WSJ : After Another Bad Year for Bonds, Investors Lose Faith in a Turnaround

Wall Street investors entered each of the past two years brimming with optimism about U.S. Treasurys and other types of high-quality debt. Each time, they were disappointed.

Now, they are far more guarded. In recent weeks, money managers have been dumping Treasurys, while savers have been rushing out of longer-term bond funds.

All that selling has pushed Treasury yields to the upper end of their two-year range. Still, investors remain worried that a tough environment for bonds could get even worse if President-elect Donald Trump pursues inflationary policies such as new tariffs. Many are debating whether hiding out in short-term T-bills could again be the smarter play.

“Cash is yielding 4-plus percent,” said Ed Al-Hussainy, global interest-rate strategist at Columbia Threadneedle Investments. “That’s a pretty tough bogey to beat.”

Such doubts represent a big shift on Wall Street.

Just a few years ago, bonds were enjoying a decadeslong bull run and investors hardly feared higher rates. They generally assumed rates couldn’t rise much above zero without triggering a recession.

When the Federal Reserve raised rates aggressively in 2022, most investors still believed it was only a passing phase. Through 2023, they consistently bet on a quicker and sharper turn to lower rates than the Fed itself was forecasting.

Now, though, more investors have come to believe that the economy can handle higher rates and that inflation will persist as a threat.

Starting in November, investors were ahead of the Fed in betting that the central bank would reduce rates just twice next year, rather than the four times officials signaled in September. When most Fed officials also forecast two cuts in their Dec. 18 economic projections, traders immediately stepped up bets that the central bank would cut once, or not at all.

Those wagers have taken a toll on bond returns.

As of Dec. 26, an ICE BofA index of U.S. Treasurys was poised to deliver worse returns than T-bills for the fourth straight year, having returned 0.4% compared with T-bills’ 5.2%. The widely tracked Bloomberg U.S. Aggregate Index, which includes investment-grade corporate bonds and mortgage-backed securities as well as Treasurys, has returned 1.1%, after barely outperforming T-bills in 2023 and falling short the previous two years.

In the past, bonds would usually follow a bad year with a good year. That hasn’t happened recently, prompting “this reluctance to deal with the asset class,” said Brian Nick, head of portfolio strategy at NewEdge Wealth.

Investors have pulled $5.3 billion out of BlackRock’s iShares 20+ Year Treasury Bond ETF this month, according to FactSet. If that number holds to the end of December, it would be the largest monthly outflow in the fund’s 22-year history.

Tumbling bond prices pushed the yield on the benchmark 10-year U.S. Treasury note up to 4.619% as of Friday, according to Tradeweb. That was up from 4.192% at the end of November and 3.860% at the end of 2023.

Not everyone is so pessimistic. Economists at Goldman Sachs have forecast that inflation will resume its downward trajectory next year, allowing the Fed to cut rates three times. Rates strategists at the bank predicted that 10-year Treasurys would outperform bills in 2025, arguing that the market has already priced in strong U.S. growth and hefty federal budget deficits.
Rising yields create their own headwinds for the economy because Treasury yields set a floor on an array of borrowing costs. Their recent uptick has already driven average 30-year mortgage rates back up near 7%, extending a deep slump in home buying.

Pressure on bonds can also squeeze riskier assets. Stock valuations are currently lofty by most measures, but particularly so when weighed against the risk-free return investors can get by holding a 10-year Treasury note to maturity. Historically, that has meant that stocks have struggled to outperform bonds over the next 10 years, according to data compiled by the economist Robert Shiller.

Investors should own “at least as many bonds in your portfolio as you normally would, and maybe even more if you are sort of setting this and forgetting it for a very long period of time,” said Nick of NewEdge Wealth. “Bonds are offering you more value than the broad equity market is.”

Still, many others are hesitant. The 10-year yield could easily climb above 5% if Trump adds to inflation by raising tariffs and can’t curb increases in the supply of Treasurys by reducing the budget deficit, said Yung-Yu Ma, chief investment officer at BMO Wealth Management.

In hindsight, it is the low-rate world of the 2010s that is starting to look as though it was “a complete bubble” for bonds, he added.

FT : Nvidia bets on robotics to drive future growth

Nvidia bets on robotics to drive future growth
US chipmaker looks to new industries amid rising competition in core AI business

Nvidia is betting on robotics as its next big driver of growth, as the world’s most valuable semiconductor company faces increasing competition in its core artificial intelligence chipmaking business.

The US tech giant, best known for the infrastructure that has underpinned the AI boom, is set to launch its latest generation of compact computers for humanoid robots — dubbed Jetson Thor — in the first half of 2025.

Nvidia is positioning itself to be the leading platform for what the tech group believes is an imminent robotics revolution. The company sells a “full stack” solution, from the layers of software for training AI-powered robots to the chips that go into them.

“The ChatGPT moment for physical AI and robotics is around the corner,” Deepu Talla, Nvidia’s vice-president of robotics, told the Financial Times, adding that he believes the market has reached a “tipping point”.

The push into robotics comes as Nvidia is experiencing more competition for its powerful AI chips from rival chipmakers such as AMD, as well as cloud computing giants such as Amazon, Microsoft and Google, who are seeking to reduce their dependence on the US semiconductor giant.

Nvidia, whose valuation has soared past $3tn on the back of huge demand for its AI chips, has positioned itself as an investor in the ‘physical AI’ space, in a bid to help grow the next generation of robotics companies.

