We are living in a bifurcated world. If someone is happy, another person is sad. If one stock group is up, another has to go down. If your team loses, mine has to win. What does this mean?
The hot topic today is artificial intelligence (AI). The predominant fear is that if AI does well, jobs are going to be lost. The fear is that it’s a zero-sum game. If AI does poorly, then jobs are safer. What jobs are safe and which ones aren’t is part of the bipolar world we are living in right now. Let us compare that to how the stock market is dealing with this event.
For 30 years the best investments in the stock market have been software stocks that lock you into their code and raise prices every year. When Anthropic released an AI program called Mythos which does programming for you, ALL software stocks plummeted. How much is the plummeting? Microsoft is down 31%. Intuit is down 67%. Shopify is down 32% and Adobe is down 63%. We will stop there. These stocks have been viewed as safe havens, and they were trading at very high PE multiples. That is changing. We are actively researching this group because we think AI will be a threat to some software stocks but not all of them. In some cases, using Mythos to eliminate coders will improve the productivity of software companies and save them money. We also question the winner-take-all approach to the AI theme. Making it easier to program with AI doesn’t mean that everyone will rush to replace Microsoft Windows or IBM AS/400s. We don’t think it’s that simple. If Mythos writes me a program, will I use it to drive my car? Take over my checking account? Be my doctor? We don’t think so. Given the right prices, you will see us being active in this group.
Another trend we have seen in the markets this quarter is that if semiconductor-related stocks go up, software stocks and finance stocks must go down. Hedge funds love to do pair trades where they are long one group and short another as a hedge. It’s pretty obvious the long semis / short software stocks is a big one. Why do hedge funds do pair trades? So they can borrow more money and leverage their accounts by thinking they are hedged. We don’t think this is a great idea, but we are pointing it out to let you know it is driving the trading in this market.
The markets continue to trade based on the two wars going on in the world. The price of oil has pulled back from over $100 to $70 as we type this. The markets continue to think the world will have plenty of oil to use. What has changed this quarter is the refining capacity of that oil. Ukraine has been very effective in blowing up Russian refineries. Iran has blown up their rivals’ refineries as the US has targeted Iran’s. The ramifications of this are that we might have plenty of oil in the world but have gas, diesel, and jet fuel shortages. Russia produces around 9 million barrels of oil but they can’t refine all of that anymore into gasoline. They have been a net exporter of diesel fuel for 20 years and now they are having to import fuel from neighboring countries. This change in production is causing the price of fuel to go up regardless of which way the price of oil goes. It is possible the USA could face gasoline shortages this year if the world continues to blow up foreign refineries and seek our gasoline and diesel exports as a replacement. This is a situation that isn’t getting a lot of press but could be very damaging to consumer confidence in the US.
One final sector we have been researching is retail stocks. As a group they are doing poorly, which makes us interested. Housing sales are doing poorly and discretionary spending on clothing and food has been impacted by higher gas prices and interest rates. We think there is a possibility we will increase our investment in this area over the coming 12 months if the stocks continue to do poorly. Housing sales contribute a lot to GDP and consumer spending. Congress is working on a bipartisan bill to increase home ownership that we think could help this area.
As always, feel free to call us if you have any questions.
Sincerely,
Mark Brueggemann IAR Kelly Clift IAR Brandon Robinson IAR