Executive Summary

Read more

• Pinebrook generated a +21.58% return for the period January 2 through August 31, 2026, against an S&P 500 return of +12.28%, for a spread of +9.30%.

• August produced a +7.79% return against the S&P 500’s +2.62%. This was the second-best monthly alpha of the year at +5.17%.

• The result directly validates the July 13–16th repositioning. YTD risk metrics have recovered materially from the July trough: Sharpe 1.20 (up from 0.83), Sortino 1.18 (up from 0.81), downside capture 108.6% (down from 120.3%).

EQUITY CURVE VS. S&P 500

PERFORMANCE SNAPSHOT

RISK METRICS — YTD THROUGH AUGUST 31

MONTHLY RETURN BREAKDOWN

MONTHLY RISK METRICS — 2026 (PART I)

Return, Sharpe, Sortino, Beta, Alpha, Correlation by month. Each month standalone. June and July shaded. Sharpe/Sortino: green ≥2.0 amber ≥1.0 red <0

Alpha is annualized Jensen’s alpha. April’s -196.8% reflects underperformance vs beta-adjusted benchmark (beta 2.12, SPX +10.42%). Single-month alpha is sensitive to beta estimation over short windows.

MONTHLY RISK METRICS — 2026 (PART II)

Volatility, drawdown, win rate, capture ratios, best and worst days by month.

Max DD per month measured from rolling peak within that month. August downside capture of -22.7% reflects a month with very few down days for the portfolio vs. the market — directionally a strong result, but the sign artifact is a function of the portfolio falling less than the benchmark on negative SPX days.

PORTFOLIO COMMENTARY

January – July: Summary

The portfolio delivered five positive months from January through June, with March (-5.34%) and July (-5.37%) as the two down months. The H1 2026 Performance Report and the July 2026 Performance Report address each period in detail, including the concentration risk that drove June and July’s deteriorating risk metrics and the corrective repositioning executed July 13–16th.

August: +7.79%

August was the portfolio’s strongest month on a risk-adjusted basis, producing a +7.79% return against the S&P 500’s +2.62% for a +517 basis point spread. The monthly Sharpe of 6.27 and Sortino of 9.94 reflect both the strength of the return and its consistency — the portfolio won 66.7% of trading days with a best day of +2.55% and worst day of -1.01%.

The primary drivers were GDX and GDXJ (combined +$32,350 from entry across all four tranches as gold continued its run), IGV (+$32,006 from the July 16th entry), TSM (+$23,095), and the GEV and CAT short positions (+$12,822 and +$13,266 respectively) as industrial machinery underperformed.

EWJ short (combined -3,980 shares) remained the primary drag, down approximately -$24,000 for the month as Japanese equities continued to strengthen. The DXJ long partially offset this through the pairs structure, but the net Japan position was a headwind. KWEB long was also a small drag (-$2,775 on the 3,384 share position closed August 21st) as Chinese internet names softened late in the month.

Seven positions were closed on August 21st: SPHR (+$14,115), LYV (+$7,778), FEZ (+$3,654), EPOL (+$11,819), FXI (+$3,543), MCHI (+$2,584), and KWEB (-$2,775). Combined realized gain from these closures: +$40,718. The remaining book heading into September is more concentrated in the gold miners, the Japan pair, IGV, TSM, and the GEV/CAT industrial short basket.

ON THE RISK METRICS

The monthly metrics matrix tells the August story directly. The two-month anomaly of June (Sharpe 0.59) and July (-3.37) has been followed by the portfolio’s strongest risk-adjusted month of the year. The July report stated that whether the repositioning was sufficient would be visible in the August numbers. It is.

YTD metrics have recovered across every dimension: Sharpe from 0.83 to 1.20, Sortino from 0.81 to 1.18, downside capture from 120.3% to 108.6%, annualized alpha from 8.02% to 14.84%. The maximum drawdown of -10.29% (July 23rd) remains in the YTD series and will continue to roll off as the portfolio builds on the August result. Beta has compressed from 1.13 to 1.08 and correlation from 0.60 to 0.58, consistent with the repositioned book running less single-factor exposure than the June–July peak.

TRACK RECORD

Portfolio performance since inception in August 2024.

For those that don’t want to use Discord, the Substack chat feature will also be used, as well as long form emails when appropriate.

Here’s how to join the Pinebrook Discord, it takes about 2 minutes:

1. Join the Server.

2. Once you’re in, fill out this short form with the email you subscribed with and your Discord username on this Google Form.

3. You’ll be automatically added to the Core channels within a few minutes. No need to wait on me.

A few things to know:

• The old X private feed will be shut down on September 15, 2026. If you want uninterrupted access, get set up on Discord before then.

• Going forward, your Discord access is tied directly to your subscription — it activates and deactivates automatically, so there’s nothing to manage on your end (or mine!).

• If you run into any trouble linking your account, just reply to this email and I’ll sort it out directly.

Looking forward to having you in there!

PS. I expect to have the blotter and dashboard up by the time the X account is shot in the head on September 15^th.

