Markets rotate amid CAT pullback on burry shorts – AI thesis intact, volatility expected on NFP day

Things you need to know.

Good morning class! Let’s go…. because there is a lesson in what happened yesterday….

The Dow kissed another fresh intraday high 52,742.66, before Caterpillar (the newest AI darling), which has been on an absolute tear this year (up 73%) as one of Wall Street’s newest AI beneficiaries, got slammed. The stock fell 7%, wiping 437 points off the Dow and leaving the index down just 14 points on the day.

So, what happened? One word: valuation.

Today’s Caterpillar sits at the center of one of the biggest capital spending cycles we’ve seen in decades. The company supplies power generation equipment for AI data centers, the heavy machinery used to build those campuses, mining equipment needed to produce the copper and critical minerals driving electrification, and equipment supporting grid expansion, infrastructure investment, and the reshoring of American manufacturing.

But success has come at a price – as it usually does.

CAT now trades at 37x forward earnings, versus an industry average closer to 15x. That’s an extraordinary premium for what has historically been viewed as a cyclical industrial company. But you have to ask – Is it a cyclical industrial or is it something different? My argument? It isn’t just a cyclical industrial company anymore—and that’s exactly why investors have been willing to pay the premium.

Then yesterday, this happened. Famed investor Michael Burry—the man who correctly called the housing collapse ahead of the Great Financial Crisis—revealed bearish positions in CAT, along with NVDA, TSLA and AMAT. Those four companies touch virtually every corner of the AI buildout: chips, semiconductor equipment, electric vehicles, and the physical infrastructure powering it all.

These are crowded institutional trades and core holdings in many of today’s most popular ETFs. So, when a headline like that crosses, it doesn’t just move one stock—it ripples through the entire AI ecosystem and parts of the market.

Now, do I think Burry is completely wrong? No. Could CAT have become a bit extended? Absolutely. The stock was trading roughly 18% above its trendline, so some mean reversion shouldn’t surprise anyone.

But remember, Burry also called Tesla wildly overvalued in the summer of 2021 when it was trading around $200. The stock then doubled to roughly $400 over the following months – squeezing his ‘boys’ very hard - before eventually collapsing into late 2022. Was he right? Eventually. Being right eventually is very different than being right today.

So, here’s my take - If you’ve owned CAT for a while and you’re sitting on significant gains, what has fundamentally changed? Nothing. Could you trim your position – of course you could. Should you? That’s your call.

If you just bought it because you believe in the long-term AI infrastructure story, and that thesis is still intact, then don’t let one famous investor shake you out of your position. In fact, if the stock continues to correct, consider adding on weakness. Technical support sits near $910, roughly 8% below current levels, so use that as a guide.

On the other hand, if the fundamental reasons you bought the stock have changed, that’s a different conversation. Michael Burry shorting Caterpillar isn’t a fundamental change in the story. It’s simply one guy’s opinion about valuation. And that’s the lesson.

Here’s how the others fared - the S&P lost 16 pts, the Nasdaq lost 173 pts, the Russell gave up 12 pts, the Transports added 210 pts, the Equal Weight closed flat while the Mag 7 (remember those names?) gained 760 pts making it the clear winner – rising 2.3% on the day.

Here’s why yesterday wasn’t nearly as bad as the headline suggested. While CAT and the semis grabbed all the attention, money continued flowing into financials, communications, software, cybersecurity and economically sensitive sectors. The Equal Weight S&P held steady, confirming that investors weren’t abandoning stocks; they were simply rotating into different parts of the market.

Remember – what I said – we are in a vacation week, it is the start of a new quarter, volumes will fade so moves will be exaggerated….and yesterday I think some of them WERE exaggerated…. You should not be surprised.

