# Special Situations Report — Weekly Call (readable notes)

- **Title:** SSR Macro — the **FOMC hiked 25bp to 3.75-4.00%**, Chair Warsh's first move (after the ECB), with the dot plot showing **one more hike this year** and **2% PCE not until 2029** while markets price **three**; the **AI slowdown aftermath** (Amodei's pacing call, an Anthropic/OpenAI/Google standards body, Nadella's "deliberate pacing", **Michael Burry's four-point "self-serving" rebuttal**, and Trump calling the slowdown a hoax); the **Iran war escalation** — Houthi missiles and drones on **Riyadh** and its airport, drones on **Yanbu**, the **East-West pipeline** down for 3-6 weeks (**2.5-2.7 mb/d** of Yanbu exports, ~3% of world supply), the Houthis on **Perim Island** declaring a blockade of the **Bab-el-Mandeb**, Saudi cancelling **October crude to Europe**, spot VLCCs near **$1M/day**, the **US SPR at 285M barrels (lowest since 1982)** and JPM's global inventories falling toward a **6.8bn-barrel operational floor**; a coming **European energy crisis** (TTF €75-80, worst case €100-150); a **Western bond rout** (US 10-year above 5%, JGB 10-year **3.03%**, the UK **suspending 20- and 30-year gilt issuance**); and **three long ideas** — **Waystar (WAY)** exploring a sale (base case low-to-mid $30s vs ~$25-26), **Expand Energy (EXE)** at a **15% FCF yield** with a **$129** two-year target (20bp starter), and **Nokia (NOK)** on an optical SOTP (~**$13** vs $10.68) — plus **Eaton (ETN)** as a buy under **$400**, the income sleeve (**PDO / PDI / PAX** at ~5% discounts and ~13% yields, **RWT / RWTQ**), **Corteva (CTVA)**'s contested seed spin, the **WBD** spread back at **10%**, **Uber** insider buying, tankers as a war hedge, and **Sea Limited (SE)** still an add at $100
- **Show:** Weekly SSR research call (premium subscriber recording — no public video)
- **Guest/host:** Jay Singh (founder, Special Situations Report; ex-Goldman Sachs)
- **Date:** 2026-SEP-20 (Sunday call; the transcript title is dated 2026-09-20 and garbles the brand as "SSN"; the report's creation date is 2026-09-20)
- **Source files (this folder):** `transcript.pdf` (the verbatim premium transcript, section headers carrying the recording's `MM:SS` cues) and `report.pdf` (the condensed report + actionable items + economic calendar + Q&A write-up). The weekly deck he pages through (pp. 1-50: Waystar pp. 4-6, EXE p. 9, Eaton pp. 10-12, Nokia pp. 13-15, the war pp. 16-19, Europe p. 21, the Fidelity heat map p. 22, bonds pp. 23-26, AI p. 27, the FOMC pp. 33-34 and 42-46, the daily recap pp. 47-50) and the full EXE model (posted to the SSR Q&A tab — "too big to include in an email") are **not in this folder**.
- **Note:** readable notes extracted from the premium PDFs; fillers (um/uh/you know/false starts/stutters) removed, wording otherwise verbatim from the recording, with a few passages lightly condensed where the speaker repeats himself or reads long news items. Section headers carry the recording's `MM:SS` cue; the "Ref" column on the analysis page uses the same plain-text times, because there is **no public video to deep-link into**. Auto-transcript garbles corrected and listed here: **"SSN" = SSR**; **"EXC, which was the former Chesapeake" / "EXN" = Expand Energy, EXE** (EXC is Exelon's ticker; the title, the report and the model all say EXE); **"Wstar" = Waystar (WAY)**; **"Warner Brothers/Peacock" and "Peacock's foreign investment backing" = Paramount (Paramount Skydance, PSKY)** — the report's "Paramount Global (PARA)" is the retired pre-merger ticker; **"C Limited" = Sea Limited (SE)**; **"Besant" = Scott Bessent**; **"Andrew McDonald" = Uber President/COO Andrew Macdonald**; **"Ruiz" = Eaton CEO Paulo Ruiz**; **"Veritas" = Veritas Capital**; **"stock power releases" = SPR releases**; **"Vialores"** is kept as spoken (the report uses the same name for the seed SpinCo); **"Eco, TRMD"** in a subscriber question is kept as asked (plausibly Okeanis Eco Tankers and TORM — the report renders it "Scorpio Tankers and TORM"); **"Iren" = IREN**; **"Mara" = MARA**; **"the UA" in the Trump quote = "the USA"**. Report errors, flagged: "**PIMCO Dynamic Credit and Mortgage Income Fund (PCI / PDO)**" conflates two funds — PDO is PIMCO Dynamic Income Opportunities, PCI is Dynamic Credit and Mortgage; "**CRVL (CoreWeave)**" — CoreWeave is CRWV (CRVL is CorVel); "**accumulate through March 2027**" for EXE — the call says only "through March". Internal inconsistencies, left as spoken and flagged: the Uber insider buys are "**two kind of half a million to a million**" in the intro but "**about 15 million worth**" later (the SEP-13 call had $5.3M + ~$10M); the Waystar scenario returns do not all reconcile — **$31 is "mid-20s" upside** (≈22% on ~$25.5) and **$40 is "65%"** (≈57%); Eaton's **"50 gigawatts" is first "in the United States" and then self-corrected to global** data-center capacity; the **SPR "fallen by 131 million barrels or 46%"** — 46% is 131M as a share of today's 285M; as a share of the ~416M starting level it is ~31%; credit-card delinquencies are "**over 20 years… sorry, about 18 years**" (self-corrected); the 2022 drawdown is "**basically a 20% decline**" in one section and "**that 22% we saw in 2022**" in another; the FOMC read-out uses the first person plural of a written note ("**as we detail below**", "**we will leave it to military and diplomatic experts**") and is evidently read from an unattributed third-party piece rather than his own words; the Corteva section describes the spin both as "**spin off the seeds business and keep the legacy business**" and as "**Corteva's seed, crop protection spinoff, which are its two best businesses**", and his Corteva notes are "**from last year**" yet cite the **2026** royalty inflection; he says "**Aubrey McClendon died of suicide**" — McClendon's 2016 death was ruled an accident. The transcript footer's "Date of Transcript: 2024-05-24" and its "ssn_transcript_v6 - 2026-01-26" prompt name are stale template artifacts — the real call date is **2026-09-20** (Sunday); the recording runs **~1 h 48 m**.

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2026-09-20 - SSR - FOMC Meeting Hike Discussion, AI Slowdown Aftermath, Iran War Escalation, 3 Long Ideas WAY Acquisition, EXE Natural Gas, Nokia AI SOTP

## Introduction and Agenda - 00:00

Okay, happy Sunday everyone. The call is being recorded.

As I said over the weekend, we have several things to talk about. We need to talk about the aftermath of the Federal Reserve, where **they hiked 25 basis points, which was broadly expected by the market**. This was after the ECB, the European Central Bank, also raised interest rates this month. We then have to discuss the **AI slowdown aftermath** and the repercussions, the **Iran war escalation, the attacks on Riyadh and the airport over the weekend, and the Bab-el-Mandeb Strait closing down.** There have been some discussions of meetings, but outside of that, what I don't have in the PDF, which I want to talk about, is **1,600 drones that were sent to Russia — Moscow — hitting refineries, hitting a nuclear plant**, and what that also means for energy prices if it continues to escalate, because Russia will retaliate.

And then outside of that we have **three long ideas**. One obviously being an energy idea, **EXE, which was the former Chesapeake**. It has since delevered — I started following this many, many years ago, before Aubrey McClendon died of suicide [sic — the death was ruled an accident] — but Chesapeake, or EXE, **is now one of the biggest producers of natural gas in the world, and we think that it trades at a 15% free cash flow yield to equity, and over two years could generate about 50%, even at $70 oil and $3.34 gas per MMBtu**, because there is going to be increased volumetric demand from AI data centers over time and LNG exports to Europe now that Qatar is offline.

We'll also discuss the **Waystar potential acquisition. Waystar put itself up for sale.** It's a very interesting medical software company. Then we have **Nokia, which is the biggest optical business that competes with Ciena. The reason why it trades so cheap is it has a legacy mobile business.** We'll discuss what the sum of the parts is for that one. And we'll give, as we always do, our large-cap merger arbitrage update, economic calendar update, and the earnings calendar update.

We also found some very interesting **insider buying from the CEO of Uber. That doesn't necessarily mean that it's a buy. We've always thought that it's kind of cheap in the 60s, 70s.** But you had two kind of half a million to a million insider buys in Uber, which is interesting. And then **Eaton, which we think is a little bit expensive right now, but Eaton, ETN, is one of the biggest producers of power to AI, and we think on a pullback that could be interesting, although I'm not buying that one now.** So at the end of last week, you saw **we put in some purchases in the alerts for Waystar, EXE, Nokia. Eaton we're going to wait on.** So let's get into it.

## Economic Calendar Review - 02:48

In terms of the economic calendar, the most important events for this coming week are, number one, the **S&P US manufacturing PMI**. As you know, manufacturing has been quite weak; we're currently in the low 50s. It's expected to go to **53.5 from 53.9** in the September data. Not terrible, but also not very strong. **The service economy, which is two-thirds of our economy, is much stronger, but even that is decelerating from 56.5, which is a great number, to 55.8.**

Overall, the trend we're seeing is that the economy is still growing modestly in the United States. **If you look at the GDPNow data, it's saying nominal GDP should be growing at 5%. I don't see that with the PMI numbers, but I think it's being distorted by big capex spending in AI** — which, on a year-over-year basis, I think next year will have a much bigger economic slowdown, especially if the war does not stop. At least for now, the data is good when it comes to earnings. But at the very low end, what I'm worried about is **food companies are starting to raise food prices for the first time in many years. And that is going to squeeze consumers alongside the 140 billion of additional capital they spent on oil, diesel, gas, heating oil year to date, and that will likely grow to 200 and 250 billion into the winter** — when you could see, especially in Europe, some energy squeezes, given European TTF prices are at the highest level they've been since 2023. It's good for US energy, but it's really terrible for Europe.