Last week’s note on August 20th established that the rise in long yields shifted on July 27, 2026, from a real-neutral-rate story to a term-premium story, concentrated almost entirely at the long end. That note answered the why of the movement.

Today’s note seeks to tackle a bigger question: what kind of world produces that move?

• At the risk of giving it away, Pinebrook’s view is that the U.S. economy is currently undergoing an inflationary boom expansion.

• While many market participants, too unborn to even remember disco and Studio 54, much less a man on the moon, have been conditioned by 40 years of disinflation and fifteen years of low-rate orthodoxy, the bond market is simply along for the ride and pricing the above.

• Thus, the dog is wagging the tail and not the other way around as the so-called bond vigilantes would have you believe.

Party like its 1969, not 1999.

I. The Template: Guns and Butter, Twice

Wars are expensive. A government funding one typically faces a choice: raise taxes and cut domestic spending (guns OR butter) or run both simultaneously on the national credit card (guns AND butter).

President Johnson (“LBJ”) made the second choice, financing the Vietnam War while expanding the Great Society social safety net.

Fiscal and Inflation Scorecard, 1964 - 1969

The current and prior administrations have made the same structural choice, with one governing difference: LBJ’s butter went to the poor and working class; this cycle’s has gone to asset holders.

That distributional difference matters for who benefits (Lower-K wage earners vs. Upper-K owners of capital), but not for the causal mechanism that moves rates: booming nominal GDP (nGDP).

When the Current Clock Actually Starts

Using the current Iran conflict as a starting point for a LBJ Guns & Butter comparison era is lazy partisan thinking, as it undercounts how long the Guns & Butter agenda has been running.

A more appropriate baseline is January 2020. This is a five-year plus structural story.

• The war (butter) on Covid, marshalled the fiscal and monetary resources of the Federal Government and resulted in WWII-levels of fiscal spend and monetary accommodation.

o The CARES Act of 2020 under President Trump was a $2.2 trillion spending bill.

o The American Rescue Plan Act of 2021 under President Biden was a $1.9 trillion spending bill.

• Tariffs are likewise on the guns side of the fiscal ledger: a national consumption tax, imposed on households and importers, that show up in the price data the same way a war bill shows up in the outlay data.

• The OBBB reconciliation bill of 2025 under President Trump was more lard butter: upper-income tax cuts plus maintained domestic spending, financed on the credit card rather than through offsetting revenue cuts is identical to how LBJ financed the Great Society, just aimed at a different income cohort.

The IEEPA Tariffs Were Struck Down

On February 20, 2026, the Supreme Court ruled 6-3 that the tariffs imposed under the International Emergency Economic Powers Act exceeded presidential authority. Taxation power belongs to Congress, not the executive acting unilaterally under emergency powers.

• The government had collected an estimated $130–175 billion under that regime and is now refunding it.

• As of mid-August, roughly $100 billion (60%) has gone back out to importers.

The Whole Hog, 2020–2026

*10Y and CPI figures are calendar/fiscal-year-end approximations compiled from public trackers. Federal outlays are actual/reported FY totals; FY26 is a partial year (through July) and not directly comparable to the full-year columns beside it.

Highlights:

• 2020 → 2024: outlays rose from $6.55T to $6.75T, but the path wasn’t linear.

• Spending peaked near $6.82T in the depths of pandemic relief (FY21), fell back to $6.27T as emergency programs lapsed (FY22), then climbed again through FY23–24 even as the emergency itself was long over.

• The post-2020 baseline never returned to pre-COVID norms, regardless of who sat behind the Resolute Desk.

• 2025 → 2026 YTD (the current leg): outlays continue climbing from an already-elevated $7.01T base, now layered with tariffs, OBBB, and the Iran war.

The structural change that matters is not the spending itself, but its context:

• An economy already near full employment with little to no labor market slack.

• A wall of money hit an economy with supply chain distortions that were magnified by the sheer amount of cash that was put to work to bid prices up and clear tight markets.

What separates an inflationary boom from countercyclical stimulus is an overheating of the labor market instead of simply protecting it.

• U3 moonshot from 3.5% in February 2020 to 14.7% in April 2020.

• U3 ended the 2020 calendar year at 6.7%.

• By calendar-end 2021, U3 was at 3.9% - back to full employment.

• Monetary policy did not respond until Spring of 2022.

• Fiscal restraint did not ensue despite the return to full employment.

Cumulative Federal Deficit Fy20 Fy26

26.9KB ∙ PDF file

Download

Download

The trajectory and outcome of the Iran War is the single biggest risk to this expansion remaining a clean inflationary boom rather than tipping into a stagflationary recession.

The reason is that the escalation could accelerate inflation faster than the tariff-and-tax-cut baseline alone would.

II. The Receipts

• National debt crossed $40 trillion last week.

• Excluding ~$8T in intragovernmental holdings, Treasury debt held by the public is now roughly 100% of nominal GDP.

• Interest expense is approaching 1.0% of GDP, up from a 0.6–0.7% pre-pandemic norm sustained for roughly two decades.

• The Reagan-era peak was 1.25%.

• The 2026 YTD deficit already exceeds every full year between 2023 and 2025, inclusive.

• Debt held by the public: $31.9T vs. $29.4T a year prior.

