1.2 Million Margin Calls, One Imploded Hedge Fund Kid, and a Historic Snapback

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Yesterday was the last day of July...

and the small end of the market staged a miraculous comeback after a truly horrific week.

A huge chunk of green and only two red stocks on my 150 stock small cap watchlist after Friday morning’s open.

(I should make a “the 150 small stocks on my watchlist” index to provide better data than my observational statements)

So, what happened?

The great dump of the global AI and Semiconductor trade at the start of the week staged a violent reversal back upwards - and small ASX stocks were simply caught up in the sentiment.

If the main trade that everyone in the world is watching is thrashing up and down - you can bet the collective emotions it generates in everyone is going to spill into tiny, risk-on ASX stocks:

The week was a tale of two distinct acts (acts like in a play) that drove what pretty much every stock on the small end of the ASX was doing.

(spoiler alert: Monday is going to be good - also coming up: why Friday’s ASX small cap surge is really, really important)

ACT I: Unravelling of the AI and semiconductor trade, 1.2 million Koreans get smoked and the AI hedge fund kid implodes

AI and semiconductors are the hottest trade in the world right now - no question.

All the big global capital, retail punters and everyone in between has piled in.

There is a LOT of leverage in the space - and it’s been running for about 3 years (with a couple of blips along the way from which it rebounded higher)

All the while being called a bubble by anyone with 1999 dotcom crash PTSD.

The last 10 days have seen a selloff, ending with two real horror days...

The major climactic reprise (act 1 finale) was a high energy vomit over the Tuesday and Wednesday nights, featuring a duet from these two “stars of the show”:

The first: 23-year-old Leopold Aschenbrenner’s hyper-leveraged fund concentrated on AI (Situational Awareness fund) suffered a devastating 67% portfolio wipeout in July, triggering a forced liquidation.

(this kid was crowned a hedge fund genius for all his AI hardware bets and was up 1,551% at one stage (source), instead of selling, he hyper-leveraged)

The kid made everything worse by noticeably smashing his stock into the market - stoking the fear and contagion.

(and you thought big holders dumping stock and noticeably pushing down share prices only happened in small, illiquid ASX stocks)

The second: 1.2 million Koreans stopped out: The “AI hardware heavy” Korean stock market went down 12.6% in a single day.

This resulted in over 1.2 million investors who traded on margin, receiving immediate warnings to deposit more cash OR be forced to liquidate their positions.

The country's 14 million individual day traders, collectively known as the "ant army," were caught in a brutal "forced liquidation" cycle after aggressively buying tech stocks with heavily borrowed money.

Two days of extreme fear, selling and stop outs in the major global markets?

Of course it's going to infect our market, especially the small end - it made for some grim viewing.

INTERMISSION: Thursday evening - wiped tears away after emotional act one finale (and paper losses), that final song always gets me.

ACT II: The violent snapback, Citadel buys imploded hedge fund kid’s AI hardware bets. The Koreans return. Microsoft’s biggest share price pop in the history of the stock market

The hedge fund kid completed a fire sale of his concentrated AI hardware positions to Ken Griffin's Citadel.

Citadel is a massive global financial firm and multi-strategy hedge fund that uses advanced math and technology to manage billions of dollars.

You might remember Citadel from the GameStop short squeeze saga.

They are ruthless crisis capitalists - master opportunists who "turn other people's problems into gold."

And now they have a whole swag of fire sale AI hardware positions... The market liked this.

It also liked “no more dumping” from the hedge fund kid - his remaining positions now in “safe hands”.

The South Korean government apologised for the stock market armageddon.

Then proceeded to aggressively intervene with severe market regulations, and the stock market responded on Friday, July 31, 2026, with a historic, record-breaking rebound.

On top of all this Microsoft recorded the largest single-day market value gain in stock market history, surging 16% to add roughly $450 billion to its market capitalisation,

From a “blockbuster” Q4 earnings report proved its massive artificial intelligence investments were paying off...

Amazon also had a massive, historic week of its own, recording its biggest single-day stock gain since 2012, adding more than $350 billion in market value in a single session.
A global sentiment snap-back for the ages in the last 48 hours.

So Thursday night was epic, a rush back into AI and semis and global animal spirits returned as quickly as they had turned into extreme fear.

Including small ASX stocks on Friday - what a day.

Last night the global AI snapback continued, so Monday should be good assuming the sentiment makes its way to the ASX.