**Initial jobless claims** we expect to be a non-event; that's on September 24th. Then we have **new home sales** on September 24th, which is supposed to be roughly flat. I wouldn't be surprised if we see a lower number. It was −10.5% in July on the Iran war; it got better in August — it's supposed to be up 1.4%. **I think in September, on the resurgence of the Iran war, home sales will be quite weak, maybe even under 600,000, because with mortgage rates at 7.22%, benchmarked on the 10-year, no one is going to buy a new home with mortgage rates being this high.** The average person cannot afford, with higher home prices and higher mortgage prices, to continue to make these types of large investments.

**Building permits** is also on the 24th. On the 25th we have **durable goods orders**. That's supposed to decelerate in August from **+1.1% in July to −0.3%**, due to the weaker consumer. **Most of the growth in the economy right now is coming from businesses that are spending on AI, not from the consumer, although the top 50% of America is doing much better than the bottom 50%.** Then we have **cap goods orders, non-defense ex-air** — those are supposed to be a little bit better at **0.7%**. And **UMich sentiment** is supposed to drop again because of higher prices, to an annual low, **from 47.8 to 47.5**, which means that the average consumer is not happy, due to higher prices and the lack of new jobs, as we saw in the JOLTS labor survey. It's been declining for several months — small bounce last month — but it's been declining for almost every single month over the last two years. So there are not enough service jobs available, and food prices and energy prices are rising — not a great mix. UMich one-year inflation expectations: the estimates aren't out yet, we'll find out tomorrow, and the same for the five-to-10-year inflation expectation. But I know that Powell looked at those indicators; I'm sure Warsh is looking at them again.

## Earnings Calendar Review - 06:26

As you know, earnings season has been over for a couple of weeks. There are a couple of companies we're going to be looking at next week that are relevant for the broad economy. For the first couple of days we can basically ignore earnings outside of two companies, **AutoZone and KB Home** — we're going to be looking at the home builders as an indicator for the economy. That's mainly on Tuesday. Monday, you can just ignore earnings.

On Wednesday you have **Cracker Barrel** on the restaurant side. You have **General Mills — I'm going to be listening to General Mills' earnings call, or at least reading the transcript, to see how much they're raising food prices on packaged goods. There are two reasons why packaged food companies are raising prices: number one, because volumes are down due to GLP-1s, they have to make up for it; and two, energy price pass-through.** You also have Cintas and Paychex reporting, and then H.B. Fuller on the trucking side — we'll see how much trucking rates are going up. That's important.

On Thursday you have BlackBerry and **Darden Restaurants — we'll see how Darden is faring with the lower-end consumer getting squeezed.** After the close, **the only company I'm going to be looking at is Costco**, which is one of the most valuable retail companies in the US, specifically because of its membership model. **The average Costco consumer is richer than your Walmart or Dollar General consumer, so if Costco talks about any signs of slowdown, that would be a red flag.** I doubt they will, but I'm going to monitor it.

## Special Situations: Corteva Spinoff and Warner Brothers/Peacock Merger - 07:51

In terms of special situations, there's a name that I know some of us owned, called **Corteva**. They make seeds and fertilizers. **I no longer own Corteva, but it is a high-quality agricultural company. And as you know, they're in the middle of a spinoff.** Because of the spinoff, the stock had rallied all the way to **90**, because the rumors were already out and people knew about this spinoff happening. **They're going to effectively spin off the seeds business and keep the legacy business.**

Now, the seeds business, or the SpinCo, is supposed to trade at an EBITDA multiple, which is a cash flow multiple — earnings before interest, taxes, depreciation, amortization; it's a shortcut for cash flow. I prefer unlevered cash flow, but **the market's going to value this at between 16 and 17 times cash flow or EBITDA, which implies a $45 billion market cap for the seed business, whereas investors see the RemainCo of Corteva trading at about eight times EBITDA, which is about an 11 to 12 billion market cap. So this is one of the few scenarios where the RemainCo should probably sell off, and the seed business could actually catch a bid because it's their best business.**

There have been some lawsuits around this — around crop pricing pressures, competition, the impact and sustainability of higher corn prices, which are up, etc. So there are some moving parts here. We'll come back to this in a moment.

In other news, **the FCC approved Paramount's foreign investment backing.** As you know, part of the financing for Paramount's acquisition of Warner Brothers is coming from outside of the US, and it just makes it one step closer for this deal to close. And as you know, **we were adding to this arb spread at about 20%; it widened above a 20% arb spread, then it tightened to like seven, now it's back at 10. So if it widens past 10, we might add a little bit more after we sold.** But merger arb spreads are quite interesting, like you saw with US Steel: **when they widen out a lot, you can buy them; when they shrink, you sell them; and then you can buy them again. You can do it multiple times. We've been in and out of Warner Brothers–Paramount like three times.** On the large-cap merger arb side, outside of that, there isn't a lot I'm interested in. But there are some new smaller potential mergers that I'm getting involved in, which we'll talk about, like Waystar, in about two minutes.

In the meantime, going back to Corteva: **Corteva's seed / crop protection spinoff, which are its two best businesses, will be the focus for the market over the next few weeks for two reasons.** Last Monday, **California's AG, along with 19 other states, asked a federal court in South Carolina to temporarily block the October 1st spin, claiming that the company will have insufficient assets to cover its PFAS liabilities and environmental liabilities.** Corteva quickly responded that it will defend against the AG's attempt to stop the separation, that it never sold PFAS products, and that it has a well-equipped balance sheet to cover any liability it may face. Secondly, Corteva hosted its investor day ahead of the spin. **Vialores, which is going to be the name of the seed division**, had its investor day at 9:00 a.m. on Tuesday, followed by the new Corteva, which has the potential PFAS liability, at 1:00 p.m. **One of the reasons why they're doing the spinoff is that the seeds business won't be tainted by that potential PFAS liability, so the seed business could actually trade at a full valuation.**

## Waystar Potential Acquisition Analysis - 11:16

In other news, **shares of Waystar were up 12% in early hours on Tuesday. We waited for them to sell off a little bit — to up 6-7% — and we added a position. We still have room to add more to the position in the 25s, as we think the potential takeout could be in the 35 range, which implies almost 40% upside in the stock.**

There was a **Reuters report saying that the healthcare software company had hired an investment bank and is in the early stages of selling itself.** You can read about the large-cap merger arb on page three; for the sake of time, I'm going to jump into Waystar on page four. While Waystar has not officially announced an agreement to sell itself, Reuters reports indicate it is exploring a potential sale, and this is quite a good business. **Waystar operates as a high-margin enterprise healthcare revenue cycle management company and a clearinghouse platform.** The company retained an advisor called **Evercore, which is one of the best boutique M&A banks in the United States. Barclays is also advising** the company to evaluate strategic options, including selling itself to a private equity firm.

The conversations are at an early stage, but I think this is quite an interesting name to hold in the portfolio, because **it's trading at a very reasonable valuation of around 10-11 times forward EBITDA, and if it were to sell itself, it would probably sell in the 13-14 times EBITDA range.** As you know, we owned another company a couple of years ago called **R1, or RCM** — you can look in the alerts — and we made a decent profit on that business. It did have some volatility, however, and it was before the software sell-off.

The company went public in **2024**. It was a private company, and major existing shareholders include **EQT at 13%, the largest Canadian pension fund, CPPIB, at 10%, and Bain Capital.** Based on current financial performance and market multiples in healthcare technology, **Waystar could realistically sell for an enterprise value of about 7.5 billion to 9.5 billion, representing an equity valuation of 32 to 42 per share. The mid of that would be 36, implying about 40% upside from Friday's close.**

At its current share price, it has a market cap of about **4.5 to 5 billion**, and it has very little net debt, about **1.3 billion**. Its revenue guidance, which you'll also see in our tracking model snapshot, is about **1.28 to 1.29 billion**, and adjusted EBITDA of about half a billion, **535 million to 545 million, which represents a very healthy 42% EBITDA margin. It currently trades at about 10.5 to 11 times forward EBITDA and about four and a half times sales.**

Now, there are three different cases we looked at, and these are very generous cases. **Where we think a private equity firm would get involved is about 14 times EBITDA; that would be about $31 a share** — about mid-20s-type upside. **If we see a strategic — another healthcare company — buy, they could afford to pay around 16 times. This is not my base case, however, but that would be about $37 a share** — a little bit higher than what I'm thinking, but a mid-40s-type return. And the **high-synergy bull case** is if a big healthcare company that really appreciates the asset pays around **$40 a share; that would represent 65% upside.** **My base case is between the sponsor LBO floor and the strategic M&A — kind of a low 30s to mid-30s type.** While I haven't finished the full LBO/takeout model, I did provide a **tracking model for the company's revenue growth, to show how strong the business has been and how low its multiple is relative to its revenue growth, and an income statement model to show its stable margin profile.**

What drives the valuation range? The company has a very strong margin profile. **Waystar has an adjusted EBITDA margin above 40% and strong unlevered free cash flow of about 300 million per year**, giving it a very reasonable free cash flow yield and **making it an attractive target for LBOs, where a private equity firm could use this cash flow to add debt and then repay debt over time.**

In terms of the private equity floor: **EQT or CPPIB, who previously backed Waystar prior to its IPO, could anchor a valuation floor around $31 to $33 a share at about 14 times, where peers kind of trade.** In terms of strategic synergies: **a strategic buyer in healthcare IT or payment clearinghouses, where you could achieve synergies — which means they could fire people to achieve cost savings, or cross-selling on the revenue side, which is lower probability — could pay a higher price of $37 to $42 a share. However, as I said, that's not my base case.**

In the United States, the healthcare payment system is notoriously fragmented and complex. Between complex insurance rules, thousands of medical billing codes, varying coverage and patient co-pays, healthcare providers — hospitals, physician groups and labs — struggle to get reimbursed accurately and on time, which is why they rely on Waystar. **Waystar is an essential software business that in my opinion cannot be fully disintermediated by AI, because healthcare is quite regulated.**

Waystar acts as a **financial operating system sitting between healthcare providers, insurance companies or payers, and patients.** Its platform automates the end-to-end payment life cycle:

1. **Patient access and onboarding, pre-care.** It automates insurance eligibility checks, cost estimations and prior authorizations. There is regulatory involvement here, so it is difficult for AI to take care of this full step.
2. **Claims and billing management, mid-care.** It scrubs claims for errors before submission to payers to prevent rejections or delays. There is regulatory involvement here as well, but the company itself can use AI to speed up this process within its own software.
3. **Denials and revenue recovery, post-care.** It uses its own AI algorithm to appeal denied claims and track missing payments for commercial payers and Medicare.
4. On page six, finally, the fourth step: it engages with a **consumer-friendly digital payment portal, payment plan management and patient billing** with end consumers.

