X.AI - Musk Reportedly Creating ChatGPT Artificial Intelligence Rival
Despite recent outspoken criticism of artificial intelligence - warning of the "danger of training AI to be woke" - it appears Tesla and SpaceX CEO Elon Musk is working on an AI-related project that will reportedly take on ChatGPT.
The Wall Street Journal and the Financial Times reported that Musk has started a new AI firm called X.AI Corp.
Developing artificial intelligence is nothing new for Musk. Together with the company’s current CEO, Sam Altman, he co-founded and chaired OpenAI in 2015.
The revelation came after information surfaced that Musk is assembling a team of AI researchers and engineers, according to The FT.
Musk incorporated a company named X.AI on March 9, according to Nevada business records.He is the company’s only director, its secretary is listed as Jared Birchall, the ex-Morgan Stanley banker who manages Musk’s wealth.Musk recently changed the name of Twitter to X Corp in company filings, as part of his plans to create an “everything app” under the brand “X”.
The report suggests that Musk is in talks with existing SpaceX and Tesla investors regarding investments in the upcoming AI venture.
“A bunch of people are investing in it... it’s real and they are excited about it,” added FT’s source.
Additionally, Twitter recently acquired new talent with an extensive background in the AI field. In March, engineers Igor Babuschkin and Manuel Kroiss joined Musk’s team after working with DeepMind, an AI research subsidiary of Alphabet, Google’s parent company.
These developments come only a few weeks after Musk signed an open letter, along with thousands of other researchers in the tech space, to temporarily halt the development of AI due to the risk to humanity.
Musk is also on record in 2017 giving a warning to regulators at an event with the United States National Governors Association that AI research needs to be regulated “before it’s too late.“
This latest revelation comes after reports of Musk purchasing 1000s of GPUs (critical infrastructure for AI development).
While Musk left the board of OpenAI in 2018, the launch of the new AI startup will place him among other tech giants, such as Google and Microsoft, to build next-gen AI... and perhaps this time, without the implicitly woke bias we have seen from the existing models.
A new $6bn high for the sports boom
Head’s up– a new world record* for the most expensive sport club sale just dropped.
Josh Harris, the billionaire co-founder of Apollo Global Management, is nearing an agreement to buy the National Football League‘s Washington Commanders in a deal valuing the club at close to $6bn. The transaction (*pending league approval) would eclipse last year’s record $4.6bn sale of the NFL’s Denver Broncos to Walmart heir Rob Walton for the top spot for global franchise transactions.
If ratified by fellow NFL owners, it would end a tumultuous and controversial tenure under the stewardship of, who bought the team in 1999 for a then-record $800mn. In the past few years, he’s faced numerous probes into allegations of fostering a toxic workplace environment.
A deal with Harris would wrap one of the strangest sports transactions in recent memory. Several people involved in discussions around the Commanders expressed frustration about the bidding process and its relative lack of transparency compared to other recent sales, including that of Chelsea FC. Complicating the process was the decision by Jeff Bezos, the world’s third-richest person with a net worth of around $125bn, to explore a bid alongside the rapper Jay-Z.
But a sale to Harris would put a well known steward of pro-sports teams in the circle of one of the most elite clubs in the US: the network of NFL owners. Already co-owner, with fellow private equity titan David Blitzer, of the NBA’s Philadelphia 76ers, the NHL’s New Jersey Devils, and the English Premier League’s Crystal Palace FC, Harris was not shy about his ambitions to add an American football team to the roster, as he told Scoreboard at our Business of US Sport conference in October.
Harris is also a minority owner of the Pittsburgh Steelers. That means his financials have effectively been provisionally vetted by the NFL and might make an approval of his purchase speedier. Hedge fund manager David Tepper followed the same playbook — holding a limited stake in the Steelers before buying the Carolina Panthers in 2011.
All the same, the biggest takeaway from the pending Commanders sale is whether such a rapid rise in NFL valuations will put added pressure on the league to consider allowing private capital investment in teams. The NFL, the wealthiest and closest-knit league of owners with strict debt limits on financing and generous revenue sharing amongst teams, is the lone US holdout against institutional investment.
