MidWeek Commentary

HI Market View Commentary 10-23-2023

HI Market View Commentary 10-23-2023

Mary lost big time on her day trading bet !!!

What is the most important index to use for market movement? – S&P 500 for the USA Markets

DOW = 30 stocks that represent less then 1% of the stock market capitalization

NASDAQ Composite = 3700 stock tech heavy in general

S&P 500 = 503 stocks that best represent the BLUE chip, modern America workforce

 3 stocks have two share classes in the 500 = Alphabet, FOX Corp, News Corp

NYSE – 2800 companies 4th common index

Russell, Wilshire, S&P Indexes/ETFs, VIX

S&P 500 Broke the 200 SMA so there are no more buy orders at that level = 4100, 4045

         Most individual stocks will not be moving against the index, low tides sink all ships

 

So why do you trade individual stocks?=  Volatility to be able to dollar cost average without asking for more money, because mutual funds don’t beat the market 96% (93%)  of the time (fees 5-11% ALWAYS), You can’t beat the market if you are the market, The belief in Warren Buffet Investing= Underpriced, fundamentally sound companies = There is no time frame for returns,

 

Disney Sucks – I’ve heard that but does it suck fundamentally ? Lost a cricket broadcast in India and also lost 8 million Indian Disney+ Subscribers

 

Are you patient enough to wait for the rebound in stocks even if stocks that you trade are falling in an up year of the market (dogs)

 

https://www.briefing.com/the-big-picture

 

The Big Picture

Last Updated: 20-Oct-23 15:32 ET | Archive

Why would the Fed cut rates soon? It won’t, unless…

These are interesting times, which is one way of saying it is hard to know what to make of them.

  • We have a geopolitical crisis brewing in the Middle East and Treasury yields are moving higher.
  • We have a House of Representatives that lacks a Speaker, meaning business in that chamber will be at a standstill until a new Speaker is elected.
  • We have weekly initial jobless claims at their lowest level (198,000) since January and existing home sales running at their lowest annual pace (3.96 million) since October 2010.
  • We have a Leading Economic Index that has registered negative readings for the last 18 months and an Atlanta FedGDP Now model estimating 5.4% real GDP growth for the third quarter.
  • We have a market-cap weighted S&P 500 that is up 10.3% for the year and an equal-weighted S&P 500 that is down 2.8% for the year.

Something that isn’t surprising is the call for the Fed to start cutting rates in 2024. We’ll call that a conditioned call — and one that is likely to go unanswered.

The Consequence of Loitering

The Fed has raised the target range for the fed funds rate by a total of 525 basis points since March 2022, and yet the unemployment rate remains below 4.0%, median housing prices are still rising, and third quarter real GDP growth, if not 5.0%, looks slated to be well above potential, driven by strength in consumer spending.

We can’t help but think that the Fed is taking this in and thinking “what were we thinking leaving the fed funds rate at 0.00% and continuing with quantitative easing as long as we did?” The Fed might take that thought a step further and concede that there is no way it will be cutting rates anytime soon unless there is a systemic crisis.

The financial crisis of 2008? The COVID pandemic of 2020? Those were true systemic crises that warranted extraordinary Fed action. In both cases, though, the Fed remained enmeshed with a zero-bound policy rate and quantitative easing too long.

A consequence of that loitering is that market participants have come to expect the Fed to ride to the rescue at the first sign of trouble. It is why the market thinks it is entitled to a rate cut at the first signs of slowing in the economy or a 10% drop in the S&P 500.

We think (we hope) Fed Chair Powell learned his lesson in keeping policy too easy for too long. The Fed and others, including us, underestimated just how stimulating all the fiscal stimulus was amidst the COVID crisis. The irony today is that it has sparked concerns about a fiscal crisis that is showing up in increasing term premiums.

The higher rates the market is witnessing today, which are much higher than anything seen over the last 15 years, but which are closer to normal rates seen before the financial crisis, should lead to a slowdown in economic activity.

The housing market has certainly felt the adverse impact of those higher rates, but overall, the economy has shown some surprising resilience so far. Fed Chair Powell said as much this past week, noting that economic evidence is telling the Fed that its policy is not too tight, maybe because rates haven’t been high enough for long enough.

