Hey Big Spender, How Are You Doing?

Today is shaping up to be a highly consequential one for markets.  As discussed yesterday, we have an FOMC meeting this afternoon.  Despite some talk about the potential for a rate hike, the most likely scenario priced into Fed Funds futures and prediction markets is for a “hawkish hold”.  Then, less than an hour after Chair Warsh leaves the podium, we expect to get quarterly results from Microsoft (MSFT) and Meta Platforms (META).  Based on the reaction to Alphabet’s (GOOG, GOOGL) report last week, it’s hard to know what to root for.

In recent weeks, we’ve seen shifts in the collective mindset about AI-related spending.  For some time, roughly coinciding with the rise of the “Magnificent Seven”, or “Mag7”, all spending was good spending.  The Wayne Gretzky quote, “You miss 100% of the shots you don’t take,” defined the mentality.  Over time, the thinking changed somewhat.  The cost of each shot at a fixed net in a hockey game, especially by one of the all-time greats, is essentially nil.  The cost of taking shots at the ever-moving target of AI dominance is quite expensive, however. 

In recent months, we have pointed out the shift from “takers” to “makers”, meaning that investors have been favoring the recipients of copious AI spending over those who are borrowing immense amounts of money to facilitate that spending.  Those “makers” included the manufacturers of memory chips, which led the Philadelphia Semiconductor Index (SOX) and South Korea’s KOSPI Index on wild rides, but also other suppliers like Corning (GLW), DELL, and Caterpillar (CAT).  The SOX index and many of those other stocks are well off their recent highs, even though still I hesitate to refer to the selling in SOX as a bear market because of its residual performance and volatility.

SOX: 6-Months, Daily Candles

Source: Interactive Brokers

The market reactions to recent results from GOOGL and now SK Hynix (SKHY) should raise the stakes for META and MSFT today, and Apple (AAPL) and Amazon (AMZN) tomorrow.  GOOGL results were originally well received, with the stock initially rising in the aftermarket after beating on the top and bottom lines but then sinking after the company said that it intended to increase capital spending by more than expected.  In some ways, that was better than the alternative.  Had they said that they were keeping spending steady, or even decreasing it, the ramifications on the “makers” would have been profound.  Instead, they only sold off mildly the next day.

Last night, one of the key “makers” got throttled.  SK Hynix ordinary shares (000660) sold off sharply despite the company reporting its best quarter ever.  Unfortunately, the 557% annual increase in operating profit fell short of analysts’ expectations.  Bear in mind that the stock fell by 16% on the prior day, so it is not as though the sentiment was already lofty. 

(By the way, SK Hynix ADRs (SKHY) are vastly outperforming the ordinary shares.  This is because the ADR facility is maxed out at 2.5% of the float, so the mechanism that normally keeps the ADRs in line with the ordinary shares can’t function.  As the table below shows, if you’re buying the ADRs, you’re paying roughly 1/3 more than you would if you bought the ordinary shares! And if you’re an IBKR customer, most of you can buy those ordinary shares relatively easily. Please think before hitting the SKHY “buy” button.)

SK Hynix Ordinary Share Pricing versus ADR Pricing

Sources: Bloomberg, Interactive Brokers

As I commented to a reporter yesterday, “we flipped from all news being good news for AI to a ‘let’s look under some rocks and see what the risks are’ mindset.”  We punished GOOGL for spending too much money and then punished SK Hynix for not receiving enough of it, despite receiving an awful lot.  Thus, the stakes are very high this afternoon.  What if MSFT or META management says they will be simply maintaining their current pace of spending, let alone cutting it back?  Down would go the already shaky “makers.”  Yet if they say they are increasing spending and, worse, borrowing even more to facilitate it, that could certainly pressure those shares – and because of their size, the markets as a whole. 

Perhaps today’s selloff is demonstrating that the prevailing psychology is already dire enough to forestall a “damned if they do, damned if they don’t” outcome.  Or perhaps Warsh demonstrates a so-far-not-obvious capacity for boosting investors’ spirits.  Of course, a set of positive developments in the Persian Gulf might save the day.  But for now, we have no choice but to listen carefully to the trio of pressers – Warsh, MSFT, and META – this afternoon.

(One more note – I’ll skip the bulk of the usual options market analysis.  Long story short, the peak probability for META options is slightly below the current price, the skews are relatively symmetrical, and the implied volatility is generally in line with recent post-earnings moves.   The peak probability for MSFT is roughly at-money, the skews show a bit more downside concern, and the implied volatility is above its average of recent post-earnings moves.)

IBKR Probability Lab for META Options Expiring July 31^st, 2026

Source: Interactive Brokers

Skews for META Options Expiring July 31^st (blue), August 7^th (purple), August 21^st, 2026 (yellow)

Source: Interactive Brokers

IBKR Probability Lab for MSFT Options Expiring July 31^st, 2026

Source: Interactive Brokers

Skews for MSFT Options Expiring July 31^st (green), August 7^th (purple), August 21^st, 2026 (yellow)

Source: Interactive Brokers