Other US leagues, beginning with Major League Baseball in 2019, began relaxing such rules as club valuations skyrocketed and minority owners searching for liquidity during the pandemic looked for adequately capitalised buyers for such stakes. With American football valuations on the rise, and worries of a potential recession looming, might the NFL be next?
US regulator calls for greater scrutiny of hedge funds after bond turmoil
SEC chair Gary Gensler says ‘once in a generation volatility’ highlights risks from shadow banking sector
Hedge funds and other parts of the shadow banking system should face greater scrutiny after last month’s upheaval in US government bonds, the country’s top markets regulator has said, reflecting concerns that speculative investors pose a risk to financial stability.
Gary Gensler, chair of the Securities and Exchange Commission, told the Financial Times that taming risks from speculative funds and other so-called non-bank financial institutions was now “more important than ever”.
He added he wanted a better understanding of how bets by such asset managers — often highly leveraged — can spill out across asset classes and into the real economy.
Gensler’s comments signal regulators’ determination to tackle risks outside the banking sector following a UK government bond crisis that contributed to the ejection of Liz Truss’s government last year, and what the SEC chair termed as March’s “once-in-a-generation” rally in Treasuries.
“We just had Treasury yields move more significantly than they had in 35 years in three days in mid-March,” he said, referring to the rally sparked by the failure of Silicon Valley Bank. “When you have that, it’s appropriate as a capital markets regulator to talk to folks and see whether that risk . . . propagates out.”
As well as initiating such contacts, the SEC can also propose forcing market participants to increase disclosure of their activities.
But regulators have concentrated over the past decade on the banks that helped spark the 2008 financial crisis, largely leaving hedge funds alone — even after the 2021 collapse of Archegos, the hedge fund-style family office.
In the meantime, assets managed by hedge funds globally have more than quadrupled to $4.8tn since 2009, according to data provider BarclayHedge.
However, several heavy-hitting macro hedge funds suffered billions of dollars of paper losses when investors moved in to bonds after SVB failed.
A pick-up in bond prices quickly turned into the biggest rally since 1987 as hedge funds rushed to close out bets against Treasuries that had brought them handsome rewards last year.
“A little bit of news got vastly amplified” by the “speculative community”, Sushil Wadhwani, a former central banker and chief investment officer at PGIM Wadhwani, an asset manager, said at an event this week.
A hedge fund manager told the FT he and several peers had now received inquiries from regulators seeking information on their institutions’ positions in Treasuries — a crucial market that determines prices across global asset prices. Gensler declined to comment on any specific requests to firms.
Another hedge fund manager said that leverage built up by shadow banks had been the focus of recent conversations. They said the regulator was “gathering market intelligence” on this rather than expressing specific concerns.
Gensler added that authorities should not be distracted from the risks posed by non-banks by the failures of lenders such as SVB and Credit Suisse — a message echoed by other global regulators at the IMF spring meetings in Washington.
He said he had previously identified hedge funds as a risk to financial stability, adding that the SEC’s oversight, along with other regulators of bank lending to hedge funds, was “a really important focus of not just ours but of others overseeing [the banking sector]”.
The SEC was in direct contact with market participants and received quarterly reports from hedge funds as well as information from banks, Gensler said.
The US regulator has put forward proposals to give it access to more real-time data in times of market stress. Last year it also proposed guidance that would require hedge funds to inform it immediately when they have large investor withdrawals or big losses.
Klaas Knot, chair of the Financial Stability Board, an international alliance of regulators, last week also emphasised the focus on shadow banking.
The drive extends beyond hedge funds, since other non-bank institutions can exacerbate market volatility. Last year’s crisis in UK government bonds was sparked off by specialist investors serving pension funds.
Gensler said recent inflows also strengthened the arguments for tighter regulation of money market funds, which investors have piled in to for shelter from chaos in the banking sector.
Brookfield Infrastructure Strikes $13.3 Billion Deal for Shipping Container Giant
Triton International , the world’s largest lessor of shipping containers and a Barron’s pick over the years, has agreed to be acquired by Brookfield Infrastructure in a $13.3 billion transaction.
The cash-and-stock deal is valued at $85 per Triton share, versus the $31 and $63.50 levels where Barron’s recommended buying shares in 2018 and 2022, respectively.
