I hope you’re all having a great holiday and weekend. In case you missed it, I posted a CrowdStrike earnings review earlier in the week.

Brazil’s central bank finally issued its long-awaited plan to tackle the budget deficit. It will cut $12 billion in federal spending through 2025 and 2026 in an effort to demonstrate fiscal responsibility and its intention to stick to its commitment of limiting public spending through 2026. The proposal included new salary ceilings for highly paid public employees, tax hikes for affluent individuals and another $860 million in cuts through the end of this year. Interestingly, it also incorporated new tax exemptions for lower-income individuals to curb the economic hit from less federal support. That piece wasn’t liked by markets, as it hinted at Brazil’s leadership simply not doing enough to fix its budget issues. 

There were two main concerns coming from this news that led to Brazil’s stock market having its worst week in two years. First, the economic hardship that coincides with lower federal entitlement spending will hit discretionary income and consumer confidence. How sharply this happens remains to be determined. The second issue is that some feel this response is simply not enough. Some analysts called it the “bare minimum” and think more is required. Expectations of borrowing to fund continued large deficits led to more inflationary concern and the Brazilian Real weakening to its lowest point in several years. It also led to JP Morgan raising its neutral interest rate in that nation from 13% to 14.25%.

Taken together, this means a more fragile Brazilian economy, lower velocity of money and more growth challenges for Brazilian companies. This is especially true for highly interest rate-sensitive areas like credit. Nu stock falls into this category.  

We need to split this take section into a “long term” and “near term” discussion.

Starting with the long term. I love Nu, its business case and its management team and this changes nothing about my overall optimism. I think this company will keep fixing massive inefficiency in Latin American financial services and will briskly compound the top and bottom line for decades in the process of doing that. The company’s recipe of scaled growth, unique value, fantastic leadership and elite margins is what matters here for the long term. Whether or not Brazilian macro forces are headwinds or tailwinds in any given year is not going to determine if this investment and company succeed over the long haul. Continuing to dominate its markets and delight its customers is what matters.

Zooming out, I think all that this will do is accelerate market share gains as weaker competitors fail against tougher backdrops. Nu will easily get through this with its fortress balance sheet and prudent lending practices. This isn’t a company trying to maximize originations to create a resulting “sugar high”. On the contrary, Nu has periodically proactively pulled back on some credit originations to lean consistently, overly conservative when it deems that to be prudent. It’s building a 100-year company. I’m not fretting over 100 days or 100 weeks of tough macro. Go ahead and coil the spring, Mr. Market. That’s the long term portion of my mindset. 

For the near term, I didn’t add to Nu following these developments. While macro items are noise for the long haul, they matter dearly when zooming in and are clearly becoming more challenging. I absolutely love this company and team, but I also deeply respect macroeconomics. I know that exogenous forces can create irrational buying opportunities that I must give myself the room to buy into. This is predominantly a non-U.S. lender doing most of its business in a country poised for hawkish monetary policy. That will absolutely impact Nu’s Q4 and potentially 2025 results and hurt overall investor sentiment surrounding that region. 

So amid all of this balancing, what is my plan? The same as when I added to it most recently. I will continue to accumulate more shares of this name into more PE multiple contraction. I will also widen the bands of multiple contraction needed to justify adding to account for rising macro risk. Especially considering its continued expansion into riskier credit buckets (going very well so far but always delicate), I think this is the correct approach. Nu the company is going to be just fine. Nu the stock is also going to be just fine eventually, but I would not be at all surprised to see more turbulence ahead. I’m happy if it turns out that my biggest risk here was not owning quite as much as I wanted to.

It’s always fun when the conversation shifts to “things are going up too quickly, what do I do?” That is my favorite problem to have, but it’s still a problem. As Max readers know, I’ve done a bit of selling in recent weeks, yet remain nearly 100% invested and have kept the trimming modest. Most of those trims have also simply been reallocated to other names.

Like for Nu in the section above, I think it’s important to continue balancing two ideas here. First, we cannot grow overly complacent or greedy… We cannot let “20x” sales become a normal part of the conversation… We cannot begin to think of ourselves as the next Warren Buffett… We cannot let companies get endlessly more expensive without rightsizing risk. Increases in price alone are not a problem… Increases in valuations are. Rate cuts have a way of making every bull feel brilliant, and that must be understood.

