Weekly Research Briefing: Fall Begins

A worldwide shortage of motor oil is becoming more acute, with prices of the car engine lubricant reaching new highs, oil-change shops running dry and a US retail group rationing sales to do-it-yourself customers.

The surge in the cost of base oil used for the full synthetic motor oil required for many newer cars far outpaces steep price rises for crude oil, petrol and diesel. The US price of so-called Group III base oil has almost quadrupled since February to a record $12.45 a gallon on Friday, according to Argus Media…

Walmart’s website this week reported low stocks for several brands. “We work closely with our suppliers to keep products available at the low prices our customers expect,” Walmart said.

“There will be some spot outages that we have to just deal with,” said Mauricio Quezada, chief executive of Jiffy Lube, a US oil-change and auto-repair chain. Jiffy Lube was part of Shell until its $1.3bn sale to a private equity firm in July and still received most motor oil from Shell’s Pennzoil business, Quezada said.

Motor oil sells in small volumes but serves a critical function greasing the insides of internal combustion engines. Global lubricant base oil exports are typically only about 350,000 barrels a day, a fraction of the more than 100mn b/d world oil market.

"Amid soaring diesel prices, Food at Home CPI could rise to 7-8% over the next 6 months, up from the current low single digits (2.1% in August)."

Fed Chair Kevin Warsh says 3 things changed that led to the rate hike today:

1. Strength of the economy. "The economy has strengthened. It’s a judgement I have and the committee has."
2. Inflation summer trends weren’t passing his test for moving toward 2% "clearly and at sufficient speed"
3. Geopolitics (aka war in Iran and oil/diesel). Warsh says "Our judgement about what is the most likely or least likely geopolitical situation has changed"

“I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee. So we removed a dose of accommodation.” - Federal Reserve Chairman Kevin Warsh

@MebFaber: The only guide the Fed needs.

Mark Costa, CEO of industrial giant Eastman Chemical, said in May that the one-two punch of interest rates and inflation was forcing his industry into a corner. Eastman makes the plastics, additives, and other materials used in products as diverse as medical devices, animal feed, and car windshields.

“Everyone had their back against the wall and had no room to absorb these increases,” Costa said on Fox Business. “Everyone is very quickly raising prices faster than I’ve ever seen in 20 years.”

On the retail side, unexpected pressure from energy and raw materials costs will “fully offset” the benefit of $730 million in tariff refunds, Home Depot CFO Richard McPhail said last month.

“There’s just so much uncertainty right now. … You think inflation, interest rates, fuel prices,” McPhail said last week at a conference.

“So back to your question, absolutely, if we have to pace things, we will always make investment decisions based on a strong ROI. But from where I sit today, there is so much opportunity to drive growth, that I’m still highly focused on getting more compute to keep that flywheel going.” - OpenAI CFO Sarah Friar

“...with respect to AI financing, if everyone is right and the build-out of the compute capability in the next 5 years is going to take $8 trillion, there’s going to be a lot of financing to do that. Now I’m not sure it’s going to be a straight line. I’m not sure everybody is estimating at the end of the day, the right capital needs that they’ve got the right pricing models. But I do think there’s going to be a lot of demand, and there’s going to be a lot of needs.” - The Goldman Sachs Group CEO David Solomon

With the Federal Reserve unanimously raising the federal funds rate, corporate borrowing costs will likely move higher as well. The chart of the week examines which areas of the market are best positioned to absorb those higher financing costs. Looking at interest coverage ratios, a measure of a company's ability to meet interest payments from operating earnings, the Mag 7 stands out as particularly well positioned. Strong profitability and healthy balance sheets leave these companies with significant flexibility to increase borrowing and continue investing in growth, an increasingly valuable advantage as abundant cash flows become less of a tailwind. The picture is less favorable for the rest of the market. Compared to the Mag 7, many companies across the broader S&P 500, as well as mid- and small-cap stocks, have less capacity to absorb higher interest expenses, making them more vulnerable to a restrictive monetary environment.

AMD REPORTEDLY PREPARES ~10% CHIP PRICE INCREASE AS TSMC COSTS RISE

AMD has notified partners of an expected roughly 10% price increase tied to higher TSM wafer costs, according to a report cited by Wccftech.

The increases are expected to affect AI accelerators, consumer GPUs and motherboard chipsets, with new pricing policies planned for Q4.

AMD relies heavily on TSMC for its advanced-node CPUs and GPUs, making wafer pricing a key input cost.

