Stop AI Takeover in 6 Months or Less | The Daily Peel | 3/31/23

Mar 31, 2023 | Peel #431

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Market Snapshot

Happy Friday, apes.

Maybe it’s the Final Four coming up on Saturday or the MLB beginning yesterday, but regardless, something’s put a risk-all-the-way-on vibe back into markets. The past two weeks’ 5.2% gain got us feeling like summer 2020 again, apes.

Okay, not really, like at all…but we’ll take all the green we can get. Equities generally gained modestly yesterday as large-cap, non-financial names led the way. Breadth held up decently, especially in the Nasdaq 100, with 81 of 101 listed tickers positing a positive day. The regular Nasdaq, S&P, and Dow all joined hands and put up a solid day as green as the Boston Celtics.

The risk-on mood kept up over in the boring ol’ bond world as well, with yields mostly lower despite a respectable rise in the market-implied odds of another 25 bps hike in May moving higher to make things about 50/50 with the chances of no move. Safe to say the games have begun.

Let’s get into it.

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Banana Bits

• Goldilocks, is that you? Jobless claims gain hella mildly, showing the labor market isn’t in full-blown recession (yet) while still looser than it has been in recent months
• Like how 3rd graders “flirt” with each other, 45th President Donnie T and Democrats across the country can’t stop bullying each other as the former Pres becomes the first to ever face criminal charges…all I know is that you can cut the sexual tension with a knife
• Final estimates for GDP in Q4 suggest the vibes were mellow as we apparently accelerated at just an annualized rate of 2.6% over the period
• Richard Branson is having a terrible week as his pet project Virgin Orbit will effectively cease to exist and layoff all but about 100 employees

Macro Monkey Says

Homes, Not Homies

Not to be controversial, but we here at the Peel are anti-homelessness. As a result, one of our very favorite things is a healthy housing market. Let’s see how that’s going.

The correct answer is “me” - for now - in case you’re wondering.

In recent days, we’ve had an absolute slew of data pouring in across the housing sector. Now that we’re in one of those weird times for market watchers where there are few marketwide catalysts ongoing, yet everyone is still glued to FinTwit waiting for any kind of meaningful update.

It’s not gonna get better for a good bit either, unless, of course, another bank fails or something (fingers crossed!), with most market junkies waiting until at least next Friday’s jobs report for their much-needed fix.

Still, we got some mortgage data on Wednesday, along with pricing updates the day prior.

To sum it up, buyers were pleased while sellers were, well, not. The Case-Shiller US National Home Price Index gained just 3.8% in January (yeah, I know it’s basically April. It’s a lagging indicator, okay?) as opposed to gains of 5.6% in December.

It might not seem like much, but homes are generally a particularly difficult asset to knock down in price, especially given selling dynamics, with most homeowners utterly refusing to take a loss, or even a markdown from recent highs, on their home. Buyers, on the other hand, are rejoicing at the slight interest rate reprieve seen in recent weeks and jumping all over it, apparently.

From highs of 7.1% set a few months ago, 30-year averaged fixed rates have fallen to about 6.3% as of Wednesday. This is, of course, still higher than the 6.1% set in the beginning of February, but the point is that the downturn confirms a reversal of the steady rise seen in the past two months.

Lower rates naturally spur buying activity and, even with prices still rising, will motivate marginal buyers to move across a population so large.

An interesting trend could be emerging at the same time. Some major cities, almost entirely concentrated on the West coast, fell big time in the year ending January 2023. San Fran homes saw declines of 7.6% while (kinda) nearby cities like Seattle (-5.6%), Portland (-0.5%), and Ron Burgundy’s hometown of San Diego (-0.1%) sank for their own part as well.

Can’t blame ‘em, really; who would want to live in a region where you gotta be up by 6:30 am to catch the market open? Couldn’t be me, don’t care how nice the weather is.

Anyway, Western cities from SD to Boise saw a far more impactful homebuying boom over the C-19 years while people mostly fled the dense, dirty, yet pinnacle-of-civilization cities on the Atlantic coast. So I guess it only makes sense that every one of the 12 major metros West of Austin, TX, registered home price declines to start 2023 while they increased in all 37 of the largest metros East of Colorado (excluding the weirdos in Austin, ofc).

This can be argued as a sign of normalization finally starting to show its face. At the same time, the still-egregious mortgage rates may actually be putting the Fed in a self-induced inflationary spiral.

Think about it. As mortgage rates rise on the back of the fed funds rate, you discourage homebuying. In the same stroke, you encourage renting, thus increasing demand and, therefore, prices of rentals. Given housing costs, including “owner’s equivalent rent,” drive nearly 1/3rd of CPI and carry a plethora of downstream impacts pulling service costs higher, it doesn’t take a genius to see how 475 bps of hiking in 12 months might hurt a bit.

To anyone out there looking to be happy with the price, you buy or sell at, good luck. F*ck bulls and bears, this market just seems miserable.

What's Ripe

Evgo ($EVGO) ↑ 22.09% ↑

• When boomer a** new technology haters decide they want to harass EV owners for the day, one of the common tropes is that you can’t “just go fill up your tank” at any of the zillion gas stations across the country.
• Meanwhile, Evgo is tearing down that argument more and more each day. The EV charging station maker saw shares catch quite the buzz yesterday on the back of stellar Q4 results and forward guidance.
• Sales came in ~35% above expectations, while the firm’s $20.1mn in EBITDA losses were still ~4mn less than analysts had expected the company to set on fire. Numbers like these were more than enough to electrify investors, to say the least.

