Feb 4, 2024
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:
TheFacebook: META just had a pretty stellar earnings report this past week that saw its stock up 80 points, or 20.3%, in a single day on Friday. It was not long ago that the stock traded at just $88 a share in November of 2022. Since that low, META has exploded upwards of 400% and just traded at another new all-time high on Friday.
The company has seen ups and downs over the years, but it all got started 20 years ago today on February 4th, 2004. A Harvard student by the name of Mark Zuckerberg, along with his some of his college roommates and fellow students, launched“TheFacebook” from their dorm room. Initially, it was just limited to Harvard students, aimed at creating a network that connected people through a web of friends. That’s an idea we take for granted as part of our daily lives now, but it was once revolutionary to have an online platform that mimicked any individual’s unique social life. The platform quickly blew up and became wildly popular, and the rest, as they say, is history.
*This image is taken from a scene in The Social Network, depicting Zuckerberg working on the early stages of TheFacebook.
Investing
Passive Funds Overtake Active Thanks in Part to Advisory Shift (AdvisorHub)
In 2023, passive investment funds in the US, including mutual funds and ETFs, surpassed actively managed funds in total assets, reaching $13.252 trillion versus $13.244 trillion. This landmark shift, a first in 48 years, was propelled by significant annual growth of 22.6% in passive funds against 10.6% for active funds. Clients are moving away from commission-based trading to advisory accounts and advisors are moving from traditional broker-dealers to fee-only RIAs. [Link]
TIPSplaining a lousy inflation hedge (Financial Times)
In the pandemic era, investors poured their money into TIPS, hoping to mitigate the risk of inflation. However, 2022 saw investors facing significant losses in both nominal and real terms, with the TIPS market barely outperforming the nominal US Treasury market. The Fed’s response to inflation by raising rates resulted in increased real yields and led to lower TIPS prices and negative returns. This did not align with investor expectations, leading to around $30 billion being withdrawn from the four largest TIPS ETFs since their peak at the end of 2021. [Link]
Chinese Fervor for Overseas Stocks Is Breaking ETF Trading (BNN Bloomberg)
Chinese investors are increasingly seeking exposure to overseas equities, to the extent of paying premiums of up to 40% over the asset value in some ETFs. This surge in demand has led to trading halts and purchase limits on numerous ETFs tracking foreign stocks. Despite the high premiums, both retail and institutional investors are drawn to these ETFs due to stronger performances in international indices like the S&P 500 and Nikkei 225. The phenomenon underscores a broader shift away from Chinese equities amid frustration with their underwhelming returns. [Link]
This ETF outperforms by stressing corporate culture — but not ESG (MarketWatch)
The Harbor Human Capital ETF invests in companies with strong corporate cultures, as indicated by a proprietary index that assesses factors like employee engagement, management respect, and innovation. Launched in October 2022, the ETF aims to provide investors with the opportunity to invest in large-cap companies that are believed to have better performance potential due to their positive work environments. Since then, it has outperformed the S&P 500. [Link]
AI & Technology
Elon Musk Says Neuralink Has Implanted Brain Chip in Human (WSJ)
The first human has successfully received a Neuralink brain implant, marking a significant step in brain-computer interface technology, potentially aiding individuals with conditions like quadriplegia. The patient is reported to be recovering well, with the implant showing promising initial results in neuron spike detection. The development could be a potential breakthrough for severely disabled individuals, although it is expected to take years before the technology becomes widely available. [Link]
Battle Looming Between AI and Counter-AI, Says Official (US DoD)
The Department of Defense and other defense departments around the world are beginning to integrate AI, which could lead to a future “arms race” between AI and counter-AI. The department aims to leverage AI for threat analysis, vulnerability assessment, and enhancing the security of government and defense systems. AI’s role in processing vast amounts of data for threat detection is seen as crucial to staying ahead of adversaries and maintaining security in an ever-evolving digital environment. [Link]
