsu supplier relationships, which American companies used to complain about.

In summary here is what I see.

• GPU’s are fast enough for now.

• The problem moves to speeding up the memory.

• Memory products are getting increasingly complex.

• HBF and HBM are still difficult to package and difficult to commoditise.

• From here the next product is potentially a memory-centric server. Memory as a system.

Given all this does it make sense that SK Hynix is trading on 3x forward estimated earnings? Does this sound like SK Hynix asleep at the wheel about to get run over by CXMT or Samsung?

It’s sad that Korean retail traders have lost 56%, but if they could see the bigger picture and where memory is going maybe they wouldn’t be selling.

But remember, this is not financial advice! Always ask your financial advisor what they think is right for you.

Everyone telling you the next great investment idea.

Ideas and themes all over the place.

But how do we put them together?

How do you build a portfolio?

Few ever talk about how to build a portfolio.

Yet, it is arguably the most important part of the process.

What are sensible guidelines and tools for portfolio construction?

Did you weight that super amazing idea at 1% or 20%?

1%? Oh sorry. And meanwhile the bad idea was 3%?

Here are my thoughts on portfolio construction having seen the academic side of it as well as the real life side.

And of course there is a new YWR tool for you:

YWR 3-60 Portfolio Optimiser

But first some background.

‘Best Ideas’ or ‘A Delicious Soup’

There are two schools of thought on how to construct a portfolio.

One is to consider each idea independently and build a portfolio of the Best 10-15 Ideas. If each of the ideas are good the portfolio should eventually perform well in the end on a total return basis. This is similar to how a VC looks at his portfolio; a collection of individual bets which hopefully performs well over 10 years. Any one of which could be a home run and generate the returns of the whole fund. The view is don’t get overly focused on correlations and risk management. Pick the best businesses or investments. Fundamental long-only managers like this style.

The alternative is to build a portfolio as you would construct a delicious soup. The ‘delicious soup’ you are building is a return stream with varying degrees of risk and return depending on the ingredients. You want this balance of return versus risk to be as high as possible (the Sharpe ratio). To cook your soup you fiddle around adding a little small cap here, a dash of real estate there, a sprinkle of CTA….

Unlike the Best Ideas portfolio the delicious soup might include positions which wouldn’t make a list of twenty best ideas, but which are uncorrelated to the rest of the portfolio. These positions zig when everything else zags. On a 10 year total return basis they might not be the best, but day to day the ride is smoother. Investors in the soup portfolio value lower volatility. The delicious soup method is important for managers running public funds with daily or monthly liquidity and don’t have the luxury of multi-year lock-ups.

Modern Portfolio Theory

The academic expression of the delicious soup is Modern Portfolio Theory by Harry Markowitz. In Modern Portfolio Theory (MPT) investors analyse the return and volatility of every security in the market and combine these securities to create optimal portfolios with the best mix of risk and return. Investors mix and match the securities to create the delicious soup that best fits their taste. There is an optimal frontier with every flavour from low volatility-low return to high vol-high return and everything in between.

Like many things in economics MPT makes sense as a concept but is hard to implement in real life. The problem with MPT is there is no way to know the actual future return of a security. We can only guess. The other problem is risk metrics such as volatility and correlation are backward looking. We know how volatile a security used to be, not how volatile it will be in the years ahead. So the MPT breaks down in practice. Yes, it would make sense to build an optimal portfolios based on the future risk and return, but there is no way to know the future return or the risk.

Portfolio Optimisers

But the MPT concept is cool, so quants figured out how to make a version of it work using portfolio optimisers. A portfolio optimiser takes a universe of potential stock ideas and creates the ‘optimal’ portfolio based on your estimate of future return (or some related measure) and historical volatility or correlation as the risk measure. It’s a work around.

In practice a fundamental research team might create a list of 30 best ideas based on their models and meetings. The quants then ask the fundamental analysts to give each stock a price target or a conviction score. This is the ‘return’ input for the algorithm. The historical (last 5 or 10 years) volatility and correlation of the ideas to each other are the ‘risk’. This data is easy and comes from historical price data. But is backward looking.

The quants feed the return and risk of each stock into the optimiser algorithm… then beep, boop, beep, boop….a few seconds later the optimiser spits out the ‘optimal portfolio’. It tells you the best soup you can make with your 30 ingredients.

I like optimisers.

But I have my own take on Best Ideas, Delicious Soups and optimisers.

A hybrid a approach I call the YWR 3-60 Portfolio

The YWR 3-60 Portfolio

Disclaimer alert! This is a guideline.

This is not financial advice.

First, some grounding assumptions which you may or not agree with.

Fact #1. You only have 3 good ideas. The market is flooded with information and ideas. It’s impossible to have a view on all the sectors and themes. You are only human. Yet, many people try to build a diversified portfolio with 15-30 different ideas where they think they have a view on everything.

My take is this. We have simple minds and most of the time only have a differentiated intelligent views on 2-4 themes. Really we have are 2-4 good ideas, but because we think we need to be ‘diversified’ we dilute the good ideas with 10 mediocre ones.

The result is a mish-mash portfolio that struggles to beat the market. 2 of your 3 themes worked, but then 1 of your other 10 ideas wiped it out, and you ended the year +10% when the market was +12%. Sound familiar?

The ‘3-60’ in the YWR 3-60 portfolio is to take your top 3 themes, where you have conviction, and make them the bulk of your portfolio. Make those 3 core themes/ideas 60% of the portfolio. Or 50% if you want, but put more weight on a smaller number of themes.

More bat on the ball.

That is the key idea. And it’s deliberately simple.

Like your brain.

Fact #2. The market index returns are good and 85% of professional fund managers have been unable to beat the index over the last 10 years. If none of the fund managers can beat the index the odds of me or you beating the index are low as well. Maybe we should save money on Substack subscriptions and market data and just buy an index fund.

Or, maybe there is an approach where we can still beat the market.

Let’s allocate 60% to our high conviction ideas. But then for the rest of the 40% of the portfolio consider buying an index fund. Or, if you can’t help yourself and have to buy lots of different stocks make the remaining 40% a mix of 2-4% positions which will average out to an index like return. Try to not make these big bets. The big bets are in your 60% allocation.

Fact #3: Your brain is not great at running complex correlation analysis. That’s not what it does. And MPT is correct. 4 uncorrelated ideas are better than 4 ideas which are all the same bet. Use an optimiser for suggestions on how to weight your 3 top themes.

The challenge for us is that a lot of themes seem different on paper, but actually have high correlation. On paper they look like different sectors or geographies, but often there is an underlying macro sensitivity which makes them all trade same.

That correlation is what the optimiser sees, which many times you can’t. That’s why I suggest coming up with 3-4 high conviction themes and then asking the optimiser how best to weight them. It’s just a suggestion, but it’s interesting to see what the optimiser says. And it’s better than no process at all, which seems to be how we usually determine portfolio weights.

Putting it all together.

The YWR 3-60 portfolio construction process is simple a hybrid approach. It takes the fundamental high conviction best ideas style (but only 3 ideas because those are the good ones) then uses an optimiser to help figure out how to weight those themes and make a delicious soup.

And don’t worry if you don’t have a portfolio optimiser.

I built one for you.

The YWR 3-60 Portfolio Optimiser

Here’s how it works.

Pick 3-5 ‘themes’ using ETF’s. In your real portfolio you can use individual stocks, but for this risk analysis piece we are using ETF’s to approximate themes.

For each theme give a conviction score. This is your ‘expected return’. 5 is high conviction/high return/you love it, 1 is low.

Then click ‘Build my 3-60’.

Given the themes you entered, combined with how much you like them (conviction score) the optimiser is going to calculate the optimal weightings for each of those themes considering the correlation of those themes to each other and to the other 40% weighting in the MSCI All World Index.

Remember that last part. If your ‘theme’ is tech and tech is also 30% of the MSCI All World index the optimiser is going to see the high correlation between the two and not be wild about it. ‘It’s all the same bet’.

There is also a constraint that the max weighting for any ETF is 25% of the portfolio.

Below the optimal weightings output there is a chart with the historical performance of your optimised portfolio and the MSCI AW index.

You can adjust the sliders to increase the weighting of any of your themes. The adjusted portfolio will show as a red line in the chart (‘Your weights’). The charts and performance are backward looking. The overall volatility number is also backward looking but important to note.

I want to show you how this can be helpful.

Let’s say you like European Banks, China and the NASDAQ. Which I kind of do. And let’s say you like them all equally. Below is what you would enter into the optimiser. All of them get a ‘3’ for conviction. Theme 4 is empty.

These seem like 3 different bets. Europe, China and US Tech.

But when you put them in the optimiser it picks up that European Banks have been trading a lot like NASDAQ which also trades like the MSCI AW index, which is the other 40% of your portfolio. FXI is the only differentiator in the whole book. When the optimiser looks for the best risk/return it likes China’s lower correlation and increases the weighting. In fact it takes China to the highest weighting possible. 25%.

That’s why I think it’s useful. I don’t think you would look across your portfolio and make the connection that Europe, Tech and MSCI AW are all the same trade and that if you say you like them all equally, of the three it makes sense to add more China.

Here is the link again to play around with it now that you know how it works.

YWR 3-60 Portfolio Optimiser

Remember that the optimiser is a simple mathematical algorithm maximising two variables (the conviction score you gave for each theme and portfolio volatilty). All the optimiser knows for volatility is the last 5 years of returns, and all it knows for the future returns are the conviction scores you give it.

That said, it’s a useful tool to help analyse portfolios and construct themes in a way that they aren’t all the same bet.

Have a good weekend.

Erik

The one eyed CIO with imagination is king.

I say that because I’m kind of amazed.

I’ve participated in two PM/HNWI/FO best ideas conferences in the last two weeks and listened to over 40 investment professionals stand up and share their best investment ideas on stocks, FX, commodities, economics, technology and macro trends. Both events were fun, with great people, great dinners, and lots of creative ideas.

