The AI War Continues

Earlier this month, SEC documents revealed Elon & Co. are seeking to raise $1bn in funding for X.AI. [The Daily Peel... ]( December 13, 2023 | Peel #605 Silver banana goes to... [Brilliant. ]() In this issue of the Peel: - Last month, the U.S. economy saw aggregate prices increase by 3.1% from a year ago and 0.1% from the prior month. - CAVA Group and Zillow Group had a ripe day, while Oracle and Lucid Group suffered a share price decline. - Earlier this month, SEC documents revealed that Elon & Co. are seeking to raise $1bn in funding for X.AI. Market Snapshot Happy Wednesday, apes. Christmas is officially 12 days away, apes, which I think means this is the official first day of Christmas? I expect to see many partridges in pear trees in the Daily Peel Global Headquarters today. Don’t disappoint! Markets certainly didn’t disappoint yesterday, however, unless you’re the Russell 2k and you decide to take a sudden dive at the end of the session to finish the day down 0.10%. The other U.S. majors were up on the day, with the Nasdaq’s 0.70% gain leading the day as large-cap stocks were back on top. Once again, the boring sectors like real estate, utilities, and energy were the only S&P sectors to fall. Thankfully, for my retirement, [WSO Alpha]( managed to actually gain on the day, rising 0.43%. Congrats to the room-temps over on that team. I think all your choice words for them yesterday served as true motivation. Meanwhile, treasury yields pushed higher on the day as a flat Core CPI reading convinced bond markets that JPow is coming out extra spicy later today during the December FOMC meeting’s press conference. The 2-year rose mildly to the ~4.735% range while the 10-year spiked too, hanging around the coolest rate possible at 4.20%. Let’s get into it. Invest in Your Biggest Asset: Your Brain [image]() From unpacking AI and LLMs to navigating a sea of data, Brilliant helps you conquer the complex concepts you need to stay one step ahead of the pack. With thousands of highly-visual, bite-sized lessons that break down essential topics in everything from math and logic to data science and programming, Brilliant makes it easy (and fun) to level up in just minutes a day. Interactive content and hands-on problem solving keep you engaged and motivated, so it’s easy to build a daily habit. [Try Brilliant](=) for zero bananas for a full 30 days. Plus, Daily Peel readers will get a surprise when they click through. Banana Bits - Just a day after November’s CPI report, the economic overlords are keeping us entertained with an [FOMC meeting]( later today. - The big red streaming giant is finally deciding to tell us how edgy and cool we are, acquiescing to the request to release [viewing statistics](=) for almost every title. - As someone who loses all of their possessions on a regular basis, I can’t wait to use this [stolen iPhone feature]( that Apple is introducing. Macro Monkey Says Diss-Inflation American poets and scholars like Eminem, 50 Cent, Eazy E, and a slew of others are famous, in part, for their ability to completely and utterly destroy the livelihoods of others through their diss tracks. Tupac’s Hit ‘Em Up might be the most disrespectful of all time, but we think JPow could potentially steal the crown with one of his own. We may have just gotten to the point where Fed Chair Powell could, should, and arguably needs to release a diss track against inflation. After all, the Fed is trying to get more in touch with the kids through their [Instagram.]( What better way to do it than for JPow to drop the Hit ‘Em Up of macroeconomics? To be fair, the guy has already bodied inflation, or at least, that’s what yesterday’s data partly suggests. Maybe it’s just plain mean at this point? Whether or not we’ll get a certified hood classic from the Fed is up for debate, but the Bureau of Labor Statistics (BLS) did release the inflation print for the month of November yesterday. Last month, the U.S. economy saw aggregate prices increase by 3.1% from a year ago and 0.1% from the prior month. That’s a slight step down from 3.2% in October, continuing the trend of disinflation. "A monthly decline of 0.1% in the rate of inflation isn’t much, but it sure is honest work." A monthly decline of 0.1% in the rate of inflation isn’t much, but it sure is honest work. On the Core side, however—when we remove volatile food and energy prices from the basket of goods that headline CPI is based on—we see Core inflation clocked in at 4% annually in November and 0.3% for the month. That annual figure is exactly in line with October’s reading, meaning we did not see disinflation in Core CPI throughout last month. But this didn’t come as much of a shocker to markets as economists (surprisingly) got this one right and had been anticipating no change to the Core metric. And that’s because there appears to have been a continuation of this fun game of tug of war going on with the American consumer’s wallet. Energy prices continue to move lower, with the index declining 2.3% last month, a slight slowdown from the 2.5% drop seen in October. But at the same time, shelter prices continue to push headline CPI higher, once again coming in as this line item was once again the top contributor to inflation last month. Shelter costs rose 0.4% for the month and a big 6.5% for the year. Keep in mind that your dog could come up with a better way to measure home prices in national inflation reports released by the government because, literally, anything else is better than the “owner’s equivalent rent” nonsense we use. As a reminder, that reading typically makes up ~1/3rd of the basket of goods used in measuring CPI, and they calculate it by asking U.S. homeowners how much they think they could rent out their homes for… see your dog might not be a genius, but he can definitely smell something fishy going on there.