Overbought Mania
NASDAQ mania
NASDAQ has not been this overbought since early 2018.
Source: Refinitiv
Another day...
...another new high print for the NDX vs NDX equal weight ratio. Impressive.
Source: Refinitiv
Under the hood...
Callahan with some stats: "...NDX is up ~7.5% over the last month .. under the hood, only ~50% of the index is even up over this 1-month stretch and nearly 70% of the gains (e.g. ~5pts of the ~7.5pts) can be attributed to just three stocks (NVDA, AVGO, AAPL)."
Overboughter
Earlier this month (here) we explained the psychology of Apple and when big stocks break out of big ranges. Mighty Apple continues pushing higher and RSI stays at extreme levels, but as we all know, overbought can stay overbought for long periods of time.
Source: Refinitiv
and it's back
Spot up, volatility up in NASDAQ is making a comeback. The crowd is busy chasing upside exposure, as this remains the number one force. These are the things you pay close attention to...especially with markets in very overbought territory.
Source: Refinitiv
AI and the narrowest of rallies
Artificial intelligence sparked the narrowest of rallies. Chart shows S&P 500 equal weight vs market cap, 3-year annualized relative returns.
Source: BofA
Not all tech is equal
Small vs big cap tech gap is very wide. Time for a catch up trade by small caps, or is small cap tech telling us something is "wrong"?
Source: Refinitiv
NVDA - cheaper and cheaper
JPM market intelligence: "For those not involved in NVDA, the stock continues to cheapen on a P/E, e.g., last fiscal year the stock was +200% and earnings were +581% (Jan 29, 2023 – Jan 28, 2024)."
Source: JPM
Asymmetry is cheap
Based on low ISM new orders, weak FCF yield vs 10Y rates, elevated ROE, middling US Capacity Utilization and the rise in jobless claims, our model shows a high probability of a large move…yet index options prices are low, writes GS' Marshall. What are you waiting for...? Just decide on your directional preference...
Source: GS
The big buyer is taking a pause
The buyback blackout has just started and is expected to last until July 19.
Source: GS
Metaverse And Augmented Reality Remain Unpopular With VCs
The metaverse is not getting funded.
That was the unsurprising finding from our latest data dive regarding investment in startups innovating around the metaverse, virtual reality and augmented reality.
The space, which was significantly buzzier a few years ago, has apparently lost its cachet with VCs. Dwindling investment comes on the heels of disappointing adoption for the gear and leading metaverse platforms.
Even Apple’s U.S. introduction earlier this year of the Vision Pro headset, marketed as a “spatial computing” device, didn’t produce a notable turn in sentiment. Demand for the $3,500 device is reportedly cooling, with Apple said to have cut its shipment forecast.
Back in startupland, the investment climate seems downright chilly. Per Crunchbase data, roughly $464 million this year has gone into seed- through growth-stage funding rounds for companies tied to AR, VR and the metaverse. That puts 2024 on track for the lowest funding total in years.
Most of the startups that raised the biggest financings during the peak funding of 2021 have not closed new rounds since then. This includes headset maker Magic Leap and augmented reality game developer Niantic.
This year, while activity is muted, some sizable financings are still getting done.
So far in 2024, the largest AR-related round went to Rokid, a maker of augmented reality glasses that raised $70 million in a January financing. Redwood City, California-based Rokid primarily markets its products for workplace and industrial use cases, but also has a consumer offering.
Another good-sized financing went to Beijing-based Xreal, a maker of mixed-reality glasses that raised $60 million in a January round at a value of $1 billion. The company pitches itself as a lower-cost competitor to Meta’s Quest and Apple’s Vision Pro.
Fading buzzwords
In addition to lackluster uptake for virtual- and mixed-reality gear and platforms, another factor behind seemingly slower funding tallies may be that the buzzwords themselves have fallen out of favor.
A few years ago, describing oneself as a metaverse company might have helped spike interest from venture investors. Today that’s no longer the case. Startups prefer, for example, to emphasize their artificial intelligence focus. Even Apple studiously avoided using the term metaverse in promoting Vision Pro, opting instead to talk up the device’s spatial computing capability.
Should adoption of virtual and mixed reality devices accelerate, venture investors will likely give the space renewed attention — and bigger checks. But perhaps by then, the ambitious startups will be using different buzzwords, like AI-enabled video simulations or spatial computing environments.
The Week’s 10 Biggest Funding Rounds: Biotech And Cybersecurity See Big Bucks
The top five raises this week came from sectors that have seen good heat recently. Biotech/healthcare and cybersecurity dominated the run of big rounds this week, with a few AI startups also seeing good-sized checks. After a few slow weeks, megadeals seem to be back, as four companies locked up nine-figure rounds.
1. Marea Therapeutics, $190M, biotech: This big biotech round is actually the combination of two rounds. Marea Therapeutics, a clinical-stage biotechnology company developing medicines for cardiometabolic diseases, launched with $190 million in a combined Series A and B financing. The Series A round was led by Third Rock Ventures — where the startup was incubated — and the Series B round was co-led by Forbion Capital Partners, Perceptive Advisors, Sofinnova Investments and VenBio Partners. The company didn’t split out the rounds, so we record it as one and it tops the list this week.
2. Huntress, $150M, cybersecurity: Maryland-based Huntress became the newest cybersecurity unicorn after it raised a $150 million Series D at a $1.5 billion-plus valuation. The new round was led by Kleiner Perkins, Meritech Capital Partners and existing investor Sapphire Ventures. The startup focuses on security services for small business to small enterprise customers — an often overlooked sector in cyber as many companies chase Fortune 500 companies. Huntress currently is realizing more than 70% year-to-year revenue growth for the past two years as it continues to “approach $100 million in annual recurring revenue.” Founded in 2015, Huntress has raised nearly $310 million, per Crunchbase.
