This Week in Barrons: 10.13.2024

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It worked, but just barely…  is the story of just about everything engineers have ever created.  Per Seth G: the first plane just barely flew and early VisiCalc was just barely useful.  The earliest bridges were shaky, unreliable, and made of vines.  Successful product development is NOT an innovation that bursts on to the scene as a great product.  It’s more like nurturing, sharing, and improving something that is almost useless – until we can’t imagine living without it.  It’s the same process we use when we: learn to walk, speak a new language, or even visit a new community.

The number one question I’m asked is: "Will my job be replaced by an AI bot?”  Allow me to ask a question back: “When was any game-changing technology NOT good for everyone?”  What past paradigm-shifting tech did NOT grow the economy, add jobs, and power innovation.  I remember when smart phones, 3D printing, EVs, blockchain, and digital currencies were going to upend our lives.  AI will accelerate the speed of opportunity.  AI will change the corporate landscape, increase wages, and create wealth.

“I’d like more tension in my job please?” …  This is virtually never requested, but it’s the tension that we remember.  Tension is what changes us.  Tension is the feeling we experience just before we grow.  Ironically, it’s the exact medicine that we need to grow – at the exact time we’re trying to avoid it.

The Market:

One heck of a student project …  A couple Harvard students just demo-d a proof-of-concept system using Meta’s Ray-Ban smart glasses that allow the wearer to access personal information about strangers, raising major privacy concerns.

• 2 students combined Meta’s smart glasses with custom software, enabling the ability to ID people and retrieve personal data.
• Their system, I-XRAY, uses a combination of facial recognition, reverse image search, and LLMs to find names, addresses, phone numbers, and other details. 
• The privacy concerns come as Meta confirmed that it can use any images and videos shared with Meta AI.

The demo exposes how much privacy and surveillance are about to change in the AI age – and it’s coming fast.  If a couple of students can achieve these abilities with a pair of Meta smart glasses and publicly available tools, what will dedicated corporations and governments be capable of? [Heck, what can go wrong?]

Interestingly … right after our FED cut the overnight rate by 50bps and signaled the beginning of a rate-cut cycle, the market started to move yields higher.  I mention the ‘reverse’ action in market rates because I believe they have a big impact on what groups are leading the market.  I’m not chasing healthcare, small caps, and regional banks while rates are rallying, but would rather be long the Mag-7.  When rates decline, then I would lighten-up on the Mag-7 and buy more: healthcare and emerging markets.  

[ Gain free access to Bullseye Trades here… ]

InfoBits:

• 2 Nobel Prizes went to AI this year:
• The Nobel for Physics went to: John Hopfield (who developed a network model mimicking how the brain recalls memories) and Geoff Hinton (who created how neural networks learn from their mistakes).
• The Nobel for Chemistry went to David Baker (for developing novel proteins), and to Demis Hassabis (Google AI) and John Jumper (Google’s Deepmind) for their work on Alphafold.  
• I still remember 8 years ago when Bob Dylan was the first musician ever awarded the Nobel Prize for Literature.
• Gone in 7 Days…  is how long it took MISO to sell through their first batch of Flippy Fry Station kitchen robots.
• U.S. Homeowners have a record $38T in home equity.
• Wynn Resorts won the first commercial license…  to offer gambling in the United Arab Emirates
• Home Depot will start to require…  its corporate employees to work a full day shift at one of its retail stores each quarter.  [Know Your Customer.]

• The DOJ is examining splitting Google into multiple companies…  because they are operating in markets that are “indispensable to the lives of all Americans.”
• o BUT, since Google has provided many of its services for FREE (search, Gmail, Google Maps, Google Photos) – haven’t they actually been helpful to the consumer?
• o Our government believes that: “Google’s illegal conduct unlawfully enriched Google”.  That would be a good argument if Google was a private company, but it’s a public one, owned by tens of millions of Americans.
• o [So DOJ, who exactly will benefit from Google’s breakup?] 

