What a wild and remarkable journey the market has been on this month, and a lot of it orchestrated by Leopold Aschenbrenner.

I told the story on Making Money with Charles Payne  yesterday.

He was propelled to superstar status as an artificial intelligence (AI) wunderkind this year, growing his fund from $2.0 billion to $45.0 billion, only to watch it unravel.

Just last month, the WSJ was singing his praises.

Leopold graduated valedictorian at Columbia University at age 19, was a member of the philanthropy team at FTX, and was fired from OpenAI in 2024.

He then wrote a 165-page essay titled Situational Awareness that later became a series called Situational Awareness: The Decade Ahead.

Later, heavy hitters backed his investment fund of the same name, which grew to $45.0 billion.

For a while, he looked like a genius, and every stock he blessed became a ‘rocket ship.’ That kind of echo chamber is usually earned after many years, and even then, the likes of Warren Buffett never moved stocks the way Leopold did.

Then the AI trade began to move in the wrong direction at warp speed.

Wednesday night, there were rumors that the Situational Awareness fund was trying to raise more money, but instead the bulk of the portfolio was sold to Citadel after recent losses.

I also read Leopold is getting married this weekend, and who needs that kind of headache on their honeymoon?

Too Much Leverage

The AI trade wasn't over, and it wasn't crumbling on poor fundamentals – I have stressed this vigorously to subscribers.

Leopold made the same mistake investors in South Korea made – too much leverage.

From a logical point of view, you would say that a 39% drop is devastating, but being up 30% would still seem to provide relief.

The problem is a lot of the buying and leverage came towards the top. So, once the hot names began pulling back, they triggered margin calls, which in turn triggered even more margin calls.

KOSPI hit an all-time high on June 22nd, and by July 13, there were 1.2 million margin calls.

Pair Trades

Leverage added fuel to the gains, but the secret sauce to Leopold’s performance was ‘pair trading.’

A review of his filings in May saw long exposure:

Bearish on semi hardware and short infrastructure and software:

Although the frantic effort to raise more cash failed, I agree with the assessment: this is the moment lots of investors have been waiting for – lots of stocks on sale. After yesterday’s adjustments, many Situational Awareness positions are still down a ton. More authentic price discovery begins.

There are rumors of two more similar situations occurring at this very moment. I suspect some funds tried to enhance performance with leverage and trades that flipped, but I’m not aware of anything the size and scope of Situational Awareness.                

What A Day

Interesting that software (IGV) rallied with semiconductors, although a number of them slipped.

Message from Biggest Advancers and Decliners

The thoroughbreds were let out of the barn and took off like the good old days (before July).  Names are higher on the strength of earnings and guidance, which is a relief in itself, considering the reception most stocks have received, even with great results.

Data-driven businesses and counting stocks took it on the chin. As I stated when they caught bids earlier in the week, I don’t think more, cheaper, and faster AI helps their value proposition.

Momo is Back!

The Flip-Flop

The wild gyrations in the market unsettled lots of nerves. Smoothness is much desired as we head into the last trading session of the week.

Today’s Session

The market opened in the green and seems to carry yesterday’s momentum.

Reports are circulating that Moonshot’s Kimi K3 was built using 20,000 H200 chips from Alibaba (BABA).

In other news, Oil is moving  higher after further skirmishes in the Middle East, including an attack on 2 tankers trying to transit the Strait of Hormuz.

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