Got Burned Playing with Fire

Inflation got unleashed with the massive supply-demand imbalance in the wake of the global pandemic, the massive increase in the money supply, the massive fiscal stimulus provided by Congress, and the Fed staying at the zero bound and continuing with quantitative easing too long, believing the early signs of inflation would be transitory.

We chronicled our dismay about the Fed sticking with its ultra-easy policy in a November 2021 column here entitled An absurd monetary policy position is a risk we should all see coming. In that piece we wrote,

“The Fed is playing with fire still sitting on the zero bound with the inflation rate at 6.2%, an economy averaging 5.0% real GDP growth, and the unemployment rate at 4.6%. It’s an absurd policy position, because it’s the same position the Fed had when the inflation rate stood at 0.2%, real GDP was negative 31.2%, and the unemployment rate was close to 13.0%.

It won’t surprise us in the least if the stock market keeps running, but, honestly, would it surprise anyone if there is a nasty correction or — egad — a bear market because of an interest rate shock or an exogenous shock?”

We know what 2022 produced for the market: a ramp in the Fed’s tightening efforts, a bear market for stocks, which suffered their worst year since 2008, and the worst year ever for bonds.

So, does the opposite hold true today now that the Fed has raised rates by 525 basis points and reduced its balance sheet by approximately $1 trillion with quantitative tightening? Should the Fed be cutting rates soon?

Some think the Fed should cut rates soon because of the lag effect of its prior rate hikes gathering influence as an economic momentum killer.

In other words, the data-dependent Fed can’t wait for the data to tell it that growth is weak, and inflation is back to its 2.0% target. It needs to be in front of the data, because if the Fed waits for the data, it will be too late. The lag effect will keep coming and the economy will be in recession.

What we know from the available data is that real GDP was up 2.1% in the second quarter, core PCE inflation was up 3.9% year-over-year in August, or nearly twice the rate of the Fed’s inflation target, the unemployment rate was 3.8% in September, or 0.2 below the Fed’s longer-run estimate, average hourly earnings were up 4.2% year-over-year in September, and cash in money-market funds (i.e., idle spending potential) is a whopping $5.61 trillion versus $3.63 trillion when COVID hit.

For added measure, analysts are projecting 12% EPS growth for the S&P 500 in 2024. That’s not exactly a recession forecast.

What It All Means

Fed Chair Powell and his colleagues have been adamant about their mission to get inflation back to 2.0% on a sustainable basis. Fed Chair Powell said the world counts on the Fed to deliver low and stable inflation.

A growing number of Fed officials have conceded that the Fed can “proceed carefully” now when making policy decisions, mindful that there should be a lag effect of prior rate hikes and that the jump in long-term rates has tightened financial conditions (reported in the press as “having done the Fed’s work for it”). None, however, have said they expect to cut rates soon.

Atlanta Fed President Bostic (2024 FOMC voter) came the closest, saying he sees a rate cut in late 2024. The fed funds futures market does, too, except it doesn’t see the first rate cut in late 2024, it sees the third rate cut in late 2024.

That seems ambitious relative to where we are today, particularly with the inflation rate. Remember, the Fed doesn’t just want the inflation rate to get to 2.0%, it wants the inflation rate to stay at 2.0%.

Having erred as badly as it did with its view that inflation would be transitory, and seeing what happened, the Fed is apt to be more patient holding rates where they are than the market would like.

The Fed would cut rates if a true systemic crisis arose. Let’s hope that doesn’t happen. The good news is that the Fed has the interest-rate ammunition now to do something about a systemic crisis. The bad news is that a systemic crisis wouldn’t be good for earnings prospects.

That point aside, the Fed knows too much inflation in the system is its own kind of crisis for American households. Job number one is to get inflation back down to 2.0% where it will stay, and the Fed, burdened by its part in contributing to inflation harming American households, will be patient in that pursuit.

Patrick J. O’Hare, Briefing.com

 

 

Earnings dates:

AAPL –     11/02  AMC

BABA –     11/16  BMO

BA –          10/25  BMO

BIDU –      11/21  BMO

COST –     12/14  est

DIS –         11/08  BMO

F –              10/26  AMC

GE –          10/24

GOOGL –  10/24  AMC

KO –          10/24  BMO

META-     10/25  AMC

SQ –           11/02  AMC

UAA –       11/02  BMO

V –             10/24  AMC

VZ –          10/24  BMO

MU-          12/21  est

 

 

Where will our markets end this week?

