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

“Status quos are made to be broken.” ― Ray A. Davis

First news

• Microsoft hires atomic bigs to bring nuclear-powered AI nearer
• It’s an open secret that Russia’s getting all the Western war chips it needs through third parties
• There is a larger-than-infinitesimal chance that quantum computing will transform finance – and upend crypto.

Overnight

• *BIDEN FREEZES APPROVALS TO EXPORT GAS IN BLOW TO U.S. LNG.* link
• There’s a rumor going around about Congress’s big new tax deal. link
• US Eco Brief: Core PCE Inflation on fast track toward 2%. link
• Vinod Khosla-backed Krutrim becomes first Indian AI unicorn. link
• Global lithium prices tumble due to a slowdown in EV demand. link
• Biden robocalls point to the power of AI to undermine elections. link
• A Russian court extends WSJ reporter Evan Gershkovich’s detention by another two months. link

MARKET LEVELS

MORNING INSIGHT

Good morning!

Seventy-four companies are reporting this week. Of the 123 companies that have reported so far (25% of the S&P 500):

• Overall, 70% are beating estimates, and those beating, are doing so by a median of 7%.
• Of the 28% missing, those are missing by a median of –8%.
• On the top line, overall results are beating estimates by a median of 2% and missing by a median of –2%, and 67% of those reporting are beating estimates.

Click HERE for more.

TECHNICAL

The Small-cap divergence on SPX’s push to new highs is worth watching.

SPX and QQQ attaining new all-time high territory has not yet been followed by similar movement from the Russell 3K, Value Line Average, and DJ Transportation Avg., and this divergence will be important to concentrate on in the weeks ahead. 

The U.S. Equity rally appears to be getting a bit tired, if the lack of follow-through on Thursday’s economic data was any indication. 

Overall, we’re still a bit skeptical that oil has truly bottomed. OIH has also not broken out and has traded up to resistance.

There is movement back to new highs in SPX following bear market lows and Small-cap percentage above/below all-time highs.

^{Source: Fundstrat, Bloomberg}

Click HERE for more.

CRYPTO

In today’s Crypto Comments video, we discuss reasons to be optimistic about GBTC outflows, the QRA potentially serving as a bullish catalyst, and the upcoming Jupiter airdrop being a positive near-term tailwind for Solana.

Click HERE for more, and HERE for our full strategy note.

FIRST NEWS

Drs. Proton and Electron. About six weeks ago, we wrote about OpenAI-backed Helion Energy’s deal with Microsoft (Grave New World) to use nuclear fusion to produce essentially limitless energy needed for the seemingly limitless energy needs of AI. (Naturally, we’ll need some energy to work a blender or vacuum cleaner once in a while; also to charge our EVs.) Now, in its perhaps quixotic-slash-brilliant-slash-demonic quest for nuclear-powered data centers, Microsoft has hired two industry-veterans-slash-energy-mavericks specializing in the development of small modular reactors. The Register

^{Miss Atomic Bomb. Source: WSJ}

Not Very Intelligent. In related news, today’s AI needs so much power that, in certain places, old coal plants are sticking around. A 30-square-mile part of northern Virginia has been dubbed ‘data center alley’, as the boom in artificial intelligence turbocharges the consumption of electricity and inadvertently prolongs the lifespan of coal plants used to generate it. At one point in 2022, the power company that serves the area paused new data center connections for a minute as it struggled to keep up with demand. Virginia’s environmental regulators were even going to allow data centers to run diesel generators during power shortages, but backed off after the idea drew fierce community opposition. Bloomberg

By Hook, Crook, or Schnook. Believe it or not, the person writing these lines began life in the Soviet Union and, when finally allowed to leave (an exit visa for the nuclear family was procured at the cost of a bribe equal to 13 years’ worth of an average Soviet worker’s income) was old enough to have learned enough about the way things got done to recognize the Russian way of doing things when he sees it.

In the 1980s, Ronald Reagan had a virtual monopoly on telling Soviet jokes in English (the ones that translated well, anyway) in order to give audiences a window into the soul of the people unwillingly inhabiting the ‘evil empire’. One of the most aphoristic of these was this one: They pretend to pay us, and we pretend to work. Indeed, forced equality and a lack of financial incentive demotivated many. At the same time, the placement of harsh restrictions on people’s lives, livelihoods, and lifestyles often awoke a spirit of enterprise and shrewdness,* a drive to seek non-standard solutions to seemingly insurmountable obstacles.

