This week's interesting finds

This week in charts

Growth vs. value – U.S. & Japan

Growth vs. value – U.S. & Europe

Global rate cuts

U.S. government spending

Global wealth & investment management equity allocation

Japan vs. U.S. headline inflation

Gold inventories

U.S. small- vs. large-cap valuations

S&P 500 Index company lifespans

U.S. industrial supply imports

Capital expenditures by large-cap companies

Is Wall Street ready to stay up all night?

The New York Stock Exchange, the largest in the world, is one of a number of groups which are now looking to offer much longer trading windows.

This is pushing investment professionals to engage in surprisingly complex debates around the simplest-seeming questions.

When, for example, does a trading day begin and end if it runs around the clock? What would be the closing price of a stock — typically the reference point for trillions of dollars in funds — if the day were seamless?

Those are just a couple of the big questions about trading through the wee hours. Other worries include how portfolio managers deal with the risks of big moves in their holdings while they’re asleep, and the cost and difficulty of maintaining complex systems with little or no downtime.

“Talk 24-hour and the joke is, ‘I don’t know when our operations guy is going to sleep.’ That is an actual issue,” says Tyler Gellasch, chief executive of investor advocate Healthy Markets Association. “But I feel like that’s going to be the least of your worries when you wake up to a margin call on a big position.”

The dollar trades 24 hours a day on various platforms around the world and dealing in S&P 500 index futures, which signal the likely market direction ahead of the New York opening, is brisk from the Tokyo morning onwards. Cryptocurrency investors, meanwhile, have never known anything but a 24-7 digital world.

From the earliest days of informal trading in lower Manhattan coffee houses, US stock markets have largely stuck to some form of a traditional business day, though precise hours have varied.

Daytime trading for stocks is also practical because it involves so many parties: a million-plus people are employed directly in the US securities industry, and there are the executives of the companies whose shares are being traded and the regulators who oversee it all.

Adding to the complexity is the sheer scale of the $50tn market. Some 12bn shares are traded daily through millions of transactions. The counterparties include giant pension funds, high-speed traders dealing in milliseconds and individual investors trading a handful of shares. Every transaction must be agreed, with money and shares changing hands the next day. On top of all this is a web of intricate rules designed to ensure fair dealing.

This week’s fun finds

Happy lunar new year!

Several EdgePointers wanted to share their new year celebrations with internal partners by organizing a moai. A lot of food was eaten, many fortune cookies were cracked and even a “Happy Birthday” sung!

How the Woolly Mammoth Could Prevent Trillions in Economic Loss

Colossal [Biosciences’] scientists, based in Boston, Dallas, and Melbourne, Australia, have made recent strides toward bringing back the woolly mammoth, Tasmanian tiger, and dodo bird, assembling the most comprehensive genomes to date for each of the extinct species and making breakthroughs in bridging the gap between DNA sequences and live organisms.

Biodiversity in ecosystems is essential for food security, drinkable water, medicine, climate stability—and economic growth. A November 2024 study found that exposure to biodiversity risk was associated with a 3.2 percent decrease in ROA, on average, and research published this month observed that firms with greater exposure to biodiversity risk “may be compelled to maintain substantial capital reserves to ensure operational continuity,” which could undercut firm efficiency.

A key way to guard against biodiversity risk—de-extinction and conservation of vulnerable species to restore balance to the ecosystem—is exactly what Colossal is working on.

Back to the elephant—or rather, mammoth—in the room. What does resurrecting a giant herbivore do for biodiversity?

Well, the arctic permafrost is currently thawing and projected to release between 119.3 and 251.6 billion tons of carbon by 2100, a November study found. But as Lamm explained on Inc.’s What I Know podcast in 2022, research shows that expanding the population of large herbivores like the mammoth would increase snow density and reduce the ground surface temperature, thus protecting the permafrost. 

 That’s why Colossal is on track to produce the first mammoths for rewilding by 2028.

This week's interesting finds

Fourth quarter commentaries are now live!

This quarter, Claire Thornhill makes some predictions for EdgePoint in 2025, while Derek Skomorowski goes public about the risks of private credit, and the opportunities left behind.

This week in charts

Government spending

Electricity prices

Policy rate changes in response to tariff scenarios

Tariffs applied to and by U.S.

Revenue per worker

Japanese chip exports

Magnificent 7 bond yields

Most crowded trade

Valuations

Return contribution to the S&P 500

The European discount

U.S. outperforms the rest of the world - relative price returns

U.S. vs. global tech stocks

Private purchases of U.S. equities

Equity risk premium in negative territory

US stocks at most expensive relative to bonds since dotcom era

A record-breaking run for US equities, which hit a fresh high on Wednesday, has pushed the so-called forward earnings yield — expected profits as a percentage of stock prices — on the S&P 500 index down to 3.9 per cent, according to Bloomberg data. A sell-off in Treasuries has driven 10-year bond yields up to 4.65 per cent.

That means the difference between the two, a measure of the so-called equity risk premium, or the extra compensation to an investor for the risk of owning stocks, has fallen into negative territory and reached a level last seen in 2002 during the dotcom boom and bust.