In February, it was one of several companies, including Microsoft and OpenAI, to invest in humanoid robotics company Figure AI at a $2.6bn valuation.

Robotics has so far remained an emerging niche that has yet to generate large returns. Many start-ups in the space are struggling with scaling, reducing costs and increasing the accuracy of robot products.

Nvidia does not break out robotics product sales, but it currently represents a relatively small share of overall revenues. Data centre revenue, which includes its sought-after AI GPU chips, made up about 88 per cent of its overall sales of $35.1bn in the group’s third quarter.

But Talla said a shift in the robotics market is being driven by two technological breakthroughs: the explosion of generative AI models and the ability to train robots on these foundational models using simulated environments.

The latter has been a particularly significant development as it helps solve what roboticists call the “Sim-to-Real gap”, ensuring robots trained in virtual environments can operate effectively in the real world, he said.

“In the past 12 months . . . [this gap] has matured sufficiently that we can now carry out experiments in simulation, combining with generative AI, that we could not do two years ago,” said Talla. “We provide the platform for enabling all of these companies to do any of those tasks.”

Talla joined Nvidia in 2013 to work on its ‘Tegra’ chip, which was initially aimed at the smartphone market. However, the company quickly pivoted, with Talla overseeing the redeployment of about 3,000 engineers into “AI and autonomous training [for vehicles, for example].” This was the genesis of Jetson, Nvidia’s line of robotic ‘brain’ modules that emerged in 2014.

Nvidia offers tools at three stages of robotics development: software for training foundational models, which comes from Nvidia’s ‘DGX’ system; simulations of real-world environments in its ‘Omniverse’ platform; and the hardware to go inside the robots as its ‘brain.’

Apptronik, which uses Nvidia’s technology throughout its development of humanoid robots, in December also announced a strategic partnership with Google DeepMind to improve its products.

The global robotics market is currently valued at about $78bn, according to US market researchers BCC, and is projected to reach $165bn by the end of 2029. 

Amazon has already deployed Nvidia’s robotics simulation technology for three of its warehouses in the US, and Toyota and Boston Dynamics are among other customers using Nvidia’s training software.

David Rosen, who leads the Robust Autonomy Lab at Northeastern University, said the robotics market still faces significant challenges, including training the models and verifying they will be safe when deployed.

“As of right now, we don’t have very effective tools for verifying the safety and reliability properties of machine learning systems, especially in robotics. This is a major open scientific question in the field,” said Rosen.

FT : French stock market on track for worst showing since Eurozone crisis

French stock market on track for worst showing since Eurozone crisis
Politics and luxury goods weigh on benchmark Cac 40 index

French stocks are on course to deliver their weakest annual performance since the depths of the Eurozone crisis, as investor worries over tariffs and political turmoil combine with lacklustre demand for luxury goods.

Paris’s Cac 40 index has fallen 3 per cent this year, compared with a 6 per cent gain for the region-wide Stoxx Europe 600, after a strong start to the year driven by bumper sales for companies such as LVMH melted away.

Investors have been put off by political crisis, sluggish demand from the key export market of China and a weakening domestic economy. The prospect of a trade war after US president-elect Donald Trump threatened sweeping tariffs on goods has added to the malaise.

“So many things are happening at the same time [that] people want to stay away from French names,” said Roland Kaloyan, head of European equity strategy at the French bank Société Générale. “This downturn has been quite remarkable.”

The political turmoil has weighed heavily on the French market, analysts said, with François Bayrou becoming the country’s fourth prime minister this year.

That crisis has intensified a debate over how the country will tackle a growing budget deficit. Investor unease about the country’s fiscal situation has already pushed its 10-year borrowing costs above 3 per cent this year and the additional margin that France pays over benchmark German debt has reached its highest levels since the Eurozone debt crisis.

Earlier this month Moody’s downgraded France’s credit rating following outgoing premier Michel Barnier’s government’s vote of no confidence, citing a “materially weaker” economic outlook.

The falling price of French stocks stands in stark contrast to neighbouring Germany, where a 18.7 per cent gain in the country’s stock market this year has defied the gloom enveloping its domestic economy.

Luxury goods companies, which are a cornerstone of the Cac 40, have struggled as it has become clear that China’s economic recovery from the pandemic has stalled.

The rise of middle-class Chinese shoppers this century had transformed earnings for luxury goods companies, with consumers flocking to European and Asian capitals alike to buy designer handbags and other goods.

Covid then supercharged purchases as bored shoppers stuck at home spent furlough payments on accessories and premium alcohol. Profits at companies like LVMH as well as beauty giant L’Oréal, grew by double digits.


But Chinese shoppers have reined in their spending on concerns over a potential sharp economic slowdown. Beijing has announced sweeping plans to stimulate confidence in the economy and markets.

“The big disappointment in China has probably reached a trough,” said Caroline Reyl, head of premium brands at Pictet Asset Management, adding that she is now waiting for the Chinese government stimulus to translate into consumer activity as she “doesn’t expect a worsening of the situation”.

Still, more than one-fifth of the Cac 40’s constituents are consumer goods companies with “heavy” exposure to China, including LVMH and Kering — which are down 12 and 40 per cent this year respectively. 

Emmanuel Cau, an analyst at Barclays, said the market is “split” on whether luxury goods companies will bounce back in 2025 or earnings will weaken again. He forecasts sector growth of just 3 per cent next year, at constant currency rates. “This was a year of pain,” he added.