­­­ But alas, your dog isn’t the chair of the FOMC. That’s the boy JPow, and we’ll get to hear from him later today with the Fed’s latest decision on rates. "... we’ll get to hear from him later today with the Fed’s latest decision on rates." Oh yeah, did I forget to mention the FOMC is meeting today? Not exactly a whole ton of time to digest this new data release, but an interest rate move in either direction would come as a huge surprise to markets even without the November CPI being released. Now, as the disinflationary process appears to be slowing down itself, the question is whether or not the Fed has done enough to get inflation back down to that 2% target. We’ve been harping on the past few years as the “fastest rate hiking cycle in history,” but even that could require an extension to tame the beast of inflation. Hawkish comments from JPow later today could signal that, and if it does, expectations for rate cuts in March/May of 2024 could disappear, and we all know that’s no good for our portfolios. Bond yields spiked in the immediate aftermath of the release, highlighting that schizophrenia exists even among the “smart money” and signaling that JPow and the boys could be even more hawkish going forward. I didn’t realize that was possible, but I guess you learn something new every day. Or maybe we can just call it quits and bump the inflation target to 3% or something. After all, the best reasoning ever provided to explain why economists chose 2% as the target was “because 1% is too low and 3% is too high.” Well said, and economists wonder why other Nobel prize categories make fun of them… What's Ripe Cava Group (CAVA) $38.87 (↑ 19.64% ↑) - Anyone who's ever been into a Cava location knows that… it’s a little weird (like, what is that smell in there?) But regardless, so is the stock and its underlying capital structure. - Shares ripped yesterday, but it wasn’t actually because the company did anything new. Basically, companies usually have a lock-up period in which a certain portion of the total outstanding shares can’t be sold for a certain period, or, in this case, 180 days. - Well, it’s been 180 days, and that lockup period has now ended. Typically, this leads to a sizable increase in the number of shares openly traded and, as is the usual case when the supply of anything increases, the share price falls. - Apparently, Cava is built different, and despite the ~10x usual trading volume seen yesterday, there were still a helluva lot more buyers than sellers. Naturally, shares ripped in response, leading to a nearly 1/5th increase in value on the day alone. Zillow Group (Z) $47.26 (↑ 3.75% ↑) - Zillow probably should’ve changed its name to “zero” a little while ago as that much more accurately reflects the activity going on in the housing market, which is precisely what this firm needs to survive. But analysts at JMP Securities don’t give a damn. - Shares moved almost 4% higher on the day as the stock got an upgrade from the middle-market investment bank, rerating shares from “market perform” to “outperform.” - And apparently, Wall Street agreed. Zillow is still down well over 75% from recent highs seen in 2021, but the analysts at JMP smell an increase in residential real estate demand on the horizon that they think will warm up a market that’s been frozen ever since JPow dropped its rate hiking nuclear bomb. What's Rotten Oracle (ORCL) $100.81 (↓ 12.44% ↓) - An “oracle” is often described as someone that can see into the future, or some sh*t like that, as the Greeks and Romans really liked to include these schizo mfers in their stories. - But clearly, Oracle couldn’t see into the future on this one. Immediately after releasing their latest quarterly results, nausea spiked across the country as analysts immediately fell sick after looking at the firm’s numbers. - Revenue missed estimates, and as we’ve discussed, that’s been the cardinal error this earnings szn as the third quarter has largely been a test for how much demand these firms can hold in an assumed economic slowdown. EPS of $1.34/sh vs $1.32/sh was a respectable beat, but the $12.94bn in top-line revenue took a big swing and a miss vs the $13.05bn that was expected. - Guidance wasn’t too terrible either, but [see above] that revenue miss bit them in the *ss fast and hard. The B2B market has been particularly challenging in recent months, so it’s no surprise to see the boomer version of Salesforce or Microsoft, that is, Oracle, take an L this quarter. Lucid Group (LCID) $4.22 (↓ 8.46% ↓) - Everybody should just start laughing now—what just happened to Lucid is precisely the opposite of what any investor wants to see. - Lucid, the mini-Tesla trying to make a name for itself in the EV market, just lost their CFO in an abrupt, unexpected departure. Sherry House, Lucid’s CFO since 2021, resigned Monday night with little apparent reason… - I mean, I guess the reason could be that the stock is down 92% from highs seen in late 2021, or it could have something to