• Notably, Petersen attributes the increase mainly to net interest (+$91B), Social Security (+$71B, COLA-driven), and Medicare (+$65B) — the entitlement-and-interest core of the budget, not tariffs or the war directly.

• The counterweight: total nonfinancial debt-to-GDP (public plus private) has been broadly stable since 2010.

• The rise in government leverage has been partly, not fully, offset by private-sector deleveraging.

III. Adjudicating the Rival Explanations

Read more

Gold is indeed shining again, after being taken to the woodshed and left for dead this spring following its parabolic move into the 3-sigma area in January.

In fact, gold round-tripped its up move back down into the negative 2-sigma territory, with a final bottom on July 16, 2026.

Now with financial media catching up to the trade +16% off the July bottom, some readers would like to know if the bounce should be faded (sold), let to run (maintain position), or added.

Below is an update on where things stand given the levels used in the analytical framework of the evaluation.

Read more

The book is at a new all-time high after a thus far very strong August (7.07%/20.77% MTD/YTD, respectively) as of this morning. Thanks gold!

Selling, all for market on close (MOC) today:

Read more

• None of it constitutes new information, and price moves require marginal information, not restated priors.

• If the market were pricing on consensus knowledge of the fiscal trajectory, the move would have been continuous rather than a “spasm” concentrated in a specific window.

Thus, the appropriate framework is not in rehashing old stories, but in seeking out what changed, when, and then triangulate our way to the why.

The mechanism generating higher long yields inverted on July 27, shifting from a real-neutral-rate story (constructive, capex-driven) to a term-premium story (less constructive, compensation for risk) within a five-trading-day window.

From July 1 through August 20 (latest available):

• The front end is flat while the belly and long end are both up. The shape of a curve has steepened, not parallel shifted.

• The relative size of the 10Y and 30Y moves is not in itself evidence of anything: a longer-duration instrument moving more basis points than a shorter one is simply DV01 delta (the notional dollar value change for every corresponding 1-basis point change in rates), and is not a signal.

• A genuine Fed-repricing event would also show up at the front end, and it has not.

• Measured against their own historical distributions, the 10-year is not stretched, but the 30-year is.

The regime break: July 27

Read more

• Pinebrook generated a +12.79% return for the period January 2 through July 31, 2026, against an S&P 500 return of +9.41%, for a spread of +3.38%.

• July was the portfolio’s second down month of 2026, declining -5.37% against a flat S&P 500 (-0.13%). The loss was driven by concentrated exposure to the AI/semiconductor/Korea complex during the first half of the month.

• A rotation on July 13 - 16th addressed the concentration directly. Through midday August 12^th (13 trading days into the new month) the portfolio has returned +5.52% against the S&P 500’s +3.36%, recovering the bulk of July’s loss and approaching the June 30th all-time high.

• YTD Sharpe of 0.83, Sortino of 0.81, and downside capture of 120.3% reflect the accumulated cost of the June and July concentration period.

• The monthly breakdown in the tables below shows these metrics in full by month; January, February, and May - Sharpe 3.79, 4.56, and 4.26 respectively - represent the baseline. June and July are the anomaly.

EQUITY CURVE VS. S&P 500

PORTFOLIO COMMENTARY

January – June: Summary

The portfolio opened 2026 with two months of consecutive gains before its first down month in March. January (+6.28%) and May (+9.89%) were the standout months, with February (+1.84%), April (+4.02%), and June (+1.77%) each contributing positive spreads against the benchmark.

March (-5.34%) tracked the S&P 500 closely on a broad risk-off move.

Full commentary on the January through June period is available in the H1 2026 Performance Report.

July: −5.37%

July was the portfolio’s sharpest monthly drawdown of 2026, declining -5.37% against an essentially flat S&P 500 (-0.13%), producing -524 basis points of negative spread. The month had two distinct phases separated by a major book rotation on July 13 through 16th.

• Phase one (July 1–12): The China short positions (MCHI, FXI, KWEB) were closed July 1st at a combined gain of approximately $28,000. EFA and IEUR short legs were closed July 6th at a small loss. The remaining concentrated positions in EWY, TSM, SMH, QQQ, and XLK faced a sharp sector rotation. SMH fell approximately 10% through the first two weeks of July; EWY fell over 14%; TSM declined roughly 15%. These positions, held in size since April and May, drove the bulk of July’s loss.

• Phase two (July 13 - 16): EWY sold in two tranches, 310 shares on July 13th at $171.61 and 628 shares on July 16th at $163.36, both realizing substantial gains from the April 7th entry at $133.34 despite the July drawdown. SMH, EMXC, QQQ, and XLK longs closed. Rebuilt into: long FEZ (European equities), long EPOL (Poland), long MAGS (Magnificent 7 basket), long DXJ / short EWJ (Japan pair), short XLK vs. long MAGS (sector hedge), short GEV and CAT (industrial machinery), additional GDX/GDXJ, and long FXI/MCHI/KWEB (China thesis reversed from short to long on July 16th).