It is a combination that puts the Cac 40 on track to being the only major stock market worldwide to end the year in negative territory.

French banks and insurers, which make up 10 per cent of the benchmark, have fallen sharply as they are exposed to slowing economic growth and also hold substantial government debt, which investors now consider more risky.

BNP Paribas, Europe’s biggest bank and often traded by investors as a proxy for the French economy, has fallen 8 per cent this year.

Intense competition from China’s electric-vehicle makers and political turmoil has hit carmakers, including Stellantis. Shares in the company behind the Peugeot, Fiat and Jeep brands have fallen 41 per cent in Paris this year.

As the Cac 40 struggles, French companies have started to explore other capital markets. Pay TV operator Canal+ listed in London this month, although shares have slumped nearly 30 per cent since they began trading.

TotalEnergies has said it is “seriously exploring” a US listing, while fast-growing asset manager Tikehau told the Financial Times last month that it was considering moving its listing from Paris to the US.

However, France’s struggles are also reflection of the challenges the continent’s politicians are now facing, which include stimulating growth and the looming prospect of a global trade war with sweeping tariffs after Trump’s election win.

Barclays’ Cau added: “We need some kind of catalyst for Europe to take care of itself. It has been dependent on China but now the world is less globalised and China is growing less.” 

FT : Asia infrastructure to drive more deals after $15bn data centre sale, Macqu

Asia infrastructure to drive more deals after $15bn data centre sale, Macquarie says
Australian asset manager sold AirTrunk business to Blackstone

Asia-Pacific infrastructure should drive more deals in 2025 despite economic challenges for the region, Macquarie said after the Australian asset manager wrapped up a A$24bn (US$15bn) data centre sale.

Ani Satchcroft, co-head of Macquarie’s infrastructure division in Asia-Pacific, said the region would offer opportunities even with the impact of a weak Chinese economy and geopolitical instability hitting growth.

Macquarie, one of the most active global investors in infrastructure investment, this month completed the sale of Australia’s AirTrunk to Blackstone in its biggest deal of 2024. It bought the company for A$3bn five years ago.

AirTrunk has since expanded into markets including Japan, Hong Kong and Malaysia.

Some of the world’s biggest tech groups are also stepping up investment in data centres in the region as demand grows for services based on artificial intelligence.

Macquarie is the biggest private sector owner of infrastructure assets in the UK but has attracted scrutiny, notably in the water sector, after it attracted criticism for almost trebling Thames Water’s debt after buying a stake in the business in 2006.

The water company has since struggled with its debt and has been the subject of proposals this month to repair its finances including emergency loans, a break up or a nationalisation.

Macquarie, which sold its last stake in the water company in 2017, has defended its record, saying it invested billions in the utility. It re-entered the British water sector when it acquired Southern Water in 2021.

In Asia-Pacific it has focused more of its investment in areas including digital infrastructure and renewable energy projects.

Macquarie had a mixed year as it missed profit expectations after it struggled to exit investments due to weak market conditions. It told investors in November that it expected deal flow to pick up in 2025. 

Satchcroft said Japan remained an attractive investment destination after Macquarie invested in telecoms company Rakuten’s mobile towers in August. “The challenge there is the ability to deploy and scale investments,” she said. 

She said the asset manager also expected to continue to deploy capital in South Korea, where it acquired the Hanam data centre business in August, despite the country’s recent political upheaval including the impeachment of the president.

Satchcroft said Australian infrastructure was in a “pretty good spot” to invest and said more public sector assets could soon come on to the market as state and the federal government deal with high levels of debt.

Macquarie has taken a broader view of the definition of “infrastructure” in recent years, pushing into markets including energy, telecoms and data centres. 

Satchcroft pointed to Macquarie’s involvement in an A$8bn deal in 2022 to take over the running of vehicle registration services in the state of Victoria. She said the number plate registry had the hallmarks of an infrastructure-style asset, as an essential service with stable cash flows that needed private capital to upgrade it. 

She said she would expect other Australian state governments to consider similar deals.

“Something that the Australian state governments have done really well is [to] think outside the box in terms of what assets can be commercialised,” she said.

