Neuro Gum | September 4th, 2024

Today's insights are courtesy of Neuro, they empower better minds with innovative functional gum and mints using science-backed formulas consciously formulated to work fast.

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GOOD MORNING

Here's everything you need to know today: Tuesday delivered a face-ripping session for the markets, with the S&P 500 taking its worst hit since the August 5th debacle, nosediving over 2%. The Nasdaq 100 fared even worse, shedding 3.1%, while the Dow limped behind with a 1.5% drop. Fallen idol Nvidia led the tech sector’s swan dive, plunging 9.5%, and Boeing got clipped by 7.3% after an analyst downgrade for, well, being Boeing. It was the kind of day that makes you wish for a three-day weekend… wait.

What’s driving the broader panic? Traders are sweating over the Fed, betting on an unusually steep rate cut—possibly more than two full percentage points over the next year. Usually, a rate cut might offer a lifeline to equities, but when the Fed’s in panic mode, it’s less of a lifeline and more like monetary policy triage.

Treasury yields tumbled, the yen got a boost as Japan’s central bank teased rate hikes, and oil prices slid on global demand worries. And with Friday’s payrolls report looming, the market is bracing for whatever might push Jay Powell to choose between a 25 or 50 basis-point cut. Or he could just flip a coin.

Let’s Dive Into More Details Below…

BREAKING NEWS
CrowdStrike’s 2024 “Global Threat Report” warned of the accelerating speed and intensity of cyberattacks, highlighting how adversaries are compressing the time between initial entry, lateral movement, and breach. This cautionary message was underscored by Tuesday’s reveal of a major data breach at Halliburton, a key player in the energy industry and the company involved in the 2010 Deepwater Horizon oil spill. While this latest breach didn’t involve oil, the potential fallout from compromised data in such a critical sector could be even more devastating.

This most recent data breach at Halliburton, involving a company with extensive reach in the upstream oil and gas sector, highlights the ever-present and evolving threats that cybersecurity firms are tasked with defending against. The implications of compromised data in such a vital industry could be catastrophic, further emphasizing the essential role of companies like CrowdStrike in the fight against cyber threats.

WHAT HAPPENED
Circling back to Halliburton, the risk of further infection is high due to the company’s vast, interconnected systems. Halliburton isn’t just a player in the global energy industry; it’s a powerhouse, serving a massive network across multiple continents, providing essential services for offshore exploration, deepwater drilling, and onshore operations. Continued breaches could have catastrophic ripple effects, stretching from North America to the Eastern Mediterranean, from the Arctic to Australia.

Sensitive data leaks could cripple not just Halliburton’s operations but also those of its clients and partners worldwide. Delays and inefficiencies might drive up energy production costs, leading to higher prices for consumers and businesses. Imagine another wave of inflation, pushing Fed Chairman Jerome Powell toward early retirement. Disrupted oil prices could destabilize entire energy-dependent regions.

While Halliburton downplays the breach’s immediate impact, the long-term consequences—legal risks, reputational damage, and financial fallout—could be severe. Just look at CrowdStrike. This is the last thing global markets need, especially with energy policies and international relations already strained by ongoing conflicts. If these attacks spread to competitors like Schlumberger, Varco, and Baker Hughes, nations might be forced to partner with less capable firms, leading to shifts in alliances and weakened global stability.

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BREAKING NEWS
Volkswagen is in a bit of a pickle (well, Germans love pickles, so fill in your own trouble food metaphor here). As Europe’s top carmaker stares down the barrel of a potential factory closure in Germany for the first time, the pressure from its Asian rivals is becoming too big to ignore.

In fact, while VW’s challenges might seem personal, they’re just the signal of a seismic shift in the automotive industry, with the ripple effects threatening to shake the foundations of the European car market. Yeah, it’s not so Fahrvergnügen over there.

WHAT HAPPENED
Volkswagen is considering shuttering not one but two of its factories in Germany, including one large vehicle plant and one component factory. This is a monumental move for a company that has been a cornerstone of German industry for decades. The reason? Mounting price pressures from Asian competitors, particularly in the electric vehicle space, are forcing VW to rethink its entire strategy. The idea of closing these factories is the first major clash between VW’s relatively new CEO, Oliver Blume, and the company’s powerful unions, who are already vowing “fierce resistance” to the executive board’s plans.

But that’s not all. The European Commission has been floating the idea of imposing a 21.3% import tariff on Chinese-made vehicles, like VW’s own CUPRA Tavascan, an all-electric SUV that’s designed in Spain but made in China. And raising the price of the Tavascan isn’t really an option either. In the current European economic environment, hiking up the price tag from the already steep $57,500 could be the sales kiss of death. So why not just move production, you might be asking? Well, because VW has blown a crater of sunk costs into the Anhui plant as part of a joint venture with China’s JAC Automobile Group. VW definitely finds itself in a position without any right answers, but we’re sure there’s a German compound word for that emotion.

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BREAKING NEWS
If you’re still clinging to the idea that the market operates on a level playing field, it might be time to check your compass. Citadel Securities and Jane Street are busy making billions off their increasingly dominant market-making businesses, all thanks to their not-so-secret weapon: payment for order flow.

