Upward Pressure on Yields and Equities

CoreWeave

Across the shows: 2 speakers in other episodes, 0 bullish and 2 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  CoreWeave's serial convertible issuance signals high-yield markets shutting out neocloud borrowers.

  McDonald says a proliferation of serial convertible issuers signals that the high-yield market has shut them off, and he names CoreWeave and the neoclouds. Neocloud public bonds are a leading indicator for the credit cycle, because these firms access public markets rather than bank lending. If public credit tightens for them, a credit problem may move upstream, to banks and bank-financed AI infrastructure.

  “whenever you see a proliferation of serial convertible issuers, that's a sign that the high yield market has shut these guys off. Core Weave, the neo clouds.”at 16:20

Meta Platforms

Across the shows: 16 speakers in other episodes, 19 bullish and 4 bearish calls, past 30 days

• Larry McDonald · The Bear Traps ReportBearish

  Meta's off-balance-sheet AI financing protects free cash flow from heavy AI spending.

  McDonald says Meta has moved AI data-center financing off its balance sheet, from about $35 billion to $600 billion. He argues this protects reported free cash flow, which he calls 'incineration' because of heavy AI spending. The financing is double-A rated, full-recourse lending against Meta's cash flow from Instagram and Facebook. He also argues that Meta is burning cash to build AI products that have no barriers to entry, which weakens its earlier oligopoly position. He puts Meta alongside Oracle as part of the bank-financed AI buildout.

  “They've taken off balance sheet financing from thirty five billion to 600 because you know what that does? It protects their free cash flow.”at 24:29

Banks

• Ken Leon · CFRA Research

  Bank stock valuations look more reasonable after the August pullback, with capital markets upside.

  Leon says bank stocks have pulled back since they started correcting in mid-August, and their valuations now look more reasonable. He sees opportunities tied to capital markets and investment banking. He is focused on whether banks can keep generating strong earnings in the third quarter and give directionally good guidance for the fourth quarter, and he expresses confidence that they can keep delivering strong performance.

  “Bank stocks have pulled back. The valuations seem more reasonable than they did before they started to correct in the middle of August. We see opportunities clearly related to the capital markets and investment banking.”at 9:28

• Ken Leon · CFRA Research

  Bank credit quality is neutral; no major loan-loss provision increases expected in Q3.

  Leon says credit quality is in a neutral zone. Banks are not showing significant increases in loan-loss provisions, and he does not see a credit risk for the large banks in the third quarter. The issue he flags for banks is the deposit side (rates and deposit competition), not credit losses.

  “we're in the kind of the neutral zone for credit quality... no significant increases of loan loss provisions... I don't see a risk, you know, for the large banks on credit while in the third quarter.”at 11:54

• Ken Leon · CFRA Research

  Fintech and AI-enabled startups are pressuring bank deposits as consumers chase higher rates.

  Leon says consumers are getting smarter about chasing higher interest, and money can move overnight from a phone. Newer fintech and AI-enabled startups (he names Stripe, Ramp and Plan) give customers alternatives for capturing higher CD rates or moving money. This competition challenges banks' ability to offer competitive deposit rates and may affect their margins.

  “There is competition... with AI capabilities, the agility of some of the new startups... like Stripe, Ramp, Plan. All these give you just great opportunities for capturing higher CD rates or just moving money around.”at 13:06

• Michael Ball · Bloomberg

  Deposit competition and a flatter yield curve will squeeze bank margins.

  Ball says the competition for deposits from fintech and AI-enabled alternatives will affect bank margins. He adds that a flatter yield curve also hits banks, so margin pressure is coming from two directions. His view is that this matters more than the IPO and M&A pickup that investors are focused on.

  “that competition obviously going to affect the margins... a flatter curve, which hits the banks as you know.”at 13:40

Market sentiment, positioning & volatility

• Matt King · Satori Insights

  Repo market growth to $7 trillion lubricates markets but creates liquidity-shock vulnerability.