Lower to flat

 

DJIA – Bearish almost oversold

SPX –Bearish and broke the 200 SMA

COMP – Bearish

Where Will the SPX end Oct. 2023?

10-23-2023            +1.0%

10-16-2023            +1.0%

10-10-2023            +1.0%

10-02-2023            +1.0%

 

Earnings:   

Mon:           CLF

Tues:           MMM, GLW, HAL, KMB, NUE, PHM, CB, SNAP, TXN, WM, KO, GE, GM, VZ, GOOG, V,  

Wed:           CME, GD, HES, HLT, TMUS, FLS, IBM, IMAX, MAT, VMI, BA, META,

Thur:           MO, ARCH, BSX, CMCSA, GWW, HTZ, HON, IP, MDC, MRK, RCL, UPS, VLO, AMZN, COF, SAM, CMG, INTC, JNPR, SKYW, X, MA, LUV, F,

Fri:              XOM, PSX, TROW

 

 

Econ Reports:

Mon:          

Tue             

Wed:           MBA, New Home Sales

Thur:           Initial Claims, Continuing Claims, Durable Goods, Durable ex-trans, GDP, GDP Deflator, Pending Home Sales,  

Fri:              Personal Income, Personal Spending, PCE Prices, Core PCE, Michigan Sentiment Treasury Budget,

 

How am I looking to trade?

Looking at individual stocks to decide where we can take some profits on puts again.

We take off BIDU 127 puts for a great profit, and yes we still have 110 BIUD put on

S&P -2.39  HI 0.007854 LAST WEEK

Sept -4.87, Oct -1.85 and the market is down almost -13% from the highs yet we are mostly flat, cash  heavy

 

www.myhurleyinvestment.com = Blogsite

info@hurleyinvestments.com = Email

 

Questions???

 https://www.cnbc.com/2023/10/18/30-year-fixed-mortgage-rate-just-hit-8percent-for-the-first-time-since-2000.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

The 30-year fixed mortgage rate just hit 8% for the first time since 2000 as Treasury yields soar

PUBLISHED WED, OCT 18 20231:02 PM EDTUPDATED WED, OCT 18 20232:08 PM EDT

Diana Olick@IN/DIANAOLICK@DIANAOLICKCNBC@DIANAOLICK

KEY POINTS

  • The average rate on the popular 30-year fixed mortgage rate hit 8% Wednesday morning.
  • Yields on U.S. Treasurys are soaring.
  • Higher mortgage rates have caused applications to plummet.

The average rate on the popular 30-year fixed mortgage rate hit 8% Wednesday morning, according to Mortgage News Daily. That is the highest level since mid-2000.

The milestone came as bond yields soar to levels not seen since 2007. Mortgage rates follow loosely the yield on the 10-year U.S. Treasury.

Rates rose sharply this week and last week, as investors digest more reads on the economy. On Wednesday, it was housing starts, which rose in September, though not as much as expected, according to the U.S. Census Bureau.

Building permits, an indicator of future construction, fell, but by a less than the expected amount. Last week, retail sales came in far higher than expected, creating more uncertainty over the Federal Reserve’s long-term plan.

These higher rates have caused mortgage demand to plummet, as applications fell nearly 7% last week from the previous week, according to the Mortgage Bankers Association.

“Here’s another milestone that seemed extreme several short months ago,” said Matthew Graham, chief operating officer of Mortgage News Daily. “The fact is that many borrowers have already seen rates over 8%. That said, many borrowers are still seeing rates in the 7s due to buydowns and discount points.”

The homebuilders are using buydowns to help customers afford their homes. They do this through their mortgage subsidiaries.

While they had used the financing tool very sparingly in the past, it is now the top incentive among builders, according to industry sources.