Now, why is this a good business? Waystar possesses structural competitive advantages that make it a highly defensible software-driven business model.

- **Number one, mission-critical software with high switching costs. Healthcare providers cannot operate without receiving payment.** Waystar's platform is directly integrated into core electronic health record systems — **Epic, Cerner and Athenahealth**. Replacing an RCM provider causes massive operational friction and risks interrupting cash flow, resulting in very low churn and strong net revenue retention. **The company has been retaining over 100%** — it actually increases revenue per client. It doesn't mean it's retaining more than 100% of its customers; it's growing its current customer base. So it's a very high net revenue retention.
- **Number two, a highly recurring and scalable revenue base.** Waystar monetizes through a combination of recurring SaaS subscription fees and usage- and volume-based transaction fees. **Because healthcare volume is non-discretionary and continues to grow with demographic tailwinds like an aging population, revenue is highly predictable and resilient during broader economic downturns.**
- **Number three, network effects and a data flywheel.** Handling payments for **over 1 million distinct healthcare providers** and processing billions of transactions gives Waystar massive scale. Its machine learning models analyze vast clearinghouse data to identify rules that lead to claim rejections across different insurance providers. **Now this part you may not like, but what the company does is it allows these payment providers and insurance companies to reject claims that they normally wouldn't have to pay, and it gets paid to do that.** As more providers use Waystar, the software gets smarter at preventing claim rejections, making the platform increasingly valuable. And on the other side, **it helps consumers that are getting rejections, that have real medical needs, fight for those claims. So it kind of plays both sides.**
- **Number four, a high-margin profile and operating leverage.** Because its platform is built on cloud infrastructure, it doesn't have to host its own servers; incremental transactions generate high gross margins. Waystar delivers a strong adjusted EBITDA margin, over 40%, combining growth with actual profitability rather than cash burn. **RCM operations in the US healthcare market represent a 100 billion annual labor pool. By embedding generative AI and automation directly into their workflows — appealing denied claims, automated clinical documentation parsing through acquisitions like Iodine Software — Waystar captures market share by directly replacing expensive manual billing labor.** In the past you used to have people going through all these billing codes, working with insurance companies, going through rejections. It was a very cumbersome process, and so **Waystar is already effectively an AI company in automating a lot of these processes.**

Given its strategic position connecting providers and payers in the regulatory landscape, potential acquirers fall into strategic and financial buyer categories. Who can buy this company?

- **Large healthcare IT and EHR giants.** **Oracle — which is a low probability, because it's having its own problems with its AI business** and its growth — but Oracle actually owns **Cerner**, and post its Cerner acquisition Oracle has been aggressive in modernizing healthcare infrastructure; it's one of its best businesses. Integrating Waystar's cloud billing and clearinghouse capabilities would strengthen its enterprise health system against Epic. **If Oracle wasn't dealing with all of these contracts with OpenAI, it would have the bandwidth to acquire this business, but right now we think this is a low probability.** **Epic Systems** is another potential buyer, which is also unlikely — Epic historically builds in-house. **Veradigm, formerly Allscripts, and NextGen Healthcare** are a higher-probability acquirer: ambulatory software players looking for scale and end-to-end clearinghouse operations.
- **Payer and healthcare services conglomerates — which I think are more likely — like Optum in UnitedHealth Group, that wants to diversify into software. Optum is the most obvious strategic acquirer in terms of scale.** Following antitrust scrutiny around Change Healthcare, Optum has an appetite for high-margin RCM software, though any transaction would face stringent FTC/DOJ reviews. **Another interesting acquirer could be CVS Health, Elevance Health or Signify Health** — diversified managed healthcare players seeking to own the clearinghouse and payment workflow rails between providers and health plans, to diversify from their PBM and other businesses. **So CVS and UnitedHealth could be acquirers.**
- **Financial data and payment processors.** A lot of payment companies have seen margin compression, and because this is an inefficient vertical that also has regulatory components, it's harder for AI to compete against once AI incorporates payments. Companies like **Fiserv, FIS, Global Payments or Experian** could potentially want to buy, although I think the probability here is lower. If **Experian** were to buy, acquiring Waystar would create an end-to-end powerhouse in patient clearance, billing and claims management — Experian also has a major healthcare patient-access vertical.
- **Private equity and buyout firms** could take this company private because it generates a good amount of cash — **Thoma Bravo**, one of the biggest software owners in the world (it owns over 100 billion worth of software companies); **Veritas**, which has a deep focus on healthcare technology; Blackstone, KKR, Clearlake — your traditional private equity.

**So the summary verdict is that this potentially could be sold in the low-to-mid 30s to someone. Oracle is a low probability. In my opinion, the most obvious buyers could be Optum — owned by UnitedHealth — CVS Health, or Veritas or Thoma Bravo, those four.**

## Long Idea: EXE (Chesapeake Energy) - 24:16

Now on the other side of things, let's talk about energy. **EXE we think is one of the most compelling larger-cap natural gas longs.** Natural gas is quite cheap in the US right now, and a lot of the natural gas players have sold off because we could have a warm winter. **So especially going into the winter, especially if natural gas stays low, it could be a good time over the next six months to accumulate something like EXE — because in the long term, Europe is at a strategic disadvantage, and LNG exports have been growing in the US by 10 to 15% every year.**

**The stock is basically trading at the lows of the year**, and it's a decent-sized company: **a 20 billion market cap, but very little debt.** The company has paid off its debt from when it was Chesapeake. **It used to have over 10 billion of debt before 2019; today it only has about 3 billion of debt — 3.6 billion of debt, 600 of cash — so it's in a much better position.** It has about **13.6 billion of sales, 7 billion of gross profit, 6.7 billion of EBITDA, 2 billion of net income — basically $9 a share of net income. So it trades at less than 10 times earnings. And it does about two and a half billion of free cash flow, going to 3 billion of free cash flow in 2026. So it is a cash flow machine, and our long-term share price target over two years for this stock is 129.** From 88 on the close, 129 on 88 is roughly **47% upside**, and this company has long-term tailwinds because **it has access to some of the best acreage in the United States for natural gas. It trades at a 15% free cash flow yield to equity on 2026. We added 20 basis points here on Friday, which is a very big starter position, and we'll continue to add to it through March.**

**We have a very in-depth EXE model that we've shared in the SSR Q&A tab**; a snapshot is on page nine — the full model was too big to include in an email. We have a bull-bear case. **Even in our bear case, the price would be about 80, and so that only implies around 10% downside. Our bull case is around 152** — if natural gas prices are higher than the mid-threes — **152 on 88 would be about 70% upside. So we think it's quite an interesting up-down, with 10% downside and 70% upside, with the mid-case being around 50%. It's basically like up seven, down one, in a two-year time frame.**

The company also has pretty diversified geographic reach: **the Marcellus in Northeast Appalachia, Southwest Appalachia, the Utica, and exposure in the Bossier and the Haynesville.** So it's in three large US basins — Marcellus, Utica and Haynesville — **a very diversified natural gas company with a very low-cost base.** And **our assumptions are very conservative: we're assuming $70 of oil in 2028-2029 after this oil spike this year; Henry Hub of around 3.34 in 2027, 3.53 in 2026, going to 3.75. We don't think that's unreasonable given all the LNG demand and the AI demand. And we're using roughly a mid-five-times multiple, EV to EBITDAX, which is also not that egregious. That's what gets us to about a 128 valuation.** We also graph the company's free cash flow yield to equity at the bottom of the page, and you can see our assumptions for production, volume and benchmark prices at the bottom of page nine.

## Long Idea: Eaton Corporation (ETN) - 28:31

On page 10: **we think Eaton is a very, very good company to own. We think it's kind of expensive at the moment, but we think it's a buy on pullbacks under $400 a share.** Eaton represents one of the purest, highest-quality secular growth plays in large-cap industrials. It sits directly at the nexus of four capital expenditure trends: **one, AI data center expansion; two, grid modernization and reshoring; three, electrical content multipliers; and four, high-margin industrial execution.** Rather than betting on volatile AI chip designers or software players, **an equity long in Eaton is effectively a tollbooth play on the physical layer of the global energy transition.**

**The first part of the thesis is a grid-to-chip infrastructure bottleneck. Compute capacity cannot scale without electrical power. While tech hyperscalers order GPUs in months, grid interconnections, switchgear, substations and transformers take many, many years.** The company had a really interesting update during the week: **there's a 342 gigawatt pipeline versus a 50 gigawatt base.** In the United States we have 50 gigawatts of power — [he corrects this below: global data-center capacity] — but based on all the data centers being built, and while this number might seem outrageous, there's basically six times as much that needs to be built versus what we have today. It's an insane number — **nearly 6.8 times the total installed base in computing history needs to be built, for AI specifically, for power.**

**Most of this pipeline represents revenues that will not show up on the P&L for this company until 2028 and beyond, which gives us a head start. This gives Eaton structural revenue visibility and an order backlog duration that few industrial companies can match.**

**Number two, content per megawatt is accelerating.** Eaton is not just selling more units; it's extracting significantly higher dollar value per unit of power built, because there's so much demand. **In traditional cloud computing, Eaton's addressable power management content averaged 1.5 million per megawatt. Driven by high-density AI clusters, high-voltage architectures transitioning towards 800-volt DC, and thermal management acquisitions such as Boyd Thermal, the addressable content has expanded to 3.4 million per megawatt.** So it's growing its service offerings, and because of all the demand it's able to raise price.

