Notes, thoughts and observations - Compiled weekly
Consolidation deals (M&A) in digital media are accelerating. Disney and Warner Bros are planning to bundle many services, while Sony and Apollo Group are planning to divest parts of Paramount group.
Automotive continues to realign. GM announced its dropping yet another vehicle from the lineup, leaving only the Corvette as the sole ICE car. Meanwhile Chinese car manufacturers continue to flood the EV market. While those vehicles won’t show up in the US, it could seriously impact EV exports.
Notes, thoughts and observations - Compiled weekly
Justice? Maybe not but at least a judge called B.S. on Adam Neumann’s plan to buy WeWork out of bankruptcy. He was told to pay off the $4b debt first, and ostensibly everyone he owed money to.
An article out of the Wall Street Journal (paywall) that confirms population decline. Record low birth rates aren’t new but mainstream acceptance that it will influence economics is. Again, I don’t think it’s a gloom and doom crisis, but it will change things.
A lot of news out of Artificial Intelligence this week. I highly recommend the latest edition of The Pragmatic Engineer newsletter for all the juicy details. Are LLMs hitting the “Napster” moment of licensing? Several lawsuits by IP holders seems to indicate.
Microsoft teased a new web-based version of CoPilot that builds on GitHub Codespaces and provides an intersection between CoPilot web and GitHub CoPilot. In the demo you can see the prompt engineer explain the concept and the LLM expands the idea and ultimately generates code.
This is a different approach than Devin or Magic.dev which aim for the moon shot of taking input and generating code without intervention. I won’t ignore that Microsoft has deep enough pockets to fund this project longer, I also think they are trying to gain market share early by producing tools that make developers more productive, rather than replace them.
Notes, thoughts and observations - Compiled weekly
I think we all learned an important lesson about stories from journalists who seek to sensationalize topics to generate clicks. The predicted Baltimore supply chain issues never materialized after shipping was shut down by the collapse of the Francis Scott Key Bridge.
Young workers have the lowest unemployment rate since the 60s and weekly wages are higher than in the past. Again, this contradicts the prevailing narrative that Gen Z is doing worse than previous generations. Look past the commentary at the data.
Median weekly earnings, inflation-adjusted, for young people are the highest they have ever been
Wall Street wasn’t happy with META’s spending on AI. They’d rather the money be returned to the shareholders. We heard a very similar critique with Amazon as Bezos directed online retail profits into building what would become Amazon Web Services. The future of consumer AI will be through service providers, and companies like Meta and Microsoft will play a part.
The idea of natural gas as a bridge fuel is gaining mainstream support with the likes of Jim Cramer admitting as much. I’m still cautious that it will quickly bridge us to nuclear power which is the only reliable base load source that is carbon friendly.
Finally, the economy seems to be roaring ahead despite predictions of current or pending recession. GPD grew steadily but inflation also. Shelter costs and pending trade tariffs will only make inflation stickier. I see daily commentary on how indicators point toward future recession, but I’m mindful that while these indicators have a high correlation the timing is never consistent.
Notes, thoughts and observations - Compiled weekly
Bill Gross is predicting that the yield curve needs to flatten, otherwise the long-term outlook for the economy is not positive. Infact everyone is perplexed by the continued inversion of the yield curve. As Howard Marks says “Being too far ahead of your time is indistinguishable from being wrong”
Fisker is on the road to bankruptcy as the company is delisted from the NYSE and its stock price is going to zero. The outlook for EV manufacturers is consolidation and clearly Tesla and BYD are the winners. Speaking of BYD, I can’t imagine a scenario where BYD is allowed to sell vehicles in the US based on security concerns. Given recent revelations of auto manufacturers selling driver data and the political wrangling around TikTok this isn’t going to happen.
Notes, thoughts and observations - Compiled weekly
Rough times for gaming as budgets are slashed and employees let go. Both Sony and Electronic Arts announced major changes. Given the strength of PC and mobile gaming, you must wonder about the future of consoles.
Apple throws in the towel on self-driving cars. Does this signal capitulation that the technology is nowhere close to road ready? Another interesting point is why Apple is reassigning employees from the car division to AI. Is this a FOMO move or was Apple already working on its own AI for vehicles?
