Standing Room Only
Morning Musings 7.10.26- views from the island
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” Charles Mackay (Extraordinary Popular Delusions, 1841)
Standing Room Only
| morningmusing.com | July 10, 2026
A Brown economics professor gave his class a take-home midterm this spring. Average score: 96%. In nearly two decades of teaching the course, the average had never exceeded 80%. He suspected AI. So he made the final exam in-person. Eighteen students dropped the course. The average final score: 48.6%. Nineteen students failed. Class enrollment had surged from the usual 30 to 86 after the take-home format was announced. (Inside Higher Ed)
The market is running the same play. Record participation (enrollment tripled). AI-inflated scores everywhere (forward EPS +30% YoY, valuations at multi-sigma extremes). Everyone performing beautifully on the take-home. The in-person test starts Monday with bank earnings.
TL;DR:
The market priced out Iran and walked into a positioning trap it has no hedge for. Retail turnover at the 99.7th percentile, ETF volumes up 50% YoY, valuations at 2-to-4 sigma above the mean since 1900, and the rotation trades (financials, value, small caps) already rolling over. SK Hynix’s $26.5B Nasdaq debut is a real-time referendum on AI hardware. Delta beat. Bank earnings start Monday.
MY READ
Iran was always going to be fast-decaying political theater, and the oil round-trip confirms it. The genuine tension sits elsewhere.
AI hardware demand is real. Nanya guiding capex up 4x, ChipMOS printing record revenue, SK Hynix oversubscribed 7x. But the positioning is extreme: retail turnover at the 99.7th percentile, yet net buying at the weakest since Covid. The crowd is churning at record speed and not actually adding. Valuations at the richest readings since 2000 on nearly every metric. VIX near 16. And the rotation trades that were supposed to prove broadening are failing. XLF/SPY below its 200-day. Value/growth rolling over. Russell/SPX peaked and rolled back.
Concentration bets break when the payoff timeline slips and everyone is max long. Hartnett this week: ‘no landing, no cut, no hike, no sweep, no bears.’ (BofA) Crowded room. Unmarked exits. What kills this read? Broadening confirms: rotation trades reverse, Nasdaq single-name vol compresses back to index vol, and bank earnings prove the rally has legs beyond five names.
WHAT MATTERS TODAY
SK HYNIX opened on Nasdaq this morning. Largest foreign IPO ever in the US. $26.5 billion at $149 per ADS, 7x oversubscribed, cornerstone allocations to Baillie Gifford, Coatue, and Situational Awareness Partners. (BBG) Kospi ripped 2.5% Friday, SOX gained 5.2% Thursday (YTD +87%). Big Tech has doubled its collective debt to roughly $350 billion to fund data centers. (BBG) Apollo warned that if AI does not pay off quickly enough, it becomes ‘everyone’s problem.’ (BBG)
BofA frames it as ‘a generational transfer in free cash flow’: hyperscaler 12-month forward FCF collapsing toward zero as capex consumes cash, while semiconductor company FCF explodes to roughly $450 billion. (BofA) The buyers are going broke funding the sellers. That is the AI cycle in one chart. And it is the Netscape analog playing out in real time: right about the technology, wrong about who captures the value.
IRAN, FADING
Oil fell roughly 4% Thursday, Brent to $76.25, ship-tracking shows vessels resuming Strait transit. (PDB)
The IEA sees surplus by year-end if Hormuz flows recover, which means the market is betting on peace holding. (BBG)
Complication: Russia banned diesel exports after Ukrainian drone strikes on refineries, pushing the gasoil crack to its highest since 2011. (BBG) Europe’s energy balance is tightening even as the Gulf calms.
DELTA Beat this morning. EPS $1.56 vs $1.51, revenue $17.67B vs $17.53B. Record fuel costs absorbed by premium demand. FY guide reaffirmed, well above the Street. (BBG)
Counterpoint, per Torsten Slok at Apollo: Manhattan congestion pricing has pulled roughly 140,000 vehicles a day off the streets since January 2025, a 13% drop from baseline. The consumer responds to visible price signals. Pricing power works until it doesn’t.
FED
June minutes showed a few officials argued for an immediate hike. Williams said AI-driven demand is his primary inflation concern. (BBG)
And yet: the market is pricing the opposite. 1-year inflation swaps at 2.76%, 5-year swaps at 2.55%, 5-year breakevens at 2.54%, all sitting on their lows. (BBG) The bond market is saying the oil shock faded and inflation is decelerating, while the Fed is saying AI might keep it sticky. One of them is wrong. The 10-year eased to 4.539%, but the 30-year auction cleared at 5.058%, highest since 2007. If inflation expectations are falling while the long end demands record yields, the long end is not pricing inflation. It is pricing term premium. Fiscal risk. Duration supply. That distinction matters: it is the structural case for both gold and the steepener.