3. Talkiatry, $130M, healthcare: Mental health is a growing concern. Just 31% of adults believe their mental health is “excellent,” a 20 percentage point drop from 2004. New York-based psychiatric care startup Talkiatry locked up a $130 million raise — a mix of equity and debt financing — led by Andreessen Horowitz to try to improve those numbers. The startup offers a national mental health practice that provides in-network psychiatry and therapy, trying to help the 60% of adults in the U.S. with a diagnosable mental illness who go untreated every year. Founded in 2019, Talkiatry has raised $245 million, per the company.
4. Semperis, $125M, cybersecurity: Huntress’ big round wasn’t the only one in security this week. Hoboken, New Jersey-based Semperis secured $125 million in growth financing — a mix of equity and debt — from J. P. Morgan and Hercules Capital. The new round reportedly values the company at $1 billion. Semperis provides a variety of security services, including protection for the Microsoft directory service. Founded in 2014, the company has raised nearly $500 million, per Crunchbase.
5. Elion Therapeutics, $81M, biotech: More than 150 million people suffer from serious fungal infections around the world, resulting in approximately 1.7 million deaths annually. A New York-based biotech raised big this week to try to lower those stats even as such infections have become more virulent. Elion Therapeutics, which focuses on the treatment of life-threatening invasive fungal infections, raised an $81 million Series B led by Deerfield Management and the AMR Action Fund. This is the company’s first announced round, per Crunchbase.
6. CesiumAstro, $65M, space: Austin, Texas-based CesiumAstro, a developer of space communications technology, closed a $65 million Series B+ round led by Trousdale Ventures. Founded in 2017, the company has raised more than $185 million, per Crunchbase.
7. Genspark AI, $60M, artificial intelligence: Palo Alto, California-based Genspark AI, an artificial intelligence search startup, raised $60 million led by Lanchi Ventures at a reported $260 million post-money valuation.
8. (tied) Daydream, $50M, ecommerce: New York-based Daydream, an AI-powered search platform for the retail industry, launched with a $50 million seed round co-led by Forerunner Ventures and Index Ventures.
8. (tied) Iambic Therapeutics, $50M, biotech: San Diego-based Iambic Therapeutics, a clinical-stage biotechnology startup developing therapeutics using an AI-driven discovery platform, closed a $50 million Series B extension led by new investors Mubadala Capital and Exor Ventures. Founded in 2019, the company has raised nearly $233 million, per Crunchbase.
8. (tied) You.com, $50M, artificial intelligence: Palo Alto, California-based You.com, an AI-enhanced search engine developer, reportedly is finishing up raising a $50 million Series B. Investors were not named. Founded in 2020, the company has raised $95 million, per Crunchbase.
M&A Is Back. 4 Stocks That Could Be Targets.
Mergers are back—and that means opportunity for small-cap investors.
Small-caps don’t have a lot going for them. The Russell 2000 index has gained 0.2% this year, lagging the S&P 500’s 15% return. But they do have one thing in their favor: This year, there has been $847 billion of merger and acquisition activity in the Americas, up 43% over the same period last year, according to LSEG Group. That puts activity on pace to hit just over $1.87 trillion for the entire year, only a few hundred billion dollars below the 2021 peak. And small-cap companies are usually the target.
The return of M&A has been helped along by a number of factors, including a stabilization in interest rates. With the Federal Reserve done hiking—and, instead, considering cuts— interest rate volatility has declined and Treasury yields across the yield curve remain below their peaks. Yields on corporate bonds have dropped, too, reflecting market optimism over the ability of companies to repay their debt. Lower rates make it more attractive for companies to borrow money to make acquisitions. “We have stability on rates,” says Glenn Mincey, head of private equity at KPMG. “M&A activity will continue to increase for the rest of the year.”
Where should investors look for possible deals? Healthcare looks like a good place to start. Pharmaceutical giants such as Bristol Myers-Squibb and Amgen have drugs that will be coming off patent, leaving them exposed to potential competition. They’ll be looking to refresh their pipelines of drug candidates, and with billions of dollars in annual free cash flow, they have the capacity to buy smaller biotech players.
Opportunities are plentiful. The SPDR S&P Biotech exchange-traded fund has 131 stocks with an average market value of $14 billion and dozens of companies valued between $1 billion and $2 billion. Possibilities include the $5.9 billion Ionis Pharmaceuticals, which develops human therapeutic drugs, the $14 billion Incyte, which focuses on oncology and hematology, and the $2.2 billion Iovance Biotherapeutics, which makes cell therapies and novel cancer immunotherapy products. All three appeared on a Wolfe Research screen of small-cap stocks that have underperformed the biotech fund this year and have seen CEO changes in the past 12 years.
Larger software companies— Microsoft, Salesforce, and Adobe, to name a few—could be looking to bolster their artificial-intelligence capabilities and could find plenty of opportunity in smaller, AI-centric names. And there’s opportunity as well, with the Invesco S&P SmallCap Information Tech ETF down about 10% from its 2021 high.
One possibility: The $3.6 billion C3.ai. The company, which provides a platform for businesses to develop new AI applications, appeared on Wolfe’s screen of small-cap buyout candidates that have net debt less than three times expected profits, have Buy ratings from less than half of analysts covering them, and operate in consolidating industries. C3.ai’s revenue is mostly subscription-based, its sales are expected to hit $1 billion by the end of the decade, and it has no debt. It would look good nicely tucked into a larger software firm.