>>> Weekend Papers Summary

FINANCIAL TIMES
-Global corporate debt sales reached an unprecedented $8T in 2024 thanks to higher investor demand for borrowing plans. Corporate bonds and leveraged loans issuance climbed by over a third from 2023 to $7.93T, with companies like AbbVie and Home Depot taking advantage of lower borrowing costs compared to government debt. This surge in activity exceeded a previous peak in 2021, as strong investor demand reduced costs for corporate borrowers even before the Federal Reserve and other central banks began cutting interest rates. Bankers attribute the cheap funding costs to companies pulling forward their issuance to avoid market turbulence around the US election. However, as spreads tightened, some companies decided to lock in next year's borrowing needs.
-For three decades, major powers like Trump, Xi Jinping, and Putin have largely embraced the Davos worldview, focusing on economic interdependence and geopolitical rivalries. However, these powers have now become revisionist powers seeking radical changes to the current world order. Putin's invasion of Ukraine in 2022 sacrificed his country's economic ties to the west for his vision of Russian grandeur. China has become more nationalistic and menacing towards Taiwan, and Trump is demanding fundamental changes to the international trading system and America's relationship with its allies. Russia and China are demanding changes to the world order, as Russia seeks to rebuild its lost influence and China seeks to accommodate its ambitions. American revisionism is both puzzling and far-reaching in its consequences.
-Italian journalist, Cecilia Sala, who writes for Il Foglio has been detained in Iran, marking the first arrest of a foreign press member since anti-regime protests triggered a crackdown amid heightened tensions. Sala was arrested on December 19 and authorities are trying to establish the details of her arrest. Her employer has decided to make her detention public due to reassurances from Italian authorities that this would not hinder efforts to bring her home. Italy has detained an Iranian national accused by the US of supplying drone technology to Tehran and another Iranian national in Switzerland. Italian defence minister Guido Crosetto called Sala's arrest "unacceptable." Italy's ambassador in Tehran has visited Sala in jail to verify her health and detention conditions.
-Elon Musk and MAGA supporters have clashed over immigration policies, highlighting a divide between Donald Trump's Silicon Valley backers and his more radical base. The disagreement stems from Trump's appointment of Sriram Krishnan as the White House's senior policy adviser for artificial intelligence. This led to a backlash from Trump's "Make America Great Again" base on X, which escalated into a debate over H-1B visas, aimed at highly skilled foreign labor critical to US technology groups. Far-right activist Laura Loomer expressed concern over the appointment of career leftists to Trump's administration, who share views in direct opposition to Trump's America First agenda.
-Arnab Ghatak, a former McKinsey partner, is seeking damages from the consulting firm following its $650M legal settlement with the US government. Ghatak claims that McKinsey's managing partner Bob Sternfels defamed him in a memo sent to staff and alumni after the agreement with the justice department. Ghatak was one of two partners fired in 2021 for violating the firm's professional standards due to an email exchange referencing document deletion. Martin Elling, the second partner, was found to have deleted over 100 files related to his work with Purdue Pharma and pleaded guilty to obstruction of justice.
-Vanguard has agreed to new control of its investments in US lenders, a move that could have significant implications for money managers and banks. The deal, disclosed by the US Federal Deposit Insurance Corp, allows Vanguard's funds to remain large shareholders in a wide range of US banks while increasing the watchdog's supervisory power over the $10tn money manager. This comes as investors have poured into passive funds that buy up shares in numerous stocks, raising concerns that these holdings could allow big passive fund managers to influence companies vital to the economy. FDIC board member Jonathan McKernan praised the agreement, stating it would help address concerns about gaps in the FDIC's monitoring of the purported passivity of the largest index fund complexes.

