The 🔥H.E.A.T.🔥 Formula

AI Driven Insights to Spark Your Portfolio

February 12, 2025

The H.E.A.T. Formula is a radically different way to look at investing your portfolio.

‍H- Hedges, you should always have hedges and be agnostic as to being long or short. Bonds are not a hedge

‍E-Edges, you should always look for edges. Preferably these are edges with some sort of psychological underpinning, structural edges, or some sort of barrier to entry.

‍A-Asymmetric. Everything you do, be it trades or your overall portfolio, should be designed so that heads you win a lot, tails you lose a little.

‍T-Themes. You should always be invested in the top themes. Most everything else is just noise.

Preview of Coming Attractions

I think AI is going to make traditional indexing and active management obsolete. I am putting my money where my mouth is…

The investment firm is introducing eight new AI-focused funds, including offerings targeting UFO disclosure and DeepSeek's emerging AI technology.

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Uncovering Hidden Themes with AI: How DeepSeek Is Rewriting the Investment Playbook

Thu, Feb 27, 2025 2:00 PM - 3:00 PM EST

1. Bullets From DeepSeek to Disruptors: Explore how one AI breakthrough (DeepSeek) reveals cost-effective strategies and under-the-radar opportunities beyond mainstream tech giants.

2. Finding Alpha in the Noise: Learn how AI-driven data-mining cuts through market hype and identifies genuine growth catalysts—even in emerging or overlooked sectors.

3. Comparing & Contrasting Strategies: Discover how to harness AI to evaluate different investment approaches.

YouTube Videos

We will be hosting The Watchlist every Tuesday and Thursday. Jeremy Vreeland (Bullish Bears) and I will be discussing stocks we are currently watching, buying, or shorting. We will also be discussing how to structure trades for asymmetrical returns and we will take your questions.

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Tuesdays are live streamed on YouTube here:

Market Recap

One of those days when looking at the S&P 500 doesn’t really tell the story. Rough day for all of my favorite themes as they were almost all negative. Money rotated into value, which it does from time to time. Still think the idea of “value” stocks is stupid. In this day and age are you going to consistently find undervalued stocks that other people haven’t recognized? I doubt it. But, money does move around in the market day to day.

Another bad day for TSLA, and a bad morning.

Really does look like an ugly chart. Yesterday I mentioned BYD, which seems to be putting pressure on TSLA with cars that have assisted driving standard and cars the cost less than $10K (more on TSLA below).

Today we have CPI and day 2 of Powell. Day 1 was benign, which is what we expected. The only statement of note was about the neutral rate…..

“My own view is that the neutral rate will have risen meaningfully from what it was before the pandemic. It was clearly very low before the pandemic. Extraordinarily low, historically….. So yes, I think it’s moved up and many of my colleagues on the FOMC feel the same way.”

Of course Powell was asked about Trump’s policies, which I fear the Fed will have some trouble trying to navigate….

“It really does remain to be seen what tariff policies would be implemented. It would be unwise to speculate when we really don’t know. We see proposals, but it’s so hard to say what will happen,” BUT “It’s really not just tariffs. It’s tariffs, immigration, fiscal policy and regulatory policy,” and “We’ll try to make sense of it and do what’s right for monetary policy.”

I had GPT take a deep dive on the issues facing TSLA and asked whether it’s still a core holding, short answer was “maybe”…

1. What’s Driving the Recent Sell-Off

  1. Elon Musk Distractions

    1. Musk’s political entanglements, leadership in the Department of Government Efficiency, and a potential $97\$97$97 billion OpenAI takeover bid raise “key-man” risk.

    2. Investors worry about whether Musk’s time away from Tesla or future stock sales (to fund acquisitions) might dampen TSLA shares.

  2. Competitor Moves (BYD, etc.)

    1. China’s BYD is bundling driver-assistance tech across its models, which underscores broader competition. The days of Tesla owning all the EV autopilot headlines may be eroding.

    2. Future Fund’s Gary Black warns many companies will have self-driving cars. Tesla may not fully monopolize the self-driving “robotaxi” advantage.

  3. Tariffs & Macroeconomics

    1. Geopolitical tension, potential new tariffs, and an uncertain macro environment weigh on the entire auto sector (GM, F down too).