A Veteran Value Investor on 3 Things to Avoid—and Why He Likes Meta Stock
Kevin Holt, manager of Invesco’s Comstock fund, studies companies over a 20-year cycle. Energy, healthcare stocks also make his list.
Managing one mutual fund for 25 years is a rare feat. Managing that fund and beating your peers and respective index is tougher still.
Just ask Kevin Holt, 56, who has managed the large-cap value Invesco Comstock fund (ticker: ACSTX) since August 1999. From that distant date through May 31, the fund’s Class A shares have returned an annualized 8.3%. The fund, with $11.5 billion in assets, has outperformed its Russell 1000 Value Index benchmark by 1.2 percentage points on an annualized basis, and its large-value Morningstar category by 1.8 percentage points, according to Morningstar Direct.
This year, Comstock is up 8% compared with peers and the index, which have returned about 7% each.
Holt, who has run the fund with Devin Armstrong since 2007, applies classic value-investing techniques espoused by Benjamin Graham, considered the father of value investing. The pair seeks to identify a company’s normalized profitability and cash flows, and might dig through 20 years of history to better understand a company and its industry. Diligent research and patience have allowed Holt to make contrarian bets and wait five years or more for them to pay off.
In addition to managing Comstock, Holt is Invesco’s chief investment officer for the asset manager’s $63 billion in value strategies. He recently spoke with Barron’s about his focus on free-cash-flow yield and management incentives, and why he likes Meta Platforms, health insurers, and other unloved shares.
An edited version of the interview follows.
Barron’s: Why go back 20 years when investigating a company as a potential investment?
Kevin Holt: I’ve always been big into history and analytical proof. You want to make sure you’re accounting for cyclical tendencies in businesses. One of our competitive advantages is our ability to look at businesses over a long period and say, this is your normalized earnings and cash flow. If businesses don’t change, then it’s relatively easy, but businesses change.
Relying on cash flows is tangible. At the end of the day, what’s in your checking account is what you’re worth, not what you say you’re worth. It’s a fundamentally based, conservative approach to investing.
We start with a screening process, looking on a long-term basis for stocks that are selling at a historical discount on the metrics most relevant to identify value. In financials, price-to-book relative to a company’s history still has a lot of relevancy. For growth areas such as technology, consumer staples, and healthcare, we’re looking at historical price-to-cash flow multiples relative to the market.
Where do you go from there?
Once we identify inexpensive stocks, we ask why they are inexpensive. We look at three or four key issues and ask ourselves whether we agree or disagree with the consensus view. Maybe there is a cyclical reason why the stock is cheap, or maybe there is a short-term blip in capital allocation. Maybe it’s a misstep by the management team that is correctable.
When we talk to management at any company outside of financials, we ask if revenue and operating margins are depressed, and if so, why. We ask banks what the market doesn’t understand about their loan book or business model. What is the normal return on tangible common equity?
What are some lessons you’ve learned in the past 25 years?
Companies that make a lot of acquisitions typically don’t integrate the acquisitions. They typically don’t have good returns on capital because they buy earnings and overpay for them. That dilutes shareholder value. Also, there is no substitute for good management. You need compensation metrics that drive the CEO and boards to run the company for shareholders.
About five or six years ago, my co-manager Devin Armstrong and I reviewed our performance, studying how we could have improved. We found those three common characteristics in about 20 stocks that we had owned: owning acquisitive companies, owning companies whose management wasn’t as strong as it could be, and owning companies whose managers weren’t acting in shareholders’ best interest. If we could have eliminated those stocks, our performance, while good, could have been a fair bit better. We’ve put more emphasis in these three areas with the younger members of our team, and it has helped with execution of the strategy.
You own Meta Platforms, which most people don’t think of as a value stock. What is the attraction?
I don’t like when people call stocks growth or value stocks. There are inexpensive stocks and expensive stocks. You have to understand how to value different industries and what to look at.
We got fortunate with an opportunity to buy Meta in 2022, when there were privacy-rights issues with the Apple iPhone and Meta’s advertising went down. [Apple’s 2021 iOS 14 update hurt Meta’s revenue by affecting how the social-media giant served ads to its users.] It became more challenging to project advertising growth. Advertising set a new base, and now it just grows off that base.
We were able to buy Meta with a 6% free-cash-flow yield when the market was selling at a 4% free-cash-flow yield, so we paid a 50% discount to the market. Free-cash yield—or free cash divided by market value—is the ultimate litmus test of value for a stock. It doesn’t require discounting any growth. We have sold some of our Meta holding because the risk/return calculus has changed, but I still like it a lot.
You made a contrarian bet on energy a few years ago that paid off, and it started with persuading management in the industry to change its compensation metrics. Explain what happened.
We liked the assets of energy companies, and they had a lot of cash-flow potential, but managers were compensated for growth, not returns. To make the cost of capital, companies needed oil to be around $75 a barrel. Instead [in 2015-16], oil was trading around $40-$45 a barrel because there was too much oil around.
We approached a lot of companies and said, you’re not making your cost of capital, and you should run your business appropriately. The stocks hadn’t performed in eight or nine years. In any industry, there is a high correlation between increased return on capital and improving stock prices. We went substantially overweight energy in 2017-18. When Covid hit and oil prices went negative in 2020, we bought more.
From 2017 to 2020, the energy industry slowly changed its compensation metrics to emphasize cash-flow generation and return on invested capital. It is now an investible group over a whole cycle, as opposed to an industry growing just for growth’s sake. The companies’ value proposition is the dividends that they pay and the cash they return to shareholders. By the end of 2022, the stocks’ returns were astronomical.