PERHAPS machines will make many humans unemployable eventually—but there is no sign of it yet. On September 4th the Bureau of Labour Statistics reported that the American economy added 162,000 jobs in August, far above expectations. The unemployment rate is 4.1%, lower than in almost 90% of months over the past half-century. Young workers, often cast as the first victims of artificial intelligence, are doing just fine: the gap between unemployment among 20-24-year-olds and the overall rate is close to a multi-decade low…

AI-related layoffs get lost in a churning jobs market where employers shed roughly 1.7m workers in a typical month. And the evidence so far is that AI is already creating a lot of jobs to replace those it has destroyed. The vast sums pouring into data centres and power generation have set off a race for construction and infrastructure workers. AI startups are hiring like there is no tomorrow. Incumbents racing to keep up are creating new AI roles. And by making some workers more productive, AI may be increasing demand for their services.

Add it all up, and The Economist estimates that AI has so far created around 1m new jobs in America. That easily exceeds the roughly 200,000 lay-offs attributed to AI since mid-2023, and appears more than enough to offset weaker hiring in many back-office roles. America’s AI infrastructure splurge has created many of them.

"S&P 1500 Software revenue per employee has gone parabolic. If you are looking for evidence that AI is starting to impact the real economy, this is exhibit A."

From Eaton speaking at a conference yesterday, just jaw dropping numbers:

“So, when we released our Q2 numbers the total announced projects for data centers was 307 gigawatts to be built, just think about that. And now today, we checked this week, it’s already 342 gigawatts. So, a month later, it’s already more. And then you contrast to what this industry has ever built. We have installed 50 gigawatts. So, today operating, there are 50 gigawatts. So, we are talking about between 6x and 7x what exists today is what’s going to be built in the next years. Most of this is not going to turn into ‘27 or ‘28 revenues. So, it’s going to be a longer cycle, that’s the way to think about it.”

Coca-Cola CEO: AI is materially reducing creative production costs and cycle time in consumer campaigns.

“We're doing the creativity work of the campaigns with a fraction of the cost and a fraction of the time.”

"While US telcos traded down on concerns on X chatter around Meta’s Muse and rival AI agent Instinct has focused on their new ability to make outbound calls to U.S. businesses, including negotiating phone and cable bills on behalf of users. This could become a risk for telcos because AI agents can wait on hold, escalate with support teams, switch users to cheaper plans, remove add-ons and claim credits at scale—potentially increasing pressure on ARPU, retention economics and customer-service costs. The same risk applies to European names as these AI assistant role out. But its NOT just telcos as other industries could also face pressure -industries most at risk are those with recurring bills, negotiable pricing, confusing add-ons, high churn incentives and customer-service friction—including cable/broadband, insurance, utilities, banks/credit cards, subscriptions, travel, healthcare billing, retail returns, auto leasing and gyms. If AI agents can persistently call, wait on hold, compare offers, cancel services, claim credits and renegotiate terms on behalf of customers, companies that rely on inertia or under-claimed discounts could face higher retention discounts, lower add-on revenue, more support volume and weaker pricing power."

Founded in 2021, the creator of Claude hadn’t even produced a dollar in revenue until 2023. By August, it was making around $65bn on an annualised basis, although such unofficial numbers should be treated with kid gloves. This growth seems to have come as a surprise to Amodei too. Only 18 months ago, Anthropic expected its revenue in 2027 to be just $12bn.

Now, some investors predict a revenue run-rate of $320bn by the end of next year. They are not impartial, of course. But if they are right, then $2tn would represent a valuation of just seven times its 2028 sales. That’s a little less than Microsoft, according to LSEG. SpaceX, meanwhile, trades at 16 times that year’s revenue. Take that as the benchmark — they are both companies with wild aspirations and charismatic leaders — and Anthropic could in future be worth $5tn.

Supportive profit growth has been accompanied by positive earnings revisions, with 2026 and 2027 estimates moving higher across major regions. There are four broad areas which have been driving much of this profit growth. First, technology earnings continue to be very robust. Second, rising energy prices have pushed up profits in the commodity sector. Third, banks have generally enjoyed strong earnings backed by positive nominal GDP growth, steep yield curves and strong private sector balance sheets. Finally, sectors such as Industrials have benefited from the surge in AI capex spending which has spilled over into improved revenues for the ‘pick and shovels’ of AI infrastructure. The breadth of the earnings' growth has also increased the opportunity for investors to diversify across sectors as well as countries.

The US MSCI trades at a 19.4 forward P/E versus 12.6 for the ACW ex-US, 15.6 for Japan, 14.2 for the European Monetary Union (EMU), 9.7 for Emerging Markets, and 5.0 for South Korea. Korea is at a 14.4-point discount to the US.