The End Of The Internet As We Know It

Reformed Millennials - Learn Earn and Invest

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* Christmas Parties Belong In December

* Ai’s position in media and the internet ad market

* Market update

* Sports business update

* LIV golf drama

* Recommendations and Links

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Market Update📈📉

Welcome back.

First I want to urge all readers to check out Ben Thompsons latest piece - Regretful Accelerationism.

As this year comes to a close a year after OpenAI’s ‘ChatGPT moment’ that kicked off the gold rush in the AI Tech Wave last November, it’s clear that for now the big tech ‘Magnificent Seven’, most with market caps over a trillion dollars each, rule the public market roost. Some might say their AI tales are wagging the relative smaller cap ‘dogs’ in the market (pun intended). As the WSJ notes today in “What the Stock Market Taught Us This Year: Don’t Fall for These Investing Traps”:

“A handful of tech and tech-related stocks, weight-loss drugs and artificial-intelligence providers offer the sum total of stock-market outperformance this year. Beyond these headliners, there is less and less attention on individual names.”

“Those tech behemoths, dubbed the “Magnificent Seven,” account for more than 30% of the index and 87% of its return through October. Let us say that again: Just seven stocks represent one-third of the S&P 500 index. Some now consider Google parent Alphabet, Amazon.com, Apple, Facebook parent Meta Platforms, Microsoft, Nvidia and Tesla to be defensive businesses that can grow through any economic cycle.”

We’ve seen this before, and the lesson is always the same: Winner-takes-all can dominate over shorter time frames but is rarely a winning bet in the long run.”

This concentrated performance of the AI boosted performance of big tech is something we’ve talked about on this podcast at length.

As this other WSJ piece also today “How Long Can the ‘Magnificent Seven’ Stocks Hold the Line?” notes:

“As in the eponymous 1960s Western, the so-called Magnificent Seven stocks keep on winning. This also means investors are betting the farm on just a handful of bullets hitting their targets.

The S&P 500 is in a bull market, fueled by soft inflation data in the U.S. and Europe and the widespread belief that interest rates will start coming down early next year. Yet the stock market has become so top-heavy that speaking of a “bull market” carries less meaning than before.”

Without the key seven stocks listed above and talked about at length on this site, the WSJ adds:

“The high-growth, technology-related companies that analysts have dubbed the Magnificent Seven—the S&P 500 would be up only 8% this year, rather than 19%. Indeed, these stocks inched higher Tuesday even as the broader equity market faltered.”

The issue becomes complicated in a public market increasingly dominated by index investing, which for individual investors in abstract is an eminently wise way to invest in stocks for the long term. But the ‘Magnificent 7’ concentration means that:

“That poses a conundrum for investors, who increasingly use index funds. Right now, buying an S&P 500 tracker means investing 30% of the money in just seven stocks. Historically, the top seven have accounted for 21% of the benchmark, taking the end-of-year average of the past decade.”

And this means a stratification in valuations in this concentration:

“This not only runs counter to the principle of diversification, but also means the most important stocks investors own are pricey. The seven stocks have posted strong profits lately, but they are still trading at an average of 32 times forward earnings, compared with 19 times for the broader index.”

Of course, all assets are ultimately driven by the realities and perceptions of where interest rates are and might go, in the much larger bond markets. Investors in both private and public markets are of course adjusting from over a decade of aberration ally low interest rates (aka ZIRP, RIP for now). As the earlier WSJ piece noted:

“The extremely low interest rates that have persisted for much of the past two decades. Over the past 50 years, U.S. interest rates have averaged 5.98%. Today’s 5.5% rate seems high compared with the 0.25% paid during the recession of 2008, but no comparison to 1980 when rates topped out at 20%.”

“Similarly, at the start of the new millennium, a 30-year fixed-rate mortgage was 8.08%—basically in line with 2023 levels, but significantly higher than the bargain 2.96% rate that could be had just two years ago.”

“Higher interest rates now feel like a shock to our systems because we got anchored to some extreme lows. When considered in the full context of a longer history, though, they are in line.”

“Now people are anchored to the S&P 500 beating everything else. But just as we have seen with interest rates in 2023, the trend will revert to the mean, even if it takes a while.”

Of course on the tech and AI front, we’ve long made a point of making sure investors separate financial cycles from secular technology cycles. They’re almost never in sync. This post is to highlight the broader realities of the financial cycles for now. Again, as the WSJ notes in their piece on the ‘Magnificent Seven’:

“With so much market value concentrated in those seven stocks, the benefits of diversifying into small-caps can be severely reduced when a few of their company-specific investments pay off, the research also suggests. The artificial-intelligence boom sparked by OpenAI’s ChatGPT, which has already helped chip-maker Nvidia triple its revenues relative to a year earlier, could be just such a payoff.”

“But reliance on big idiosyncratic effects cuts both ways. Who will benefit most from AI is still an open question. And other megatrends are underpinning the value of the Magnificent Seven, such as Meta’s metaverse or Tesla’s self-driving cars, that are showing less promise.”

Tune into the podcast next week to hear more on this.

Twitter links from the pod:

* BIOTECH BOOM

* Japanese stocks

* Andy Constan talks about market makeup - supply vs. demand

* Trevor Tombe talks about carbon tax policy

Podcast & YouTube Recommendations🎙

* Prof G talks about the GS <> Apple break up:

* Serhant Talks about the biggest trends in real estate:

* Cybertruck is here and its hideous:

Best Links of The Week🔮

* Working - with Barrack Obama on Netflix

* After Charlie Munger passed away at age 99, a reader kindly shared his video Psychology of Human Misjudgement. If you listen to any podcast episode this week, make it this one. Munger goes through the most common causes of human misjudgment, including distorted incentives, the urge to reciprocate, social proof, authority bias, commitment bias, etc.

* I also loved the interview with British historian Edward Chancellor. He’s bearish on the renewables and the private equity industries since they’re hurting from recent interest rate hikes. Chancellor thinks the best value can be found outside the United States, especially in the UK and Japan.

* Finally, have a look at the ASEAN stocks discussed by Ross & Van Compernolle in their recent update. These include Delfi, Velesto, PV Drilling, Marco Polo Marine, CSE Global, Arwana Citramulia, etc. Ross & Van Compernolle believe that the offshore oil & gas services market remains tight as industry capex lags behind demand. They also believe that Indonesia’s economy will benefit from fiscal spending in the run-up to the 2024 election. Most of their stocks trade at single-digit P/E multiples.

* "Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months following the sharp global bond market rally... The acceleration in issuance follows a rapid shift in investor sentiment over the past few weeks, in which markets have begun to price in US and European interest rate cuts in the first half of next year... US bonds recorded their best monthly performance in nearly four decades in November." Source: FT

* "Amazon is betting members of its Prime program will want to pay a separate monthly fee for unlimited grocery delivery on some orders. Trial service will give Prime members in three cities the option to pay $9.99 a month for access to free Fresh and Whole Foods deliveries on orders more than $35. The company has tweaked its fee-free grocery delivery threshold in recent years amid mounting costs." Source: CNBC

"A leading Gulf artificial intelligence company has said it is cutting ties with Chinese hardware suppliers in favour of US counterparts, in a sign of the growing geopolitical struggle over the new technology. G42 of the United Arab Emirates is making the move to ensure its access to US-made chips by allaying concerns among its American partners, which include Microsoft and OpenAI, chief executive Peng Xiao said." Source: FT

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