“Although our mortgage company has been offering slightly below market rate loans most of this cycle (just to be competitive), the full point buydown for the 30-year life of the loan we’ve been referring to recently as a builder incentive is not something we had done in previous cycles, at least not on the broad, majority basis we are doing so today. You might have found it on select homes in the past on an extremely limited basis,” said a spokesperson from D.R. Horton, the nation’s largest homebuilder.

The average rate on the 30-year fixed was as low as 3% just two years ago. To put it in perspective, a buyer purchasing a $400,000 home with a 20% down payment would have a monthly payment today of nearly $1,000 more than it would have been two years ago.

 

https://www.cnbc.com/2023/10/06/china-plans-to-ease-one-of-the-biggest-hurdles-for-foreign-business.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

China plans to ease one of the biggest hurdles for foreign business

PUBLISHED THU, OCT 5 202310:02 PM EDT

Evelyn Cheng@CHENGEVELYN

KEY POINTS

  • In a proposed draft, the Cyberspace Administration of China has said no government oversight is needed for data exports if regulators haven’t stipulated that it qualifies as “important.”
  • New “draft regulation relieves companies of some of the difficulties with cross-border data transfer and personal information protection,” the European Union Chamber of Commerce in China said in a statement to CNBC.
  • The U.S.-China Business Council’s latest annual survey found the second-biggest challenge for members this year was around data, personal information and cybersecurity rules.

BEIJING — Chinese authorities are signaling a softer stance on once-stringent data rules, among recent moves to ease regulation for business, especially foreign ones.

Over the last few years, China has tightened control of data collection and export with new laws. But foreign businesses have found it difficult to comply — if not operate — due to vague wording on terms such as “important data.”

Now, in a proposed update, the Cyberspace Administration of China (CAC) has said no government oversight is needed for data exports if regulators haven’t stipulated that it qualifies as “important.”

That’s according to draft rules released late Sept. 28, a day before the country went on an eight-day holiday. The public comment period closes Oct. 15.

“The release of the draft is seen as a signal from the Chinese Government that it is listening to businesses’ concerns and is ready to take steps to address them, which is a positive,” the European Union Chamber of Commerce in China said in a statement to CNBC.

“The draft regulation relieves companies of some of the difficulties with cross-border data transfer and personal information protection partly by specifying a list of exemptions to relevant obligations and partly by providing more clarity on how data handlers can verify what is qualified by authorities as ‘important data,’” the EU Chamber said.

This is a small but important step for Beijing to show it’s walking the walk when the State Council earlier pledged to facilitate cross-border data flows…

Reva Goujon

RHODIUM GROUP

The EU Chamber and other business organizations have lobbied the Chinese government for better operating conditions.

The cybersecurity regulator’s draft rules also said data generated during international trade, academic cooperation, manufacturing and marketing can be sent overseas without government oversight — as long as they don’t include personal information or “important data.”

“This is a small but important step for Beijing to show it’s walking the walk when the State Council earlier pledged to facilitate cross-border data flows to improve the investment climate,” Reva Goujon, director, China Corporate Advisory at Rhodium Group, said in an email Friday.

The proposed changes reflect how “Beijing is realizing that there are steep economic costs attached to its data sovereignty ideals,” Goujon said.

“Multinational corporations, particularly in data-intensive sunrise industries which Beijing is counting on to fuel new growth, cannot operate in extreme ambiguity over what will be considered ‘important data’ today versus tomorrow and whether their operations will seize up over a political whim by CAC regulators.”

More regulatory clarity for business?

China’s economic rebound from Covid-19 has slowed since April. News of a few raids on foreign consultancies earlier this year, ahead of the implementation of an updated anti-espionage law, added to uncertainties for multinationals.

“When economic times were good, Beijing felt confident in asserting a stringent data security regime in the footsteps of the EU and with the US lagging behind in this regulatory realm (for example, heavy state oversight of cross-border data flows and strict data localization requirements),” Rhodium Group’s Goujon said.

The country’s top executive body, the State Council, in August revealed a 24-point plan for supporting foreign business operations in the country.

The text included a call to reduce the frequency of random inspections for companies with low credit risk, and promoting data flows with “green channels” for certain foreign businesses.

During consultancy Teneo’s recent trip to China, the firm found that “foreign business sources were largely unexcited about the plan, noting that it consists mostly of vague commitments or repackaging of existing policies, but some will be useful at the margin,” managing director Gabriel Wildau said in a note.