  King says repo volumes have doubled since 2020 and now total about $7 trillion. This leverage helps finance basis trades, Treasury trades and equity financing, and so lubricates markets. But the same growth creates vulnerability. Repo numbers keep getting larger, which raises the risk of liquidity shocks in which everything becomes correlated. He compares the scale to bubble-driven processes and says the risk has been pushed into the tails. Standing facilities such as the SRF give some protection, but they have not removed the risk.

  “all of these volumes have doubled, just since 2020 or so. We're up to $7,000,000,000,000 in terms of the repo [agreements].”at 6:17

• Larry McDonald · The Bear Traps Report

  Big family offices are starting to buy tail-risk funds, a sign of rising crash hedging.

  McDonald says that he and Lee Robinson, who has been bullish, are both seeing large family offices start to buy tail-risk funds. He describes this as a shift in positioning toward crash protection. It is an anecdotal signal of rising defensive positioning among wealthy investors.

  “what he's seeing, what I'm seeing is big family offices are starting to buy tail risk funds.”at 17:49

• Larry McDonald · The Bear Traps Report

  Crowded multi-strat pod positioning could trigger forced selling and a volatility spike.

  McDonald says multi-strategy hedge funds now run about three times as many pods as they did ten years ago. Pods are long the index, short the underlying, and all in the same trade, with strict risk controls. When a shock hits, as in June, one or two pods get cut and then 40 or 50 get cut at once. That mass liquidation creates the volatility opportunity.

  “they're all in the same trade. And what happens is if something happens like we had in June... 40 or 50 of them get carted out. And so that creates this opportunity in volatility.”at 20:28

US housing

• Selma Hepp · Cotality

  High mortgage rates and poor affordability are stalling home sales, with no sign of improvement.

  Hepp says high borrowing rates and poor affordability are stalling housing activity. Home sales are at some of the lowest levels in decades when adjusted for population growth, so turnover is very low. Forecasts that had sales gradually recovering through the rest of the decade no longer look likely, and she sees no signals of improvement.

  “they stop buying homes... high borrowing rates and overall lack of affordability out there in the housing market is really stalling housing market activity... there's really no signals that things are going to improve.”at 31:22

• Selma Hepp · Cotality

  A 3-5% sale discount is normal, not a sign of housing distress.

  Hepp says the average price reduction from list to sale is about 3 to 5%. This is not much different from the 2012-2019 period, when homes also sold at a 3 to 5% discount. The discount depends on local inventory: in markets with no inventory, homes still sell above asking price. She therefore sees the current discounts as within a normal historical range.

  “So the average price reduction out there is about three to 5%... that's not that much further away from where we are historically.”at 32:19

• Selma Hepp · Cotality

  Around 8% mortgage rates is the point where more housing markets start to deteriorate.

  Hepp says mortgage rates in the low sixes, or below 6%, brought back demand and unlocked many markets, including weak ones like Florida and Texas. Psychologically, 7% is a barrier. When rates reached 8% in 2024, home prices slowed more significantly, and she thinks 8% is the level at which more markets begin to deteriorate, even though national prices are still positive.

  “when we reached 8%... we did see more significant slowdown in home prices... I think eight percent is the point at which more markets start to deteriorate.”at 35:23

US Treasuries & yields

• Matt King · Satori Insights

  Rising yields are driven more by who is borrowing and their borrowing appetite than by real yields alone.

  King argues the usual explanations for backing-up yields (growth-driven real yields, not inflation breakevens or oil) are incomplete. The real yield is rising, but the deeper driver is who is doing the borrowing and how much they want to borrow. He contrasts the US, where deficits have been largely self-financed through domestic money market funds, hedge funds and repo, with France, which relies more on foreign buyers who are more yield-sensitive. He says money is close to rotating out of equities into cash as real yields rise, but the market has not reached that point yet.

