A daily market update from FS Insight — what you need to know ahead of opening bell

“Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market.” — Michael Lewis

Overnight

Japan 10-Year Yield Seen Breaking Above 1% Even Before BOJ Hike. link

Fierce anti-corruption crusader and Russian opposition leader Alleksei Navalny has died in prison according to Russian news agency Interfax. link

Latest bid to overturn SALT cap fails. link

IRS chief defends budget increase. link

Moderate House Republicans are offering a bipartisan proposal on Ukraine aid and border security. link

VP Harris to give anti-isolationist speech at Munich Security Conference featuring NATO Sec. Gen. Jens Stoltenberg, EC President Ursula von der Leyen, Chinese Foreign Minister Wang Yi, Ukrainian President Volodymyr Zelensky. link

A first step to what may be Tesla re-incorporating in Texas at the upcoming shareholder meeting in May. link

Venezuela orders U.N. agency that monitors human rights to leave the country; risks reimposition of U.S. sanctions. link

Global emergency stockpile of cholera vaccines empty as southern Africa grapples with worst outbreak in decades. link

Citi vet Brownstein tapped to advise Over Board on PREPA debt restructuring. link

JPMorgan Chase and State Street withdraw from investor coalition focused on climate change. link

U.S. regulators give green light to long-delayed merger between Donald Trump’s social media venture and a blank-check company. link

OpenAI develops web search product in challenge to Google. link

First news

• Top Israeli banks downgraded by Moody’s, but not by other ratings agencies
• AI update: smaller companies consider selling in an indication of the coming consolidation in the sector; Lego-like-stackable chiplets may be the answer to the insatiable need for increasingly expensive, power-hungry AI chips; OpenAI’s messy corporate governance continues to be cause for concern.

Charts of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

Sixty-three companies are reporting this week. Of the 395 companies that have reported so far (79% of the S&P 500):
Overall, 79% are beating estimates, and those that “beat” are beating by a median of 7%.
Of the 20% missing, those are missing by a median of –5%.
On the top line, overall results are beating estimates by a median of 4% and missing by a median of –3%, and 65% of those reporting are beating estimates.

Click HERE for more.

TECHNICAL

Due to a medical emergency affecting Mark Newton, our Head of Technical Strategy, there is no technical update this morning. Thank you for your understanding.

CRYPTO

Coinbase reported earnings yesterday afternoon after market-close. In this Crypto Comments video, we examine the stellar report showing Coinbase beating top and bottom-line estimates, presenting an optimistic outlook for the exchange in 2024.

Click HERE for more.

FIRST NEWS

Banking on Instability. Following Moody’s downgrade of Israel’s credit rating, a move Israeli Finance Minister Bezalel Smotrich dismissed as “a political manifesto based on a pessimistic and unfounded geopolitical worldview”, the ratings agency also lowered its ratings of 5 major Israeli banks.

Certain voices who don’t share Minister Smotrich’s emotional response to the downgrade have posited that Moody’s downgraded Israel’s credit rating primarily on the strength – or weakness – of uncertainty. Still, Fitch and S&P, the other two major ratings agencies, maintain an A+ and AA- rating, respectively, for Israel’s credit, albeit while lowering their outlook to ‘­negative’.

As if to rub salt in the wound, Moody’s announced this week that it had lowered the ratings of Israel’s five largest banks to A3, while also downgrading its outlook on them to negative, pointing to further cuts in the future.

The decision deals a blow to Israeli banking majors Bank Leumi, Bank Hapoalim, Israel Discount Bank, Mizrahi Tefahot Bank, and the First International Bank of Israel. In its decision, Moody’s cited its concern that the government may not be able to support Israeli banks for the same reasons that led to its own rating downgrade, expressing its distrust in the Israeli government’s ability to implement policies that would stabilize the Israeli economy and market.

Still, economic analysts at Moody’s said the firm “continues to assume a very high probability of government support for the five large Israeli banking groups that it rates given their systemic importance and the Israeli government’s long-standing practice of supporting such systemically important banks, in case of need.”

The negative forecast comes following concerns about a possible decline in the banks’ stability should the Israeli economy be weakened further, especially if the war in Gaza intensifies and should a wide-scale conflict break out on the northern front.

The downgrade is not projected to affect the banks’ customers. Recent reports published by the Bank of Israel reported no risk to the stability of the country’s top lenders. Ynet, Times of Israel

“Don’t Be Venal”. As the goalposts of quality and believability in AI-generated texts, images, and video move ever upward, some startups mull cashing out. Founders of artificial intelligence startups spent much of the past year seeking capital to fund the high cost of developing their software. Now those costs have pushed some to consider another alternative, such as merging with a larger company. Perplexity AI, a one-year-old San Francisco–based startup developing an AI-powered search engine, raised $25.6 million last March. By October, the company was generating around $3 million in annual recurring revenue, a measure of subscription sales. Around that time, several companies expressed interest in acquiring Perplexity, whose management, concerned about the cost of training AI models and about intense competition from search giant Google, entered into discussions with at least four companies.

Clearing the slate

Google’s parent company Alphabet cut 12,000 jobs or ~6% of staff in several areas of the business in 2023, and hundreds more this year as part of its largest-ever layoff process. The search giant continues to marshal resources for AI – or, in the words of a spokesman, “responsibly investing in our company’s biggest priorities and the significant opportunities ahead”.

