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:
“We are the 99%.” On September 17th, 2011, the first Occupy Wall Street protest ignited in New York City’s Zuccotti Park. What was born out of frustration with corporate greed, cronyism, and inequality quickly spread around the world. While the movement did not lead to immediate policy change, it succeeded in raising awareness about crucial concerns and sparked broader conversations about wealth distribution.

Technology & Social Media

AI just beat a human test for creativity. What does that even mean? (MIT Technology Review)
AI chatbots, including OpenAI’s ChatGPT and GPT-4, outperformed humans in a test commonly used to assess creativity. While the AI chatbots achieved higher average scores, the best-scoring human responses were rated higher, indicating that AI systems may excel at mimicking human behavior but may not truly exhibit original thought or creativity. These results could align with the belief expressed by Renaissance CEO Robert Mercer, as covered on Bespoke’s X account this past Wednesday, that “human intelligence, intuition, creativity, and finesse are nothing more than computation.” In his view, it’s only a matter of time before AI overtakes humans in these fields as well. Give us a follow @bespokeinvest! [Link]

I.R.S. Deploys Artificial Intelligence to Catch Tax Evasion (NYT)
The IRS is deploying artificial intelligence to investigate tax evasion among hedge funds, private equity groups, real estate investors, and law firms. Using AI to identify patterns, the IRS plans to conduct extensive audits on partnerships with over $10 billion in assets. This initiative is part of a broader focus on scrutinizing wealthy taxpayers, many with unpaid taxes, and investigating investments in digital assets and offshore bank accounts. Despite criticism regarding the use of AI and concerns about taxpayer data, the IRS believes this approach will enhance its ability to detect tax evasion and reduce unnecessary audits. [Link]

How Elon Musk Went from Superhero to Supervillain (The New Yorker)
Elon Musk is quite the character. From SpaceX to Tesla and now X, formerly Twitter, Musk’s life and career is full of remarkable achievements. The article delves into those achievements as well as his personal relationships, including his marriages and family dynamics which shed light on his complex persona. It also discusses Musk’s controversial and often provocative behavior on social media platforms like X. Musk perceives it as a means to combat what he calls the “woke-mind virus” and preserve civilization. [Link]

How Barstool Built an Empire by Swiping Sports Highlights (The Daily Beast)
Four years ago, Barstool Sports faced criticism for its methods used to profit from content it didn’t own using anonymous Twitter accounts that posted copyrighted sports highlights and viral clips. Barstool would then share those clips on official accounts to avoid strikes leading to suspensions or bans. Now, a new investigation by The Daily Beast found over 40 anonymous Twitter accounts that appear to be controlled by Barstool taking similar actions. [Link]

Electric Vehicles & Energy

Electric Vehicle Outlook Report 2023 (BloombergNEF)
EV sales are soaring thanks to government support, better batteries, more charging stations, and appealing new models. China still leads the global EV market, but sales are rising globally. EVs as a whole, are already displacing oil use by 1.5 million barrels daily (3% of road fuel). With EV sales climbing, rising battery demand strains the supply chain for materials like lithium, cobalt, and nickel. [Link]

Peak fossil fuel demand will happen this decade (Financial Times)
The International Energy Agency (IEA) predicts that global demand for fossil fuels (oil, gas, and coal) will peak in the coming years, driven by clean energy growth and changing economic factors. This shift (if it actually plays out), even without new climate policies, marks a significant turning point for the energy sector and climate action. [Link]

Insurance & Loans

A 3% Mortgage Rate in a 7% World? This Startup Says It Can Do That (WSJ)
Roam, a new real estate startup, aims to make “assumable loans” more popular as mortgage rates rise above 7%. Assumable loans allow sellers to transfer their mortgage loans to buyers, potentially giving buyers access to lower interest rates. The idea hasn’t gained much traction recently, partly because lenders are reluctant to process assumptions for less profit than originating new mortgages. Roam plans to help buyers and sellers navigate the assumption process and will recommend lenders for additional financing and collect a fee equal to 1% of the purchase price from buyers. [Link]

‘Almost All Loans Are Bad’—Why Banks Aren’t Lending (WSJ)
U.S. banks are finding it difficult to expand lending due to rising deposit costs, weaker loan demand, and increased regulatory requirements. Despite a strong economy, higher interest rates are making borrowing more expensive for consumers and businesses. Banks are also concerned about maintaining stable deposits to meet investor and regulatory expectations. They are also becoming more selective in their lending, prioritizing attractive loans for their top clients. The challenge lies in finding a sufficient number of high-quality borrowers to support loan growth. [Link]

IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024 (WSJ)
The IRS is taking steps to curb fraud from overstated claims for the pandemic-era tax break known as the employee retention credit (ERC).  Effective immediately, processing of all refund requests has been halted until at least 2024. It also plans to scrutinize the existing queue of over 600,000 ERC requests more rigorously. The ERC has led to an unexpected surge in refund claims and tougher measures aim to disrupt scams, but they will also delay payments to eligible businesses. [Link]

