Barron’s Weekend Summary: Despite the underlying weakness, the S&P 500 SPX 0.11% index appeared expensive
Cover Story:
Despite the underlying weakness, the S&P 500 SPX 0.11% index appeared expensive, particularly given where profits appeared to be heading. Adding to the sense of unease, the index couldn’t seem to crack 4200, suggesting some unknown risk limiting the market’s upside. Yet through it all—the debt-ceiling standoff, a banking mini-crisis, and a potential earnings slump—the market has held its own and then some. And what the bears have apparently forgotten is that stocks are always looking forward, not back. All of the hand-wringing over a possible recession can’t hide the fact that the S&P 500 already suffered through a bear market in 2022.
Interview:
-Recently, Barron’spoke to Sara Devereux, global head of the fixed-income group at Vanguard. Devereux spoke with Barron’s about the outlook for the US economy and inflation and where she sees opportunities now. Devereux joined Vanguard in 2019 from Goldman Sachs, where she spent more than two decades specializing in mortgage-backed securities and structured products. This year, she was recognized by Barron’s for the second time as one of the 100 most influential women in US finance. She believes that “Bonds Are Back.”
“I haven’t seen this kind of opportunity in a long time, after a decade of yields at the zero lower bound,” says Devereux, whose unit has more than $2T in assets under management. Vanguard is the world’s second-largest asset manager, with $7.7T in assets under management. In bonds it is best known for index funds. But it is also one of the biggest providers of US active bond funds, with $890B in assets, and Devereux is helping lead the charge in active management.
Tech Trader:
-Last week Apple presented the Vision Pro virtual-reality headset, which won’t actually be available until sometime next year. But, more importantly, it was what it didn’t present that was surprising. Apple managed to deliver a more than two-hour keynote and not say the words “generative AI.” This is radically different in a world where Intuit announced a potentially game-changing AI strategy, Cisco Systems (CSCO) unveiled new AI features in its WebEx communications software, and Adobe (ADBE) disclosed plans to start charging companies who use Firefly, the company’s growing suite of generative AI tools.
The Trader:
-Oil production costs appear to dropping as the current craze continues to subside, inflation abates, and new development remains limited. Prices for the tubes and pipes used in oil production and transport are already down over 20% over the past year. Costs of various oil-field services—which reset periodically when contracts are renewed—have been trending lower. Fracking machinery and sand prices are holding in there for now, but appear set to fall as availability improves. Devon Energy and Marathon Oil (MRO) are among the biggest potential beneficiaries of the energy price trend, given the majority of their generally shorter-term drilling contracts rolling over in the second half of the year.
-When it comes to picking the stocks that treat their investors the best, don’t rely on dividend yield alone. The highest dividend yield in the S&P 500 these days belongs to Altria Group, maker of Marlboro cigarettes, with an 8.4% yield. But there’s more to cash returns than just the dividend, such as buybacks and debt paydowns, which increase the share of a business’ value that accrues to equity holders. Together, they’re known as shareholder yield. Altria does a pretty good job of returning cash to shareholders. Its quarterly dividend payments come in at about $6.8B a year, while it also spent some $1.8B on share buybacks in 2022 and reduced its net debt by close to $1.1B. Add it up, and Altria returned $9.7B to shareholders last year, versus Altria’s current market capitalization of $80.5B—good for a trailing shareholder yield of 12%.
Features:
-While China appears to lag behind the US in AI technology—for now—experts say US lawmakers must keep the nation in mind when deciding the extent of AI regulation. That arms race—along with China’s own heightened regulation and some high-profile AI stumbles—is leaving investors on the sidelines until the technology matures in the world’s second-largest economy.
AI’s complex nature and meteoric development has bred confusion in both countries among government officials, investors, and even companies trying to get into the AI arena. US lawmakers have asked AI firms themselves what regulations are needed. There is also widespread disagreement over how much Washington could hobble China’s programs with a more severe ban on the semiconductors that are crucial for AI. Last year, the US banned sales to China of an industry-leading Nvidia chip central to many AI programs.
-NET Power is an unusual clean-energy company that has developed a natural-gas power plant that makes it easy to capture carbon dioxide released by the burning of natural gas. Unlike current plants, which burn natural gas in the air and produce pollutants like nitrogen oxides as well as CO2, NET Power’s method produces emissions of only CO2 and water. The plants burn natural gas in pure oxygen, and the resulting high-pressure, liquefied CO2 spins turbines to make electricity. The CO2 is then buried or used for energy production. The company went public this past week when it merged with Rice Acquisition II, a special-purpose acquisition company, or SPAC, formed by Danny Rice, an entrepreneur, energy executive, and member of the well-regarded energy-focused Rice family.
European Trader:
In light of the collapse of Credit Suisse, as well as the failures and cumbersome resolutions of Silicon Valley Bank, Signature Bank SBNY +8.33% , and First Republic Bank FRCB –5.50% , we believe that renewed calls to rethink and redesign the financial architecture within which banks operate will finally gain traction. This will imply, at least in the US, tighter regulation that requires banks to have more capital and hold more liquidity. Banks’ liquidity-intermediation capacity will likely shrink further, and some traditional activities will likely go into private markets and nonbank lending.
Emerging Markets:
No updates this week
Commodities
-When the commercial traders are net short copper futures in a big way, that is a pretty good topping sign for PMI. As the economy weakens, those traders move from net short as a group to net long, and the PMI follows that path lower. The nice thing about this relationship is that the COT Report data come out weekly, whereas the monthly PMI data are released with a lag. So we can get a clue about what the PMI data are going to look like. The implication of the big net long position that the commercial traders are holding now in copper futures is that we ought to see a price rebound for copper, part of a rebound for the economy, and that should eventually show up in the monthly PMI numbers...
Streetwise:
-Jack Hough believes Campbell’s has a spicy new chicken soup, and it could hold the key to stock market gains from here. The S&P 500 is up 12% year to date despite bank failures, recession fears, a narrowly averted Treasury default, and now Canada smoking Manhattan like a brisket. But gains have been concentrated at the top. Among the 10 largest index members, the median gain is 39%. For the rest, it’s less than 1%. That’s owed to artificial-intelligence buzz. I don’t want to overstate AI’s significance—that’s venture capitalist Marc Andreessen’s job. It’s possibly the most important thing civilization has created, he writes, “certainly on par with electricity,” and “probably beyond” it. I plan to verify that on ChatGPT as soon as my laptop recharges.