What do you think of energy today, and the energy acquisitions we’re seeing? Chevron is buying Hess, and ConocoPhillips is buying Marathon Oil, to cite two examples.
I still like oil stocks; I just don’t like them as much as I used to because valuations have gone up a lot. There were stocks that we bought in 2020 with a 25% to 30% free-cash-flow yield on normalized oil prices. Now, the group sells for an 8% or 9% free-cash-flow yield based on today’s oil price.
Acquisitions are mostly happening because the shale-oil companies are running out of inventory, so they have to either merge with someone else, or sell to a larger company. Chevron is in my top 10. We were historically owners of Pioneer Natural Resources and Hess, which were bought by Exxon Mobil and Chevron, respectively. It all comes down to, what are the prices? Are you buying good assets, and are you buying at a fair price? I own all those companies. I’m happy with the transactions, in general.
Among bank stocks, Wells Fargo and Bank of America are your top two holdings. Why?
With rates at 5%, you have 5% top-line growth. You have to pay a lot of it back to [depositors], but not all. Higher rates give banks more latitude to generate revenue.
Banks had to write down their tangible book value because they invested customer deposits in five- and six-year-duration bonds, and those bonds went down in value when rates went up. We view that as a transient issue. Unless you have a run on the bank, those bonds will mature, and the tangible book value will creep back up. We can wait for it because of our five-to-seven-year time horizon.
The book value weakness affects regional banks more, but even Wells Fargo an Bank of America suffer from this. These are good, stable banks with good deposit bases. Wells Fargo still has the government-mandated asset cap in place, which we’re hopeful will be lifted at some point in the next year or two.
What is undervalued now?
We like the health maintenance organizations, which are cheap on the basis of price/earnings multiples relative to history. HMOs and health-insurance stocks are going through government reimbursement changes because the government is paying a little bit less in the near term for Medicare. Elevance Health [formerly Anthem] is a top 10 holding.
More people used Medicare in 2023 as they underwent medical procedures after Covid ebbed. The companies that turn in Medicare pricing bids didn’t price the business appropriately. Some are losing money, some are marginally profitable, and all the stocks have sold off. We think the Medicare HMO stocks are oversold.
In the next two years, we expect these companies to get operating margins on their Medicare business back to 3.5% to 4%. This isn’t a high-margin business, but it is still a good business. Looking out a few years, the market is underappreciating the return of earnings power, maybe not all the way back to where it was, but to 80% of where it was.
Value is underperforming as artificial intelligence pushed up tech stocks, so why might value perform better in the future?
I can’t predict where the economy is going, but it feels like inflation is going to be in the 2% to 3% range for a period. When inflation is over 2%, our studies show, value typically performs quite well against growth.
Inflation creates a little more cyclicality in the economic backdrop. The Federal Reserve is more active. You see more rotation between cyclical and noncyclical groups. That creates a more dynamic market backdrop than when rates were zero and everyone owned growth.
Barron’s Weekend Summary: The 2024 Barron’s Top CEOs list rewarded customers and investors with companies that have smart plans
Cover:
-The 2024 Barron’s Top CEOs list rewarded customers and investors with companies that have smart plans for the future, including companies like e.l.f. Beauty's Tarang Amin and Meta's Mark Zuckerberg. Over half of these companies factor into the current artificial-intelligence investment rapture, selling chips, buying them and offering computing as a service, putting algorithms to work sharpening advertising or pricing, or selling the electricity used for all of the above. Jensen Huang, whose Nvidia became the most valuable US company, did not just climb to the top of the AI market; he created it. The list is compiled each year by a panel of writers and editors through a process of screening, nomination, preliminary harrumphing, and extended debate. Some trends and twists stand out, not all of them related to silicon, such as the expiration of excuse-making, the Covid-19 pandemic, and the recovery of many markets. S&P 500 companies that are still struggling should consider the possibility that it's them, not the economy.
Interview:
-Barron’s speaks to Kevin Holt, who has managed the Invesco Comstock fund since August 1999, with Class A shares returning an annualized 8.3%. The fund, with $11.5B in assets, has outperformed its Russell 1000 Value Index benchmark by 1.2 percentage points and its large-value Morningstar category by 1.8 percentage points. This year, Comstock is up 8% compared to peers and the index, which have returned about 7% each. Holt, along with Devin Armstrong, applies classic value-investing techniques espoused by Benjamin Graham, the father of value investing. They seek to identify a company's normalized profitability and cash flows, often digging through 20 years of history to better understand the company and its industry. Holt is also Invesco's chief investment officer for the asset manager's $63B in value strategies.
Tech Trader:
-Nvidia, a leading player in the artificial intelligence market, has seen its revenue increase 262% YoY in April, resulting in a 629% increase in profit. However, the company's quarter-over-quarter growth has slowed from 88% to 34%, 22% to 18% over the past four earnings reports. This suggests that Nvidia's market cap is unsustainable.
The company's forward price/earnings multiple has increased from 25 at the end of last year to 45, and it trades for 20 times expected revenue for the January 2026 fiscal year, based on Wall Street estimates. This raises concerns about the potential for AI to become the most important technology development since cloud computing, the internet, mobile phones, or personal computers. Nvidia's market value is now nearly 5X the industry estimate for next year's global chip sales, surpassing Microsoft and Apple. However, there are picks-and-shovels AI bets that don't require the same heroic assumptions as Nvidia stock. These include picks-and-shovels AI bets that don't require the same heroic assumptions, such as picks-and-shovels AI bets that don't grow triple digits but will all benefit from the continued growth of AI.