The ideas were great. But I was also interested in the meta game.

What are a wide sampling of investment experts comfortable pitching. And what do they not want to pitch.

I imagined each of them at some point prior to the event sitting all alone at home thinking of what idea they would present to their peers. Because I had to do that too.

What would sound smart? What would sound stupid? Where did they have conviction? Where would they be able to answer questions intelligently?

Will people agree with the idea?

Or, will I look stupid?

The first conference I attended was quite macro with lots of ideas around being long volatility (interest rates and FX), long gold miners, long UK, long EM, long Brazil, long Venezuela, and shorting the S&P.

The second group was more futuristic and hyper focused on AI. Although it was not a tech conference the best ideas were bullish memory, bullish compute, advanced manufacturing and space. Like group 1, group 2 was also bullish on gold.

All sensible and smart. Don’t get me wrong.

But I couldn’t help noticing the two big things nobody at either conference wanted to pitch. Including me.

One of them is the most important variable in the world.

An obvious thing with the power to derail all other trades.

The elephant in the room.

The emerging energy crisis.

‘Too Geopolitical’

I want to share one more anecdote, because I think it explains why investors have such a difficult time taking a view on the Price of Energy. Even if the Price of Energy is the most important input to economic activity.

I was at a shipping conference in London listening to a private credit analyst talk about his experiences lending to tanker companies. He said it had been easy back in 2013-2016 to lend to tanker companies when the ships traded at 60% of NAV. But currently, everything was ‘too geopolitical’. He didn’t have a view here and wasn’t playing. He would wait 2-3 years for the cycle to turn down again. Not that shipping companies need his money, but the comment was insightful. The sensible MBA graduate was confident to commit tens or hundreds of millions of dollars to a spreadsheet ‘return to the mean’ type trade, but the analysis and conviction broke down completely when it came to analysing political conflict.

What would the IRGC do? What would Trump do?

He had no idea.

Or, just as importantly, I’d say he had no view he was willing to pitch to an investment committee back in Manhattan. No way. Too difficult. There is no Excel spreadsheet or chart which tells you what happens next. We have left the world of spreadsheets and are in the world of religion, history, egos, human nature and game theory. No way he was going to stand up in a boardroom and explain how they were betting hundreds of millions based on his hunch of how a highly religious military might react to a head strong US president who appears irrational and how long shipping rates might stay high. Instead, he conceded that it was all ‘too geopolitical’. Like that’s something we can just choose to ignore.

The Energy Crisis issue is wrapped up in politics so the conversations very quickly get political and uncomfortable. I know because I’ve had them. It’s more pleasant to talk about AI.

Except, maybe we need to get uncomfortable.

In the future when we look back on this time with 20/20 hindsight, will we say the Middle East Energy Crisis was THE most important event which disrupted every other thing and determined everything about asset class performance through that period? Will we say, yes AI was super important over the long-term, but for several years the energy crisis disrupted everything?

Is understanding the unfolding Energy Crisis today the same as realising the significance of the housing bubble back in 2007 and how it would ripple through the financial sector and change the world?

The Frog in Boiling Water.

Guys. I know the Iran-US conflict seems impossible to know and we would prefer to make calls on Memory and Brazil or whatever… but what is happening in the Gulf is freaking massive.

Do you remember back to when we used to fuss about OPEC meetings and whether they would cut 100k or 200k barrels?

That is so insignificant compared to what is going on now.

Iran is blockaded with 2 mn barrels/day offline. 2 million barrels! That in itself if huge. And it’s not an immediate problem, but day by day there is damage to the fields which will take time and work to repair.

Then Qatar; the biggest LNG exporter in the world at 20% of global supply, is blocked in and can’t get its LNG ships out.

Then Saudi Arabia, the second largest oil exporter in the world is getting its arms pulled apart on both sides. The East West Pipeline is blown up, their refineries are getting attacked and their tankers can only get out of the SOM intermittently. What if Saudi gets completely disabled?

Yes, oil and oil products are getting out through trucks, pipelines, and off again on again through the SOH, but we are probably still losing around 6 million bpd of supply which is 6% of global oil supply and maybe 20% of global LNG.

But it’s not just the energy effects. This conflict has killed traffic through 2 of the most important shipping chokepoints. We forget about it but the Suez Canal is one of the great shortcuts of the world, and traffic there is down 50%. Ships from Asia to Europe are diverting thousands of extra miles down the coast of Africa, around the Cape of Good Hope and back up to Africa, adding time and expense to everything.

The Energy Crisis is not confined to the Middle East either. Russian oil has been sanctioned on and off again since the Ukraine War in 2022. Then you have Ukrainian drones have been taking apart Russian refining capacity forcing it to import diesel from India and Turkey. And like with Iran, there are the gradual, slow burn effects to future oil production when investment is sanctioned.

Also looming over the horizon is the effect this conflict will have on fertiliser and food prices if it continues.

Governments have been trying to minimise the shock, but it’s been going on longer than everyone expected and the effects are starting ripple through the economy.

Diesel prices are through the roof.

And like in 2022 broader inflation measures are rising.

Long-term interest rates are also moving higher.

The Federal Reserve and ECB, which thought they would be cutting rates, have had to reverse course and start raising the policy rate.

US house prices have been stable so far, but there are signs of weakness as mortgage rates keep moving higher.

Stresses from the Energy Crisis are building.

But like a frog in boiling water nobody wants to panic because who knows, the US-Iran War could be resolved anytime. Nobody wants to be the idiot who panicked and went overweight energy stocks the day before the peace deal.

Irreconcilable Differences

The Iran War has been off again on again since February.

There have been talks and agreements.

There have been times of relative calm.

These fluctuations give us hope the whole problem could go away quickly.

But really this conflict has been decades in the making and there are irreconcilable differences between the parties.

The US does not trust with a nuclear bomb a military dictatorship who for decades has been burning American flags, bombing embassies and chanting death to America. Sorry. No way.

On the other side the IRGC knows the US and Israel want regime change no matter what, and no matter what agreement is signed. They know their only real defence is a nuclear weapon. They want to be untouchable like North Korea.

And it gets worse.

If getting the US, Israel and the IRGC to sit down at a table and potentially iron out their differences wasn’t hard enough, now we have a side fight breaking out between the Houthis and the Saudis. A side fight which may, or may not drag in Pakistan and Turkey.

Yes, there are attempts at talks between everyone, but the escalating missile strikes on cities, airports, ships and political leaders make it hard to put Humpty Dumpty together again.

How could it get resolved?

A consistent view I hear is that the IRGC is an immovable object fighting for its life and will never give up. The IRGC will never step down and can’t be overthrown from within. The US doesn’t want to put boots on the ground and the Iranian protestors are unarmed and don’t feel like charging the machine gun nest over and over again.

There’s always a chance the IRGC dissolves from within and transitions to a more moderate government which the US and Isreal accept, and we get peace. And maybe this happens. Like the fall of the Berlin Wall. But I also reluctantly accept that the IRGC, like an old African dictator, can be good at ruthlessly hanging on to power.

Which leads to the conclusion I usually hear that the only way conflict in the Middle East stops is if the US just goes away, or signs an agreement giving Iran what it wants (control of the SOM and development of nuclear weapons). Because, you know, ‘the US has lost already anyways.

One possibility is that Trump loses the midterms and a new Congress enacts the War Powers Act, which forces the US military to disengage. This requires the Republicans to lose both the House and the Senate.

The War Powers Act might be easier said than done though. The wording of War Powers Act legislation would be tricky in this situation. What exactly would it say? There isn’t a clear war. Would it say the US Navy can’t enforce sanctions on Iranian oil by blockading Iranian tankers outside the SOH? Would it say the US Navy can’t protect freedom of navigation in the SOH? There would have to be clear language which both the House and Senate could agree upon and they never seem to agree on anything.

Historically it has been a tricky piece of legislation. Presidents have notified Congress of US military engagement as stipulated by the War Powers Act, but the act has never forced the removal of the US military from a conflict. Altogether, it might be wishful thinking that Trump loses both the House and Senate and then Congress passes legislation which forces the US military to leave the Persian Gulf.

Some would argue Trump might support the process and actually be relieved to capitulate. He could say his hands were tied and get out of this mess. Possibly.

Then on the other hand is the theory that to some extent conflict in the Middle East is good for the US and US energy dominance. Maybe Trump likes the status quo. It’s relatively stable. No US ships are getting attacked. No sailors are dying. Meanwhile, he and Bessent quietly choke Iran to death. Inconsistency of Middle East energy also keeps China on the back foot.

We can go round and round on what Trump thinks, but it gets more complicated than Trump and the IRGC. We also have the Israelis, Houthis and Saudis. The Israelis will fight the IRGC to the end. They remember everything and will not be done until the IRGC is gone. And I don’t know how you put the Saudi-Houthi fight back in a bottle. The Houthi-Saudi conflict could shake Saudi to its very foundations, which would be a whole new chapter in the future history books.

Then one other thing worth mentioning which thankfully hasn’t happened yet. Turkey and Israel are not happy with each other and have come close to blows in Syria.

I used to play ice hockey in high school. When it had been a particularly rough game and fights broke out the referees could handle maybe 1-2 fights on the ice at any one time. But if it got to three fights at the same time things would get out of control and sometimes ended in a bench clearing brawl. We are in that 1-2 fight inflection zone now. More than 2 fights and it gets exponentially harder to solve.

Messina, Sparta and the Three Hundred Year War.

The first conference I told you about was in Greece. It was lots of fun and one of our side excursions, when we weren’t talking about FX vol, was a tour of the local Greek ruins. Our guide, a local Greek school teacher, walked us around the ruins while casually explaining the various wars which had ravaged the temples. She explained how the cities of Messina and Sparta had fought for centuries. As in “They fought between the 5th and 8th century BC”.

