The Story of the Market Is Access to Capital, Not Its Cost
Anthropic needs Broadcom guarantees to obtain massive loans.
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There is minor strength in the indexes early Tuesday. Oil is ticking up, and bonds are steady. The market is in flux as it contends with the big issue of the moment: how much is being spent on AI, how it is being paid for and whether it will ever be profitable enough to justify it.
The Anthropic IPO filing was one piece of that story. This morning we have more circular financing hitting the market.
Broadcom Steps In
The Wall Street Journal reports that Broadcom (AVGO) CEO Hock Tan intervened over the weekend to seal a $63 billion debt deal for Anthropic, the largest ever to raise money for AI infrastructure. The money lets Anthropic lease the specialized chips Broadcom is developing with Alphabet (GOOGL).
Tan had spent nearly two months trying to get banks to commit more than $40 billion. Broadcom had already agreed to provide financial guarantees because of its strong credit rating, but according to the WSJ, some banks grew anxious about participating and considered pulling out altogether because they didn’t feel they were being paid enough for the risk.
In the end, Tan held 11th-hour talks with bank executives, agreed to higher loan interest rates, and gave the banks more comfort on Broadcom’s guarantees if Anthropic defaults. Bank of America (BAC), Citigroup (C), and Morgan Stanley (MS) led the deal, and another chunk, partially financed by Blackstone (BX), brought the total to $63 billion.
Broadcom was the supplier, guarantor, and negotiator. The bears will slam this as more circular financing, and they have a point. A chip company is guaranteeing the loans that let a customer lease its chips.
Access, Not Cost
Monday I wrote about Elon Musk’s comment that the debt markets have almost entirely shut off for the neoclouds. This deal is the other side of the equation. The strongest players can still get money, but only because companies with sterling credit are willing to put their own balance sheets behind it. Everyone else is on their own.
That will widen the divide Musk described. Companies with strong credit, or powerful partners willing to guarantee their debt, will keep building. The ones without that backing will struggle to raise money at any price.
It also tells us something about the Fed. The banks wanted a higher rate, and they got it, but the rate wasn’t what nearly killed the deal. The question was whether the money would be there at all. For the AI group, this is more about getting funds than what they cost, so Wednesday’s Fed decision may matter less to these stocks than the earnings reports that follow.
SpaceX Makes the List
On Monday I noted that SpaceX (SPCX), one of my core holdings at Hammerhead Financial, can use its superior credit to build its infrastructure. This morning Bank of America added SpaceX to its “US 1 List” of its best investment ideas, in part because SpaceX has investment-grade credit with Starlink and launch revenue behind it.
Bank of America is also a lead bank on the Anthropic loan, so the same bank recommending SpaceX is financing the AI buildout. That doesn’t mean the call is wrong, but it is part of how this cycle works.
From Semis to Software
DataTrek Research has been tracking a rotation that fits what I’m seeing. Since the June 8 call to shift from semiconductors to software, the iShares Expanded Tech-Software Sector ETF (IGV) has outperformed the VanEck Semiconductor ETF (SMH) by 26 points.
DataTrek says that is unwinding a record 84-point outperformance by semis over 100 days through May 13, the most extreme divergence since 2010. Nine of SMH’s top 10 holdings are down over the last 100 days, while nine of IGV’s top 10 are up.
DataTrek believes the market priced in too much AI disruption for software and too much earnings durability for semis, and it expects the rotation to continue through year-end. That fits with what we have been seeing across the market.
The money is moving away from the most crowded parts of the AI trade and toward areas that have been left behind. Computer security, which led the market on Friday, is part of that software group, and I’m looking for new leadership there.
Game Plan
The market is digesting all of this ahead of the big Magnificent Seven reports over the next few days. The volatility that follows the news is the trade, and that will require some fast moves when the reports hit.
I’m not going to guess ahead of time. I’ll be ready to act on the reaction.
At the time of publication, Rev Shark was long SPCX.
