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- [00:00]
Anne Barry
This episode is brought to you by Charles Schwab. Timing the Market, Fighting Inflation Managing risk Financial decisions can be tricky. Investing isn't just math, it's psychology. Your neurons are playing favorites, and the market doesn't care. Financial Decoder, an original podcast from Charles Schwab, can help join host Mark Reape as he breaks down practical strategies to help overcome the mental traps that may affect your investing decisions. Listen@schwab.com FinancialDecoder
- [00:31]
John Croteau
Palantir its CEO said AI sovereignty drove the company's quote, otherworldly earnings. We have the latest situational awareness. We break down the collapse of the AI Hedge fund and profile the firm that was poised to benefit. And Caterpillar, the company known for yellow bulldozers, is the latest unlikely AI winner. We explore why for Tuesday, August 4, it's Brew Markets Daily and I'm Ann Barry. More market details to come. But first, Caterpillar, the world's biggest maker of construction equipment, the market cap of over $400 billion while today delivering one of the biggest earnings surprises of the quarter, with a leap onto that big market bandwagon, that is. Yes, you guessed it, data centers. Caterpillar just reported record quarterly revenue of $20.5 billion, the first time in its history that it's topped the $20 billion mark. Sales climbed 24% from a year ago, its backlog is up over 90% to $72 billion, and adjusted earnings surged to $8.17 a share, crushing Wall street expectations by nearly 2 bucks. Lots of big news here. And just as importantly, Caterpillar raised its full year sales outlook after what CEO Joe Creed described as continued strength in AI related infrastructure investment. Well, management said that demand tied to AI data centers boosted both its power and energy business, which supplies engines, generators and backup power systems. Sales there jumping 17% as well as benefits to the construction industries division as contractors build massive AI campuses. Revenue there jumped 35% to over $8.3 billion, helped by a remarkable 50% increase in North American retail sales. Well, this caught our eye as yet another example of a company that investors don't traditionally think of as an AI stock getting a ton of benefit from the data center boom. Yesterday we talked About Warehouser, the $18.6 billion market cap timber company making money from selling land on which to build data centers and now stretching to pitch timber as a construction material of choice for that building activity. That's one of the quirkier examples of the transformational power of data centers in driving earnings. Others have been, of course, that we've talked here on the show About Corning, the $138 billion market cap glass maker best known for Gorilla Glass, benefiting from a fiber optic boom. There's trane Technologies, the $104 billion market cap H Vac manufacturer providing cooling systems for data centers. And then you've got businesses like Ecolabs, $282 billion of market cap providing water treatment and efficiency technologies that operators use to reduce water usage. But topping my list of quirky data center beneficiaries isn't even Caterpillar. It is Toto, famous for luxury toilets. But the roughly $6.5 billion market cap Japanese company also has a high tech ceramics business. Those ultra pure ceramic components are used in semiconductor manufacturing equipment. So the AI chip boom has lifted. A company that most people know for its bidets, activist investor at Palliser Capital, even called Toto the most overlooked AI memory beneficiary. While fun times Caterpillar stock up more than 6% today, we're going to keep on watching. Coming up in a moment, a spin through the headlines that are moving the markets today, including earnings out of Wayfair, McDonald's and Palantir. But first, this episode is brought to you by Charles Schwab. Timing the market, fighting inflation, Balancing Risk no one says financial decisions are easy. In fact, it's the opposite. Financial decisions can be really tricky, and it's often your own thinking that can lead you astray. Financial Decoder, an original podcast from Charles
- [04:27]
Anne Barry
Schwab can help join host Mark Reap, head of the Schwab center for Financial Research, as he offers modern strategies to help combat the wait. What in your head Mental traps like overconfidence, loss aversion and recency bias may cloud your investing decisions. When you understand these patterns, you can take steps to make better informed financial decisions.
- [04:46]
John Croteau
Listen@schwab.com financialdecoder or wherever you get your podcasts that schwab.com financialdecoder well, let's take a quick spin through some of the headlines that are moving the markets today. And it's earnings Central shares of Wayfair ticker Keeping it simple surged 30% after the furniture retailer beat Wall Street's top and bottom line expectations and also posted its strongest U.S. revenue growth since 2020.
