Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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On This Day in History:

Artificial Intelligence

From doom to boom: AI is slowly re-energizing San Francisco (MSN)
As much as the pandemic killed the city of San Francisco as businesses closed, crime rates rose, and the drug crisis escalated along with the homelessness issue, the city appears to be experiencing an optimistic turnaround. In the city that’s home to the 49ers (at least in name), which was named after those who rushed West for gold, the AI gold rush shows some promise. The flow of venture capital into AI companies in San Francisco hit new highs, with startups raising significant sums. AI firms are leasing tons of office space in the city and recruiting has become easier due to the boom, all of which is expected to continue to drive economic growth. [Link]

Dropping Out of College to Join the AI Gold Rush (WSJ)
AI has a wave of college students dropping out to pursue AI startups. Over 25% of American startup investments this year have gone to AI companies, with a generative AI market estimated to be worth $43 billion in 2023. While many are applauding this surge of entrepreneurial spirit, there is also caution that not all ventures will succeed, and a shakeout is expected for companies that use AI simply as a branding tool. Critics argue that AI is deeply complex, and students still have so much to learn before dropping out and pursuing the new technology so fast. [Link]

This new data poisoning tool lets artists fight back against generative AI (MIT Technology Review)
A new tool called Nightshade allows artists to alter their art before uploading it online. Invisible to the human eye, the tools can disrupt AI training when using art without consent. While helping artists, Nightshade could damage future AI models and cause them to produce unpredictable results. The tool brings power to artists, promotes their creativity, and puts a check on the explosively popular new technology. Check out the article to see some images of Nightshade at work. [Link]

Artificial Intelligence Powers Mach Ai & Clout Ai Bats (Rawlings)
Making a baseball bat is way more complicated than it may appear. With AI in the picture, Rawlings claims to have made the best possible ones in the Mach Ai and Clout Ai bats. AI ran thousands of calculations to create unique barrel designs that balance factors like pop, swing weight, and forgiveness. AI can create design variations more than 100 times faster than human engineers and was able to produce models comparable to that of top-of-the-line bats. It looks like AI has even found its way into sporting goods. [Link]

Electric Vehicles

Toyota nears mass production of solid-state batteries (Financial Times)
Toyota claims it is in the process of scaling up “solid-state” batteries. If the automaker is successful, it’ll have a huge range and charge time advantage, as solid-state chemistries have significant advantages over traditional battery packs. [Link]

How to Make Sense of Electric Cars’ Month of Disarray (Heatmap News)
Tesla and Rivian, EV makers, are good examples of those who have tried to cross the “valley of death” between product development and large-scale production. The business is a tough one to be in. Legacy automakers like General Motors and Ford are facing those struggles as they attempt the transition to electric vehicles. Companies like GM and Ford typically earn profits from gas-powered vehicles while losing money on each EV sold, so they will need to find ways to bridge the gap and make burning cash to scale up operations and become profitable a reality as the path forward in the auto industry more clearly becomes electric. [Link]

Financial Services

Schwab Study: Millennials Want Fixed Income With Feels (WealthManagement.com)
Fixed-income investments are becoming more appealing to investors as interest rates rise. Surprisingly, millennials have a larger portion of their portfolios in fixed income compared to older generations, with up to 45% of their investments in bonds and other fixed-income assets. The study also highlights that ETFs are the preferred investment vehicle for 80% of respondents, and 55% are considering equity ETFs, 47% fixed income products, and 43% real assets. As millennials invest more in fixed income, it’s suggested that the generation wants to invest more with individual beliefs and values.  [Link]

Elon Musk gives X employees one year to replace your bank (The Verge)
Elon Musk, full of ideas that many would categorize as crazy, has made another major announcement for his social media platform X, formerly Twitter. Musk envisions that X will handle various financial activities, including payments, money, securities, and more. He suggests it would eliminate the need for traditional bank accounts altogether. It’s not the first time Musk has mentioned plans to make X a financial platform before, and he does have experience with financial services with his old company X.com which eventually became part of PayPal. [Link]

Real Estate

Food Halls, a Hot Real-Estate Investment, Conquer the Suburbs (WSJ)
Food halls are growing in popularity in suburban areas as the popularity of hybrid work and foodie culture bodes well for the dining collections made well-known in big cities. These small restaurants offer diverse and gourmet food which are often local businesses rather than big chains. Thanks to the pandemic, food halls in the suburbs took off as people moved to more remote work and proved more resilient than traditional restaurants. To put the growth in perspective, the US has at least 364 of these food halls, and 120 more are expected to open by the end of the year. That’s a 33% increase by New Year’s. [Link]

The effect of bus rapid transit on local home prices (Science Direct)
Bus Rapid Transit (BRT) systems are becoming more common in cities across the US. BRT systems provide those looking for different transportation options, but they can be a bit of an inconvenience as they can come with increased noise levels and less space on the road for others. This research finds that homes within a 20-minute walk of a BRT station carry a price premium of 5-7%. The research also finds that the value of real estate near BRT systems increased six times more than what the system costs to build. It’s possible then that the profits from higher property values might help pay for new transit projects in the future. [Link]

