Happy Father’s Day!
Welcome to Boyar’s Research Digest for June 16th, 2024. In this issue:
The Fed and Interest Rates
Inflation
Robotaxis
AI
and more
Fact of the Week:
The US Inflation Rate has been above 3% for 38 consecutive months, the most since the 1980s/early 1990s.
Overview of the Week
The S&P (+1.58%) and the Nasdaq (+3.24%) both advanced, posting their 7th gain out of the past eight weeks and each notching several more record highs. The S&P 500 has already set 29 all-time highs in 2024, averaging more than one a week! Market breadth was once again narrow (the S&P 500 equal weighted index lagged the S&P 500 by ~2% and has now underperformed 4 out of the past 5 weeks). Notably small cap stocks (as represented by the Russell 2000) were down 1.01% this follows last week’s loss of over 2%.
Technology shares significantly outperformed (+6.42%) with Apple gaining (+7.9%) and Oracle advancing (+9.7%) The worst performing sectors were Energy (-2.32%), and Financials (-2.0%).
All eyes were on the Federal Reserve this week as they held their latest meeting and unsurprisingly kept interest rates unchanged (unlike their counterparts in Europe and Canada who started to reduce rates last week). While 15 of 19 Fed officials project that they will reduce interest rates this year, the midpoint of those projections suggests just a single rate cut in 2024. It is worth noting that in March a majority of Fed officials had predicted three rate cuts in 2024… this probably speaks volumes about their ability to accurately forecast their own actions, and how these projections should be taken with a giant grain of salt as economic sentiment can change quite quickly.
The latest CPI data was lower than previous months with a flat month-over-month reading and up 3.3% year over year in the month of May, a bit cooler than the 3.4% economists expected. Meanwhile, core prices (which exclude volatile food and energy items and are more heavily scrutinized by the Fed) had their mildest gains (+3.4% year over year; +0.2% on a monthly basis) since 2021. This could be a sign that inflationary pressures are easing but as Fed Chair Jerome Powell said, “[the report was] a step in the right direction…but you don’t want to be too motivated by any single data point.”
That said, we think the data starts to paint a fairly compelling case that inflation is moderating towards the 2% target, especially considering “supercore” CPI was up just 1.9% from the previous year. This unofficial metric goes a step further than core CPI by also excluding shelter-related inflation, which remains elevated by the ongoing U.S. housing supply shortage and tends to be a lagging inflation metric (i.e. rents change when leases expire).
As inflation moderates, the Fed’s monetary policy becomes incrementally more restrictive because the “real” rate (subtract inflation from the interest rate) becomes increasingly higher. As we noted above, the Fed has a spotty record forecasting its future rate policies, and there is the possibility that rates will fall faster than their most recent assessment. The futures market seems to suggest so: As of this writing, CME FedWatch Tool shows that interest rate traders are factoring in roughly a 70% chance of two rate cuts by the end of the year.
In case you missed it, we’ve made last year’s Fresh Looks edition available for download. You can find it here:
Notable Reads (and Watches):
Cathy Woods discusses her company’s 5 year $2,600 price target for Tesla
(TSLA: $178.01)
Boyar’s Take: Ms. Wood’s thesis hinges on Elon Musk developing a Tesla based autonomous robotaxi platform (which would have a recurring revenue model, making Tesla’s margins closer to that of a software company than that of a capital intensive automobile manufacturer). While I would never bet against Elon Musk, this price target seems outrageous.
Elon Musk has been talking about producing self-driving cars since at least 2016. In 2019 he proclaimed, “next year, for sure, we will have over 1 million robotaxis on the road.” Since then, he has made countless public pronouncements that autonomous vehicles will be available in short order (we are still waiting!).
Recently Musk set a date in August to reveal a Tesla robotaxi. Developing this type of technology is a monumental task (however if anyone could figure out how to do it, it would probably be Elon Musk), but investors whose thesis on Tesla hinges on them dominating the autonomous vehicle market (which does not yet exist!), at scale and in short order, should serious rethink their thesis.
On the subject of Robotaxis:
Anita Hamilton of Barron’s wrote an interesting piece titled Robotaxis Are Retaking the Streets. Why Some Say They Need to Slow Down, which outlines both the safety and logistical problems facing manufacturers of autonomous vehicles and discusses why they are not quite ready for primetime.
Excerpt:
The safety experts Barron’s spoke with expressed skepticism that driverless technology has improved much since the gruesome accident last fall that led to Cruise halting driverless operations nationwide after California suspended its permits. “There’s been no quantum leap in technology,” said Phil Koopman, a Carnegie Mellon University autonomous vehicle safety expert who testified at a congressional hearing last summer…
Regulators are watching closely. In May, the National Highway Traffic Safety Administration launched an investigation into more than 30 incidents involving vehicles from rival driverless taxi firm Waymo, ranging from driving into opposing traffic on the wrong side of the road to crashing into parked vehicles. Amazon’s start-up Zoox is facing a similar inquiry…
Cruise and Waymo both say their autonomous vehicles are safer than human drivers. But several embarrassing glitches and mishaps caught on video lay bare the technology’s shortcomings, namely “their inability to reason under uncertainty,” says Missy Cummings, director of Mason Autonomy and Robotics Center at George Mason University.”
Microsoft’s Nadella Is Building an AI Empire. OpenAI Was Just the First Step.
https://www.wsj.com/tech/ai/microsoft-nadella-openai-inflection-9727e77a
Chief Executive Satya Nadella bet the future of Microsoft on the potential of artificial intelligence when he forged a groundbreaking partnership with OpenAI, the creator of ChatGPT.
[…]He has hunted down new partners around the globe and invested in a range of AI startups, including pouring $1.5 billion into an Abu Dhabi-based firm in April.
Nadella has also begun building what amounts to an in-house OpenAI competitor inside Microsoft—potentially putting it on a collision course with its most important partner…
[…]Nadella’s moves have helped Microsoft leapfrog others—most notably the longtime AI front-runner Google—to release AI chatbots and workplace tools expected to change how people think and work. The question is whether these tactics will be enough to keep Microsoft ahead of the pack in artificial intelligence.
Boyar’s Take: Satya Nadella’s turnaround of Microsoft is nothing short of amazing (and the stock price advancing more than 10x since he became CEO certainly reflects it). This article details his approach to embracing and investing in AI while also providing a good snapshot of both his leadership and management philosophy. It appears that the investments they have (and continue) to make have put the company in a good position to compete in the highly competitive technology arena for the foreseeable future.
Jim Chanos on Markets, AI and Meme Stocks, Musk's Pay
Interesting interview with famed short seller Jim Chanos. He discusses the large amount of speculation he believes is in the stock market, and his strategy for short selling. He also talks about how he is shorting certain AI related stocks, certainly worth watching.
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