  “It is the real yield, but it's actually more about who's doing the borrowing and their desire to borrow that keeps pushing these yields up.”at 2:05

Credit markets

• Matt King · Satori Insights

  Tail risks are rising, with bond stress starting to spread into credit and other markets.

  King notes that bond volatility has picked up, but day-to-day equity volatility remains very low. That gap is a warning sign: tail risks are rising, and stress is beginning to spread from bonds into credit and then into other markets. He ties this to the same liquidity and leverage dynamics in repo and money market funds, which could make correlations jump together when a shock comes.

  “And yet the tail risks are rising, and you begin to see signs of stress spreading out from bonds into credit and through into other markets.”at 7:31

AI & jobs

• Ken Leon · CFRA Research

  AI efficiency gains could let banks cut headcount, mostly in back-office roles.

  Leon argues that banks can become more efficient, possibly reducing headcount. He breaks the bank into front, middle and back offices and says most of the change is happening in the back office. He also notes that AI agents are already being used by financial advisers to understand clients' objectives and portfolios.

  “the banks have clearly have a chance possibly for headcount reductions as they get more efficient... A lot of this is happening more in the back office.”at 14:02

US stock market outlook

• Larry McDonald · The Bear Traps Report

  Index is being propped up by a few names while the broader market has already crashed internally.

  McDonald says the relationship between the index and consumer and brand names such as Nike, Lululemon and Harley-Davidson shows the market has already crashed internally. About 40 S&P 500 names, and 50 world-class brands, are down 30 to 70%. He calls this a 1987-style setup in which the index is being pinned up while internals are poor. He thinks laggard names should outperform the index from the fourth quarter through about June, and he links the pattern to passive indexing.

  “When you have a year where the index is up a lot and the internals in the market are poor... you'll get much better performance from that group.”at 19:33

US rates & the Fed

• Larry McDonald · The Bear Traps Report

  Fed is more worried about credit and underlying weakness than inflation, unlike 2007; he bets on cuts.

  McDonald says he hears behind the scenes that the Fed is playing tough, even with CPI on the way at a hot 0.6% month-over-month. But the Fed is more concerned about credit and underlying weaknesses than it was in 2007. He says more people in the Bloomberg chat are betting on 75 basis points of cuts coming before 75 basis points of hikes, and he is on the cut side.

  “I'm hearing that behind the scenes, the Fed's playing tough... I hear behind the scenes, the Fed's a lot more concerned about credit and underlying weaknesses.”at 21:22

AI chips & semiconductors

• Michael Ball · Bloomberg

  AI chips may not hold value as collateral; depreciation and Chinese competition are growing risks.

  Ball says the depreciation schedules for AI chips are a game that companies have been able to play for five to seven quarters. He argues that rapid technological change, rising competition from overseas (he cites China's chip production) and a growing memory-side problem will make these assets less pristine as collateral. He expects that lenders will need to price that risk a couple of years out.

  “Right now, they've been getting away with it for probably five or six quarters, seven quarters. But then each quarter that goes on... So again, it doesn't seem like these are gonna be as pristine as a collateral.”at 25:23

AI bubble & tech valuations

• Larry McDonald · The Bear Traps Report

  Private AI markups flowing through hyperscaler earnings distort the S&P 500's true earnings power.

  McDonald says SpaceX, Anthropic and OpenAI were worth about $360 billion three years ago and now are worth about $5.1 trillion. Hyperscalers such as Meta, Oracle and Microsoft mark up their stakes in these companies, and the gains flow into S&P 500 earnings. He argues this one-time mark-up effect distorts the index's true earnings power and questions whether it is appropriate for retirement investors.

  “Three years ago, SpaceX, Anthropic, and OpenAI were worth 360,000,000,000. Now it's 5,100,000,000,000... those markup and assets are in the S and P 500 earnings from the hyperscalers... really distorting the true earnings power of the S and P.”at 27:46