But at the same time? Valuations for most stocks don’t look nearly as stretched as they did during the pandemic bubble. It warms my heart to see investors arguing over how fair 40x earnings is for Nvidia (growing EPS 40% Y/Y) rather than how fair 40x sales was for Shopify three years ago. These conversations are undeniably much healthier and far less concerning. Furthermore, we aren’t gearing up for overly restrictive macro policy, stimulus hangovers and supply chain chaos. Instead? Today, we are poised for gradual rate cuts, healthy supply chain and inventory dynamics, continued full employment and expectations of domestic economic deregulation. The setup is easily more favorable.

We also have to remember that many of the names exploding higher today are recovering from ridiculously low multiples (some had negative enterprise values). Shockingly (I say as sarcastically as I can), investors are realizing that all of these models assumed to be zeroes weren’t actually losers.  They were simply hibernating. They were awaiting the slightest hint of an easier Fed to re-accelerate the growth engines, access better liquidity, take advantage of falling cost of capital and enjoy brighter sentiment. They were, as I’ve said so many times, coiling springs where earnings were growing and stock prices were contracting until sellers capitulated and the spring (stock price) was ready to snap back. 

These high fliers are flying back to where they were three years ago… but with actual profits and battle-tested value propositions. And? They’re racing from crazy cheap to reasonable… while they raced from crazy expensive to even more crazily expensive throughout 2020-2021. This time is different.

In summary, we have to let our winners win. We have to let ourselves be right. We have to let our well-placed, well-crafted conviction get us paid. But? We don’t need to get greedy. We can’t. Just like I am widening the bands of multiple contraction needed to add to Nu, I am widening the bands of multiple expansion needed to conduct more trims for winning stock.

I will continue to trim; I will continue to be more picky about where I do so; I will continue to share all of those transactions in real-time with Max subs. Don’t Fight the Fed, Brad. That now means something much more fun than it did in 2022.

Meta will invest $10 billion in an underwater fiber-optic cable spanning the globe. The investments will happen in stages and the project will take years to finish. TechCrunch posted an article on this last week with some great quotes from a subsea cable insider named Sunil Tagare. Thank you, TechCrunch. According to him, supply here is quite limited and needs to be reserved years in advance. Meta is now in line.

The consumer internet giant makes its money from delivering engaging experiences, plus relevant recommendations and ads to its consumers. An important way to make this content delivery as impactful as possible is by minimizing latency. It’s annoying when that loading circle endlessly spins while we watch a video of a squirrel finally getting his acorn. Did it get the acorn? How can I move on before I know for sure? Now we will know a fraction of a second sooner. To that I say, “thank goodness!”. Priorities.

On a serious note, this helps with time spent on apps; it helps with advertiser conversion rates; it helps make building even more complex models and apps more rational; it helps everywhere. As the global social media king, this is another way that Meta can lower latency through vertical integration. It’s a way for it to ensure its existing products are as interesting as possible, while ensuring it can seamlessly expand into new product categories with ultra-fast compute capacity in place. This removes 3rd-party service reliance and future growth bottlenecks. The company already owns pieces of several of these pipelines, but this will be the first time it owns the entire thing.

Interestingly, the cable will be routed to avoid all geopolitical hot zones including the South China Sea, the Red Sea etc. That matters a lot, considering the Federal Communications Commission could soon update underwater fiber-optic cable regulation to restrict building through these sensitive locations. The route does include India, which many take as a hint of Meta’s intentions to build AI infrastructure in that promising nation.

We’ve gotten some early data on how the Black Friday Cyber Monday (BFCM) weekend is shaping up. According to Adobe, Thanksgiving e-commerce sales rose 8.8% Y/Y to $6.1 billion while Black Friday sales rose 9.9% Y/Y to $10.8 billion. It expects 6.1% Cyber Monday Y/Y growth to $13.2B for the weekend to comfortably surpass inflation rates. Finally, Buy Now Pay Later (BNPL) volume for the weekend is expected to rise by 10% Y/Y. While this growth is considered quite healthy, it was aided by sharper discounting. Adobe is looking for 8.4% Y/Y growth, with these results in aggregate tracking slightly ahead of that expectation.