The Hollywood Jobs Most At-Risk From AI (The Hollywood Reporter)
A study indicates that nearly 240,000 positions in Hollywood, particularly among sound engineers, voice actors, concept artists, and entry-level employees, could be affected by AI within three years. AI is developing abilities to efficiently produce content such as sound design, 3D assets, and realistic dubbing, posing a threat to traditional roles in the industry. The development sparks new reasons for concern regarding AI, this time among the elite in the entertainment business. [Link]
FCC moves to criminalize most AI-generated robocalls (NBC News)
The FCC is set to criminalize unsolicited robocalls that utilize AI-generated voices, following an incident involving a fake AI-generated message mimicking President Joe Biden. This proposal would extend the Telephone Consumer Protection Act (TCPA) of 1991 to include such AI-generated calls, as concern over AI’s role in scams grows. [Link]
Can This A.I.-Powered Search Engine Replace Google? It Has for Me. (NYT)
The AI-powered search engine Perplexity, founded by former OpenAI and Meta researchers, has attracted a lot of attention and investment for offering a new approach to online searches, namely tech insiders and investors like Jeff Bezos. Differing from traditional search engines like Google, Perplexity provides AI-generated summaries of web content rather than a list of links, aiming to make information gathering more efficient. Still, there are concerns about its accuracy and the impact on digital media, essentially making it unnecessary to visit websites anywhere. [Link]
Plane Problems
Kayak reports 15-fold increase in passengers filtering out 737 Max flights (The Independent)
Kayak is a travel search engine that allows users to filter and find the most ideal traveling and hotel plans. Since the recent incident with an Alaska Airlines 737 Max 9’s fuselage blowing out mid-flight, Kayak reported a massive increase in users filtering out flights on 737 Max 9s. The FAA has grounded dozens for inspection after a potentially fatal event and some travelers are taking no chances with the jet. Confidence is surely rattled and therefore, aircraft type is an important part of flying for travelers right now. [Link]
‘I would absolutely not fly a Max airplane’: Ex-Boeing manager raises alarm on jets returning to service (Los Angeles Times)
Some airlines have resumed flights with 737 Max 9 jets that had been grounded after the viral incident with Alaska Airlines. Many, including former Boeing employees, still express deep concerns about the safety of the Max planes, citing persistent issues and a culture prioritizing speed and profit over quality and safety. The decision to resume flights after specific inspections has been met with skepticism, suggesting a need for major change to truly ensure passenger safety. [Link]
EVs
Electric vehicles and hybrids surpass 16% of total 2023 U.S. light-duty vehicle sales (EIA)
In 2023, the United States saw a significant increase in the sales of hybrid vehicles, plug-in hybrid electric vehicles (PHEVs), and battery electric vehicles (BEVs), which collectively rose to 16.3% of total new light-duty vehicle sales, up from 12.9% in 2022. This growth was driven by an increase in the number of BEV models available, a shift towards offering hybrids in more popular size classes like crossovers, and a reduction in BEV prices, partly due to manufacturer price cuts and incentives from the Inflation Reduction Act. [Link]
Planning & Zoning
Legislature Advances Proposal Allowing Cafes in More Neighborhoods (The Urbanist)
The state of Washington is considering a legislative proposal that could increase the number of small neighborhood cafes within walking distance of homes, aiming to ease strict zoning laws that have long segregated commercial and residential uses. The move is seen as a way to enhance community access to services and strengthen local connections, also expanding the definition of cafes to potentially include venues serving alcohol with food. [Link]
Empty Nest Emptiness
When Junior Heads to College, Helicopter Parents Turn to Empty-Nest Coaches (WSJ)
“Helicopter parents” who become deeply invested in their children’s daily activities and development may experience deep sadness once those kids fly the coop. Enter empty-nest coaching, a niche that offers support and counseling for parents struggling with the emotional and logistical void left by their children’s departure. These coaches have even gone viral on social media platforms like TikTok for helping parents cope with their changing roles. [Link]
“Beware the Viral Graph”
Maybe young men and women aren’t so ideologically different (Good Authority)