Environmental

An Oil Giant Quietly Ditched the World’s Biggest Carbon Capture Plant (Bloomberg)
Occidental Petroleum (OXY) is constructing a billion-dollar complex called Stratos that aims to capture carbon from the atmosphere and bury it underground. In 2010, the company built a plant for carbon capture which was never successful. That plant used older technology, but OXY is hopeful that the new technology in Stratos will provide much more positive results. Other large corporations and even the US government are betting big on the project. It’ll be interesting to see the results. [Link]

Mental Health

Libraries Are the New Front Line in America’s Mental-Health Crisis (WSJ)
Over recent years, natural disasters, the pandemic, drug epidemics, and a lack of mental health services have led those in need to libraries for food, shelter, warmth, assistance, or just a safe space. In response to such a trend, librarians find themselves in a unique position to help those seeking it, whether it be drug overdoses, homelessness, or other odds and ends. Some libraries are hiring social workers and receiving training to provide the best assistance they can. Who knew all that was in the job description? [Link]

Sports Betting

Here’s Why Bettors Are Angry With DraftKings Over Franz Wagner Free Throws (Action Network)
A recent NBA game between the Orlando Magic and Houston Rockets had DraftKings sports bettors in a frenzy after an error in scoring that cost them their money.  Franz Wagner made two free throws during the game which were mistakenly credited to his brother. That caused confusion on the points prop betting as Franz had 19 points in reality, but 17 were shown. DraftKings decided to honor the correct score and the issue was largely resolved in the end for those that would’ve lost money on that error. [Link]

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Have a great weekend!

The S&P 500 having made fresh lows in the past week has justified a continued decline in bullish sentiment per the latest AAII survey.  As shown below, only 29.3% of respondents reported as bullish this week compared to 34.1% last week. Although sentiment has quickly reversed, the last week of September actually saw an even lower bullish reading of 27.8%.

Bearish sentiment, on the other hand, rose up to 43.2% which was the highest reading since the first week of May.  Bearish sentiment rose 8.6 percentage points week over week which was the largest single-week increase since February.

Given the new high in bearish sentiment and drop in bulls, the bull-bear spread tipped deeper into negative territory.  Bears now outnumber bulls by 13.9 percentage points. That is the widest margin since May.

While the AAII survey has shown an expressly negative turn, other sentiment surveys are more mixed.  For starters, the NAAIM Exposure Index echoed the AAII results. The index tracking equity exposure of fund managers echoed the pessimistic tones of the AAII survey as it dropped to the lowest level since the week of October 12th last year.  Meanwhile, the Investors Intelligence survey of newsletter writers has managed to hold onto a more bullish tone.  That survey’s bull-bear spread has been more steadily above its historical average over the course of the past couple of months.

Although much of the morning’s data topped expectations, one of the areas of weakness was jobless claims.  Initial jobless claims were slightly higher than expected coming in at 210K versus expectations of 208K.  Additionally, last week’s sub-200K print was revised up to 200K. While that doesn’t steal from the fact that jobless claims have pulled back to some of the stronger levels of the year, the past few weeks are now looking a bit more choppy than they were only a week ago.

On a non-seasonally adjusted basis, claims have begun to tick higher as could be expected for this time of year.  At 191.89K, claims are 7.34% higher than they were the comparable week last year.  However, that is roughly in line with readings from a couple of years prior to the pandemic.

Albeit higher, initial jobless claims remain at historically healthy levels and are not deteriorating too rapidly.  The same cannot be said for continuing claims.  Rising to 1.79 million through the week of October 14th (continuing claims are lagged an additional week versus the initial claims number), continuing claims have risen for five straight weeks. That is the longest streak of increases since a 12-week run ending in early December last year, and claims are now at the highest level since May 20th.

It has only been five weeks since the recent low of 1.658 million. In that span, continuing claims have risen almost 8%.  As shown below, there are plenty of examples of even larger five-week increases in continuing claims counts, the most recent being in Q4 2022,  however, it is still a historically rapid rise.  The recent increase ranks in the top 5% of all five-week moves on record. Historically, prior increases of that size have mostly (though not always) occurred in the context of a recession. While not exactly covering like-for-like periods, that makes this recent rise in claims even more unusual when compared with GDP data released at the same time showing an impressive 4.9% QoQ annualized growth rate.

With each passing day this year, it seems as though the underperformance of small caps relative to large caps keeps getting wider.  While the small-cap Russell 2000 is currently down over 30% from its post-Covid highs and within 1% of a multi-year low, large caps have held up relatively well as the S&P 500 is less than 12% from its post-Covid high.  As a result of the divergence, the large-cap S&P 500 is outperforming the small-cap S&P 600 by more than 15 percentage points in 2023.

Just like the overall indices, the performance gap between the two is also wide across most sectors. The chart below compares the YTD performance of large (S&P 500) and small-cap (S&P 600) sectors so far this year.  Amazingly, while the large-cap Communication Services and Technology sectors are both up over 30% YTD, their smaller-cap peers are either slightly down or just marginally higher. Within the Consumer Discretionary sector, there has been a similar pattern although to a less extreme of degree.

Outside of those three sectors, there really isn’t much in the way of gains for other large-cap sectors, but even if they are flat to down on the year, they’re still outperforming their smaller-cap peers.  Of the eleven sectors, the only three where small caps are outperforming large caps are Consumer Staples, Energy, and Industrials.  In the two latter sectors, not only are they outperforming, but they’re also the only two sectors in the S&P 600 with gains on a YTD basis.  Imagine that, gains in small caps!