    2. Tesla is not immune—investors see broad consumer softness.

  4. Earnings Cuts & Model Transitions

    1. After Tesla’s 4Q results missed, 1Q earnings estimates fell ~25%. Fears that consumers will wait for the “updated Model Y” or a rumored cheaper model are hurting near-term deliveries.

    2. Lower shipments => lower earnings => short-term negative sentiment.

Conclusion: Multiple factors hitting Tesla short-term, from leadership distractions to model-cycle transitions and downward earnings revisions.

2. Is Tesla Still a Core Holding?

(A) Long-Term AI & EV Thesis

  1. Market Leader in EV

    1. Despite new entrants, Tesla still holds a strong brand, scale, and advanced manufacturing efficiency.

    2. Global EV adoption continues to accelerate. Tesla is typically a prime beneficiary in Western markets, though it’s losing some share in China.

  2. Autonomous Driving Potential

    1. Tesla’s Full Self-Driving software has a large installed user base, generating subscription revenue.

    2. Future expansions could lead to a partial “robotaxi” scenario. Even if not fully realized soon, incremental improvements keep adding software-based revenue.

  3. Operational & Financial Strength

    1. Despite near-term negativity, Tesla remains profitable, with healthy automotive gross margins relative to many EV peers.

    2. The brand is strong (though some question if Musk’s politics hamper it with certain buyers). The product remains highly rated among EV enthusiasts.

(B) Near-Term Headwinds

  1. Brand & Political Risks

    1. “Key-man risk” with Musk’s involvement in new political roles. Some consumers might avoid Tesla due to politics.

  2. Competitive Pressure

    1. BYD, among others, are pushing advanced self-driving and cheaper EVs. Tesla’s product pipeline must keep pace (e.g., rumored cheaper model).

  3. Valuation & Volatility

    1. Tesla historically trades at high multiples. Large swings are common. Investors must handle big price fluctuations.

(C) Conclusion on “Core Holding”

  • Tesla’s long-term AI/EV story remains compelling if you believe:

    • EV adoption continues quickly,

    • Tesla’s margin advantage endures,

    • Full Self-Driving (or partial autonomy) yields significant software revenue,

    • Musk eventually refocuses on Tesla’s major product expansions and new model rollouts.

  • If the user can stomach volatility and short-term brand controversies, Tesla can still be a “core holding.” However, near-term risk is high, and new competition plus uncertain political headlines could weigh on the stock for months.

3. Technical Levels & Future Catalysts

  1. Support Levels

    1. Technicians see some support around $315\$315$315. If that breaks, $270\$270$270 might come into play.

  2. Potential Upside Catalysts

    1. Cheaper Tesla model unveiling or an official “Model 2” launch,

    2. Self-driving breakthroughs or partial “robotaxi” deployment,

    3. Musk opting out of an OpenAI acquisition or clarifying no TSLA share sale,

    4. Rebound in near-term deliveries if new model transitions go smoothly.

Bottom Line

  • Short-Term: Tesla is under pressure from earnings cuts, leadership distraction, brand controversies, new competition, and macro. Expect continued volatility.

  • Long-Term: Tesla remains a top EV/AI play with advanced manufacturing, margin leadership, and a big self-driving data advantage. If you can weather short-term drama, it can still be considered a core holding for EV/AI believers.

BABA was one bright spot yesterday. It’s up again this morning, and does look extended short term…..

I asked GPT to review the article on comment on BABA being a core holding….

1. The Rumor: Apple Teams Up With Alibaba on AI for iPhones in China

  1. What Happened

    1. The Information reported that Apple is working with Alibaba to roll out generative AI features in China for iPhone users, subject to Chinese regulatory approval.

    2. Alibaba soared up to 8.6% on the news, while Baidu slid almost 3%, as Baidu is also vying for local AI partnerships and had been a potential Apple partner.

  2. Why It Matters

    1. iPhones sold in mainland China currently lack official access to Apple’s ChatGPT-based features due to OpenAI’s regulatory hurdles. A local partner is needed for large language models (LLMs) in compliance with Chinese regulations.

    2. If Apple finalizes Alibaba as a partner, Alibaba’s Qwen model and broad data resources could be the local generative AI engine for iPhones, capturing a portion of the AI user base among affluent iPhone owners.

2. Alibaba’s AI Position

  1. Qwen 2.5 Max

    1. Alibaba’s recent LLM benchmark results showed it outperformed Meta’s Llama and even some versions of DeepSeek, positioning it among the leading Chinese AI players (along with Tencent, ByteDance, Baidu).