This article challenges an article from last week’s installment of Bespoke’s Brunch Reads. Last week’s article showed a graph that went viral for the ideological gap between young men and women in the US. The contrast was eye-catching, but this article argues that these ideological differences are much smaller, averaging about a 5-point difference vs the 30-point difference suggested previously suggesting that the differences are also not necessarily more defined among young people. [Link]
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Jan 24, 2024
There are any number of ways to illustrate the disparate performance of individual stocks based on market cap this year, but the chart below really drives the point home. The blue lines show the YTD performance of each stock in the S&P 500 starting with the largest in terms of market cap on the left all the way down to the smallest companies on the right. YTD, the second-best performing stock in the S&P 500 – Nvidia (NVDA) – is also the fifth largest company in terms of market cap. Besides NVDA, the only two other stocks up at least 15% YTD are Palo Alto Networks (PANW) and Juniper (JNPR). While just three stocks are up over 15%, seven are down over 15%, including Archer Daniels Midland (ADM) and Boeing (BA) which is down nearly 19%.
While the blue line shows the performance of the individual components, the red line shows the rolling 20 stock performance where the leftmost point on the line represents the performance of the 20 largest stocks in the S&P 500. As shown, the group of 20 stocks with the strongest YTD performance this year is right near the top of the market cap list (stocks 5 through 24 which includes NVDA and AMD). While there are exceptions, the main trend this year has been that the further you move down the market cap ladder, the weaker the YTD returns. The 20 smallest stocks in the S&P 500 also have the worst performance of any other point in the series. Not only that, but 17 of the 20 smallest stocks in the S&P 500 are down YTD, including each of the smallest sixteen.
Breaking the S&P 500 into deciles based on market cap further illustrates this pattern. While 78% of the 50 largest stocks in the S&P 500 are up YTD with an average gain of 3.65%, less than a quarter of the 50 smallest stocks in the index are up YTD, and the average performance of those 50 stocks is a decline of 4.18%. If 2024 is going to be the year of broadening, it’s getting off to a slow start.
Jan 18, 2024
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Jan 17, 2024
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“We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” – Dwight D. Eisenhower, 1/17/61
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s not a pretty morning for risk assets as Asian stocks, specifically China, were down sharply overnight, and Europe is down sharply this morning after ECB President Lagarde followed the lead of US central bankers when she noted that rate cuts aren’t likely to start until the Summer and UK inflation came in higher than expected. Here in the US, it’s a busy day of economic data. Retail Sales and Import Prices were just released, and they both came in higher than expected. On the docket, we have Industrial Production and Capacity Utilization at 9:15 and then Business Inventories and Homebuilder Sentiment at 10 AM.
When comments like the above are made today, the people making them are often written off by the mainstream as candidates being on the fringe, but President Dwight D. Eisenhower made the statement above as part of a nationally televised farewell speech from the Oval Office when his approval rating was just under 60%. Eisenhower’s concerns stemmed from the fact that after multiple major wars, the US defense industry was becoming a much larger share and player within the US economy, and he was pointing out that as its size grew, so too would its influence.
During Eisenhower’s last year in office (1960), total US defense spending, according to the World Bank, was $47 billion. Within 16 years, defense spending had doubled, and just six years later, it had more than doubled again to over $220 billion. Under Reagan, spending steadily increased and reached a short-term peak in 1990 at $325 billion. For the remainder of George H. Bush’s term through most of Clinton’s entire time in office, total spending actually drifted lower but then surged exponentially after 9/11. Spending then generally declined for most of Obama’s time in office and then ramped back up again after Trump came into office (“When I took over our military, we didn’t have ammunition”). As of 2022, the latest year of available figures, total defense spending in the US reached $877 billion, or more than 18 times the level during Eisenhower’s last year in office.