The Trader:
-The stock market rally has reached its 31st record high of 2024, with the S&P 500 index rising 0.7% this week and the Nasdaq Composite gaining 0.2%. The Dow Jones Industrial Average has advanced 1.4%, but remains below its record high. Economic data shows moderate growth, with inflation expectations and interest rates remaining below their multiyear peaks. Federal Reserve governor Adriana Kugler has suggested a rate cut could come this year, which would keep the economy growing. However, the market's high valuation has left many scratching their heads. The chief concern is that the Fed won't cut rates due to inflation remaining sticky. Service prices, such as energy and utility costs, rose 5% year over year in May, while shelter prices rose more than 5%. If shelter remains elevated, overall inflation won't drop to the Fed's 2% target this year. The market has never lost faith in a rate cut, though delayed, but shaking that confidence would be a problem. Wolfe Research strategist Chris Senyek warns that the most significant downside risk for U.S. equity markets is for investors to lose faith in the 'Fed Put,' referring to the central bank's willingness to cut rates if the economy or stock market appears to be falling on hard times.
-FedEx stock has been struggling since March, with the shares dropping 0.2% in 2024. The market is not convinced that the company can meet its earnings targets, and FedEx will have a chance to prove investors wrong when it reports on June 25. In March, management guided full-year earnings to $17.75 a share, but FedEx reported fiscal-third-quarter sales of $21.7B, below estimates for $21.9B and down 2.2% year over year. Analysts expect sales of $22B, up almost 1% from the same quarter last year, given that shipping volumes were stabilizing in February. For its FedEx Ground segment, the volume backdrop remains soft but stable. Combined with continued cost-cutting, the earnings picture looks decent. The company is looking to improve route efficiency, reduce flight hours, and limit head count. Salary and other administrative expenses comprise a large chunk of operating costs, and should only grow 1% for fiscal year 2025, allowing margins to increase from 7.1% to 7.9%. This means fiscal 2025 earnings can rise to $20.97, especially with a few billion dollars in free cash flow to repurchase shares.
Features:
-Penn Entertainment is considering a buyout offer from Boyd Gaming, which has sparked a 9.9% increase in Penn stock. The news comes after a Reuters report suggested that Boyd is interested in making an offer to buy the gambling company. Neither Penn nor Boyd immediately responded to Barron's request for comment. The Donerail Group, a merchant bank and shareholder of Penn, believes that a sale of the company's assets could generate value creation for equity investors. However, analysts are mixed on whether an acquisition of Penn by Boyd is a positive move. Penn stock fell 3.1% to $19.43 on Friday, and shares have fallen 25% this year. Craig-Hallum Capital Group analyst Ryan Sigdahl upgraded Penn shares to Buy from Hold and increased his price target to $30 from $20. He believes this presents a compelling risk/reward opportunity and recent activist involvement and M&A rumors provide a floor on valuation. Raymond James analyst RJ Milligan also noted that while BYD acquiring Penn makes sense on the surface, he sees few other compelling reasons other than potentially getting the portfolio at a cheap price.
-The aid industry is facing unprecedented challenges due to the shifting geopolitical environment, conflicts, climate change, and debt distress. Traditional donors must reinvent themselves, focus on impact, and give more voice and representation to developing countries and emerging markets. Aid is becoming politicized and weaponized, with superpowers like the U.S., China, and Europe opposing developing countries. This weaponization is causing famine in Sudan and reducing migration in countries like the UK and Rwanda. The new geopolitics also erosion the legitimacy of multilateral institutions, including the Bretton Woods institutions. Policy interventions in the utility sector in recipient countries are necessary for concessional lending and guarantee schemes to be bankable. The aid industry is becoming more reactive, with flows reaching historical highs. This shift towards humanitarian aid is due to intensifying conflicts and climate-related shocks. This reactive nature of aid is concerning, as less development aid is going towards structural objectives, which could have reduced vulnerability to shocks.
Europe:
-Political upheavals in Europe have slowed growth and caused bond yields to rise, while the UK is set to have its first center-left government since 2010. However, economic prospects for Europe are brightening, as growth has been slower than in the US since the end of the pandemic. Business surveys indicate a recovery in Europe, with inflation coming down, the labor market being strong, and wage growth running at a fair old clip. The European Central Bank sees growth improving, raising its growth forecasts in 20 euro countries to 0.9% in 2024 and 1.4% in 2025. The US growth rate halved in the first quarter of this year, and euro-zone unemployment fell to a record low in April. Slower inflation has allowed the ECB to lower interest rates for the first time since the pandemic, which could prove a big help to growth. The head start of the ECB, which has yet to cut, could prove a big help to the region's economic fundamentals.
Emerging Markets:
-China is focusing on the "low-altitude economy" - the airspace below commercial and military aircraft traffic, where civil-manned and unmanned vehicles operate. As the low-altitude economy takes off, China is introducing new products and experiences, including drones for package delivery, winged taxis for daily commutes, and hobbyist sightseeing helicopters. These operations could also play critical roles in aerial logistics, emergency medical rescue, and firefighting efforts. Beijing has recognized the sector as a key emerging industry, with the size of the sector exceeding 500B yuan ($69B) last year, up 34% from the previous year. The civil drone sector saw its market share rise by 32% to 120B yuan, while industrial drones reached 77B yuan. China has 1.11M registered civilian unmanned aerial vehicles at the time of last year. Provinces and cities across the country are also investing in the low-altitude economy, with officials in Sichuan province allocating 200M yuan to support the sector.