Triton (TRTN) leases the rectangular metal boxes that carry the vast majority of the world’s trade outside of oil and other raw materials. Its customers include all of the major shipping lines, such as Maersk, MSC, and Cosco. They have relied more heavily on Triton and its competitors in recent years, first in an effort to become more efficient and focus investment spending on new ships, and then during the supply-chain madness of the pandemic era.
The disruption was a gift for Triton, as bottlenecks lengthened shipping times and customers required more containers. The company added more than a million containers to its fleet and was able to lock in sky-high leasing rates. The average lease duration for Triton containers in 2021 was 13 years.
Record revenue, earnings, and free cash flow were the result. “Triton was able to refinance much of its debt in the past two years and lower its interest cost,” wrote Barron’s last year. “Being able to charge more on the assets it leases, while paying less for financing those assets, is obviously a winning formula. The long-term nature of Triton’s leases means the company and its shareholders will continue to benefit from 2020 and 2021’s shipping-container chaos for years to come.”
Triton also raised its dividend several times and resumed buying back stock, returning profit to shareholders.
This past Wednesday, Brookfield Infrastructure (BIPC)—a subsidiary of Brookfield Infrastructure Partners (BIP)—announced a deal to acquire Triton for a mix of cash and stock valuing the company’s equity at $4.7 billion. At $85 a share, the deal represented a 35% premium to Triton stock’s closing price of $63.01 on Tuesday.
“Triton is an attractive business with highly contracted and stable cash flows, strong margins, and a track record of value creation,” said Brookfield CEO Sam Pollock. For Brookfield, adding Triton gives it access to a core provider to the world’s shipping infrastructure with attractive cash returns.
Triton shareholders will get $68.50 in cash and $16.50 in Brookfield Infrastructure shares, subject to a collar should the latter stock move significantly before closing. Management expects the deal to close in the fourth quarter of 2023.
Getty Images Activist Wants a Sale
Wall Street isn’t buying that Getty Images Holdings GETY +0.80% can be sold, but an activist investor is sticking to that vision.
Getty stock (ticker: GETY) briefly popped this week after investment firm Trillium Capital urged in an open letter for the stock-photo company to find a buyer. Trillium pointed out that shares have languished since Getty went public last year through a special-purpose acquisition company. Shares climbed as much as 10% Tuesday after the release of Trillium’s letter, but those gains were gone in a flash after Wall Street realized it would be tough for Getty to find a buyer, given limited growth opportunities.
“I don’t think private equity even sniffs at this,” Wedbush analyst Michael Pachter told Barron’s. By Pachter’s analysis, the company trades at a “reasonable” 12 times forward earnings before interest, taxes, depreciation, and amortization, or Ebitda. Stronger revenue growth and cost cutting could get Getty stock to 15 times Ebitda, but potential buyers would probably want more upside than that.
Trillium CEO Scott Murray thinks Wall Street is missing the bigger picture.
“We believe there’s a lot of value,” Murray tells Barron’s. He sees a company such as Microsoft (MSFT) as a natural buyer for Getty, and thinks Getty could do more to monetize its vast library of images, videos, and music. “Doing nothing and waiting for the truck to hit you is not a strategy.” Trillium also wants a board seat.
For its part, Getty says it’s “open to constructive insights and engagement with investors.”
This Manager Sees a Margin of Safety in Stocks Such as KKR and Exor
Call it a comeback. After years of underperformance, GoodHaven FundGOODX +0.37% , managed by Larry Pitkowsky, has finally started performing the way its founders imagined when they launched it in 2011.
Founded by Pitkowsky and Keith Trauner, GoodHaven (ticker: GOODX) trailed its peers and the S&P 500 from its inception through the end of 2018, as large positions in oil and other commodity-related stocks soured, and bets on turnarounds failed to pay off. Net assets under management at GoodHaven totaled $551 million on Aug. 31, 2014. Recently, the fund oversaw just $110 million.
