Barrons : Nvidia Is the Pricey AI Play. These 7 Stocks Are Real Bargains.

Nvidia Is the Pricey AI Play. These 7 Stocks Are Real Bargains.
Companies in emerging markets are important players in AI—and they are cheaper than many U.S. counterparts.

Nvidia and a handful of other U.S. stocks have become almost synonymous with artificial intelligence. But investors willing to venture into emerging markets can find companies that are also critical for making AI a reality—at bargain prices compared with many stateside options.

Companies cashing in on AI include those in Taiwan, South Korea, and parts of southeast Asia. “If you are looking for AI, emerging markets is the place to look,” says Anthony Sassine, senior investment strategist for Krane Funds Advisors. He says that some of these companies have significant competitive advantages in the design, manufacturing, and packaging of chips. They are also a lot cheaper, with some trading at roughly half that of companies like Nvidia, Advanced Micro Devices, and ASML Holding.

Taiwan Semiconductor Manufacturing, which is responsible for about 90% of the world’s super-advanced semiconductors, is among the most well known and widely owned AI plays outside the U.S. At 23 times next 12-month earnings, it trades at about a 33% discount to Nvidia.

The stock is “tremendously cheap for an enabler of all the AI enthusiasm,” says Ben Durrant, an investment manager on Baillie Gifford’s emerging markets equity team, which has long held the stock. Part of that discount comes from the geopolitical cloud that looms over Taiwan, as the island nation remains a hot-button issue in the U.S.-China rivalry.

Many of the companies critical for transitioning the world to use AI go through Asia—and demand has already been a boon to supply chains through the region. For those who want to stick with megacap companies, two South Korean giants offer a way into AI. SK Hynix (ticker: 000660.Korea) is a leader in the high-bandwidth memory required by the latest processors from Nvidia and peers to power AI.

After inventory-related concerns last year, the memory company’s shares are up about 50% this year as demand for its AI-related chips begins to show up in its financials. While no longer a bargain at 1.8 to two times book value, it is still cheaper than some U.S. peers, and fund managers still see upside. The reason: AI-related products account for just 5% of last year’s sales, but SK Hynix says that could hit 60% by 2028. Rondure Global Advisors founder Laura Geritz has a more conservative expectation for AI sales but still sees further opportunity for the stock as AI—and high-bandwidth memory—powers a new leg of earnings growth for years to come.

For those looking for a better-known option, SK Hynix rival Samsung Electronics is one of the cheapest AI-related plays in Asia, says Hiren Dasani, Singapore-based co-head of global emerging markets equity at Goldman Sachs Asset Management. Samsung trades at 1.2 times book value, about 30% cheaper than SK Hynix.

Samsung comes with some baggage—including weakness in the other facets of its business, including smartphones, and lingering criticism that the founding family prioritizes control over shareholder returns.

Samsung is also lagging behind SK Hynix on high-bandwidth memory. Dasani sees a potential catalys t as the company tries to become qualified to be part of Nvidia’s supply chain over the next few months. If it succeeds, Dasani says it could change the market’s perception of Samsung into an AI play as it catches up to SK Hynix.

Korean companies have another potential catalyst as South Korea embarks on efforts to nudge companies to boost shareholder returns. Korea stocks have long been stuck because of governance-related issues, in part to its history of family-controlled business groups, or chaebols. Those concerns could recede as the government looks for reforms and a governance makeover similar to the one that Japan has implemented over the past decade, says Phillip Wool, global head of research for quantitative asset manager Rayliant Global Advisors.

MSCI Taiwan, an index that tracks Taiwan stocks, trades at about 19 times forward earnings, well below the 30 times earnings the Nasdaq Composite fetches. The MSCI Korea is far cheaper, at 10 times. Rayliant’s Wool attributes the gap to the Korea discount for complex corporate structures, messy governance with family-owned chaebols dominating the market, and a dismal record for shareholder rights. Details are still sparse, and it could take a while, but a reduction in the Korea discount offers another catalyst to stocks like Samsung.

There’s also opportunity in smaller companies integral to the overall AI-supply chain or the buildout of infrastructure needed to support it. That includes companies such as Alchip Technologies (3661.Taiwan), which makes specific use of application specific integrated circuits, or ASICs, for the likes of Amazon.com, Intel, and Li Auto. These chips are smaller, more efficient, and less energy intensive than generalist central processing unit, or CPUs, and graphics processing unit, or GPUs, which makes them more attractive as the AI revolution increases energy demand. As a more direct bet on chips, AIchip is pricier than less pure-play AI opportunities. But at 27 times forward earnings, Wool notes that it is still cheaper than market-darlings like Nvidia and ASML.

One backdoor into AI is through companies engaged in cooling servers as the increased computer power for AI increases the need for liquid cooling rather than traditional air, which is several times more expensive. As Nvidia launches its new GB200 chip and server architecture, Todd McClone, a manager on William Blair’s emerging markets equities strategies, says it could draw more than double the electricity compared with current leading-edge products.

Server cooling could become a $10 billion market in two years, growing at a 30% compounded annual growth rate, according to McClone. One way in is through Asia Vital Components (3017.Taiwan), which provides these cooling technologies. While the shares have soared, with the stock valuation hitting mid-20s, McClone still sees opportunity, noting that the market is still underestimating the earnings potential and the speed of adoption of its solutions.

McClone and others are also looking at power-related stocks as another way to play AI, given the surging energy demands. Data centers could contribute to 7% of global power demand by 2035 as they try to support AI, a reason that some companies are investing aggressively in electrification and energy-efficient technology.