It hit me how unimaginable it would be to have a ‘hundred year war’ in our day and age. We can’t believe the conflict in the Middle East has gone on for 8 months. Then listening to Greeks casually talk about hundreds of years of war, you wonder if our perspective of what is possible is highly influenced by an 80 year period of relative calm. Are we more intelligent and civilised now, so long wars don’t happen any more? The recent track record is that they don’t, Or can big, nasty multi-year, even multi-decade wars still happen? As they have in the past.

Do drones and robots and precision missiles make it more likely that we have lower intensity, but longer lasting wars because fewer human casualties are involved?

Maybe the current conflict gets resolved in December after the mid-terms. Or maybe in 2028 when a new president is elected. Or maybe it goes on to 2030. Or 2130. It’s hard to know. But we have to accept the off-ramps are hard to see right now. Which is why I titled this Hormuz 2030. And the risk is the title looks really foolish next week. But the idea is to expand our imagination on where this could be going and how long it could last.

$200 Oil

There is another reason investors don’t discuss the rise in oil prices, besides that the fact that it’s touchy to talk about the Middle East.

It’s because most are structurally bearish.

Oil is a dirty boomer fuel. A relic of the past. It will be like whale oil. Autonomous cars and robots don’t run on Brent Crude.

The bearish view is oil would be $65 if it weren’t for the conflict with Iran. “You oil bulls got your dream event, a war in the Middle East and oil still can’t stay consistently above $100/barrel. That tells you how broken it is. It’s in a structural bear market” The futures curve confirms this with 2030 oil futures at $65 and 2037 at $55. The futures market says the outlook for oil is slow death.

At this point there are two rebuttals I might make to the oil bears

• You were saying all the same things at $65/barrel and are saying them again at $95…..so….

• As for not holding $100 despite all the conflict… let’s give it time. We’ve had an unprecedented draw down of global inventories to keep oil below $100. But that is a short-term solution. And it’s really ironic, or predictable, that Biden reduced the SPR a few years before we got the exact event it was created decades ago to cushion. Either this conflict ends soon or we are going much higher.

But I’m not going to say any of that.

Because I want to make a different point.

This isn’t all about supply. There is a demand side too.

We focus on the EV’s and renewables in developed markets, but we never step back and appreciate the hundreds of millions of emerging consumers entering the market place who need a lot of energy and are probably not going to plug an EV into their unreliable electricity grid. I agree EV’s are a headwind to oil price, but possibly we have the relative magnitudes wrong.

Do you remember the last commodity boom which started in 2002 and why it happened?

It kicked off because 1 billion Chinese started consuming while the mining and energy industry didn’t see it coming and wasn’t ready for it. So prices squeezed higher for years before supply could react.

Well guess what? 1.3 billion Indians just did the same thing. GDP per capita in India has been going vertical and has crossed $2,500. In today’s $’s this is that same inflection point China hit in 2002. And like last time nobody is ready for it or talking about it.

We are all focused on EV’s and the weak Chinese economy, but nobody is talking about 1.3 billion Indians. Or for that matter 1.4 billion Africans.

For years the IEA did an amazing job of brainwashing the world that hydrocarbon demand was going to decline, not grow through 2050. And everyone bought into it. The energy industry, particularly the European oil majors, set modest targets for production growth. They reduced exploration, reduced drilling and reduced growth capex. BP, Shell and Total shifted a portion of their capex budget to renewables and away from hydrocarbons.

This bullish EM demand story which the industry doesn’t see coming is why I was pitching $200 oil last year before the Middle East problems even started.

Link to: Why $200 Oil Pops the Bubble.

Where do we go from here?

I’m going to take a stab at how this plays out across asset classes.

It’s hard to do, but I think you have to. And maybe it helps.

Sometimes it helps to have a guy like me plant a crazy idea out there that we could have a multi-year energy crisis unfolding. Then you can discuss it objectively at your IC’s without the reputational risk of being the one who came up with the idea if everyone thinks it’s ridiculous.

Also this is not financial advice and has a high chance of being wrong.

Read more

I hope he’s right. I doubled down this year.

A copy of Fred’s slides are below.

Read more

Investor sentiment remains remarkably negative. The list of concerns is long: recession fears, higher interest rates, oil prices, a K-shaped economy, dollar strength, the Iran conflict, the Russia-Ukraine war, and persistent warnings that AI and equities are in a bubble. Taken together, there is certainly enough uncertainty to keep investors awake at night. Yet markets and economic fundamentals continue to show considerably more resilience than the prevailing narrative would suggest.

Positioning is crowded, not just cautious

This is not merely pessimism as an attitude — it is pessimism as a position. CFTC data compiled by Goldman Sachs show leveraged-fund short exposure in Nasdaq-100 futures surging toward roughly $80 billion, while longs have held near $20–25 billion. The resulting net short of about –$60 billion was the most negative reading in several years. That crowding is a contrarian setup: if the tape keeps rising, short covering becomes fuel.

One timing caveat belongs in the note. The most extreme net short was concentrated in August; by late September it had moderated — CFTC data show leveraged funds net short roughly 31,000 contracts on September 22 versus about 62,000 on August 18 — even as gross shorts remained elevated. Pessimism is still elevated. The single most stretched reading has already started to unwind.

The consumer story is uneven, not broken

For years the rule of thumb was that housing drives the cycle. That linkage looks weaker now. There are legitimate reasons to be cautious on the lower-income consumer, where higher rates and affordability constraints bite hardest. But the recession thesis requires the whole consumer to be impaired, and the aggregate balance sheet does not support that. Household deposits and currency stand at about $5.43 trillion — only 0.9% below the recent peak, far above the pre-pandemic level. The cash stock built in 2020–22 has not been drawn down in any meaningful way. Money-market assets have surged from roughly $3 trillion before the pandemic to more than $8.4 trillion. Total household assets are about $206 trillion, up 6.6% and at a record, with household net worth approaching $186 trillion (+7.2%).

That changes the transmission mechanism of higher interest rates, which are almost universally discussed as a pure negative. They clearly hurt borrowers. But households holding trillions in cash,money-market funds, and fixed-income assets are earning substantially more interest income — at a 4% yield, $8.4 trillion in money markets alone represents roughly $336 billion of annualized income. The result is the K-shaped economy in action: higher rates squeeze the indebted end while transferring income to savers. Aggregate household balance sheets remain near record strength.

Geopolitical narratives have run ahead of outcomes

Oil is a useful example of how the narrative can outrun reality. Despite repeated claims that the Iran conflict and the Russia-Ukraine war would leave the world short of supply, oil has not delivered the sustained spike the bears expected. This echoes the earlier claim that the war would destroy the global breadbasket and produce lasting food shortages. In both cases the risks were legitimate, but markets adapted — through substitution, new supply, changing trade routes, and higher production elsewhere. A supply shock does not automatically produce the worst-case outcome, because prices themselves create incentives for the world to adapt.

The AI “bubble” deserves the most scrutiny

I have worked through the dot-com bubble, the China construction boom, and the U.S. housing bubble. Those episodes shared a defining characteristic: capacity was built dramatically ahead of actual demand. Fiber was laid that went unused. Homes were built for buyers who did not exist. China built enormous property and infrastructure in anticipation of future demand. When demand failed to arrive quickly enough, excess capacity sat idle — in some cases for decades.

That is not an accurate description of AI today. The distinction is the relationship between capacity and economically productive demand — not the absolute amount of money being spent.

Leading-edge compute capacity is not being constructed to sit idle. Demand is already here: hyperscalers are racing to secure GPUs, networking, memory, power, and data-center capacity, and newly deployed capacity is being absorbed as it is built. The useful life of the infrastructure may be shortening, not lengthening, because each generation of chips, models, and networking materially improves the economics of the last.

More importantly, AI investment has evolved beyond a conventional capital-spending cycle into a global strategic arms race. Leadership in AI could confer enormous advantages in productivity, scientific discovery, financial markets, cybersecurity, autonomous systems, and military capability. Nearly every Magnificent 7 CEO has framed falling behind as an existential threat. If management genuinely believes that, slowing spending simply because the numbers look historically large is not rational strategy. The question is the cost of over investing versus the cost of allowing a competitor to achieve a decisive advantage — and for companies with enormous balance sheets and cash flows, the second risk may be considerably larger.

Rapid obsolescence, which would normally argue for delaying investment, actually encourages more of it here. If a competitor deploys the next generation of models and infrastructure and achieves dramatically better economics, no one can afford to sit on the previous generation for a decade. And the applications are advancing visibly — from increasingly capable agents and products like Meta’s emerging AI tools and glasses to the longer pipeline of autonomous vehicles, robotics, and humanoid systems. We are still discovering what this infrastructure will support.

None of this means every AI company is undervalued, that spending cannot overshoot, or that recession is impossible. There will be failed projects, overbuilt capacity, and valuations that cannot be justified. But there is a difference between identifying individual excesses and declaring the entire cycle a bubble.

The bottom line

Consider what the bearish case requires: a consumer collapse contradicted by $206 trillion in household assets and $5.4 trillion still sitting in deposits and currency, an oil shock that has repeatedly failed to materialize, a capacity bubble in AI where capacity is being absorbed rather than idled — and investor positioning that was already at historic extremes in August and has since begun to cover. The risks are real, and they are widely discussed. But they are also increasingly reflected in expectations and in portfolios.

The market does not need all of today’s concerns to disappear. It only needs growth, earnings, and AI demand to turn out better than what increasingly bearish expectations have already discounted.

Time to assess the quarterly performance of our strategies.

As a reminder Dirty Dividends, our longest running strategy, was born at the height of the European ESG madness in 2023. This was when funds didn’t want to invest in anything to do with mining, energy, autos, banks and tobacco. It has evolved over time, but still remains biased towards value, and dividends.