August MTD (through August 12): +5.52%

Through midday August 12th the portfolio has returned +5.52% against the S&P 500’s +3.36%. Primary contributors: GDX/GDXJ (+$22,936 combined from entry), TSM (+$28,386), SPHR (+$23,352), EPOL (+$12,172), DXJ/FEZ Europe long (+$30,436 combined), CAT short (+$6,938). Primary drag: EWJ combined short (-$29,100) as Japanese equities have continued to strengthen against the thesis. MAGS/XLK pair is flat (+$3,024 / -$11,360 net -$8,336) functioning as a sector hedge.

ON THE RISK METRICS

The tables above show every metric for every month. The numbers are what they are.

January (Sharpe 3.79), February (4.56), and May (4.26) are the Pinebrook standard. June (0.59) and July (-3.36) are the cost of running a single-factor book for too long.

The June report flagged thematic concentration as a known risk and committed to addressing it. July is what happens when that correction is delayed.

• The numbers that are bad: downside capture 120.4% (portfolio drops harder than the market on down days), YTD Sortino 0.81 (downside-adjusted returns barely positive), July Sharpe -3.36 (a month that destroyed risk-adjusted performance).

• The number that is defensible: annualized alpha remains +8.02% YTD and the since-inception spread is +54.12 percentage points.

The corrective action came July 13th. The August data shows it is working.

PERFORMANCE SNAPSHOT

RISK METRICS — YTD THROUGH JULY 31

MONTHLY RETURN BREAKDOWN

MONTHLY RISK METRICS — 2026 (PART I)

Return, Sharpe, Sortino, Beta, Alpha, Correlation by month. Each month standalone. June and July shaded. Sharpe/Sortino: green ≥2.0 amber ≥1.0 red <0

MONTHLY RISK METRICS — 2026 (PART II)

Volatility, drawdown, win rate, capture ratios, best and worst days by month.

TRACK RECORD

But none of this really answers the fundamental question heading into Q3, which is whether the forward growth, inflation, and earnings pictures are strong enough to justify holding risk into a market still working through an unresolved 20%+ semi correction, which these pages still view as live and in-play.

Growth

Skip Headline GDP from last week.

• Q2 real GDP printed 1.5%, down from 2.1% in Q1.

• Real final sales to private domestic purchasers, which is the cleaner read that strips out trade, inventories, and government, came in at 3.9%, the strongest print since Q1-2023.

• Consumer spending accelerated to 3.2% annualized from 0.5% in Q1.

• Nonresidential fixed investment ran at 8.4%.

• Data center construction rose by 7% in June.

Every dollar-denominated measure of private demand in this economy got stronger last quarter.

Why did the headline number break bad? Net exports subtracted a full percentage point, on an 11.5% surge in imports.

However, look at what’s being imported: servers, networking equipment, cooling systems. These are all physical inputs for the data center buildout.

The import component of the GDP print is the growth-accounting confirmation of Pinebrook’s thesis that the hyperscaler capex is large enough to be a genuine investment-demand shock, and it’s now showing up everywhere we look — real yields, import data, capital goods orders.

This is the same mechanism the July 28th Signal & Noise Filter identified in the rates complex. RRFNR, the real, duration-adjusted neutral rate, round-tripped from a January trough of 1.14% back to 1.72%, essentially matching the level from the day the Fed started cutting in September 2024, and the move has been driven by real yields, not term premium or inflation expectations.

Thus, the Q2 GDP report did not point towards a demand problem. The weak Q2 print reflects an accounting identity that does not distinguish between weak demand and strong demand for things we don’t make. In short, hyperscaler capex puts the boom-boom in booming, and will likely push Q3 GDP to a high-two or low-three handle for GDP percentage growth.

Read more

This time may be different, but over the weekend I thought it would be instructive to have a look at historical forward returns after -20% corrections in the semiconductor space.

Forward returns from the -20% crossing point

For each -20% SMH correction (or lower) since 2011, I identify the exact trading day the peak-to-trough drawdown first crossed -20%, then measure the forward price path at 5 trading days (≈1 week), 10 trading days (≈2 weeks), and 21 trading days (≈30 calendar days) from that crossing date.

I separately record how much further SMH fell from the crossing point to its eventual trough, and how many additional trading days that took.

Averages across the 5 completed episodes:

Read more

The rotation trade (and trades) flagged here, here, and here took a break today.

The price action appears to be driven by the news that the Situational Awareness Fund, run by Ai Wunderkind Leopold Aschenbrenner, has liquidated its semiconductor and Ai positions in a single block trade to Citadel Securities.

Prelude

• Leopold Aschenbrenner’s Situational Awareness LP, a fund that peaked around $45B AUM and was up 439% net through the end of June 2026, got run over in July.

• It was carrying roughly 4x leverage on concentrated AI infrastructure and semiconductor longs, hedged with software shorts including Adobe that moved against it simultaneously.

• Its core holdings, SK Hynix, CoreWeave, Nebius, Micron, Bloom Energy, fell between 35% and 47% this month, which was enough to wipe out the equity cushion under the borrowed money.

• Goldman Sachs, JPMorgan Chase, and Bank of America, its three prime brokers, issued margin calls. Rather than a slow unwind, the fund sold its entire public book, long and short, in a single block trade before market open on July 30.