That benefits the likes of HD Hyundai Electric in Korea, which in the first quarter made up almost 40% of its full-year sales forecast. Given the strong growth, McClone says he expects further double-digit increases in sales and earnings, which justifies its current valuations. Plus, the stock trades at about a 14% discount to other global grid equipment options. The stock trades for under 20 times 2025 earnings.

Rajiv Jain, chief investment officer at global asset manager GQG Partners, owns Malaysia’s YTL Power International (YTLP.Malaysia). The company stands to benefit from a host of reforms in Malaysia of its power sector as it sees a data center boom and the country tries to become a regional hub, exporting power to Singapore and other parts of southeast Asia.

At 12.6 times next year’s earnings, valuations in Malaysia are still relatively attractive. “No one is paying attention to the sleepy market,” Jain says.

Barron's : Large-Cap Value Stocks Will Power the Market Rally From Here, This St

Large-Cap Value Stocks Will Power the Market Rally From Here, This Strategist Says
Savita Subramanian of BofA Securities also favors companies generating free cash flow and those becoming “labor light.”

The S&P 500 has gained almost 14% this year, and the Nasdaq 100, 16%, mostly due to monster rallies in a handful of megacap tech stocks. All the more reason for investors to increase their exposure to value stocks in cyclical industries, says Savita Subramanian, head of U.S. equity and quantitative strategies at BofA Securities. The biggest stocks have run up so much, she says, that it could be increasingly difficult for them to meet, or exceed, investors’ expectations.

The S&P 500 has gained almost 14% this year, and the Nasdaq 100, 16%, mostly due to monster rallies in a handful of megacap tech stocks. All the more reason for investors to increase their exposure to value stocks in cyclical industries, says Savita Subramanian, head of U.S. equity and quantitative strategies at BofA Securities. The biggest stocks have run up so much, she says, that it could be increasingly difficult for them to meet, or exceed, investors’ expectations.
Subramanian has been following markets for more than two decades, and has earned a reputation for prescient investment calls. Her work marries quantitative research with fundamental analysis, and draws on the precepts of behavioral finance. A dual major in mathematics and philosophy at the University of California, Berkeley, she joined Merrill Lynch in 2001 after a stint at Scudder Kemper Investments, now owned by Deutsche Bank.

Subramanian moved to BofA in 2008 when Bank of America bought Merrill in the teeth of the financial crisis. She was named head of U.S. equity strategy in 2011.

In March, she raised her S&P 500 year-end price target to 5400 from 5000, then one of the most bullish calls on Wall Street. The index topped that level on June 12 after the release of the consumer price index for May, which indicated that inflation had cooled, but she isn’t planning to change her target now. “There are parts of the S&P where we’re more constructive but our directional conviction is lower given that market sentiment has moved from bearish to more neutral,” she said.

Barron’s spoke with Subramanian on June 9, and via email on June 12, about her favorite market segments, her concerns about tech stocks, and her career. An edited version of the conversation follows.

Barron’s: The S&P 500 rose 24% last year, and is up again this year. Can stocks keep climbing from recent levels?

Savita Subramanian: If I were going to buy one kind of investment for the next 12 to 24 months, it would be large-cap value. That’s where you’re going to get the most bang for your buck. That’s what will lead over the next few years, given the macro environment.

What worries me about the market is that at the beginning of the year, there was tremendous skepticism around the longevity of the rally. Today, there is far more bullish sentiment. At the beginning of the year, it was much easier to be bullish because there were a lot more bears. And at this point, I feel like a lot of the bears have capitulated.

Do you blame them? Valuations seem lofty, with the market trading at 22 times next year’s expected earnings.

I’m not worried about equities from a valuation perspective because these multiples are sustainable. We’re moving from a period of uncertainty. Prior to the Federal Reserve hiking interest rates by more than five percentage points, nobody knew how we were going to escape zero rates. Today, interest rates are well above that. The Fed has done a lot of the hard work already.

Inflation volatility has subsided. This is where clients probably disagree with me the most, but I feel that what the Fed does now is less important because it has already done the extreme process of hiking.

How many rate cuts do you expect this year?

We could see one cut in December. But the risk is, if the Fed doesn’t cut, what happens? There is a high probability that the Fed holds rates steady for the rest of the year. And if inflation comes back with a vengeance, the Fed could be forced to hike. What happens in that scenario?

Until we get to that moment where the Fed says we’re at peak rates, inflation is coming down, and we can be more accommodative, you want to hold inflation-protected sectors such as energy, materials, and financials. These are more cyclical than defensive sectors.

Is inflation still the biggest concern for investors and the Fed, or is it secondary to fears about the economy and job market?

The monthly and weekly economic data are noisy. Over a three- or four-month time period, they look worrisome because they’re all softening. But when you look at them from a longer-term time horizon, they look fantastic.

When we were in more of an inflationary environment, we wrote about how the best environment for equities was 2% to 4% inflation. That’s where we are right now. The best environment for equities is when real wage growth is positive and nominal sales growth is at reasonable levels.

There is the potential for a cyclical recovery. Even though the recent ISM manufacturing data wobbled a bit, the numbers aren’t as low as a couple of months ago. We are looking at things through the wrong end of the telescope. Every week there is cause for recession or stagflation concerns. But in the grander scheme of things, we’re seeing economic data normalize from very hot levels after the Covid pandemic and all the fiscal stimulus to levels that are good for equities, especially cyclical companies.

We keep hearing that this rally will broaden out. Meanwhile, Microsoft, Apple, and Nvidia account for 20% of the market valuation of the S&P 500. Are you concerned about that concentration?

I’m not concerned because it isn’t a negative signal. But I am surprised by how narrow the market has become. I would have expected a broadening out to have happened earlier.