In Putin’s Russia, this spirit is alive and well – only it’s used in service of an evil empire being enterprising in the face of Western sanctions with the aim of obtaining chips for its war machine. Russia is even now successfully working around European Union and G-7 sanctions to secure crucial semiconductors and other technologies for its war in Ukraine. Customs data show that in 2023, Russia imported milspec chips made in the U.S. and the E.U. via re-exports from third countries.

Chips made mainly by Texas Instruments, Analog Devices, and other U.S. makers have streamed into Russia through Hong Kong dealers despite export restrictions. Predictably, the manufacturers say they had no knowledge of the transactions. Imports of chips from Turkey and the UAE by Russian military-linked companies have also soared. Overall, Russia imported more than $1 billion of advanced chips last year. Classified Russian customs service data, provided by the Washington-based investigative nonprofit C4ADS, shows that more than half of imported semi-conductors and integrated circuits in the first nine months of 2023 were manufactured by U.S. and European companies.

These days, Russia is pretending to fight a war of principles and Orwellian ‘liberation’, while Western firms pretend their chips aren’t ending up in Russian war machines. Bloomberg

 ^{* Cynicism, too.}

-Um, That’s a Different Kind of Quant-. Most people aren’t sure what a quantum is, much less what quantum computing does, and yet everyone knows it will be the source of – you guessed it – a quantum leap forward. Strictly speaking, a quantum is a tiny little thing, while the leap is rumored to be gigantic – but the point is that it’s something quite revolutionary, so we’d like to know what it is and what it can offer to people in finance and the people who love them.

In simple terms, quantum computers act on subatomic particles (your electrons or photons) via quantum bits, or qubits, which allow these particles to exist in more than one state (i.e. 1 and 0) at the same time. (Regular computers use a stream of electrical impulses, your ones and zeros, in a binary and sequential manner to encode information in bits.) Quantum machines compute more efficiently when generating probability distributions, mapping data, testing samples, and iterating, thus bringing exponential power to bear on mathematically challenging problems, improving accuracy, reducing computation runtimes, even attempting previously impossible calculations.

Quantum computing as a field is still very young, yet we know that some of the problems quantum computers will solve have applications in the phenomenal world, not just in the area of abstract math. One of these real applications is finance. None less than the Bank of England seems to think super-powerful quantum computers could transform financial markets by driving major innovations, thus allowing for more complex transactions, transforming payments, and causing “high-level changes to how the market functions.” 

While that phrasing sounds quite high-level itself, a recent study in Nature goes into some detail about how state-of-the-art quantum computing has concrete applications for the financial world, specifically in stochastic modeling, optimization, and machine learning. Also: quantum annealers (which are quantum computing methods used to find the optimal solution for problems involving a large number of solutions) can be used to analyze risk, optimize portfolios, find arbitrage opportunities, perform credit scoring and KYC operations, and price derivatives, while quantum amplitude estimation can result in a speed-up of for Monte Carlo sampling.

Another article in Nature highlights the risk of quantum computers eventually becoming capable of solving mining puzzles much faster than current-generation mining devices, thus threatening blockchain security, which relies on cryptography.

Future-focused in its computing vision – if not, as we’ve written before, in its demographic planning (From China, with Too Few Workers) – China has the largest investment in quantum technology, with a total announced investment of $15.3 billion. China also leads in quantum patents by country. Not surprisingly, Origin Wukong, its third-generation quantum computer, has completed 33,871 quantum computing tasks for global users since going online January 6 of this year. The U.S. tops the list of countries accessing China’s quantum computer; mysteriously, U.S. quantum computers can’t be accessed by China.

We can all take a quantum of solace in this asymmetry, and simultaneously – to honor the qubit’s modus operandi – contemplate the fact that, once quantum computers really get up to speed (broad adoption is already scheduled for the early 2030s) no transaction relying on current cryptographic protocols will be safe. This will surely signal the end of the world, at which point spontaneous, pointless entertainment will flood the airwaves. Quantum-computer-vs-AI death match anyone? IBM, CCN, Bloomberg, WSJ