• The fund isn’t dead. It keeps its ~$5B Anthropic stake and continues as a private vehicle.

The consensus seems to be of the view that Citadel has plugged the leak in the sectoral PNL and put a floor on the correction.

Maybe.

The implicit logic here is that a privately brokered agency cross-trade motivates other agents to stop their selling and resume their buying.

Maybe.

There are flaws and unproven assumptions in this thinking.

• Agents have homogenous risk positions, and the margin calls are over. No one else is up to their eyeballs in sectoral exposure. ❌

• Agents have homogenous risk preferences. Everyone has an appetite for the thing that has come down and turned some PNLs red for the year. ❌

• The Citadel bid was at fair market value. ❌

Sharks feasting on the carcass of a whale liquidation is the easiest free money on Wall Street.

• Citadel very likely purchased the securities for its center book at a discount, then sold off constituent pieces internally to various pods, at a slight mark-up but still discounted to the Street.

• The pods will in turn do what pods do: buy-hold-sell to someone else.

• Citadel is a multi-strategy risk manager, not a buy-and-hold conviction investor.

• Citadel’s multi-strategy approach and massive risk infrastructure make it uniquely positioned to absorb positions too painful for a more concentrated fund to hold through drawdowns.

• That is a statement about balance-sheet capacity, not about Citadel being bullish on the names.

• It can hedge, distribute, or unwind pieces of that book on its own timeline without that being publicly visible for weeks (next 13F).

This was a leverage/collateral event, not new information about AI capex, chip demand, or earnings.

Citadel’s purchase addresses exactly one of these five mechanisms below. The other four are independent of who owns the leveraged book and appear, by the data gathered here, to still be live.

Historically, 2-sigma-plus extremes across 14 years of data have not resolved in days or weeks.

Mere mortals and flies on the ass of an elephant do not know which way the elephant herd will turn next. The whales that sling billion-dollar trades will do what suits them, irrespective of the wishes of mortals and fly-sized market participants.

There are, however, tools that can be used to assess if the selloff is over or is a dead-cat bounce.

Technical

• A single block trade absorbed by one large, well-capitalized buyer is mechanically better than a piecemeal forced dump.

• A piecemeal liquidation of a position this size, including 8% of Core Scientific’s float, would have meant days of relentless, price-insensitive selling that overwhelms dealer liquidity.

• This would drag implied vol higher across the whole complex, and forces sympathetic de-risking from every fund holding overlapping positions.

That tail risk is now off the table.

However, one should not conflate the end of forced selling with a technical and fundamental repricing of assets. They are not the same.

This is where things stand on the technical side of things.

• Semis (SMH) outperformed software (IGV) by +84.1 points over the 100 trading days through May 13, 2026. This relative all-time high was more than five standard deviations above the 2012 - 2026 mean of 4.83%.

• SMH is currently overbought relative to IGV by 35.49% (as of close July 30, 2026), still more than two standard deviations above the historical mean.

• The move is broad, not single-stock: all ten of SMH’s top holdings have fallen since May 13^th, while half of IGV’s top ten have risen (Palo Alto Networks, ServiceNow, CrowdStrike leading).

SMH has behaved similarly to the broader market, having fallen from 62.86% overbought (almost 5-sigma) relative to the SPY ETF on June 30^th, to just over 2-sigma today at 31.29%.

Fundamental

Putting aside a long list of positive metrics such as valuations and profits, or the AI supercycle, there are two fundamental issues creating uncertainty that remain unresolved by the Citadel purchase.

Analysts’ annual revenue and profit growth estimates for this year and next started moving sideways over the past month or so.

• The S&P 500 Semiconductors industry is expected to grow revenues 66.8% this year and 46.9% in 2027.

• Expected earnings growth are equally slowing, 107.0% this year and 59.3% in 2027.

To be clear these are phenomenal absolute numbers. But markets do not like flat-line or declining numbers after parabolic spikes.

Thus, the market has stopped giving the industry credit for these growth prospects, and the forward P/E has fallen to 16.6x from north of 30x late last year.

Market Breadth & Correlation

Average correlation of five S&P sector ETFs (XLV, XLF, XLY, XLI, XLK) to SPY has collapsed to 0.41, a 27-year low, 4.07 standard deviations below the historical mean, ranking in the bottom 0.4% of ~6,900 trading days.

• The only comparable prior reading was September 2000, six months into the dotcom unwind and roughly two years before that bear market’s actual bottom.

• Health Care has decoupled entirely (correlation to SPY now negative).

• Technology alone remains close to its historical norm, consistent with an index whose price action is now dominated by a narrow, AI-exposed complex while the rest of the market goes its own way.

Mean-reversion / z-score analysis (SPY/XLK/SMH/IGV/MTUM, 2012–2026)

Spot the outlier: The pullback is real but incomplete: the trade remains in roughly the 96th–98th percentile of 14 years of data, not a reversion to the mean. The exception is software, which is oversold relative to the broader market by less than 1-negative standard deviation.

