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

“Champions keep playing until they get it right.” — Billy Jean King

Overthe Weekend

Democratic Rep. Henry Cuellar and wife indicted on bribery charges tied to Azerbaijan (Semafor)

Spotify is moving lyrics behind a paywall in a likely bid to lure subscribers to its rumored Hi-Fi tier (TR)

FTC to recommend potential criminal case against ex-Pioneer CEO for his comments to Texas rivals suggesting they coordinate ways to drill less oil (Semafor)

U.S. security officials are nervous about China’s plans to build floating nuclear power plants in the South China Sea to power its military installations there (WP)

South Korea has approved 60+ new R&D projects, including an AI accelerator for advanced chips to take on Nvidia, part of a $1.5 billion high-tech push (BK)

Herbert Hunt – billionaire who lost all through silver and made it back in oil, gas, and real estate – the inspiration for ‘Trading Places’, dies at 95 (WSJ)

FuboTV’s stock dives as excessively high licensing costs led to loss of content (MW)

Self-driving technology company Luminar lays off 20% of its workforce (Barron’s)

Boeing’s long-delayed Starliner reusable space capsule, a SpaceX competitor, launches today atop a United Launch Alliance Atlas V rocket (Barron’s)

Carvana father-son duo makes $11 billion in 3,000% stock rebound (BBG)

SpaceX is creating NASA spaceport congestion problems (Sherwood)

Berkshire Hathaway reports a 39% YoY increase in Q1 operating earnings to $11.2B thanks to gains in its insurance underwriting; cash hoard swells to $189B (CNBC)

Lenders accuse PE firm 777 Partners of fraud (BBG)

Nomura and Mizuho face $100M in losses over counterparty shorts (BBG)

VC deal flow remains stagnant in Q1 (WSJ)

HF’s options bets hand green investors path to predicting returns (BBG)

U.S. added fewest jobs in six months as unemployment rose (BBG)

BoE rate-cut plan is set to differ from Fed’s (BBG)

Worsening climate is igniting $25B weather-derivatives market (BBG)

Global HFs are growing increasingly bullish on China/Hong Kong (RT)

Retail investors snap up triple-leveraged U.S. equity ETFs (FT)

Investor frenzy for Taiwan ETFs is raising caution (RT)

U.S. equity funds see fifth-straight week of outflows (RT)

Reddit co-founder/CEO Steve Huffman owns 61.5% of Class A shares (RT)

Consumers ditch big brands over inflation (WSJ)

BlueCrest Capital prepares to expand trading teams (FT)

Shell sold millions of ‘phantom’ carbon credits (FT)

SEC shuts down Trump Media’s auditor over ‘massive fraud’ (FT)

McLaren’s Norris clinches maiden F1 victory in a dramatic Miami GP (F1) 

First news

• Hedge funds are moving into the frothy active-ETF market as a way to achieve preferable tax treatment for their own and clients’ money
• Apple has been quietly efficient all along, spending less to make more – in services, and possibly in AI.

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

So far in May (3 trading days), the S&P 500 is up +1.8%, the Nasdaq 100 up +2.6%. As we noted previously, we expect May to prove to be a positive month for stocks, as the -4% decline in April reset risk/reward favorably for equities:

The case for positive equity gains in May is as follows:
– The economy no longer seems “red hot”, given softer April jobs report and March JOLTS
– Fed is “dovish” and pushed back against the idea of hikes and of “stagflation”
– 1Q24 EPS season strongest beats since 2021…
– S&P 500 -4% decline in April alleviated “overbought” conditions
– Investors de-leveraged in April
– Bears became confident.

Click HERE for more.

TECHNICAL

To summarize the week, it’s likely that our recent pullback from late March is complete, given the start of Treasuries and Equities higher, along with a meaningful pullback in the U.S. Dollar. The FOMC’s plans to accelerate its QT tapering, along with a weaker jobs report, helped to counter the recent hawkish narrative that had driven rates a bit too high.

Technology enjoyed its best day in more than two months on Friday, which should have kicked off a push in Technology, which could resume its rally back to new highs following a multi-month consolidation.

A key question is whether traditional May seasonality would prevent markets from enjoying a bullish rally during the first weeks of May, which tend to be far inferior than the back half of the month. However, as discussed yesterday, traditional May seasonality in election years is typically much better than that for April, and its median return of +1.1% since 1950 has more than doubled April’s normal performance.

Click HERE for more.

CRYPTO

Weekly funding fell from $152 million to $125 million across 23 deals compared to last week’s 31. The largest deal of the week was a $47 million strategic round completed by Securitize, notably led by BlackRock and making CeFi the leading fundraising category this week. As one of the largest asset managers in the world, the investment carries significant weight in legitimizing the tokenization sector. BlackRock used Securitize to issue its first tokenized fund, BUIDL.