Commodities:
-Exxon Mobil is expected to generate $14B in earnings by 2027, primarily due to cost reduction and growth in Guyana's oil reserves. CEO Darren Woods has already secured $9B in savings since 2019, and is seeking an additional $6B over the next few years. Exxon's acquisition of Pioneer Natural Resources provides more untapped acreage for advanced drilling technology. Woods is expanding refineries and integrating more chemical production to drive profitability, building a global network for shipping liquefied natural gas, and exploring carbon capture and lithium mining. Woods' countercyclical investment strategy has given Exxon a financial edge, with most oil and gas investments earning yearly returns over 10% even at oil prices of $35 or less. The barrel price needed to cover Exxon's dividend is among the lowest in the group.
Streetwise:
-Delta, the largest and fastest-growing airline in the US, is turning 40% of its profit while operating 20% of its capacity. The company's success can be attributed to its on-time rate and customer satisfaction in premium classes. Delta's upswing began during its complicated integration with Northwest Airlines after a 2008 merger, which led to significant investments in technology. A predictive engineering program and a new baggage-tracking system reduced maintenance delays and made lost luggage rare. Front-line workers, such as flight attendants and gate agents, noticed the changes and benefitted from them. Today, a third of each Delta plane is fitted with premium seating, resulting in 10 points higher profit margins than in the main cabin. Delta's flywheel effect extends to American Express, which is its largest and fastest-growing card program. Delta's premium seats generated $19B of revenue last year, and AmEx remuneration was $6.8B, which combined for 55% of total revenue. This reduces Delta's sensitivity to economic swings.
Weekend Papers Summary
FINANCIAL TIMES
-The US is expected to fund a significant increase in its budget deficit with short-term debt, potentially impacting money markets and the fight against inflation. The Congressional Budget Office predicts that aid packages for Ukraine and Israel will push the US deficit to $1.9T this fiscal year, compared to its February prediction of $1.5T. This increase has raised concerns among fiscal hawks, who warn that the US's lack of discipline will increase borrowing costs and that neither President Joe Biden nor his Republican challenger Donald Trump have substantive plans to stabilize the country's finances.
-Between the European parliament elections and the French parliamentary elections, France appears to have returned to a traditional pattern of left against right, with progressives against fascists. The liberal centre, led by President Emmanuel Macron, has collapsed, while the left is dominated by the radical La France Insoumise (France Unbowed), led by Jean-Luc Mélenchon. The Greens provide only a marginal boost for the left. The far right has advanced, with the Rassemblement National (RN) of Marine Le Pen winning 31.5% of the French votes for the European parliament. Macron won the presidency in 2017 by uniting the centre-right and centre-left under his new party, En Marche (now called Renaissance), splitting the Socialists and Les Républicains.
-French President Emmanuel Macron's centrist alliance is gaining ground in the first round of France's snap parliamentary election, according to recent opinion polls. The far-right Rassemblement National is predicted to win the first round vote, with 34% of the vote predicted by IFOP and 33% by Harris. The leftwing Nouveau Front Populaire bloc is at 29% and 26%, respectively. A third poll by OpinionWay put the RN at 35% and the centrists at 20%. Harris' seat projections suggest France is likely heading for a hung parliament, potentially leading to political gridlock. Macron's alliance, which includes his Renaissance party and two others, won 14.6% in European parliament elections on June 9, prompting him to dissolve parliament. Polls in the aftermath showed his party languishing in the mid-teens.
-Apple has ruled out releasing its iPhone's new artificial intelligence features in Europe during its global launch later this year, citing uncertainty stemming from Brussels' new competition rules. The company unveiled features two weeks ago, including Apple Intelligence services and a partnership with OpenAI. However, Apple has said that the complexities of making the system compatible with EU rules, which require critical parts of its iOS software and App Store services to be interoperable with third parties, will result in EU users being denied certain features when they launch in other parts of the world later in 2024. Apple stated that due to regulatory uncertainties caused by the Digital Markets Act, it is unlikely to roll out iPhone Mirroring, SharePlay Screen Sharing enhancements, and Apple Intelligence to EU users this year.
-Wealthy foreigners are leaving the UK due to the abolition of the "non-dom" regime, which allowed them to avoid paying tax on overseas income. The change, supported by both the Conservative and Labour parties, has led to a decline in the UK's attractiveness, according to interviews with wealthy foreigners and their advisers. Other deterrents include Brexit, fiscal and political instability, and concerns around security. A billionaire businessman who has lived in London for 15 years and is now moving his tax residency to Abu Dhabi cites security as a major issue contributing to the tax reasons for leaving. Labour shadow chancellor Rachel Reeves has proposed toughening the planned crackdown, including reversing a Tory decision to permit non-doms to shield foreign assets held in offshore trusts from inheritance tax permanently.
-Chinese term "runxue" or "run-ology" refers to the practice of escaping China and bringing wealth with you. The term originated in 2022 during the Covid lockdown, which prompted people to dream of a life abroad. This year, the "running" has become a concerted sprint for the exit, with record numbers of Chinese millionaires and multimillionaires expected to emigrate from their homeland. An estimated 15,200 Chinese millionaires are predicted to emigrate this year, up from 13,800 who left China last year. This migration is a canary in the coal mine, signaling a profound shift in the global landscape and tectonic plates of wealth and power.
-Four members of the Hinduja clan, the UK's wealthiest family, have been convicted of exploiting their domestic staff and sentenced to lengthy jail terms by a Geneva court. The panel found Prakash Hinduja, his wife Kamal, their son Ajay, and his wife Namrata guilty of serious employment offences related to Indian staff. The case sheds light on the punishing conditions the Hindujas subjected their workers, who were mostly illiterate and flown directly from India to work at the family's Swiss home. The court cleared the Hindujas of the more serious charge of human trafficking.