So AI is real and going to happen fast and right now?

Or is it a bubble and we are in for a dot com style crash?

So what is the most important takeaway from this set of rollercoaster global events and whipsawing sentiment towards AI?

These gyrations of capital that could alter the impact of AI on humanity for thousands of years to come?

Here it is:

Yesterday's snapback on the last day of July means that my “the market will start ripping again starting in July” prediction still has a chance to come true.

The 31st of July is still July.

Yep, drawing a long bow.

We would need to see many more solid weeks of small stocks running, continuing on from Monday at open for the prediction to be saved.

And the only chance for this to happen right now is to catch the updraft from a continued AI and semiconductor snapback that kept going overnight.

(reminder: a cow in a hurricane has zero control over its outcome)

Let's see if it happens and I can escape this prediction with my pants at least partially on...

Then I can turn to dodging cabbages for my silver September 2025 prediction which is up for judgement in a couple of months’ time... unless you did well because you sold in January.

Which I didn't.

(I still believe silver’s second wind is coming)

US critical minerals stocks are our other favourite macro theme and the smalls are still languishing...

DESPITE the US critical supply problem getting worse every month and not going away.

Real world stuff is happening to drive this macro theme.

BUT

Small ASX stocks in this space are still recovering from their hangover of early exuberance when it was all still conceptual.

Reminds me a bit of the 2018/19 battery metals boomlet on the CONCEPT of electric vehicles.

Speculators pile in too fast before the real world has caught up.

In 2018 the market bought the EV revolution and battery metals companies before anyone was buying EVs.

Without real world backing, the macro theme hype tapered off...

~18 months later (the glorious battery metal bull run of 2020 to mid 2022), when EV sales actually doubled in the real world, the REAL run started, and it was 10x bigger.

We think H2 2025's critical minerals (and precious metals) run was the "2018 moment."

The 2020 moment is still coming.

The process of US critical minerals macro materialising in the actual real world keeps coming:

Just in the last 10 days - things keep getting more real:

• 20 July - Trillion dollar US military industrial complex cut off from adversary supply. New Executive Order makes it much harder for US defence contractors to buy critical minerals from "adversary" nations. The Pentagon must map contractor supply chains by January 2027. More forced demand for allied and domestic US supply. (source, source)
  
• 24 July - China still isn't delivering the goods. US Trade Rep Jamieson Greer says China's rare earth exports still fall short of its May summit commitments - raised directly with Beijing ahead of the September Trump-Xi meeting. Rare earths remain THE bargaining chip. (source, source)
• 31 July - President Trump enacts emergency export bans on e-waste, black mass, and magnets to protect the domestic critical minerals recycling loop. The US wants every bit of scrap and e-waste kept onshore so they can recycle it and extract those precious critical minerals. (source, source)

WAIT - what is that last one? from yesterday?

Emergency export bans on e-waste, black mass, and magnets to protect the domestic critical minerals recycling loop.

According to Reuters the US exports nearly 33,000 metric tons of e-waste PER MONTH.

And all the critical minerals inside it.

Here it is, released less than 24 hours ago:

(source - read the full thing)

So what this is saying is that the US is limbering up for banning the export of any scrap, old electronics (e-waste) or any waste material that contains critical minerals...

With the view of recycling it and extracting the critical minerals

This executive order directly relates to what our Investment Iondrive (ASX:ION) does.

Our Investment ION's tech takes e-waste/old magnets and pulls critical minerals out from the scrap.

And it is doing it in the USA.

No wonder the ION share price was popping off yesterday:

(source)

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Quick whip through of what ION is doing on recycling critical minerals in the USA:

1. Independently verified tech:

ION's tech which takes biodegradable, non-toxic Deep Eutectic Solvents applies it to e-waste/old magnets and pulls critical minerals from the scrap.

Last month, ION announced testwork on commercial US e-waste which recovered ~93.5% dysprosium, 96.5% neodymium and 96.5% praseodymium. (source)

Dysprosium being one of the most important - a heavy rare earth, is used in the magnets inside missiles, drones and fighter jets, and China controls close to 100% of the world's separated supply.

2. The feedstock - via a binding agreement:

ION has a binding agreement with Colt Recycling, one of the biggest e-waste processors in the US, handling ~40 million lbs of e-waste a year. (source)

Colt is also a member of the US Defense Industrial Base Consortium.