**Number three, backlog acceleration and guidance upgrades.** Eaton has systematically beaten and raised organic revenue growth targets for the last several quarters. It has a record order backlog: **total electrical global backlog expanded 103% year over year, up 54% organically excluding acquisitions, with a rolling book-to-bill ratio firmly above 1.2 to 1.3**, which is quite good.

It also re-rated its 2030 targets. **Management's baseline target of 31 billion in electrical segment revenue by 2030 was modeled assuming only 17% annual data center growth. With actual data center growth above 65% right now, management has signaled that the current multi-year targets represent an understated floor.** The company has also been simplifying its business — a high-margin mix shift. **Eaton's Electrical Americas segment operates at a structural segment margin of 27.5 to 33%**, driven by pricing power and specialized engineering requirements. **It's also spinning off its mobility business to unlock further value — just like we talked about with the Corteva spin — the legacy lower-margin mobility segment, which focuses on automotive and vehicles, to become a pure-play electrical and aerospace platform.** So instead of focusing on autos, which is a declining segment as people buy fewer cars, it's going to focus on electrical, AI and aerospace, which will make it a better business overall.

Its backlog has been growing rapidly. **Between Eaton's 2Q26 earnings release and mid-September 2026 — its update last week, a window of roughly six weeks — global tracked data center project announcements expanded from 307 gigawatts to 342 gigawatts.** Global operational data center capacity sits at about 50 gigawatts — **sorry, that's global data center capacity; most of it's in the US, obviously** — but the announced pipeline represents 6.8 times the total infrastructure built in modern computing history. **Ruiz, the executive at the company, emphasized that these projects do not translate into immediate revenue, noting most will not hit until 2028 and beyond.** This reinforces that grid interconnections, switchgear lead times, transformer manufacturing and physical site construction remain the primary bottlenecks for AI deployment. **It'll shift from chips, which I think will slow down in 2027, to power, which will become the biggest bottleneck.**

You can see Eaton's stock price and summary financials on page 11, and its summary financial segments on page 12.

## Long Idea: Nokia - 33:51

The last name we're going to talk about is **Nokia**. Nokia is a Finland-based company engaged in network and internet protocol infrastructure, software and related services. The businesses include Nokia Networks and Nokia Technologies. The sub-segments include ultra broadband networks, IP networks and applications, and Nokia Technologies. **The ultra broadband network segment includes mobile networks and fixed networks. The IP networks and applications segment, which is the fastest-growing AI segment, comprises IP and optical networks, which competes with Ciena**, and the applications and analytics segments — software spanning customer experience management, network operations and management, communications and collaboration, policy and charging, as well as cloud, IoT, security and analytics.

**Ciena, which is a publicly traded comp you can look at, has a ticker of CIEN. This is a direct comp to Nokia's optical segment. Ciena trades at a 50 billion market cap and has only done about 1 billion of EBITDA this year. It doubled from last year. That implies this company trades at 50 times trailing EBITDA, and because it's growing so fast, it's supposed to do about 1.4 billion of EBITDA next year. The 50 divided by 1.4 gives you a 36 times forward multiple, and if you were to value Nokia's optical segment at a similar 35 to 40 times multiple, you would get that Nokia is probably worth around $13 a share.** That summarizes a lot of this analysis; you don't have to read it. **We use 40-45 times trailing EBITDA and 30-35 times forward EBITDA to get to a target price, from where Nokia is currently trading around 10.68 after the big AI pullback in the summer, which means that it has about 20% upside. So this one's not as interesting, but it's also one of the lower-volatility AI names. This is not a name that's going to sell off 20-30% in short order, because it does have a pretty stable existing business.** You can see its segment breakdown on page 14 — **the optical networks are growing much faster than the mobile infrastructure** at the bottom of the page — and a roll-up of the company's financials as a combined business on page 15.

## Geopolitical Update: Iran, Saudi Arabia, and Oil Markets - 36:23

Now let's quickly talk about the Iran war and the Saudi escalations in Riyadh and the Bab-el-Mandeb Strait. Before we get into details, **JP Morgan has released a terrifying chart on the world's oil inventories. The stockpiles are in free fall, and if this line, which you can see on page 16, reaches 6.8 billion barrels of oil reserves, then we'll have a serious problem, and oil could actually go much, much higher, and there could actually be a lot of demand destruction.** **The US Strategic Petroleum Reserve has hit its lowest level since 1982.** This decline follows the **172 million barrel release authorized by President Trump earlier in 2026**, part of a coordinated International Energy Agency effort totaling **400 million barrels** to ease supply pressures from the Middle East conflict near the Strait of Hormuz.

The exchanges let companies take oil now and return it later with a premium, aiming to stabilize markets without a taxpayer cost. While some blame past administrations for the vulnerability, and gasoline prices near $4.30 per gallon fueled debate, analysts note that the reserve's purpose is to buffer such shocks, though lower levels cut the margin for future issues. **Globally we've been depleting reserves in Japan, in China and the US; we reached about 7.6 billion barrels in June, and we're now close to 6.8 in September — getting near the operational floor, according to JP Morgan — and that's why JP Morgan is very worried about oil prices going into the winter.**

Over the weekend, tensions surrounding the Iran conflict experienced a significant, sharp escalation, driven by renewed Houthi strikes into Saudi Arabia, threats of expanded US military operations, and escalated disputes over maritime bottlenecks.

**Number one, the escalation in Yemen and Saudi missile interceptions. The capital, Riyadh, was targeted over the weekend.** Iranian-backed Houthi forces from Yemen launched a major strike using ballistic missiles and drones targeting Riyadh, including its international airport. **This represents the first direct threat to the Saudi capital since the recent resumption of the regional conflict.** Although Saudi air defenses intercepted the incoming missiles, residual debris caused fires at a **fuel storage depot near King Khalid International Airport**, causing significant flight delays and diversions. Saudi forces confirmed intercepting the missile over Riyadh alongside **drone attacks aimed at the Red Sea oil export terminal of Yanbu**. In response, Saudi aircraft executed **28 retaliatory strikes** across Houthi-controlled regions in Yemen — Taiz, Al-Jawf and Marib.

**Number two, rapid Houthi coastal offensives. The Houthis have seized the Bab-el-Mandeb Strait, which is the main strait where Saudi sends its oil from its East-West pipeline.** Over recent weeks Houthi forces conducted a lightning offensive capturing key coastal districts including Hays, Al-Kawkah and Dhubab, and **they seized Perim Island, which is in the middle of the strait, giving them a strategic foothold and allowing them to mine the strait — which would be a terrible consequence — and bomb Saudi VLCCs, or supertankers, that send oil through the Red Sea.** This gives them effective operational control over the entire Yemeni Red Sea coastline and the Bab-el-Mandeb. Houthi units have widened operations around Taiz and Marib, pushing government forces back towards Dhubab and Mocha. **Leveraging their control of the coastline, the Houthis have declared an active maritime blockade on Saudi-bound shipping** and are fortifying captured coastal zones with subterranean tunnels and radar arrays. They're basically not allowing imports of other goods and consumer goods into Saudi Arabia as well.

**Number three, escalating Saudi airstrikes and the regional response.** The Saudi Air Force, using American F-15s and Typhoon jets, executed dozens of retaliatory strikes across Houthi-led governorates, including Sana'a, Taiz, Al-Jawf and Marib. Washington issued a stark travel advisory warning that the conflict has the potential to escalate rapidly. **While the US previously declined direct Saudi requests to execute joint strikes inside Yemen, the State Department approved a $24.3 billion sale of 48 F-35 jets to Riyadh.** The renewed campaign has displaced over **112,000 civilians** inside Yemen, with thousands fleeing across the Red Sea to Djibouti.

**Number four, US warnings and threats.** The State Department issued a stark security warning to American citizens, but **what we've learned over the weekend is that the US government might also be sending aircraft to bomb Yemen.** There have been Tehran counter-threats as well: Iranian officials claim intelligence that the US is preparing a renewed bombing campaign against Iranian targets. **The IRGC, which is the source of all our troubles, retaliated with warnings that any strike would trigger painful attacks without limitations** targeting US bases in the region, like Jordan, and naval assets in the Indian Ocean.

**Number five, chokepoint disputes and economic fallout. Hardliners in Tehran are actively resisting pressure from China and diplomatic channels to reopen the Strait of Hormuz, maintaining that the maritime blockade could serve as leverage until seven preconditions are met, including lifting US oil export blockades and unfreezing assets** — the US financial sanctions. So China is trying to put pressure on Tehran as well — not a big surprise, as China is the biggest consumer of oil in the world — but right now Iran is pushing back. Iranian forces claim to have shot down a US reconnaissance drone over the Strait of Hormuz; CENTCOM reported it has directed over **100 commercial vessels** to enforce maritime compliance. **Official Iranian data released over the weekend showed Iran is in a big recession, with GDP contracting by about 10.1% year-over-year** in Q1 of the Persian calendar. **So the US's financial sanctions are having an impact. The problem is the IRGC is not budging yet.**

In terms of diplomatic channels: after leaving Tehran, Iranian Foreign Minister **Abbas Araghchi** stopped in Qatar for coordination before heading to New York for the UN General Assembly, **where I believe he will meet Trump.** Qatar's Prime Minister warned against repeated cycles of escalation and retaliation.

On the graphs on page 18, you can see **China's clean product exports have risen from low levels, as the Chinese teapot refineries are now buying oil again after effectively striking — that's why oil prices were so low during the summer** — and they are now increasing refining capacity and exporting to the rest of the world as well.