For Shopify, we got some vague commentary on things being off to a good start. That’s it for now. We will learn a lot more about how the weekend shaped up from Shopify, Amazon, card players and others in the coming days. Stay tuned. We’ve also seen most retailers fare pretty well this earnings season, with strong results from Walmart, Costco and enablers like Shopify.

Early indicators point to Moana 2 being yet another box office hit for the red-hot film division. This matters for Disney in so many ways. First, it directly drives profit growth. This past quarter, fantastic results for Inside Out 2 and the Deadpool sequel netted an incremental $300 million in EBIT  for a single quarter. But wait… there’s so much more. Hit films are one of its most powerful growth drivers for streaming subscriptions. One could easily argue that live sports is a bigger needle mover, but from a scripted point of view, this is second to none. The company enjoyed noticeable upticks in Disney+ growth from other 2024 hits and this should be no different. Finally, Moana fandom means more opportunities for building engaging exhibits at its parks. Disney’s unmatched ability to connect on-screen passion, with in-person experience relies on having brands and characters that the world knows and loves. Moana is an 8 year-old concept and has already become a successful Walt Disney World attraction. It just adds to its unmatched IP vault.

If you checked out on Disney a year ago and are now reading this piece, you may be surprised. Disney’s film division was mightily struggling through 2022-2023 in terms of creating valuable new content and financial success. It was turning into a cash drain. Iger returned and refocused on telling stories rather than influencing culture.  He sought to entertain, rather than steer societal debate. He also slashed a large portion of the company’s film pipeline to focus on only its best ideas, while connecting content creators and film marketers to ensure more financial responsibility. All of this is working and Moana 2 is simply the latest indication.

SentinelOne reports earnings this week. There is every reason to believe this should be an excellent quarter. Many ripped on the company for lack of upward revisions following the CrowdStrike outage, but that criticism is misplaced. SentinelOne has been excluding the potential effect from forward guidance until this quarter, and will now start including it next week. The firm has spoken consistently on how material this has been in winning new business, and now we will see that quantified. 

Next, all other cybersecurity names have reported solid numbers. In endpoint, CrowdStrike was good and so was Microsoft Defender. Across complementary categories, Cloudflare was average, but it called out improving macro and blamed its own execution for the miss. Palo Alto results (endpoint and complementary) were fine too. Nobody in the sector spoke about macro and buying appetite getting worse, so there are no excuses this quarter.

Furthermore, SentinelOne has been dealing with internal operational disruption for the last few quarters. Like Cloudflare, it has had to overhaul its go-to-market approach to get closer to partners, optimize incentives and position itself to win larger enterprises. Its tech has always been world-class, while its selling has always been underwhelming. It has made the needed (expensive) hires to fix that issue, and we should see the fruits of this showing up this quarter. Finally, accelerating Remaining Performance Obligation (RPO) growth over the last few quarters bodes well for forward-looking demand and SentinelOne should continue to deliver its convincing inflection to profitability. We shall see how things go next week, but the stars have clearly aligned for a strong showing. Go execute.

Jefferies sees Zscaler beating sell-side billings growth expectations and meeting higher buy-side expectations this quarter. Its channel checks were positive overall. It sees billings rising in the low-to-mid 20% range for fiscal year 2025 as it’s confident in Zcaler’s acceleration guidance being accurate (I am too, considering the optimism is based on already contracted business).

Goldman Sachs unveiled a new holiday shopping survey this week in which Amazon was the top shopping destination for 35% of respondents. This rose “notably” Y/Y.

The FTC is launching new investigations on Microsoft, Meta and Uber to join the long list of companies they’ve opened cases into in recent weeks. This is all irrelevant until we get new leaders of the FTC into power in the coming weeks and hear what their plans are.

Morgan Stanley sees a small EPS beat for Lululemon when it reports earnings next week. UBS also talked up “improving trends” throughout the quarter. It sees it raising its full-year profit guidance by $0.05 or 0.3%.

Per the new Fed Minutes, there’s large support for slowly lowering rates. Some think a pause is warranted. Labor market risks have “diminished” and risks to its dual mandate are well-balanced.