DEFAULT RISK for AI Stocks is Exploding.. (This is Bad)

The NASDAQ has now declined five days in a row. Credit default swaps are blowing out for hyperscalers. What does that mean? Well, it's not great. We have a lot of problems out there, a lot of things that are changing. I actually sold $50,000 worth of one stock today. We'll talk about all of that. What's happening in markets? What do you do right now? What are my thoughts around the markets? And we have a a clip from Mark Newton and Funstrad and he shares kind of his perspective on the markets as well. So we have a banger for you guys today. I don't want to waste your time. Hit the like button, subscribe to the channel if you guys have not done so already and let's begin. Also, this video is sponsored by myself. If you guys want to come join the trading community where we are up over 90% year to date this year, we're just going out to find opportunities before Wall Street does. That's the simplest way to to put it and that's the only strategy that really works if you're trying to make a lot of money in the markets in 2026. Chasing FOMO no longer works. Buying dog no longer works. You know, it's this is the only strategy that works. Okay. So, before we get into anything else here, I think we all just have to understand what's happening in the markets right now. In case you don't know or you're a little confused, there's there's different things happening. So about 80% of the market's problem right now is the Iran war. Why? Well, the Iran war is putting upwards pressure on Treasury yields because we now have a new Fed chair that is committed to bringing inflation down. And I could put that in air quotes because I think he's really a dove in wolf's skin, right? He has Kevin Walsh has to sound like he's a hawk kind of to get credibility in the marketplace. But nonetheless, the Iran war is causing all kinds of problems out there. Higher inflation expectations. I mean, three Fed officials last Fed meeting wanted to raise rates. None of that is good. Okay. So, a lot of our problem, I would say about 80% of our actual problem is the Iran conflict and all of the effects from that, right? higher gas and hurts the consumer, right? The other 20% of our problem is this psychological thing that is happening right now in the bond market. So, the US national debt just crossed over $40 trillion. Nothing really changed from the last couple of weeks. We're still operating business as usual, but that $40 trillion number is becoming a bit of a problem for investors to conceptualize. Well, I think it goes a little bit deeper than that. I think there are worries about the AI trade and potential bailout concerns long-term that are also driving higher um treasury yields. But again, I think that's for one area of the market, right? The bigger problem for everything is the Iran war like cyclicals, small caps industrials um software, like just just name the sector outside of AI hardware. The Iran war is number one. Beyond that, again, you have this treasury yield problem and you have AI hardware stocks that are selling off. And I've talked about this on X. I've talked about this on the channel for a while now. So I don't want to harp on it too much here, but I think it's very important that everyone understands the simple fact is Anthropic and OpenAI are your number one number two AI companies. These are companies that are putting out a lot of promises, a lot of guarantees to Oracle and Microsoft and all of these guys to rent out their data centers, right? Well, Enthropic reported 65 billion in ARR, missing estimates of 80 billion. At the same time, OpenAI posted revenue growth of only 18% quarter over-arter. Last quarter, revenue was 6.7 billion. This these numbers are not sustainable if hyperscalers are spending $3 trillion to build out infrastructure for the most part for Enthropic and OpenAI. Now, Enthropic came out with a 2028 ARR target, which actually means revenue for 2029, of about $200 billion. That was a big disappointment as well. So, it's really throwing into doubt the sustainability of the AI trade, right? If you're only going to be doing 200 billion in revenue by 2029 and OpenAI is probably maybe a similar amount, maybe a little bit less, they're promising hundreds of billions of contract value by then. What does that mean? That means they're going to have to raise a lot of debt. They're going to have to issue stock. They're going to have to fund that some way besides cash flows. That's also pressuring the bond market just across the board. You can see from zero hedge today. Um he writes, "The post July rip is over. Hyperscaler CDs are blowing out again and Oracle and or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O or O oracle and Nvidia are at alltime wides. Meta just shy of the record." Now a CDS is a credit default swap. Now what does that mean? That is like you know if you guys have ever watched the big short the movie right Michael Bur CD shorting the the housing market right well it's basically saying look if uh if we go bust or can't pay our bills this is insurance against that. So you could see something like Coreweave, right? 