**One of the big things that is causing me to be worried is that tanker rates have gone from what was like 50,000 a day to over a million dollars a day.** No one's paying a million dollars on most contracts — those are longer term — but this is the spot market: **if you wanted to charter a VLCC super oil tanker today and you didn't have a contract with any of the big companies, you would have to pay a million dollars a day. That's how tight the shipping market is, because some of these ships have to go all the way around Africa, around the Cape of Good Hope, to get oil into the Indian Ocean.** And that is causing these oil tanker companies to rally. **We owned a number of these companies over the past year, including STNG, Scorpio Tankers, and IMPP, which we still own — Imperial Petroleum, which we think is really, really cheap; that could double. The only issue is that management is a little bit annoying, not the most transparent.** Some other names in the space that are interesting are **DHT, Nordic American, Frontline (FRO), Ardmore Shipping.** And if you look at where names like **STNG** trade right now, they trade at the highest levels of the year — around **87**. **But when you actually look at its valuation, the company trades at only about five times EBITDA; it's going to do a billion and a half of free cash flow this year — basically a 30% free cash flow yield to equity.** The market's assuming these tanker rates will fall, **but the longer the war stays here, the longer these companies will be able to earn obscene amounts of cash. It's a 33% free cash flow yield — that means this company could pay a 30% dividend if it wanted to. Right now it's only paying a 2% dividend. We think, one, it's going to raise its dividend, and two, it's going to buy back shares.**

On page 19, a couple of other things. Saudi oil exports, because of the temporary damage to the **East-West pipeline, which will take about three weeks for the pump station to get fixed and another six weeks for the full pipeline** — and, by the way, the Yemenis can obviously bomb it again — **could cut Yanbu exports by about 2.5 to 2.7 million barrels a day, which is about 3% of the world's oil supply. Saudi Arabia can redirect roughly 3 million barrels a day through Ras Tanura, but that increases reliance on the Strait of Hormuz, which is already a problem.**

So Trump offered to make a deal with Iran, with no response. **Because the FOMC was such a shock, right after the FOMC, when Warsh raised rates, he tried to pretend like he was making deals with Iran, to keep oil prices from rising, because that increases interest rates through the inflation impact — but we haven't seen any deals yet.** Trump over the weekend then said, **if there's no peace, I might make a big decision on Iran** — which he tweeted about today — **which could mean an acceleration of the war ahead of the midterms, which would be catastrophic for the votes going into the midterm elections.** Trump also told Axios he plans to use an upcoming UN meeting with Saudi Arabia, UAE, Qatar, Bahrain, Kuwait and Oman to hear directly from regional allies about next steps, and Pakistan, which has been mediating between Iran and the US, is also going to be at that. **He declined to say whether a decision would come before or after the US midterms, which is a big problem. That's why oil is so high.**

One of the issues of Saudi Arabia's infrastructure being attacked is that **European customers did not receive oil orders for next month. Basically, Saudi Arabia said that they're cancelling oil orders from Europe for October. That's a huge problem going into the winter, because that means Europeans could freeze.** They're already not getting pipeline gas from Russia, so they'll have to pay through the nose to buy gas from the US. There are also reports that **the Khurais oil field southeast of Riyadh may have been attacked**, so this is only escalating. **I'm surprised the market is up — Nasdaq's up 30 bps, S&P up 20 bps. It looks like the market right now is ignoring a lot of the energy risk.** **The US is preparing for large-scale military operations against Houthi forces in Yemen**, according to CNN — the latest that came out this weekend. US security alerts issued Saturday warned of potential flight cancellations, airspace closures and major travel disruptions. This might make real estate really cheap in Dubai. **This war has now been going on — it'll be a year by February of next year — much longer than anyone expected, and Trump still hasn't said when it's going to stop.** President Trump cut short his stay at Camp David and is returning to the White House this weekend, and **Iran has reportedly placed its armed forces on Code 100 alert**, putting the IRGC, regular military and security forces on a heightened state of readiness.

## The European Energy Crisis - 50:17

**If we do see further escalation, oil and bond yields are likely to spike higher together. Markets have been very resilient, so they will encounter another test if we see a breakout above 108 on crude and 5% on the 10-year.**

**There is a European energy crisis coming.** A complete, sustained halt of Middle East oil exports, alongside Brent hovering above **$100 to $110** a barrel and **Dutch TTF gas breaching €75 to €80 per megawatt hour** due to the blockade of the Strait of Hormuz, would trigger a systemic economic and geopolitical crisis across Europe that will lead to stagflation. Having eliminated most pipeline supply from Russia, Europe relies heavily on seaborne energy, especially LNG from Qatar. This energy crisis would have five impacts:

1. **A macroeconomic shock — stagflation 2.0.** TTF at this level would force countries to subsidize energy. Energy carries a high weighting in the European HICP basket; **sustained double-digit energy price growth immediately reverses progress on disinflation, dragging headline Eurozone inflation back towards 6 to 8%.** The ECB and the Bank of England face a severe policy mismatch: inflation requires higher rates, but higher rates exacerbate recessionary contractions. **If they hike into this energy crisis, they will cause a recession across all of Europe.** Markets would quickly price in cuts to save growth, but cuts cannot happen until energy prices fall. **This would cause European currencies to fall in 2027 — and, as you all know, global equities tend to rally when the US dollar falls, and that could be derailed for 2027 if the war continues.** The European economy would shift from sluggish growth to an immediate multi-quarter recession, made worse by rising food prices.
2. **Severe de-industrialization and demand destruction.** As you remember from the Russia-Ukraine war, Europe had to shut down several chemical and fertilizer companies it has not restarted. With Qatari and Gulf LNG blocked, **Europe is forced into an aggressive bidding war with Asian buyers — Japan, South Korea and China — for Atlantic-basin spot LNG cargoes from the US and West Africa. This pushes TTF towards €100 to €150 per megawatt hour in a worst case**, and energy-intensive sectors — fertilizer, chemicals, steel, glass, automotive — reach destruction thresholds where operating cash goes negative. Factories face mandatory output rationing so that people can afford heating. **That will cause a lot of companies in Germany, which are already suffering from Chinese competition, to close down permanently.**
3. **Fiscal pressure and sovereign debt volatility.** The return of energy subsidies means **countries like France will see rising deficits and bond yields going up even more — France's 10-year hit well above four and a half percent, the highest since 2008.** High-deficit, high-debt nations — Italy, Spain, France — face widening spreads over Bunds. The European Commission would likely trigger emergency interventions: mandatory gas demand reduction targets (lower productivity), **windfall taxes, which hurt European energy companies but benefit US energy companies**, and coordinated SPR releases via the IEA — **which we can't keep doing, because we're getting close to the floor in the US reserve and in Japan. China is the only one that still has a lot of room.**
4. **Trade balance and current-account deterioration.** Europe's trade balance collapses into deep deficit as energy import bills swell and industrial exports decline. **Non-Middle Eastern producers like the US, Norway, Brazil and Guyana capture massive capital inflows while Europe suffers a direct wealth transfer out of its economy.**
5. **Geopolitical and policy realignment.** Energy security eclipses the climate transition. **Germany will restart its coal plants and forget ESG. You will start seeing expedited nuclear approvals in France and the UK** if this lasts more than a year. European capitals would press Washington to secure alternative maritime routes, increase US energy export permits and force a diplomatic resolution — **the problem is diplomatic relations between Europe and the US are so bad right now that I doubt anything is going to get resolved soon.**

## European Energy Crisis and Strategic Oil Reserves - 55:40

On page 21 there's a short diagram: **surging energy imports will result in headline inflation spiking above 4%, which will force the ECB to hike interest rates again, which will cause a recession and stagflation** as discretionary income is squeezed and companies are forced to shut down factories.

In the face of this, **France has already called for the release of oil stockpiles. Macron said on Friday he would convene a meeting of the G7 in the coming weeks to discuss the potential release of strategic oil product stockpiles**, as soaring energy prices from the war in Ukraine and the conflict in the Middle East sap growth — to improve coordination on stockpile levels, with greater cooperation on exports and production capacity, and to consider releases in Japan, the US and Europe. I'm sure they'll ask China, but China basically runs its own game.

## Fidelity Weekly Heat Map and Bond Volatility - 56:06

On page 22 there's a really interesting **Fidelity weekly heat map** that looks at next-12-months EPS growth, operating margins, the CNN Fear & Greed Index, AI LLM token prices, **H100 and A100 lease rates, Oracle CDS**, WTI, rates and credit, Fed hike probabilities, high-yield spreads. It's quite an interesting dashboard, just updated last week. **If you follow Timmer, he updates this every week. It's a cool dashboard to look at.**

Also, **bond volatility is back — the highest it's been since May of this year, when you had that oil spike — and we expect bond volatility to continue to be higher than it was in the summer.**

## The Western Debt Crisis and Rising Bond Yields - 57:20

The Western debt crisis. **Oil prices have been one of the key igniters of this bond crisis, but it's also been deficits, and it's been the crowding out of bond issuance by these big AI companies that have issued three trillion of debt over the last couple of years.** Since January 1st of 2025:

- **The Japanese 10-year has gone from 1.09% to 3.03% — 193 bps — which is quite scary.**
- The French 10-year from 3.19% to 4.55% — 135 bps.
- The German 10-year from 2.36% to 3.57% — 120 bps, not as bad.
- Italy from 3.52% to 4.47% — 95 bps.
- **The UK from 4.57% to 5.43% — 86 bps. At 5.43%, with mortgage rates in the high single digits, it's very hard for real estate prices to go up. In fact, real estate prices are going down all over the UK.**
- Canada from 3.22% to 3.96%, and the US a 46 basis point move.

Everyone talks about the US because it's the global benchmark for 40 trillion of debt, but as you can see, **Japan is the biggest move.** **The US 10-year is the highest since 2007, the US 30-year the highest since 2004, the Japanese 10-year the highest since 1996, the UK 10-year the highest since 2007, the French 10-year the highest since 2008, the German 10-year the highest since 2009.** The rapid simultaneous surge in Western yields — **the US 10-year crossing 5% for the first time since 2007 and UK 30-year gilts touching multi-decade highs near 6%** — is being driven by a triple whammy of structural supply, geopolitical energy shocks and shifting central bank expectations.

## Factors Driving High Inflation and Interest Rates - 59:44

The energy shock and resurgent inflation fears, with Brent in the 100s, act as an immediate tax on growth. **Instead of proceeding with rate cut cycles, markets are now rapidly pricing in rate hikes, with the US market pricing in three hikes** — Fed hikes and multiple Bank of England increases — pushing short- and long-term borrowing costs up across the board.