Analysts said the US’s steep equity valuations, labelled the “mother of all bubbles”, were the result of fund managers clamouring for exposure to the country’s buoyant economic and corporate profits growth, as well as a belief among many investors that they cannot risk leaving the so-called Magnificent Seven tech stocks out of their portfolios.

The traditionally constructed equity risk premium is sometimes known as the “Fed model”, because Alan Greenspan appeared to refer to it at times when he was chair of the Federal Reserve.

However, the model has its detractors. A 2003 paper by Cliff Asness, founder of fund firm AQR, criticised the use of Treasury yields as an “irrelevant” nominal benchmark and said the equity risk premium failed as a predictive tool for stock returns.

Some analysts now employ an equity risk premium that compares stocks’ earning yield to inflation-adjusted US bond yields. On this reading, the equity risk premium is also “at its lowest level since the dotcom era”, said Miroslav Aradski, senior analyst at BCA Research, although it is not negative. 

Equities’ valuation relative to bonds is just one measure of exuberance cited by managers. Others include US stocks’ price-to-earnings valuation against their own history or compared with stocks in other regions.

Many investors argue that high multiples are justified and can be sustained. “It is undeniable that [US stocks’ price-to-earnings] multiple is high relative to history, but that doesn’t necessarily mean that it is higher than it should be, given the underlying environment,” said Goldman Sachs’ senior equity strategist Ben Snider.

US stocks have now regained all the ground lost during a fall since December. That sell-off highlighted some investors’ concerns that there was a level of Treasury yields that the stock market rally could not live with, because bonds — a traditional haven asset — would appear so attractive.

For others, US stocks’ declining risk premium is just another reflection of investors piling into Big Tech stocks and the risk that concentration in a small number of big names poses to portfolios.

This week’s fun finds

January 22nd was National Hot Sauce Day and we decided to celebrate with the hottest sauce from Hot Ones (The Last Dab X), along with some Halifax hot sauces gifted to an internal partner. None of the sauces were overwhelming from a spice perspective, but the Nurple sauces were both quite flavourful.

The Patagonia vest endures in San Francisco tech circles, despite ridicule

Long associated with Wall Street and Silicon Valley, the Patagonia vest has endured as a tribal symbol of finance and tech. But those who've dared in recent weeks to put on their vests in San Francisco have been the target of a resistance of sorts. 

"Urgent: Stop wearing vests," implore flyers plastered around the city. "You live in San Francisco now. It's time to start acting like it."

Not everyone who sports a Patagonia vest is a "tech bro," says proud Patagonia vest-wearer Sam Runkle. "It's comfy," Runkle says. It gets the job done."

This week's interesting finds

We’re hiring

Specifically, we want to add a Trade Operations Associate to our Trade Operations team in our Toronto office.

We're always looking for talented people who can help us achieve our goals and we understand that extraordinary human ability is a scarce resource in high demand. If you think you've got some and are interested in our company, please send your resume to: WeAreGrowing@edgepointwealth.com.

You can view the posting on our website here.

This week in charts

2024 Market cap surge

Revenue from abroad

Positive and negative Real GDP growth

Dwelling vs. intellectual property products

Foldable smartphones market share

Global smartphone shipments

Apartment affordability

Population in China

10-year returns: Commodities

10-year returns: U.S. Treasuries

S&P 500 companies with fast sales growth

Property damage by natural disaster

AI set to fuel surge in new US gas power plants

As many as 80 new gas-fired power plants will be built in the US by 2030, said energy consultancy Enverus, adding 46 gigawatts of capacity — the size of the electricity system in Norway and nearly 20 per cent more than was added in the past five years.

The capacity surge is expected to unfold during the second presidential term of Donald Trump, who has vowed to keep fossil fuels at the centre of the US economy, and signals a reversal of earlier forecasts for natural gas capacity to fall in the next five years.

The expansion will imperil Biden administration climate targets, which called for greenhouse gas emissions to fall by 50-52 per cent from 2005 levels by the end of the decade and the grid to be 100 per cent carbon-pollution free by 2035.

US gas power plants emitted more than 1bn tonnes of carbon dioxide last year, up nearly 4 per cent in a year and the highest on record, according to data from Ember, an energy think-tank.

None of the planned gas plants tracked by Enverus will come equipped with carbon capture systems. While the Biden administration required new facilities to include the technology starting in 2032, Trump is expected to scrap or weaken the rule.

The gas boom comes as the US races against China to develop AI and tries to bring back manufacturing lost to Asia in recent decades, sparking a historic surge in demand for cheap electricity that can run uninterrupted.

The US is already the world’s biggest natural gas producer thanks to its huge shale reserves. This helped keep domestic prices for the fuel relatively low, even during Europe’s energy crisis, and has underpinned the boom in seaborne exports.

Although clean energy supplies are also rising across the US — boosted by vast subsidies in the Inflation Reduction Act — developers say intermittent renewables, even with new batteries, are not yet adequate to meet the needs of big consumers.