A Historical Comparison to Past SMH Corrections

• Number of corrections exceeding 20%: 6, including the current one, which is ongoing and not yet resolved into a new all-time high.

• Average trading-day length: 135.7 days including the current episode; 157.6 days across the five completedcorrections (median 187). The current one is only 26 trading days old.

• Peak-to-trough decline / duration: Average decline across all six: –31.9%. The current correction (–24.6% over 26 days) is shallower than average and far shorter than any completed episode except the COVID crash (22 days).

• Z-score compression (SMH/SPY 100-day rolling relative return): average peak reading +1.16σ, average trough reading –0.72σ, average compression 1.88σ. In all five prior corrections, the z-score crossed into negative territory before the price found its bottom and the relative-outperformance extreme was fully purged. In the current episode, the trough reading (July 29) is still +1.23σ and it has never gone negative. This correction has not yet reached the level of relative-strength exhaustion that has marked every prior bottom in this dataset.

• Percentage distance from 200-day moving average, peak to trough: average peak was +29.5% above the 200dma, average trough was –15.8% below it. In all five prior corrections, price eventually fell below the 200dma. In the current episode, the trough is still +12.4% above the 200dma — again, the one correction in six that hasn’t reached the depth of every historical precedent.

*Peak/Trough z-score = SMH-vs-SPY 100-day trailing relative return, standardized against its full-history mean (6.20%) and population std dev (11.57%), n=3,571 trading days, 2012-05-16 to 2026-07-30.

Averages: decline -31.9%; duration 157.6 trading days (5 completed episodes) / 135.7 including the ongoing 2026 episode; peak z +1.16σ → trough z -0.72σ (compression 1.88σ); peak 200dma distance +29.5% → trough -15.9%.

Concluding Remarks:

• This was a leverage/collateral event, not new information about AI capex, chip demand, or earnings.

• Technical tail risk has been removed from the market.

• SMH remains 2-sigma overbought relative to SPY and IGV.

• Analysts’ annual revenue and profit growth estimates for this year and next have plateaued, for now.

• Market sectors have become extremely uncorrelated.

• By decline magnitude, duration, relative-strength exhaustion, and 200dma undershoot, this correction is running shorter and shallower than every completed 20%+ SMH correction since 2015 and specifically, it hasn’t yet hit the exhaustion signatures (negative z-score, sub-200dma price) that have marked every prior bottom.

• Base case is for a hawkish-hold on the policy rate.

• The soft inflation data for June provides the cover for not hiking in July.

• The committee will inject a stronger tightening bias and tee-up up a hike for Q3.

• The resumption of hostilities in the Middle East, diplomatic or kinetic, argues for more supply-chain driven inflation.

Since Fed Chair Warsh’s June press conference, these pages have argued that future FOMC meetings would have little left to reveal. In part due to Chair Warsh disdain for forward guidance, but also in part because the hawkish reaction function was already out in the open.

That thesis holds for July 28 – 29. But this week the noise has multiplied rather than thinned.

• A live Fed decision with no fresh dot plot.

• An earnings season whose headline growth rate is partly a GAAP accounting artifact.

• The two largest hyperscalers on earth reporting the same afternoon Chair Warsh speaks.

None of that is the signal.

The Signal: RRFNR Has Round-Tripped

Read more

These pages will skip the traditional “sell in May and go away” seasonal platitudes in favor of teasing out a forward-looking signal from the price action.

The chop is not a total surprise.

• Summer was flagged as a window of weakness back in the dark days of the start of the Hormuz energy shock.

• August was flagged as the month when inflation and growth pressures emanating from the Hormuz shock would fully manifest themselves and get digested by the market.

• Instead of index level volatility, the eye of the storm has been in market internals at the sector level, which have been experienced a violent rotation from the high-beta semiconductor momentum trade to other sectors.

MTUM is down -8.43% MTD for the month of July. Some of its bigger components are faring worse:

• MU is down -18.28% MTD.

• CAT is down -15.72% MTD

• GEV is down -12.925% MTD.

Meanwhile, SMH, the semiconductor ETF, is down -12.831% MTD.

The salient summer question is this: is this the end of the unwind or does it have more to go?

Read more

• June CPI (July 14) delivered the first real Core CPI miss in months. Most of it doesn’t matter for PCE.

• June PPI (July 15) delivered the part that does matter: airfares and portfolio management came in soft, and that’s the real impact on the core PCE call below.

• A July hike is off the table, but these pages have front run that.

• The house call is for a December hike, but September/October are still alive and for now genuinely data-dependent rather than a foregone conclusion.

Read more

Read more

Here is what the performance scorecard looks like since June 2^nd, the day XLK peaked, through July 10^th.

The rotation is no longer a speculative theory.

• There is a nearly 1,600 basis points of spread between the best and worst sectors since the semi peak (XLV vs. XLK).

• That is not noise. It is a shift within the current bull market.

In the June 8th note, the 5-sector 30-day rolling correlation average vs. the S&P500 stood at 0.491, which was described as -3.58σ below the post-2018 mean. It was flagged as one of the most extreme readings in the 27-year dataset outside specific market dislocations.

There was an underestimation in how much further it would go.