• Tesla unveiled its Robotaxi strategy…  and it involves using their new CyberCab automobile, along with cars of Tesla owners who want to make a little money on the side.  Of course, Tesla still has a long way to go to prove that its autonomous driving software is safe, but it’s fun to dream.  [FYI: Google’s Waymo already services 100,000 paid rides per week in Los Angeles, San Francisco, and Phoenix.]
• OpenAI projects $14B in losses by 2026…  and $101B in revenue by 2029.
• Boeing will cut 17,000 jobs…  and delay the first 777X delivery as the strike begins to hit its bottom-line.
• TD Bank agreed to pay $3B in a money-laundering settlement.

• In the last 2 years, VC-backed projects have:
• o Exited 70% of the time below their level of invested capital.
• o Have seen a majority of later stage investments end in a loss.
• o Have confounded even sophisticated investors like Andreessen Horowitz with 25% of their investments going to ZERO.

Crypto-Bytes:

• 65% of all bitcoin in circulation have not moved in the last 12 months… which is great for HODLers because that means less liquidity for the circulating supply.  And for the past 3 years, +50% of all bitcoin in circulation have not moved – despite the price of bitcoin tripling during that period.

• Satoshi Nakamoto was identified as Peter Todd…  in a new HBO documentary.  The film, “Money Electric: The Bitcoin Mystery,” uses circumstantial evidence to point to the 39-year-old Canadian software developer as the creator.  [FYI: Satoshi’s $69B BTC stash has not moved.]

• Michael Saylor envisions MicroStrategy as a Bitcoin bank…  focusing on BTC-based capital market instruments.  He believes Bitcoin will make up 7% of global financial capital by 2045, with a projected price of $13m/BTC.

• Fidelity will introduce a blockchain-based money market fund…  to take advantage of blockchain’s transaction efficiency.

• ~Half of U.S. investors are planning to invest in crypto ETFs…  over the next 12 months.

TW3 (That Was - The Week - That Was):

Thursday:  The CPI inflation report came at +2.4% YoY, and core inflation was reported at +3.3% YoY.  The Washington Post spun it as: “More good news on inflation. US inflation was close to the Federal Reserve’s 2% target and the lowest since February 2021. For the month of September, inflation rose just 0.2%.  Rent continues to be the key driver of inflation.  Food also had a higher than usual month.”  Honestly: 

• Inflation is not under control.  The CPI came ~25% higher than the 2% target, and core inflation remains ~50% higher than the target. 
• This is shedding doubt on whether our FED should have done a 50bps interest rate cut in September. 
• Our FED now finds themselves in a tough spot: If they cut interest rates further, they risk having the US enter a period of accelerating inflation.  If they leave rates alone, they risk the US falling into a recession. 

[FYI: Charlie B’s prices over the last 4 years: New Cars: +20%, Electricity: +30%, Gasoline: +44%, US Home Prices: +47%, and Auto Insurance: +60%.]

Friday:  Today the US Labor Department delivered its latest wholesale inflation report (PPI).  It came in unchanged vs an estimate of +0.1%.  The Dollar along with interest rates fell, while precious metals and bitcoin rose.

Morgan’s Moments…

Happy Birthday 2022 Bull Market…  The stock market’s bull-run officially turned 2 years old yesterday.  The S&P 500 is up 61% since October 12, 2022 – when the index hit its bear-market bottom of 3,577.  We’re about halfway through the average 46-month bull market, so if this ends up being a typical upswing – investors have about 22 months of runway left.

Zoom … Zoom … Zoom:  During its annual developer conference, Zoom announced a upcoming feature that will allow users to create custom, AI-animated, photorealistic avatars of themselves – that they can use to send messages to their work colleagues and to attend meetings.

• To create their digital avatar, users will record a video of themselves talking.  Zoom’s AI will then translate this into a digital clone that mirrors their appearance and voice.
• Users will then write what they want their digital clone to say, and Zoom will create the audio ‘n synch it with the avatar's lip movements.  Users can then send the video update to their teammates.  
• The avatars (available in Q1 2025) should enable video chats among teams, and allow employees to send their “digital twin avatar” to meetings in their place.

[I sure hope bad actors won’t use this to create deep fakes and spread mis-information.]