771 basis points. They're pricing in like a 7% chance of literally not being able to pay their bills one day. SpaceX at 1.67%. Nvidia 0.8%. Meta 0.9%. So less, you know, less than 1%. But when you're dealing with a company that these companies are trillions of dollars, that's that's a problem. Amazon and Microsoft. Microsoft is actually the best one here, only pricing in about a 0.46% chance, less than a half a 1% chance that they would actually default. Oracles over a 2% chance of defaulting over the next these are probably 20 30-year uh CDs. So, or CDS's. So dude, like of course that's going to drive up or be a factor in what's happening with government debt. If people are all of a sudden like, whoa, the AI trade's unsustainable, but the whole economy is basically built on it at this point. What do you think happens if Oracle can't pay their bills or Google can't pay their bills or Coreweave for that matter? The government's going to have to bail these companies out or you're going to have a literal depression on your hands. Now, let me be clear. I do not think this is the moment the bubble is popping. I I personally think this is kind of like the uh what's that company called that nobody nobody likes anymore? Oh, yeah. Super Micro. Remember this one? Super Micro was like king of the hill back in the day with Nvidia. Everyone rushed into the stock. Stock went up, it came down. I think the AI trade could kind of look like this, right? Where everyone got all hyped up about the AI trade and AI is very real, but hardware is not the best place to be at the end of the day, right? The big winners long term are not going to be hardware. I think people might just shift their attention to other areas as long as the AI trade doesn't hit a a dead end, right? As long as AI is useful, practical, raises productivity, which I do think it does, I don't think you're going to have a bubble popping kind of moment, but you are going to transition into new areas and people are going to stop caring to a certain degree about hardware and about what this stock is doing and that stock is doing. In other words, I think the AI trade will become more sustainable, less of a frenzy to let's just buy everything we can. And I think it's kind of going to be like Super Micro. Super Micro is still in business. They're still doing okay, but nobody cares about it. It's not the end of the world. Back in the day when Nvidia and Super Micro were the dominant forces, Super Micro falling 10 20% would crash the entire AI complex. Today, nobody gives a So, I think we are moving into a new AI trade, as I've talked about on this channel many times before. You know, we're moving into robotics and automation and AI software and cyber security and probably other ideas as well over the next year or two. And I just think there's going to be less attention on the AI buildout. Now, you could potentially even see the buildout slow down from a year-over-year percent basis. You probably will see the buildout slow down um just because the law of large numbers, right? The percentage growth of deployments of data centers and spending will slow down from low numbers, low bases. But I just think it's going to kind of look like super micro as again super micro did not go bankrupt. They're still doing just fine. But attentions have shifted now. Again, the big catalyst for AI stocks is going to be Nvidia earnings next week. That is going to be a big driver for the entire trade. And again, that is to the point that I've been making, right? I think the Iran war is like 80% of the broad markets problems like cyclicals and even software and, you know, just all of these areas, right? Consumer defensives and financials and blah blah blah blah blah. But that other big problem is what's happening with the hardware trade. And the hardware trade is just kind of different from what's happening in the broader market. So there's different stories playing out at the same time right now. JP Morgan issued a warning that while the Treasury's expanded bond buybacks will lower long-term yields temporarily, it won't solve the real problem that the US government is running a roughly 6% budget deficit near full employment and national debt has surpassed 40 trillion. And JP Morgan estimates a funding gap exceeding 3.5 trillion in the coming fiscal years. Again, I also think there is this hidden variable that what happens if the AI trade does fail? The government's not just going to sit back and watch a depression unfold. They're going to have to issue more bonds. That's going to add the market, you know, flood the market with supply. It's going to push prices down and the bond market is pricing in some of that risk ahead of time. Now again, sentiment's going to change with the wind. One thing happens, this happens, that happens, humanoids are successful, whatever it is, the markets are going to change their perception around things like credit default swaps and the long-term sustainability of the AI trade. Because while I don't think you're going to get rich in AI hardware stocks at this point, I don't think they're attractive investments. I'm not super concerned about the AI trade just up and going kapoof, right? I'm not super concerned about that because I do think AI will be very successful longer term. And even if some companies fail, like sure, could cororeweave fail? Yeah, sure. Or could the next guy fail? Yeah, sure. But I don't think you're going to have this systemic problem