Silver banana goes to…

In this issue of the peel:

• 🏭 U.S. manufacturing continues to miss worse than Jim Cramer. Thankfully, the services sector is carrying the economy, led by strong hiring in the North Pole.

• 🛩️ UFO sightings are carrying shares in drone makers while Tesla jumps on a fresh analyst upgrade. Super Micro is becoming the Boeing of the tech sector, and Nvidia investors are starting to size up the company’s issues.

• 🌐 AI hype wasn’t enough. Scroll to see the numbers, insights, and inside scoop driving the surge in quantum investment right now.

Market Snapshot

Banana Bits

• Softbank announces a $100bn investment in U.S. projects over the next 4-years; President-elect Trump demonstrates the Art of the Deal by asking the Japanese investment firm’s CEO to double it on the spot.

• Amazon’s new workforce structure is carrying the coffin of the middle manager.

• Broadcom crosses the $1tn line for the first time ever as the chipmaker continues to gain on Friday’s performance.

• Believe it or not, the U.S. obesity rate actually fell in 2023.

• WNBA competitor “Unrivaled” just raised $28mn, including investments from NBA star and current MVP contender Giannis Antetokounmpo (spelled it right without even looking).

The Daily Poll

Previous Poll:

Can Trump’s reforms actually shrink the government?

Yes, it’s doable: 44.5% // Only partly: 32.3% // No, too complex: 10.1% // Politics will ruin it: 13.1%

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Macro Monkey Says

A Tale of Two Economies

It truly is the best of times and the worst of times for the U.S. economy.

Don’t get me wrong—compared to Europe’s museum vibes and Japan’s retirement home pace, the American economy looks like the love child of Adam Smith and Elon Musk.

But, last month, the success of your company—and your paycheck—largely depended on whether you can actually touch and feel the stuff you sell.

Let’s get into it.

What Happened?

Yesterday, S&P Global—which apparently does more than just offer the world’s sickest equity index—released the latest data on activity in the U.S. manufacturing and services sectors.

Last month, the S&P Global Composite Flash U.S. Purchasing Manager’s Index, or U.S. Flash PMI, rose to a record high not seen since early 2022:

The Numbers

In December, the U.S. Flash PMI rose to 56.6 from 54.9 in the prior month. Keep in mind—a reading above 50 represents economic expansion, while below signals contraction.

Increasing only 3.1% might not seem like much, but that’s the fastest one-month jump in activity we’ve seen since March 2022.

And like Kobe dropping 81 in a single game, the services sector put the entire team on its back and then some.

This side of the index rose to its highest level since October 2021 last month at 58.5, a 38-month high, building on strength in expected output and employment.

Output optimism in services hit its highest level since March 2022 in December, while sector employment grew for the first time since July.

A post-election “clearing of uncertainty” has, according to S&P, sent a jolt of optimism through both the services and manufacturing sides of the economy. However, the latter sector has a long hill to climb.

While everyone else is enjoying the party, the manufacturing sector is like that friend who’s pissed, sitting in the corner alone because his friends won’t let him hit their vape.

Output on this side of the index decreased in December to 46.0, a three-month low and a 4.0% decline from November.

This marks the 6th month in a row of contraction for the manufacturing sector and the fastest decline in production since the PTSD-inducing month of May 2020.

Employment improved, but as we can see above, none of the other subcomponents did. The weakness was led by poor export demand and lengthening supplier delivery times.

So, the U.S. services sector is on fire while manufacturing continues to suffer, thanks to fears over international demand and tariff-related inflation. Now I know what you’re all wondering—how does this impact Lebron’s, I mean, *inflation’s legacy?

Prices

Price pressures declined at the headline level in December, but inflation at the subcomponent level looks like a Jackson Pollock painting—mindlessly all over the place, but still “good.”

While overall fairly chill, increases in manufacturing input prices went stupid in December thanks to “supplier-related price hikes” and increases across global shipping rates.

Still, compared to recent history, underlying inflation at the producer level hit a multi-year low.

The Takeaway?

Now that Americans and their oh-so-generous employers know who our governing overlord will be for the next four years, the increased certainty is bringing along with it a huge uptick in optimism.

December’s increase in Flash PMI was driven almost entirely by an improved demand outlook, particularly domestically. With producer-level inflation continuing to decline, it’s a hard report to be mad about.

Career Corner

Question

Is it worth it to try to network and have calls with IB professionals based in Hong Kong if I'm recruiting in the U.S.?

Answer

If you’re still learning about the industry, sure, but beyond that, probably not unless you’re open to locations or struggling to find someone to connect with in the U.S.

For example, if the only person at Bank XX who went to your college is based in another country, by all means, reach out, but if you have plenty of options in the U.S., then I would focus time there.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Red Cat Holdings (RCAT) 26.97%

• Time to add a chapter in The Intelligent Investor on UFO sightings. How Ben Graham didn’t anticipate this is a mystery to me, just like whatever the hell is flying over New Jersey.

• A few weeks ago, tweets from Elon Musk and a move from Donald Trump Jr. to join the board of Unusual Machines got traders hyped about drone stocks.

• That hype isn’t stopping on Monday as drone makers surged, driven by mysterious sightings of what appear to be drones over New Jersey and other North East states.

• The speculation is that the Department of Defense is testing drone technologies and will look to increase funding to respective contractors in the near future.

