26 Nov Capital 19 Catch-Up
Weekly Index Movement
|Aussie All Ords
The catch-up rally continued last week and will probably roll on into year-end. US Stocks have an almost goldilocks scenario. Profits came in 1.3% higher than the same period last year, the economy is growing and the next move in interest rates by the Fed will be down.
Talk is we have the elusive soft landing no one thought would happen.
Enjoy it while it lasts. I suspect things will get more difficult next year. But we should have 4+ months of good times before that hits.
Gen Ai is Essential.
I’ve been thinking this week about when we look back at 2023, what will the story be?
Slowing inflation? An end to the interest rate rises? Yes, they happened, but they do not explain the index performance. The real story is Generative Artificial Intelligence or Gen AI.
Consider this. The S&P500 is up around 17% for the year. The table below shows how much each US Big Tech stock has contributed to that return. In total, they constitute 118% of that advance. All of it, in other words, and then some. The other stocks dragged them down. If you had just held these Big US Tech stocks by weight and had the rest (meaning 75% of your portfolio) in cash, you would have done better than the index this year. In other words, you would have risked just 25% of your funds and earned more than by having 100% in the index.
Non-Big Tech stocks have gone nowhere from the end of 2022 because, while earnings have been stable, interest/discount rates are still much higher than a year ago. This should have led to lower prices but markets unwound the recession probability and expanded valuations which just about offset the interest rate issue.
Gen AI was a legitimate catalyst because it appeared almost out of the blue exactly one year ago and has the potential for radical change.
Which brings me to my second thought of the week.
I have come to the conclusion that to succeed in growth investing, you really need to be looking for what is going to CHANGE. If things stay the same then stock prices will not change. However large changes to the future lead to large changes in stock prices.
This is what makes growth investing so hard. Looking into the crystal ball and trying to work out what will be different in 6 or 12 months’ time. We probably get as many of these predictions right as we get wrong.
But Gen AI does truly offer a massive change. The potential for what it can do is enormous. Much as internet 1.0 powered the first real tech rally in the 1990’s, Gen Ai could be the catalyst to cause massive change to everything. And we are just at the start.
If you want growth, you cannot ignore Gen Ai. It is essential in every growth portfolio.
Open.Ai does the Hokey Pokey
Open.Ai is one of (maybe The) leaders in Gen Ai, headed by CEO Sam Altman.
This week Sam was in, out, then back in again, to the role of CEO.
It’s quite a story and goes like this.
OpenAI was started as a non-profit to counterbalance the Silicon Valley profit-based AI efforts, about which many (like Elon Musk) harbor Skynet-like concerns.
However, the massive cost of creating AI chatbots proved too high for the donor model. So the company added a for-profit arm to allow investors like Microsoft, which bought a 49% stake, to jump in.
This arm has a capped profit, and any extra profit goes to the non-profit. An array of other investors and employees own the majority stake in this entity, via a holding company.
To manage this situation properly, there is another for-profit company between the nonprofit and investable company that acts as a manager, controlling both the holding company and the investible for-profit.
The point is, Sam Altman, CEO, fell out with the board. So the board voted him out of his position as CEO.
Microsoft (a 49% owner of the for-profit company) offered Sam a role there. Microsoft must have thought they held the winning lottery ticket for a short time because it is claimed around 700 of the 765 staff signed a letter stating they would leave and go to Microsoft too.
Realising the mistake the board did an about face, brought back Sam and then got rid of three of the board members who were causing the trouble.
The new board members are much more business focussed and include the former CEO of Salesforce and former Treasury Secretary Larry Summers. There were reports more directors could still be added and that Microsoft could still have board representation as well.
It’s good to see capitalism at work and the power of profits make everyone see sense.
Green Energy Costs Too Much
Take a look at what has been happening in ICLN – The iShares Global Clean Energy ETF.
It is down 33% in the last 12 months
Turns out green energy actually costs a lot to install and now interest rates are higher nobody wants to pay for it
I do enjoy seeing it all failing. Means my coal stocks will continue to pay me massive dividends for another decade and maybe more.
I’m a bit late to this but here is another story.
The idea was this solar farm would provide energy for 25 years. It lasted 4 and highlights the problems.
Renewables just aren’t reliable enough. I’m looking forward to black-outs in Australia to see how quickly the public switches back to wanting more coal power.
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.