do with the fact that the stock is also down over 57% in its entire trading history, or maybe it could have something to do with the company getting the boot from the Nasdaq 100 on Friday. But, not that it just be crazy… right?? Thought Banana R-AI-sing Cash The AI wars have arguably been the business story of 2023 (stay tuned for the Platinum Banana awards to find out) as this new technology has quickly disrupted much of our lives, perhaps most notably for cheating your way through college. RIP to Chegg on that one, but now the AI wars are finding themselves in a war of their own that’s much, much older than even computers—the war for cash. According to actual smart people who understand technology, OpenAI and Microsoft are the clear leaders in terms of capabilities within the space through GPT-4, but with Google’s newly released Gemini model, they’re apparently catching up. Professional wild man Elon Musk just weeks ago released Grok, or X.AI’s first LLM designed to compete with those listed above and all the other LLMs out there. It might not have the capabilities (yet), but the attention received by this thing has been as you’d expect anything to do with Elon Musk to be… extreme. And now, both X.AI and OpenAI are trying their hardest to reveal as little information about themselves as possible in order to free up some capital, but for very different reasons. "... both X.AI and OpenAI are trying their hardest to reveal as little information about themselves ..." Earlier this month, [SEC documents](=) revealed that Elon & Co. are seeking to raise $1bn in funding for X.AI. Of that, $135mn has already been sold among 4 investors, but the firm is still looking to raise an additional ~$865mn. That’s a whole lot less than the ~$14bn OpenAI has raised from Microsoft alone, but apparently, Elon and the allegedly funny chatbot think they’ve got all they need. And that’s the cool thing about this Grok dude. I don’t know him personally, but X.AI has already warned potential users that “Grok is designed to answer questions with a bit of wit and has a rebellious streak, so please don’t use it if you hate humor!” and that Grok has the balls to “answer spicy questions that are rejected by most other AI systems.” "... who wouldn’t want to cash in on a piece of an $86bn pie after all?" We’ll see about that. Meanwhile, over at the company behind the OG chatbot that refuses to answer pretty much any fun question, OpenAI employees and investors are looking to get a little wet. Sorry, not wet but *liquid. Got confused there for a second. The company has been hyping up an active tender offer that has given the world’s hottest startup an $86bn valuation by allowing employees to sell restricted shares at the “fair market value.” So the company itself might not be in the market for cash, but damn, those employees sure are… who wouldn’t want to cash in on a piece of an $86bn pie after all? However, both X.AI and OpenAI have dug themselves into tricky situations around these capital raises and tender offers. For X.AI, the ownership structure is completely unclear as, apparently, former Twitter (X?) shareholders will actually own 25% of X.AI, given that the chatbot has been trained on the social app's enormous repository of data. Meanwhile, OpenAI is like that unemployed friend who “claims” to be looking for a job but is actually just vaping in their parent’s basement all day. The “nonprofit” status of this company (because that’s what it is, a company) has made OpenAI’s financials a “black box,” according to non-profit financial experts like Professor Thad Calabrese at NYU. As if the AI space is ever boring, now it seems to be a particularly fun time to be artificially intelligent. Personally, I wonder what it’s like to be intelligent at all, but it’s barely even been a year since ChatGPT dropped… imagine where we’ll be by this time next year. The Big Question: How will this AI war shake out? Will ChatGPT be the next “Google,” or will Grok/Bard steal the spotlight? When will we get more transparency in OpenAI’s ownership structure? Is OpenAI really “nonprofit? Banana Brain Teaser Yesterday — You have two cards, one red on both sides, one red on one side, and black on the other. You reach into a hat and pull out one card, viewing only the top. It is red. What's the probability that the other side is red? Answer The probability that it is red is 2/3. If you think of the 3 red sides as labeled r1, r2, and r3, then 2 of the 3 times you see a red card, it will be red on the other side. Today — At the local games evening, four lads were competing in the Scrabble and chess competitions. Liam beat Mark in chess, James came third, and the 16-year-old won. Liam came second in Scrabble, the 15-year-old won; James beat the 18-year-old, and the 19-year-old came third. Kevin is 3 years younger than Mark. The person who came last in chess came third in Scrabble, and only one lad got the same position in both games. Can you determine the ages of the lads and their positions in the two games? Shoot us your guesses at vyomesh@wallstreetoasis.com Wise Investor Says “I don't care half so much about making money as I do about making my point and coming out ahead.” — Cornelius Vanderbilt How would you rate today’s Peel? [All the bananas]() [Decent]() [Rotten AF]() Happy Investing, Patrick & The Daily Peel Team Was this email forwarded to you? 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