Tesla (TSLA) 6.14%

• As their first act of service, the Department of Government Efficiency (DOGE) is requiring all Americans to purchase at least one Tesla in 2025.

• Kidding, but I could see how you might think that’s the case after Tesla’s jump on Monday. But no, shares surged on a run-of-the-mill analyst upgrade.

• Wedbush analyst Dan Ives jacked his price target on the automaker from $400 to $515 on a view that Trump 2.0 will be a “total game changer for the autonomous and AI story for Tesla and Musk over the coming years.” He sees a path to $2tn.

What's Rotten

Super Micro Computer (SMCI) 8.26%

• Investing in chip stocks and AI companies is a good way to get exposure to Moore’s Law. Unfortunately, this tech company is more exposed to Murphy’s Law.

• Everything is going wrong at Super Micro as the embattled firm continues to reel from still-delayed SEC filings. On Monday, another double-whammy of bad news hit.

• The stock is getting booted from the Nasdaq 100 Index after falling >70% since May. Plus, Super Micro is working with Evercore to raise capital, diluting existing shareholders.

Nvidia (NVDA) 1.68%

• God rested on the 7th day and Nvidia is resting in the 12th month. That only makes sense, as the creator of the AI investing world needs to cool off once in a while, too.

• Shares entered correction territory, down more than 10% from a recent high, as small roadblocks are starting to pile up. There’s no big problem, but many unknowns.

• Uncertain Blackwell chip sales expectations, further chip export restrictions, and challenging historical growth to compete with have put the firm’s valuation into question.

Thought Banana

Schrödinger’s Gains

The word “quantum” makes me wish I was born before the advent of indoor plumbing. 

It’s a scary term, one that I don’t really know what it means, yet it seems like it will speed up AI’s destruction of humanity. 

But, according to my personal therapist, Jordan Peterson, I should face my fears (and adopt a pet lobster), so let’s dive in.

What’s Happening?

A few weeks ago, Amazon’s AWS launched the “Quantum Embark” program as a way to help cloud computing clients prepare for the eventual quantum leap.

And last week, Google-parent Alphabet announced Willow, their quantum computing chip that serves as a proof-of-concept in resolving a huge roadblock on the path to quantum computing.

So, big tech is getting ready for quantum. These announcements have acted as fuel on the fire of AI and edge-technology investment hype pervading markets right now, sending shares of anything with “quantum” in its name soaring.

Although only one actually has “quantum” in its name, check out the size and recent returns of the largest publicly traded, pure-play quantum stocks:

The runup seen in the last few months among these stocks echoes that of AI firms in late 2022 and early 2023. However, the big difference here is that AI hype brought the use cases and spending needed to avoid the “bubble” label.

The opposite is true (so far) in quantum computing.

While ChatGPT launched AI into the stratosphere with a monetizable consumer product and a clear roadmap to B2B revenue generation, Google’s Willow and Amazon’s Embark announcements don’t have nearly the same legs to stand on.

Quantum’s Current State

Austrian physicist Erwin Schrodinger is a borderline household name thanks to his thought experiment that allows midwits like us to understand what the hell the quantum realm even is.

You’ve probably heard of Schrodinger’s Cat, but right now, financial markets appear to see Schrodinger’s Gains—traders aren’t sure if the monstrous returns promised in quantum computing are real or not, but they’re sure as hell acting like they are.

Just yesterday, each of the above stocks had a major uptick. IonQ rose 23.2%, Rigetti was up 17.7%, and D-Wave climbed a ridiculous 44.6%. But, with a few use cases and funding compared to AI, it’s unclear if these gains are here to stay.

For instance, in 2023, those three companies made a combined $42.8mn in revenue, most of which was earned via research collaborations, government contracts, and other quantum-related (but not quantum computing) revenues.

At a combined market cap of $13.19bn, these stocks collectively trade at a price-to-sales ratio of ~308x. That’s almost 100x the average P/S of S&P 500 companies and 37x that of high-growth tech firms.

So, Why Are Traders Pouring In?

Amazon’s announcement was cool, but Google’s Willow announcement was a true game changer.

The problem with quantum chips is that as you add more qbits (the quantum equivalent of transistors), the error rate of the computer’s output increases, unlike traditional computers.

Google’s Willow chip purports to be the first quantum chip to solve this problem, reducing errors when more qbits are added through an innovative way (shape) of laying out the qbits on a chip.

So, this essentially signals that it is possible to scale quantum computers—full stop. No one has done it yet or is close to doing it, but Google showed that it is possible.

When paired with tech hype hovering over markets more than the ghost of bubble’s past, it makes sense why everyone is pouring in. Nobody wants to be the guy who was late to Nvidia and to quantum stocks.

The Takeaway? 

Proceed with caution. Gains in the quantum sector, although erupting in recent weeks, remain as alive as the cat in Shrodinger’s box.

The potential in this sector is undeniably huge, but it remains a long way away. How long are you willing to wait for your quantum investments to pay off?

The Big Question: When will quantum computing have use cases for consumers and businesses, if ever? Are quantum stocks the best way to trade the industry?

Banana Brain Teaser

Previous

In a certain sequence of 8 numbers, each number after the first is 1 more than the previous number. If the first number is -5, how many of the numbers in the sequence are positive?

Answer: 2

Today

A total of s oranges are to be packed in boxes that will hold r oranges each, with no oranges left over. When n of the boxes have been completely filled, what is the number of boxes that remain to be filled?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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