While it may look as though defense spending has only become a larger influence on the US economy since Eisenhower left the Oval Office for the last time, when measured as a percent of GDP, defense spending has generally been on the decline. During Eisenhower’s last year in office, total defense spending equaled about 9% of GDP, and through the decades steadily declined to a low of 3.09% of GDP in 1999 during Clinton’s second to last year in office. Again, spending ballooned as a percent of GDP during George W Bush’s Presidency after the 9/11 attacks, but then started to decline again after Obama came into office. While total dollar-spending surged after Trump came into office, as a share of the economy, the increase looks much more subdued.
In terms of the current US geo-political picture, it’s hard to remember a time when more fires were smoldering around the world, so you would think that it would be a great time for defense contractors. Based on the performance of the largest US defense contractors over the last year, though, that has hardly been the case. The chart below shows the one-year performance of the five largest defense contractors (market cap greater than $50 billion), and during that time, TransDigm (TDG) is the only one that is outperforming the S&P 500. Of the remaining four, two are up less than 4% while Boeing (BA) is down over 5% and RTX is down over 13%. BA is facing its own issues as the company tries to get its act together, but for the other companies rising geo-political instability hasn’t necessarily been good for their stocks.
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Jan 14, 2024
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.
While you’re here, join Bespoke Premium with a 30-day trial!
On This Day in History:
Miracle on the Hudson: We’re one day off but it’s a long weekend and Monday marks fifteen years since the Miracle on the Hudson on January 15, 2009. Shortly after takeoff, US Airways Flight 1549 had its engines disabled after a bird strike, forcing an emergency landing on the Hudson River in New York City. Captain Chesley “Sully” Sullenberger and First Officer Jeffrey Skiles determined that they didn’t have enough speed or altitude to make it back to the airport, making the cold Hudson the only option. The heroic actions and quick decision-making under a world of pressure saved the lives of all 155 people on board. Since the crash in 2009, a movie was made about the event in 2016. It’s titled “Sully” and stars Tom Hanks as Captain Sully.
Investments
ETFs in 2023: A Tale of Success and Failure (Morningstar)
The ETF market experienced substantial growth in 2023, with significant inflows and more than 500 new launches. As a result of strong competition, though, there were almost 250 closures. Many of these were linked to factors like low assets, high fees, and poor performance. Commodities-focused ETFs had the highest number of closures, along with closures in leveraged equity ETFs and active ETFs. [Link]
Hedge Funds’ Popularity Flags Among Allocators, per Consulting Firm (Chief Investment Officer)
Hedge funds are losing their popularity according to Agecroft Partners. Despite growth in hedge fund assets, investment inflows are slowing, with smaller and midsize funds outperforming larger ones. For some time, hedge fund returns have been in the single digits along with higher fees. The overall hedge fund industry is predicted to experience consolidation, with stronger managers attracting more investments and underperforming ones facing potential closure. [Link]
AI & Technology
This iPhone fell out of Alaska Airlines Flight 1282 (The Verge)
At this point, most of us have seen the video of the Alaska Airlines Flight that lost part of its fuselage shortly after takeoff. If you haven’t, this link has a clip of it embedded in the article! The incident, involving a Boeing 737 Max 9, led to an emergency landing at Portland International Airport. The National Transportation Safety Board confirmed two phones from the flight were found on the ground, including one that survived the fall to Earth! Pretty crazy to think about when some of us have dropped and cracked phones from just a few feet. [Link]