Cash Dragons was born in late 2024 at the height of China’s uninvestableness.

The YWR ETF portfolio is a new creation where we work together to create a simple, low-cost global allocation portfolio using ETF’s.

Aside from Cash Dragons, we are having a good year.

YWR ETF Portfolio

I like this portfolio.

If you remember back in December 2025 we surveyed the YWR community on their top ETF picks for 2026 (YWR 2026 Asset Allocation).

Usually, I fade investor surveys and do the opposite, but since this was YWR readers, the elites of the financial community, we took the picks at face value and went with what everyone liked. I made one tactical overlay though, which was to add the Korea ETF (EWY). We started the year with five ETF’s all at a 20% weighting.

YTD the portfolio is +27%. It’s been really helpful that we were bullish energy when nobody else was. Brazil is also performing well. It was challenging to stick with Brazil during the depths of despair, but now it is working and if the election goes our way has more to go. Real interest rates in Brazil are at Africa levels. Surprisingly, gold miners, which everyone loved earlier in the year, have been a dud ytd. China, which I keep pushing, has been the worst performer :(

We haven’t traded the ETF portfolio all year, but there were two decision points where we considered shifting our positioning, yet didn’t.

At the end of Q2 we were frustrated that China CSI 300 with all the cool AI optical companies like Zhongi Innolight and Eoptolink was outperforming our FXI portfolio of loser software companies and banks. We were considering switching to the CSI 300. Thankfully, we stuck with FXI and didn’t get whipsawed into buying CSI at the top.

Our other decision point was whether to panic sell Korea on the lows when all the leveraged retail traders got margin called in July. We decided the July sell-off was most likely a buying opportunity, not a time to sell. Our oversized imagination could see Korea going on to confound the memory bears and make new all time highs and we wanted to be on board for that. So we did nothing.

Below is our current allocation after the YTD performance.

I like how the portfolio is performing and I like how diversified it is. Our five themes have low correlation with each other. We are +27% ytd and still have gold and China in our back pocket.

BTW: This risk analysis was created by Stevie. Just give Stevie the tickers you want and ask him to build you a 5 year correlation heat map in Google Sheets.

Dirty Dividends

Dirty Dividends was +15% in 1H 2026 and added another 1.9% in Q3.

*A note on performance tracking. Starting in July I switched to using Portfolios on Run Plutus to track Dirty Dividends and the Cash Dragons.

The only trade during the quarter was to reduce Jackson Financial (JXN) from 7% to 5%. We bought it back in April 2023 (A Friday Money Maker) at $36 and it’s +260% (not including the dividends).

I don't want to be a chicken little, but I am wary of this increased use of reinsurance captives in the life insurance industry. I think I understand what Jackson is doing, why they set up BrookeRe and why the hedge accounting would look funny if the S&P went up unrelentingly (which it has), but I also appreciate what I don’t know. We always knew a life insurance accounting bear case would raise its ugly head at some point, although it is also why Jackson trades on 5x earnings because nobody understands it. Let’s recognise that we’ve done well while there is now potentially something which we do not understand, and take some profits.

During the quarter we also reinvested some dividends into Frontline (a Tuesday Money Maker). In hindsight we should have made Frontline bigger.

Dirty Dividends is massively exposed to European banks and the fear this week is that the rise in long-term yields in Europe will be negative for the banks. I understand the concern, it makes sense, but I’m not selling. To me this is stage 2 of the trend towards higher interest rates in Europe. Eventually, the banks will benefit. The ECB will gradually, or not so gradually, raise their policy rates to new highs, and with a lag bank interest margins will widen further, kicking off higher earnings and higher share prices. 2022 all over again. In the meantime we have to sit through the volatility.

Cash Dragons

Sheesh. It’s been a tough year for the Cash Dragons.

The strategy is -20% ytd and underperforming FXI. The big difference is we haven’t owned Chinese banks, which have been the star performers. Ping An, our main financial holding, which had good results, is down 22% YTD.

I have to say I did not predict the implosion of China’s leading tech companies. I should clarify. Alibaba and Baidu imploded, while Tencent has been more of a derating. TenCent’s core business is holding up well. The market is just not thrilled about the growth in AI related costs.

As I said earlier Ping A results were solid and estimate revisions are positive. Hong Kong Exchange results have also been good. The exchange is benefitting from higher trading volumes and record IPO issuance.

I’m sticking with our China stocks and still think this is going to work astoundingly well, but as noted in the Q2 2026 Performance Review I did reduce my personal exposure to the Cash Dragon theme. Partly because my conviction around the tech company results was slipping, but also because it was the most tax efficient way to raise money to buy some real estate.

Summary

We thank the market gods for a good year so far, and if it is not too much to ask, would love to see China, Brazil and Gold have a stonking Q4.

Note: All the YWR Portfolios, both current and past are available at YWR Portfolios.

Have a good fall weekend.

Erik

And Japan in particular is benefitting.

Japan has been top 5 ranked country in the Global Factor Model for years, but this month it’s #1. Over the US. Over China.

We will look at Japan, but first let’s go over the Top 30 ranked companies on our combination of estimate momentum, valuation and price momentum.

At the bottom of the post are links to the updated datasets:

YWR Global Factor Model Retool Data App

YWR Global Factor Model Ranking Sheet

Global Top 30

In the Top 30 we see familiar trends; refining, shipping, precious metals, semiconductor supply chain, and memory.

Our factor model captures that refiners and shipping stocks show rising earnings estimates with low valuations. Valuations are low because investors struggle with the ‘sustainability’ of these record earnings. They struggle to put a timeline on the Iran War. Does it get solved next month? Or, is the Middle East chaos for the next 5 years? I’ve had conversations with many investors in the Middle East and Europe, and there isn’t any conviction either way.

Memory stocks also trade on surprisingly low P/E’s despite the best earnings growth in the world. Why is this? If I summarise what I’ve heard in conversations it is often the same thing. Investors have made lots of money, want to take profits and not ‘give it all back’ in a sector which has been epically cyclical. On the other hand memory is the most important challenge to scaling AI inference. Memory is the key bottleneck and where cutting edge new solutions are needed. The risk reward on SK Hynix looks good here. Especially, now that leveraged retail investors are out.

Note Core Civic is a data funny. Estimate revisions are rising on the back of a one off sale of 4 prisons for $2.2 billion to ICE. It’s a reminder the data scores are useful, but we still need to do the fundamental work.

USA Top 30

For the US degens we also put together the USA Top 30 list.

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Worried we could break down from here?

Worried about the move in the bond markets?

Worried about blowups in the credit markets?

Congratulations.

You are consensus.

50% of investors are bearish. Another 18% aren’t sure.

In this month’s 50 slide pack (link below) we cover:

• S&P 500 Earnings Estimates

• BofA Fund Manager survey highlights

• Sentiment indicators

• Hong Kong the cheapest market in the world

• Charts from the YWR Shipping call.

But here are 5 charts which suggest the S&P 500 moves higher from here.

#1 Earnings estimates are going vertical.

#2 The stock market is looking cheap for once. The S&P 500 is now trading below the 10 year average forward P/E.

#3 This 30 day move in bond yields is in the 97th percentile. The time to worry about bonds was back in August.

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But it might be the opposite.

Demand for Dubai real estate might be infinite.

Why do I say that in the midst of war in the Middle East?

Two reasons.

#1 People are losing patience with taxation in the West.

When you think about all the ways you get taxed from birth to death, you almost wonder what’s the point. It seems it’s designed to allow you to make a little bit of income, but not get rich.

Let’s say you are working a job in the UK. Any income over £50,000 is taxed at 40%. Then around £100,000 there is a weird transition point above which the earlier £12,500 tax free income gets reversed and you are paying 60% tax on incremental income.

After you’ve paid 45% to the government on your income let’s assume you invest it in some stocks.

Let’s say these shares which you invested in (with post-tax money) pay you a dividend. Now that dividend gets taxed at 35%.

Then you sell those shares and pay a 24% tax on the gain.

Why does the government get a double dip on your investment income? They already hit it the first time when you earned it, so why are they hitting it again after you invested it?

Let’s also not forget the sales taxes and VAT’s all day long. Or the ‘congestion charge’ or the ‘ultra low emission zone charge’ or the growing 20 mph speed limit zones with speed cameras. Do you know how hard it is to drive under 20 mph? It’s constant annoying harassment to not have a car for the sake of the environment.

Now say you go one like this all your life, a tax donkey, and manage to save over £325,000, but then you die. After the funeral service is over the UK government will take 40% of everything over £325,000.

Yes, another 40% swipe after you die. ‘Thank you for your energy and hard work. You will be missed.’

60% of everything you ever made your entire life went to a mindless entity which doesn’t care about you or listen to you.

As long as you are happy to earn less than £50,000/year and don’t try to accumulate more than £325,000 over your entire life you are fine. Try to accumulate wealth and you instantly run into in quick sand. It’s what Michael Green calls the Valley of Death.

But that’s not enough. It never is.

The new Labor government wants to lower the starting valuation point for the ‘mansion tax’ from £2mn to £1.5mn. In London there are a lot of houses you would not consider ‘mansions’ which cost £1.5 million. That really starts to cut into upper middle class. This is on top of an earlier decision that parents should pay 20% VAT (sales tax) on private school fees. Ouch.

You can try to be clever and set up a company, own shares in it and pay yourself a dividend, but it all works out the same. Roughly 50% of what you make, no matter which way, goes to the government in round one. With repeated 30% slices thereafter for the rest of your life until you die.

That’s the one end of the burning candle.

Then the other of the candle is what you get for your 50% pound of flesh.

There are some really good public schools in the UK, but it’s getting harder and harder to get into them. There is a large allocation to international students and disproportionate admissions for low income students. If you are middle of the road income and not ‘diverse’ your odds are poor.