- [05:12]
Anne Barry
Management said that growth was driven by higher income consumers. Sales and Wayfair's upscale furnishings business jumped 35% during the quarter, with those customers spending almost three times as much as the average Wayfair shopper. But the picture wasn't as strong overseas International sales slipped about 1%, contributing to the company's net loss of $1 million.
- [05:31]
John Croteau
But investors were encouraged by the US growth story. Wayfair erasing its entire year to date losses in a single trading session. When you take a look at that share price, the stock now up over 55% for the last 12 months. Over now to McDonald's, where international markets in contrast, are doing much of the heavy lifting.
- [05:51]
Anne Barry
Shares of the fast food giant rose nearly 2% after reporting earnings. International same store sales increased 1.5% during the quarter, while US same store sales rose a more modest 0.8%.
- [06:02]
John Croteau
McDonald's said that Americans are spending more per visit, but that fewer customers are coming in through the doors. Of course, the company is trying to increase that foot traffic. We've seen McDonald's appoint a new president of its US business whose focus will be on strengthening the company's value offerings
- [06:17]
Anne Barry
and marketing and talking about marketing and branding. And I want to know why. McDonald's has a category of beverages called refreshers. They're fun, they're popular, they have names like BlackBerry Passion Fruit Refresher drink. But last week we were talking about Starbucks earnings and the management highlighted their refreshers as a prompt promising non caffeinated afternoon drink. If we're talking about marketing, why doesn't McDonald's trademark McFreshers come up with something unique? There's a boom for these drinks And I think McDonald's is to find its alley.
- [06:45]
John Croteau
John Croteau pitching right there for a job at the McDonald's marketing department. So if you're listening, call our producer on McDonald's shares remaining down about 12% year to date, keeping with the consumer and moving though to household essentials. Shares in Kimberly Clark, the maker of Huggies and Kleenex, rose more than three and a half percent today after beating earnings expectations.
- [07:05]
Anne Barry
It's been a disruptive quarter for Kimberly Clark. A fire in Southern California warehouse contributed to organic sales in North America falling by nearly 1%. Plus, the company is dealing with allegations in China that its diapers were found to have traces of a toxic substance, which Kimberly Clark insists is false. This has all led to the company trimming its full year sales growth outlook.
- [07:26]
John Croteau
Management emphasized those were isolated headwinds and investors seem to agree. Those shares up more than 9% yet year to date. And finally, shares of Palantir. Let's go there. Soaring 29% after the software company delivered what its CEO called otherworldly second quarter earnings revenue jumping 93% year over year, driven by almost 150% growth in its commercial business and 90% growth in government.
- [07:53]
Anne Barry
Palantir designs software that helps companies integrate AI into their existing systems and data, and the company highlighted the demand for AI sovereignty that's keeping sensitive data out of the hands of Frontier AI Labs, CEO Alex Karp wrote to shareholders. Every organization in the world is awakening to the risks of handing the creators of the language models the keys to their institutions, of letting the models loose within their homes. Very interesting push and pull developing between these AI labs and the users of those models.
- [08:22]
John Croteau
Well, let's take a quick break and when we come back, Situational Awareness. It's the hedge fund that has been making headlines with massive AI positions. We're going to talk about how those positions in public equities in that sector unraveled and why Citadel, Ken Griffin's outfit stepped in.
- [08:40]
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- [09:11]
John Croteau
past several days, there's been a ton of reporting on the extraordinary downfall of the Situational Awareness AI hedge fund, not least because there's a very interesting human interest element to this, and that is the founder is a young man, Leopold Aschenbrenner, whose age and pedigree and background in AI before launching this fund really caught the imagination of a lot of folks, not least the investors who got behind him to the tune of billions of dollars. Well, six weeks ago, Ashen Brenner was being heralded as the quote, Nostradamus of AI. His fund had hit $45 billion in assets under management and his routine quarterly 13F filings were blockbuster events on social media. However, last week the fund was liquidated with a big chunk being sold to Citadel. Not the first time, by the way, that Citadel has bought up distressed assets. They have a knack for getting this done. We're going to get more into that in just a moment. But first, John, give us some background on Aschenbrenner.
