Pay Attention: Musk xAI-Nvidia Circular Deal, Oracle Report Shows Lower Margins on Renting Nvidia GPUs

To gain an edge, this is what you need to know today.

More Red Flags For Investors

Please click here for a chart of Oracle Corp (NYSE:ORCL).

Note the following:

This article is about the big picture, not an individual stock. The chart of ORCL stock is being used to illustrate the point.
The chart shows that ORCL stock has pulled back after out of this world projections for new revenue to be generated from AI infrastructure primarily by renting out NVIDIA Corp (NASDAQ:NVDA) GPU based servers.
A new report states that over the last three months on $900M of rentals Oracle generated gross margins of $125M or 14%. The expectations of credible analysts are about 25% gross margins. Many momo gurus are touting over 50% margins and pumping stocks such as Nebius Group NV (NASDAQ:NBIS), IREN Ltd (NASDAQ:IREN), and Cipher Mining Inc (NASDAQ:CIFR).
In our analysis, if a well healed player like Oracle with the tremendous connections of its founder Larry Ellison cannot generate the expected gross margins, the projections for lesser players that are being pumped may be overblown.
On top of the gross margin red flag, we have previously shared with you the red flag of circular financing. Circular financing continues to accelerate. Nvidia is going to invest $2B in Elon Musk's xAI. xAI, in turn, is going to buy Nvidia chips. Previously, Nvidia announced an investment in OpenAI. In turn, OpenAI is buying chips from Nvidia and renting AI servers from Oracle. Oracle is buying chips from Nvidia.
Prudent investors need to be concerned about circular financing because in circular financing the same dollars are counted multiple times by different companies. The 2000 crash in tech stocks when Nasdaq lost 78% was, in part, due to circular financing led by the most popular stocks of the day such as Lucent and Nortel.
As you may recall, we were one of the first to come out of the gate in 2022 and state with conviction that AI was real and a fortune was to be made in AI all the way to 2030. It will not be a straight line. At times, it will be treacherous. Along the way, there have been several times when the market thought the AI trade was done. But as you know, we held firm in its conviction. Our every macro call on AI so far has proven spot on.
The FOMC minutes are scheduled to be released at 2pm ET and may be market moving.

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks. For this reason, to get ahead and get an edge, investors need to dig below the surface of the Mag 7 stocks. It is equally important to rise above the noise of daily news on the Mag 7 stocks. The best way to get an edge, dig below the surface, and rise above the noise of the daily news is to pay attention to early money flows in the Mag 7 stocks on a daily basis. When there is significant news in the Mag 7 stocks that rises above the threshold of noise and impacts your entire portfolio, it is covered in the main section above.

In the early trade, money flows are positive in Amazon.com, Inc. (NASDAQ:AMZN), NVIDIA Corp (NASDAQ:NVDA), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are neutral in Meta Platforms Inc (NASDAQ:META) and Microsoft Corp (NASDAQ:MSFT).

In the early trade, money flows are negative in Apple Inc (NASDAQ:AAPL) and Alphabet Inc Class C (NASDAQ:GOOG).

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ. Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil. The most popular ETF for gold is SPDR Gold Trust (GLD). The most popular ETF for silver is iShares Silver Trust (SLV). The most popular ETF for oil is United States Oil ETF (USO).

Oil

API crude inventories came at a build of 2.78M barrels vs. a consensus of a build of 2.25M barrels.

Bitcoin

Bitcoin (CRYPTO: BTC) is range bound.

What To Do Now

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider a protection band consisting of cash or Treasury bills or short-term tactical trades as well as short to medium term hedges and short term hedges. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges. The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive. If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

A protection band of 0% would be very bullish and would indicate full investment with 0% in cash. A protection band of 100% would be very bearish and would indicate a need for aggressive protection with cash and hedges or aggressive short selling.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash. When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks. High beta stocks are the ones that move more than the market.

Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of five year duration or less. Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.