C3.ai ($AI) ↑ 6.35% ↑

• Investing is hard. We all know this, and obviously, as a result, that’s why the strategy of just simply buying the company whose ticker represents the hyped-up-tech du jour can never be a winning strategy, right?
• Wrong. For the millionth reason in 2023 alone, you might as well just set your Finance 101 textbooks on fire and drop out. With barely any material news to back it, shares in this obscure AI maker have boomed 150% this year alone.
• This time, the firm’s sizable single-day rise can mostly (probably?) be attributed to the “Pls Stop AI” letter that Elon and other people who are way smarter than me and you signed in recent days. Basically, it seems that the Street sees this letter as confirmation the tech is valid rather than the fear-mongering letter of warning it’s meant to be. Glad to see where our priorities are!

What's Rotten

Bed, Bath, & Beyond ($BBBY) ↓ 26.23% ↓

• At this point, talking about Bed, Bath, & Bankrupt in any way, shape, or form just feels like bullying. But alas, we do what we gotta do.
• As this company’s shareholder base seems primarily made up of 12-year-olds and “deep value” fraudsters, Bed and Bath is once again voicing concerns over potential bankruptcy if its newly announced $300mn equity sale sh*ts the bed.
• Although, if this thing goes like any of the firm’s other recent financing attempts, it may have to change its sheets already. The $565mn in debt financing the firm raised last year has already fallen to a value of $300mn, while the company’s $225mn offering in February couldn’t get the job done either.
• Basically, this might be the only company having a worse 2023 than SVB…it looks like some parts of the market just don’t know it yet.

Charles Schwab ($SCHW) ↓ 4.96% ↓

• If you were one of those “geniuses” who just “knew” they should buy Schwab shares after the firm’s 31% fall but didn’t upon seeing the next day’s insider-buying induced +20% gain, well, here’s your chance.
• Like every other ticker in the sector, $SCHW plummeted alongside the SVB collapse. Shares ripped in the days following as insiders began buying on the cheap, but now, shares are up only about 1% off those lows after yesterday’s 5% crash.
• This time, shareholders can thank the analysts at Morgan Stanley for the decline as the firm slapped a fat downgrade on Schwab shares on account of worse-than-expected cash management. Haters gonna hate, but like we said, all you geniuses out there have been given another chance. You buyin’?

Thought Banana

Big Sigh in AI

“...profound risks to society and humanity” is quite the attention grabber on its own, but when you find out the likes of Elon Musk, Steve Wozniak, Andrew Yang, and thousands of others are behind the statement, sh*t starts to get a little concerning.

Just over a week ago, the Future of Life Institute, a non-profit organization focused on the reduction of existential and catastrophic risks with an emphasis on AI, biotech, nukes, and climate change, published an open letter to anyone with two thumbs and a sufficiently intelligent AI system to pls stop…for the next 6 months.

The FLI is backed by the likes of Elon Musk, Sam Harris, Vitalik Buterin, and plenty of others. Primarily conducting research and publishing a whole lot of “Open Letters,” the organization intends to bring well-deserved attention to the issues raised above as well as others. The point is: this team is legit.

Essentially, these big-name tech nerds worried about AI are asking their fellow nerdy brethren to chill tf out on developing such advanced artificial intelligence so fast. The primary claim is that we don’t yet have a comfortable degree of understanding of these things, and by extension, that means they could probably kill the sh*t out of us if they really wanted to.

Maybe that’s a bit hyperbolic, but experts allege this tech could one day be to us as we are to chimpanzees (or even ants), so is hyperbole even possible here?

The letter goes on to beg AI developers to consult with policymakers as well as collaborate with fellow industry magnates in a transparent, *safe* way that ensures we don’t make a big oopsie and accidentally create the Terminator.

Honestly, this thing seems directed at 3 people in particular: Sundar Pichai, Satya Nadella, and, most of all, Sam Altman.

The CEOs of Google, Microsoft, and OpenAI (formerly a non-profit, now a controversial capped-profit org), respectively, appear as of now to be leading the AI development wave. If it’s not intended for them, who else could possibly make any kind of a difference outside of formalized legislation?

Speaking of which, legislation is encouraged if industry leaders aren’t able to not kill us all on their own. I mean, ChatGPT, supposedly the best of the best, did just tell me that it “...cannot predict the future or provide financial advice or recommendations for specific stocks.” If this thing can’t give me the next 10-bagger on the spot, then it clearly isn’t half as smart as all of you apes, so what are we really worried about?

The big question: (When) Will AI come to upend life as we know it? What legislation and other guardrails can we put in place to not all die? How worried should we be at this point?

Banana Brain Teaser

Yesterday — I was carried into a dark room and set on fire. I wept, and then my head was cut off. What am I?

A candle.

Today — It’s 50 bananas off the PE Deals Process Course for the first 3 correct respondents. LFG!

What type of cheese is made backwards?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Investing is about having an edge. You don’t have to be the smartest person in the world; you just have to be slightly smarter than the person on the other side of the trade.” — Chamath Palihapitiya

Happy Investing,

Patrick & The Daily Peel Team

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