Okay, you’re likely thinking, “Another PFOF explainer? Is it 2021 already?” Fair enough. But we really should have this conversation again—not just because Citadel and Jane Street are raking in so much cash it’s impossible to ignore, but because Cliff Asness (yes, that Cliff Asness) is now sounding the alarm that this booming PFOF hustle is making markets dumber and less efficient by the day.

WHAT HAPPENED
Let’s break down the numbers that have everyone buzzing. Citadel Securities saw its net trading revenue skyrocket by 81% to $4.9 billion in the first half of the year. Not to be outdone, Jane Street casually pulled in $8.4 billion, a 78% jump that would make even a VP at Salomon Brothers in 1986 blush. Both firms are on track to smash their own revenue records, muscling into territories that big banks used to guard with their middle managers’ lives: corporate bonds, interest-rate swaps, ETFs—you name it. Citadel has even elbowed its way into European interest-rate swaps, while Jane Street is ruling the ETF and credit trading worlds like a newly conquered fiefdom.

But here’s where Cliff Asness enters the chat. Asness, the managing principal at AQR Capital Management, has been vocal about, well, a lot of things, but lately, he’s been laser-focused on how the market has been getting dumber over time. He’s particularly perturbed by how stocks are priced, which is basically Asness’s bread and butter.

As Big Cliff puts it in a new research paper for The Journal of Portfolio Management, “Markets have gotten less efficient, making disciplined, value-based stock picking both riskier and likely more rewarding long-term.” And guess what? It’s not hard to see how. The rise of PFOF, where market makers like Citadel and Jane Street pay brokers to route retail orders their way, is Exhibit A of how market dynamics have shifted… and we’re not saying for the better, necessarily.

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1. Hewlett-Packard to Pursue $4 Billion Claim Against Mike Lynch’s Estate

Hewlett-Packard confirmed it will continue its $4 billion lawsuit against the estate of Mike Lynch, the British tech entrepreneur who died in a yacht accident. The case stems from the 2011 acquisition of Lynch’s software company, Autonomy, which HP claims was fraudulently overvalued.

2. Volkswagen Considers Factory Closures in Germany Amid Cost-Cutting Efforts

Volkswagen is contemplating closing factories in Germany for the first time in its history as part of an aggressive cost-cutting strategy. The move is driven by declining demand for electric vehicles and rising competition from Chinese manufacturers.

3. Cathay Pacific Grounds Airbus A350 Fleet Over Engine Component Failures

Cathay Pacific has grounded its entire fleet of Airbus A350 aircraft after discovering engine component failures in 15 of its planes. The airline has canceled dozens of flights, and the issue has sparked concerns over the reliability of Rolls-Royce engines used in these aircraft.

4. Constellation Brands Slashes 2025 Earnings Outlook, Takes $2.5 Billion Charge

Constellation Brands has lowered its earnings outlook for fiscal year 2025 due to weak demand in its wine and spirits division. The company will also take a goodwill impairment charge of up to $2.5 billion, reflecting ongoing challenges in the alcoholic beverage market.

5. Super Micro Computer Denies Short-Seller Allegations, Addresses Filing Delay

Super Micro Computer has issued a response to allegations made by short-seller Hindenburg Research, stating that the claims are misleading. The company also addressed its delayed financial filing, assuring stakeholders that no significant changes are expected in the reported results.

6. Elon Musk’s xAI Launches World’s Largest AI Supercomputer with Nvidia GPUs

Elon Musk's AI startup, xAI, has activated Colossus, the world's largest AI supercomputer, powered by 100,000 Nvidia GPUs. The supercomputer is expected to significantly advance AI training capabilities and bolster Nvidia's position in the AI hardware market.

7. Former Volkswagen CEO Winterkorn Faces Trial Over Dieselgate Scandal

Martin Winterkorn, former CEO of Volkswagen, is on trial for fraud and market manipulation related to the Dieselgate scandal. The 2015 emissions scandal, which revealed that VW rigged diesel engines to cheat emissions tests, has had long-lasting repercussions for the company.

8. Intel and Volkswagen Reevaluate Major Investments in Germany Amid Economic Woes

Intel and Volkswagen are reconsidering multi-billion euro investments in Germany as the country grapples with a prolonged recession. Intel may pull out of a €30 billion factory project, while Volkswagen is considering plant closures, raising concerns about the future of German industry.

9. Citadel Securities and Jane Street on Track for Record Revenues in 2024

Citadel Securities and Jane Street, two leading market-making firms, are set to achieve record revenues in 2024. Their growing dominance in the trading industry is putting pressure on traditional banks, which have seen their market share decline.

10. Nvidia Stock Drops Nearly 10% Despite Strong Q3 Revenue Guidance

Nvidia shares fell almost 10% despite issuing strong revenue guidance for Q3. Investors expressed concerns over the sustainability of Nvidia’s growth, particularly in the AI sector, which has been a major driver of its recent success.

CONTINUE READING ➔

Today's insights are courtesy of Neuro, they empower better minds with innovative functional gum and mints using science-backed formulas consciously formulated to work fast.

Learn More Here ➔

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