Realizing that something needed to change, GoodHaven reorganized in 2019. Pitkowsky became controlling owner and sole portfolio manager, with Trauner holding a minority stake, along with Markel (MKL), the holding company that had helped seed GoodHaven when it launched. Pitkowsky’s plan, laid out in GoodHaven’s 2019 letter to shareholders, was to get back to basics by acknowledging that investing is “not an IQ test,” among other principles.
The fund’s revival was immediate. GoodHaven has returned 25%, including reinvested dividends, over the past three years, outpacing the S&P 500SPX –0.21% ’s 18.6% return. Pitkowsky, however, knows he has a lot of work to do to regain investor confidence. While GoodHaven now ranks in the top 10% in midcap-value fund performance over the past five years, according to Morningstar , it still is in the bottom 1% over the past 10. “I would consider myself pleased, but hardly satisfied,” he says.
Pitkowsky talked with Barron’s over the past month about the fund’s turnaround, his views on value investing, and his favorite stocks. An edited version of the discussion follows.
Barron’s: Larry, we have to ask: What went wrong?
Larry Pitkowsky: Portfolio management is a little like chefs in a fine restaurant. Sometimes, you have the resources and talent and there’s some reason the food came out really well for a long time. Then it’s not quite as good as it should be. And you make some changes and the food starts coming out better. But it was never one thing. It was a whole bunch of—we’ll call them not scientific things. Some of us made it a bit harder than it needed to be by getting a little too macro-focused, forgetting that value investing is consistent with owning high-quality, growing businesses. As long as you can purchase them with a material margin of safety, and you’re thinking about risk, the markets are there to serve you.
So, what’s going right?
Our process has been better, our research has been good. We’ve behaved opportunistically when presented with things in our circle of competence. We’re slow to part with great underlying companies that we own, which has served us well. It has also been important to not try to make it harder by owning a lot of what I would call “stuff in the middle.” We can own a good business that has a competitive advantage and good returns on capital and was bought at an attractive price, or we can buy a special situation with a catalyst that opens value. In the middle are the structurally challenged businesses. I try to avoid those.
It must also help that value stocks are finally performing well again. What makes a good value investor?
It’s some unusual mix of complete paranoia and long-term patience. You kind of need both. Being a value investor means resisting the poles of mass psychology at any given moment. You need the complete paranoia because you need to continue to reassess your most beloved thesis. If the market hasn’t figured out your super-clever idea within a couple of years, you’re probably wrong. I’m in favor of changing my mind.
Having said that, it’s a bad idea to change your mind just because the fundamentals and the thesis appear to be evolving. Often investors don’t get long-term results from the businesses they own because they don’t hang around long enough.
How do you choose investments?
We try to own some high-quality businesses that have high internal returns on capital, are growing, and are run by talented people; businesses that we bought at attractive prices with a big margin of safety. One benefit of not being 25 anymore is you have a lot of companies that you have kept an eye on over the years. We’ve got a long list of companies that we have admired, that we would like to own at a certain price—but we need to wait for the market to give us that price.
We’ve got a high-quality portfolio, with companies growing faster than the S&P 500. But at 13 times earnings, it is much cheaper than the market, with some interesting special situations and things that have a lot of upside.
What do you make of the macro backdrop?
This period is very unusual, but it doesn’t strike me as one in which there are existential risks to the financial markets or the overall economy of the magnitude we saw in the spring of 2020. We have much higher inflation. We have a Federal Reserve that’s raising interest rates to try to get a handle on that. Even with the demise of Silicon Valley Bank, we had long contemplated how rising rates would impact what we own and want to own, and we’d seen runs on the banks before. It isn’t a “Lehman Brothers moment,” for lack of a better phrase. Regulators were well aware of the need to address it, and they did.
Do you worry about a recession?
All kinds of things are important, but unknowable. The odds of getting that stuff right are extremely low. But one has to assume that recessions will show up periodically, that there is still a business cycle. Occasional market dislocations and downturns often provide potential opportunities.
Which stocks stand out now?
We own Builders FirstSource [BLDR], the nation’s largest supplier of structural building products. We stumbled on it back in 2017. At the time, the industry was beginning to consolidate. The company had some leverage, which it was planning to bring down. We also thought there was a potential tailwind from an underbuilt single-family housing market that had never recovered from the financial crisis. We liked the management, and were paying an attractive price.
