1) Stocks are volatile again today as investors try to figure out what might happen next with the conflict with Iran...
As the New York Times reports, negotiations between Iran and Vice President J.D. Vance failed to yield an agreement. And President Donald Trump ordered a closure of the Strait of Hormuz, effective at 10 a.m. Eastern time this morning. At first glance, this news looks bad.
My view is more optimistic. The U.S. Navy will only be prohibiting ships traveling to and from Iranian ports, not all traffic. Most importantly, it doesn't appear that Trump is eager to renew the aggressive bombing campaign, much less order a ground troop deployment.
So my advice to long-term-oriented investors remains the same: Ignore the headlines related to Iran (and other geopolitical conflicts), and focus on the fundamentals of the U.S. stock market.
2) Investments in artificial intelligence ("AI") have been driving both the economy and the market. And they don't look likely to let up anytime soon...
As this cover story in yesterday's Wall Street Journal notes, AI's rapid energy usage is increasing demand for computing power:
The sharp capacity crunch has caused consternation among power users, forced companies to scuttle products and led to reliability problems. The issues are a warning sign for the AI boom, as they may limit the utility of powerful new AI tools just as massive amounts of users have begun to rely on them to boost productivity.
Over the past few months, demand has exploded for "agentic" AI, autonomous tools that use the technology to independently perform tasks, from writing software code to scheduling house tours for real-estate brokers. Companies have been scrambling to secure the availability of computing capacity needed to serve a growing base of customers who are also significantly increasing their AI use.
As the article continues, AI is following the trajectory of other historical technology booms – demand is growing faster than resources and infrastructure:
Historically, price increases have been among the only ways to address a supply crunch, but such a move could be perilous for frontier AI companies, who are in a ferocious competition to gain users.
Hourly rental prices for GPUs, the microchips used to train and run AI models, have surged since the fall.
I remain bullish on the transformative power of AI and the companies leading the charge. (One exception is OpenAI, which I'm still bearish on – it's burning more than $1 billion per month while its AI assistant ChatGPT is losing to Anthropic's Claude and Google's Gemini.)
3) I also remain bullish on the market overall because corporate earnings appear to be exceptionally strong as we head into earnings season, which begins today. Yet the price-to-earnings (P/E) multiple of the S&P 500 Index has fallen this year...
Regarding the former, this article in yesterday's WSJ notes that the number of companies issuing positive earnings guidance is the highest in five years:
The article also notes that analysts estimate a first-quarter earnings growth rate of 12.6% for the S&P 500, which would be the sixth straight quarter of double-digit growth.
At the same time, valuations have become more reasonable. The index's forward P/E multiple has fallen from a high of 23 times in December to 20 times today, as you can see in this chart courtesy of MacroMicro:
4) While the S&P 500 is down less than 1% this year, plenty of stocks have gotten crushed. That includes the two government-controlled mortgage giants, Fannie Mae (FNMA) and Freddie Mac (FMCC)...
I shared the bull cases for these stocks made by two of the smartest investors I know: Pershing Square's Bill Ackman on November 19 and Michael Burry of The Big Short fame on December 10.
Since then, they're both down around 30%. But they've rallied in the past month, as you can see in this one-year price chart for Fannie Mae (Freddie Mac's stock tracks it closely):
The recent rally was fueled in part by Ackman's X post on March 29:
I sat down last week with my colleague Matt Weinschenk to discuss these two stocks and why they're my second-favorite speculations after Joby Aviation (JOBY).
We also did a deep dive into how politics, policy, and capital markets collide – and what that means for your portfolio. You can watch the full YouTube video here:
In our 45-minute conversation, we broke down:
- How Fannie Mae and Freddie Mac actually work
- Why they're considered businesses with a "license to print money"
- What happened during the 2008 bailout – and why it still matters
- The complex capital structure (preferred versus common shares)
- How government policy could instantly reprice the stocks
- The three major scenarios for investors (including a total loss case)
- Why this is a political speculation – not a traditional investment
- The asymmetric upside versus downside setup
- Why position sizing is critical in high-risk opportunities
- How top investors like Ackman and Burry view the trade
Burry wrote about the two companies again on March 26 (subscription required to view the full Substack post). He concluded:
I believe the IPO [for Fannie Mae and Freddie Mac] is now a 2027 proposition at best. The Iran War seals it after the lukewarm reception on Wall Street. Higher rates may transmit to the mortgage market and impact an already shaky housing market. Regardless of whether Fannie and Freddie would be better untethered and free to help the housing market, the optics of risk are too significant.
Again though, I do not believe we need an IPO. An uplisting and an announcement on the Senior Preferred Stock is all that is needed, especially from these prices. And I do not believe that is a big ask.
For more on the bull case, see this X post by Aakash Gupta, who argues:
So what are you actually buying at [today's price]? A royalty on the American mortgage system. 65 [basis points] on $7.5 trillion in outstanding [mortgage-backed securities]. $48 billion in gross annual revenue. Under 5 [basis points] in historical losses. The most predictable spread in finance, backstopped by a guarantee both parties have publicly committed to preserving.
JPMorgan trades at 13x and takes real credit risk. Utilities trade at 15x with half the visibility. These two trade at 0.48x collecting tolls on other people's risk.
Here's a rebuttal by Karl Krummenacher, who concludes:
This is a speculation on political resolution, with a fat left tail if it goes wrong. If you have money you can genuinely lose and you want to own the optionality, that's a conscious decision. But don't let someone's X post convince you this is a "pricing error." The market knows about the earnings. It's pricing the uncertainty around what common shareholders actually get to keep.
I agree with Krummenacher. These stocks are speculations, and the outcome depends more on political decisions, not the businesses' economic performance.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.