New material found by AI could reduce lithium use in batteries (BBC)
Microsoft and the Pacific Northwest National Laboratory, with the help of AI, discovered a new material that could reduce lithium usage in batteries by up to 70%. AI screened through tens of millions of materials in less than a week to identify candidates for the job. Once AI could identify qualifying materials, it took less than nine months to develop a battery prototype. The material called N2116 has the potential to be a sustainable energy storage solution because it’s safer than lithium. The quick AI finding is also beneficial because of the lithium shortage that could occur in just a year. [Link]
California wants to reduce traffic. The Newsom administration thinks AI can help (Los Angeles Times)
The California Department of Transportation is exploring the use of AI to reduce traffic, not just for the cars jammed up in LA and other dense cities, but also for pedestrians and cyclists. AI would be employed to analyze data from traffic sensors and cameras. The technology would be able to identify narrow roads, frequent site crashes, dimly lit areas, and other factors that clog up traffic and lead to more accidents and then present solutions to those problems. [Link]
Our fingerprints may not be unique, claims AI (BBC)
Columbia University is challenging the belief that every fingerprint is unique with the help of AI to analyze 60,000 prints. With 75-90% accuracy, AI could identify whether different fingerprints belonged to the same individual. There are some issues with the research though, as the methods used by AI aren’t fully understood due to untraditional analysis. If this research continues to develop, AI could have implications in biometrics and forensics. [Link]
How AI Replaced the Metaverse as Zuckerberg’s Top Priority (Bloomberg)
Since starting Facebook at Harvard in the early 2000s, the CEO of Meta Platforms, Mark Zuckerberg, has seen a fair share of technological changes. Perhaps the development of AI is the biggest evolution yet, and Meta’s AI research group is now focusing more on developing consumer-facing AI products. The company’s strategy includes leveraging AI to enhance user engagement on its platforms. After the launch of ChatGPT, which has quickly accelerated public interest in AI, Zuckerberg has shifted focus from the Metaverse to AI-driven initiatives. [Link]
Environment & Energy
America’s Carbon Emissions Fell for the First Time Since Covid (Heatmap News)
In 2023, the United States saw a 1.9% decrease in greenhouse gas emissions even as the economy grew. That marks the first time this decade that economic growth and emission reduction occurred simultaneously. The decline in emissions was driven mainly by the power sector, with notable reductions in coal usage and increases in solar and nuclear power. However, transportation and industrial sectors still present challenges, with rising emissions in air travel and heavy industries. [Link]
A huge battery has replaced Hawaii’s last coal plant (Canary Media)
In 2022, Hawaii shut down its last coal plant and replaced it with the Kapolei Energy Storage system, featuring 158 Tesla Megapacks. The project boasts 185 megawatts of discharge capacity, providing crucial grid services like capacity, energy storage, and frequency stabilization. The battery’s integration aids in maintaining grid reliability while transitioning to renewable energy, marking a significant step in Hawaii’s commitment to a clean-energy grid. [Link]
Marketing
How Pop-Tarts pulled off its unforgettable mascot sacrifice (Marketing Brew)
Pop-Tarts made a bold marketing move just before the new year, ending 2023 with a bang. After Kansas State’s 29-19 win over North Carolina State in the Pop-Tarts Bowl game, a Strawberry Pop-Tarts mascot climbed into a massive toaster before spitting out an equally large and edible Pop-Tart for the victors to feast on. It was certainly an unconventional marketing tactic playing to its “crazy good” mantra. It ended up being a big success, as internet memes and discussion boosted viewership and turned the stunt into the brand’s biggest earned campaign. [Link]
Back to Work?
