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

“What I’ve found in my research is that realism and self-honesty are the antidote to ego, hubris, and delusion.” — Ryan Holiday

First news

• Concerned with the future of AI, Sam Altman is on a mission to raise more money than can be raised.

Overnight

• The S&P 500 closed up 0.1% yesterday, after briefly passing the 5,000 mark for the first time on record. link
• Big office renewals outpaced new leases in the U.S. link
• Supreme Court signals Trump to stay on presidential ballot ahead of formal decision. link
• Google starts monetizing AI, putting paid version of its Gemini into Gmail, Docs. link
• Ukrainian president replaces top general with one whom army leaders see as “the most experienced general Ukraine has”. link
• Israel kills Hezbollah military commander in retaliatory drone strike. link
• U.S. strike kills Kataib Hezbollah commander behind deadly attack on American base. link
• GM appoints former Tesla executive as VP of battery unit. link
• China’s property crisis is starting to ripple across the world. link
• FCC voted Thursday to immediately ban scam robocalls using AI-generated voices. link
• U.S. State Dept. offers $10 million for leads on ransomware gang targeting U.S. hospitals. link
• Kim Jong Un Says He Has Lawful Right to Destroy South Korea. link

Chart of the Day

“There is no obvious rise in the share of spending being financed on credit cards vs debit cards.” — BofA

MARKET LEVELS

MORNING INSIGHT

Good morning!

There is a case for an even STRONGER 2024 emerging.

The Lunar New Year starts 2/10, and 2024 is the Year of the Dragon. Since 1871, equities do particularly well during Dragon years, gaining 12%. Since 1979, the Russell 2000 has outperformed in such years 88% of the time.

Click HERE for more.

TECHNICAL

Recent sub-par breadth won’t matter if Healthcare, Financials keep rising.

Divergence between the top-performing stocks within Technology and the broader market could eventually lead stock indices to consolidate. Currently, we’re seeing the opposite, however, as groups like Industrials and Healthcare have both pushed back to new all-time highs. A minor broadening out in sector performance has happened, and this week has brought about a rally back to new all-time highs for the MSCI World index, along with a breakout in Equal-weighted SPX to the highest levels in nearly two years. While many have avoided chasing some of the high flyers that have dominated performance, there’s been precious little sign of these stocks turning down. Conversely, the broader market has now begun to show signs of mean reversion higher after a weak January.    

Does poor breadth matter? Sure. However, the breadth expansion from October 2023 into year-end was so robust that many intermediate-term breadth gauges remain in good shape, despite some of the waning in short-term measures.

Click HERE for more.

CRYPTO

Compelling Case for Continuation

Heading into Q1, the key risks identified were: (1) A potential QRA supply shock, as long-term interest rates could surge due to a possible shift in bond issuance towards longer-duration securities, (2) the repricing of interest rate cuts, as the Federal Reserve downplayed expectations regarding the timing and frequency of such cuts, and (3) concerns regarding the dynamics between the expiration of the Reverse Repurchase Agreement (RRP) and the conclusion of Quantitative Tightening (QT) – specifically, if the RRP, a current liquidity source in the market, were to be depleted while QT persisted, this could result in a reduction of bank reserves below the minimum level deemed necessary for the banking system.

In recent weeks, we have successfully navigated these risks, potentially supported by additional inflows from the newly introduced spot ETFs.

Click HERE for more.

FIRST NEWS

Today’s First News story is so out of this world that it’s left no room for any others.

If we wrote that Elon Musk is seeking contracts and cooperation from government to go to Mars (true), on a terraformed version of which humanity may eventually be forced to thrive, it would be old news – however outlandish (and quite literally extraterrestrial) – and if we wrote that Sam Altman is seeking trillions of dollars to fundamentally reshape the business of chips and AI (also true), for the purpose of which the CEO of OpenAI is actively pursuing investors, including the government of the United Arab Emirates, you would think someone was mad.