The earnings of the megacap tech cohort are so high that we are more likely to see a deceleration than an acceleration. Another reason to expect a broadening out is that we got positive guidance across the board, and not just from tech companies, during first-quarter earnings season. The other major market sectors were all posting more positive than negative guidance.

A couple of years ago, you mentioned in an interview that you liked big, old, boring U.S. companies. Is that still the case?

I don’t know if I would say I still like big, old, boring companies. I like a mix of companies that are generating strong free cash flow and enjoying the benefits of this tech revolution, but also companies that are potentially becoming more labor light. If you think about the areas that could benefit from generative artificial intelligence, it’s banks, legal services, and IT [information technology] services.

And if you think about cash flow, it isn’t just tech but also utilities, power, infrastructure, and energy companies that are generating substantial amounts of cash. Some are exciting, and some are boring. But they are mostly big. That’s where I differ from a lot of other bulls. I don’t think you want to buy all small-caps, because while some of them are economically sensitive and will benefit from better gross-domestic-product growth in the U.S., others are morphing into smaller-cap companies because they used to be large.

I also like companies like Alphabet and Meta Platforms that have decided to start paying dividends. These are stocks that will probably show up in value benchmarks in a year. What I don’t like are companies that don’t make any money and might not be able to hack a higher-for-longer rate environment.

How nervous should investors be about the U.S. elections in November?

In the U.S., elections are less important than they might be in other regions of the world. We’ve seen contentious races, and the outcome has been somewhat of a nonevent. Former President Donald Trump’s win in 2016 was OK for stocks and the economy even though we initially thought there could be big changes.

The differences between Trump and President Joe Biden are around things like healthcare spending, immigration policy, and maybe the regulatory landscape. We aren’t going to see massive corporate regulations levied, especially at techs or banks, because these are the two sectors that are critically important for the U.S. to retain its position of primacy. You can’t choke off all the lending at the banks with regulations, because the economy would come to a halt. The regulatory backdrop is potentially less punitive than it might have been in prior election cycles.

The fact that both candidates agree that they want to bring back manufacturing from China and other regions of the world to the U.S. has created more jobs. While these policies are protectionist and inflationary, they are also pro-growth.

You’ve been at BofA and its predecessor company, Merrill Lynch, for more than 20 years. What has it been like to work in one place that long, both personally and from the standpoint of an investment strategist?

It has helped me become a better investment strategist. At some level, I find it easier to forecast things that I’ve lived through.

The credit crisis taught us that leverage can be evil. Short-term debt can be evil. But in a weird way, that created an environment much more suited to managing higher rates. We all took our lumps during the financial crisis, and now big corporations don’t have massive leverage risk. The lessons learned in 2008 prepared the economy for what is happening now. It is good to live through different types of shocks and see how companies and consumers adapted to those crises.

What has surprised you most about how the investment world has changed during your tenure?

Time horizons have gotten faster. Technology has gotten better. But it might not be an easier or a harder time to be a strategist. It’s easier because there is more data, but it’s harder because you have to filter out more irrelevant information.

Right now is the most interesting time to be a market strategist, in my opinion. We’re back to a more rational market. When we were in a zero-interest-rate, massive-stimulus-driven market, it was hard to forecast what would happen next. Events were in the hands of central bankers.

Today, inflation volatility has subsided. It is interesting to see how companies are recalibrating, and what the lay of the land is in each region of the world and each sector. The outlook depends less on central bankers, and more on corporations and consumers.

FT : Boeing and Airbus bought plane sections with falsely certified metal

Boeing and Airbus bought plane sections with falsely certified metal
US air safety regulators are investigating scope and impact of issue that started with titanium originating in China

Boeing and Airbus have included parts in their jets made with titanium whose certification documentation was counterfeit, the two companies acknowledged Friday.

Both manufacturers said the planes in service containing the parts were safe.

The companies bought fuselages and wings from Spirit AeroSystems, the Kansas supplier that has struggled with quality issues over the past year. The metal originated in China, where the documentation reportedly was falsified, before working its way through the global supply chain to be used in parts installed in jets made by the duelling plane makers.

The news, reported earlier by The New York Times, is another setback for an industry with a years-long backlog of orders and customers eager for new planes. Titanium is used to make critical components for aircraft, including landing gears and fasteners for the pylons that join an engine to a wing. The NYT said the transactions may have occurred as far back as 2019.

Boeing and Spirit AeroSystems have been scrutinised in recent months by regulators, following a door panel blowout during a commercial flight in January. US Federal Aviation Administration administrator Mike Whitaker told a US Senate subcommittee on Thursday that the agency’s previous approach to regulating Boeing was “too hands-off”. An audit of the two companies found examples of them failing to meet requirements for manufacturing and quality control.

US Senator Chuck Grassley, a Republican from Iowa, on Friday said he would launch a congressional oversight inquiry into both Boeing and the aviation regulator over the blowout, noting in a letter that “while Boeing’s actions had deadly consequences, the FAA’s oversight failures allowed for it to occur”.

Boeing said it would remove the titanium parts from planes that are awaiting delivery but it has not paused deliveries, and the in-service fleet can continue flying.

Boeing declined to say which aircraft the parts were used on. Spirit makes the fuselage for the 737 Max and the nose and leading edge of the wing for the 787. The US group builds parts for several Airbus jets, including the wings and engine pylons for the A220 jet. 

Airbus said it is “aware” of the situation. The European plane maker said “numerous tests” had been performed on parts coming from the same source of supply, which showed the “A220’s airworthiness remains intact”. The company said it was working with its supplier. 

The FAA said it is now investigating the scope and impact of the problem, which Boeing voluntarily reported.

The metal tested shows “the correct titanium alloy was used”, Boeing said, even though the documentation was falsified.

