Barron’s Weekend Summary: Five experts, including Dario Gill, director of Research at IBM, discuss the opportunities and risks around artificial intelligence
Cover Story:
Five experts, including Dario Gill, director of Research at IBM, discuss the opportunities and risks around artificial intelligence—and the companies most likely to lead the way. Generative AI promises to democratize the power of large data sets, making it dramatically easier for people and businesses to find information, create content, and analyze data. And yet, AI isn’t magic, despite all appearances to the contrary. The technology is creating widespread worries about the misappropriation of personal information, the misuse of copyright-protected content, and the creation of false and misleading data. Some people even see AI as an existential risk to the future of life on Earth—a recent Time magazine cover asked whether AI will eventually lead to “The End of Humanity.”
Interview:
-No interview this week.
Tech Trader:
-Cisco shares look cheap. The networking equipment giant’s stock has been a laggard in 2023, with a 15% gain on the year, versus the Nasdaq Composite rally. The stock trades for less than 14 times forward earnings and under four times forward sales. And that for a company that offers a nearly 3% dividend yield and is aggressively buying back stock. Cisco sales crumbled in 2020, as the work-from-home trend crushed demand for enterprise hardware, while component shortages reduced the company’s ability to fulfill the orders it had. In 2021, as businesses started spending again, orders piled up—topping 30% growth for three straight quarters. Cisco continued to grapple with parts shortages, though, and its backlog ballooned. Over the past few quarters, the dynamic has reversed. The component shortages are gone, which and Cisco has sped up shipments, providing a boost to revenue.
The Trader:
-Yields are rising and stocks have real competition from bonds in a way they haven’t for a decade and a half. The yield on the 10-year U.S. Treasury note hit 4.25%, up 0.3 points since the start of August and near its highest since 2007. That’s a nice payout, especially with stocks appearing pricey. It’s a big reason the Dow Jones Industrial Average fell 2.2%, the S&P 500 lost 2.1%, and the Nasdaq Composite dropped 2.6% this past week. There are several forces behind the recent move higher in yields. Some are largely technical: U.S. Treasury issuance has been larger than normal this month, the Bank of Japan just allowed yields to drift higher, and the credit-ratings firm Fitch downgraded the U.S. sovereign rating on Aug. 1.
-Oil stocks have quietly been the market leaders this summer—and they should have the energy to keep the streak going the rest of the year. With technology stocks taking a break, the Energy Select Sector SPDR exchange-traded fund has been the best sector performer since the start of June, gaining 17% during that time. That’s well ahead of the second-place sectors, consumer discretionary and industrials, each up 12%. All three sector rallies reflect improving investor sentiment on the U.S. and global economy and the market pricing in peak benchmark interest rates. Mizuho Securities USA’s Nitin Kumar also has Pioneer as one of his top picks, and he recently upgraded producers Chevron, Matador Resources, and Permian Resources to Buy, while lowering refiners Marathon Petroleum, HF Sinclair, and Magnolia Oil & Gas to Neutral. “Although near-term refining margins are likely strong, risk/reward is skewed to the downside and we move to the sidelines,” Kumar wrote.
Features:
- Bond prices decline when yields rise. Yields have risen to levels not seen in years, giving patient investors the opportunity to bolster portfolios with bonds with the potential for both high income and capital gains. And the most aggressive Federal Reserve rate-hiking campaign in decades crushed the bond market in 2022, sending the iShares Core U.S. Aggregate Bond ETF down 13%. After rebounding earlier in the year, bonds have produced more losses in recent days as yields climbed sharply. Investors buy bonds for safe income, not double-digit losses. For retirees and those nearing retirement, the question is where in the wide world of fixed income should they invest? What’s the right duration? Short-term Treasuries—including 3- and 6-month T-bills—are sporting yields higher than 5.4%. That’s enticing. But if the Fed begins cutting rates in 2024, longer-term bonds will be the better investment.
Europe:
-The World Bank has warned of a “lost decade” for the global economy, and has forecast that growth for the remainder of the 2020s could hit a three-decade low. It cites an aging workforce, weaker investment, and lower productivity. The euro-area economy grew by 0.3% in the second quarter, narrowly avoiding a recession. The United Kingdom expanded by just 0.2% in the three months through June, according to data published on Aug. 11. By comparison, the U.S. economy grew by 0.6% in the quarter, according to the Organization for Economic Cooperation and Development, or OECD. China has even bigger problems than Europe. A deflating property bubble and a weak recovery from Covid-19-era lockdowns have left the economy struggling. Plus, there’s a whiff of deflation.
Emerging Markets:
- Argentina Devalued the Peso After Election. Its Bonds Look Attractive. Investors were rattled by upstart Congressman Javier Milei’s first-place finish in Sunday’s Argentinean presidential primary election, with 30% of the vote. Best described as a far right-populist with Trumpian rhetorical flourishes, Milei’s provocative campaign promises include “dollarizing” Argentina’s long-suffering economy, “burning down” the central bank, and legalizing the sale of bodily organs. But bearish investors overlook the bigger picture, says Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Global Wealth Management: Candidates from a more sober center-right party nearly matched Milei with 28%. The incumbent Peronists, whose policies have yielded inflation north of 100% annually and poverty rates near 50%, limped into third at 27%. “Almost 70% of the vote went against the current administration,” Czerwonko says. “Given the potential for political regime change, bond prices are more likely to go up than down.”
Commodities:
-United States Steel‘s days as an independent publicly traded company could be numbered. Its story holds some fascinating history as well as some important lessons for investors.
US Steel announced it was looking at strategic alternatives after receiving multiple bids for the company. One of the bids was from steel peer Cleveland-Cliffs. US Steel is in play and shares were trading down 3.8% to around $30 on Tuesday. The S&P 500 and Dow Jones Industrial Average were down 0.8% and almost 0.9%, respectively. It’s almost unthinkable, but US Steel could end up in the hands of private equity or be subsumed into a larger entity. The company has been around, and traded, since 1901 after John Pierpont Morgan himself created it by merging Andrew Carnegie’s steel company with several others. The new firm had a market value of more than $1B, the first billion-dollar corporation in America. Steel, which is essentially an alloy of iron and carbon, was the hot commodity, a better construction material for buildings and bridges. U.S. steel was dominant, shipping about eight million tons in 1901, roughly one-third of the global total.
Streetwise:
-This week, jack Hough discusses his interest in New Balance sneakers and some of its competitors from Deckers Outdoor and the Swiss brand On Holdings and Adidas and Crocs, of course, the focus is on how the related stocks are performing and what style cues are affecting sales and appeal. The inspiration for the article comes from the fact that Hough has decided to buy a new pair of sneakers, and that after years of wearing New Balance, he wants to try alternatives.