‘I’ve heard Durham is a good school’…

I’d say the healthcare system is pretty good, but I have to caveat that I’ve never had an emergency and I’m not old. So it’s been easy clinic type stuff.

There also isn’t really any new infrastructure to point to. Maybe a new tube line every 20 years. Basically, it’s all old and quaint. Maybe there are new roads somewhere, but you get taxed every time you move your car so what’s the point?

So you put your head down and push on because others before you have made it. Surely, there will be light on the other side of the Valley of Death.

Bothering you though is this increasing discussion of wealth taxes. Taxes on the value of assets as well as income. Across Europe, the UK and the US it’s a trend. The Netherlands already went ahead with it. You think you have it figured, out how to accumulate some wealth by owning stocks and not selling them, but then they come and tax that too.

It’s bothersome because it signals you may never come out the other side. You are tax slave. You are a slave who is supposed to be grateful for what you have and not complain about how much you are getting squeezed because of ‘those less fortunate than you’. Except, every now and then you get a glimpse of how the guilt trip around ‘those less fortunate than you’ is full of fraud and scams.

You are supposed to not mind the wealth taxes because politicians promise it will only be the 0.1%, and that it’s not you they are targeting (yet). But it’s always the ‘thin end of the wedge’ as they say. Because wealth tax enforcement starts with reporting. Everyone needs to report their entire net worth; all assets, not just income. Fill out the form. How much is your house worth. How much is your stock portfolio worth? Do you own any art? List all your properties. Then when the tax authorities have the full picture they can review the data and decide the exact amount you owe. Today it’s the 0.1%. Tomorrow it’s the top 10%. Or, tomorrow it’s high rate for the top 10% and a ‘reasonable’ rate for you.

It never stops.

Thank you tax donkey.

I’m sorry for complaining.

I’m trying to communicate a theme.

A frustration which is building.

Across the world, one by one; in the US, the UK, and Europe the middle, upper class and wealthy realise the system is not fair. There is no appreciation for the disproportionate contribution they are making to the tax bill. Instead it is non-stop attack and criticism that it isn’t enough.

And things are likely to get worse.

A growing concern for the upper middle class that the door might be closing on them.

And after the door closes they slowly get ground to dust.

Like Boxer the horse.

They realise they need to make a plan and get going now.

Any goal to accumulate substantial wealth is going to have to involve a low tax jurisdiction strategy. Low-tax jurisdictions are not just for the super rich anymore. It’s an upper middle class need as well. And you need to start now. Dr Ben Tippet’s UK wealth tax proposal (above) will be enforced 10 years after you leave the UK.

This problem of too much debt, a narrow tax base which gets squeezed, is a global trend. There are millions of wealthy people across the Europe, the UK and the US who will realise they need to start the process of building up activity and residence in a low tax jurisdiction.

Hong Kong, Singapore, Monaco, Puerto Rico, Cayman Islands, and Dubai are all going to benefit. But, in my view, only Dubai can handle the volume which will be involved. Dubai is a 5 million person city which could be going to 10 million. A new London.

This is reason #1 Dubai is going to go supersonic.

Reason #2: Dubai is becoming cool.

I’ve been going to Dubai for 20 years.

My first visit was in 2007 right before the huge property crash. They were still building the Burj Khalifa (Dubai). We were investing in a new Dubai futures exchange (DGCX).

I remember visiting Jumeriah Lake Towers when 84 towers were under construction at the same time. To my Western mind it was unimaginable to construct 84 office towers at once. Between the towers were large open spaces with tarps laid out over the sand which were going to be lakes. I was blown away. So was John Burbank. Within 10 min of landing he texted that we needed to have an office in Dubai. The city made an impression on us that quickly.

Later in 2010 after the crash I was in Dubai working on a project. For 2 months I used to walk around the empty construction sites. On Saturdays I would walk to Ibn Battuta Mall and watch movies. It was a real low point for the city.

Then over the next decade I would visit for short layovers on the way to Africa. I would notice the big billboards of new projects under development and how previous projects I remembered as concrete shells (Dubai Mall and Dubai Marina) were now alive and bustling with activity. The city was growing.

Then recently I visited Dubai again. The first time since 2019 and was truly surprised at how much it had changed. Yes, there were a few more buildings, and Business Bay has really filled in, but more it was that for the first time there was a hustle, bustle feeling when you landed and took a taxi from the airport. It was a bit like JFK. There was a feeling that you were in a real city with real people. A city with a pulse. Not a fake picture on a billboard.

For fun I stayed at the Five Palm Jumeriah. You can stay anywhere you want right now for $150/night. The Five Palm Jumeirah had a cool vibe and reminded me of The Standard in LA. One of my favourite hotels. Yes, everyone was ridiculous and trying too hard to be cool, but it was fine. The DJ’s were good, the food was great, and the night time skyline was filled with the blinking lights of cranes building something new for the future. As if to say ‘Come back soon and check out the new things we have built!’

It kind of makes sense to compare Dubai with LA.

If you look at a map of Dubai you see it is surrounded by billions of people in Africa and South Asia. These billions of Global South youth want to move up in the world and enjoy the good life. Like Americans who would Head West to California in search of their dreams,these youth come to Dubai. They want to be the first person in their family to have a fancy car, wear a fancy watch, stay at nice hotels and drink expensive cocktails. They are hungry for it. And that’s good.

How we make money.

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Below are the slides I put together to get the conversation going. I was trying to make a multi-year bull case for shipping, because that’s what I see missing in the discussion.

I pitched container shipping as the less obvious trade where container rates are rising, but the stable, long-term value is in…

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When I ponder the ramifications of agentic trading..

my mind splatters.

It makes me think a new business model may be emerging for asset management.

Asset management as a subscription service.

And it makes me think we need a YWR MCP.

Which we built. More below.

Agentic Trading MCP

What is an MCP (Model Context Protocol)?

MCP is a tool connector for Claude or ChatGPT.

MCP connects your LLM with software. It enables an LLM to operate software directly (as you).

Tools (connected through MCP) are what turn your chatbot (LLM) into an agent.

Common MCP tools are Gmail, Google Drive, Notion and Slack.

But there is a new tool available to connect to your LLM.

And it might change everything.

Your brokerage account.

Now you can trade your brokerage account directly through Claude or ChatGPT.

Robinhood launched it.

And IBKR did too.

Yes, it means what you think it means.

“Hey Claude.. review the top movers in my portfolio and look up any news.”

“Hey Claude please build an automated trading script to rebalance my portfolio every month and add to anything which is -20% over the last 60 days.”

“Hey Claude can you make sure I know if YWR talks about any of my stocks? If Erik likes something please buy a 1% starter position.”

It seems so cool.

But as you see it starts to change everything.

And to see where this could be going we need to go back.

We need to go back to a conversation I had with our friend Jason @ back in 2021 during COVID.

The Future of Asset Management.

Jason is younger, South African, and crypto native.

He also has bold views. Which he loves to share.

Back in 2021 Jason was struggling with a problem.

He wanted to launch a crypto asset management business, but was torn between launching a traditional Cayman fund, or a new crypto native asset management product using Blockchains. In his view blockchain technology made much of the current asset management structure irrelevant (funds, administrators, custody), but he was worried he was too far ahead of the market. Boomer allocators.

He predicted (correctly) for the next 10 years the fuddy, duddy allocators would want to invest in crypto, but would want to do it the old fashioned way, even though if they truly understood the technology they were investing in they would see owning a Cayman fund no longer made any sense. But they would be stuck in their old structures. So why fight it? Right?

Jason went with the tradfi Cayman fund even though in his mind it was against the very technology he was investing in.

It bothered him though because in his mind he saw where asset management was going.

“Erik. In the future nobody is going to need your ‘funds’. If you are a financial advisor I will fund a digital wallet with stable coins for you to manage and allow you to connect to my wallet. I will also set up smart contracts to guardrail what you can do. I won’t need a custodian or administrator. It will all be transparent and on the blockchain. And the assets are in my wallet. I have custody. I don’t write you a letter asking for them back. Oh, and I will pay for it like a Netflix subscription. Same as everything else. That is the future.”

That was an interesting, but painful view of our industry.

Especially, the last part.

It requires a lot of structural change (full tokenisation of assets), but I increasingly worry Jason will be right. Eventually.

Jason’s view was back in 2021. Pre-AI.

Now we have agentic trading MCP’s. And it makes me think Jason’s view is happening, but in a slightly different way.

Maybe we don’t need the digital wallet on a blockchain. Your IBKR or Robinhood brokerage account is the digital wallet.

And the financial advisor being connected to your account is Claude.

Claude is the gatekeeper. You naturally run everything through him first. Claude subtly runs your account.

And Claude is AI. With the right data and programmatic access to your brokerage account he can do amazing things.

For example, maybe you don’t need a S&P 500 ETF. Claude can build you a customised version of the S&P 500 and rebalance it monthly. Claude can also read every Substack in the world and execute the best ideas automatically. You don’t have to read anything. And it goes back to Jason’s view of the future.

Doesn’t it change what the asset management industry is selling?

We used to be selling funds, but maybe now we are selling content.

Or, we are selling ‘judgement’.

Claude doesn’t need your fund. But it does want your creative ideas. Claude will take in your investment ideas and decide how to best implement them in the context of the individual’s overall account, risk tolerance and tax situation.

You see where this is going.

To Claude a model portfolio in a newsletter is more useful than a fund.

Alpha Capture as pre-MCP asset management

At the hedge fund level a version of this has been happening for years. It’s called alpha capture systems. Marshall Wace’s TIPS system is the most famous and long-running alpha capture system, but there are many others.

Hedge funds remunerate independent analysts and writers to run paper portfolios on their systems. The analyst submits their trading ideas, and gets paid on performance, but without ever knowing what the hedge fund is actually doing with the trade ideas. The hedge fund has hundreds of analysts submitting ideas. Behind the scenes the hedge fund is analysing questions like ‘What is everyone’s favourite ideas? What is the prevalent sentiment or allocation. Who has the best hit rate? Over what interval? Which sector will nobody recommend?’