All the suspect parts have since been removed from Spirit’s production, said spokesperson Joe Buccino, and “more than 1,000 tests have been completed to confirm the mechanical and metallurgical properties of the affected material” to ensure the planes already delivered with these parts are safe to fly. 

Boeing said the titanium in question comes from “a limited set of suppliers”. The bulk of the titanium the company purchases is unaffected by the counterfeit documentation.

>>> Tenaris - To commences Fourth Tranche of its $1.2 Billion Share Buyback Prog

To commences Fourth Tranche of its $1.2 Billion Share Buyback Program

announced today the completion of the third tranche and the commencement of the fourth tranche of its USD1.2 billion Share Buyback Program announced on November 1, 2023 (the “Program”).

During the third tranche, which ran from May 13, 2024, to (and including) June 13, 2024, the Company purchased a total of 18,080,524 ordinary shares for a total consideration of EUR276,630,414, or USD300 million.

As of June 14, 2024, the Company held in treasury 34,447,527 ordinary shares (including 16,367,003 ordinary shares bought in the second tranche), equal to 2.96% of the total issued share capital.

On June 14, 2024, Tenaris entered into a non-discretionary buyback agreement with a primary financial institution (the “Bank”) for the execution of the fourth tranche of the Program, covering up to the remainder amount of the Program. This fourth tranche shall start on June 17, 2024, and end no later than October 31, 2024, and will cover an amount of up to USD300 million.

The Bank will make its trading decisions concerning the timing of the purchases of Tenaris’s ordinary shares independently of and uninfluenced by Tenaris and will act in compliance with applicable rules and regulations, including the Market Abuse Regulation 596/2014 and the Commission Delegated Regulation (EU) 2016/1052 (the “Regulations”). Under the buyback agreement, purchases of shares may continue during any closed periods of Tenaris in accordance with the Regulations.

>>> Weekly Market Update

Weekly Market Update: Better inflation data in the US overshadows more cautious Fed policy forecast and political jitters in France

This week opened and ended with political turmoil in Europe weighing on markets there. Specifically, President Macron’s call for a snap election led to a surge in the polls for both the both the far-right and far-left in France, squeezing Macron’s centrists. The French CAC came under pressure along with EU banks in general. The spreads between French and German government bond yields widened to levels not seen since 2017. The Euro slumped to the lowest levels in more than a month. Macron’s Finance Minister exacerbated uneasiness with pre-election rhetoric warning of potential financial crisis if the election were to force France to exit the EU. Separately, the G-7 met in Italy and agreed on a plan to support Ukraine with frozen Russian assets.

The S&P and NASDAQ broke out to fresh all-time highs on Wednesday after annualized core CPI rose at the slowest pace in three years. Notably, some of the softness was due to declines in categories such as airfares and auto insurance that do not carry over to the PCE calculations. Meanwhile, the critical shelter cost components remained sticky, but the closely followed supercore fell m/m. The data was welcomed by the Fed and Chairman Powell, and overshadowed the latest iteration of the dot plot which took officials' prior projection of three rate cuts this year down to just one. In his press conference, Powell reiterated that policy remains squarely data dependent and that the Fed is still ready to adjust policy once it has more confidence inflation is on track to move down towards the 2% target. The following session, PPI was negative m/m and core was flat, supporting a resurgent disinflation narrative. Also, weekly jobless claims jumped to the highest reading since last August, causing some to argue that the FOMC’s overall message was a bit more hawkish than needed given the increased signs of softening. By Friday, US Treasury yields fell to the lowest levels since early August while the US dollar index was at a 1-month high. For the week, the S&P gained 1.6%, the DJIA slipped 0.5%, and the Nasdaq surged 3.2%.

In corporate news this week, largecap tech continued to show its muscle, driven by the mad dash to upgrade AI systems. Oracle and then Broadcom were the latest AI-related companies to see their stock accelerate to new highs on the back of strong earnings reports. Oracle touted its Remaining Performance Obligation up 44% to $98B, while Broadcom noted that in FY24 it expected revenues from AI at over $11B, more than 20% of overall revenues. Buyers came back into Apple after it announced its stepped up AI effort called ‘Apple Intelligence’, which will rely in part on integrating ChatGPT into Siri and MacOS and iPhoneOS platforms. That collaboration sparked outraged comments from Elon Musk who called it an “unacceptable security violation.” Meanwhile, Tesla shares saw a small relief rally as stockholders gave in to Musk’s compensation demands, and he reaffirmed his vision for producing an army of humanoid robots as the next pillar of Tesla’s growth plan. Separately GM indicated the auto industry remains strong, announcing expectations that Q2 earnings will show sequential improvement. Industrial tools supplier MSC Industrial injected a note of caution to the space, issue much lower than expected Q3 guidance. And in M&A news, National Amusements said it was not able to reach deal terms with Skydance Media, sending Paramount shares plunging.


MON 06-10
(EU) EU Parliament Elections Summary: French Pres Macron called for snap elections after his party losing to Marine Le Pen's National Rally (first snap elections for France since 1997); German Chancellor Scholz’s SPD party had its worst ever result, coming third behind the far-right Alternative for Germany (AfD); Belgium PM Croo resigned
(EU) EURO ZONE JUN SENTIX INVESTOR CONFIDENCE: +0.3 V -1.7E (1st positive reading since Feb 2022); Notes its inflation barometer indicates an unfavourable inflation environment
(RU) Russia Pres Putin said to visit North Korea and Vietnam in coming weeks - Russia press
(US) Citi Mid-June Economic Surprise Index -5.5 v -4.1 prior (update)
AAPL Announces 'Apple Intelligence' suite of AI features – WWDC
AAPL Elon Musk: If Apple integrates OpenAI at the OS level, then Apple devices will be banned at my companies; This is an unacceptable security violation
UUUU Achieves commercial production of separated neodymium-praseodymium ("NdPr") at its White Mesa Mill in Utah; Simultaneously advancing Uranium production, preparations are being made to commence a uranium ore and alternate feed uranium-bearing material processing campaign in Q3 2024