**Fiscal deficits and massive debt issuance.** Higher energy prices are causing more energy subsidies — in Germany they're actually slashing the gas tax — which means governments bring in less revenue and issue more debt. Governments across the US, UK and Europe are running **historically massive peacetime budget deficits: 4% of GDP in the UK, a 40 trillion sovereign debt pile in the US with a deficit over 6%, and almost a 6% deficit in France.**

Western treasuries are flooding primary markets with unprecedented volumes of new debt to fund public spending, defense budgets and energy subsidies. **Massive corporate debt issuance — tech giants funding hundreds of billions in AI data center and energy capex — is competing directly with sovereign paper for institutional capital, forcing yields higher.** **Norway, which has one of the biggest sovereign wealth funds in the world, basically sold 80 billion dollars of US Treasuries and government bonds. And the same thing is happening in Japan, because they're using these funds to support the yen. That's basically 160 billion dollars of demand that has evaporated for US Treasuries, which has to be replaced by US banks and US citizens. That's not going to happen overnight, which is why yields have been going up.**

## Shifting Central Bank Policies and Bond Market Dynamics - 01:01:32

There's an expanding term premium and a buyer retreat. For over a decade after the great financial crisis, central banks were price-insensitive buyers of government debt via QE. That backdrop has reversed: **we're seeing quantitative tightening; central banks are shrinking their balance sheets or letting bonds mature without reinvestment, removing a primary buyer from the market. And that's why Bessent is issuing short-term debt to buy long-term debt, because the Fed is not doing it.**

There's also demand for a higher term premium: bondholders demand significantly higher compensation to lock up capital for 10 to 30 years in the face of volatile inflation, election and budget uncertainty, and currency debasement risk. **Yield spikes in one major currency block immediately spill over to others as global asset managers reallocate. If Japan sees a JGB spike, that's likely going to result in the US spiking; if the US sees a 10-year spike, that's likely to result in the German 10-year spiking.**

**With the Bank of Japan hiking rates towards 1.25%, bringing the 10-year JGB yield to 30-year highs above 3%, Japanese institutional investors — traditionally massive buyers of US Treasuries and European paper — are repatriating capital into domestic yen assets, as the Japanese bond is now more attractive than European and US bonds on a risk-adjusted, FX-hedged basis.**

**Markets are increasingly accepting that the 2008 era of zero interest rates is permanently over.** Real yields are rising as investors price in higher baseline growth, AI capital intensity and structurally higher rates over the next decade. You can see the German and Japanese 10-years on page 24. **Bond positioning on the short side is near extremes last seen since the taper tantrum of 2018, while equity positioning, on the next page, is near extreme highs, which is kind of counterintuitive.**

## UK Gilt Market Crisis - 01:03:33

In the UK, **the gilt market is in crisis. Britain is now halfway into a crisis after it announced that it's reversing its quantitative tightening program** — effectively holding QE-based monetization in place to stop rates from rising. **UK energy bills are expected to spike 25%**, increasing inflation rapidly. **And just last week the UK fiscal authority said they're no longer going to sell 20- and 30-year gilts. They're basically stopping issuance of 20- and 30-year bonds altogether. If you understand how insane that is — imagine if the US tomorrow said, we're just not even going to sell 20- and 30-year bonds. It would sap all of the supply, and all these insurance companies would have nothing to buy.** That's effectively what's happening in the UK. There's no growth and you have an energy crisis, so they're basically saying they simply can't even issue 20- and 30-year bonds — they're too expensive. **That's a really bad thing for UK-based insurance companies.**

## Stock Valuations and Market Extremes - 01:04:59

**If you compare the S&P 500 free cash flow yield to the 10-year Treasury yield, stocks are the most expensive versus bonds that they've been in 26 years.** That's what the graph on page 26 is showing you, in a very simplified way.

After the UK announced it's not selling 20- and 30-year bonds, it actually did help their market: **the UK 30-year gilt rallied and yields fell 11 basis points in basically a few minutes, the largest single-day drop since May 20th.** 30-year yields had spiked to almost 6%, multi-decade highs, and they felt they needed to do this. The 10-year dropped about seven basis points, while policy-sensitive two-year yields only fell four.

## AI Industry Slowdown and Hedge Fund Positioning - 01:06:04

There's also been news about hedge fund positioning going into an AI slowdown. **We've seen estimates of AI capex effectively peak. We've been growing 30% a year, and finally people are saying that pace might slow down if OpenAI and Anthropic both delay their IPOs, because they need to raise money to spend on all this capex.**

The AI debate took a sharper turn this weekend with **Dario pushing for a slower pace of frontier model development.** It comes at a difficult time, as investors had just started leaning back into the trade after the Situational Awareness blow-up in the summer. **Goldman Sachs' PB shows hedge funds had bought US TMT in 10 of the last 11 sessions, led by semis and semi-equipment, right into this slowdown, with the two-week pace of long buys in the 97th percentile of the last five years.** So hedge funds, after Situational Awareness, scrambled to buy semiconductor stocks, only to be blown up in the middle of September again. **The sell-off in semiconductors hasn't been that bad, but there hasn't been the rally that everyone expected.**

## Michael Burry's Take on AI Industry Self-Interest - 01:07:25

On page 27, **Michael Burry adds his few cents.** Anthropic, OpenAI and Google have been holding talks about working together to create an **AI industry standards body** — and I think today Trump also mentioned hiring a new AI czar. This is from The Information. The talks started before Dario Amodei called last Saturday for AI companies to coordinate on testing and auditing. **Sam Altman told a staff town hall that he supports a testing and auditing organization for the AI industry.**

**A lot of people are saying this is happening because these guys want the US to effectively intervene and stop the usage of Chinese AI models, which are a lot cheaper than US AI models.** Sam believes the major AI labs would have to create a standards body on their own, without the support of the US government. The working group meetings between Anthropic, OpenAI and Google are ongoing, according to The Information; the group met as recently as the past week.

Michael Burry says: **"Let's take a moment to understand how self-serving it is for OpenAI, Anthropic and other execs like Elon Musk, a big hyperscaler, to talk about slowing things down."**

1. **LLMs are not AI and won't be AGI. AGI is still some time away — I agree with that.** There's nothing AI to slow down. He thinks these companies have already accomplished a lot, and the incremental dollar they're spending is not going to really improve revenue.
2. **Competition is coming up fast, slowing the benefits to incumbents** — like you see with these Chinese models.
3. **IPOs need hype and puffery.** These companies need to say, we're so awesome it could become dangerous — and by saying AI could be a danger, that supports their hype-and-puffery thesis.
4. **It could be cover for a real, uncontrollable slowing, as these IPOs look to be pushed out further and further, into the end of '26 and '27.**

## Satya Nadella and Trump on AI Regulation - 01:09:34

**Microsoft CEO Satya Nadella also said that we should slow down — because he's spending a lot of capex as well, and maybe these companies realize that, in order to generate profit, they need to slow down the pace of spending.** He says any pursuit of superintelligence has to be grounded in the core principle that if the AI we build is not helping humanity and under human control, it's not worth pursuing; we also need to spread the benefits broadly across countries, communities and companies; this requires a frontier ecosystem in which both closed and open-source models can thrive; firms must retain full control over their unique and tacit knowledge, able to build their own continuous learning loop "without becoming dependent on any one model provider." **"So in this context, we welcome the research focus and deliberate pacing needed to get alignment right as the design goal"** — and the key is that this cannot be controlled by a handful of entities but must have broad representation, including academia.

Basically, all of these companies are saying we need to slow down. **But Trump responded to the AI slowdown** in an interesting post: the only control or guard rails AI needs is "a strong and smart, high IQ president," and the USA has that in spades. The Trump administration has stopped AI people from doing bad or potentially bad things — like Dario, "who is now pretending to be a perfect little angel" — "we already have tremendous criminal and regulatory power over these companies" (they only kind of do); "there is a sick conspiracy going on against AI and data centers, and the only one that is happy about it is China. Whoever wins AI wins." **This part is true.** "Conspiracy theorists, treasonists, traitors and leakers, beware." There are a lot of very ridiculous tweets like this over the past week. **There was a little bit of truth in that we do have to beat China, and the AI companies are self-serving, but I do think there needs to be at least some cybersecurity oversight and someone looking at safety.**

## Market Analysis: Overinvestment in AI and S&P 500 Performance - 01:12:04

Market participants are starting to see over-investment in tech. After that small pullback in the summer, **the most recent BofA Global Fund Manager Survey says about 37% of investors think companies are over-investing in AI. Goldman is saying if capex were fully expensed, consensus 2027 EPS estimates would be about 22% lower than under current accounting rules** — this depreciation-extension thing is one of the things driving profitability.

**Only 36% of S&P 500 stocks are trading above their 50-day moving average, and yet we're only 2.5% from all-time highs. That says something.** A lot of companies are not performing well, especially consumer companies. **Look at restaurant stocks — Wingstop is at multi-year lows. There's a very small group of stocks keeping the overall market higher.**

## FOMC Aftermath: Rate Hikes and Market Reactions - 01:13:03

Let's briefly talk about the FOMC aftermath. **We've raised interest rates 25 bps over the past week — the first policy move of Chair Kevin Warsh's tenure — raising the policy rate to the 3.75 to 4% range. This change did not come as a shock. Bond markets had been pricing in a rate increase well in advance, with the 10-year Treasury up 1% from its February lows.**

What made last week's move different from prior liftoffs was **the lack of guidance about where and why rates are likely to move from here. What problem does the economy have that higher interest rates will solve? Higher rates cannot fix oil prices.** As we detail below, the path forward is unusually murky. Navigating between avoiding recession and controlling inflation, while keeping the bloodshed to a minimum, is the Fed's mandate; the Fed rarely embarks on a serious mission to bring down inflation unless it's willing to inflict some pain. Whether its efforts will draw blood this time depends on how committed the FOMC is to its 2% target. **The FOMC in the dot plot doesn't expect 2% PCE until 2029 now. So there isn't a lot they can do to get inflation down this quickly.**

The Federal Reserve is back to hiking. While Chair Warsh's less communicative approach is likely to create greater structural uncertainty, this meeting's outcome was not in serious doubt. Various Fed officials, including Warsh himself at Jackson Hole, had laid out inflation benchmarks that need to be met. **After the August CPI and PPI reports both came in hotter than expected, this month's hike was close to a certainty.** The FOMC's projections — which do not include Warsh's views — showed stronger growth in labor markets through 2027 and higher inflation in 2026. **I didn't think they would have to hike, but my view is that the resurgence of the Iran war is what tipped them over in August.**

At the same time, **the median FOMC member expects only one more rate increase this year, and most members expect the committee to start cutting in the next few years.** With a day or two of reflection, the market's reaction has been largely positive: **stocks were shaken on Wednesday afternoon but recovered strongly on Thursday, led by technology, whose earnings growth is perceived to be less cyclical and more structural.** Short-term rates increased as more hikes were priced in, but **the long end stabilized around 5%. This flattened the Treasury curve, a sign that monetary policy is tightening again.**

## The Impact of Rate Hikes on the Economy - 01:16:07

On page 33 — what are rate hikes going to accomplish? It's hard to say how a brief and gentle tightening cycle would bring inflation down, particularly when the economy is growing above trend and the labor market is at full employment. **Markets are pricing in three more rate hikes over the year, but nothing close to the move the Fed had to make in 2022 and 2023**, when inflation problems were larger and the labor market was clearly overheating — which resulted in basically a 20% decline in the market in 2022.