He added that “the 24-point plan included a commitment to clarify the definition of ‘produced in China’ so that foreign companies’ domestically made products can qualify.”

When U.S. Commerce Secretary Gina Raimondo visited China in August, she called for more action to improve predictability for U.S. businesses in China. Referring to the State Council’s 24 points, she said: “Any one of those could be addressed as a way to show action.”

The U.S.-China Business Council’s latest annual survey found the second-biggest challenge for members this year was around data, personal information and cybersecurity rules. The first challenge they cited was international and domestic politics.

The council was not available for comment due to the holiday in China.

While the proposed data rules lower regulatory risk, they don’t eliminate it because “important data” remains undefined — and subject to Beijing’s determination at any time, Martin Chorzempa, senior fellow at the Peterson Institute for International Economics, and Samm Sacks, senior fellow at Yale Law School Paul Tsai China Center and New America, said in a PIIE blog post Tuesday.

Still, “not only did the leadership commit to a more ‘transparent and predictable’ approach to technology regulation in the wake of the tech crackdown, the new regulations follow directly on the State Council’s 24 measures unveiled in August, which explicitly call for free data flows. Other concrete actions to improve the business environment could flow from those measures as well,” Chorzempa and Sacks said.

The proposed changes to data export controls follow an easing in recent months on other regulation.

In artificial intelligence, Baidu and other Chinese companies in late August were finally able to launch generative AI chatbots to the public, after Beijing’s “interim regulation” for the management of such services took effect on Aug. 15.

The new version of the AI rules said they would not apply to companies developing the tech as long as the product was not available to the mass public. That’s more relaxed than a draft released in April that said forthcoming rules would apply even at the research stage.

The latest version of the AI rules also did not include a blanket license requirement, only saying that one was needed if stipulated by law and regulations. It did not specify which ones.

Earlier in August, Baidu CEO Robin Li had called the new rules “more pro-innovation than regulation.”

 

https://www.cnbc.com/2023/10/17/bank-of-america-bac-earnings-3q-2023.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

FINANCE

Bank of America tops profit estimates on better-than-expected interest income

PUBLISHED TUE, OCT 17 20236:15 AM EDTUPDATED THU, OCT 19 20232:52 PM EDT

Hugh Son@HUGH_SON

KEY POINTS

  • Bank of America earnings and revenue topped Wall Street’s expectations.
  • The bank posted better-than-estimated interest income.
  • CEO Brian Moynihan said consumer spending continued to slow.

Bank of America topped estimates for third-quarter profit on Tuesday on stronger-than-expected interest income.

Here’s what the company reported:

  • Earnings per share: 90 cents vs. expected 82 cent estimate from LSEG, formerly known as Refinitiv
  • Revenue: $25.32 billion, vs. expected $25.14 billion

Profit rose 10% to $7.8 billion, or 90 cents per share, from $7.1 billion, or 81 cents a share, a year earlier, the Charlotte, North Carolina-based bank said in a release. Revenue climbed 2.9% to $25.32 billion, edging out the LSEG estimate.

Bank of America said interest income rose 4% to $14.4 billion, roughly $300 million more than analysts had anticipated, fueled by higher rates and loan growth. The bank’s provision for credit losses also came in better than expected, at $1.2 billion, under the $1.3 billion estimate.

Shares of Bank of America closed more than 2% higher Tuesday.

The results show Bank of America avoided major pitfalls related to loan losses and higher rates, analyst Mike Mayo of Wells Fargo wrote in a note. He called it an “okay quarter” that fell short of JPMorgan and Citigroup’s results.

CEO Brian Moynihan said the second biggest U.S. bank by assets continued to grow, despite signs of an economic slowdown.

“We added clients and accounts across all lines of business,” Moynihan said. “We did this in a healthy but slowing economy that saw U.S. consumer spending still ahead of last year but continuing to slow.”

‘A thorn in the side’

Bank of America was supposed to be one of the biggest beneficiaries of higher interest rates this year. Instead, the company’s stock has been the worst performer among its big bank peers in 2023. That’s because, under Moynihan, the lender piled into low-yielding, long-dated securities during the Covid pandemic. Those securities lost value as interest rates climbed.