TUES 06-11
(CN) CHINA MAY CPI Y/Y: 0.3% V 0.4%E
(CN) China official: EU's probe into EVs is trade protectionism
(CN) US Indo-Pacific chief Paparo: I want to turn Taiwan Strait into ‘unmanned Hellscape’ if China invades; US has plans to deploy thousands of lethal drones if mainland China invades Taiwan – SCMP
(CN) US reportedly weighs more limits on China's access to chips for AI - press
(FR) French Pres Macron: Election result will not affect my position
(FR) Follow Up: A person close to French Pres Macron camp reportedly denies earlier reports of his potential resignation – press
(FR) French Pres Macron said to be discussing potential resignation with his close circle in case of possible right-wing victory in early parliamentary elections - French radio
OPEC Monthly Oil Report (MOMR)
(US) BOFA INSTITUTE: MAY TOTAL CARD SPENDING +0.7% Y/Y V +1.0% AVERAGE IN APR; Notes consumer spending momentum continues to appear soft but stable; There are signs of increased financial pressures for some in the younger generations
(US) Data provider to homebuilders Zonda: May/early June trends below April; According to Zonda's survey, 33% of builders said demand is on track with expectations in May v 57% in March
(US) International Longshoremen’s Association (ILA) union representing dockworkers at East and Gulf Coast container ports has suspended labor contract negotiations set for Tue, June 11th due to the automation issue - press (update) [**Note: current ILA contract set to expire on Sept 30th, 2024]
(US) TREASURY'S $39B 10-YEAR NOTE REOPENING DRAWS 4.438% V 4.560% PRIOR; BID-TO-COVER RATIO: 2.67 V 2.34 PRIOR AND 2.48 OVER LAST 8 REOPENINGS
GM CFO: Expects Q2 earnings better q/q (implies >$2.62 v $2.59e) - DB conf
ORCL Guides Q1 EPS $1.31-1.35 ($1.33-1.37 cc) v $1.32e, Rev +5-7% (+6-8% cc) v +7.2%e; Have increased confidence that revenue will grow and accelerate - earnings call
ORCL Reports Q4 $1.63 v $1.64e, Rev $14.3B v $14.6Be; Expect double digit Rev growth in FY25 with acceleration every Q; In Q4 alone, signed over 30 AI sales contracts totaling >$12.5B
PARA National Amusements said to stop discussions with Skydance – press
WMT Exec: Still seeing consistent consumer overall; Market remains a bit more promotional - Oppenheimer's 24th Annual Consumer Growth and E-Commerce Conference

WED 06-12
(AU) AUSTRALIA MAY EMPLOYMENT CHANGE: +39.7K V +30.0KE; UNEMPLOYMENT RATE: 4.0% V 4.0%E
(FR) France Fin Min Le Maire: France could face a ‘Liz Truss scenario’; France would be plunged into a debt crisis if far-right leader Marine Le Pen were to win snap elections and implement her economic program (update)
(FR) French Pres Macron: Absurd to think I will resign before 2027; EU vote was clear, could not be ignored; Snap elections was only way possible
(IN) INDIA MAY CPI Y/Y: 4.8% V 4.9%E
(US) Atlanta May Sticky-CPI annualized 2.4% v 4.6% m/m, Core 2.2% v 4.6% m/m (update)
(US) Adobe Analytics May Digital Price Index (DPI) -0.6% m/m v -0.5% prior (update)
Comparative Analysis of current vs prior FOMC statement: Saw modest progress on inflation target (vs 'a lack of further progress' in May); Rest of the statement is unchanged
(US) DOE CRUDE: +3.7M V -1ME; GASOLINE: 2.6M V 0ME; DISTILLATE: 0.9M V +1ME
(US) Fed Chair Powell: Today was certainly a better inflation report than most anyone expected; Hope we have more like it, not able to give specific number of good reports needed - Q&A
(US) MAY CPI M/M: 0.0% V 0.1%E; Y/Y: 3.3% V 3.4%E (lowest annual pace since Feb 2024 and first flat M/M print since Oct 2023)
(US) FOMC SUMMARY OF ECONOMIC PROJECTIONS (SEP) FOR JUNE: Raises long run rate forecast for second consecutive time; Cuts median forecast projection to 25bps of rate cuts in 2024 (prior 75bps)
(US) USDA WORLD AGRICULTURAL SUPPLY AND DEMAND ESTIMATES (WASDE) CROP REPORT
AXP CFO: Seeing relative strength in the consumer space; Q2-to-date trends are similar to Q1 - conf comments
DIS Central Florida Tourism Oversight District said to give Co locked-in, long-term plan for expanding Disney World; Said to reach agreement with Gov Desantis – NYT
IEA Monthly Oil Report (OMR); Cuts 2024-2025 global oil demand growth forecasts citing muted economy
JPM Exec Rohrbaugh: Q2 Investment banking rev could be up by 25-30% y/y (prior expected ~mid-teens y/y); Q2 trading rev is tending slightly better than mid-single digit growth guidance - MS conf
OXM Reports Q1 $2.66 v $3.78 y/y, Rev $398M v $420M y/y; Cuts FY guidance citing consumer sentiment has dropped meaningfully from early 2024 and has driven the consumer to become more cautious; Q2-to-date comp sales trend is positive
PLAY Reports Q1 $1.12 v $1.56e, Rev $588M v $614Me
TSLA CEO Musk: Both Tesla shareholder resolutions are currently passing by wide margins - X post
UMI.BE Cuts FY24 Adj EBITDA €760-800M (prior €900-950M); Notes slowdown in EV growth significantly impacts 2024 and volumes for a Chinese battery OEM not materializing in 2024; Started a process of re-assessing growth projections post 2024
VRA Reports Q1 -$0.21 v -$0.09 y/y, Rev $80.6M v $94.4M y/y; Notes reduced visits and spending across "all household incomes and channels at Vera Bradley, especially in the under $75K households", To unveil strategic plan Project Restoration in mid-July