NEW YORK TIMES
-Western officials have long been concerned about Moscow's shadow fleet, an assemblage of aged tankers used to covertly carry Russian crude oil. However, the shadow fleet may now present a more pressing threat to the West. This week, Finnish commandos boarded an oil tanker that is suspected to have cut through vital underwater cables in the Baltic Sea, including one that carries electricity between Finland and Estonia. The Eagle S, bears all the hallmarks of vessels belonging to Russia's shadow fleet, and if confirmed, it would be the first known instance of a shadow fleet vessel being used to intentionally sabotage critical infrastructure in Europe.
-Finnish authorities seized an oil tanker suspected of severing vital undersea cables, leading NATO to increase security in northern seas and the European Union to threaten new sanctions against Russia. The Eagle S, an aging oil tanker registered in the Cook Islands, is being held under police and naval guard in the Gulf of Finland. The tanker is believed to be part of Russia's "shadow fleet," which President Vladimir V. Putin has used to circumvent Western sanctions on Russian oil exports and conduct acts of sabotage. The five cables, including a power cable from Finland to Estonia, were damaged before the tanker was seized.
-Homelessness has reached its highest level on record this year, with 770,000 people experiencing homelessness, an 18% increase from last year and the largest annual jump since 2007. The Department of Housing and Urban Development reported that homelessness has risen by a third in the past two years, after declining modestly over the previous decade. The report cited factors such as the end of pandemic-era measures to protect the needy, but Biden administration officials emphasized the role of asylum-seeking migrants who overwhelmed shelter systems. They argued that the migrant crisis had begun to abate since the annual count in January.
-President-elect Donald Trump has filed a brief requesting the Supreme Court to block a law that requires TikTok to be sold or shut down by January 19. The deadline falls a day before Trump's inauguration, and the brief argues that Trump opposes banning TikTok and seeks to resolve the issue through political means once he takes office. The brief does not take a position on the legal question of whether Congress violated the First Amendment by effectively banning TikTok. Instead, it praises Trump's expertise, electoral mandate, and political will to negotiate a resolution to save the platform while addressing national security concerns. The brief also notes that Trump is particularly knowledgeable about social media, particularly TikTok.
-Treasury Secretary Janet L. Yellen warned Congress that if lawmakers do not raise or suspend the nation's debt limit by January 14, she would likely need to use "extraordinary measures" to prevent the US from defaulting on its debt. The warning comes at a tense political moment, with Republicans set to take control of the US next month. President-elect Donald J. Trump has already called on Congress to abolish the debt limit before pushing through tax cuts and spending priorities. The debt limit was suspended in June 2023 after a contentious negotiation over federal spending, work requirements for government benefits, and funding for the Internal Revenue Service. The suspension is set to expire on January 2, forcing Treasury to begin using extraordinary measures to allow the federal government to continue paying its bills.
-Myanmar's military junta, which overthrew a democratic government in 2021, has lost control of two-thirds of the country's territory. The armed resistance, including the Arakan Army, is accused of massacring Rohingya, including their parents, in a display of ethnic chauvinism. Over a million Rohingya have been expelled from Rakhine State to neighboring Bangladesh, making them the world's largest stateless population. The armed resistance's victories offer no moral certainty.
-The US set the stage for their own defeat before the Taliban's rise in August 2021. The US empowered warlords and criminals to conduct the war on its behalf, inspiring hatred and turning their presence into a Taliban recruiting tool. Lt. Gen. Abdul Raziq, the police chief of Kandahar Province, was responsible for Afghanistan's largest known campaign of mass disappearances during the war. The Americans turned allies into enemies by blindly trampling into places they did not understand, seeding hatred and resulting in errant airstrikes that killed innocents and American allies. The Taliban declared an amnesty and an end to poppy, indicating that the fighting was over and former enemies were prohibited from settling scores. The Taliban also declared an end to poppy, seemingly accomplishing Washington's key war goals. The remnants of a poppy boom town in the desert, Bakwa, were once a barely inhabited stretch of desert, but thanks to American efforts to eradicate poppy and the opium trade, people flocked to the desert district, where the Taliban embraced them.
-Before President-elect Donald Trump takes office, a major divide has emerged among his supporters over immigration and the role of foreign workers in the US labor market. The debate revolves around the administration's tolerance for skilled immigrants brought into the country on work visas. This divide pits immigration hard-liners against prominent tech industry backers, including Elon Musk and David Sacks. Critics argue that the tech industry's long-reliance on foreign skilled workers undercuts wages for American citizens, and the debate is a significant issue for the incoming administration.
-Canadian ministers met with Trump's circle in Florida to discuss a border security plan to counter Trump's threats to impose tariffs on imports from Canada. The meeting was based on a Thanksgiving dinner with Trump and a recent telephone conversation between Trudeau's cabinet and Trump's designated border czar, Thomas D. Homan. Canada's foreign minister, Melanie Joly, and finance minister Dominic LeBlanc arrived in Florida to discuss the plan with Commerce Secretary Howard Lutnick and Interior Department coordinator Doug Burgum. Trump has threatened to impose 25% tariffs on imports from Canada if the country doesn't reduce the flow of migrants and fentanyl into the US. This could be devastating for Canada, whose economy heavily relies on exports to the US.
-A new rocket, New Glenn, built by Jeff Bezos' company Blue Origin, successfully conducted a dress rehearsal of a launch countdown, with the booster stage's seven engines firing for 24 seconds. The vehicle remained firmly clamped to the launchpad at Cape Canaveral Space Force Station in Florida. The test, known as a hot fire, was the last big technical hurdle. The rocket, known as New Glenn, should be heading to space on its inaugural flight. Neither Bezos nor his company announced a launch date, but an aviation industry website indicates it may miss that target by at least a few days into the new year, potentially launching as early as January 6. The Federal Aviation Administration has issued a launch license for New Glenn, and the rocket will now head back to the hangar for technicians to install the payload, a prototype of a spacecraft called Blue Ring.

NEW YORK POST
-A federal judge has dismissed Rudy Giuliani's contempt hearing next Friday, as two Georgia election poll workers attempt to collect a $148 million defamation award they won against him. Judge Lewis J. Liman in Manhattan issued an order dismissing Giuliani and his lawyer's attempts to dodge providing information to the election workers' lawyers. He said the litigants should be ready at the contempt hearing to explain why he should not grant a request by lawyers for the two election workers that he make adverse inferences from evidence in the case that would put Giuliani's Palm Beach, Florida, condominium in danger of being surrendered to satisfy the defamation award. Giuliani has maintained that the Palm Beach property is his personal residence and should be shielded from the judgment.
-Brooklyn-based startup It's Electric is aiming to increase NYC's electric vehicle charging network from 1,400 to 10,000 by 2030. The company installs public curbside chargers in front of commercial and residential properties and compensates owners for the electricity they provide. The US aims for half of all cars sold to be electric by 2030, and New York City alone expects EV registrations to rise from 62,000 to about 3 million. However, finding where to charge the millions of new vehicles is a challenge, especially in cities like New York where few people have home driveways or garages and instead rely on street parking.

>>> Barrons Weekend Summary

Cover:
-The drone-delivery industry in the US began in 2013 when Amazon's Jeff Bezos introduced drones to Charlie Rose in a conference room. Despite 11 years, Amazon Prime Air and its competitors are still in the testing phase, with Tesla and Alphabet’s Waymo mainly in the testing phase. However, writing off drone delivery would be shortsighted, as billions of investment dollars have been invested and significant strides have been made. Zipline, founded in 2014, is now the leading drone-delivery company by miles flown, and whoever succeeds will be one of the largest companies on Earth. The drone ecosystem now includes hobbyists, high school drone clubs, real estate agents' beauty videos, companies inspecting power lines, and military operations. Drones are now delivering medicine, sundries, snacks, and takeout food in dozens of countries, making it a rapidly growing industry. The success of drone delivery could make it one of the largest companies on Earth.