This universe of ideas and content is a gold mine for the hedge fund. They run all this data through their sophisticated analytics to find alpha. For example, the hedge fund might have discovered that trading against you in size is worth billions of dollars in performance fees, without you ever knowing why they value your input so much.

“It’s weird. My performance is terrible, but they never kick me off the system.”

For the independent analyst or writer it’s as if you are running capital without having to set up a fund.

In a sense with MCP’s and LLM’s a retail trader can set up their own alpha capture system.

For the Substack writer it means you have a new customer. Claude.

Claude, meet the YWR MCP

I know you like YWR. But we want Claude to like it too.

We can do all of this with Stevie, but we also want Claude to be able to access YWR Factor Scores and QARV Scores in its chats.

Plus, we decided to give Claude (and Stevie) something totally cool.

We gave Claude access to YWR Portfolios (Dirty Dividends and New Era Finance).

As in “Claude please show me the “YWR Dirty Dividends Portfolio”.

Or, “Claude can you create a portfolio for me based on the YWR New Era Finance portfolio, but take out Jackson Financial and add more crypto?”

Or,“Claude which US refining stocks have the best YWR Value score?”

Cool right?

To connect Claude to YWR go to Settings then Connectors, then add a new connector.

Name it YWR.

Paste in this URL:https://api.ywr-intelligence.world/mcp

When it connects it will take you to login page to check your email address with your YWR subscription. Same as with Stevie.

Have a good rest of the weekend.

Erik

Like go to the Capital Link shipping conference.

Because shipping is a top ranked YWR sector and everyone wants to know whether to take profits, stick with it or buy more.

Here are my notes and observations.

The Energy Security Panel:

96% of the world population relies of imported energy. Geopolitics is pushing this energy farther away.

70% of global trade goes through maritime chokepoints.

The world has huge exposure to maritime security.

Current situation started in 2022. The Russia-Ukraine War and sanctions on Russia increased energy ton-miles by 7%. Russian energy had to go to India and Europe had to import gas from US.

The whole shipping picture keeps evolving and creating large arbitrage opportunities which means traders will pay a lot for ships. At the beginning of the Iran War there was a huge trade to sell naphtha in the Gulf of America to Asia so ships realigned for this trade. Then there was a big trade to bring diesel to Australia. Everytime, ships need to reposition. Now you have Asian markets trying to diversify away from the Gulf. All of this locks up ships on long-term routes.

Governments may need to get into shipping, the same way they have been getting into critical metals and supply chains. ADNOC purchased older tankers and is crewing them with military personnel in order to get their energy products out of the Persian Gulf using the US Navy shuttle service.

The world has done a good job of managing through the situation so far. We came into the crisis with elevated oil stocks, but these have been worked down. Where there are still elevated inventories of crude and refined products is within the Persian Gulf which are trapped. From here the oil price is likely to react a lot more.

The tanker market could stay expensive for the medium term. The Iran conflict could go on for years. There is no making peace between Iran and Israel. Even if the war is resolved peacefully in the near-term there will be a restocking trade. Inventories will need to be rebuilt and countries will structurally want to carry more inventory. All this will require tankers.

Customers want to secure long-term contracts, but it’s really hard to know the right price. The fleet is aging quickly and not many ships are available. Oil companies want to make sure they have shipping companies to move their product. Some customers are willing to lock in 7 year tenders for ships being delivered in 2030.

‘World is chaotic but shipping is booming. Everyone is enjoying it.’

Huge lead times on new supply. No new shipyard capacity. Orders now will be delivered in 2030.

Longer-term the current disruption will accelerate investment into small modular nuclear reactors and electrification of the grid.

Global Trade in a Fractured World Panel:

Panama Canal has drought problems.

Ships are laid up in Istanbul and don’t want to go into the Black Sea.

Ships don’t want to go into the Persian Gulf.

Now they don’t want to go into the Red Sea.

Somalia is still a problem but not talked about as much.

Security is a non-stop problem.

Blocking maritime chokepoints and attacking commercial ships is the new normal. Sanctions + terrorism + ship attacks are here to stay. It’s a new age of Piracy.

Complying with all the sanctions and compliance is also challenging.

Making lots of money, but hard to enjoy it.

Globalisation is over. New trend is near-shoring and friend-shoring. China is building factories in Egypt to get goods closer to the European market. Saudi Arabia is buying solar panels from India instead of China.

The post WW2 Era is over. We are in an era of strong men (Trump, Putin, Modi). The global south is full of strong men. It makes everything more volatile for the shipping industry. ‘We are like a ping pong ball bouncing between everyone.’

For Russia and the Middle East being able to deliver energy and service their customers is an existential problem. Customers have to have confidence Russia and Saudi can deliver the energy and right now that is in doubt.

It used to be a 6,000km route to send oil to to Asia, now using the Egypt Sidi Kerir route around Africa it is a 12,000 km route.

Japan imported 90% of its crude from Middle East, but is trying to diversify this exposure. It will mean sourcing crude from farther away (like Brazil) even if it is more expensive.

4th generation Turkish shipowner is diversifying her business into ship building for the Turkish Navy.

Tanker order books are 30% of the fleet. But offsetting this there has been no scrapping of tankers. The Shadow Fleet will also have to be scrapped. So tanker bull market might last longer than people expect.

Seafarers are under stress, but actually recruitment interest at academies in Philippines and India is high. Pay for top officers has tripled. Many are making so much money they will be able to retire early.

The Black Swan event from here is if problems kick off between Taiwan and China. 78% of the ship order book is in China. If those ships can’t be delivered it will be another shock for the industry.

YWR Observation: No one had a strong view on how long the bull market would last. The word ‘uncertainty’ reiterated over and over again. Also, lots of discussion about things politicians and the world ‘should do’ to restore freedom of navigation. General mood is that the good times may last a bit longer than expected, but will eventually normalise. Either peace will come to Middle East, or new ship deliveries would lower rates.

MEPC Reality Check (Net Zero Panel):

IMO is trying to create rules to force shipowners to reduce emissions but there has been a lot of pushback. Sounds like IMO is pausing without saying that they are pausing. “Assuring shipping industry that everything is still under discussion.”

“IMO needs to acknowledge that the alternative fuels just aren’t there yet.”

Maersk was an early mover and bought some methanol ships in 2022, but sounds like they are not totally sold on methanol and still considering other fuels like ammonia, even nuclear.

Really hard for ship owners to order ships with 20 year lives when there is uncertainty around fuel regulations. Alternative fuels cost 2-3x conventional fuels.

Dual fuel ships are another solution.

“What are we regulating? Can buy a low emission engine, but then burn just as much carbon if you drive the ship faster (15 knots instead of 11).”

“Emissions can be reduced in other ways besides the engine fuel. Better maintenance, propellers, carbon capture.”

“Need to make sure there is fuel availability in all the ports not just ‘some ports’ or in ‘green corridors’.”

YWR Observation: This uncertainty about IMO engine regulations is another positive. It dials down new ship ordering.

Financing Shipping Panel:

Currently not much demand from banks for ship financing.

Ship owners aren’t really doing anything. They are watching the money flow in. There are ship owners with 20 ships fully paid off and $500mn in the bank.

A lot of 2nd hand tonnage is delevered.

There aren’t really any new banks in the ship financing industry. It’s the Greek banks and the German banks. The new player is the alternative funds. The Greek banks have been very active.

Container rates have been surprisingly resilient. The consolidation in container shipping appears to be working.

One banker thinks the top 5 container lines are colluding to keep rates high.

Same banker thinks this might also be happening in tanker market. There aren’t really that many ships on spot. He figures if you and a few friends can control 200 tankers you can control the spot market.

Where will the money flow next panel:

Private credit fund that was very active in shipping around 2016 is struggling to find opportunities now. Back then you were financing ships at 60% of replacement value, now you are financing ships at 95% of replacement value. The outlook is highly dependent on continued geopolitical risk. Equity part of capital structure is the most sensitive to geopolitical risk. Debt is less so. The order books are picking up. In 2-3 years we could be having a very different discussion.

From JPM Asset Management: If you are a Greek shipping family watching the cash come in, and have always been in shipping, then you make sure all your ships have been paid off and then maybe reinvest some of the cash in new ships. Greek family offices are also taking the opportunity of the cash bonanza to diversify out of shipping. But if you are an institutional investor trying to underwrite new deals today on a deal by deal basis it is difficult. Owners of ships have a gusher of cash coming at them and if you want to take that gusher of cash away from them you really have to pay up.

Moving a VLCC from ME to Asia used to be $2mn but is now $70mn. Do it twice and you have paid for the ship.

Western ship owners are hamstrung by compliance concerns. It is a disadvantage to being compliant. You can make a lot of money right now on certain non-compliant routes, but there can be some challenges when selling a ship depending on what is has done during this period.

ADNOC trying to keep their business balanced and reinvesting tanker profits into terminals, and specialist segments.

Can buy ships with ‘28-29 delivery and 5 year charters to guarantee ‘some’ return.

A Bulk Ship owner regrets he didn’t get more into containers and tankers. Liner business is highly monopolised. Top 10 went from 30% market share to 85% share. Top 1 controls 25% share. Other markets (bulk) are not consolidated.“Container market prices are managed. VLCC’s will be the same way.”

Infrastructure funds are coming into lots of previously specialised areas like LNG.

Question going forward will governments be more involved in shipping? Energy has become like this and the US wants to have a container line.

Those are my notes.

But what is the conclusion?

How do we make money?

Here’s my conclusion and also the global factor model rankings for the shipping stocks.

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The whole package.

One of the all time greats.

And it’s essential to listen to his keynote’s.

Especially when he goes home to Taiwan.