THRS 06-13
TTN Research Alert: At yesterday presser. Powell said there are continuing financial pressures on low-income people; Which US firms would agree with him during last few weeks?
(FR) France left wing parties say they have agreed to unite and create a new 'Popular Front' to contest the upcoming snap parliamentary election
(IS) Biden administration has reportedly grown extremely concerned that escalating violence between Israel and Lebanon's Hezbollah in recent days will deteriorate into an all-out war - Axios
(JP) BANK OF JAPAN (BOJ) LEAVES TARGET RANGE UNCHANGED BETWEEN 0.0-0.10%; AS EXPECTED
(JP) BOJ ON GOVT BOND PURCHASES; TO BUY JGB's IN ACCORDANCE WITH MARCH 2024 DECISION UNTIL JULY MEETING (JULY 31st) [**Note: Most analysts expected a cut to JGB purchases at this meeting]
(US) BOFA INSTITUTE: WEEK-TO-JUNE 8TH TOTAL CARD SPENDING +1.6% Y/Y V +0.7% AVERAGE IN MAY; Card spending appears to be off to a solid start in June
(US) Medicare to recalculate quality ratings of Medicare Advantage Plans in an effort that could be announced as soon as today - WSJ
(US) MAY PPI FINAL DEMAND M/M: -0.2% V +0.1%E; Y/Y: 2.2% V 2.5%E (1st negative M/M print since Dec)
(US) TREASURY $22B 30-YEAR BOND REOPENING DRAWS 4.403% V 4.671% PRIOR; BID TO COVER 2.49 V 2.37 PRIOR AND 2.43 OVER LAST 8 REOPENINGS
(US) Tier1 analysts June Spending Survey (conducted June 6-10th): Plans to buy a New Home over the next 12 months remain at 20%+ levels despite the slight decline to 24.0% from 24.3% last month; New Vehicle next 12-month spending expectations remain at an elevated level since last month's sharp increase
(US) S&P Global: GEP Global Supply Chain Volatility Index breaks into positive territory for the first time in 14 months as global manufacturers report stretched capacity; Factory purchasing in Asia rising at the fastest rate since Dec 2021, driven by India, China and South Korea
1929.HK Reports Q1 Mainland China SSS -27.6% y/y (v -2.7% prior), HK/Macau SSS -32.0% y/y (v +4.5% prior)
MA Judge said to likely reject $30.0B Mastercard/Visa swipe-fee deal with retailers; Official decision expected in the coming days - US financial press
MSM Reports prelim Q3 $1.32-1.34 v $1.57e, Rev $978-980M v $1.03Be; Cuts FY24 Guidance due to "ongoing heavy manufacturing softness", slower than anticipated ramp in Core Customer and increased product and customer mix headwinds and unexpected dilution from our web price realignment
Ocean Freight Volumes continue to be very strong and above last year’s numbers on Transpacific while we see structurally blank sailings due to Cape of Good Hope routings and port congestion in Asia and North America. - Flexport
SNOW Reportedly to close hacking probe after attack targeted clients – press
SIG Reports Q1 $1.11 v $1.78 y/y, Rev $1.51 B v $1.67B y/y; Notes notable acceleration from a sluggish Feb to the top half of expectations, with an even stronger May; Sees positive same store sales inflection in H2 FY25

FRI 06-14
(JP) BOJ Gov Ueda: Rate hike in July is naturally possible depending on data
(RU) Russia Pres Putin: Sets out Russia pre-conditions for talks with Ukraine and "complete ending of the conflict"; Demands Ukraine pull out of four Eastern regions entirely - comments ahead of Ukraine's Peace summit in Switzerland
(US) MAY IMPORT PRICE INDEX M/M: -0.4% V -0.1%E; Y/Y: 1.1% V 1.3%E
(US) JUN PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 65.6 V 72.0E
(US) Tier1 week-to-June 13th US Truckload Demand Indicator at 53.1 v 53.4 prior (below 54 avg freight recession level)
NUE Guides Q2 $2.20-2.30 v $3.02e, cites lower average selling prices at steel mills segment
TSCO.UK Q1 Trading Update: LFL UK & ROI +3.6% v +3.4%e; Affirms guidance; Trends in line with expectations

>>> US Close Dow -0.15% S&P -0.04% Nasdaq +0.12% Russell -1.61%

Closing Stock Market Summary
Today's trade featured a negative bias driven by normal consolidation activity after this week's record closing highs. Decliners led advancers by a 3-to-1 margin at the NYSE and by a 5-to-2 margin at the Nasdaq. The three major indices closed little changed from yesterday, though, thanks to gains in some mega cap stocks.

NVIDIA (NVDA 131.88, +2.27, +1.8%), Alphabet (GOOG 178.37, +1.63, +0.9%), Microsoft (MSFT 442.57, +0.99, +0.2%), Meta Platforms (META 504.16, +0.56, +0.1%), and Broadcom (AVGO 1735.04, +56.05, +3.3%) are winning standouts from the mega cap space.

The top performing stock in the S&P 500 was Adobe (ADBE 525.31, +66.57, +14.5%), which closed sharply higher following pleasing earnings results and guidance.

