Barron’s Weekend Summary: At some point quantum computing is going to change the world
Cover Story:
-At some point quantum computing is going to change the world. “We want to solve problems that are intractable for today’s—or even next century’s—supercomputers,” says Krysta Svore, vice president of quantum software at Microsoft. With conventional supercomputers, she says, there are unsolvable problems—like sorting through potential drug candidates—that would require compute times longer than the current lifespan of the universe. “We want to bring this technology forward and see how we can use it in conjunction with classical technology.” For those interested in investing in Quantum, Barron’s suggests some rather familiar stocks: The quantum combatants include some of the biggest players in “classical” computing: Microsoft, Intel, Alphabet, Amazon.com, and IBM are all building quantum hardware, along with Japan’s Toshiba, NEC, and NTT, and China’s Baidu, Huawei Technologies, Tencent, and Alibaba. At the other end of the scale are a handful of small firms that rode quantum hype into the public markets, mostly through SPACs, mergers, including Rigetti Computing, D-Wave Quantum, and IonQ. And that’s just the tip of the iceberg: According to PitchBook, 251 quantum start-ups have together raised more than $5.4B in venture capital since the beginning of 2017.
Interview:
-This week, Barron’s interviews David Rubenstein co-founder of The Carlyle Group. Rubenstein co-founded The Carlyle Group in 1987, and it has since become a private-equity behemoth with $369B under management and 29 offices across five continents. A lawyer by training, Rubenstein is now Carlyle’s co-chairman, but he wears many hats, as a philanthropist, author, and host of two shows on Bloomberg Television. This year has seen a worsening landscape for private equity, with high inflation, rising debt costs, and a poor fund-raising environment for much of the industry. Rubenstein has seen such economic conditions before: He worked in the White House during administration of President Jimmy Carter. His career also included a stint working alongside Federal Reserve Chairman Jerome Powell, whom Rubenstein hired at Carlyle in 1997. Rubenstein spoke with Barron’s about what makes those investors successful, the economic environment, and whether anyone could have seen the crypto meltdown coming.
Tech Trader:
-Still bullish on Amazon.com? In July, Barron’s featured a cover story that made a bullish case for Amazon.com, tied to the enormous long-term value of the company’s cloud-computing arm, Amazon Web Services. Amazon shares have since fallen 25%, amid concerns about the near-term growth prospects for both the company’s core e-commerce business and for AWS. While those worries are valid, Barron’s remains convinced that it makes sense to buy Amazon.com shares for the long haul. So, while shopping for gifts over the holiday season, you might want to commit a few bucks to Amazon shares, as well.
The Trader:
-It’s time to come up with a game plan to navigate the last month of 2022 and what is likely to be a challenging market next year, despite a solid holiday-shortened trading week. The S&P 500 closed up 1.5%, while the Dow Jones Industrial Average was up 1.8% and the Nasdaq Composite finished up 0.7%. Enjoy it while it lasts. Chris Senyek, chief investment strategist at Wolfe Research, recommends focusing on defensive sectors such as healthcare and consumer staples. In addition to downside protection, investors get dividends. The Health Care Select Sector exchange-traded fund is down 3% this year and yields 1.5%, while the Consumer Staples Select Sector is off by 1% and yields 2.5%. “Focus on these until there is more sign of a turn,” Senyek tells Barron’s, noting that he doesn’t think the market has bottomed yet.
-Since the FTX debacle, crypto-related assets have gotten crushed. Crypto bears believe that a bubble has popped and some sanity is slowly being restored to financial markets. Maybe, but when fear and liquidity issues hit any financial asset, forced selling pushes prices down further and faster than fundamentals alone would imply. Bears who don’t like crypto fundamentals should watch out for an end-of-fear bounce that typically follows events like the FTX bankruptcy. Crypto assets won’t go down in a straight line. Nothing ever does. Those looking for a Bitcoin bounce might be disappointed. “Recent volatility in the cryptocurrency market has generated a long-term breakdown in Bitcoin below key support near $18,000,” wrote Fairlead Strategies founder Katie Stockton on Wednesday. She sees prices heading down around $14,000 in coming months. CappThesis founder Frank Cappelleri sees some technical trading support for Bitcoin around $15,000, but like Stockton, he doesn’t observe a reason for a big post-FTX bounce. Cappelleri does note some support for Coinbase Global at about $40, “which lines up with the May low point,” he tells Barron’s. Coinbase is a crypto broker, similar to FTX, and its shares were caught up in the crypto shock just like the cryptocurrencies. Traders looking to take advantage of market dislocations arising from nonfundamental selling pressure might want to look at Coinbase instead of the currencies traded on its platform.