Interview:
-First Eagle Investments' Matthew McLennan is a portfolio manager and co-head of the firm's global value team. The firm focuses on scarcity value, or finding businesses with an incumbency advantage, either through a scaled market position or well-located long-duration real assets that generate better cash flows even in cyclical markets. He accounts for both probabilities in the funds he manages, such as the First Eagle Global fund, which has about $57B of assets as of September 30. The fund's largest equity investments are Oracle and Meta Platforms, but its largest holding is an 11.4% position in gold. First Eagle Global, which earns a five-star rating from Morningstar, returned 12.41% this year through December 23, outperforming both its global allocation category and related Morningstar index. McLennan sees ample investment opportunities beyond the most richly priced US tech shares and beyond US markets generally. His worries include America's growing deficit and sovereign risk globally. Resilience is a pervasive theme at First Eagle, which means finding the right balance between participating in the march of humankind and the upward drift of markets, and doing so in a way that provides protection during crises.

Tech Trader:
-No updates

The Trader:
-Subaru, a Japanese automaker, has a strong presence in the US market due to its rugged, all-wheel-drive cars like the Forester, Outback, and Crosstrek. The company produces about a million cars annually, with two-thirds of its sales in the US, and less than 10% in its home country. Subaru's inexpensive stock could benefit from further consolidation in the Japanese auto industry, which may be getting underway due to talks between Honda and Nissan. Subaru's U.S. shares trade around $8, down 8% this year and half of where it stood 10 years ago. Matthew Fine, a portfolio manager for the Third Avenue Value Fund, believes that Subaru is profitable and grossly overcapitalized, trading for around five times earnings. With a market capitalization of around $12 billion and $7 billion of net cash, investors are paying little for its car business, which is expected to earn about $2 billion in the current fiscal year ending in March.
-In 2024, the S&P 500 index experienced a decline in December due to a holiday-shortened week and a selloff fueled by the Federal Reserve. The index is now down 1% for the month, which is not the expected Santa Claus rally. Typically, December tends to be one of the best months for the S&P 500, with an average gain well over 1%. However, this month's anemic showing is atypical. According to Dow Jones Market Data, a December decline is a rarity, as the S&P 500 has been positive in the month 56 times over the past 75 years. However, during the 19 years when December was a downer, it was followed by January losses 10 times, and the index recorded a loss for the entire year afterward five times. The Magnificent Seven ETF (MAGS) has done well this month, as investors doubled down on what worked in 2024. Apple and Tesla were the only two stocks in the red, falling 24.6% and 4.2%, respectively. However, the other five stocks more than made up for that: Google parent Alphabet gained 0.3%; Amazon.com gained 2.1%; Microsoft gained 5.7%; Facebook parent Meta Platforms gained 10.2%; and Nvidia gained 24.2%. Market breadth worsened in December, with the MAGS ETF up about 10% this month, while just 64 of the S&P 500 stocks joined the party. The index has more than 500 stocks, despite its name, due to some companies' multiple stock classes.

Features:
-Tesla recalled 5.1M in vehicles in 2024, with over 99% of the issues being fixed with over-the-air software updates. The company recently made headlines with a recall of 694,304 vehicles to correct a potential error with the tire-pressure monitoring system. The National Highway Traffic Safety Administration (NHTSA) changed the form of its notification to include the statement "software update repairs recall," distinguishing between hardware recalls and those meant to update computer programs. The Tesla recall appears to be the first to be labeled as a software fix, adding context for investors following the recall process. The shift to labeling the Tesla recall as a software fix is likely to make Tesla shareholders happy, as most of the recall numbers generate negative headlines, even though most amount to little more than a regular software update. Recalls are part of the system for keeping cars safe and operating efficiently, and most car owners are aware of how the recall process works.
-Materials companies, which produce essential components like industrial chemicals, plastics, metals, and construction materials, have been struggling due to concerns about US growth and a slowdown in China. Fidelity portfolio manager Ashley Fernandes predicts that performance in this highly cyclical sector will continue to track the ups and downs of the US and global economies for 2025 and beyond. If interest rates continue to fall, it could usher in a new cycle of growth to help propel stocks. However, this is a big if, considering stubborn inflation and increasingly hawkish comments by Federal Reserve officials. Most Wall Street investors now see only one or two more Fed rate cuts next year, with fewer than 5% seeing the Fed cutting short-term interest rates by a full percentage point. Ned Davis Research reports that materials stocks are having their "worst bull on record," lagging behind the broader market by a bigger margin than they have during any run-up since 1974. Despite the rough environment, some materials stocks look attractive, such as Dow and LyondellBasell Industries.

Europe:
-ASML, a Netherlands-based company, is Europe's No. 2 tech company, behind only Germany's SAP. The company produces specialized lithography machines for high-performance chips used in smartphones, PCs, and data centers, which can cost $200M or more. ASML has virtually no competition in its high-end EUV machines, which use extreme ultraviolet light. The stock trades for 28 times 2025 earnings of $25 a share and looks appealing after falling 20% in October following a cut to its 2025 revenue guidance. ASML sees lithography spending rising at a 10% to 20% annual rate through 2030, reaching about $55B at the midpoint of a recent forecast, up from $32B this year. Analysts Sandeep Deshpande and Davit Khachatryan believe ASML's monopolistic position and alignment with secular trends position it as a cornerstone investment in the semiconductor supply chain.