There’s more than a bit of Musk to Altman: the amalgam of hydrogen-bomb-level ambition with a bomb-proof belief in the global importance and necessity of what he’s doing; the marriage of a borderline-autistic aspect* and a willingness to engage with people the world over, from other c-suiters to bankers to senators to generals to prime ministers, in the pursuit of his varied, multi-tiered, far-reaching goals; the inability to only run one company or project, and the subsequent diffusion of one’s figurative seed among many companies, initiatives, states, and countries.

Although not without significant government subsidies and a kind regulatory environment, not to mention questionable corporate-governance practices and habitual overpromising and underdelivering, Musk has managed to build, scale, and make profitable a number of highly technically demanding products, from world-class EVs to solar-system-class reusable rockets; still working on making social media insanely great; while taking on reasonable amounts of debt and running a tight ship. Altman, on the other hand, who was already trying to lead the development of human-level artificial intelligence, now professes another ambition so beyond the ken of most economies (not to mention companies) that one wonders what percentage of it is a PR-op, and by how many orders of magnitude he would be willing to come down on the numbers so that things could re-enter the atmosphere and be seen as viable by the partners whose shared participation in his vision is essential to the success of the enterprise.

We’re not quite sure how to break it to you, so we’ll just say it: the man seeks to raise $5 to $7 trillion to reshape the global semiconductor industry.

We’ve written before about Altman’s overweening ambition and his willingness to use OpenAI as a vehicle to further it (Grave New World). For months, there have been rumors about the reason for his​​ frequent travel (the one that, back in November, may have gotten him briefly sacked) ostensibly fundraising in the Middle East for a venture code-named Tigris, which would create a silicon producer focused on the AI chip market, (im)modestly seeking to take on Nvidia – and go beyond. Now we know that the once-and-current OpenAI CEO is in talks with investors, including the U.A.E. government, to raise funds for a wildly ambitious tech initiative that would do just that, at the cost mentioned above.

The fundraising plans, which, conservatively speaking, face significant obstacles, are aimed at eliminating constraints to OpenAI’s growth, chief of which is the dearth of the expensive AI-focused chips needed to train the ChatGPTs of the world. Altman often complains that there aren’t enough GPU chips to power OpenAI’s quest for artificial general intelligence, which it defines as ‘systems that are broadly smarter than humans’. Could it be that to create something that goes beyond the capacities of gray matter, one needs dry powder in quantities that exceed the size of the national debt of certain major human economies?

Much needed perspective

Since everything – even the holy grail that is AI – is perceived in relation to something else, let us put the ambitions into context. Global sales of chips were $527 billion last year, and might rise to $1 trillion a year by 2030. Global sales of semiconductor manufacturing equipment last year were $100 billion. Total U.S. corporate-debt issuance was $1.44 trillion in 2023, per the Securities Industry and Financial Markets Association. Never in the history of corporate fundraising has even a remotely similar number been broached.

Never in the history of government commitments to crucial, borderline-existential, nation-spanning projects has a similar sum been committed – while AI has yet to rise to the proof that it is all of those things. For example, the Infrastructure Investment and Jobs Act of 2021 authorized $1.2 trillion for transportation and infrastructure spending, with $550 billion of that going toward new investments and programs. Thus, the richest nation on the planet is willing to commit an order of magnitude less (than the sums Altman wants to raise) for new infrastructure spending that impacts the lives of tens if not hundreds of millions of people in a very direct way. Is it human hubris to state the obvious and say that, as a priority, AI can’t compete?

On the chance that this is not the case and our non-AI-enhanced brain is seeing it all wrong, let’s look at the details. As part of the talks with the various parties, including U.S. Commerce Secretary Gina Raimondo and U.A.E.’s chair of the Abu Dhabi Investment Authority (also national security advisor) Sheikh Tahnoun bin Zayed al Nahyan, Altman is pitching a partnership between OpenAI, various investors, chip makers, and (given the great amounts of electricity needed to run AI chips) energy companies, which would all pitch in to build chip foundries, tobe managed by existing chip makers, whose core customer OpenAI would pledge to be. Much of the effort is seen as being fundable by debt.