That’s made Bank of America more sensitive to the recent surge in the 10-year Treasury yield than its peers — and more similar to some regional banks that are also nursing underwater bonds.

Unrealized losses at the lender deepened in the quarter, reaching $131 billion on its portfolio of held-to-maturity bonds. Most of the losses were tied to mortgage securities.

“Clearly, this held-to-maturity portfolio has been a thorn in the side of the stock,” UBS analyst Erika Najarian said during Tuesday’s conference call as she prodded management for more details on the bank.

NII trough

The situation has pressured the bank’s net interest income, or NII, which is a key metric that analysts will be watching this quarter. In July, the bank’s CFO, Alastair Borthwick, affirmed previous guidance that NII would be roughly $57 billion for 2023.

On Tuesday, Borthwick told analysts that the “good news” on net interest income is that it will trough in the fourth quarter and begin to grow again in the middle of 2024.

Bank of America stock had fallen 18% this year through Monday, trailing the 10% gain of rival JPMorgan Chase.

Last week, JPMorgan, Wells Fargo and Citigroup each topped expectations for third-quarter profit, helped by better-than-expected credit costs. Morgan Stanley is scheduled to post results Wednesday.

 

https://www.cnbc.com/2023/10/23/bill-ackman-covers-bet-against-treasurys-says-too-much-risk-in-the-world-to-bet-against-bonds.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

Bill Ackman covers bet against Treasurys, says ‘too much risk in the world’ to bet against bonds

PUBLISHED MON, OCT 23 202310:03 AM EDTUPDATED AN HOUR AGO

Yun Li@YUNLI626

KEY POINTS

  • Pershing Square’s Bill Ackman revealed Monday he covered his bet against long-term Treasurys.
  • The hedge fund manager believes investors may increasingly buy bonds as a safe haven because of growing geopolitical risks.
  • Ackman also added that he removed the short because of concern about the economy.

Bill Ackman, Pershing Square Capital Management CEO, speaking at the Delivering Alpha conference in NYC on Sept. 28th, 2023.

Adam Jeffery | CNBC

Pershing Square’s Bill Ackman revealed Monday he covered his bet against long-term Treasurys, believing that investors may increasingly buy bonds as a safe haven because of growing geopolitical risks, the latest of which being the Israel-Hamas war.

“There is too much risk in the world to remain short bonds at current long-term rates,” Ackman said in a post on X, formerly known as Twitter, on Monday morning. “We covered our bond short.”

The billionaire hedge fund manager first disclosed his bearish position on 30-year Treasurys in August, betting on elevated yields on the back of “higher levels of long-term inflation.” The 30-year Treasury yield has risen more than 80 basis points since the end of August, making Ackman’s bet profitable.

Bond prices move inversely to yields, so Ackman’s bet against bonds was, in effect, a gamble on higher rates.

The 30-year Treasury yield fell 6 basis points to 5.01% on Monday after Ackman’s comments.

Bond prices have continued to decline and yields have increased lately, with the benchmark 10-year rate topping the key 5% threshold. The economy and labor market have consistently outperformed expectations, according to recent data, keeping yields elevated.

Ackman has been a vocal supporter of Israel following the Hamas attacks earlier this month, posting frequently about the conflict. Normally, growing global tensions push investors into Treasurys for safety reasons. That’s what occurred during the Russia-Ukraine war, but that has not been the case so far with these latest Middle East tensions.

Economic risk

Ackman also added that he removed the short because of concern about the economy.

“The economy is slowing faster than recent data suggests,” he wrote.

The Fed has raised rates 11 times for a total of 5.25 percentage points, taking the benchmark rate to its highest level in some 22 years. A slowing economy typically leads to lower bond yields.

Fed Chairman Jerome Powell recently said inflation is still too high and lower economic growth is likely needed to bring it down. Data has shown that while inflation remains well above the target rate, the pace of monthly increases has decelerated and the annual rate has slowed to 3.7% from more than 9% in June 2022.

JPMorgan Chase CEO Jamie Dimon recently issued a stern warning about the perils the world faces from multiple threats, saying this may be “the most dangerous time the world has seen in decades.”

