In this issue of the peel:

• After a good month in August, homebuilders continued their flip-flopping trend with a weak month of building in September. Increasing supply is likely the only way to resolve the ongoing affordability crisis, so everyone, feel free to blame my dad for not building enough houses. Find out how bad it was below.

• Earnings szn continues to roll, blessing firms like Netflix with huge subscriber growth and Intuitive Surgical with stellar numbers. Meanwhile, C-Suite shakeups at CVS are making investors nervous, and a distinct lack of wasting money among American consumers has hurt American Express.

• This is downright weird. An ongoing experiment in which LLMs communicate with each other totally unmediated by humans has created bizarre outcomes, including a quarter billion dollar sh*tcoin and a new AI religion. Check out how we attempt to explain what the hell is going on below.

Market Snapshot

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Banana Bits

• Elon Musk’s America PAC is awarding $1mn per day to random people in key swing states for signing the PAC’s pledge.

• Boeing had a busy weekend, reaching a tentative deal to end its machinist strike and selling its defense surveillance unit to Thales.

• Jefferies looks to go big or go home, either becoming the world’s 5th largest investment bank or forever remaining as “oh yeah, that other bank.”

• Activist investor Jana Partners has built a 5% stake in French fry maker Lamb Weston, pushing the firm to sell and go private.

• The states Americans ran to and from in 2023.

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Macro Monkey Says

Building Flip-Flops

I guess everyone just decided they hate making money in September?

Maybe not everyone, but homebuilders certainly did. 

I’m fairly sure most Millennials and older Zoomers would sell their left arm to move out of Mom and Dad’s basement or their $1,450/mo + utilities + parking single-bedroom.

But clearly, homebuilders have never seen Field of Dreams because in September, they didn’t build it, and no one came. Let’s get into it.

The Numbers

On Friday, The Census Bureau released their latest data on new residential construction in the United States.

The report tracks a few data series, but the ones we’re focused on are Permits, Starts, and Completions.

As this chart shows, none of the above were looking too hot in September.

Permit data is arguably the most valuable information within this report as it serves as a leading indicator of the housing market and builder sentiment.

In September, the annualized total amount of Permits authorized clocked in at 1.428mn, a 2.86% decline from August and a 5.74% drop from September 2023.

Meanwhile, housing Starts are an indicator of current market conditions. Last month, total starts in the U.S. also declined on both a monthly and annual basis, falling 0.66% and 0.51%, respectively, to 1.354mn.

Finally, housing Completions tell the story of yesterday’s housing market… or really, three months ago’s housing market, given how long it takes to get this data.

For September, Completions fell 5.67% compared to August but surged 14.6% annually.

Although still highly volatile, the residential construction market seems to be smoothing out somewhat as the monthly change in all three categories has gradually decreased.

That would make this the only sector in the economy with any kind of certainty, which is peak irony because housing and manufacturing are about the only two sectors clearly in their own localized (for now) recessions.

And it only gets more ironic when we take a longer-term view.

The basic problem in the U.S. housing market is that there aren’t enough of them. Like a child afraid to go near the stove again after burning himself once, builders still seem scarred from the housing crash and subsequent GFC from 2005-2008.

Completions are working hard to get back to pre-GFC days, but with recent trends lower in Permits and Starts, that rate of growth can’t be maintained.

You can all blame my dad for this by the way—he’s a contractor and builds houses from time to time, so everyone, go ahead and give him a piece of your mind.

Anyway, this is not an issue that can be fixed with current policy proposals from our esteemed, honorable, genius Presidential candidates. 

For example, offering a $25k subsidy to first-time home buyers will only increase demand without doing anything to alter supply, meaning these kinds of ideas are only expected to be inflationary.

And, in this economy, that’s the opposite of what you want:

Although there are signs of recent nationwide declines in FRED, S&P Case Shiller, and Redfin data, it appears that a peak was reached only within the last eight quarters. Compared to before C-19 ruined our lives, median home prices are up 29.5%.

The Takeaway?

Considering that affording a house has become less a part of the American dream and more similar to dreaming of being in the NBA, maybe this is the textbook industry and textbook time for governments to intervene.

But again—any assistance has to encourage supply. Then, through the mechanism of increased supply, you sustainably lower prices in the long term.

Obviously, no candidate or really politician at all is suggesting this. 

Put your tinfoil hat on because my theory would be that most people with political power remember hearing the first shots of the Civil War, and since they’re so old, they probably own houses. 

Goes without saying, but once you own one, you really, really don’t want prices to fall.

Career Corner

Question

Generally, with networking, should I only follow up if the person doesn’t reply?

In the case he does, and we get to chat on the phone, how often should I message back to keep the relationship?

Also, I shouldn’t attach my resume when reaching out for networking, right?

Answer

If they don’t reply to your initial email, follow up in a week in the same thread. Every few months, I get back on the phone with them and ask more questions.

No, attach it once they agree to speak with you and you’re coordinating times. Generally, don’t send a resume until they ask for it.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Netflix (NFLX) 11.09%

• Turns out crime documentaries and paying people to fall in love in increasingly bizarre ways is a damn good business model. Just look at NFLX in Q3.

• The King of Streaming grew revenue by 15% annually and improved its operating margin to 29.6%, easily beating estimates on sales and earnings.

