Russell 2000's 22% run masks software loan distress.

Transcript

Tom Buddy, have you seen the Russell two-thousand lately? Small caps are absolutely on fire, up twenty-two percent in the first half of the year, and honestly, the momentum feels like it’s just getting started.

Marie Look, I’m going to push back right away — it’s July fourth, twenty-twenty-six, this is Investment Flash, and Tom, that twenty-two percent run might be the biggest head-fake of the year. I’m Marie, joined by Tom and Gerald, and we have a massive divergence to unpack today.

Gerald Yeah look, Marie’s right to be suspicious. While Tom’s celebrating the Russell being within two percent of a fifty-two-week high, the senior loan market is telling a completely different story — specifically in software debt, where things are looking fairly grim.

Tom No way, Gerald — you’re really going to rain on the small-cap parade because of some leveraged loans? The broadening of this rally is exactly what we’ve been waiting for since we talked about selling the Nasdaq one-hundred ETF yesterday.

Gerald Alright, but the thing is, the share of private software debt trading down more than twenty percent is at a five-year high. That’s not just a minor hiccup; that is a systemic signal that the software-as-a-service model is hitting a massive wall of credit stress.

Marie Wait — wait a second, this is what I mean about the 'Our View' synthesis today. We’ve got the small-cap ETF, the I-W-M, priced for perfection with a price-to-earnings ratio near twenty, while the senior loan ETF, ticker B-K-L-N, is literally sitting at a fifty-two-week low.

Tom For real? I didn't realize the senior loan ETF was that depressed. But isn't that just the 'AI-pocalypse' fear-mongering hitting the older software names?

Gerald Honestly, the data suggests this distress started well before the AI hype really took hold. It’s a leverage problem, and if the Invesco Senior Loan ETF is cracking, those small-cap valuations in the Russell two-thousand look like they’re built on a very shaky foundation.

Marie Exactly.

Tom One hundred percent.

Gerald That's the whole story.

Marie See, this is why we’re looking at the software ETF, ticker I-G-V, as a potential sell. It’s already down nearly nine percent year to date, and if this credit contagion spreads from the loan market to the equity side, there’s a lot more room to fall.

Tom Okay, fair enough, the credit side is spooky, but let's talk about some actual wins. B-A-E Systems and Leonardo just landed a massive six-billion-dollar stealth fighter contract along with Mitsubishi Heavy.

Gerald Yeah, that’s a proper result. B-A-E is already up thirteen percent this year, and securing multi-year revenue on a major platform like that is basically a license to print money for the next decade.

Marie Not so fast for everyone in that sector, though. Thales is taking a major hit because Germany scrapped their frigate program — it just shows that in defense, you have to be on the right side of the specific contract, not just the sector.

Gerald The thing is, Germany cancelling a defense program is becoming a bit of a tradition, isn't it? It’s like analysts revising price targets after the stock has already moved fifty percent — it’s basically a free retirement plan for the indecisive.

Tom ha — fair enough, Gerald.

Marie pff, okay, that’s a bit brutal, but he’s not wrong. We’re bullish on B-A-E Systems and Leonardo because that fighter jet money is locked in, but Thales is a clear sell after that frigate news.

Gerald Right, and speaking of things being locked in, let’s look at this Bloomberg survey of French economists. They’re suggesting the Fed might actually hike rates again this year while the E-C-B stays on hold.

Tom Wait, another hike? No way. The labor market is softening! Everyone is talking about a pivot.

Marie Hold on, Tom — that’s exactly why this is our 'Most Original Take' today. If the Fed stays hawkish because of sticky inflation while Europe cools off, the dollar is going to absolutely tear through the euro.

Gerald Exactly, and that would be a disaster for long-duration Treasuries. The T-L-T is already near its fifty-two-week low; if the market has to reprice for a Fed hike instead of a cut, that bond slide is going to get very ugly, very quickly.

Marie See, this is the macro lens people are missing. If you're long the euro against the dollar, you're basically betting against a widening interest rate gap that seems more likely by the day.

Tom I’m still skeptical on the hike, but if you’re right about the dollar, that actually helps my domestic small caps, right? Most of the Russell two-thousand companies don't care about the euro-dollar exchange rate.

Gerald In theory, yes, but they do care about the cost of debt, Tom. If the Fed hikes, those small-cap interest payments go up, and we already know from the software loan data that the debt-service capacity is stretched thin.

Marie Let’s pivot to crypto for a second because the signals there are just as conflicted. CoinDesk is reporting that whales accumulated about seventeen billion dollars worth of Bitcoin in just two weeks.