**The disinflation of 2022 to 2025 has stalled and partly reversed, mostly for reasons beyond the Fed's control. Durable goods and energy inflation remain higher than normal because of tariff policies and geopolitics created by this administration.** If the Fed wanted to fully return PCE to 2%, it will have to inflict pain on the sectors most sensitive to interest rates, like commercial and residential real estate.

- **Housing:** the years-long period of rent disinflation is ending. Hikes could deter builders from adding supply and keep homeowners locked into their low fixed-rate mortgages — but the sector's contribution to overall inflation is already quite low.
- **Labor (page 34):** hikes could soften the labor market if they disincentivize hiring, but wage growth has already been decelerating for years — **it has failed to keep pace with inflation for most of this year.**
- **Financial conditions:** hikes could send corporate bond spreads higher and equities lower, dampening the wealth effect. **But it would arguably be the most painful way to lower inflation, as all of the voters would be furious at the current administration.** Nothing in the Fed's forecast or commentary says this is the path they want to go down yet.

## The Possibility of Disinflation and Market Outlook - 01:18:24

Is disinflation possible? **The true bull case for markets is that inflation comes down gently without any offsetting weakness in growth. Believers in this "immaculate disinflation" expect inflation to ease without the pains of weaker growth and higher unemployment**, and they can credibly point to the last cycle — but it's not guaranteed. The prior cycle had four helpers: the one-off post-COVID shocks would likely have dissipated with or without hikes; **a wave of migration dramatically expanded the labor force**; households had amassed considerable savings; and residential construction was white-hot in 2021-2022, creating supply in fast-growing areas like Texas and Florida.

**A swift resolution to the Iran conflict and a freer flow of oil through Hormuz could undo much of the inflationary damage of the past six months** — we'll leave it to military and diplomatic experts to say whether that's likely soon — **but commodity futures markets have been too sanguine all along about the impact the conflict could have on oil prices.**

While many households retain an ability to spend, **a growing number are falling into delinquency on their mortgage and auto loans for the first time in many years, which suggests even a small upward move in rates could do more damage for households under stress.** You can see consumer loan delinquencies of 90 days or more spiking after this administration restarted student loan payments. **Credit card delinquencies are the highest they've been in about 18 years, at about 13% — the highest since the great financial crisis.** **The US civilian labor force has also been shrinking because of a lack of immigration, from 172 million down to 170 million**, which has kept wages from falling quickly. And the data for new home construction comes in historically weak, so any further moderation in shelter inflation likely needs to come from softer demand.

**We do not see the same helpful confluence of factors that helped the economy avoid a recession in 2024 returning in 2027. If anything, the tailwinds have turned into headwinds. That means one of two things is true: either rate hikes will have a more negative effect on growth than in the prior cycle, or they will be insufficient to meaningfully bring down inflation.** We highly doubt the Fed currently has the will to meaningfully slow the economy and crush inflation. **This could mean inflation stays elevated in the 3 to 3.5% range for the near term** and introduces a greater risk that the Fed could be seen as falling behind the curve.

## Investment Strategy: Bonds vs. Stocks - 01:22:05

If there's good news about the inflation risk, it's that **investors are finally being well compensated for taking it. As rates have risen sharply from their late-February bottoms, we have become more constructive on bonds. Taxable-equivalent yields for muni bonds currently exceed those on investment-grade corporate bonds, even though historical muni default rates are lower. So muni bond closed-end funds are quite interesting.**

**We've even been adding to PDO, PDI and PAX, the PIMCO funds, which now trade at discounts to their NAV, which they haven't in many months. I've been adding to PAX and PDO. They trade at like 5% discounts to NAV and they pay about 13% monthly dividends. So that is a low-volatility way to take advantage of this interest rate hike, and the average duration on those bond funds is also lower than TLT, but they do have a little bit of leverage.** 13% a year, paid monthly, isn't that bad, especially at a discount to NAV. **For those who can take a little bit of risk, you can earn basically twice what you can earn in munis** — while munis are a lot safer — by looking at closed-end funds like that.

**If Fed hikes significantly weaken the economy, by accident or by design, we think interest rates could actually fall and bonds would be among the best-performing asset classes.** But even without price appreciation, **bonds' current coupons make them competitive with stocks. The long-term return outlook for bonds rivals that of stocks for the first time in about 25 years** — you can see it in the equity risk premium of the S&P 500 versus the Bloomberg US Aggregate. We caution against using valuation as the sole basis for decisions; valuation is not reliably predictive short term.

We were encouraged by the stability at the long end after the hike — long-term yields often reflect what the Fed is going to do before it does it. **Absent a major inflation shock from the Middle East, or a surprisingly hawkish turn from the Fed, we see rates across the middle and long end as likely close to their peaks.**

We remain constructive on the economy and the investing environment. **A short and shallow hiking cycle, even if it ends with inflation slightly above target, should be fine for earnings and keep valuations supported. Valuations have actually been coming down because earnings have been growing faster than stock prices this year — the forward P/E is around 19 times, versus around 23 times last year. So there isn't a lot of downside in equities — maybe 10%, versus the 22% we saw in 2022 — if the Fed hikes a few more times.**

But investors should pay attention to how they're being compensated. **It may be a good time for investors whose portfolios have fallen out of balance with overexposure to stocks to allocate more to closed-end funds and more to bonds. A lot of prefs have sold off. We've also been adding to RWT and RWTQ — those are also double-digit yields. So there are six names we've been adding to just on the income side, and we're going to try to find more baby bonds to buy.** I've been focused right now more on interesting mid-cap stocks, **but RWT, RWTQ, PDO, PDI and PAX are just some examples of where you can earn 13% without taking a boatload of risk.**

## Daily Market Recap and Analysis (Week in Review) - 01:25:58

**We saw some insider buying in Uber last week. We didn't add much of Uber, but it's very interesting that Andrew Macdonald and Dara Khosrowshahi, the CEO of Uber, bought about 15 million worth of stock in the first two weeks of September. So if they continue to buy — Uber's trading near the lows of the year — we might increase some exposure there.**

There's also been food price commentary from companies like **Campbell's, where the CFO said last week that they can't just keep cutting costs; they're going to have to raise prices on packaged food. This is a big problem.** Evercore said its food input basket is showing sharp acceleration in grain-based commodities like wheat and corn, resins and freight, and as a result **it's lowering EPS estimates for CAG, KHC and CPB, because their input costs are going up — which means over the next six months all these companies are going to have to raise food prices.**

The consumer is surviving so far because they're borrowing more, incomes have been okay and stocks have been going up. **But if food prices go up into next year, the poor could be in a very difficult situation.** Last week's strong August retail sales report was driven by high-end consumers and **pushed the Atlanta Fed's GDPNow to 5.1%**, the highest in the last few quarters — and in the breakdown at the bottom of page 41, **private investment in the form of AI spending is more than half; consumer spending is a little less than half.**

You can see how the market usually sells off on the FOMC — **for the three Warsh Fed meetings, the market sells off every time. But in this case, on Thursday, the market did rally.** Pages 42-46 have my thread of Warsh's speech, the statement side by side (what changed from July 29th to September 16th), the projections and dot plot, and **the pace of this shallow hiking cycle versus the prior cycles — '22-'23, the '94-'95 Greenspan cycle, the 2004-2006 Greenspan-Bernanke cycle that ended in the 2008 crash, and the 2015-2018 Yellen-Powell cycle. This is the most calm hiking cycle of those.**

On page 47 we have our daily market recap:

- **Monday — a clear AI rotation: long software, short semis.** ServiceNow, Adobe and Intuit up 2-5%, while CoreWeave and Intel were down 3-5%, along with Sandisk, Marvell and Nvidia — the market repricing the AI trade after the weekend's safety debate around Dario's essay. **Semis and neoclouds sold off the most because their bull case is tied directly to continued AI capex growth.** Oil crossed 105 and the US 10-year crossed 5%. **Palantir, Nvidia and Booz Allen Hamilton are reportedly restricting Anthropic's Fable model for sensitive work** over data-retention concerns. Trump called Jensen Huang during the All-In Summit and was put on speakerphone, **calling this whole AI slowdown a hoax.** OpenAI acquired Glass Imaging (DSLR-like smartphone image quality). **Truist initiated Nvidia at a buy with a 355 target** on higher pricing for one-to-three-year deals. US consumers aged 40 to 49 now account for **27% of new consumer bankruptcies**, the highest share since 3Q15. **JPMorgan upgraded IREN to overweight and raised its target to 65 from 46**, calling it a top-tier neocloud — **we think IREN is one of the better ones versus MARA. We don't own IREN; we own one of its competitors in the alerts.** **Global semiconductor revenue hit a record 425 billion in Q2 2026, up 31%**, per Omdia — 752 billion in the first half, about 1.5 trillion annualized. Apple is rolling out its new Siri AI in iOS 27. **US diesel rose to $6.20 a gallon, up 78% in nine months — very bad for trucking; California diesel a record $8.14. Trucking prices will eventually come into food and consumer goods prices, which is not being covered well in the media. Jet fuel is at $4.35, and airfares were up 23% year over year in August.**
- **Tuesday —** the Clarity Act failed to advance in the Senate on September 15th, short of 60 votes; **despite that, crypto had a short-term sell-off and then rallied strongly in the back half of the week.** Elon at the All-In Summit: odds of catching Starship on the first try "at least 50 to 60%," and full reusability likely in 2027 — a bold claim. **Grab will acquire a 60% stake in Atome Financial for 1.5 billion in cash.** Global yields broke out to 2007 levels. **Saudi Arabia suspended all oil loadings at Yanbu — that's when oil started to go up very quickly.** Mark Zuckerberg said he didn't think the AI industry needed a coordinated pause. Long-term unemployment continued to rise in August.
- **Wednesday (page 50) —** the 25bp hike; Warsh said it "removed a dose of accommodation" and shows the Fed is serious about restoring price stability. **Generac signed a long-term agreement to supply backup power to Amazon data centers. Nvidia announced another 20% price increase on H100, H200, B200 and B300 GPUs effective October 1st**, which led the stock a little higher. Officials considered a meeting with AI executives on the sidelines of Xi Jinping's Washington visit next week. Chipotle partnered with Palantir on food-safety monitoring — very strange. **US home builder confidence fell to 32, its weakest since 2022 — that's why we'll be watching home builder earnings this week. Nokia is expanding AI-RAN trials with operators in North America, Europe, Asia Pacific and the Middle East — one of the reasons Nokia did well despite the AI pullback. One of the reasons we like Nokia: it keeps announcing new contracts.** Apple is weighing a return to the server market with an AI system on its M-series chips and Nvidia's NVLink Fusion. **CoreWeave signed a 15-year anchor lease with BlockFusion** at its Niagara Falls campus.
- **Thursday —** Trump told Axios "we have a big decision coming up" on Iran. **OpenAI disclosed that an unreleased Astra-family model showed rare signs of misalignment during reinforcement learning — six concerning incidents over six months**; there was also a Gemini report of hacking three companies. SpaceX reportedly discussed buying customer and operational data from defunct startups to grow Starlink. **The SEC issued an innovation exemption allowing on-chain trading of US-listed stocks through tokenized security venues (TSVs) — Coinbase and Robinhood rallied strongly.** **AMD reportedly notified partners of a 10% price hike tied to higher TSMC wafer costs. CoreWeave signed short-duration Q3 contracts at $40 million per megawatt — another price increase. And Nokia and Microsoft are expanding their partnership to bring agentic AI into telecom network operations — another Nokia deal.** **BofA estimates Meta could save roughly 8.5 billion in 2027 with its own AI chips** (MTIA 450 in 1H27, MTIA 500 later, both with Broadcom; 5-6 GW of own capacity at ~200 billion). **Meta still seems like it's spending way too much on AI.** US real median household income rose about $2,200 (2.6%) in 2025 to **$87,460**. **The SPR fell another 403,000 barrels to 285 million, its lowest since November 1982 — the 25th consecutive weekly decline — down 131 million barrels, or 46%, over the stretch. The SPR held roughly 650 million barrels in 2020, more than 128% above current levels. I don't think people really understand how much the SPR is down.** **US margin debt surged 37 billion in August to 1.45 trillion, the second highest on record — up 228 billion (19%) year to date, more than the stock market rally, and up 847 billion (140%) since the end of 2022 versus the S&P's 98%. Margin debt is now 4.5% of US GDP, nearly double 2022 and above the 2021 peak of 3.6% and the dot-com peak of 2.8%.** Just something to keep in mind.

## Crypto Resilience and Q&A - 01:40:45

The last page before Q&A is some reflection on **crypto surviving negative catalysts. While crypto will be volatile if oil prices go higher, crypto might have seen a near-term bottom in June, July and August, because Bitcoin just absorbed five major bearish headlines in a single week: the Clarity Act failed in the Senate, the Fed raised rates, the Bank of Japan raised rates, the US dollar rose above 100 for the first time in seven weeks, and oil is climbing. Despite all five, crypto was strong.** I'm not saying this is an actual bottom, but after the bearishness from October to August, the market is now looking forward to 2027.

## Q&A Section

## Recap and View on Corteva (CTVA) - 01:41:34

Melmel is asking: "Would you give a short recap of Corteva with your view? I have neglected this and thank you for the reminder. I'm still in the green but admonishing myself for not paying attention." **I will follow up on this. We talked about the Corteva spin-off briefly on this call; because it's a little bit late, I will spend more time on Corteva on our following call, maybe next Sunday.** I haven't spent much time on the spin-off, but I will need to recap myself. **We do own some of these ag names and fertilizer names.** [He returns to Corteva at 01:45:24.]

## Outlook on Sea Limited (SE) - 01:42:21

Steve is asking: "Sea Limited is down 30% from its recent intermediate high of 130 and hit 100 on Friday. Is this one still an add, or has something changed with its outlook? Q2 revenue miss apparently on August 14th, and insider sales." **I have added to SE, as you know, this year. I think the earnings were a slight disappointment, but the company is still one of the strongest gaming and e-commerce growers. Around $100 a share, with 5 billion of expected EBITDA in 2027, it's trading at about 11 times EBITDA for a business that's growing 30 to 40% a year.** It should do about four and a half billion of free cash flow in 2027 based on estimates; it's already at 4.4, so it's basically free-cash-flow flat — you can even use 2026 at 4.4 billion. **4.4 billion divided by a $62 billion market cap is a pretty healthy 7% free cash flow yield for a business growing this quickly. I still think the company is cheap. I wouldn't make it a very big position yet, because I think it still will be volatile. The market's going to be looking at Q3 for an acceleration. The insider sales don't make a lot of sense to me. I will continue to add to the stock at 100 and under 100. It's probably one of the cheapest growth stocks of its size.**

## Potential in Shipping and Tanker Stocks - 01:43:58

Molly's Chamber is asking: "Seems like shipping stocks like Eco, TRMD have had a big run. Do you still think there's some more juice to squeeze?" **I think of tanker stocks as basically a hedge to the portfolio. If this war lasts longer than we expect — right now the market is only expecting one year of super-high earnings for these names — if earnings extend at these margins into 2027, these companies are going to generate so much cash that they'll be able to pay off all their debt.** For example, **Frontline and STNG: if they were to generate as much cash next year as this year, not only would they be able to pay off all their debt, they would be able to pay 20-30% one-time dividends.** So it really just depends on the war, and **I wouldn't add them now as an outright long. I would add them as one of the few ways to actually benefit from the war extending. With oil it's difficult — the federal government, with SPR releases, could manipulate the price of oil short-term. But these tanker companies' cash flows are growing at an insane rate, and as some of the older contracts roll off, they don't even need tanker rates to go higher from here. They just need the older contracts to roll off at higher rates, and they'll be even more profitable next year than this year.**

## Deep Dive into Corteva's Business Model - 01:45:24

Going back to Corteva, because I answered that question quite quickly. **Corteva is a pure-play agricultural technology leader, spun off from DowDuPont back in 2019** — this is from my notes from last year. It's widely regarded as a high-quality moat business within industrials and materials. The quality stems from its **proprietary germplasm — intellectual property around seeds — high switching costs for farmers, and a structural margin inflection via royalty economics**, in a resilient dual-segment business model.

- **Barriers to entry:** its proprietary genetics or seed segment is **about 57% of total revenue**. Corteva owns unmatched multi-generational germplasm libraries, like the **Pioneer** brand, built over 100 years. Developing competing germplasm with equivalent yield, resilience and regional climate adaptation takes decades and billions of capex. **People say, what about AI? Well, their seeds are proprietary. Unless you were to actually break down their seeds and compare them to thousands of others and upload that data into AI, you really can't replicate this. And they've licensed it, so if you copy it one for one, you're going to have a lawsuit.**
- **Biotech trait licensing:** the flagship weed-control system **Enlist E3** protects soybeans, and **Enlist corn** is resilient to weeds; it has captured dominant share across North America. **Over 100 independent seed companies license Corteva's genetics** — so because they license them, you can't really copy them.
- **A structural inflection in royalty economics: in 2026, Corteva crossed a critical threshold, flipping from a net royalty expense to a royalty-positive company. This creates pure high-margin cash flow expansion that's decoupled from acreage fluctuations.**
- **Pricing power: farmers buy yield, not commodity inputs.** Because seed choice dictates a farmer's entire annual yield and revenue per acre, farmers are highly risk-averse to switching away from proven seeds. **Corteva achieved +3% price-mix in seeds across all regions, even during periods when farm commodity prices are depressed** — even when farmers are stressed, because it's so important.
- **Crop protection is about 43% of sales**, shifting from generic post-patent chemicals toward proprietary biological and spinosyn-based insecticides — **margins around 22-23% for a commodity product, and it generates about 3 billion of free cash flow.**

**Overall the business itself is quite good, but the planned separation is going to make this seed business, I think, valued higher than before**, because before, the whole business was valued as an insecticide/seed/agricultural conglomerate. **If the company can separate the seed business from the risk of lawsuits from the PFAS business** — a segment where they entered a defined payment settlement for PFAS liabilities — **the seed business could be worth more. That is why the stock has been rallying this year.** There have been some sharp declines in global corn and soybean spot prices, which have squeezed farmer net income, and some generic chemical pricing pressure, particularly in Latin America and Asia, but the seed business has been able to raise prices despite that. **It's a gem of a business.**

And on SE, I wouldn't add a lot — **I'm still an adder**, and it is very cheap optically, **but you need the company to actually beat in Q3 for it to start inflecting above 120.**

Thank you guys for listening to the call. **We talked about three longs, and one that we're monitoring, which is Eaton — but the longs like EXE, Nokia and Waystar are more actionable. We talked about income names that we've been adding, like RWTS, RWTQ, PDO, PDI and PAX. So across the call we talked about at least eight names that are actionable.** We're trying to help you navigate this market. The recording will be up very shortly. We'll talk to you all next week.