Barron’s Weekend Summary:
Cover Story:
For months now, Congress, the White House, the US military, foreign governments, and a range of other institutions have been warning about the risks posed by TikTok. TikTok CEO Shou Zi Chew recently spent five hours testifying before an extremely hostile House Committee on Energy and Commerce. In the opening minutes, Rep. Cathy McMorris Rodgers (R., Wash.) declared TikTok to be “a tool to manipulate America,” asserting it “should be banned.” For TikTok, it was all downhill from there. Critics like Rodgers think the person with the most power at TikTok is Chinese President Xi Jinping. If you believe TikTok is a tool for China to spy on Americans and distribute propaganda, then details about the ownership and management structure don’t really matter. But those details are of keen interest to investors—and so is the potential fallout if the app is actually banned. TikTok is a unit of ByteDance, a China-based internet conglomerate and the world’s most valuable privately held venture-backed company with an estimated valuation of $225B.
Interview:
-This week, Barron’s features Cheryl Mickel, who oversees money markets, short-term taxable bonds, and stable value for T. Rowe Price’s fixed-income group, She looks for opportunities amid the chaos—even in the short-term debt of banks. Mickel is one of Barron’s 100 Most Influential Women in US. Whether the recent troubles among U.S. regional banks and some European giants will become a widespread crisis has yet to be determined, says Mickel, who heads T. Rowe Price’s U.S. Taxable Low Duration Group, overseeing more than $100 billion in assets. But rather than hunker down, Mickel’s team is searching for opportunities to lock in higher yields.
Tech Trader:
Lyft has been a terrible stock, losing almost 90% of its value since its March 2019 initial public offering. While the ride-sharing company’s financial results have rebounded from a pandemic-era swoon, it continues to lose ground to rival Uber. To stanch the bleeding, Lyft’s board this past week made a dramatic management change, conceding that Lyft needs a new plan: CEO Logan Green and President John Zimmer, who founded Lyft 16 years ago will step down in the weeks ahead. To replace them, the board made a surprising choice: Lyft director David Risher, who while having impressive credentials, hasn’t played a significant role at a for-profit business in more than two decades. He spent the early part of his career at Microsoft, then joined Amazon in 1996 as employee No. 37. Amazon founder Jeff Bezos put him in charge of expanding the e-commerce business beyond books. Risher left Amazon in 2002.
The Trader:
-The debt ceiling has been forgotten amid the banking turmoil, but it’s still there and could cause a chaos situation of its own. The US federal government hit its self-imposed debt limit of just under $31.4T in January, and Congress appears to be barreling toward a protracted fight over lifting it in the coming months—or else risk a disastrous first-ever US default. Markets have taken notice, but they don’t appear overly concerned just yet. A high-stakes standoff over raising the debt ceiling in 2011 resulted in credit-rating firm Standard & Poor’s downgrading the US sovereign debt rating. That wasn’t without cost. The yield premium on U.S. Treasuries has consistently been one to two percentage points higher relative to German bunds since 2011 compared with before the downgrade, notes Richard Bernstein, chief investment officer of Richard Bernstein Advisors.
-Another earnings season is just around the corner and it could help the market decide if it wants to head higher—or retest its 2022 lows. Analysts predict that S&P 500SPX +1.44% earnings per share will decline 4.6% in the first quarter of 2023 compared with a year earlier, according to Refinitiv. That would follow a 3.2% year-over-year decline in the fourth quarter. Revenue is forecast to continue growing—by 1.7% as of the latest consensus estimate from Refinitiv—but high inflation and a tight labor market are pushing costs up faster than firms can raise prices.
Features:
-Elon Musk is right to call for a six-month pause on all “training” of AI systems more powerful than OpenAI’s cutting-edge GPT-4. A breather, at least in theory, would allow the industry to develop shared guardrails for this fast-evolving technology.
Musk may have personal reasons to take a swipe at OpenAI, which he helped start in 2015 (more on that in a moment). But more important than Musk’s individual opinion is that of the other 1,800 or so tech experts—some of them current and former executives at AI startups—who also signed an open letter published this week calling for the six-month pause. Given the known and unknown risks that smart technologists associate with “generative” AI, the industry should err on the side of caution.