Gains in the aforementioned names propelled their respective S&P 500 sectors to positive territory today while the eight sectors closed with losses ranging from 0.1% (health care) to 1.0% (industrials). The information technology (+0.5%), and communication services (+0.6%) sectors were the top performers.

The broad selling activity left the equal-weighted S&P 500 with a 0.6% decline. The overall downside bias was catalyzed by political uncertainty around the French election, which stirred speculation about an EU exit move if France's left-wing bloc wins, along with growth concerns following a weak consumer sentiment report for June.

The preliminary reading for the June University of Michigan Index of Consumer Sentiment showed an unexpected drop in consumer sentiment (actual 65.5; expected 73.0; prior 69.1) and a rise in long-run inflation expectations to 3.1% from 3.0%.
The Treasury market didn't react much to the report, though. The 2-yr note yield settled unchanged from yesterday at 4.69% and the 10-yr note yield fell two basis points to 4.22%.
  • Nasdaq Composite: +17.8% YTD
  • S&P 500:+13.9% YTD
  • S&P Midcap 400: +4.1% YTD
  • Dow Jones Industrial Average: +2.4% YTD
  • Russell 2000: -1.0% YTD

Reviewing today's economic data:
  • May Import Prices -0.4%; Prior 0.9%
  • May Import Prices ex-oil -0.3%; Prior 0.7%
  • May Export Prices -0.6%; Prior was revised to 0.6% from 0.5%
  • May Export Prices ex-ag. -0.8%; Prior 0.7%
  • January Univ. of Michigan Consumer Sentiment - Prelim 65.6 (consensus 73.0); Prior 69.1
    • The key takeaway from the report is that consumers' assessment of their personal finances slipped due to high prices and weakening incomes. That could presage some weakening spending activity.

Looking ahead, there is no US economic data of note on Monday. Tuesday's calendar features the May Retail Sales report and the May Industrial Production and Capacity Utilization report. As a reminder, markets will be closed on Wednesday in observation of Juneteenth.

FT : Makeovers and M&A: how the UK pub sector is recovering

Makeovers and M&A: how the UK pub sector is recovering
Environment remains tough but several groups are doing deals

The Tokenhouse pub in the City of London is buzzing with office workers relaxing with after-work pints on an early Thursday evening, now the busiest night of the week.

“We still haven’t got Mondays and Fridays back,” admits Benjamin Relph, who manages the pub owned by Fuller, Smith & Turner, nodding to how many of its clientele now work from home on those days. But he is hopeful that the Uefa European football championship, which begins on Friday, will provide a boost, encouraging customers to arrive earlier and stay longer while watching matches on the Tokenhouse’s seven large screens.

Meanwhile, footfall has recovered to pre-pandemic levels between Tuesdays and Thursdays as more people return to the office. “By the end of this year, we’ll be much more comfortable with how City pubs are performing,” Relph added.

Relief cannot come soon enough. The pub sector has endured a difficult time over the past four years, emerging from Covid-19 lockdowns into a period of surging inflation, labour shortages and a cost of living crisis that has put a squeeze on punters.

Many of those headwinds are now easing to some degree, with events such as the Euro championship and Paris Olympics also expected to provide a boost.

But the overall picture remains strained with the number of pubs reducing each year. More than 1,200 shut their doors for the last time in 2023, according to the Campaign for Real Ale, equivalent to 3 per cent of the overall 46,500 pubs currently trading.

Yet many of the bigger, stronger groups are taking advantage of the tough environment to do deals, scooping up portfolios either from smaller operators or pockets of outlets from rivals.

Admiral Taverns, which runs 1,400 pubs and is owned by real estate private equity group Proprium Capital Partners, will acquire 37 Fuller’s pubs this month for £18.3mn. It is also spending £28mn on refurbishments in the coming year.

“We think there were a number of bidders involved and it was competitive,” said Chris Jowsey, chief executive of Admiral. “There is certainly a growing sense of optimism [after] growth has been hampered over the last few years.”

Punch Pubs said in April it had acquired 24 pubs from the Milton Three pub group, which fell into administration in November, in a deal believed to be worth about £15mn. Meanwhile, Mitchells & Butlers announced last month the acquisition of Italian restaurant chain Pesto Restaurants, which has 10 outlets, for up to £15mn.

There are predictions of more deals ahead. Saxon Moseley, head of leisure and hospitality at RSM UK, said the environment “presents an opportunity for well-funded larger operators to go out and acquire sites, maybe at a discount”.

One senior industry executive said he expects “the sector will probably do consolidation between some of the big block companies” should interest rates come down, as anticipated, in the next couple of years.

Others are refurbishing their sites, adding an outdoor space or expanding seating areas, to attract new guests and tempt regulars to come more frequently.

Heineken plans to pour about £40mn annually into refurbishing its 2,400-strong estate, which operates under the Star Pubs and Bars arm, while Greene King will invest £40mn in a new brewery in Bury St Edmunds to replace an existing facility there by 2027.

Fuller’s, which this week unveiled a more than 60 per cent rise in full-year pre-tax profits to £20.5mn, plans to invest £30mn in its properties during the current fiscal year after spending £27mn the year before.

JD Wetherspoon increased its capital expenditure on new and existing pubs by a quarter to £44mn in its latest half-year as it adds gardens and extra space. The group said in May that sales continued their “steady recovery from the pandemic” with annual profits expected to be towards “the top of market expectations”.

Pub chains are “becoming more bullish in investments, as they are much more confident on what they see for margins”, said Roberta Ciaccia, an analyst at Investec. Wetherspoons’s half-year operating margin, for example, was 6.8 per cent, up from 4.1 per cent a year earlier.