Features:
-Business development companies lend to midsize private companies at high interest rates. They have proven popular with retail investors in recent years by offering dividend yields of around 10%. Total industry assets have doubled to about $260B since late 2020. Leading BDCs include Ares Capital, Owl Rock Capital, FS KKR Capital, and Blackstone Secured Lending (BXSL). The largest BDC is the nontraded Blackstone BXS Private Credit fund, known as Bcred, which has grown to $22B in net assets since its inception in January 2021, more than twice the size of Ares ARCC Capital, the largest public BDC. The bullish case for BDCs has been that they allow individual investors to invest side by side with institutions in the booming market for “private credit,” and benefit from what have been historically low loan losses. Most loans have floating rates tied to short-term interest rates. This has allowed BDCs to capitalize on the sharp rise in rates to a recent 4% from near zero at the start of 2022. A high percentage of loans go to companies acquired in leveraged buyouts by private-equity firms.
European Trader:
-Prospects for Germany’s economy looked dire earlier in the year. Russia’s invasion of Ukraine cut off a significant portion of the country’s national gas supplies. Energy prices spiked, and inflation shot up. That prompted the European Central Bank to start raising interest rates for the first time in a decade. And yet, the economy unexpectedly grew in the third quarter. Consumers lifted spending after saving through the pandemic, accounting for most of the strength in the period. Gas prices retreated, alleviating the crunch on industry, and the country scrambled to maximize gas storage for the winter. That is an impressive feat, especially as Germany was already under considerable pressure to adjust to a new world order. Its legendary car industry, led by powerhouses Volkswagen, BMW, and Porsche, are facing new competition from electric vehicles. Its famous Mittelstand, or small to medium-size companies that make up a majority of output, was just starting to recover from the pandemic when the energy crisis hit. To be sure, economists still expect a downturn. It just won’t be as bad as feared.
Emerging Markets:
-The Western powers are wimping out on a promise to cap Russia’s oil export revenues. Or they are letting the market do their work for them. By November 25, the G7 remained in closed-door talks on a price cap due to take effect on Dec. 5. Leaks steered expectations toward $65 to $70 a barrel. That’s...about where prices are now. Back in June, the European Union, Russia’s largest traditional oil customer, pledged to halt all imports as of December. It also banned EU insurance companies from covering shipments of Russian oil anywhere. The United Kingdom joined in. The two entities control 95% of the tanker insurance market, so this looked like a staggering blow. Then the Biden Administration, bedeviled by soaring gasoline prices at home, stepped in with a sort of get-out-of-jail-free card: Russian oil could get insurance after all, so long as it was sold below a price to be named later.
Commodities:
-A recent tumble in coffee bean prices will likely reverse shortly, prompting possible gains of as much as 25% over the coming weeks. The issue is that the downdraft, caused by collapsing Vietnamese currency, plus an overly optimistic outlook for Brazil’s crop, has gone too far. “I think the panic stage is over, and we are due for a substantial bear market rally,” says Shawn Hackett, president of Hackett Financial Advisors. “This is an opportunity to go against the trend.” In other words, the broad price trend isn’t higher, although the likely surge over the next few weeks—possibly as high as $2—will be significant enough for investors to watch. Traders hoping to benefit from the likely jump should consider buying March-dated futures contracts on the London-based ICE. Those who don’t favor buying futures might try the iPath Series B Bloomberg Coffee Subindex which tracks the price of coffee beans. ETNs are like exchange-traded funds but also expose the investor to the credit risk of the issuer.
Streetwise:
-Jack Hough wonders whether Bob Iger can get Walt Disney stock rising, or will streaming losses dim his legacy? It’s a difficult moment for corporate icons. Mark Zuckerberg must miss being called a fiendish genius now that he has been downgraded to obstinate cash furnace. His Meta Platforms stock has fallen some 65% from its peak in just over a year, amid rampant spending on a cartoon fever dream called the metaverse. Elon Musk has been owning the libs on Twitter, and they’ve been rethinking their ownership of Tesla vehicles. He’s the first person to amass $300B in personal wealth, and now the first to lose $100B in a year. Iger’s main challenge will be that streaming is still a metaverse-level money loser, and Disney is all in.