JAPAN
Katayama called on pension funds to increase domestic holdings. JGB 10-year yields fell 11.5bp, USD/JPY dropped to 161.29. (BBG)
One-day squeeze or durable policy shift ahead of a September GPIF review? Option strikes at 160.50 expiring July 13 and 15 are now live.
ELECTION INTEGRITY
The administration cleared the Election Assistance Commission: two Democratic members fired, Republican member resigned, months before midterms. (BBG) No direct market impact. The institutional erosion compounds in the background.
MOVERS THAT MATTER
SK HYNIX (SKHYV) | Nasdaq debut at $149/ADS, $26.5B raised | SO WHAT: The AI hardware cycle’s signature moment. If the ADR premium widens and holds, the memory complex has months of runway. If it fades after the first session, the ‘crowded at any price’ thesis gets its first data point of falsification.
OIL (Brent ~$76.25, WTI ~$72) | Down roughly 4% Thursday, fading further | SO WHAT: The geopolitical premium proved thin and fast-decaying. Crude longs from the midweek spike are offside. Watch today’s CFTC report for forced liquidation.
SECTORS
XLK | SOX +5.2% Thursday, futures soft Friday. Chip-vs-software divergence: hardware eats software’s lunch.
XLF | +1.04%. Near 52-week highs but XLF/SPY rolling over below the 200-day. Tired.
XLE | Oil down 4%. Giving back the geopolitical premium. Russia’s diesel ban is the counter nobody’s watching.
XLV | Quiet. Vertex dropped $10B on Crinetics. UNH reports 7/16.
XLI | Delta beat lifts airlines. Defense spending elevated, Deutz buying FFG for EUR 1.6 billion. Industrials are the quiet beneficiary of both war and peace.
XLC | Netflix 7/16 is the read. Ad recovery and AI-enhanced engagement are the thesis; content costs and war-hit ad budgets are the risk.
XLY | Delta’s consumer read constructive, but BNPL delinquency (AFRM 30+ at 2.8%) is the lead indicator.
XLP | PepsiCo beat both lines. Defensive bid. Pricing power intact.
XLRE | Housing bill in limbo. Rates eased, helps. Regulatory overhang on homebuilders.
XLU | Unloved defensive. Data center power demand is secular, but lags in risk-on.
XLB | Infineon raising prices, warning of rationing. (BBG) Tied to oil and China, both uncertain.
FLOWS & POSITIONING
Retail equity turnover is running at the 99.7th percentile of its 2012-to-present range. (Vanda/Daily Shot) But here’s the twist: NET retail buying has fallen to its weakest level since the pandemic. (Vanda/Daily Shot)
Gross activity at record highs, net buying at post-Covid lows. The crowd is churning furiously but not actually adding exposure. That is not bullish participation. That is anxious trading.
ETF daily volumes topped $40 trillion in H1, up 50% YoY. (GS/Daily Shot) AAII bull-bear near -0.9. NAAIM exposure edging down. (Daily Shot)
Equity funds took in $56.4 billion in the week to July 8 while money market assets hit a new all-time high at $7.9 trillion. (BofA/BBG)
Hartnett says ‘no bears.’ His own Bull and Bear indicator reads 9.5 out of 10, deep in the sell zone. Above 8 is historically a contrarian sell signal. (BofA)
Why is VIX near 16? Dealers shifted back into positive gamma above the SPX 7500 strike. (T1A) That mechanically suppresses realized vol: hedging flows work against the direction of moves, pinning the index into a narrow range.
The calm is manufactured, not organic. If 7500 breaks, gamma flips negative and vol amplifies. The 7500 level is doing all the work.
Forward EPS re-accelerating to roughly 30% YoY; 10 of 11 sectors saw positive 2027 EPS revisions since Q1, led by Energy and Tech. (GS/Daily Shot) The earnings growth is real. The question is whether the multiple, with nearly every valuation metric at 2-to-4 sigma above the mean since 1900 (Daily Shot), survives a payoff wobble.
The rotation trades are failing. XLF/SPY below its 200-day. Value/growth below both moving averages. Russell/SPX peaked in late June and rolled back. Broadening is not confirming.
Paid Section has deep dives into financials and energy, more on consumer space, and the full live trade book with current marks: the 2s10s steepener now in the money at +38bp (entry +35bp on 7/2), the gold long working at $4,114 (entry ~$4,050 on 6/29), and the Brent short cut after the Hormuz pop. A new expression: why Nasdaq downside protection is the cheapest insurance in the tape with VIX near 16 and single-name tech vol diverging from index vol. The full bank earnings positioning guide ahead of JPM, WFC, Citi, BAC, and Goldman all reporting July 14. Conviction ranking, decision tree, and watchlist.
Bank earnings start Monday. Either the broadening thesis gets its proof, or the concentration bet gets its reckoning.