Things have gone even better than I could have imagined. When we bought it in 2017, it was doing $7 billion in annual sales. Last year, it did $22.7 billion. It was levered over four times back then. Today, it’s on its way to being leveraged less than one times. The company combined with its major competitor, BMC Stock Holdings, and the industry continues to become more consolidated. It is a better business, and shares outstanding are higher, but the company is repurchasing shares at a rapid clip.
Why do you like Builders FirstSource now?
In 2021, we wrote that one of these days the housing market is going to cool. But we were OK with that; we think the business is so good. Management is doing a great job, and the price is still cheap—at 14.2 times forward earnings—that we’re willing to live through this cycle. The company made $18.71 a share last year. It benefited from higher lumber prices and a still-healthy backlog. It might make only $6 a share this year. But it is unlevered to a great extent, the business is still consolidating, and it is still acquiring smaller companies. Getting overly focused on a slower period in single-family housing construction misses the long-term potential. If the stock price assumed continued earnings as seen in 2022, an unusually good period, well, that might give us some pause. But that’s not the case.
You’re a longtime holder of Alphabet [GOOGL]. How worried are you about ChatGPT and the potential that Microsoft [MSFT] has to erode Google’s search dominance?
Google has been talking about artificial intelligence for a long, long time. It’s part of the main products in different ways. Microsoft made an aggressive step forward, and Alphabet has taken a more measured approach.
But even predating ChatGPT, growth has slowed. I’ve been surprised it took so long. There was some pull-forward of results coming out of the Covid lockdowns. And there is the issue of growing the expense base fast, which TCI’s Chris Hahn wrote of. If it is a slower-growth environment, what is the right pace of expense growth? That is within Google’s ability to address. The secular question about something like ChatGPT? It’s too early to tell.
KKR [KKR] is one of your 10 largest positions. Don’t higher rates make it more difficult for the company to make solid investments?
When rates move as much and as fast as they have lately, there is a bit of an adjustment factor. Higher interest rates affect all valuations to some extent, so I’m happy that they took some markdowns on some investments. But KKR has a lot of different engines. They have alternative credit, infrastructure, and real estate strategies, in addition to the core private equity. It still seems that alternative-asset managers are garnering share from lots of the pockets of the investment business. KKR has used downturns in the past to opportunistically deploy capital and continue to grow the business. The stock is $51, and they’ve got almost $20 a share of quality investments, so we think you’re paying less than 10 times earnings for the core business.
Exor [EXOR.Netherlands], another GoodHaven holding, is controlled by the Agnelli family, and was once considered a baby Berkshire Hathaway [BRK.A, BRK.B]. But a lot has changed as CEO John Elkann appears to be focusing on luxury brands after selling PartnerRe, Exor’s reinsurance company. What makes Exor attractive?
Elkann is taking the company in a certain direction. He got out of insurance, so I don’t think he’s looking to replicate the exact structure that Berkshire put together, marrying insurance and reinsurance with operating businesses and an investment portfolio. But I like what he’s doing. Elkann is moving more capital into potentially higher-growth—and higher-return—areas, including some venture capital, and companies like Christian Louboutin. Ferrari [RACE] is a one-of-a-kind luxury brand. [Exor owns nearly a quarter of the Italian car maker.]
Exor shares have been periodically available at a discount to net asset value. But I like that Elkann is focused on growing the underlying value, as opposed to being obsessed about where the stock is versus net asset value.
Thanks, Larry.
Closing Stock Market SummaryToday's trade had a predominately negative bias, sending many stocks lower. The main indices tried to move higher in the early going, but quickly fell below their flat lines and remained in the red through the close. Investors were digesting a slate of economic data and corporate news ahead of the open, including some pleasing Q1 earnings results from several large banks.
JPMorgan Chase (JPM 138.73, +9.74, +7.8%), Citigroup (C 49.56, +2.26, +4.8%), BlackRock (BLK 691.33, +20.60, +3.1%), and PNC Financials (PNC 121.85, +0.44, +0.4%) were among the top performing stocks today, driving a 1.1% gain in the S&P 500 financial sector.