-Airbus is in talks with Spirit AeroSystems to take over parts of the aerospace supplier's work on its A220 and A350 aircraft programs, allowing Boeing to purchase the rest of the group. The agreement would see Airbus take over Spirit's work at several global sites, including Belfast in Northern Ireland. Boeing is expected to take over the bulk of Spirit's operations, including its main facility in Kansas. The talks are "moving in the right direction," and an announcement could come as early as next week. Boeing has been in talks with Spirit since March to improve the supplier's manufacturing processes after a mid-air blowout of a section of one of its 737 Max aircraft in January. The talks come after Boeing and Airbus admitted to using titanium parts in their jets, purchased from Spirit, whose certification documentation was counterfeit.
THE NEW YORK TIMES
-President Vladimir V. Putin of Russia visited Asia to disrupt the world order and anger Washington, undermining Beijing. He embraced North Korea and signed deals with Vietnam, injecting more potential threats into a region already strained by Taiwan tensions and South China Sea clashes. North Korea, a rogue nuclear state, was at the center of the map of risk in Asia, empowered by Russian promises of military aid and a mutual defense pact. Putin also signed deals with Vietnam, a country of growing importance for both China and the United States as they vie for influence. He insisted that "reliable security architecture" could not be built with closed military-political blocs. Putin's visit to Asia left a redrawn map of risk in Asia, with North Korea at the center of the map.
-As Ukraine expands its military draft, some men are hiding to avoid draft officers who roam the streets. Fearful that conscription is a one-way ticket to bloody trench warfare, these men spend their days holed up at home to avoid draft officers who roam the streets. Military officials stopped men in Kiev, the capital of Ukraine, this month to check whether they have updated their information with the draft office. Vladyslav, a 45-year-old Ukrainian man, stopped going into Kyiv's city center to avoid draft officers checking papers and exercising at the gym due to patrols in his neighborhood. Now, he spends most of his days holed up in his apartment, often using binoculars to watch officers serving draft notices to commuters leaving a nearby subway station.
-Louisiana Governor Jeff Landry has signed bills to expand the presence of religion in the state's public schools, allowing them to hire chaplains and post Ten Commandments in classrooms. The new laws require transgender students to be addressed by the pronouns for gender on their birth certificates, and public schools to employ chaplains. Landry also signed a mandate that the Ten Commandments be hung in every public classroom, demonstrating a new willingness for Louisiana to go where other states have not. Louisiana also became the first state to classify abortion pills as dangerous controlled substances last month. The Ten Commandments law signals a broader Christian agenda, as Louisiana aims to be at the forefront of a national movement to advance legislation with a Christian worldview.
-During the annual Hajj pilgrimage in Saudi Arabia, at least 450 people died due to scorching temperatures and throngs of people. The pilgrims, some of whom have saved their lives for the hajj, spent days walking and sleeping in tents during their journey to Mecca, the holiest city for Muslims. The heat was a contributing factor to many of the deaths, with Indonesia reporting the most deaths at 199, and India at 98. The countries said they could not be sure that heat was the cause of all the deaths, but relatives of the missing and dead and tour operators have said the heat was at least a contributing factor. The hajj is one of Islam's five pillars, and all Muslims who are physically and financially able are obliged to embark on the pilgrimage.
-Pope Francis used an offensive anti-gay slur during a conference with Italian bishops, causing shock and confusion among Catholics. The pope, known for his openness to and acceptance of LGBTQ people, used homophobic slang and cautioned priests about admitting gay men into seminaries. The apparent inconsistency in Francis' messaging reflects the deep contradictions and tensions that underlie the Roman Catholic Church's and Francis' relationship to homosexuality. The church holds that "homosexual tendencies" are "intrinsically disordered," and its guidelines state that people with "deep-seated" gay tendencies should not become priests.
-A Southern California school board president was recalled after his conservative majority approved policies on critical race theory and transgender issues. The conservative board members of the Temecula Valley Unified School District passed a resolution banning critical race theory from classrooms in December 2022. Months later, they fired the superintendent, believing the district needed someone with new ideas. They also passed a rule requiring parents to be notified whenever a student requests to be identified as a different gender at school. The moves were applauded by conservatives, many of them Christian churchgoers who had helped install the new board members, hoping that Temecula Valley could remain an island of traditional values in a liberal state. The culture wars came to a California suburb, and a leader has been ousted.
-Israeli cabinet minister Bezalel Smotrich has been accused of a secret government bid to cement control of the West Bank, despite Israeli judges stating that the territory is a temporary military occupation. In a taped speech, Smotrich, a member of Prime Minister Benjamin Netanyahu's coalition, told settlers in the Israeli-occupied West Bank that the government is engaged in a stealthy effort to irreversibly change the way the territory is governed, cementing Israel's control over it without being accused of formally annexing it. Smotrich suggested at a private event earlier this month that the goal was to prevent the West Bank from becoming part of a Palestinian state. He described the changes as "mega-dramatic" and "change a system's DNA." The speech, which was reviewed by reporters, highlights the government's efforts to change the way the West Bank is governed and cement its control without being accused of formally annexing it.
-A new antiviral drug, lenacapavir, has been found to provide total protection from HIV in a clinical trial of young African women. The injection, given twice a year, was found to be better than the current oral drug for pre-exposure prophylaxis, which is taken as a daily pill. The every-six-months injection was found to be more effective than the current oral drug for pre-exposure prophylaxis. Dr. Linda-Gail Bekker, an investigator in the trial of lenacapavir, described the startling sight of a line of zeros in the data column for new infections as "surreal." Advocacy for Prevention of HIV and AIDS in South Africa leader Yvette Raphael called the news "the best news ever." The study highlights the importance of early detection and treatment for HIV in the population with the highest infection rates.