The heart of his universe.

Here are my takeaways.

#1 No longer a chip company.

When you design $100 billion data centers top to bottom with DSX simulation software you are no longer making ‘chips’ for a box. You are the box.

Nvidia is building factories. The most complex, expensive factories in the history of mankind. $100 billion for 1 datacenter. In comparison the So-Fi stadium cost $5bn.

A datacenter is +20x the So-Fi stadium.

Think about that.

This is the new industrial revolution. We thought Trump’s re-industrialisation of the US to look like car assembly lines, instead it is AI factories which make tokens.

#2 Nvidia as the benevolent dictator.

A recurring signal in GTC presentations are slides showing Nvidia’s partners. Jensen boasts of these great partnerships. They are partnerships, but another interpretation is that Jensen is creating self-reinforcing network effects. Nvidia feeds the whole ecosystem. Like the Toyota supplier ecosystem.

Nvidia finances the clouds (Coreweave,Nebius, IREN) who buy the chips, who appoint the design and construction firms for these multi-billion $ projects. Bechtel, Siemens, Caterpillar, ABB, HPE, Dell, Foxconn, Pegatron, Digital Realty, Mitsubishi Electric.

Nvidia sets the design and the technology and organises how it all comes together. Nvidia also decides where they want to extract value and where they are willing to let others own the space.

I imagine if you were trying to build an AMD datacenter you would experience grit at every step of the supplier selection process trying to save that 20% on the chips. The system is built around Nvidia.

#3 Tokens/Watt

The constraint for a datacenter is energy. You only have 1 GW to work with. That’s all the local utility will give you. So revenue maximisation is how many tokens you can create with your 1GW. Tokens create revenue and the key metric is tokens/watt.

You buy an Nvidia Vera Rubin datacenter because Nvidia (and their ecosystem) will get you the fastest TTFT (time to first token), the highest token/watt and the longest life cycle. The more tokens your datacenter can crank out during it’s life cycle the higher the revenue, the higher the project ROI.

Jensen likes to joke “the more you buy the more you make.” Which is why Q2 revenues were $96bn and +106% yoy.

#4 Software creation going vertical.

New commits and repos on Github are going vertical. Jensen points to this as an example of improving software developer efficiency. The same number of developers can produce 3x as much software/person thanks to AI coding systems.

It’s interesting. But what is the economic significance of this? Does more software mean higher GDP growth? Jensen thinks so and that this has will come through into higher GDP. Cathy Wood has been forecasting the same thing. That GDP growth accelerates is AI kicks in. Maybe Github commits are a new economic indicator we should be tracking. At the very least all this software has to be hosted and run somewhere, which is good for datacenters and the companies who build them (Nvidia).

#5 The Agentic Computing Framework

According to Jensen agents are the key architecture going forward. Everything, even a computer, will be an agent.

An agent is a brain (LLM) connected to a harness. The harness controls what the LLM does. The harness is the prompts, the tools (a database, an API, spreadsheets), the skills, the runtime (cpu, Railway) and the memory.

#6 Agentic framework will be good for software companies?

Traditionally software companies were selling ‘seats’. And seats were constrained by the number of humans. There is no constraint on the number of agents. There can be billions. The billions of agents will need to use software as part of their tools. And the software needs to be configured to be usable by agents. Adobe, for example has built connectors so ChatGPT and Claude can edit photos directly through the chat window. It’s a cool feature to try out in ChatGPT.

It’s a new opportunity for software companies, but also a new business model. Software companies used to control the customer through the interface, but how does that work for an agent accessing a connector? TBD.

#7 The Neoclouds are working.

Everyone went bananas when Nvidia invested in CoreWeave in 2023. This was seller financing and the 1999 internet bubble all over again. But here we are 3 years later and Coreweave shows they were right about the opportunity they saw to build AI native data centers. Coreweave is a real business with a $49bn market cap and $6bn in run rate EBITDA. Coreweave continues to build their AI capabilities, make technology acquisitions and build a top notch customer list (Anthropic, Cursor, Jane Street). Nvidia has since expanded its neocloud investments to Nebius and IREN.

The early private credit funds (Blackstone and Magnetar) also show they were not reckless idiots for financing Coreweave. They were just innovative. Now Coreweave is more established and financing itself with investment grade debt issued through Mitsubishi and Morgan Stanley, which BTW is a core YWR thesis (large banks are going to come to the party).

#8 Are Taiwanese hardware stocks too cheap?

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Like for hundreds of years.

$1 invested in stocks in 1802 was worth over $700,000 by 2012 compared with $1,778 if invested in bonds.

That’s a 395x difference.

Ask a Wharton MBA why stocks outperform bonds and they will dutifully repeat the textbook answer.

“Stocks are riskier than bonds, so they should return more.”

It’s the ‘equity risk premium’.

Makes sense. Kind of.

Bonds are higher up the capital structure and their interest payments are structurally safer.

Plus, bonds have lower volatility when measured over short periods.

But aren’t markets supposed to be rational?

If we all know stocks consistently return more than bonds, then why are they still considered risky?

Over the long run bonds, bills and the US$’s are the risky assets.

And who hasn’t realised by now that the biggest risk to assets over time is inflation and in this regard stocks are safer than bonds.

So why do we keep calling bonds ‘risk-free’ assets?

And if we all know stocks return more than bonds over hundreds of years, and stocks are a better hedge against inflation, then why isn’t there a stampede to sell bonds and buy stocks?

Shouldn’t every investor and insurance company be like Buffet and have as much equity exposure as possible? Why wouldn’t you? It’s what Buffet says to do every year in his letters.

And after hundreds of years of data you would expect investors to ‘take a long-term view’ and bid up stocks to extreme levels ‘because stocks always outperform bonds’ which paradoxically would result in long periods of stock underperformance. You would expect that in an efficient market the outperformance of stocks over bonds would swing randomly back and forth over time due to these shifts in investor psychology.

Instead the outperformance of stocks over bonds is relatively consistent through time, and periods of under performance are short.

Trailing 10Y Annualized Stock Minus Bond Returns, 1802-2022

The Equity Premium Puzzle

To Economists this persistent outperformance of equities doesn’t make sense. It’s a puzzle.

Why is there this free money?

Why do stocks keep outperforming?

Or, to flip the question on its head and ask it another way, why are real interest rates so persistently low?

To put it crudely ‘why are bond yields so crappy?’

For the last 20 years real yields have been below 2%.

With S&P 500 EPS growth of 20% and inflation at 3% why are 10 year yields less than 5%?

Who would buy 10 year yields at less than 7% when stocks are doing so well? And yet they do. In the $ billions everyday.

Jeremy Siegel in his paper ‘The Equity Risk Premium Puzzle’ summarises all the different explanations economists have tried to come up with to explain the persistent outperformance of stocks.

One method to make the numbers work and explain why there is essentially free money on the table (a less risky asset which returns more’) requires assuming that consumers get much higher utility out of consuming goods than by foregoing consumption to invest in equities. But the numbers required to justify this are extreme and not realistic.

Economists also tried to ascribe the equity risk premium to extreme risk aversion. But the amount of risk aversion required to make the numbers work also doesn’t make any sense. Siegel goes through all of these attempts in his paper.

Another thought is that this is survivorship bias. US investors are perpetually scared of a big market ending wipeout which never comes to the US, but which has happened in other countries like Japanese and German stock markets in WW2.

US stock markets have just been lucky.

But lightening could still strike at any time.

Except, when you look at Japanese and German markets and the rest of the world the equity risk premium exists everywhere.

Yes, wipeouts happen, but stocks still outperform.

The equity risk premium effect is persistent across time and markets.

“History shows that investors have been consistently rewarded for taking risk and compounding the dividends and coupons available in equities and bonds.”

-Deutsche Long-Term Return Study

Another thought was that maybe the data doesn’t go back long enough. And maybe the bond data Siegel used under represented bond returns in the early 1800’s.

Edward McQuarrie in his paper ‘Where Siegel went Awry:Outdated Sources and Incomplete Data’ adds a few more years to the data series and recalculates bond returns in the early years to conclude that for the first 130 years (1793-1923) bond and stock returns were the same. The strong outperformance of equities over bonds has only been over the last 100 years.

OK. Whatever.

There were 130 years where bonds performed the same as stocks then another 100 years where stocks did better.

Still seems like a good case for stocks.

So why is this equity risk premium happening and how can we trust it will continue?

I see two explanations which make sense.

We also conclude with a rule of thumb to know when the bull market is over.

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That’s the view from gold mining CEO Jeremy Gray.

We review the gold market set up and the exciting restart of Pilar Gold.

For more information about the Pilar project click the link below.

Our own YWR economic symposium from Montana.

Like Jackson Hole but better!

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I didn’t want to go to my mom’s boring Church event.

But I said I would.

It was an evening talk about home health care for the elderly.

But I’d promised I’d go early and help set up chairs.

Now I’m glad I helped out with the church event.

The talk was more interesting than I expected.

And I think God rewarded me with a stock idea.

TL/DR: Healthcare costs are exploding and you will likely die in your home with a nurse. Not go to a nursing home. But there is a good stock to play this.

A nurse from a local hospice provider (healthcare at home when you are dying) had come to speak to the elderly at the church about the new trend in ‘palliative care’; low acuity health care at home. She was speaking to 30 elderly in a church hall with everyone sitting in rows of folding chairs. In the rear of the room there was a table with snacks people had brought.

It turns out if you are homebound and have 2 co-morbidities Medicare will pay for nurses to visit you. This is ‘palliative care’. And it is growing quickly. Our nurse assured us everyone in the room would qualify.

The nurses check in on patients in their home and help manage the mix of drugs, doctors and tests these patients have accumulated across their different ailments. This firm’s local palliative care practice had grown from 40 patients 4 years ago to over 200.

