9/23/2024

Good Morning. 

This morning we experienced a technical issue with our email provider. We were able to find a solution this morning. We apologize for the delay and remain dedicated to delivering high quality content.

• The highly anticipated Fed rate cut cycle has begun. 

  • Overnight Federal Funds Rate is set at 4.75 to 5%.

  • The Fed announced a larger than expected 50 basis point cut, surprising most market participants.

  • Fed sentiment signals that inflation has been beaten and it's now set on prompting growth. “We made a good strong start to this. And that is really frankly a sign of our confidence.” (Jerome Powell, Federal Reserve Chairman)

  • All market participants are now faced with the question: Has the market reached the soft landing the Fed proclaimed or could the economy face further deterioration?

• The EU is demanding that Apple allow third-party developers access to its software.

  • Big tech companies such as Nvidia, Google, and Apple are facing growing antitrust lawsuits across the world.

  • These legal actions partially threaten companies’ proprietary information, such as software. It also endangers lucrative businesses in which these companies have enjoyed a large market share.

• Open AI’s latest fundraising round is valuing the company at $150 billion, aiming to raise $6 billion, an unusually large sum for early fundraising.

  • Potential investors include Microsoft, Apple, Thrive Capital, and United Arab Emirates.

  • Sam Altman and executives are arguing that Open AI will be worth trillions of dollars and have a dominant market share in AI. However, lofty evaluations could prove hard to reach as the market’s embrace of this revolutionary technology dampens.

In today’s newsletter we will cover:

• The market’s reaction to rate cuts 

• Palantir (PLTR)

• Intel potentially being acquired

Markets 

After much anticipation the Federal Reserve finally decided to cut rates. Immediately following the cut the S&P 500 broke through all time highs for the 39th time in 2024. The consensus from market participants indicates that this is only the first of many cuts to come. The chart below shows the market's expectations for future cuts.

• The labor market has been cooling, however easing on monetary policy should support economic growth. Investors will be watching future labor data closely. In addition, bonds have outperformed stocks during the cutting cycle. The data below illustrates this correlation.

Palantir (PLTR) is set to join the S&P 500 index during the quarterly rebalancing on Monday. Palantir is a software based company “that empowers organizations to effectively integrate their data, decisions, and operations at scale.” Their software is used by some of the leading commercial institutions and governments of the world.

As indicated in the stock chart above, Palantir has delivered strong gains over the past year. They are a classic high growth technology company that has been fueled by the hype in AI. Their software effectively deploys AI, which continues to be a key growth driver. The stock is trading at extremely high multiples. Investors must balance the short term valuation risk with the long term potential for the company.

Intel Potential Partial Acquisition

Intel appeared set to thrive, with numerous grants to build semiconductors in the U.S., a surge in demand for semiconductors driven by AI, and plans to build sprawling factories. However YTD Intel is down 54.31% and has struggled to keep up with semiconductor giants like NVIDIA and AMD. The company has been plagued by development issues, supply chain logistics, and other headaches that have disrupted its turnaround story.

After a disappointing earnings report in August most investors lost all confidence that the company could turn around. While its competitors are thriving Intel has been left behind. Plans to scale back growth and sell off units quickly became a possibility. Intel is a distressed company in a thriving industry because it has failed to keep up. Bids are starting to be placed to acquire ownership.

(Intel YTD performance; market cap of $93 billion, Bloomberg)

Apollo has expressed interest in making a $5 billion equity investment.

Qualcomm

Little is known about the rumored deal but Qualcomm, an American semiconductor producer, has approached Intel about an acquisition. 

What’s next

It's important to note that Apollo's potential $5 billion investment is not a takeover, and Qualcomm would be unlikely to own Intel in its entirety.

An acquisition is still unlikely; if it happens it will probably follow the model of a leveraged buyout. For example, Qualcomm would sell off many parts of the business and keep what it believes it can turn around and restore in order to strengthen its existing businesses. 

Additional interested parties will likely make bids or get involved. For example direct lenders might see an opportunity to lend to Intel. This would enable Intel to make investments needed to catch up while using its existing infrastructure as collateral. Antitrust violations could become a major roadblock to an acquisition as well. 

Right now any deal is mostly speculation but the markets will be watching. This could be the first major acquisition after rate cuts, potentially signaling that lower rates are spurring greater borrowing and investment activity.

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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