 

https://www.cnbc.com/2023/10/18/baidus-ernie-4point0-fails-to-wow-investors-citi-jefferies-keep-buy-ratings.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

Baidu’s newest AI model Ernie 4.0 fails to wow investors, but analysts maintain ‘buy’ ratings

PUBLISHED WED, OCT 18 20231:22 AM EDTUPDATED WED, OCT 18 20231:23 AM EDT

Sheila Chiang@SHEILACHIANG

KEY POINTS

  • Analysts are bullish on Chinese tech giant Baidu’s latest version of generative artificial intelligence model, Ernie 4.0.
  • Still, Baidu’s stocks did not react positively to the news.
  • Baidu’s Hong Kong-listed shares closed 1.65% lower on Tuesday, underperforming a 0.75% increase in the Hang Seng Index. Its Nasdaq-listed shares slid 4.12% overnight.

Analysts are bullish on Chinese tech giant Baidu’s latest version of its generative artificial intelligence model, Ernie 4.0, but investors did not react positively to the development.

“We came away positively following the announcement of several new products including the official debut of Ernie 4.0,” said Citi analysts in a report, after Baidu announced a “significantly improved” version of Ernie 4.0 on Tuesday.

“CEO Robin Li also announced the rebuilding of all apps within the Baidu ecosystem with deeper AI integration,” the analysts said, maintaining a “buy” rating at a target price of $182.

During Baidu World 2023, Li said: “This is the most powerful version of Ernie foundation model to date, upgraded in its entirety, under the full capabilities [of] understanding generation reasoning and memory.”

At the company’s annual flagship tech conference, Li demonstrated Ernie 4.0′s ability to compose a martial arts novel in real-time, create advertising posters and videos with prompts, plan a trip itinerary as well as solve complex math problems.

“A significant improvement in [comprehension, generation, reasoning and memory] capabilities is seen in Ernie 4.0, with 3.6x improvement in training algorithm,” said Jefferies analysts in Tuesday report, maintaining a “buy” rating with a $216 price target.

The Chinese tech giant claimed Ernie 4.0′s capabilities are on par with those of ChatGPT maker OpenAI’s GPT-4 model. “It has been significantly improved compared to the online version of Ernie bot and now it is not inferior to GPT-4,” Li told an audience of analysts, investors and journalists.

Baidu first released Ernie 3.0 on March 16 to a limited pool of users.

The company launched the 3.5 version in June, and claimed that Ernie 3.5 outperformed ChatGPT and GPT 4 in several key areas.

It officially opened access to the public on Aug. 30 after getting government approval.

“Baidu’s statement that it is now on par with GPT-4 marks a significant milestone for the Chinese tech giant,” Xiaolin Chen, head of international at KraneShares, told CNBC.

However, she pointed out that the efficacy of AI models can vary depending on specific use cases and tasks.

“Evaluating Ernie across a diverse range of applications would be instrumental in making a more comprehensive comparison with other models. It’s also worth noting that direct comparison between different AI models can be challenging, due to the diverse methods and benchmarks employed in testing,” said Chen.

Investor sentiment down

However, investors did not react positively to the development.

Baidu’s Hong Kong-listed shares closed 1.65% lower on Tuesday, underperforming a 0.75% increase in the Hang Seng Index. Its Nasdaq-listed shares slid 4.12%.

“We believe that investors remain concerned over long-term issues such as how Baidu will deal with chip sanctions and other key risks that could impede further development of the firm’s AI business, which were never addressed during CEO Robin Li’s presentation,” wrote Kai Wang, senior equity research analyst at Morningstar Asia.

“The conference highlighted some of the model’s capabilities rather than giving an update on the long-term strategic direction of

Large language models such as ChatGPT and Ernie require high-performance memory chips. Such chips enable generative AI models to remember details from past conversations and user preferences in order to generate humanlike responses.

On Tuesday, the U.S. banned exports of more AI chips, including Nvidia H800, to China.

Last week, Washington tightened rules aimed at limiting China’s ability to obtain or manufacture high-tech semiconductor chips. Washington is concerned that China would use such high-tech chips to advance its military capabilities.

– CNBC’s Michael Bloom contributed to this report.

 

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