But even Wetherspoons is being ruthless in disposing of underperforming sites. It sold or closed 13 pubs in the six months to January while only opening two others, reducing its estate from 825 to 814.

“Pub companies are also regaining confidence through restructuring and estate rationalisation to create leaner, more profitable portfolios,” said Maggie Davis from food and drink research firm Lumina Intelligence.

The picture on costs remains mixed. Companies say energy costs have been abating while food price inflation, which hit a peak of 23 per cent in December 2022 and hovered around 20 per cent for much of last year, has pulled back significantly. It stood at 6.7 per cent in April, according to the Foodservice Price Index report prepared by Prestige Purchasing and CGA.

However, labour costs are higher following the almost 10 per cent increase in the National Living Wage in April. “I think [the increase] is much larger than it needed to be,” said Simon Emeny, Fuller’s chief executive, although he said it was not a big concern.

Indeed, increased wages are in some ways a positive thing for pubs, argued David McDowall, the chief executive of Stonegate — the UK’s biggest pub group, which owns brands such as the Slug and Lettuce.

“The positive that we can take from the recent national living wage increase is a little more money in our guests’ pockets,” he said.

Throughout last year, both “wet” pubs — in which drinking is the main point — and restaurant pubs have had year-on-year monthly sales increases that mostly surpassed hospitality groups, including restaurants and bars, according to the CGA RSM Hospitality Business Tracker.

The segments had 7.9 per cent and 6.2 per cent growth, respectively, in March, compared with 5.2 per cent for the hospitality sector overall — although the figures all turned negative in April due to rainy weather throughout the UK. What is driving sales are pubs in suburban and residential areas, companies say.

For now — and with UK drinkers predicted to spend an extra £94mn during the Euro 2024 tournament, according to the British Beer and Pub Association — there is some sense the sector has turned a corner.

“There’s still a real appetite among the British public to go to the pub,” said Jowsey. “The challenge in our sector is to translate that revenue into profit, because the cost of doing business is still pretty high.”

The Information : OpenAI’s Japanese Rival Gets $1 Billion Valuation From Silicon

OpenAI’s Japanese Rival Gets $1 Billion Valuation From Silicon Valley Investors

The Takeaway
• NEA, Lux and Khosla are co-leading a new round for Sakana AI
• The Tokyo-based startup wants to be the OpenAI of Japan
• It was valued at $200 million in January

In their hunt for artificial intelligence investments, U.S. venture capitalists are looking past Silicon Valley at foreign AI startups, betting that locally developed large-language models will outperform imports from the U.S.

The latest to win their affections is Sakana AI, a Tokyo-based large-language model developer. Founded last year by alumni of Google’s DeepMind, Sakana is raising around $100 million in a new financing co-led by New Enterprise Associates and existing investors Lux Capital and Khosla Ventures, according to three people with direct knowledge of the deal. The round values the company, which does not yet generate revenue, at approximately $1 billion, the people said.

The funding has not closed and the terms could change. Sakana cofounders David Ha and Llion Jones did not respond to a request for comment.

Sakana’s new funding comes on the heels of a breakthrough announced in March, when it released research showing how to develop large-language models for less money, as well as an LLM that solves math problems in Japanese and models that can generate and understand images and text in Japanese. It has released some of its models as open-source software, but not a product that consumers can access similar to OpenAI’s ChatGPT. It’s still unclear how the company will make money.

U.S. AI developers are already establishing a presence in Japan. In April, OpenAI announced that it opened up an office in Tokyo as a way to expand Asia operations. It also hired Tadao Nagasaki as president of OpenAI Japan and gave local businesses access to a model that is optimized for the Japanese language.

The new funding for Sakana comes amid a rash of investment interest for AI startups developing models focused on specific geographies.

Earlier this month, the Paris-based AI startup Mistral, which has styled itself as the “OpenAI of Europe,” raised $650 million at a $6 billion valuation from U.S. investors including Lightspeed Venture Partners and General Catalyst, for instance. Nikkei Asia earlier reported Sakana was in talks with the U.S. VC investors for a $1 billion round.

‘DeepMind of Japan’

Sakana was founded last year by Ha and Jones, who co-authored the Google research paper that outlined the transformer model architecture that underlies today’s most popular LLMs like OpenAI’s GPT and Anthropic’s Claude. Ha previously told The Information that he intended to build a “DeepMind of Japan.”

“If we had started Sakana AI in the Bay Area, it would have been a strategic blunder, because we would have looked more like everyone else and it would have been very hard to differentiate,” Ha said.

In January, Sakana raised a $30 million seed round led by Lux Capital and included a mix of Japanese investors, including Sony Group and NTT Group as well as Japan-focused venture firms such as Geodesic. The round valued the company at $200 million, according to two of the people with direct knowledge.

Sakana also has received a boost from the Japanese government, which chose Sakana as one of a handful of companies and labs to receive grants to gain access to a large amount of computing power.

The startup is also part of a growing number of upstarts looking to challenge the traditional transformer architecture. Transformers, which are particularly capital and compute-intensive to train and run, are notorious for producing errors known as hallucinations, which make them difficult to use in high-stakes business settings. Recent research has also suggested that as transformer models get better, they will require increasingly more training data—and, therefore, capital—to eke extra performance out of them.

Instead, Sakana is building foundation models inspired by concepts found in nature. (Its name is derived from a Japanese word “meant to invoke the idea of a school of fish coming together and forming a coherent entity from simple rules,” a reference to the company’s unique approach to building “nature-inspired intelligence.”)

For example, the company has experimented with “model merging,” in which researchers combine two or more models trained for different purposes to create a single model that exhibits the strengths of the original model without needing additional training—a similar concept to evolution in nature.