Editor's Notes:

• My hypothesis is that investors largely believe in AI's disruptive power and long-term value, but the excess liquidity, high valuation of a few concentrated names (e.g. NVIDIA and like), and narrative fatigue are turning investors away. The natural act now is to look at 2nd / 3rd / 4th degree beneficiaries, and think 2/3/4 steps ahead, to find stocks that will benefit yet trading at a reasonable valuation. This "broadening out" may continue in 2026.

  • You see most of the price increases are driven by AI - Micron, Bloom Energy, Arista, Fabrinet, BWX, Amphenol, Vertiv, Nova - the list goes on. And the center-of-stage companies will likely have more volatility (AMD, Oracle, etc.)

• Industrial stocks are starting to get noticed, with positive fundamental cyclical signs, e.g. Ciena, Jabil, Enerpac, JTEKT, etc. somewhat also tied to AI / EV. Most are trading at a reasonable level, worth paying attention.

• Tailwind for defense may continue, as the entire world increases military spending. China consumer market may be showing signs of reaching bottom, with some positive news showing up (Nongfu, Chow Tai Fook, Li Ning), while US consumer market is in a tough transition phase.

• Speaking of consumers... MakeMyTrip is the #1 OTA in India (50%+ share). It's trading 34x fwd EV / EBIT, so I've been staying away. But it's always on my watchlist, given the tremendous macro story around India.

Yesterday's market was characterized by a blend of cautious optimism, driven by cooling US inflation and "Goldilocks" narratives, alongside significant systemic risks. Key takeaways include global market shifts influenced by Japan's monetary policy and persistent US fiscal challenges, alongside the dominant but divisive role of Artificial Intelligence (AI) in sector rotations and valuation debates.

Overall Themes, Market Sentiment & Debates

US Market: Goldilocks Narrative Meets Fiscal Headwinds

Sentiment in the US is largely buoyed by the November CPI report indicating cooling inflation (2.7% annual increase, below 3.1% forecast), which fuels expectations of Fed rate cuts and supports a "Christmas rally." This "Goldilocks economy" scenario, however, is heavily tempered by concerns over the escalating US national debt, now at $38.4 trillion. The "Fiscal Death Spiral" thesis argues that rising debt servicing costs could pressure the Fed into lower rates and quantitative easing to maintain solvency, potentially re-igniting inflation and devaluing dollar-denominated assets. This creates a critical divergence between short-term monetary optimism and long-term fiscal instability.

Japan Market: Monetary Policy Shift and Global Instability

The Bank of Japan's 25bps rate hike to 0.75% (a 30-year high) has introduced significant volatility. While largely priced in, the move strengthens the Yen, pressing Japanese exporters like Toyota and Sony (experiencing multi-day declines) but offering potential upside for Japanese banks. The more profound risk lies in the "Yen Carry Trade Unwind" thesis. With Japan's 10-year JGB yield crossing 2%, the era of ultra-cheap Yen capital could end. This poses a "dual tail risk": either rapid Yen appreciation (to 140) or depreciation (to 170) could trigger systemic liquidation. Potential global implications include forced US Treasury sell-offs by Japanese institutions, equity market margin calls (especially in high-beta growth stocks), and a broader liquidity vacuum. BoJ Governor Ueda's comments, signaling receding concerns about a US economic downturn, hint at a potential sustained shift in monetary policy, reinforcing this as a key global macro overhang. The Nikkei 225 is expected to fluctuate, facing headwinds from both the Yen strength and global AI sector valuation concerns.

Hong Kong Market: Cautious Optimism Amid Sector-Specific Plays

The Hong Kong market reflects cautious positivity, partly tied to broader HKEX liquidity proposals. While broad market sentiment is mixed, specific sectors and companies demonstrate resilience or opportunity. Noteworthy is the focus on technological advancements in smart mobility (e.g., L3 autonomous driving approvals), and the sustained interest in telecom infrastructure, particularly those benefiting from AI demand. The China consumer recovery narrative is also playing out, with sporting goods and e-commerce health platforms showing signs of renewed activity. Broader commodity price tailwinds are also supporting specific mining plays.

AI Sector Valuation Debate: Bubble or Fundamental Re-rating?

The debate over an "AI bubble" persists. Skeptics point to the S&P/NASDAQ growth decoupling from earnings, OpenAI's current unprofitability, and concentrated capital. Concerns also include the underestimation of data center costs and environmental impacts. Conversely, long-term holders dismiss bubble talk, citing deep integration into national infrastructure and the "Computing Power War" which is heating up with Google's TorchTPU and Meta's support challenging Nvidia's CUDA monopoly to diversify supply chains. The US reviewing advanced AI chip sales to China adds a geopolitical dimension to this critical sector. For those seeking a hedge, "quality software" companies like ServiceNow ($NOW) with strong fundamentals and moats are highlighted.

Notable Big Stock Moves, Earnings and Development

Interesting Comments, Facts and Ideas

AI & Semiconductor Sector Dynamics

The "Great RAM Drought" & HBM

AI hyperscalers are diverting memory production to High Bandwidth Memory (HBM), creating a shortage for standard RAM. This directly benefits Micron ($MU), which reported robust demand and strong guidance for memory, signaling a sector recovery. Conversely, Dell ($DELL) is vulnerable, as its reliance on short-term supply is now an "Achilles' tendon," leading to increased costs and potentially affecting its Client Solutions Group (CSG) profitability, compounded by reported insider selling.