While the financial sector was providing support for the broader market, mega cap losses offset much of that support and drove a lot of the index level weakness. Names like Meta Platforms (META 221.49, +1.14, +0.5%), Amazon.com (AMZN 102.51, +0.11, +0.1%), and Alphabet (GOOG 109.46, +1.27, +1.2%) were able to recover their losses and finish with at least a modest gain. This coincided with the broader market rebounding from its lows of the day. Ultimately, the main indices closed the session off their lows of the day.
In addition to pressure from mega cap stocks, investors were reacting to Fed Governor Waller's (FOMC voter) remarks in a speech before the open that the Fed hasn't made much progress on its inflation goal and that he thinks monetary policy needs to be tightened further and remain tight for a substantial period of time. Also, some added selling pressure kicked in after the preliminary University of Michigan Consumer Sentiment Index for April at 10:00 a.m. ET showed year-ahead inflation expectations rising to 4.6% from 3.6%.
Treasury yields rose today in response to the inflation expectations data and Fed Governor Waller's comments. The 2-yr note yield rose 11 basis points to 4.10% and the 10-yr note yield rose seven basis points to 3.52%.
The Dow Jones Industrial Average (-0.4%) was a relative underperformer among the major indices today, feeling the pinch of sizable losses in Boeing (BA 201.71, -11.88, -5.6%) and UnitedHealth (UNH 551.79, -14.44, -2.7%). BA declined on reports it expects production and delivery delays for its 737 MAX due to parts problems while weakness in UNH stemmed from investors' concerns about meeting short and long-term EPS targets in the face of Medicare Advantage changes.
Notably, regional banks were under pressure today despite gains in larger banks. The SPDR Regional Bank ETF (KRE) fell 2.0%. The weakness in regional bank stocks contributed to the underperformance of the Russell 2000 (-0.9%).
- Nasdaq Composite: +15.8% YTD
- S&P 500: +7.8% YTD
- S&P Midcap 400: +2.4% YTD
- Dow Jones Industrial Average: +2.2% YTD
- Russell 2000: +1.1% YTD
Reviewing today's economic data:
- Total retail sales declined 1.0% month-over-month in March ( consensus -0.4%) following an upwardly revised 0.2% decline (from -0.4%) in February. Excluding autos, retail sales were down 0.8% month-over-month ( consensus -0.4%) following an upwardly revised unchanged reading (from -0.1%) in February.
- The key takeaway from the report is that sales declines were seen across most retail categories, reflecting weakness in consumer spending on goods that should exacerbate concerns about an economic slowdown that cuts into earnings prospects.
- Import prices declined 0.6% month-over-month and were down 4.6% year-over-year. Excluding fuel, import prices were down 0.5% month-over-month and down 1.5% year-over-year. Export prices fell 0.3% month-over-month and were down 4.8% year-over-year. Excluding agricultural products, export prices were down 0.2% month-over-month and were down 5.2% year-over-year.
- Total industrial production increased 0.4% month-over-month in March (consensus +0.2%) following an upwardly revised 0.2% increase (from 0.0%) in February. The capacity utilization rate jumped to 79.8%( consensus 79.0%) following an upwardly revised 79.6% (from 79.1%) in February.'
- The key takeaway from the report is that the entire gain in industrial production in March was driven by the increased output of utilities, which is to say the headline print belies an otherwise soft environment for manufacturing output.
- Business Inventories rose 0.2% in February ( consensus +0.3%) following a revised 0.1% decrease in January (from -0.1%).
- The preliminary University of Michigan Consumer Sentiment Index for April checked in at 63.5 ( consensus 62.7) versus the final reading of 62.0 for March. In the same period a year ago, the index stood at 65.2.
- The key takeaway from the report is that short-run inflation expectations were up noticeably from the prior month, which is something that could compel the Fed to press ahead with another rate hike in May even though long-run inflation expectations remained stable.
Looking ahead to Monday, market participants will receive the following economic data:
- 8:30 a.m. ET: April Empire State Manufacturing survey (prior -24.6)
- 10:00 a.m. ET: April NAHB Housing Market Index (prior 44)
- 4:00 p.m. ET: February Net Long-Term TIC Flows (prior $31.90 bln)