Emerging Markets:
-Indian stocks have experienced a 21.8% annual gain since March 2000, just behind the 22.7% gain logged by the S&P 500. As global investors soured on China due to Covid and geopolitical tensions, many gravitated to India, finding an economy remade by reforms and aggressive infrastructure investment. This energized entrepreneurs, supported a burgeoning middle-class, and made India a more attractive manufacturing destination for global companies looking for an alternative to China. However, the Indian market has started to lose momentum, with some veteran investors warning of a major correction. The country's red-hot initial public offering market raised more than $16B this year, more than double the take of the year before. Ajay Krishnan, managing Wasatch Emerging India and Wasatch Emerging Markets Select, predicts a major correction in India due to froth and low-quality banks trading at 50 times earnings. Indian stocks have started to pull back, with the MSCI India down 7%TK since September. However, the market is still pricier than the S&P 500, at 23.8 times forward earnings compared to 23 times for the S&P 500.

Commodities:
-No update

Streetwise:
-International Paper is a poor long-term stock performer with no significant ties to current hot topics like artificial-intelligence chips, quantum computers, and cryptocurrency. However, its largely box business has led to a 62% increase in shareholders since the announcement of a new CEO in March, more than triple the S&P 500 index's return. This suggests a turnaround afoot, as seen in the ugliest turnaround attempts of 2024, including Intel, CVS Health, and Boeing. Jefferies sees over 20% further upside for IP stock in 2025 and calls it a top pick. The company's stock is gaining attention due to its potential for a turnaround. International Paper's stock is a top pick, with Jefferies seeing over 20% further upside for IP stock in 2025. The company's packaging is cushiony with multiple layers, including a squiggly one in the middle, unlike cardboard boxes. While the company is wary, it is intriguing to consider its potential for growth.

WWD : Mexico’s New Ban on U.S.-bound Apparel Imports a ‘Nightmare Scenario’ for

Mexico’s New Ban on U.S.-bound Apparel Imports a ‘Nightmare Scenario’ for Brands, 3PLs
Logistics provider XB Fulfillment reportedly told customers it will no longer be able to import duty-free apparel into its Mexican warehouses.

Mexico’s recent decision to immediately restrict textile imports through its IMMEX import duty-deferral program could put U.S. apparel brands bringing goods through the country in a major scramble to kick off 2025—and it already appears to have third-party logistics (3PL) providers working overtime.

On Dec. 19, Mexico President Claudia Sheinbaum issued a decree banning finished apparel goods from being imported under the IMMEX program, which allows goods to move temporarily into the country duty-free if they’re intended for re-export to the U.S. That program is designed to enable foreign companies to operate and manufacture in Mexico with low-tax structures and reduced labor costs.

The immediate restrictions under the Manufacturing, Maquiladora and Export Services Industry (IMMEX) program effectively nullify many of the advantages of lower cost importing into the U.S. from a 3PL with Mexican warehouses. Many U.S. e-commerce brands currently take advantage of the Section 321 de minimis provision to avoid customs duties on shipments valued at $800 or less by importing goods from China into Mexico-based warehouses, before shipping them via truck to the U.S.

While U.S. Section 321 laws have not been immediately impacted, the move could add further pressure on Congress to reform the legislation —especially as calls escalate to scrap de minimis altogether.

XB Fulfillment, an e-commerce 3PL platform that provides U.S.-based e-commerce and omnichannel brands with fulfillment and warehousing services, reportedly notified customers that it will no longer be able to import apparel into Mexico for them, declaring force majeure on their contracts.

“The vast majority of their customers are apparel brands,” said Ryan Petersen, chief executive officer and founder of Flexport, in a post on X. “This has created a nightmare scenario for XB, its competitors, and the many great brands they serve. They’re scrambling to get the government to not destroy their business, and their customers are searching for solutions.”

XB Fulfillment hasn’t confirmed the notice or the force majeure declaration. Force majeure is a clause that removes liability for a party from fulfilling contractual obligations in the event of unforeseen circumstances or an “act of God.”

WWD’s sister publication Sourcing Journal reached out to XB Fulfillment, whose clients include True Classic and Cuts Clothing.

According to Petersen, Flexport is first prioritizing onboarding customers of XB that the digital freight forwarder already works with for international freight forwarding and customs clearances. But he noted that the company will then help solve the issue for any brand affected by this surprise disruption.

As of June 2023, XB Fulfillment operated four fulfillment centers in Mexico, at the time saying it planned to expand its capacity by about 60 percent when it secured $100 million in growth capital. In 2023, the company shipped 116 million total units across 27 million orders, with total value of product shipped totaling $3 billion.

Petersen said many of XB Fulfillment’s imports actually first enter the U.S. via West Coast ports like Los Angeles and Long Beach before being trucked to Mexico under a tax-free, in-transit customs bond. The items are stored, picked and packed at one of the warehouses across the border, before being trucked back into the U.S.

“At least 30 of the top 100 American brands on Shopify now fulfill from just across the Mexican border, mostly in Tijuana, to avoid U.S. customs duties,” Petersen estimated. “From there the goods are handed off to UPS, FedEx, USPS or other last-mile networks for final delivery to American households.”

As of now, importers with goods already en route to Mexico are likely to face unexpected customs duties, leading to potential short-term disruptions. Apparel brands expecting to be impacted by the IMMEX revision that aim to import under the duty-free de minimis exemption can still host goods in Canada.

Under the new decree, certain finished products are excluded from temporary importation under IMMEX. These exclusions include finished clothing and textile articles classified under Harmonized Tariff Schedule Chapters 61, 62 and 63; quilts and comforters classified under HTS subheading 9404.40, and pillows, cushions and other bedding materials classified under HTS subheading 9404.90.