AI Infrastructure Demand

The insatiable demand from AI data centers is creating premium pricing power for Texas power production companies, given the state's unique grid and perceived lack of new power plant construction. Similarly, companies like Vertiv ($VRT) and Arista Networks ($ANET) are highlighted for their critical roles in AI data center infrastructure and high-speed interconnects.

Enterprise AI Adoption

AI is increasingly integrating into core business processes for traditional companies. Conagra Brands ($CAG) is launching "Project Catalyst" to reengineer operations with AI for efficiency, while Yum! Brands ($YUM) has seen record digital sales (nearly 60% of total) driven by its "Digital Acceleration" initiative. Waste Management ($WM) is also leveraging technology to optimize costs and improve net margins.

Competition for Nvidia

The "Computing Power War" is intensifying with Google's TorchTPU and Meta's support challenging Nvidia's CUDA monopoly to diversify supply chains. This dynamic signals a potential future diversification of AI chip supply chains and could lead to price pressures.

Macro, Geopolitics & Regulatory Shifts

Cannabis Rescheduling & $TLRY

President Trump's executive order rescheduling cannabis to Schedule III is a potential "game-changer." This move is expected to eliminate IRS Section 280E, drastically improving profitability for legal operators by reducing effective tax rates from 70-90%. It also closes the "hemp loophole," reducing competition from unregulated products. Tilray ($TLRY) is pitched as a prime beneficiary, with a speculative price target of $50.

US National Debt Implications

The sheer scale of the US national debt at $38.4 trillion, nearly double the combined valuation of the Magnificent Seven, raises concerns about a "Fiscal Death Spiral." This suggests a future where the Fed might be compelled to pursue lower rates and QE to maintain solvency, risking inflation and potentially driving investors away from dollar-denominated assets.

The "Venezuela Crisis" & Canadian Crude

The crisis is creating a shortage of heavy sour crude, potentially leading to panic bidding for Canadian WCS oil. This scenario is expected to significantly increase profit margins for producers like Canadian Natural Resources ($CNQ).

Apple's AI & Regulatory Headwinds

Apple ($AAPL) faces criticism that Tim Cook is "overrated," with a focus on massive share buybacks ($750B over 10 years) at the expense of R&D in AI, potentially missing key opportunities. Concurrently, regulatory headwinds in Japan (Mobile Software Competition Act) forcing App Store changes could impact its cash flow.

ESG & Circular Economy

Campine NV (Belgium), a specialty chemicals company, is investing in proprietary third-generation antimony recycling technology, signaling growth opportunities in sustainable materials.

Investment Ideas & Market Observations

Magnificent Seven Bonds

Consider Apple, Meta, Google bonds as a potentially undervalued play, offering compelling yields (e.g., 5.72% for a Meta bond) relative to their credit quality. This allows for bullish exposure to the AI industry without the direct equity risk.

Silver as Long-Term Allocation

Silver is seen as a strong long-term allocation due to a favorable macro backdrop (falling rates, fiscal deficits), rising investment and industrial demand (solar, EV, data centers), and physical market tightness.

GLP-1 Threat "Overblown" for Dialysis

DaVita ($DVA) is believed to be undervalued, with the GLP-1 threat considered "overblown." The company trades at a significant discount to historical P/E, engages in aggressive share buybacks, and is expanding internationally while pivoting to integrated and home dialysis, positioning it as a low-beta, recession-resistant defensive play.

Insider Sentiment

A co-founder's $1M insider purchase in Sprout Social ($SPT) is seen as a positive signal, particularly when the chart appears "hated." Conversely, insider trading patterns in Wave Life Sciences ($WVE) (clustered 10b5-1 plan adoptions leading to sales after positive trial results) raise questions about typical compensation cycles versus notable flags.

Cramer's Calls

Jim Cramer continues to influence retail sentiment. He recommends CrowdStrike ($CRWD) as a preferred cybersecurity stock and sees "tremendous momentum" in TJX Companies ($TJX). He maintains a negative view on NuScale Power ($SMR) and Cal-Maine Foods ($CALM) and advised selling half positions in AppLovin ($APP) due to high valuation.

Japanese Trading Houses & Central Asia

Major Japanese trading houses like Itochu, Mitsubishi, Mitsui, Sumitomo, and Ajinomoto are actively expanding investments and partnerships in Uzbekistan, Kazakhstan, and Turkmenistan, targeting sectors from critical minerals and logistics to uranium development, renewable energy, and infrastructure. This highlights a strategic pivot towards resource-rich Central Asia.

China Market Nuances

While Nike ($NKE) was "crushed" by China slowdown concerns despite an earnings beat, other Chinese plays are showing sector-specific strength. Zhejiang Shibao's gains are linked to an auto parts sector rebound driven by EV supply chain localization, while Li Ning benefits from consumer recovery bets and holiday spending optimism.

Small/Mid-Cap Research Gap

Investors face challenges in efficiently researching under-followed small/mid-cap stocks at scale, noting current GenAI tools are ineffective for deep fundamental analysis on these less-covered names. This presents an opportunity for advanced analytical platforms or human expertise.

E-commerce Lending Arms

The complex intertwining of consumer lending divisions within large e-commerce players like Sea Limited ($SE) and Mercadolibre ($MELI), coupled with a lack of historical data for emerging market credit cycles, poses significant analytical challenges.

Happy Alpha Hunt!
- Distilla

Disclaimer: This content is generated using AI, synthesizing public data (filings, reports, news) and social media (Reddit, X). It may contain errors, inaccuracies, or hallucinations. Nothing herein constitutes financial advice. This newsletter is for informational purposes only; please consult a qualified professional and conduct your own due diligence before making any investment decisions.