The nurse who was presenting spoke well and her anecdotes about what she sees everyday visiting patients helped explain the challenge and why palliative care is growing quickly.

What often happens is a patient goes to their primary physician and gets referred to various specialists for different ailments along the way. Each specialist recommends their own drugs and tests. ‘Take this and this 2/day and check in for a blood test every 3 months’. These prescriptions and tests accumulate.

The palliative care nurse comes to the patient’s home and sees the overall picture. She also sees where the patient lives and how well they can move around the house. And often she can make judgements to reduce some of the pills and tests the patient is taking. ‘I think you can stop taking this, and your breathing is improving so take this test every 6 months instead of 3’. The nurse can give sensible advice from seeing the whole picture on a regular basis, which the individual specialists cannot. She can also prescribe specialised home health services. “I think you need some physio.” or, “you need speech therapy.”

As the talk unfolded and the questions from the elderly started I realised the following:

#1 Home health care could be a better model

To me and everyone else in the room listening to this palliative care sounded highly appealing. I can see why it is growing. A sensible nurse comes to your house, ‘checks in on you’ and has a normal human conversation about how you are feeling, all the drugs you are taking, which of your problems are getting better and which are getting worse and need help. Effectively, a medical advisor.

It also came up that in the meeting that in this town getting access to a primary care physician was challenging. The town has been growing rapidly and there aren’t enough doctors. The nurse explained that some or her patients are using palliative care as their primary healthcare.

And another massive realisation.

#2 These nurses are also financial advisors.

What I noticed from the Q&A from the elderly in the room. Nobody knows what insurance and medicare will pay for and what it won’t. It is a confusing maze to them. The nurses (or at least this nurse) had a very good understanding of anything related to Medicare; what was covered and what additional services she could prescribe. She knew details like ‘Medicare will only cover this for 15 days, so let’s hold off on this. We don’t want to burn up our 15 days right now.”

And related to this.

#3 You will die at home. Nobody/few can pay for nursing homes anymore. The costs are going through the roof. What the elderly are realising is their insurance plans didn’t cover nursing homes, or for only 4 years, or there is no availability in their town, or they can’t afford to pay for it out of pocket. In this town the nursing home capacity was declining. There used to be 3 nursing homes, but 1 just closed.

The message from the nurse was the future trend is you will die in your home with your family taking care of you combined with hospice care.

#4 The company this nurse worked for might be a good investment.

The nurse worked for a subsidiary of Pennant Group ($PNTG) which specialises in hospice and home health care. Q2 2026 earnings grew +20%. Pennant acquires local hospice businesses and provides backend services while letting the local business operate under their own name with their own management.

Healthcare is not my specialty, and likely I’m missing important details, but here is what looks interesting.

Investment Case Basics

#1 The elderly are a growing demographic.

It’s not massive tailwind, but the elderly will grow 1.1% year through 2050 and expand to 22.8% of the population by 2050.

#2 The home health care market grows faster

The rising cost of healthcare, and lack of nursing home capacity is forcing patients to turn to home healthcare as an alternative, especially for end of life care. PWC expects home healthcare to grow at a 7.7% CAGR.

A key forcing function for home healthcare is that nursing home capacity is flat/declining. From 2019-2024 effective nursing home capacity declined by 5%.

#3 Patients prefer home healthcare to doctor visits.

#4 Pennant Group super charges this growth by making acquisitions and consolidating a fragmented market.

Pennant has made 92 acquisitions since 2020.They have expanded across the Western US, are building out the Southeast and recently got a toehold into the Northeast with their equity stake in Hartford Health.

#5 The decentralised model works well for this industry.

Pennant touts it, and this nurse confirmed it. Pennant largely lets these local healthcare businesses manage themselves.

What they and I realise is customer acquisition is highly localised through referrals and community groups. Pennant needs to have local business CEO’s and nurses who like where they work and fit in well with the community. They need strong relationships with the local doctors, hospitals and churches. It can’t be too corporatey. This isn’t like selling Coca-Cola where you ram a commoditised product down the consumer’s throat. These practices are built up carefully through relationships. So Pennant, the mega corp, sits in the background watching the numbers, and providing the technology, while the nurses go out to the churches and tell how they work for a small town business they like, which is flexible and part of the community. It’s a good combo, and it works well for this industry.

#6 Pennant is growing like a weed

Earnings were hit during COVID, but since 2023 Pennant has really got its feet under it and the growth is coming through.

The Negatives:

Again, I don’t know healthcare services well, especially all the nuances of Medicare, but here are some general things to note.

Pennant Group is already an expensive stock. It is trading on 23x 2027 consensus estimated EPS ($1.64). So the growth has not gone unnoticed by the market, but this trend in home healthcare seems massive.

There are no strong network effects. It’s a roll up platform of local home healthcare agencies. There are some synergies when Pennant buys specialty care businesses which they can plug into their home health care customer base, but this is not an exchange.

The biggest customer is Medicare. There might be 10’s of thousands of patients, but Medicare is the payer. And Medicare is trying to control costs and crack down on fraud in the home health industry. So even though Medicare sees home health as a future trend to reduce the cost of caring for the elderly, they are trying to limit the size of the yearly reimbursement rates. The fraud crack down might be good for highly compliant, publicly listed players like Pennant. The big get bigger.

Nurses are in high demand. It’s a challenge to balance the rising wage costs for nurse with Medicare reimbursement rates. Maybe this plays to the advantage of the bigger players like Pennant.

Palliative Care doesn’t make money. Full blown hospice care makes a lot of money for Pennant, but the earlier stage Palliative care, with the nurse checking in on you, isn’t a money maker. Maybe it will be in the future if Medicare increases reimbursement rates, but for now it acts more like a feeder for the hospice business.

Summary

Home healthcare and hospice is a lower cost solution to end of life medical care that the elderly increasingly cannot afford. The era of nursing homes is over.

This is a powerful trend nobody is talking about because they are all focused on AI and now we have a good $1 billion market cap play on this which nobody is talking about.

I feel blessed to have gone to church and learned about Pennant.

Below is the historical financial model on Pennant if you want to take a closer look and try your hand at some forecasts. I just used the consensus EPS estimates.

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Not wanting to price in reality.

The Global Factor Model is where we screen over 10,000 stocks and score them on estimate revision momentum, valuation and price momentum. We are looking for stocks with positive estimate momentum and low valuations.

The YWR Global Top 30

Cognitive Dissonance Trade #1 Refining: Our top ranked list is flooded with refining stocks. PBF, Bangchak, Star Petroleum, Helleniq, Chennai, HF Sinclair, and S-Oil. Valero and Marathon didn’t make the top 30 but they score well too.

Diesel prices are the highest they’ve ever been, while crude prices are not. Another way of saying crack spreads are high.

But refining share prices refuse to keep up with the surge in earnings, which is why the P/E’s have compressed to less than 5x earnings. Nobody wants to be the idiot who bought refiners on peak earnings.

That’s a valid concern. But 2 pushbacks. First, refinery CEO’s think the same thing ‘This is temporary due to the Iran War and disruptions in Russia’, so they are not out there committing $15 billion for a new refinery which will take 8 years to build. Well, maybe Dangote will, but most will not. In general the companies share your skepticism so the supply response will be limited. Second pushback. If the market doesn’t rerate these stocks it’s a great opportunity for the company to buyback shares, which does make the higher EPS permanent.

Counterintuitively, the trade is to stay long the refiners or even consider whether to buy them.

Cognitive Dissonance Trade #2 is Memory: It’s similar to refining. ‘Memory stocks never make money’ so the experts refuse to put a double digit multiple on Samsung, SK Hynix, Kioxia or anything related to it. Wouldn’t the biggest Mind Splatterer be if memory stocks went up and made a new high?

Top Scoring Industries

This is where we count the number of stocks by industry within the top 300 ranked stocks. We are looking for trends by industry.

Three of the top 5 scoring industries are Iran War trades. Marine Shipping, Refining and Specialty Chemicals. Energy (another Iran War trade) didn’t make the top 5 but also scores well. The Iran War and everything to do with it is what the market refuses to price in.

Cognitive Dissonance Trade #3 Shipping: You know the allegory about the bumblebee? The engineer looks at the bumblebee’s large body and low wing to weight ratio and says this insect should not be able to fly. The physics are all wrong. But the bumblebee doesn’t know better and flaps its wings and flies anyways.

That’s like shipping stocks.

I’ve never met a shipping ‘expert’ who is bullish on shipping stocks. They’ve all seen it so many times before and don’t see any way the current boom in shipping profitability can last. There is technically no way to have a bull market because the shipowners will just buy new ships and kill the pricing. Everyone has seen it 100 times. So you get these stocks paying out insane dividends but nobody cares. It’s doomed. Like memory stocks.

So the stock prices aren’t moving up in line with the earnings and dividends.

Everyone is fading it.

For example, we bought Frontline in March this year at $35/share (A Tuesday Money Maker) and have already received $2.60 in dividends. Today Frontline announced a Q2 dividend of $2.61. And they’ve locked in Q3 tanker rates at the same rate as Q2. We’ve already been paid 16% in 5 months.

At current tanker rates Frontline has a dividend yield of roughly 24%.

Somebody needs to write the bull case on shipping.

Maybe YWR will.

Other notable estimate revisions

Interesting to see positive revisions in software stocks like Adobe, Salesforce, Palantir, Microsoft and Intuit which are supposed to be getting disrupted by AI.

Also notable are the positive estimate revisions for active asset managers (Untouchable #9) which are also supposed to be dead.

A few consumer stocks had signs of life.

And is there something happening at Nike finally? Has it finally bottomed?

I’ll let you review all the data for yourself.

Below are links to:

• Global Factor Model Rankings Sheet

• Global Factor Model Data App

I also included our inflection screens by country and industry. This is where we search for ‘V’s in the estimate trends which might signal estimate inflection points.

So get a coffee and as usual share what you find.

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