THE NEW YORK POST
-Former President Donald Trump has announced that Teamsters General President Sean O'Brien has accepted his invitation to speak at the Republican National Convention in Milwaukee. This is a significant win for Trump, who is edging ahead of President Biden in polling with traditionally backed Democrats, including union members. A survey this year found Biden and Trump tied at 47% among union members in the six closest swing states Biden won in 2020, Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin. O'Brien has a controversial history, having been criticized by Post columnist Charlie Gasparino last year for failing to compromise with a major union employer, Yellow, which led to 22,000 Teamsters jobs lost. With support from the National Republican Congressional Committee, Pennsylvania House candidate Deb Haaland debuted his campaign's "Battle Station" office.
-Chinese battery manufacturer CATL has become the top recipient of state subsidies among all mainland listed companies, indicating a strategic focus as government support in the West becomes scrutinized. Last year, the company ranked No. 1 in subsidy receipts among over 5,000 mainland businesses, according to data from Chinese information provider Wind and surveyed by Nikkei Asia.
-US stocks could face a dip of 5% or more before the end of this year, according to veteran Wall Street analyst Sam Stovall. Stovall warned that tech is the only outperforming sector, as AI chipmaker Nvidia surged to become the world's most valuable company, worth over $3.3T. He warned that US stocks could fall further due to consumer confidence hitting its lowest level since November. Stovall also compared a possible downturn to a "resetting of the dials" or "digestion" after a big meal. He warned that the tech-driven recent rally of share prices could come to an end as Americans were feeling gloomy about the economy.
Nike Stock Can Just Do It. It’s Time to Buy.
Shares of the athletic shoemaker have fallen, but the arrival of the Olympics could signal that a turnaround is set to begin.
It feels like a golden age for athletic wear. So why is Nike struggling so badly?
Nike investors aren’t used to watching the stock take this kind of beating. Shares have tumbled 12% this year—and it isn’t hard to see why. China’s uneven economy has meant slower sales, while the high cost of living has also weighed on consumers elsewhere. Nike’s long innovation cycle resulted in inventory problems and created an opening for competitors like Hoka maker Deckers Outdoor and On Holding, which have both climbed roughly 50% this year.
It’s a lot of bad news, but much of it is already baked into the stock, with shares trading at a 25% discount to their historical average. What’s more, Nike appears to have new shoes coming that could excite shoppers again, while the Summer Olympics, set to start in late July, should be another catalyst for the stock. Add it up, and the tough times fo
r Nike, which is due to report earnings on June 27, should be coming to an end.
“It takes time for a comeback of this scale, but it’s clear Nike is focused on the right things,” says Maria Lernerman, a portfolio manager at Harding Loevner. “I don’t see it as a question of if, but of when, performance will improve.”
The Nike turnaround starts with the Olympics. Although Nike has gotten some blowback from the uniforms it designed for some female athletes, the Summer Games are still a likely catalyst for its shares. Given the company’s sport-first approach, it’s a time for some of its star athletes to shine. It’s also outfitting the American break-dancing team with a new, specially designed shoe as the sport makes its Olympic debut.
The Games coincide with what’s likely to be a fresh wave of new Nike products. The company hasn’t been sitting idle as brands like Hoka and On push the boundaries of athletic footwear, but R&D takes time. Now it’s likely on the cusp of a new wave of sneakers that could reignite interest in the brand. During earnings calls in May, Foot Locker and Dick’s Sporting Goods , key retail partners for Nike, highlighted the company’s recent innovation as a potential for future sales. This spring, the company’s innovation summit in Paris highlighted some of its coming products, like new iterations of its Nike Air franchise.
“We have seen Nike in this spot twice before over the past 10 years, and when they really focus on new innovation, it has translated to great results over the following years,” Edward Jones analyst Brian Yarbrough told Barron’s in an email.
Just don’t expect Nike to report great results when it releases its financials. Recent quarters have been disappointing. Downbeat guidance sent the shares tumbling after its most recent earnings report in March, a repeat of what happened in December, when Nike had its worst day in years after its sales forecast disappointed. The company is expected to report a fiscal fourth-quarter profit of 84 cents a share, up from 66 cents from the same period a year ago, on sales of $12.9 billion, up a tick from $12.8 billion. Those numbers matter less than its fiscal 2025 outlook. A positive change in tone could do a world of good for the shares.
“We don’t expect green shoots to translate into sales growth in the first half of fiscal 2025, but building evidence of Nike’s innovation pipeline would bolster confidence in a second-half turnaround,” notes BofA Securities analyst Lorraine Hutchinson, reiterating a Buy rating on the stock.
Of course, there’s no guarantee that Nike’s newest products will hit the mark, especially given how new entrants have started to grow a loyal consumer base. Likewise, ongoing pressure on the consumer means that the company’s coming results could be another quarter plagued with a conservative forecast.
Reflecting that, Truist Securities analyst Joseph Civello kept the stock at Hold with a $99 price target, citing his belief that management’s tone won’t change.
Still, Nike seems like a bet worth making. Right now, the stock trades for 24 times forward earnings. That’s higher than the S&P 500’s 21.7 times but well below Nike’s five-year average of 31.5. Stifel analyst Jim Duffy admits that the shares won’t be able to expand their multiple again “until inflection to growth and resulting operating leverage becomes more tangible.” That said, he still argues that the stock—which he believes should trade to $117, up more than 20% from Thursday’s close of $95.57—is “worth a premium,” given its market-leading position and the opportunity for the brand to rebound.
When it comes to Nike stock, just do it.