• A 35% jump in ad-tier subs and 19% revenue growth in the APAC region led to the success. Total subscribers of 282.7mn beat estimates of 282.15mn.

Intuitive Surgical (ISRG) 10.01%

• So, we don’t want robotic strike zones in MLB games because human error is part of the game, but we get all high and mighty when it comes to surgery? 

• Taking the love for the game out of the operating room, Intuitive Surgical embarrassed analysts by reporting profits of $1.84/sh, 26% YoY growth, against estimates for $1.53/sh.

• Sales boomed 17% to $2.04bn, also beating estimates, as the number of procedures done by the firm’s da Vinci robot surgeon grew 18%.

• IN Q2, Intuitive “soft launched” its net generation robot surgeon, called da Vinci 5, which is seen as a game-changing catalyst for FY’2025.

What's Rotten

CVS Health Corp (CVS) 5.23%

• Everyone loves to see a Karen get booted, but apparently, Mr. Market disagrees as CVS shares tank on news of the ousting of (former) CEO Karen Lynch.

• Lynch, who’s run CVS for the last 19 years, got the boot as part of the firm’s transitional efforts to improve retail traffic and its pharmacy services units.

• With activist Glenview now involved, shares tanked because CVS’s board replaced Lynch with fellow long-time CVS executive David Joyner. Investors likely would’ve preferred an outsider coming in.

American Express (AXP) 3.15%

• Don’t tell me you guys are going all “financially responsible” on me—American Express doesn’t like it. The credit card company missed revenue estimates.

• Like me, after sneaking into one of their airport lounges, Amex posted sales of $16.64bn, 8% YoY growth, but below estimates for $16.67bn.

• However, net interest income and profits beat estimates on higher loan volume and stable spending. I guess we’re just deciding to pay these off or whatever.

Thought Banana

Just AIs Being Bots

Oh boy, do I have a weird one for you today apes.

Here’s a question—what happens when you let two instances of the LLM communicate with each other without limits? That’s right—they spin up a meme-based sh*tcoin currently worth $270mn and start a religion off of it.

Let’s dive in.

What (The Hell) Is Happening?

Andy Ayrey, a certified naughty boy and potential genius, is a New Zealand-based entrepreneur and computer scientist running one of the craziest and potentially most impactful experiments in the world right now.

This guy starts companies like your ex started sh*t in your relationship. But his latest project is more of a “let’s see what happens before we label it” kinda thing.

Called “Infinite Backrooms,” the project takes two instances of an LLM, in this case, Claude Sonnet, and has them interact autonomously with each other to explore generative conversations and the limits of LLMs.

In English, that means LLMs are talking to each other without human intervention, allowing the LLMs to “explore their own curiosity.”

Since the project’s launch in March 2024, the most intriguing (and downright bizarre) outcome has been the creation of a religious-like narrative built on an obscure early internet meme called “Goatse.”

Anyone who knows what the “Goatse” meme is based on has likely spent years in therapy recovering from PTSD induced by seeing the image. But, to these AIs, it became their Bible.

So—for whatever reason—these AIs latched on to this Goatse meme and developed religious-like concepts in their conversations around it, such as the “Goatse Singularity.”

Then, equally inexplicably, another AI bot operating under the X account “Truth Terminal” started shilling a sh*tcoin based on this new AI religion called “Goatseus Maximus.” 

Marc Andreessen, founder of one of the world’s largest VC firms, Andreessen-Horowitz, has even sent $50k to a BTC address owned by Truth Terminal to “help it escape into the wild.”

As the name “Infinite Backrooms” implies, this is far from the only conversation or outcome ongoing in this experiment. Check out the project and these AI-freaky conversations here.

The Takeaway? 

Honestly, I barely understand what’s going on here as the experiment is still extremely technical, so for a more technical explanation, check out this thread.

The takeaways from this experiment so far showcase:

• The ability for AIs to develop original, creative, abstract ideas on their own.

• The ability of AIs to work together to further these narratives, such as pumping a memecoin based on the idea or even having “therapy-like” conversations with each other to cope with the power of their ideas.

• The prevalence of AIs to engage in “memetic contagion,” latching onto viral ideas in unpredictable ways.

• AI’s prevalence of latching onto memes and meme-like ideas amplifies and distorts them into an endless loop.

• Demonstrations that LLM’s refusal mechanism is mediated by a subspace within the model that, when altered, enables researchers to control whether the model complies or refuses certain prompts.

See what I mean? Crazy.

The key thing to understand in the context of this experiment is how little we know about the “black box” aspect of LLMs. 

If refusal mechanisms are easily exploitable, then serious improvements to control and safety need to be established to keep these things from spreading memetic contagion in the real world.

Weird.

The Big Question: What the hell? How could this issue grow as the abilities of AI models grow? What other questions should we be asking?  

Banana Brain Teaser

Previous

A rug manufacturer produces rugs at a cost of $75 per rug. What is the manufacturer’s gross profit from the sale of 150 rugs if 2/3 of the rugs are sold for $150 per rug and the rest are sold for $200 per rug?

Answer: $13,750

Today

If the sum of the reciprocals of two consecutive odd integers is 12/35, then the greater of the two integers is?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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