On the Eco data front – we got a great Prices Paid report – something I told you to watch – because it speaks to what manufacturers are paying for raw materials that they use in the manufacturing process….it came in at 73 – down from 82.1 and below the estimate of 77.5…That’s bullish – there is nothing negative about it…

ADP came in a touch weaker, but I don’t pay much attn to this one data point…Today’s NFP report is what the market will pay attn to and it is expected to show an increase of 120k new jobs…I think it comes in a bit stronger – but let’s see what happens at 8:30. Unemployment to remain anchored at 4.3%. Avg Hourly Earnings m/m and y/y are both expected to be in line…. Again, I’ll say it – it is a holiday week, many people are gone from their desks…. volumes will remain subdued…moves will be exaggerated….do not make any big decisions today on the back of this report.

Fed Chair Kevy Warsh’s appearance in Portugal was his first major international speech since becoming Fed Chair. He reiterated that inflation risks have eased but made it crystal clear that the Fed remains committed to its 2% inflation target. He also refused to provide any forward guidance, saying policy decisions will remain meeting-by-meeting.

Bonds also reacted (interpreting those comments as more hawkish) …the TLT fell 1% the TLH lost 0.8%..and that sent yields higher…the 2 yr is now yielding 4.17%, the 10 yr is kissing 4.5% while the 30 yr is kissing 5%...Again, not a disaster, but we are entering the ‘cautious’ zone.

Now Gold had a different reaction…..this morning it is up $40 at $4,065 – gold bugs are betting that Warsh is not going to raise rates thus the move back into gold….I too do not believe that Warsh will raise rates in September but nor do I believe he will cut them either….but we do have 3 months of data to consider – July, August and early September before that meeting…so it could all change…but also remember this….the election is in November – the FED should not make a change in policy – just weeks before the election – which doesn’t mean they won’t it just they shouldn’t for fear of being seen as partisan….

Let’s not forget...in September 2024, JJ cut interest rates by 50 bps just 7 weeks before the presidential election. At the time, many questioned the timing, but JJ maintained the decision was driven by the data—not politics. Fast forward to today, and Kevin Warsh is taking a very different approach. He’s refusing to provide forward guidance, emphasizing that every meeting will be data dependent, and going out of his way to avoid creating the perception that the Fed is steering policy around market or political expectations.

Oil is trading lower…down $1 at $67.65…. That’s good. We are now well below the trendline at $70…..next stop for oil should be in the low 60’s…. sit tight….

European markets are all higher this morning….

US Futures are mixed….. Dow futures up 75 pts, S&P’s up 3 pts, the Nasdaq down 100 pts while the Russell is up 4 pts.

The S&P closed at 7,483 down 16 pts. Trendline support is down at 7,378 with the all-time high of 7,620 as resistance.

Here’s the takeaway. Don’t confuse volatility with a change in the story. Caterpillar didn’t suddenly become a bad company yesterday. Nvidia didn’t suddenly become obsolete. One famous investor expressed an opinion, traders took some profits, the new Fed Chair made some comments, and the market did what healthy markets do—it rotated.

The KEY - If your investment thesis hasn’t changed, then neither should your discipline.

Simple grilled rib-eyes with peppers, onions and mushrooms

Happy 250^th Birthday to America! This is a perfect dish to complement the burgers and dogs.

For this you need the Rib-eyes, olive oil, s&p, sliced bell peppers, sliced onions, sliced mushrooms, a couple cloves of garlic sliced and butter.

Take the steaks out of the refrigerator 45–60 minutes before cooking. Pat them dry. Season with s&p and massage with olive oil.

Cook the Veggies - Heat a large cast-iron skillet over medium-high heat. Add the olive oil and onions - cook about 5 minutes until they begin to soften. Now add the peppers. Cook another 5–6 minutes. And now the mushrooms. Season with s&p.

When the mushrooms begin to brown...Add butter and garlic. Cook another 2–3 minutes. Keep warm.

Grill the Rib-Eye - Get the grill screaming hot. Place the steaks over direct heat. Add steak – cook 4 mins on one side and then 4 mins on the other (depending on thickness). Should give you a perfect med rare steak.

Remove and let it rest for 5 minutes. Don’t skip this. The juices redistribute and the steak becomes dramatically better.

Serve it with the peppers, onions and mushrooms on the plate.

Serve with a large mixed green salad.