Next Week: High Vol + High Mkts. = FEAR

Bkgd:  We are in a high volatility market - trapped inside of a tight range.  The longer we’re trapped inside of this range (SPX between 5720 – 5840), the more violent the resolution (upside or downside) is going to be.

We have gone 3 weeks without even touching the edge of an S&P Expected Move.  The only behavior resembling this occurred back in June of 2020 (COVID trade) and its resolution was violent.

Trading when the VIX is over 20:

1. Trade with small allocations and using OPTION SPREADS.
2. BUY rather than SELL into this volatility because it allows you to further define your risk and behavior.
3. Let the range resolve itself BEFORE diving into a conclusion.  We will NOT break outside this range without heavy degrees of correlation.  There is no FOMO in this environment.  If the SPX breaks higher, so will +90% of the equities.

Beware of the: FAKE LEFT – GO RIGHT move:

1. IF we pop to the upside, watch for a CRUSH in CALL option volatility, and a temporary decrease in the value of your upside CALLs.  This too shall pass.
2. Many of the PROS are ready to FADE any market move higher – believing that only the election will be the final resolution to the range. 

TIPS:

1. Tip #1: Commodities:  I remain bullish on commodities given improved technicals, a global policy pivot toward rate cuts, cheap valuations, and supply-side tailwinds.
2. Tip #2: Commodity Equities:  I remain bullish due to reasonable valuations along with the bullish outlook for commodity prices in general.
3. Tip #3: Oil/Energy:  Crude oil looks technically primed to rally and corresponding equities appear ready for an upside surprise.  Energy stocks look attractive as a cheap alternative hedge (given increased geopolitical risk and inflation returning).  Remember 2022 when oil prices surged over 70% in the wake of the Russian invasion of Ukraine – the S&Ps went into a bear market, while energy stocks rallied more than 50%.  

SPX Expected Move (EM):

• Last Week’s EM = $106 and we moved $60 total.
• Next Week’s EM = $86 – but Monday and Tuesday will be a bit of a slop-fest due to the holiday.

TIPS:

Bounce vs Break:

1. Tip #4: Bonds are setting up for a move: Watch the /ZN around $111.
2. Tip #5: The U.S. Dollar is setting up for a move: Watch DXY around $103.60.
3. Overall, it’s fair to say that the energy sector is an overlooked and undervalued part of the market with macro catalysts in the wings.  It’s worth a second look if only for diversification and risk management purposes.

HODL’s: (Hold-On for Dear Life)

• 13 to 17-Week Treasuries @ 4.75%
• Physical Commodities = Gold @ $2,674/oz. & Silver @ $31.7/oz.
• **Bitcoin (BTC = $63,200 / in at $4,310)
• **Ethereum (ETH = 2,460 / in at $310)
• HROW – Harrow Health = $50.7 / in at $12 
• INDA – India ETF ($57 / in at $50)
• BRK/B – Berkshire = ($460 / in at $439)
• **IBIT – Blackrock’s Spot Bitcoin ETF ($35.9 / in at $24)
• SVM – Silvercorp Metals = (4.86 / in at $4)
• DSVSF – Discovery Silver = (0.683 / in at $0.62)

Options to Reduce Risk:

• Materials / Utilities: Long Call Verticals…
• XLU – Utilities: Jan ’25: $85 / $89 CALL-Sp.
• WEC – Wisconsin Power: Jan ’25: +$100 / -$105 CALL-Sp.
• SVM – Silvercorp Metals: Jan. ’25: +$5 Calls
• SLB – Schlumberger: Jan. ’25: $47.5 / $52.5 CALL-Sp.
• HAL – Halliburton: Jan. ’25: $31 / $34 CALL-Sp.

Options as Hedges:

• SPY – S&Ps: Jan ’25: +$520 / -$500 PUT-Sp.
• SPY – S&Ps: Jan ’25: +$500 PUTs
• GLD – Gold ETF: Jan ‘25: +$255 / -$260 CALL-Sp.

Options for Income:

• **RIOT – Riot Bitcoin Mining
• Bi-Weekly:  BUY the Stock
• BUY Puts 1 Std. Dev. OTM for protection
• SELL Covered Calls ½ Std. Dev. OTM for income

** Crypto-Currency aware

Please be safe out there!

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