IF exports of recoverable material get restricted, e-waste processors like Colt will have fewer places to send their material - and more reason to have it processed onshore, by tech like ION's.

3. The site and non-dilutive funding:

Last month the Oklahoma Department of Commerce issued a letter of support worth ~US$5.2M in incentives - scaling to US$15M+ - for ION's first US rare earth recycling facility.

See our note on that deal here.

And remember the carve-out in last week's Executive Order: supply from projects supported by the Department of Commerce (and Energy, and War) is explicitly protected.

ION's US facility would be backed by exactly that kind of support.

We think yesterday's US presidential Executive Order on recycling critical minerals combined with last week's mandate forcing US sourced critical minerals supply, has put together the ideal macro backdrop to get ION’s US rare earths facility funded (with more non-dilutive funding).

Hopefully enough for ION to make a Final Investment Decision on the Oklahoma facility.

Here’s what global financial media had to say about it all:

(sources)

We noticed in the Reuters article that tungsten is also a priority:

(source)

Not surprising given tungsten is a critical input into missiles and the USA has been using up a lot of those lately.

Two days ago, the US put in a US$59 billion order to “urgently” build thousands more AND significantly ramp up manufacturing capacity over the next 7 years:

(these screenshots are from 2 days ago, ignore the “X minutes ago” time stamp)

(source)

(source)

Tungsten is vital in armour-piercing ammunition, fighter jets, and the warheads of Tomahawk, Patriot and Precision Strike missiles.

The US produces zero tungsten domestically.

So how about a new tungsten mine in the USA?

Viking Mines (ASX:VKA) is trying to do that at its USA tungsten project.

Our Investment VKA said two days ago that “it’s on the cusp of” putting the first drill hole in 40 years into its historically producing tungsten project located in the USA (source).

Permitting is complete, the drill contractor has been engaged, and the drill rig mobilised last week.

We want to see VKA deliver some big tungsten drill hits over the coming weeks, in the USA...

Read our full VKA update here.

One more interesting thing I noticed yesterday:

Apple supply chain issues - struggling to buy components so no iPhone for you?

This goes back to our example of money versus goods and commodities.

It's all fine and dandy when goods and commodities are plentiful - the market determines the price based on supply.

But if you are stuck on a desert island with $1M you can’t buy a cheeseburger - even with $1M.

Elon Musk said if someone is shipwrecked on an island with a trillion dollars in their Swiss bank account, it's worthless - "the economy is goods and services," not money.

“Stranded on an island, given the choice between a pallet of food OR a billion dollars, the money has no value because there are no resources to allocate."

The government can print money, but it can't print resources.

Apple just had a wake up call - It can’t buy the components because they just don't exist, no matter what money they offer.

When will the AI and data centre hyperscalers get this wakeup call - they are all about to start building at the same time...

This is where the big green NVIDIA ball example we always talk about comes in - we want to see some of that HOT AI and semiconductor money start flowing into resource stocks and the commodities needed for the buildouts.

(in the USA tech and the "Magnificent 7” tech mega caps has been hoovering up the lion's share of capital over the last 15 years)

Here it is again (check our new custom balls below):

(Source, Mining.com October 28, 2024 all figures are in USD)

Our view has been that capital would eventually start to come out of that big green ball and into mining companies.

(ie the cheeseburger on the desert island)

Last week some money came out but a lot of it went right back in again.

So the deflating of the AI and semiconductor tech balls may be painful at the start from a sentiment perspective... (like the fear we saw earlier this week).

But ultimately the sold off capital needs to go somewhere, and all the AI hyperscalers have ALREADY raised the money to build, despite what their share prices are doing...

So a bit of money and heat is coming out of AI and semis - will it find its way into resources?

We made our own NVIDIA ball example, to show the disparity:

Now all we need is these two giant balls to empty some of their contents onto our small mining balls (wait... what?)

But there is an even bigger ball that is starting to lurk with intent...

Last weekend we wrote about money cycling from the US$31 trillion Treasury bond market into commodities. (read it here)

We saw reports of a couple of high end wealth managers recutting portfolio construction for their high net worth clients.

Moving some out of the traditionally safe and low risk bonds... and into commodities.

(source)

Now add this $31 trillion US bond market ball to the picture:

Now all we need is some re-arranging of these balls.

Have a great weekend.

Next Investors

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