In December, Entergy announced a $3.2bn plan to build three gas plants totalling 2.3GW to serve Meta’s $10bn AI data centre, the tech company’s largest. Meta will become Entergy’s “single largest customer” once the centre is online, the utility told the Financial Times.

US power consumption, known in the industry as “load”, is already at a record high but will leap by another 16 per cent by 2029, according to think-tank Grid Strategies.

The US Department of Energy says electricity demand from data centres used for AI will triple in the next three years.

Other companies are now racing to catch up with the US’s gas needs.

Share prices of utilities and turbine manufacturers, including Siemens Energy and GE Vernova, have risen sharply over the past year.

Big Oil producers, including ExxonMobil and Chevron, are also entering the business, designing plants to supply AI data centres directly, avoiding the grid.

Some producers are keeping ageing gas plants around, while others are building scale through acquisitions. Last year, Wood Mackenzie revised down 2035 expectations for total US gas plant retirements by 10 per cent.

This week’s fun find

Black hole myth busted: they don’t suck anything in

Black holes are some of the strangest, most wondrous objects in all the Universe. With huge amounts of mass concentrated into an extremely small volume, their interiors inevitably collapse down to singularities, surrounded by event horizons from which nothing — not even light — can escape. In terms of ranking objects by density, black holes are the densest objects known to exist within the entire Universe. Whenever anything passes too close in the vicinity of a black hole, the forces from the black hole will tear it apart into its constituent particles. If any particles of matter, antimatter, or radiation ever cross over the event horizon, those quanta will simply fall down into the central singularity, where they cause the black hole to grow by adding to its total mass.

These properties about black holes are all true. But if you ask people to tell you their conception of a black hole — including what it is and what it does — you’ll often find that there’s an idea associated with black holes that’s absolute fiction: that black holes suck any surrounding matter into them. This couldn’t be further from the truth, and completely misrepresents how gravity works. The biggest myth about black holes is that they suck. Here’s the scientific truth behind how they work instead.

This week's interesting finds

This week in charts

Interest rate cuts

Unemployment rates

Manufacturing GDP Per Capita

T-bill issuance

December Nonfarm payroll above expectations

S&P 500 sector performance by political outcome

30-year government bond yields

U.S. 10-year yields before and after rate cuts

Equity market concentration

Magnificent 7 market cap

2024 price return performance

S&P 500 price-to-earnings ratios

2-year calendarized S&P 500 performance since 1928

Car companies have an infuriating software problem

Last month, my car went into the shop for its third software-related recall in six months. Once again the friendly guys at the dealership were unable to install the necessary update on their own. Instead our now-undriveable SUV sat on their lot, awaiting its turn with experts at BMW headquarters. The queue took four days.

That delay was both painful and pointless. Automakers learned long ago to have the necessary parts and labour on hand before calling in a vehicle for a physical recall. Surely a company that claims to have 9mn fully upgradeable cars on the road already can set up an equivalent process for software.

Managing such updates is only going to grow more important with the spread of electric vehicles and increasingly sophisticated digital information and safety systems in petrol-driven cars. Software fixes made up 15 per cent of US recalls last year, up from 6 per cent five years ago, according to National Highway Traffic Safety Administration data.

BMW’s three US software recalls last year put it ahead of many rivals, NHTSA records show. Ford had the most overall with 19, followed closely by Chrysler. Tesla had the highest share with 50 per cent of its 16 recalls requiring a software fix. That is not surprising given that electric vehicles rely far more on software and have fewer parts than internal combustion engines.

Software woes have delayed recent launches at Volvo and General Motors, among others. Volkswagen executives grew so frustrated with their internal software development that they signed a $5bn tie up with Rivian last summer.

Traditional carmakers struggle with updates for the same reason big banks have spent billions modernising back office technology: sprawling legacy systems. While Tesla started with a clean slate, incumbent carmakers have to wrangle old electrical systems and production lines, cross firewalls and integrate software code written by suppliers.

The rewards for getting this right are considerable. As more cars offer snazzy screens and infotainment systems, and EV battery technology improves, carmakers will need to find new ways to differentiate themselves from their rivals.

Luxury goods makers have already shown that making customers feel they are getting something special is crucial to convincing them to pay extra. Done properly, software updates can strengthen the ties between carmaker and customer, maintaining the regular contact that oil changes and maintenance checks used to provide.

This week’s fun finds

For the first time at EdgePoint, a partner created their own hot sauce for others to try. The two orange habanero sauces were less spicy with a sweet mango flavour, while the two green habaneros brought the heat (an unlabelled bottle not pictured). We’re hoping she’ll bring in more for the office fridges!

We also sampled two hot sauces from Truff. Neither were incredibly spicy, but the truffle flavour really came through.

When we lose weight, where does it go?

The world is obsessed with fad diets and weight loss, yet few of us know how a kilogram of fat actually vanishes off the scales.

Even the 150 doctors, dietitians and personal trainers we surveyed shared this surprising gap in their health literacy. The most common misconception by far, was that fat is converted to energy. The problem with this theory is that it violates the law of conservation of matter, which all chemical reactions obey.