where, you know, there's just massive failures everywhere all at once. Like, I think the failures will be absorbable. But look, all of this is really being amplified by the fact that we are right before a midterm election. And there's a lot of there's a lot of hedging right now. And I've talked about this a lot on the channel, but it's called I call it event risk hedging where everyone knows this is a volatile period of the year. So what what's happening? Wall Street, they're going out to short the markets. They're going out to hedge portfolios. And this psychological nature of everyone expecting some kind of correction actually gives you the volatility. Now, I don't know if we're actually going to get a correction. Depends what happens with the war with Iran. If the war with Iran ended, let's say before the midterms, oil plummets, the Fed, you know, changes their tone on rate hikes. I think the broad markets could do very well. AI trade, you know, that's going to do its own thing and that's going to affect the, you know, headline NASDAQ. But look, the NASDAQ fell 11 12% recently. Our portfolio is actually up 1% during that time frame. Investors will just move their money into other areas if AI stocks continue to falter. So, I'm not super concerned about that like killing cyclicals, right? Um I don't think that's the case. Now all one day if the AI trade does implode and it causes a recession things like that then it would affect the broader markets but I I do not think we are there not even close at this moment but again all of this sentiment is being amplified by the fact that we are heading into a midterm election and nobody wants to be the guy that was bullish on markets that fought the seasonality and got burned, right? So, everyone's going out to short. They're taking profits. And um you could see that's that's why normally after a midterm election, you do tend to have a 9 to 10 month rally. Like it's partially because of this self-fulfilling prophecy of hedging for the midterms and then unwinding hedges after the midterms. Now, again, I do want to share this clip with you from Mark Newton in Funstrat here. uh he was on the street yesterday to um share some views on this market. So I want you guys to take a listen and let me know your thoughts on this down below in the comment section and then we will get into the stock that I actually sold today, how I'm thinking about the markets and what makes sense right now to be doing. So ultimately, as you said at the top, you expect this is a market that will move higher from here by year end with an S&P 500 8000 price target, but we could see some choppiness getting there, especially near the midterms. If we do get a pullback, what tells you it's a healthy reset from, you know, that investors should actually buy versus the start of something bigger? >> Yeah, that's a great question. I I think initially I look for really three things to determine first of all whether the stock market is getting ready to pull back and that's really interesting and the the first is the degree of breadth is breath getting worse or better are there more stocks going higher or lower recently the answer has been higher we've seen breath exprove improve and expand since not only late March but also May u the second is what's sentiment like are people too enthusiastic and too speculative right now we don't see that either and the third is are we starting to see defensive strength? Look at the utilities and the consumer staples and you know are these sectors really starting to re-engage and start to strengthen. Normally ahead of most corrections you see a flight to quality a flight to safety. We saw that the beginning of this year. We saw it beginning of last year ahead of the liberation day. Huge outperformance in staples and utilities which warned that something was ary that we could potentially have some type of volatility. This year we don't see really any of those. Utilities and REITs and staples have been honestly heading lower in recent months specifically relative to the S&P. Um so to answer your first question um you know if long-term trends start to be broken if we start to see the trend in technology specifically give way that it's going to start to pull back and violate lows uh that would be a concern. um it really has a lot to do with cycles and with sentiment and with just general technical structure is how I look at the market and so it's tough to say you know all these exogenous events would cause me concern. I think I would also take a cue from the bond market unless we start to see real widening out of spreads. Um you know what's happening dayto-day in stocks really doesn't concern me. I mean the bond market's on very good footing right now. >> Do you have a line in the sand to the downside though? Does the S&P 500 reach a level that you say, "Okay, the bullish setup is no longer working." >> Sure. I I think that right near 7,800, you want to look probably right near almost 70, you know, it's almost to get under 7,300 before you'd say normally, I would look at not only uptrends from the most recent swing low, but also just monthly lows. and and if you have a a you know the the low that happened in in late July if that is undercut for the S&P would cause me uh you know concern that this could morph