-A ban on TikTok would accentuate the current generational divide and disproportionately hurt GenZ viewers, who are, by far, the largest contingent of users. According to 2023 data from Insider Intelligence, 46% of TikTok users are in Gen Z, which the researchers define as people born from 1997 to 2012. They’re trailed by millennials, who make up 34% of users, Gen X (12%), and baby boomers (7%). That’s a shift from other social-media apps: Millennials are the biggest users of Instagram, Facebook, and YouTube. A little more than half of Gen Z adults say they oppose a nationwide TikTok ban, according to a survey from public-opinion research firm SocialSphere. In contrast, 34% of millennials shared that view, SocialSphere found. That survey didn’t include older generations, but in a national poll by CBS News/YouGov, 61% of respondents supported a ban.
European Trader:
-Rolls Royce stock is revving up. But it’s not the Rolls Royce you might be thinking about. The company doesn’t actually make cars anymore—that unit has been a subsidiary of Germany’s BMW since 2003. Rolls-Royce largely makes turbofan engines for aerospace use. Its biggest rivals are General Electric and Pratt & Whitney. Not Bentley. Shares of Rolls-Royce Holdings have jumped this year under new Chief Executive Officer Tufan Erginbilgic on hopes he will turn things around after years of underperformance. Rolls-Royce’s underlying profit rose more than 50% in 2022. The company gets the bulk of its income from servicing aircraft engines, and it says that engine flight hours, a key metric, will continue to increase this year. It expects flight hours to reach as much as 90% of the prepandemic levels of 2019 this year. They were at just 65% of that in 2022.
Emerging Markets:
-The technology sector has been moving out of China on a phenomenon that’s being described as techxodus. Potential beneficiaries of the China techxodus stretch from Mexico to Poland, Malaysia and Vietnam. Potential losers are global consumers, who may have to pay more for their gadgets as humming Chinese supply chains, built up over two decades, fragment. “Companies have experienced significant margin improvement from being in China,” Mehdi says. “They’ll have to find other ways to take the cost out.”
US restrictions on advanced semiconductors for China, which ratcheted up last October, are one driver of the search for alternatives, but not the only one. Chinese labor costs have climbed 40% since 2010. Russia’s invasion of Ukraine, and the mass exit of foreign companies there, pushed investors to contemplate a repeat with China and Taiwan.
Commodities:
-As of March 30, the S&P GSCI, a benchmark for investments in the commodity markets, fell more than 7% for the first quarter. “Risk aversion, triggered by persistent rate hikes, coupled with idiosyncratic risks such as warmer-than-normal weather conditions, have resulted in synchronous downsides and created weakness” in commodities, says Hakan Kaya, senior portfolio manager of the Neuberger Berman Commodity Strategy NBCM exchange-traded fund.
Energy fell the most, with the S&P GSCI Energy index down 12% quarter to date. Natural-gas prices on the New York Mercantile Exchange lost 53% in the first three months of the year. Newcastle coal futures on ICE Futures Europe declined over 56%, after prices more than doubled last year. U.S. and global benchmark crude futures trade more than 7% lower for the quarter.
Streetwise:
-This week, Jack Hough has some good news: The banking crisis has shifted from panic to unease, “overnight deposit runs suddenly seem so early March. Thanks to quick policy action, small banks are leaking vital cash to industry giants and money-market funds in a much more orderly way.” Moreover, Hough observes that peak debt-ceiling danger is still distant and he looks for some opportunities to invest ‘risk capital,’ noting that stocks are just the thing for that pointing out some bargains. Savita Subramanian, a stock strategist at BofA Securities, reckons that the index is priced for 7% average yearly returns over the next decade. Near term, she calls 5% returns on cash “a compelling alternative.” But surely, says Hough, stockpickers can find individual good deals highlighting Walmart, Philip Morris International, which got analyst upgrades this past week, while Amazon will host an investor day that starts Tuesday.