Regarding a US recession the data doesn’t indicate that. In fact, many believe there is no imminent danger despite some conflicting metrics. What is a risk is further bankruptcies, like for Macy’s who is closing 150 stores nationwide. The move is due to decadelong underperformance and investors looking for ROI. Things look dark for the retailer if the company can’t pull out of the dive.
The US economy’s statistical vital signs are, if not healthy, at least stable.
The guys on the All-In Podcast had a great discussion about the structure of Nvidia’s business and a breakdown of recent results (worth a watch/listen). A couple of big questions: Are these results based on a sustainable revenue model or are they simply due to a one time build out? Second who spends $22 billion? Big tech companies with lots of cash and not a lot of investment options. But at some point, investors will look for ROI and that could be bad for everyone involved.
Real estate and energy continue to hum along. Home sales are slightly down, but prices are not. It should be noted that long-term inflation accounts for most of the rise in home prices. Meanwhile energy prices remain low in the US because of the shale gas revolution. To quote: “We’ve found almost three Saudi Arabia between oil and natural gas.”
Finally, an interesting tertiary observation about the expansion of AI chips and data centers which generate a lot of heat. Folks are beginning to pay attention to the water usage, for cooling, that these data centers demand. It brings into question the location of data centers in drought-stricken areas, but it also opens the door for alternative cooling technology that Intel and other startups are working on.
Notes, thoughts and observations - Compiled weekly
Fall out from Biogen’s failed Alzheimer’s drug Aduhelm will hurt more than the company. The big loser is the reputation of the FDA.
Strategic thinkers are considering a potential collapse in global maritime shipping. To date shipping has remained operational, but mostly due to ‘ghost fleets’ via China, Russia and India. The great unknown is what happens to insured ships that are inevitably attacked.
Residential housing is not very affordable, but a recent trend in kids moving back in with parents possibly has multiple underlying reasons.
Meanwhile GM dealers are begging the manufacturer for hybrid vehicles instead of full EVs. Dealers claim that buyer are looking for a middle ground between ICE and EVs. Despite the feedback, GM CEO Mary Barra is doubling down on EV.
Evergrande finally goes out of business, or not. The Chinese company was ordered to liquidate by a Hong Kong court. What comes next will be either a bad situation for Chinese savings or for Hong Kong’s authority.
Consumers are running out of steam with nearly 30% of Americans behind on payments. “Buy now pay later” is soaring as wages fail to keep up with inflation for lower wage earners.
Layoffs continue with fresh announcements from Deutsche Bank and Zoom and job losses continue to bleed over from tech into other sectors. Despite a large number of layoffs, unemployment continues to remain at record low as the labor market is still in imbalance.
Notes, thoughts and observations - Compiled weekly
Companies are still cutting the fat, but it begs the question of whether this is all due to pandemic over hiring or does it indicate retail bracing for declining consumer spending?
Bankruptcies continue to occur, but companies are also closing money losing stores. Walmart closed 24 last year and retail pharmacies plan to close hundreds this year.
The national debt continues to grow, but the real concern is the increasing budget deficit which will exacerbate the issue.
Globalization continues to contract over security concerns leading to a short-term spike in shipping rates. Long term this will be a threat to global supply chains and particularly bad for European countries that heavily depend on contested shipping lanes.
Notes, thoughts and observations - Compiled weekly
Last update for the year. The labor market remains resilient but areas such as physical entertainment are struggling against an expanding landscape of digital entertainment. JOLTS data indicates employment decline in several sectors, but information remains unscathed.
A reminder that a lifetime guarantee is only as good as the company. Even though the classic indicator of recession remains in place many are starting to believe in economic soft landing. Call it a mild recession or not, the FED has signaled rate cuts are ahead.
Finally commercial real estate is still on everyone’s mind. In my local market of Charlotte, NC many uptown towers remain partially empty. Some predict it could be years before occupancy rates recover. Meanwhile many new businesses are increasingly likely to start remote which will impact everything from small offices to office supply and equipment purchases.
With that here are my last business notes of the year. Have a happy season and we will see you in 2024.
Notes, thoughts and observations - Compiled weekly
A major theme over the past few weeks has been the unwinding of the cheap debt economy. Experts predict this will lead to increased bankruptcies, failed start-ups and zombie companies. WeWork made it official by filing for Chapter 11 this week, while many companies are looking at a “Maturity wall” in 2025 and will need to rollover five-year loans into higher interest rates.
