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

“It’s not that I’m so smart, it’s just that I stay with problems longer.” — Albert Einstein

Overnight

Sony, Apollo make $26 billion all-cash offer for Paramount (WSJ)

Moderna loses less than expected as Covid vaccine sales beat estimates, cost cuts take hold (CNBC)

Apple sales decline less than feared as company plots comeback; $110 billion stock buyback approved (BBG)

Coinbase blows past Q1 earnings estimates; Bitcoin’s boom bolstered profits (Barron’s)

Japan likely spent ~$23 billion in latest yen intervention (BBG)

Bird flu brings the U.S.’s pandemic preparedness into focus as health officials monitor the spread of the H5N1 virus in dairy cows (Semafor)

U.S. sanctions three Russian state entities, accusing Moscow’s forces of using chloropicrin, a choking agent, and riot control gasses “as a method of warfare” (Semafor)

Russia’s Gazprom Group reports first net loss in a quarter-century (BBG)

The world’s highest astronomical observatory began operations after three decades in planning and construction (Semafor)

A study of 343 big public companies found a 9% pay bump for the average CEO, ~2x the wage increase of the people who work for them (Fred)

Peloton announces departure of CEO Barry McCarthy, cuts 15% of its workforce, as repayment of ~$1.7 billion in debt looms (Barron’s)

Hertz announces sale of additional 10,000 EVs on top of the initial intention to sell 20,000 electric models (YF)

FCA boss ‘not convinced’ private equity poses systemic risk (FT)

Berkshire is poised to hit a $1 trillion valuation as investors gather this weekend for its annual shareholder meeting (WSJ)

Blue Owl targets infrastructure investors in hunt for acquisitions (FT)

Apollo raised $40 billion in first quarter, eyes new debt vehicle for individuals (WSJ)

Biden calls ally Japan ‘xenophobic’ along with China, Russia (BBG)

Saudi Arabia steps up arrests of those attacking Israel online (BBG)

Turkey halts all trade with Israel over war in Gaza (BBG)

Major industries reported two critical security incidents every day in 2023; government, IT, finance most affected (TR)

Huawei secretly backs U.S. research, awarding millions in prizes (BBG)

TD Bank probe tied to laundering of illicit fentanyl profits (WSJ)

Per a 2023 BloombergNEF report, carbon markets could be worth $1 trillion by 2037, double what the global beef market is worth now (NYT)

Coinbase rose 9% on better-than-expected Q1 earnings and revenue driven by the crypto rally (CNBC)

Apollo Global rose ~4% after reporting a 26% YoY increase in Q1 adjusted net income on growth in management fees and its flagship annuities business (RT) 

Block jumped ~8% on a Q1 beat-and-raise driven by strong performance and growth in its Cash App business  (CNBC) 

DraftKings issued a Q1 beat-and-raise on improving customer acquisition and engagement (MW)

U.S. high yield spreads still tight despite pick-up in distress (RT)

SocGen trader fired for ‘unauthorized’ bets blames risk team and bosses (FT)

Hong Kong charges hedge fund Segantii with criminal insider trading (FT)

Goldman scraps bonus cap for U.K. bankers (FT)

Tesla is rescinding offers even to summer interns (BBG)

IRS targets higher audit rates on big firms, partnerships, and millionaires (RT)

Russian court cancels seizure of some JPMorgan funds (RT)

U.K. private bank Coutts will shift investments away from U.K. equities (FT)

Macquarie profit slumps by one-third as commodity windfall fades (RT)

Eurozone manufacturing activity slump deepened in April (RT)

Canada reported a surprise nine-month high trade deficit (WSJ)

Insurer Chubb will pay $350M for Baltimore bridge collapse (WSJ

FTC accuses Pioneer’s ex-CEO of colluding with OPEC (WSJ)

The job market is tougher than it looks (WSJ)

NCAA is facing fresh legal challenges (RT)

The retro Nokia phone everyone owned 25 years ago will get a reboot soon (TR)

Here’s your chance to own a decommissioned U.S. government supercomputer from 2016 (AT)

First news

• U.S. sustainable investment funds, including ETFs, see an unprecedented exodus in Q123; “it ain’t Europe”
• A heavily entrenched group, investment consultants say: no financial crash expected anytime soon; beware the cycles of alternative asset classes
• How I Learned to Stop Worrying and Love AI.

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

Over the past few weeks, wariness and apprehension toward equities have increased. In our many conversations with institutional investors over the past few days, this is apparent: many have become outright bearish because on fears of accelerating inflation and choppy markets (volatility is always a discouraging factor). In our view, we expect this “fear of May” to cede to “buy in May” as we expect the cadence of incoming data to be supportive of improving financial conditions:

The “fear of May” stems from multiple factors, among them:
– Progress on inflation stalled in 1Q24; hawks see re-acceleration
– US 10-yr yields moved from 3.90% to 5.0%
– Stocks gained ~30% in 5 consecutive months of gains, then fell -4% in April
– PROFIT SQUEEZE: Wages higher than expected; Starbucks and others see falling traffic
– BONUS: Japanese Yen needed 2 BoJ interventions.

Click HERE for the video.

TECHNICAL

Recent stalling out in Equities, the U.S. Dollar, and Treasury yields awaits some evidence of resolution, and despite this week’s dovish message and accelerated QT-tapering schedule, there hasn’t been enough progress to argue that a rally back to March peaks is underway. Near-term, both AAPL earnings and Friday’s jobs report might prove important, but the key rests in a broad-based Equity rally, which likely should proceed as DXY and TNX are beginning to turn back lower. As discussed yesterday, we suspect that 4/19 lows near 4953 should hold on any backing and filling, while a rally back over 5123 should result in a quick move back to test and exceed 5265.