- [10:06]
Anne Barry
He is a fascinating person. In 2021, he graduated from Columbia University as valedictorian at the age of 19. Then two years later, he joined OpenAI from that job. He was fired for apparently leaking info, reportedly to an anthropic adjacent contact. And then in 2024, this is the watershed moment, he published a white paper called Situational Awareness the Decade Ahead. And here's a quote from that paper. American big business is gearing up to pour trillions of dollars into a long unseen mobilization of American. This was his thesis around investing in AI. Then later in 2024, he launched the situational awareness AI hedge fund around that AI growth thesis. The fund became wildly popular and successful. About a fifth of the fund was a single early stake in Anthropic that ballooned in value. And Aschenbrenner got many investors on board, including Jane Street. That firm rarely ever gives money to outside managers. They gave him money and at the end of May, Situational Awareness was up more than 1,000% after fees from where it had started in 2024.
- [11:11]
John Croteau
So it's a really critical point here. You just said, John, a fifth of the fund was a single early stake in Anthropic, which of course is privately held. Right. So this is not a public company. So Aschen Brenner's portfolio has been a combination of stakes and private companies, but also stakes and publicly traded ones. So what eventually did the fund in was leverage? Because Aschen Brenner wasn't just buying winners equity positions in those every dollar of capital the fund brought in. So he's out raising money. Aschen Brenner would then just turn around and borrow three or four dollars more to buy incremental stock, which worked fine when AI stocks were going up. But in mid July, cheaper Chinese open source models did spook the market. We've seen volatility in AI related names. We've talked about it here on the show. And with the wobbling of those names came a 67% drop in in the underlying fund assets, still up 80% on the year. But it just goes to show how massive the early run up was and how big that leverage became once we saw some of these equity values start to head south.
- [12:16]
Anne Barry
Absolutely. And then rival funds, perhaps sensing blood in the water, reportedly started shorting Aschen Brenner's biggest positions. And essentially they were betting against his picks and betting that he would be forced to sell eventually because the banks started issuing margin calls. Those loans you mentioned, they started losing confidence and wanted to be paid back broadly for those three or four dollars that you had brought up. Aschenbrenner wrote, these dynamics are essentially similar to a bank run vulnerability begetting more vulnerability. It's kind of the opposite of a bank run because these are the banks coming after him as opposed to the classic folks wanting their money out of the bank. But the point is, Aschenbrenner needed liquidity to pay back these bank loans. He tried to offload that three and a half billion dollar anthropic stake that we talked about. He backed out overnight. This all happened last week. Instead he accepted an offer from Citadel to purchase the bulk of Situational Awareness's public stocks, allowing it to keep its shares in private companies. So last week the fund at its peak at 45 billion, saw its holdings drop to roughly $10 billion. And late on Thursday, Aschenbrenner wrote a letter to investors saying, quote, we let you down this month and I take full responsibility for these events.
- [13:26]
John Croteau
So let's take a look at that deal with Citadel, $71 billion firm founded by Ken Griffin. This is really a titan in the hedge fund industry. And here's what Citadel did. It did acquire the levered stock positions among them SK Hynix, which has been the South Korean business that's been on absolute tear but with enormous volatility and also a stake in Coolweave. And Citadel did this, buying it below market prices, generally getting them at over a 10 discount. And so basically that is their reward for taking on this kind of scale with this kind of risk, with this kind of short fuse timing. Now Citadel has a history of stepping in to buy assets from distressed hedge funds, including when it bought assets two decades ago from Amaranth which had highly levered bad bets on natural gas futures. So totally different industry, not tech, but commodities. And it did something similar with Soward. We're scooping up fallout from the early subprime mortgage. So here we're talking about the time of Enron. Enron, exactly. So Citadel is unafraid of complexity. It is unafraid of different industries. It sort of has a generalist model and its real skill is being able to sniff out money making opportunities when there are points of dislocation either at a macro level or within a particular fund, as we saw here. And there was an article in the Wall Street Journal if you go all the way back to August 1st, 2007. So we're really in the financial crisis when this headline comes out, quote, citadel loves a company in misery. I'm just going to read a passage from that article. Where there's trouble in the markets these days, there's usually Kenneth Griffin on Sunday. Mr. Griffin, the 38 year old founder of big Chicago hedge fund Citadel Investment Group first learned about deep troubles at Hedge fund so would capital. He called a team of 30 traders at their home and told them to come into the office trying to figure out a way to profit from the problems. On Monday, Citadel bought up many of Soard's investments, including bond positions that were rapidly losing value. Look, there was the other urban legend, too, that when Enron was struggling, when it was wobbling and that was about to go under, that Ken Griffin literally got his team on a plane to go sit down with the Enron folks to try to unpack what was going on and whether there was opportunity there.