The remainder of funding was relatively evenly distributed across other categories with DeFi, Infrastructure, and Web3 all garnering over $20 million in funding. Strategic and Seed rounds were the most funded deal stages, totaling 40% and 30% of the total, respectively. Seed rounds were also the most popular from a deal count perspective, tallying 10 deals, approximately 43% of all deals.

Last week, we highlighted Movement Lab’s Series A round led by Polychain Capital. This week, Binance announced an undisclosed investment into Movement, providing the Move-based network with another significant industry partner.

Click HERE for more.

FIRST NEWS

There’s No Place Like Home (Office). A U.S. hedge fund manager has taken the rare step of launching an ETF in a move that could signal a broader move by the asset class into the surging active-ETF market.

With roughly $1bn in assets under management, Tremblant Capital, founded by Brett Barakett in 2001, plans to launch the Tremblant Global ETF (TOGA), a concentrated, long-only portfolio of ~40 holdings.

The ETF is a conversion of the firm’s Tremblant Tax Efficient Fund, which launched in August 2022, generating a return before tax of 36.2% in 2023, and marks growing hedge fund interest in ETFs. Investors in the ETF will incur management fees of 0.69% (much lower than the fee hedge funds would generally charge investors for a similar strategy) and will benefit from a tax advantage that ETF investors enjoy in the U.S. over other fund structures, as well as better liquidity than hedge funds.

Investors are becoming increasingly sensitive to fees, and while the predominantly low-cost ETF industry pulled in about $940bn in 2023, the global hedge fund industry has suffered, losing $105bn to outflows last year and nearly $26bn more in Q124, per data from ETFGI and Nasdaq eVestment. Hedge fund managers have historically made their fortunes charging a 2-and-20 fee structure (2% of total assets / 20% performance fee on profits above defined thresholds). In contrast, per Morningstar, the average fee for an actively managed ETF in the U.S. is 0.65%. Tremblant declined to disclose its exact former fee structure, but 2 and 20 fees are not generally applied to long-only funds; it likely would have charged management fees of 1-1.5%, with potentially lower fees for larger size allocations.

Barakett said he was launching the ETF primarily as a way to achieve preferable tax treatment for his own money and that of some of his clients, as ETFs offer improved liquidity as well as the ability to defer capital gains tax bills indefinitely. Other hedge funds are expected to follow suit: offering retail investors to access investment strategies traditionally reserved for very wealthy clients – and standing to gain from a historic run in which investors have pumped record sums into active ETFs, including more than $65bn in Q124.

Barakett expects large asset allocators to start insisting that hedge fund managers launch ETFs of their own. It’s true enough that billionaire hedge fund manager Bill Ackman recently disclosed plans to launch a closed-end fund, while Warren Buffett disciple Mohnish Pabrai launched a mutual fund last year. Still, for the moment, hedge funds are not major players on the U.S. ETF scene. (Some offerings from well-known names include Gotham Asset Management, Chesapeake Capital Management, and Ionic Capital Management.) If, however, ETF versions of hedge fund strategies succeed with investors, the trend could gain momentum, as hedge funds would welcome any assets they draw from outside their clientele as a bonus.

Industry pundits believe this could be the beginning of a wave of high-quality products that are more accessible than they were in the past. For hedge funds who want to grow assets, there is a huge pool of assets in retail that they cannot access. ETFs may be the best available option at the moment. FT

The Macintosh Classic Classic Apple. As its Big Tech brethren continue on their AI-infrastructure spending bender, Apple continues a shift of its own that seems all too familiar.

While sales of the iPhone, which make up around half of the company’s revenue, have been declining, and Thursday’s quarterly report showed another 10% drop in sales, the company’s quarterly results were, on the whole, well received, thanks, in part, to its services business, which has emerged as a bright spot and the source of continued profit margin growth. 

The Services segment (including the App Store, Apple Pay, Apple TV+, and Apple Music) saw revenue growth of 14% in the company’s second quarter – gains that, along with some cost cutting, were instrumental in boosting the company’s gross margins to 12-year highs of 46.6%, up from 45.9% in the prior quarter. 

While Apple stock has been in the doldrums for years, with or without analysts noticing, Apple has been boosting its margin profile all along. Efficiency has been a theme that reads fresh for tech as a whole, especially after last year’s shift to profitability and leanness in the wake of the sector’s post-pandemic overhiring hangover, but for Apple efficiency has been the name of the game for years, as it has sought to perfect in practice its philosophy of spending less to make more.

Unlike, say, Meta, Apple has been executing on AI in a more capital-efficient manner, and this could be key to the company’s AI strategy, so far quite consistent with Cupertino’s longtime approach of not rushing into product categories, but rather thinking things through and being better, not first: thus exploiting some trends created by others, while generating – and then dominating – many of its own.

Case(s) in point: computers, MP3 players, phones, tablets, headphones, VR headsets. While most of these have been resounding successes for Apple, all of them were categories in which the company arrived later than the competition.

In its AI strategy Apple is likely to capitalize on its burnished brand and walled-garden ecosystem, while continuing to foster the margin boom that has defined its last few years of corporate life. LinkedIn