Click HERE for more.

CRYPTO

In this video, we evaluate the neutral quarterly refunding announcement, the Fed tapering QT, and a dovish FOMC meeting, keeping our “Buy in May” thesis intact.

Click HERE for more.

FIRST NEWS

Unsustainable. U.S. sustainable investment funds,* including ETFs, experienced an unprecedented exodus in the first quarter of 2023, with net outflows of $8.8 billion, says Morningstar – contrasting sharply with the consistent inflows observed during Q122 and the continued net inflows to sustainable funds outside the U.S.

^{Data: Morningstar; Chart: Axios Visuals}

Europe, in the meantime, saw $10.9 billion in net inflows in Q123, although significantly lower than the high of $133 billion in the fourth quarter of 2021.

Not surprisingly, Europe is home to the overwhelming majority of the world’s $3 trillion in sustainable funds, accounting for more than $2.5 trillion of the total. This represents a 37% swelling since mid-2021. In contrast, even after investment gains, U.S. sustainable funds’ assets under management have increased by less than 12% since Q121, reaching $335 billion in total.

The rise in interest rates has, philosophically speaking, made the future less valuable compared to the present, which is detrimental to ESG investments, which generally aim to bet on a brighter, greener future rather than on next quarter’s cash flows – and place a weighty value on its arrival in that state. The continued politicization of ESG investing in the U.S. has also done its bit to push Americans out of the asset class.

While Europe continues to embrace sustainable investing more actively, in the U.S. it seems to have missed its moment. Axios

^{* Morningstar defines sustainable funds as open-end funds and ETFs that focus on sustainability, impact, or ESG (Environmental, Social, and Governance) factors.} 

A Consigliere You Can’t Refuse. This week, a survey by Coalition Greenwich showed that investment consultants, the industry’s quiet middlemen, are wielding more power than ever. Hundreds of U.S. institutional investors managing pools larger than $150 million revealed that 85% of them partner with investment consultants to select managers. For public funds, this number was even higher, at 95%.

The market is becoming increasingly concentrated. The top twenty investment consultants now command 85% of institutional client relationships, a significant jolt from just a decade ago, when this handful of gatekeepers held only 66% of the market.

These investment consultants tend to exert enormous influence over which managers get selected. In a survey conducted by Aon some time ago on the relationship between pension trustees and investment consultants, when asked, “When it comes to investment decisions, how often do you reject the recommendations of your investment consultant?”, nearly 80% of trustees answered either not often or never.

The influence of investment consultants raises questions about who they are, what they want, and what drives their thinking when making recommendations to institutional investors.

One investment consultant just published a book covering “the financial history of the United States from the late 18th century through modern times.” The author, Mark Higgins, works for a company called Index Fund Advisors, so there may be a tilt here. The historical components of the article argue for the value of taking a long-term view. Here are two key takeaways:

One: no financial crash is expected anytime soon, as “during the past 230-plus years, the United States has experienced many a mania, panic, and crash, with the most notable so far occurring in 1792, 1819, 1837, 1857, 1873, 1893, 1907, 1914, 1929, 1987, 2000, 2008 and 2020.”

The distance sequence yields 27,18, 20, 16, 20, 14, 7, 15, 58, 13, 8, and 12. The median is 15.5 years between crashes, as is the average if you exclude the largest stretch (in the very beginning, as the market was just getting going).

Two: alternative asset classes exhibit long-wave cycles.

Institutional investors periodically plow money into faddish alternative asset classes, private assets being the current ‘in’ thing. (Whaling and hedge funds were once darlings as well.) Historically speaking, they can be quite underwhelming.

Higgins warns that, as they tend to be both illiquid and prone to herd mentality, these classes are typically riskier than investors tend to assume, often leading to disappointing results for latecomers. FundMarketer

Unmistakably AI. Even with the most stringent controls, training AI models with trillions of data points is bound to introduce mistakes into the results. Researchers at Amazon Web Services (AWS) have pioneered new methods to scrub problematic data from AI models, which can lead to bias, data privacy violations, or copyright infringement.

If successful, the technique, known somewhat ominously as model disgorgement, would be a significant advancement in allowing companies to revise models after they have been trained. It could also aid in complying with regulations like Europe’s General Data Protection Regulation (GDPR), which includes the “right to be forgotten.”

AWS researchers have been experimenting with model disgorgement to try and remove data that might lead to bias, toxicity, data privacy violations, or copyright infringement. In a paper published in the Proceedings of the National Academy of Sciences last month, they outlined different techniques, including splitting the training data into “shards” for easier deletion of specific chunks or using synthetic data.

These methods have yet to be applied to any commercial models internally, but one could say it’s still early days. After models have been deployed in the real world, model disgorgement may well eventually become a feasible fix to issues, and a recent privacy complaint filed against OpenAI at the Austrian Data Protection Authority highlights how model disgorgement could be useful. The digital rights group Noyb accused OpenAI of GDPR violations after it failed to correct false information ChatGPT had generated about the complainant and OpenAI refused, arguing that it wasn’t able to do it.

These types of issues could be prevented if OpenAI could find and delete the bits of data causing ChatGPT’s errors. In theory, model disgorgement could even support compliance with GDPR, making it easier for regulators to enforce existing laws and protect consumers. For instance, the FTC has previously asked companies like Cambridge Analytica or Amazon to delete illegally obtained or misused data and the products associated with it. Model disgorgement could mean that AI companies forced to delete data may not have to remove their products altogether if issues can be fixed retroactively. Semafor