Byju’s Hid $533 Million in Hedge Fund Once Run From Miami IHOP, Lenders Allege (Bloomberg)
Lenders attempting to recover $533 million from Indian education tech firm Byju’s have alleged that the company hid the money in a hedge fund called Camshaft Capital Fund. Byju transferred the funds to Camshaft, despite the hedge fund’s seemingly unconventional principal place of business being listed as an IHOP pancake restaurant in Miami. Byju’s is currently trying to strike a deal with creditors and has proposed buying back the loan within six months. [Link]

Climate change causing an insurance crisis in Louisiana (Insurance Business)
Rising insurance costs due to natural disasters are causing significant economic and population challenges in Louisiana, making it one of the most expensive states for property insurance at three times the national average. Twelve insurers offering homeowners coverage in Louisiana went insolvent between July 2021 and February 2022, leading to a 6.7% increase in average premiums in 2021 and an 18.5% increase in 2022. Flood insurance rates are also rising, particularly affecting low-income individuals in vulnerable neighborhoods. [Link]

Health & Pharmaceuticals

Decongestant found in many cold, allergy medicines doesn’t actually work, FDA advisors say (CNBC)
An FDA advisory panel unanimously declared that oral forms of phenylephrine, a common nasal decongestant in medications like Nyquil, Benadryl, Sudafed, and Mucinex, are ineffective at relieving nasal congestion. This could lead to the removal of phenylephrine from the market, impacting manufacturers like Procter & Gamble and Johnson & Johnson, as well as retail pharmacy chains that generate significant revenue from such products. The question is, how many other drugs on the market are just as ineffective as phenylephrine. [Link]

Economic and Financial Trends

Banking industry faces ‘significant downside risks’: FDIC chair (Yahoo Finance)
FDIC Chair Martin Gruenberg has warned that the US banking industry faces significant downside risks from inflation and high interest rates, which could weaken profitability and credit quality. Overall, deposits declined for the fifth quarter in a row, putting pressure on banks to raise their funding costs to retain account holders. Gruenberg also expressed concerns about a weakening market for commercial real estate, as banks are major lenders to commercial property owners across the US. [Link]

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Have a great weekend!

As was expected this week, jobless claims data deteriorated with seasonally adjusted claims rising to 220K from 216K. However, that was better than expectations which were calling for claims to rise by another 5K up to 225K.  As shown below, claims continue to sit at the low end of the past several months range, indicating a still healthy labor market.

At the moment, claims prior to seasonal adjustment are at an interesting point of the year.  Unadjusted claims totaled 174.5K this week.  That is only a couple thousand claims higher than last year and near the slightly lower readings from 2018 and 2019. Overall, those remain some of the strongest readings on record when comparing the like weeks of the year.  Additionally, we would note that claims are likely at or near their seasonal low. Historically, the current week of the year has been the annual low a quarter of the time (that being the case in 2018 and 2019) whereas the following week has marked the low another 35.7% of the time.  In other words, as we have frequently mentioned in recent weeks, seasonal tailwinds will begin to shift to headwinds in the coming weeks.

Seasonally adjusted continuing claims likewise came in below expectations this week, rising to 1.688 million compared to forecasts of 1.69 million.  Again like initial claims, continuing claims are far from worrisome as they sit at historically strong levels, however, the past few months downtrend in claims has begun to bottom out as it has been eight weeks since the last near term low.

The S&P 500 has managed to rise 1.15% in the past week, but sentiment has barely reflected the positive tone.  After climbing to 42.2% last week, AAII bullish sentiment dropped right back down to 34.4% this week.  That is the largest one week drop in a month although it doesn’t leave bullish sentiment at any sort of new low.

The bulls didn’t move to the bearish camp, however.  In fact, bearish sentiment fell to 29.2%, which is the lowest reading since the week of August 10.

Because the declines in bullish sentiment outpaced the drop in bears, the spread between the two dropped to +5.2.

Given both bulls and bears dropped, neutral sentiment picked up the difference.  As shown below, neutral sentiment rose to 36.4% this week, which was the highest reading since the week of May 18th when it was slightly higher at 37.4%.

While the AAII sentiment survey did not see any sort of particularly noteworthy moves this week, the equity put/call ratio did notch a new high yesterday.  As shown below, over the past couple of months, the ratio has begun to turn higher with yesterday seeing the highest reading since March 10th.  At 1.35, that ratio also measures in the top 1% of all readings since 1995.  Remember, a reading above 1 means there are more put buyers (negative bets) than call buyers (positive bets).

The S&P 500 managed to rise 0.12% on Wednesday in the wake of the CPI release.  That is the fifth month in a row in which the S&P 500 rose in response to a CPI print, and only two months over the past year (February and April) have seen negative reactions.  Although the S&P has consistently risen on CPI days, the size of the moves have been less substantial than they were previously. As shown below, taking a rolling 10-day average of the S&P 500’s daily change on days that CPI is published shows the average performance remains positive but has turned lower versus a couple months ago when the average move was above 1.2%, which was some of the strongest reactions in a decade and a half.

Although S&P 500 performance has been positive on the day of CPI releases over the last year, looking one week out, the results have been less positive.  As shown below, the S&P has consistently fallen in the week after CPI releases. Again taking a rolling 10-day average, one week performance has been negative for 20 months in a row, or every month since the start of 2022.