into a larger uh period of volatility but >> and yeah if we look at the NASDAQ we're not even really close to that at this point. NASDAQ 100 would still need to fall about 7% to get back to those lows. you'd really be flirting with the 200 day moving average at that point. And then again, you tend to find support around the 200 day moving average a lot of the time, but sometimes you do kind of undersshoot that and get a volatility move lower unless something dramatically changes. I don't see a decline like that coming. I think we're just in normal premidterm volatility times. And you know, there's there's weird going on. Government debt just crossed $40 trillion. CDS's at your hyperscalers and large companies are starting to blow out a little bit. Why? Because people are questioning the sustainability of the a of the AI trade in general, right? And I think Nvidia is going to be big next week to kind of put some of those concerns to bed. I I I don't see Nvidia having bad earnings, but hey, you know, who knows? It's possible they do. I do think right now though in your portfolio, you want to be looking at stocks that you own and saying, "Hey, you know, is this stock up a lot? Is the fundamental valuation still justified?" Have people kind of rushed into some of these stocks as a flight to safety as the hardware trade has kind of burnt itself out a little bit? And look at stocks compared to others and say, does that make sense to still be allocated to? And you know, that's why I sold I sold some stock today, okay? And I I don't sell stock all too often, but I sold some ELF, okay? Um I sold my highest tax lots. So like the ELF that I bought in the 50s4s like I still hold that and I was buying a lot of that in the 40s50s but I did sell like 500 shares like $50,000 worth of the the stock that I bought in the 60s7s8s 90s. The reason for that is I've owned ELF for like 200 some days. It's getting pretty close to the you know oneyear deadline. So, I wanted to reduce exposure because it had gotten to be such a big position. You know, we're up like 50ome percent on the stock and, you know, kind of minimize the tax burden, right? And when I was looking at ELF today, shout out to Connor in the trading community, he he kind of like asked like ELF is up 90% in the last three months. You know, the stock went from $48 to 100. You know, the PEG ratio is 2.5. I'm buying stocks with 50% growth, trading at 15 times forward earnings, with massive opportunities ahead of them, with PEG ratios at 0.5, 0.6. I can't justify owning ELF with a 2 and a halfx PEG PEG ratio compared to other opportunities out there. So, that's kind of how I'm looking at portfolios right now is, you know, how does this stock compare to this one? What is the sentiment like with this one versus that one? I still own ELF. I just basically took the initial investment off the table. And I think I think that's a good way to operate in this market, just having an objective perspective on some of the stocks that you own. And again, it was Connor and the trading community, that link is down below if you guys would like to come join us, that was like, "Hey, you know, ELF's up a lot. How much higher do you think the stock can go?" And I think the stock could run into the 130s here over the next couple of months. Like, I'm not bearish on ELF by any means, but just the riskreward has changed since we were buying the stock in the 40s and 50s. You know, stocks doubled. So, it's it's changed a bit. So, I do think it is time to look at portfolios and say, "Hey, is the story played out? Do I have big gains? How much is at risk here?" Especially if you own a lot of hardware stocks. Like, it could get a lot worse for AI hardware. If Nvidia misses earnings next week, it is GG's for a while for AI hardware. Like, that's just it. Nothing else is going to matter if Nvidia misses on earnings. You would likely see though a rotation into a bunch of other stocks in the markets. Software would likely do really well. You know, cyclicals, small caps, things like that. So again, just my thoughts on this. Let me know your thoughts on all of this down below in the comments section. Again, I'm not super concerned here for the broader markets. I'm more concerned for the AI hardware trade because again, the math isn't mathing on Enthropic and OpenAI's revenue versus their commitments. and you're seeing uh you know credit default swaps kind of blowing out a little bit. The big catalyst is Nvidia, but I've disliked that trade for months now. You know, I've I've been the bearer of bad news with AI hardware for a while. And while I do see some opportunities, Qualcomm, Marll, AMD, I'm not in a rush to go out and and buy any of that right now. Very attractive opportunities out there. Um yeah, it is time to to do some risk mitigation. I think just generally out there uh because we are at a turning point like I think the AI trade itself is at a turning point. The hardware trade that's being left behind. We're entering a new AI trade and if you're not exposed to that, if you're not positioned to that, I I I think you're going to miss out quite a bit. But again, just my thoughts. Let me know your thoughts on this down below in the comment section. Hit the like button as well as subscribe to the channel if you guys have not done so already.