Chapters 61 and 62 cover clothing including coats, suits, jackets, pants, dresses, shirts and sweaters, as well as textile accessories such as gloves, belts and ties.

Textile articles included in Chapter 63 are home goods like bed linens, blankets, pillowcases, curtains and towels, as well as tents, awnings, needlecrafts and rags.

Sheinbaum’s decree was accompanied by a new swell of temporary tariffs on textile imports into Mexico, which will increase from a current 10 percent to 15 percent on textiles like denim and polyester staple fibers. Additionally, duties on finished products such as knitwear, jackets and lingerie will jump from their current range of between 20 percent and 25 percent up to 35 percent.

These tariffs will not apply to countries with which Mexico has free trade agreements, including the U.S. and Canada.

The move from Mexico’s government appears to be a protectionist measure for the country’s textile industry, with the country’s Economy Minister Marcelo Ebrard saying that the new measures aim to protect about 400,000 jobs in the textile industry, which experienced a 4.8 percent GDP contraction in 2024.

“That’s why we are closing the door. These are measures to protect one of the most important industries for employment in Mexico. If we don’t take steps to prevent abuse or the low prices associated with ‘dumping,’ the Mexican textile industry would be at a disadvantage,” Ebrard said in a Dec. 19 press conference. “The goal is to foster the development of the Mexican textile industry, promote employment, and ensure fair market conditions.”

The restrictions also come amid U.S. President-elect Donald Trump’s threats of tariffs of up to 25 percent on Mexican goods ahead of his January inauguration, amid his criticisms of the country’s handling of immigration into the U.S., and the flow of fentanyl over the U.S.-Mexico border.

WSJ : A Thrill-Seeking Trade Amps Up Heading Into 2025

A Thrill-Seeking Trade Amps Up Heading Into 2025
Stock options are soaring with everyday investors wagering on market whipsaws

The hottest market for daredevil traders is hitting a fever pitch.

About 48 million options contracts have changed hands daily on average this year, on pace for a record in data going back to 1973, according to the Options Clearing Corp., or OCC. That is up 9% from last year and would mark the fifth straight year of fresh all-time highs.

Options were traditionally used by professional investors to protect portfolios from risk. Now, they have become wildly popular among rookie traders seeking to amplify their bets, especially on extremely volatile stocks.

The contracts allow traders to make directional bets on stocks by offering the right to buy or sell shares at a specified price, by a set date. They can expire in months, days or even hours and let traders score eye-popping payouts—or incur bruising losses.

“It’s really the phenomenon of the retail trader that continues to just drive this growth,” said Catherine Clay, head of global derivatives at Cboe Global Markets.

Many analysts expect such risky trades to keep proliferating. The Federal Reserve began cutting interest rates this year, bringing them down from their highest levels in more than two decades. Donald Trump’s re-election has already helped spur a rally in speculative assets like bitcoin and is widely expected to boost markets.

Everyday investors are making all sorts of other wagers. Sports gambling is growing on platforms such as DraftKings and FanDuel. Prediction markets let people wager on everything from who will win a presidential election to whether Taylor Swift will stay the top artist on Spotify.

Analysts say that activity from individual options traders can be a leading indicator. If they pile into bets on a stock rising, for example, the shares are more likely to jump the following week. Amateur traders made up 29% of U.S. options activity as of September, up from 23% at the start of 2020, according to Bloomberg Intelligence.

Both novices and Wall Street traders are charging into options that expire the same day. These zero-day-to-expiry options, or “0dte” trades, make up more than half of options activity tied to the S&P 500 index, up from 17% at the start of 2020, according to market researcher SpotGamma.

Industry executives are considering ways to allow zero-day bets on individual stocks, The Wall Street Journal has reported.

Single-stock options bets rose 15% this year, according to Cboe data as of Thursday. That outpaced growth of 8% and 2.9% for index- and exchange-traded fund products, respectively.

Nvidia this year overtook Tesla as the most popular single-stock options play. Traders have been eager to take advantage of the often volatile swings in Nvidia shares around the chip maker’s quarterly earnings.

Viviane Mason, a 53-year-old sales professional in San Diego, said she made about $54,000 scooping up call options ahead of Nvidia’s earnings results in May and selling them after the company beat expectations. Calls give traders the right to buy a stock at a set price.

Mason recently lost $29,000 buying Meta Platforms call options after noticing huge hedge fund call orders tied to the company. The stock didn’t take off until a week after her own calls expired, leaving her investment worthless.

“It’s not for the faint of the heart,” she said. “Not everyone has the guts of losing $20,000 one day and starting all over the next.”

Crypto-related options activity exploded after the election and the debut of options on spot bitcoin exchange-traded funds. Strategists expect that boom to continue with Trump’s embrace of the crypto industry.

Options activity has escalated around MicroStrategy, a bitcoin-buying company whose shares have skyrocketed since Election Day.

Some of the most popular options trades tied to MicroStrategy in recent days have been bets the stock will tumble to $155 or surge to $1,080 a share. The stock is up more than 400% this year and closed at $330 on Friday.

Analysts say this year’s flurry of options trading, much of which has been bullish, and the S&P 500’s 25% climb raise questions about whether markets could be headed for a downturn.

“If there is a market correction, I think it could be pretty violent. That could really still keep options volumes very elevated,” said Brent Kochuba, founder of SpotGamma.