Special Situations Newsletter: March 2025

Monthly newsletter covering two spotlight ideas, M&A activity, custom screens and more.

Tariff Trouble

The rally in momentum names finally broke in February with several companies including Tesla (TSLA), Palantir (PLTR) and MicroStrategy (MSTR) pulling back more than 25% from their recent highs. With Bitcoin down nearly 18% in February and uncertainty about new tariffs against China, Mexico and Canada going into effect next week, sentiment finally tipped over into extreme fear.

A year ago this index was in extreme greed territory and just a month ago was in neutral territory. With one exception last August - during the Japanese carry trade unwind - we haven’t seen the index this low in a year.

It is not clear to me if this will be just another blip like the one last August that the market will just power through or if we are at the start of a period of lower lows. Beyond tarrifs, the other reason some segments of the tech sector are in trouble has to do with parts of the AI narrative unwinding. The release of DeepSeek from a resource constrained company signaled that it was possible to build AI models creatively instead of the brute force method of throwing as many high-end NVIDIA GPUs as possible at the problem.

Ars Technica called the latest ChatGPT AI model “a lemon” and went on to say:

“The verdict is in: OpenAI's newest and most capable traditional AI model, GPT-4.5, is big, expensive, and slow, providing marginally better performance than GPT-4o at 30x the cost for input and 15x the cost for output.”

A combination of the DeepSeek news and the performance of the latest OpenAI model against the backdrop of tarrifs triggered a big sell-off in the markets on Thursday before stabilizing on Friday.

We have built a cash position of almost 26% in the model portfolio and this will give us dry powder to deploy if the markets continue going lower. It also helps that many of our positions are catalyst driven and as we have seen in the past, will help the portfolio act in an uncorrelated manner when the overall market drops.