Offices Around America Hit a New Vacancy Record (WSJ)
Office vacancies in major US cities have reached their highest levels in over four decades, tracing back to overbuilding in the 1980s and 1990s, worsened by the shift towards remote work and smaller office spaces accelerated by the pandemic. Many of the vacancy trends have flipped too. For example, areas that were once booming like San Francisco and Texas cities are now facing high vacancy rates, while cities in Florida that once struggled now show lower rates. [Link]
Soccer Stumbles
Chinese Remains Terrible at Soccer. It Says This Is Why. (WSJ)
Corruption is Xi Jinping’s explanation of China’s soccer struggles. The Chinese government has revealed that high-profile figures in the country have been involved in bribery and match-fixing. Li Tie is one star player turned coach who admitted to manipulating the outcome of games in exchange for money. With such a large population, of which many are fans of the sport, it’s hard to imagine that a country of its size wouldn’t be able to put together a solid team. The corruption involved sounds like it might be a smaller byproduct of larger issues like government policy and business models within the country and world of sport. [Link]
Government Programs & Policies
The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It. (WSJ)
The Federal Reserve’s emergency lending program, created during the 2023 banking crisis, has unexpectedly turned into a profitable opportunity for banks. With the market anticipating multiple Fed rate cuts, banks are able to borrow from the Fed’s program at lower rates and earn higher returns by depositing these funds with the central bank. Initially, the program provided costly loans due to expected higher rates, but the recent reversal in rate expectations made borrowing cheaper. [Link]
Maine renews effort to elect president by national popular vote (Daily Kos)
Maine is a state that divides its electoral votes: two for the statewide winner and one each for the winners in its congressional districts. Democrats in the state are now revisiting a bill to join the National Popular Vote Interstate Compact and allocate Maine’s four electoral college votes to the national popular vote winner. All member states would collectively award their electoral votes to the winner of the national popular vote and will only take effect when states representing a majority of the 538 electoral votes join, which means 270 or more votes. The goal would be to ensure that the winner of the popular vote becomes president. The popular vote winner has lost the Electoral College five times in US history, the most recent being Hillary Clinton vs Donald Trump. [Link]
IRS collects more than $500 million in back taxes from delinquent millionaires (MarketWatch)
Millionaires with outstanding tax debts have paid $520 million to the IRS following increased enforcement efforts geared toward wealthy businesses and individuals. Now that the IRS has received a big funding boost from the Inflation Reduction Act, the agency can enhance compliance which is already having success. The crackdown could be hindered by a deal to lift the debt ceiling or a potential deal to avert an upcoming government shutdown, both of which would redirect billions of dollars of funding elsewhere. [Link]
Secret Societies
Skull and Bones and Equity and Inclusion (The Atlantic)
In 2019, members of Yale’s secret society Skull and Bones, known for its elite and exclusive history, confronted its legacy of exclusion by replacing traditional portraits in their meeting place with signs criticizing the society’s lack of diversity. This act reflected broader changes within Yale’s secret societies, which historically have been symbols of privilege and exclusivity. To give you an idea of the exclusivity here, the Vanderbilts, Rockefellers, US presidents, and other high-profile figures have all been bonesmen. The societies now are increasingly diverse, with members advocating for social justice and inclusivity, which has raised tensions between those focused on progress and alumni who value tradition. [Link]
Tails Never Fails?
Scientists Destroy Illusion That Coin Toss Flips Are 50–50 (Scientific American)
After more than 350,000 coin flips, a study found that coins landed on the same side as they started 50.8% of the time, indicating a nearly 1% bias. This finding supports the theory that coins don’t rotate symmetrically in the air, meaning that they spend more time in the air with their initial side facing up. However, for everyday decisions, this bias is negligible, and standard coin flips can still be considered virtually random. If you can see the coin before it’s flipped, though, it sounds like the side facing up might be the one you should go with, instead of the favored “tails never fails” strategy. [Link]
Race Against Rats
A New York Professor Wages Epic Battle Against Rats Attacking His Car (WSJ)
A theater professor at the City University of New York has been unlucky enough to experience four rat invasions of his car in New York City, which is known for its large rat population. The professor has used some creative tactics to combat the rats, like wrapping ignition wires in minty tape and pouring a “garlic-scented potion” on his engine. It’s an issue many are having, with more than 91,700 car damage claims due to rodents in the US from July 2022 to the end of June 2023. The search for effective deterrents is ongoing, and many more interesting methods are being tested. [Link]
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