Action Plan for Prudent Investors After Eye Popping Oracle AI Numbers and PPI Shocker

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

Eye Popping AI Projections

Please click here for an enlarged 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 the price action in ORCL stock after the company reported earnings.
• The chart shows ORCL stock is gapping up over 30% as of this writing in the premarket.  It is unusual for the stock of a large company like Oracle to move 30%.
• RSI on the chart shows that ORCL stock is now overbought.
• The chart shows very heavy volume yesterday.  This indicates a battle royale between bullish and bearish investors prior to earnings.  One of the reasons the price move is so explosive after earnings is that those investors who sold short yesterday are now scrambling to buy to cover as a short squeeze takes hold.
• Oracle AI projections are eye popping and leaving investors in awe.  Here are the key points:
  • Oracle got into the cloud infrastructure business when Amazon.com, Inc. (AMZN), Microsoft Corp (MSFT), and Alphabet Inc Class C (GOOG) could not provide enough capacity for AI.
  • Oracle reported earnings lower than the consensus and whisper numbers, but that has been overshadowed by projections.
  • Oracle is projecting its infrastructure revenue to jump to $18B from $10B last year.
  • Oracle is projecting infrastructure revenue at $32B in 2027, $73B in 2028, $114B in 2029, and $144B in 2030.
  • The remaining performance obligations are now at an eye popping $455B, an increase of 359% year-over-year.
  • Oracle's MultiCloud revenue increased by 1529% in Q1.  Oracle expects this revenue to rapidly grow every quarter.
• In our analysis, if Oracle's projections turn out to be accurate, the spend on AI to 2030 will be more than the consensus at this time.  However, such spend will be inline with our call from 2022 about making a fortune from AI all the way to 2030.  Prudent investors should not ignore the risk to the downside if Oracle's projections turn out to be wrong.  Back in 1999, many companies were issuing multiyear eye popping projections similar to the projection seen from Oracle now.  Such projections caused a melt up in the stock market in 1999, but when the projections did not materialize, tech stocks crashed in 2000.
• Producer Price Index (PPI) was a shocker.  PPI came cooler than expected.  Here are the details:
  • Headline PPI came at -0.1% vs. 0.3% consensus.
  • Core PPI came at -0.1% vs. 0.3% consensus.
• In our analysis, if Consumer Price Index (CPI) is benign, after today's PPI the probability of a 50 bps rate cut has now gone up to 40%.  If CPI is a shocker to the downside, the probability of a 50 bps rate cut will likely go much higher.  We will share with you the new probability after CPI data is released.  Also be open to the possibility that CPI may not be as benign as PPI.
• In our analysis, there are several key points about PPI that investors need to consider:
  • A large number of goods are imported from China.  In goods production, China is experiencing deflation.  Please see the section on China below.
  • In many cases, Chinese manufacturers are increasing their efficiency and decreasing their margins to compensate for tariffs.
  • This month, margins of companies in the U.S. are decreasing.  This indicates that U.S. companies are also eating price increases instead of passing them on.
  • In our analysis, it is still not all clear.  Expect producers to test price increases over the coming months.  There is still a better than 60% probability that over the coming months, inflation data may not be as benign as today's PPI data.
• CPI and initial jobless claims will be released tomorrow at 8:30am ET.
• To stay ahead of the curve, prudent investors should also be aware of a new idea President Trump is floating – 100% tariffs on India and China in cooperation with the U.S. to pressure Russia.

China Inflation

The latest data from China on inflation is important to U.S. investors because the U.S. imports a large number of goods from China.  Here is the data:

• August CPI came at 0.0% month-over-month vs. 0.1% consensus.
• CPI came at -0.4% year-over-year vs. -0.2% consensus.
• PPI  came at -2.9% year-over-year vs. -2.9% consensus.

Poland

To stay ahead of the curve, prudent investors should note an alarming new development – NATO shot down Russian drones over Poland.  This is a serious escalation.

Magnificent Seven Money Flows

In the early trade, money flows are positive in Alphabet (GOOG), NVIDIA Corp (NVDA), Microsoft (MSFT), and Tesla Inc (TSLA).

In the early trade, money flows are neutral in Meta Platforms Inc (META).

In the early trade, money flows are negative in Apple Inc (AAPL) and Amazon (AMZN).

In the early trade, money flows are positive in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (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 1.25M barrels.

Bitcoin

Bitcoin 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.

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.