Microsoft is doubling down on artificial intelligence that is more specific and focused than OpenAI’s. The enterprise software maker has moved several senior AI developers from its research group to the new GenAI team in order to develop conversational AI that requires less computing power compared to the OpenAI software it’s been using. The GenAI team is focusing on developing smaller language models (SLMs) that are similar to LLMs like OpenAI’s GPT-4 but use less computing power, and are therefore more efficient and cheaper to run.

Chiplets to the rescue

Speaking of more efficient and cheaper to run, something called chiplets – which are not a new Chipotle menu item, although Chipotle is one of the menu items on our latest Granny Shotsstock list – offer tremendous potential through a number of notable strengths. Designers can mix and match chiplets, stacking them like Lego blocks to meet specific performance, power, and cost requirements, meaning more customizable chip solutions. Fabricating smaller chiplets means higher yields with reduced chances of defects and overall manufacturing costs. Developing chiplets independently speeds up the design process, which means faster time-to-market. By integrating specialized chiplets, designers can create SoCs with optimized performance for various applications, such as AI, gaming, and data centers.  

In a paper published in early January, scientists at the University of Washington and the University of Sydney proposed Chiplet Cloud, a chiplet-based ASIC AI supercomputer architecture that optimizes total cost of ownership (TCO) per generated token for serving large generative language models to reduce the overall cost to deploy and run these applications in the real world – perhaps to generate frighteningly realistic images like these.

Sam, Sam, and Elon

Last week, we wrote about Sam Altman’s quest to raise all the money to be raised to build all the AI chips to be built (Hubris to Humus, AI to Goodbye). Along the way, we pointed out all the ways in which Sam Altman resembles Elon Musk. It turns out there is a crucial one we’ve missed. OpenAI is a capped-profit company unconcerned with profits. Sam Altman doesn’t even directly own any stock in it.*

It turns out, however, as reported yesterday in Axios, and further elucidated in Money Stuff, that Altman does own – and is indeed the sole owner of – OpenAI Startup Fund, a corporate venture fund launched in late 2021 to invest in other AI startups and projects, which it has successfully done to the tune of $175 million in commitments as of last May. Its portfolio companies include video editor Descript and legal tool Harvey.

“We wanted to get started quickly and the easiest way to do that due to our structure was to put it in Sam’s name,” explains an OpenAI spokesperson. “We have always intended for this to be temporary.” Still, it’s been well over a year. We won’t be the only people to notice that this sort of shambolic way with corporate governance is reminiscent of a once-wildly-successful organization headed up by another effective altruist named Sam.**

The conflict of interest here is that, as OpenAI’s CEO (he briefly wasn’t, in November, and yet) Altman needs to give priority to the projects in development at OpenAI. And yet, despite its name, OpenAI Startup Fund legally has nothing to do with his employer, where he has no love for money, while being entirely owned by him – so he can make all the money he wants.

A couple of weeks ago we wrote about the bit of conflict of interest Elon Musk was alleged to have (“You Wanna Go To The Moon, Alice?”) in getting the Tesla board to approve a gargantuan pay package and telling it some years later that he wanted more stock or he’ll go work on AI projects somewhere else. Altman’s play is much smoother.

No confrontation is involved. No bitterly contested lost court cases, no need for threats to re-incorporate in a less strict state vis-à-vis corporate governance standards. Just business as usual, the business being the building, at any price (and Altman clearly means that part) of AGI so as to benefit humanity. Since that part of his work is capped-profit, it’s not a big deal if he makes a little money on the side via the venture fund.

And if one of the venture fund’s portfolio companies somehow beats OpenAI to a crucial bit of tech that hastens the arrival of AGI and makes Altman a mega-trillionaire – well, that’s fine, too, since, as OpenAI’s prospectus says, it’s not clear what role money will play in a post-AGI world.

In the film Don’t Look Up, a woo-woo-spouting-yet-uber-shrewd billionaire convinces scientists not to pre-emptively blow up a comet headed for Earth, so that he could control the process of breaking it up and extracting trillions of dollars’ worth of minerals. Blue-collar workers, i.e. the people who are farthest from billionaires in terms of protections from the slings and arrows of outrageous fortune (whether they come in the form of a serious health emergency which there is no money to cover or an extinction-causing event they cannot escape in a sleeper ship) fall for his promises: “We’re for the jobs this comet will provide,” says one character with a little too much confidence. The Information, WSJ, arxiv, cadence.com, Mother Jones, Axios

^{* The motivation for this seeming altruism coming less from a renunciation of the love of money, which, as the Apostle Paul tells us, is the root of all evil, but more so from an embrace of the love of power, gotten in this case via the quest for AGI, cloaked though it is in the performative virtue of not seeking profit.}

^{** As for OpenAI itself, what used to be a six-person nonprofit board now consists of just three people: entrepreneurs Adam D’Angelo and Bret Taylor, and ex-U.S. Treasury Secretary Lawrence Summers. Taylor said he doesn’t want to hold the board seat forever, announcing the launch of a startup making competing products. No more seats on the now-eviscerated board have been filled and no further clarity has emerged on Altman’s leadership – which, given the growing list of joint ventures and personal investments, reinserts front and center the question of whether this increasingly significant company should continue to be overseen by a nonprofit.}