    2. Such a local LLM star could see broader adoption if integrated into iOS for the world’s largest smartphone market by volume.

  2. China’s AI Regulatory Environment

    1. China requires generative AI providers to register models with authorities and follow guidelines about content. A local champion like Alibaba stands a better chance of compliance than direct foreign AI solutions.

    2. Apple’s rumored deal with OpenAI has faced blockade for iPhones purchased in mainland China, so Alibaba can fill that gap.

3. Impact on Alibaba’s Core Businesses

  1. Cloud Revenue Lift

    1. If Alibaba powers iPhone LLM features, it likely means more workloads on Alibaba Cloud. That could accelerate cloud growth beyond the current 11% yoy Street estimates starting in FY26.

    2. HPC meltdown mania overshadowed by unstoppable HPC expansions, with Apple funneling major volumes to Alibaba’s cloud.

  2. Data & Ecosystem Synergy

    1. Apple might pay licensing fees or usage-based fees for AI queries. Alibaba’s data from e-commerce, logistics, and payments can enhance the LLM’s domain knowledge, further fueling synergy.

  3. Profit Trade-Offs

    1. Near-term, Alibaba may need heavier AI R&D spending, possibly tempering margin improvements. But longer term, brand & scale advantages could drive revenue lifts.

4. Apple’s Strategy & Alibaba’s Strategic Value

  1. Why Alibaba Over Baidu

    1. Alibaba has a robust enterprise cloud presence, plus the highly benchmarked Qwen model.

    2. This can expedite an Apple LLM solution on iPhones in compliance with Chinese rules, bypassing the difficulty of using ChatGPT or direct Apple Intelligence in mainland.

  2. Potential Domino Effect

    1. Apple might eventually partner with multiple local Chinese cloud or AI players (e.g. Tencent, Baidu) for diversity. But Alibaba’s immediate advantage is its advanced generative model & broad suite of cloud tools.

5. Regulatory Approval Caveat

  1. China’s Cyberspace Regulator

    1. Apple & Alibaba must secure official approval. There’s no guarantee. If the state sees Apple as having “too much foreign influence,” or if the AI tools stray from content guidelines, the plan could stall.

  2. Timing

    1. Implementation could take months, if not longer, for final regulatory clearance.

6. Stock Implications: “Core Holding”?

  1. Near-Term Price Boost

    1. The rumor alone spiked Alibaba’s share price ~8%. Confirmation or official partnership announcements could drive more upside, though intangible details matter (revenue split, regulatory risk).

  2. Longer-Term Fundamentals

    1. Alibaba is still core in Chinese e-commerce, with emerging impetus from HPC meltdown mania overshadowed by real AI expansions.

    2. If it cements the Apple AI deal, Alibaba’s cloud and LLM brand gain further credibility, supporting a multi-year growth narrative.

  3. Risks

    1. Apple could shift strategy or also partner with Baidu or others.

    2. Chinese consumption remains subdued, impacting Alibaba’s core e-commerce.

    3. Geopolitical tensions or further Chinese tech regulations could hamper expansions.

7. Conclusion: Alibaba’s “Core Holding” Status

  • Yes, the rumored Apple partnership strengthens Alibaba’s AI credentials, reinforcing it as a top-tier Chinese technology firm with a broad ecosystem.

  • A successful Apple collaboration for iPhone-based AI in China would highlight Alibaba’s Cloud & LLM capabilities, potentially unlocking new revenue streams & brand exposure.

  • Caution: Implementation and regulatory approvals remain uncertain. Yet if you already considered Alibaba a core long-term China tech holding, this rumor underscores bullish potential, especially if HPC meltdown mania is overshadowed by unstoppable AI expansions globally.

Final Take: Alibaba remains a core Chinese tech/AI stock, potentially more so with a rumored Apple AI partnership. If realized, expect further synergy with HPC expansions, giving Alibaba’s stock a fresh tailwind.

Ukraine War

The release last night of Mark Fogel from Russia brought talk that we may soon see a ceasefire. I asked GPT for a list of the potential major winners and losers from this. It flagged companies that would likely get significant rebuilding business….

CAT, which I missed the move at the beginning of the year, but like them here if the 200 day can hold….

DE which I already own as a robotics play….

And CRH, which is a name I am not as familiar with….

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