As of close on July 10th, the composite correlation average stands at 0.456.

Read more

Here is a trade list and accompanying rationale.

Portfolio Positioning: Executing the Rotation

The correlation data and research converge on a set of portfolio moves that express the rotation thesis.

Read more

• For the month of June 2026, Pinebrook generated a return of 1.77% versus a loss of -1.06% for the S&P500; an outperformance spread of 284-basis points.

• YTD for H1 2026, Pinebrook has generated a return of +19.19%, against a S&P 500 return of +9.55% — a spread of 964-basis points.

• On a risk-adjusted basis, the portfolio produced a Sharpe Ratio of 1.37 and a Sortino Ratio of 1.39.

• The H1 maximum drawdown was -9.56%, and the peak-to-trough window ran from May 29th through June 10th, with the book recovering to new highs by mid-June.

• The local peak to trough drawdown for the month of June took place between June 2^nd and June 10^th.

• Beta of 1.20 and correlation of 0.63 reflect a concentrated, directional book with meaningful but selective market exposure.

• Upside capture of 136.6% and downside capture of 116.8% — combined with an annualized alpha of +19.22% — reflect a portfolio consistently generating returns independent of broad market direction.

• The last two points reflect a deterioration in risk metrics from the prior month, discussed below.

PERFORMANCE SNAPSHOT

RISK METRICS

MONTHLY RETURN BREAKDOWN

COMMENTARY

January – February: +6.28% / +1.84%

The book opened the year decisively, posting +6.28% in January and +1.84% in February against a flat-to-negative S&P 500. The primary driver in January was a concentrated position in Korean equities via EWY — entered at $104.27 and closed January 30th at $123.96, an 18.9% return on the position. DXJ, capturing yen-weakening dynamics, contributed an 8.9% gain and was exited in mid-February. Silver micro-futures provided an additional non-correlated contribution in late January and early February, contributing approximately $40,000 in combined PNL. The cumulative effect was a +8.26% portfolio gain through the first two months against the S&P 500’s +0.48%.

March: −5.34%

March was the book’s weakest month, declining -5.34% against the S&P 500’s -5.09%, a -25 basis point negative spread. A cluster of position unwinds — KRE, WNC, RSP, EWU, and DXJ — moved against the book simultaneously during a period of broad risk-off positioning driven by tariff uncertainty. The near-parity with benchmark performance reflects the portfolio’s genuine equity character; broad sell-offs correlate across the book.

April – Ceasefire Announcement: +4.02%

April produced a net gain of +4.02% despite containing the period’s maximum drawdown event. On April 7th the portfolio reached its intra-period trough, driven by GDX/GDXJ long exposure and crude oil futures positioning ahead of the Ceasefire Announcement. April 8th produced the period’s best single day at +4.88% as ES and NQ futures captured the market reversal. The April 9–10 cluster — long-biased futures and long EEM — produced additional gains as global equities recovered sharply. The S&P 500’s +10.42% headline April gain was driven primarily by the post-announcement snapback; Pinebrook’s +4.02% reflects entry positioning that was partially caught in the initial drawdown.

May: +9.89%

May was the strongest single month at +9.89%, outperforming the S&P 500’s +5.15% by 474 basis points. Semiconductor exposure via SMH, clean energy positions (QCLN, PBW), and broad emerging market participation through EMXC were the primary contributors. Short positions in EIDO and INDA also contributed positively as those markets underperformed.

June: +1.77%

June produced a +1.77% gain against the S&P 500’s -1.06%, a +284 basis point spread and the second-best monthly alpha of the year. The month was characterized by strong cross-asset dispersion: open long positions in EWY, TSM, SPHR, and SMH drove gains, while China shorts (MCHI, FXI, KWEB) contributed a combined $26,000 as Chinese equities softened. XLE, OIH, QCLN, and PBW were closed mid-month on June 18th. The ESM6 carry position was closed June 15th at a gain, with the ESU6 roll entered same day finishing the month modestly below entry.

The month’s defining session was June 5th, which produced the period’s largest single-day drawdown. The catalyst was a strong May jobs report — 172,000 jobs added with 93,000 in upward revisions — that sharply repriced rate-cut expectations and triggered an aggressive selloff in rate-sensitive technology and semiconductor names. XLK fell 6.66% on the session; EWY fell 14.1% as Korean semiconductor names bore the brunt of AVGO-driven contagion. The portfolio’s concentrated exposure to that trade — EWY, SMH, and ESM6 futures each representing a variant of the same AI/semiconductor position — amplified the impact.

The session is best read as a rotation event rather than a risk-off episode. XLV and XLF both closed positive on the day the S&P fell 2.58%, and three of the five major S&P sectors finished the week in positive territory. Capital was being reassigned, not withdrawn. Consistent with that reading, the portfolio recovered the bulk of the June 5th loss within two sessions and finished the month with a positive return and the second-widest monthly spread against the benchmark in 2026.

On the risk metrics: the YTD Sharpe and Sortino ratios reflect the full January–June period and show some June deterioration versus the May report.