As AI chips have also become part of the geopolitical battle for tech dominance between the U.S. and China, the U.S. has understandably placed restrictions on their export to adversaries, and it’s foundationally important to the success of the enterprise that the people with whom Altman is speaking, such as Sheikh Tahnoun, are ultimately allowed by the U.S. government to play whatever role is currently being discussed.

Out of your league, Son…

Now, Altman has also met with Masayoshi Son, the CEO of SoftBank, fresh off of a victory as the stock of Arm (90% owned by SoftBank) rocketed by as much as 60% on Thursday after Arm reported a better-than-projected 14% increase in December-quarter revenues. At these prices, which, given the company’s highly inflated multiple, may not last, Arm’s market cap is ~$119 billion. Let’s say Son – who has a history of making brash, out-of-consensus, intuition-driven bets that sometimes knock it out of the park – goes with his gut and pledges to Altman; in whom he sees a less sketchy (although possibly more dangerous) version of Adam Neumann; some untenably high percentage of SoftBank’s cash position, which, as of end-September, stood at 5.1 trillion yen ($34.5 billion).

Since SoftBank has pledged to promote Arm’s designs in any way possible (which makes every sense, given its majority position in the company) any hypothetical pledge of money by SoftBank to a chip-manufacturing project would start with Arm in the first sentence. Otherwise, Altman would be asking Son to make precisely the type of high-concept, present-reality-agnostic, extra-long bet he made on WeWork, and that’s precisely the type of bet SoftBank, barely back in the black, is allergic to at the moment. Besides, whatever would be an untenably large sum for SoftBank would be mere coins for Altman – if he wants to actually hit his out-of-this-world numbers.

Altman has also met with representatives of chip-fabrication companies, including Taiwan Semiconductor Manufacturing Co., also known as TSMC, to discuss the venture. In talks with TSMC, Altman has said he wants to build dozens of chip-fabrication plants in the next few years. His vision would be to raise the money from Middle Eastern investors and have TSMC build and run the plants.

Among the many difficult questions facing Altman’s effort is where new chip plants would be built. He would prefer that it be in the U.S., to take advantage of billions of dollars in subsidies the Biden administration is due to award to TSMC in coming weeks to fund new factories, yet TSMC and other major chip makers companies have not had it easy expanding in the U.S., given delays, a shortage of skilled workers, and high costs at its $40 billion plant in Arizona.

The bottom line, however, is that the U.S. government has been wary of allowing certain foreign governments to control the strategically important supply of microchips that power the digital economy. In October, G42, an Abu Dhabi-based tech company chaired by the same Sheikh Tahnoun, announced a partnership with OpenAI to “deliver cutting-edge AI solutions to the U.A.E. and regional markets.” That makes some in the U.S. government concerned about Abu Dhabi getting a large foothold in the AI market. ​​In January, Rep. Mike Gallagher (R., Wis.), the chairman of the House Select Committee on the Chinese Communist Party, sent a letter to Secretary Raimondo urging the Commerce Department to investigate G42’s ties to China, and to further consider trade restrictions against the company.

We’ve covered the cozy relations between the U.A.E. and Russia (Unhumble Pie At The Greasy Spoon), with Putin feeling sufficiently safe, even given an international warrant for his arrest, to visit Abu Dhabi and speak to Sheikh Tahnoun’s brother, Sheikh Mohamed bin Zayed al Nahyan, the country’s president, about projects of mutual interest. Given Russia’s need to circumvent sanctions, chips were probably on the agenda. An investigation will almost surely find ties to Russia, and not just China. That does not bode well for Altman’s dalliance with U.A.E. money men.

The possibility that the man who said, “We’re trying to figure out if we can align an AI to a set of human values. We’ve made good progress there technically. There’s now a harder question: Okay, whose values?” has blind spots, should be entertained – lest those who buy into Altman’s vision of the future of AI, monetarily or otherwise, be forced to admit to having a gigantic blind spot of their own. WSJ, NYMag, Yahoo Finance, FT

^{* Needless to say, we are not in the business of diagnosing these things, and this is a casual observation made on the basis of watching footage of Musk and, separately, Altman, interacting with others in public situations. Musk has stated that he has Asperger’s Syndrome, a form of Autism-Spectrum Disorder.}