Keepin' Cool

By?Matthew Gutierrez,?Shawn O'Malley, and?Weronika Pycek?· June 28, 2023

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Many headlines that dominated the financial news cycle last year featured comparisons between 2022’s bear market to those in 2000-02 and 2007-09???

But the past eight months have proven to be a different path, with many investors betting that we’re in a new bull market for years to come.

Meanwhile, higher rates and home prices have created a double-whammy for prospective home buyers. The number of homes in the U.S. for sale fell to 1.37 million in May, the lowest level since at least 2012.

Our Chart(s) of the Day below speak volumes about both developments.

—Matthew

Here’s the rundown:

Today, we'll discuss the?three biggest stories in markets:

• Why more data in the cloud means more data centers
• UBS cuts more than half of Credit Suisse's workforce
• The race to build a better air conditioner as the climate warms

All this, and more, in just?5 minutes to read.

POP QUIZ

Significant intra-year stock market drawdowns are more common than investors might think. What’s the average intra-year drawdown for the S&P 500? (Scroll to the bottom to find the answer!)

CHART(S) OF THE DAY

IN THE NEWS

?? More Data In the Cloud Means More Data Centers (NYT)

Nearly everything lies in the?cloud: Our favorite photos, important documents, work responsibilities, and more. Remote work and the growth of high-speed streaming have only grown the need for the cloud and the data centers that power it.

Finding the right land and energy for the data centers? That’s another challenge.

Amid farmlands and open fields sit many of our country’s massive, windowless buildings that house high-speed computers, enabling technologies such as?5G?and?artificial intelligence?possible.

• The data centers are nationwide, from Virginia to the Great Plains to the West Coast. Each has hundreds of servers and routers, which send and receive data for tasks from streaming to high-speed financial trades.
• All within four walls:?“It is the engine that powers the machine,” said the director of data center research at a commercial real estate services firm. “Everything on your phone is stored somewhere within four walls.”

The growth of cloud-based technologies has fueled more need for data centers, which means more buildings, land, cooling systems, and electricity to support that physical infrastructure that runs 24 hours a day, seven days a week. There’s no vacation for the data centers we’ve become so reliant on.

Just getting started:?Tech advances and A.I. breakthroughs will only increase demand for the cloud and data centers. We’ve only begun to scratch the surface on the long-term need, and it’s not just big tech companies like?Amazon?and?Microsoft?that have fast-growing cloud segments. Noted Microsoft’s VP for cloud innovation and operations:

“As a society,?we are just getting started.”

Why it matters:

Data centers?are relatively lean and efficient but come at a cost. The swaths of land needed for the behemoth buildings have arisen near housing developments and strained electricity providers struggling to keep up with growing demand.

• Northern Virginia, near the nation’s capital, has become a major hub for data centers.?Amazon?announced plans this year to build multiple data centers in?Virginia?by 2040, a roughly?$35 billion investment.
• The United States had?2,701 data centers in 2022, the largest number worldwide, followed by Germany, Britain, and China. U.S. data centers are concentrated near major cities, from Atlanta to Seattle. They’ve also provided sizable job demand: Some electricians work seven days a week at a $75-per-hour rate to build and maintain the centers.

Being strategic:?“We have to be strategic in terms of where we place data centers and consider the water stress level of the area when designing them,” noted a California scientist.

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??? UBS To Cut More Than Half Of Credit Suisse Workforce (Bloomberg)

UBS will reduce?Credit Suisse's?workforce by over 50% beginning next month.

In June, UBS finalized its emergency takeover of struggling competitor Credit Suisse, creating a Swiss banking and wealth management behemoth with a massive?$1.6 trillion balance sheet?and a workforce of?120,000.

The cuts will likely fall heavily on bankers, traders, and support staff working in Credit Suisse's investment bank in?London,?New York, and?Asia.

• Employees could see three rounds of cuts this year, with the first round projected by late July.
• The second and third rounds are tentatively set for September and October.

After the government-brokered rescue, UBS's acquisition of Credit Suisse is revealing the magnitude of job cuts. The bank has announced plans to save around?$6 billion?in staff costs over the next few years.

• UBS plans to gradually decrease the combined headcount by about 30%, or?35,000 workers.
• A merger of the Swiss?domestic?businesses of the two banks could eliminate up to?10,000 jobs.

Why it matters:

The staff reduction at the Swiss lender will significantly worsen the already?challenging year?for job prospects in the?global financial sector, where major Wall Street investment banks such as Morgan Stanley and Goldman Sachs have also announced substantial staff cuts.

The financial sector has been struggling with layoffs and currently ranks third among other?industries?facing cuts, as evidenced below:

Since taking over, UBS indicated its intention to reduce the size of Credit Suisse's investment bank, which incurred a?loss of $5.5 billion?due to the Archegos Capital Management?scandal?in 2021, involving indiction and arrest in federal charges of fraud and racketeering.

• UBS's dominance within the combined firm is evident in its executive ranks. The executive board consists primarily of?UBS representatives, while in the crucial wealth management unit, only a handful comes from Credit Suisse.

Though UBS jad intended to retain the?top 20%?of its dealmakers, specifically in?technology, media, and telecoms, numerous high-performing bankers have already left or been recruited by rival firms, including Deutsche Bank, Jefferies Financial Group, and Wells Fargo.

MORE HEADLINES

??? Powell?says?‘restriction’ is coming, including possibility of more rate hikes

?? Costco?cracks down?on sharing membership cards

?? Portland?loses?residents weary of crime and elevated housing costs

?? The Race to Build a Better Air Conditioner?(WSJ)

This week has been historically hot in Texas. The state hit record power use, and millions of people are under safety alerts as temperatures exceed triple digits. There are serious implications for?public health?and?local businesses, some of which have been forced to shut down amid the dangerous climate.

But any entrepreneur will tell you that problems can create incredible business opportunities.

Air conditioning?is critical amid the heat, though they make the world hotter while cooling people off. Startups are trying to break the cycle by easing the strain on electrical grids and helping communities withstand sizzling temperatures.

A few names to know:?Blue Frontier,?Transaera, and?Montana Technologies, each raising money from investors, including industry giant?Carrier Global?and?Bill Gates’s Breakthrough Energy Ventures?to develop more efficient tech. Efforts focus on humidity rather than heat, using new materials like liquid salt to dry out the air.

• They’re raising capital at an opportune time as a wave of government regulation and incentives such as tax credits and rebates for high-efficiency products under the?U.S. Inflation Reduction Act.
• “The climate problem is only going to get worse if we continue to add the same types of air conditioners to meet that demand,” said Transaera’s CEO, whose team is developing a new AC using highly absorbent materials that remove humidity. The company raised?$4.5 million?from investors, including Carrier last year and is making prototypes.

Why it matters:

Tech innovation in the sector is imperative for governments because heating and cooling accounts for about?15%?of greenhouse-gas emissions. Cooling is the fastest-growing use of energy in buildings, and ACs worsen climate change by consuming large amounts of electricity generated from fossil fuels.

In other words, the opportunity for better AC is massive.

• In India, the growing middle class could lift the number of ACs in use by midcentury from about?two billion?to?5.5 billion, per the?International Energy Agency estimates.

The startups are hoping to do to AC what?Tesla?did to EVs. “We’re experiencing a similar moment in the air-conditioning space to what the car industry was facing six to 10 years,” said an AC firm CEO.

TRIVIA ANSWER

The S&P 500?averages?an intra-year drawdown of about?14%. So, even though stocks rise roughly three out of every four years, it’s typically not a straight line to get there.

SEE YOU NEXT TIME!

That's it for today on?We Study Markets!?

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