- [15:42]
Anne Barry
Right. I've heard that story, too. And that competing firm said, well, we'll get to this on Monday. And he was there over the weekend overnight getting these deals done. So does this mean necessarily that Ashen Brenner's thesis is wrong? Because the day after he sold products of Citadel, many of the semiconductor and other stocks soared. Long Term Capital management imploded in 1998. Citadel bought its bonds and its boss, John Merriweather, raised another fund even after selling to Citadel. And that fund initially did well, but then shut down after some of its bets soured. So I wonder if Ashton Brenner can have a second act. His fund still has $10 billion, right?
- [16:21]
John Croteau
Let's just focus on that. He did in fact hang on to the private stakes in private technologies, including, and you said it, that he did keep that big chunk at three and a half billion dollar stake in Anthropic. So he does have a real asset there that is highly desirable. People are desperate to try and get a position there. You know, we see all the headlines of folks in San Francisco trying to sell their homes and willing to accept stock and Anthropic for it. You know, it's getting a little bit heady. But the point is that he's young. By the way, he got married, right? As this was happening just this past weekend. Just this past weekend. His background, you can't take away that he was valedictorian from Columbia University at the age of 19. You can't take away the fact that he did manage to raise an astronomical amount of money at a young age and without a lot of experience investing in public markets, which shows that he can certainly sell a story. He can get people behind his levels of conviction. So he's also got real life skills in there, not just his academic credentials. So my bet is there's a lot of forgiveness in the markets. I have found over time, particularly if these errors are made young and people can say, look, I got scar tissue from that. But I've learned from it. So I absolutely think there's going to be a second act or a third act or a fourth act when it comes to Leopold Aschenbrenner.
- [17:31]
Anne Barry
That's gonna be very interesting because people are talking about the collapse, but this is just one moment in time. I thought this was an interesting coda, Anne, as I was reading about this story, we've got Ken Griffith and you were talking about how young he was in that story. There were articles when he founded Citadel in 1990 referring to him as the boy wonder who traded options as an undergraduate at Harvard. And so you've got that generation's boy wondering sort of coming up against maybe this generation's boy wonder.
- [17:57]
John Croteau
Pure speculation, I have no idea. But I think there's a non zero charge that Ken Griffin ends up mentoring Leopold Aschenbrenner. And I bet someone like a Ken Griffin said, I like this guy's chutzpah. I like that he went after it. Look, he learned some lessons, but he did have a good run at one point and you never know. I wouldn't be surprised if Ken Griffin ends up backing Leopold Aschenbrenner directly, even having been on the other side of a deal with him. That's just one person's view from time roaming around Wall street. Well, it's 4pm on the east Coast. The markets have closed. We don't have a ticker tape. So instead let's throw it over to our human ticker, our producer John, to get us through the wrap up.
- [18:31]
Anne Barry
Right. And the market rally continued today bolstered by those strong earnings reports. We covered the S&P 500 and the Dow both up about one and eight tenths of a percent, both setting records. The Nasdaq finished up over two and a half percent for the day.
- [18:45]
John Croteau
Well, just a final thought. We've got some big things going on. We've got some of these leaders heading to the White House this week, of course, to try to determine how models are going to be previewed. Right this minute we have got SpaceX reporting earnings. I can't actually wait to clock off because I'm really excited to go in to dig in and see what on earth is going on there. But just a reminder, if you have any names, any stocks you want to go through, any interesting CEOs you want to get to know a little bit better do send us a question. Ask anything you want. We'll unpack it for you. You can get us at Brew market show morning brew.com you can comment on YouTube, on Apple, on Spotify, or wherever you get your podcast. That's it for today's Brew Markets Daily.
- [19:23]
Anne Barry
Brew Markets Daily is hosted by Anne Barry and produced by John Curto, Tarkab delatif, Ivan Elroya and Emily Millarn. Technical direction by Uchena Waoghu. Brittany Dotako is our audio engineer and the President of Morning Brew Inc. Is Devin Emery.
- [19:35]
John Croteau
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily.
- [19:43]
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Anne Barry
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