Tom Now that is a signal! When the big fish are buying while the ETFs are bleeding four billion dollars, that usually means we’re at a cycle low. I’m feeling bullish on a Bitcoin bounce here.

Marie I’m going to push back here — the options market is still incredibly nervous. We’re seeing a sixteen percent put-call skew on Bitcoin and an even higher premium for Ether puts, which means the professional traders are still paying a lot of money to hedge against a crash.

Gerald Yeah, look, it’s a classic tug-of-war. You have the long-term holders stacking sats, but the derivatives market is bracing for another leg down. I’d be very careful with the Bitcoin and Solana calls until that options skew flattens out.

Tom Alright, alright, I’ll keep the crypto-exuberance in check for now. But can we talk about Asia? The decoupling from China is moving so fast it’s actually showing up in thirty-year data points.

Marie Right — Japanese clothing imports from China just hit a thirty-one-year low as they shift production to Southeast Asia. This is a structural earthquake for Chinese manufacturing.

Gerald It’s not just textiles, either. South Korea is literally reviving an old tungsten mine just to ensure they have a supply chain that doesn’t rely on China. That’s why we’re looking at Singapore equities and the rare earth miners ETF, ticker R-E-M-X.

Tom And South Korea! The E-W-Y is up seventy-six percent year to date, but it’s still eighteen percent below its fifty-two-week high. There is so much room for that to catch up as they build out this 'China-free' ecosystem.

Marie Look, the South Korea story is fascinating because it’s about resource self-sufficiency. It’s a massive policy shift that we think justifies a long position in South Korean equities even after that huge run.

Gerald Fair enough, but let's check the temperature in Taiwan. Yuanta Securities, the biggest brokerage there, is looking for a one-point-three billion dollar loan to fund their expansion because the local stock market is booming.

Tom Buddy, that is a massive vote of confidence! When the biggest broker in the region is tapping the banks for a billion plus to handle the volume, you know the Taiwan rally has legs. I’m all over the Taiwan equity ETF, ticker E-W-T.

Marie Wait — just remember what happened with the Japan activist probe. Nikkei is reporting that regulators are looking into shareholding reports, which could slow down the corporate reform narrative that’s been driving Japanese stocks like E-W-J.

Gerald Yeah, exactly. Japan is up fourteen percent this year, but this regulatory friction could cap the gains for a bit. It’s a 'hold' for me on Japan until we see how aggressive this probe actually is.

Tom Oh come on, Gerald, a little paperwork check isn't going to stop the governance revolution! You sound like me trying to call a bottom on memory chips back in twenty-twenty-two.

Marie hah — yeah, yeah, we remember that, Tom. 'This is the six-thousandth bottom for chips,' I think you said.

Tom Alright, alright, I walked into that one.

Marie By the way, as always, none of this is investment advice — we’re just three people and a lot of data. Do your own research before you move any capital.

Gerald Before we wrap, we have to mention the energy shift. The Jones Act waiver that allowed foreign vessels to move fuel during the recent crunch really boosted the Gulf Coast refiners. Energy stocks in the X-L-E are up sixteen percent this year because of that flexibility.

Marie Right, but the shipping stocks in the S-E-A ticker are taking the hit because they’re losing that domestic monopoly. It’s a great example of how a single policy waiver creates immediate winners and losers in the energy complex.

Tom And Asia is taking notes! Bloomberg says they’re building out massive energy buffers and diversifying into clean energy to avoid the Iran-style supply shocks. I’m looking at the clean energy ETF, ticker I-C-L-N — it’s still way below its highs.

Gerald Totally.

Marie Spot on.

Tom That's it.

Marie So, to sum up our view: we’re playing the divergence. We like the defense winners with guaranteed contracts like B-A-E Systems, and we’re wary of the small-cap euphoria because the senior loan market is showing real cracks in software debt.

Gerald Exactly. Short the senior loan ETF, long the defense giants, and keep a very close eye on that Fed-E-C-B rate gap. If that widens, the dollar is the only place to be.

Tom I’m still holding out hope for my small caps, but I'll admit the credit data is a reality check. If you’re just finding us, hit follow on Spotify — or check investment-flash dot com for the full digest with all the charts and sources.

Marie Good call, Tom. We’ve covered a lot of ground today from stealth fighters to South Korean tungsten mines. It’s been a busy one.

Gerald Yeah, look, it’s going to be an interesting weekend to see if the crypto whales keep buying that dip or if the options traders get their way.

Tom I’m betting on the whales! We’ll see who's right soon enough. Thanks for listening, everyone.

Marie We’ll be back with you soon. We're back for tomorrow's Weekend Edition at ten a.m. London time. See you then!