Despite current exuberance for a soft landing, indicators of the dismal science point toward falling demand means softening consumer activity. Homeowners are locked into mortgages with the golden handcuffs of low interest rates. Automotive retailers also report a failing demand for EVs as the vehicles pile up on lots.
Though GDP expanded at an 4.9% annualized rate economist still think that there is trouble ahead. The yield curve remains inverted and an under investment in traditional fuel sources likely mean lower supply and higher prices in the future.
Large amount of money is going into energy efficiency
Notes, thoughts and observations - Compiled weekly
Asia is in real trouble. The YTD basis has the highest zombie prominence of any market which indicates a lot of potential business failures in the future. Meanwhile 67 % of all Chinese bonds are in default which could trigger another Asian debt crisis if the government does not intervene.
Everything is political, including designating a recession. Personally, I think we already had a mild recession and numbers will be retroactively revised. The numbers look different this time because of the unprecedented distortion caused by COVID era fiscal policies.
While the US corporate sector may not be in as bad a shape as Asia, our national budget situation is dire and on the verge of being out of control. This year the budget deficit was approximately the size of total income tax collected which is probably unsustainable. If the fight over house speaker is any indication, this is a very serious situation.
We wrap with an interesting chart about streaming in the US which seems to have hit a plateau. Companies are looking abroad for growth but it’s more likely that the rate of cord-cutting, and multiple streaming platforms will cool. At this phase I would expect more growth through consolidation of services.
If you didn’t think the recession designation was political, here’s your reality check
Notes, thoughts and observations - Compiled weekly
A mixed bag of news this week. Inflation remains on the radar, as do future fed hikes. The labor market remains strong but finance continues to shed jobs.
Services remain higher likely to due to higher wages
Notes, thoughts and observations - Compiled weekly
Commercial real estate seems to be stabilizing, while the housing market has gone cold. Meanwhile in China, Country Garden issues a dire warning and has missed loan payments. This could unlock a fresh hell of financial worries.
The speculative bubble in use cars continues to unwind and is shaking out weak companies like Shift Technologies who filed for Chapter 11 this week. Meanwhile Tesla continues to lower prices to both chase higher volumes and to also compete with BYD.
As soon as the Fed stopped raising rates everyone began speculating when rate cuts would begin. Some think higher for longer and others believe that history indicates cuts sooner. Either way a rate cut will be a temporary boost for borrowing. Long term, near-zero rates are gone, and the economy needs to adjust its risk-reward equation.
Profitability and debt reduction among companies is a high priority. Rising rates will ensure that weak and heavily indebted companies meet an end. Likewise high valued scaleups like Airtable need to mind the bottom line and show significant revenue to justify their valuations. All in all, the number of shutdown startups is rising as companies begin running out of money and are unable to raise.
Notes, thoughts and observations - Compiled weekly
This week illustrated the disconnect between big business CEOs and everyone else. Whether it’s Moynihan’s recession denial or Dimon trotting out a classic Warren Buffet trope it’s clear than small and medium size business are seeing a completely different reality.
In the opposing corner we have big box retail on the decline and hard times hitting bottom lines indicating we’re already in recession. Meanwhile everyone is dealing with the painful unwinding of artificially low interest rates. The fed finally paused, but what does it mean?
A major force in small business is the push toward profitability. Most everyone knows money is about to get tight and small companies need to get lean. Meanwhile everyone is paying the price of the unprecedented decline in demand during COVID. Organizations like OPEC are still whip-saw trying to deal with fluctuating demand plus the lingering impact of Russian oil embargo.
Despite the gloom, at a high level the consumer debt to net worth ratio paints a different picture. Americans are still far better off as net worth climbs faster than debt and that’s good for everyone. On the flip side of high lending rates, the lack of new home construction will continue to prop up residential real estate prices. Supply and demand still alive and well.
Paints a very different picture, net worth is climbing
Notes, thoughts and observations - Compiled weekly
Bankruptcy, fire sales and corporate debt.. all part of the cycle. Banking news buried a couple of important stories this week. Bed Bath and Beyond was the big news, but the current cycle is also taking down Jenny Craig. Meanwhile Darden is scooping up Ruth’s Chris Steak House that has struggled since the pandemic. 70 major bankruptcies so far and counting, but AI & ML threatening to disrupt more businesses.
Previous “peak search engine” equity rallies have not ended well