The portfolio ran a more concentrated, directional book in the second quarter — EWY, TSM, SMH, and EMXC in size simultaneously — which is a genuine increase in thematic concentration risk relative to the more diversified January–February positioning. This will be addressed going forward.

GETTING THE ECONOMICS WRONG AND THE TRADE RIGHT

The macro call that framed Q2 deserves a “come to Jesus moment”, and my own research timeline provides the receipts.

• Beginning in late March, Pinebrook’s published work made a high-conviction case for near-zero Q2 GDP growth, a prolonged Hormuz closure, and physical Brent crude reaching $150–200 per barrel by end-June.

• The thesis was a 900-day inventory deficit, a $150 billion regressive energy tax on the US consumer, and a ceasefire that triage-solved the tail without reopening the Strait at meaningful scale. The call for zero GDP was explicit.

• It was the wrong economic call. Q2 GDP came in at +2.7%. Brent is back near pre-conflict levels. The Strait ran longer than the one-month kinetic baseline assumed — roughly three and a half to four months of acute disruption — and growth smashed the zero forecast.

• The July 4th economic update stated directly: the miss was “very wrong” on the GDP call and “very correct” on the view that the US would outperform its peers and that the AI capex cycle would hold long enough to bridge the wedge between shock and normalization.

• The underestimate was in the offsetting forces — the restocking cycle, labor hoarding, and above all the AI capex cycle — relative to the mechanical GDP drag modeled from the supply shock.

The PNL, however, had a different experience from the macro forecast.

• Q2 produced three consecutive positive months — April +4.02%, May +9.89%, June +1.77% — with no down months in the quarter. The reason is sequencing and the willingness to change the view when the evidence changed.

• On the evening of April 7th, as markets absorbed the ceasefire announcement, Pinebrook pivoted and got long risk.

• The repositioning that followed — into Korean semiconductors, Taiwan, broad semiconductors, and EM — was the book’s expression of a probability shift.

• The worst-case scenario had been taken off the table, which concentrated forward probability toward the AI earnings cycle that equity markets were already pricing two years out.

• The central thesis that ran through all of the published research — that the US would outperform the rest of the world through the shock, supported by reserve currency status, energy self-sufficiency, and the AI capex cycle as a structural floor — held throughout and remains the organizing framework for H2.

• Getting the economics wrong and the trade right is a comfortable place to be because PNL > cute stories.

• The discipline of updating when the evidence changes is part of the process, and Q2’s results are the outcome.

TRACK RECORD

Portfolio performance since inception in August 2024.

Read more

• Growth into H2 2026 rests on three pillars: a consumer spending story that is nominally strong but real-income weak; an AI capex cycle that is now visibly bleeding into the physical economy; and a labor market showing the first hard signs of reacceleration after a year of stagnation.

• Pinebrook’s focus is on the compositional undercurrents that the headline numbers don’t show, and the Fed’s reaction function to the forward evolution of the data.

• Historically, cycles that looked like this — long leading indicators flashing yellow, real income negative, headline data still fine — have been rescued by two things: decelerating producer prices and loose fiscal policy.

• June’s jobs report, which was weak on payrolls but strong on unemployment, bought the Fed some time: the rate hike that was getting priced for October has been kicked to December.

• Pinebrook’s 10-year short position was closed at a loss — the first rates loss of the year.

• The house view on the rates complex is neutral pending clarification from the July jobs report and the August Supercore read.

Where We Left Off

Back in April of this year, we were in phase one of the energy supply shock timeline, when the ceasefire suddenly removed the worst-case tail and concentrated probabilities toward the AI earnings cycle thesis and drove the equity recovery.

• Productivity had not collapsed, and labor hoarding kept U3 stable while hours worked and soft survey sentiment deteriorated.

• The sectoral sequencing that was laid out — transportation and logistics first, manufacturing second, construction third, consumer goods fourth, services last — had begun its first stage.

• The key regime question — temporary price volatility or persistent supply instability — was the unknown.

What was known was that the U.S. was entering the shock from a position of relative strength due to its reserve currency status, energy self-sufficiency, and an AI investment boom standing in for the late-90s tech cycle.

Thus, Pinebrook’s very wrong call for zero GDP growth output was offset by the very correct view that the U.S. comes out ahead of its peers and that the AI capex cycle would hold long enough to bridge the wedge between shock and normalization.

That thesis has aged well.

• The Iran MOU was signed on June 17 and closed out the acute phase of the shock.

• Brent is back to pre-conflict levels near $72.

• The left-tail growth risk has been shot in the head, and U.S. assets outperformed RoW assets on a 100-day rolling return basis.

For those watching at home, the math holds the same on an absolute price return basis (April 24 – June 30):

While we got the trade right (what really matters), we got the economics wrong.

• The Strait closed in late February; the Iran MOU wasn’t signed until June 17 — roughly three and a half to four months of acute disruption, longer than the one-month kinetic baseline the March 30th note built its GDP math around.

• The shock ran longer than assumed, not shorter, and growth still came in near 2.7%.

• That means the miss was an underestimate of the offsetting forces — the restocking cycle, labor hoarding, and above all the AI capex cycle — relative to the mechanical GDP drag modeled from the supply shock.

Looking Forward

Read more