Bear case on AI from Doug Kass of Seabreeze Partners; A historic market rally and decline in volatility; Tesla's free cash flow vs. other electric-vehicle makers; Warren Buffett won't be on stage at the next Berkshire Hathaway meeting

1) As I've shared in past e-mails, I continue to believe artificial intelligence ("AI") will be as transformative as the Internet, and I'm closely following developments in the space.

We've seen AI stocks go through some huge booms in recent years... But we've seen some busts, as well. Not every AI project will be a hit, and there will always be setbacks in the process of trying to optimize this new technology.

To give my readers a bearish perspective, I'm sharing a blog post written by my friend Doug Kass of Seabreeze Partners. In it, he shares some recent stumbles in the AI space, starting with Meta Platforms (META):

Well, here is another big AI fail over at Meta – from the Wall Street Journal: Meta Is Delaying the Rollout of Its Flagship AI Model.

Who woulda thunk it's not working and not scaling? In fact, it almost seems to be going backwards with more complexity and more processing power...

The funny thing about Meta is their head of AI, Yann LeCun, is on record as not even believing [generative AI] will work, but it seems like [CEO Mark Zuckerberg] keeps making them spend on it anyway (and it seems to be going about as well as the metaverse). Then every time Meta reports their quarters, they keep raising their theoretical [capital expenditures] guidance, but then substantially underspending the numbers, which tells you something.

Next, Doug shares this Fortune article on "buy now, pay later" company Klarna: As Klarna flips from AI-first to hiring people again, a new landmark survey reveals most AI projects fail to deliver. He writes:

The article makes an important point that companies are using AI not because it increases productivity or is better for their customers, but because they think they have to because they think everyone else is doing it too.

Slowly but surely, they are all figuring out it is not working, and business necessity causes them to eventually go back to doing it the old-fashioned way, with real people. So much for the AI productivity miracle! The illusion only lasts so long, and executives only chase for so long...

Heck, even Microsoft (MSFT) seems to be somewhat giving up and prefers to just host the back end for customers that want to burn money on this stuff!

But the way the world is now, maybe Nvidia (NVDA) will start using Klarna so Nvidia's customers can do buy now pay later for their chips, instead of Nvidia having to fund their customers directly? It really is never ending with this stuff...

Thank you for your insight, Doug!

His bear case shows why it's important to stay on top of developments in the space – and recognize the potential booms and busts.

As such, I remain bullish on AI because there's still plenty of incredible investing potential... In fact, I'm sharing one such opportunity during a special briefing at 10 a.m. Eastern time tomorrow, May 21.

A small California firm with an AI super chip 50 times faster than Nvidia's could go soon mainstream. And this technological breakthrough could cause five little-known stocks to replace the Magnificent Seven.

Tomorrow, I'll be joined by AI expert Jeff Brown of our corporate affiliate Brownstone Research to share all the details of this transformative opportunity. Sign up here to make sure you don't miss our special presentation.

2) Charlie Bilello always has some interesting data to share in his The Week in Charts, and his latest was no exception...

This table shows the S&P 500 Index's biggest 27-day rallies in the past 75 years, with the recent 19% rally through last Friday ranking 15th:

Bilello comments:

What immediately jumps out when looking at that table of big short-term rallies?

With the exception of November-December 2008, all have occurred at the start of new bull markets, following historic bear market lows...

He also notes that the 62% decline in the CBOE Volatility Index ("VIX") over the last six weeks is the biggest volatility crash in history. He shares this table showing that in nearly all prior cases when volatility declined this quickly, the market did unusually well over nearly every subsequent time period:

In light of these two data points, do I think we're at the beginning of a bull market?

In a word, no.

The April pullback began from a very high valuation level, and, having recovered, the market is back to being richly valued. Plus, there's still a great deal of uncertainty out there – so my outlook, while not bearish, is cautious.

If I'm forced to put a number on it, I think the S&P 500 (with dividends reinvested) will compound at 5% annually for the next five years. (Keep in mind that the S&P 500's 19% gain since its low in early April is equal to nearly four years of 5% gains.)

3) Speaking of interesting charts... Whatever your opinion is on Tesla (TSLA), this chart posted on social platform X shows the company's impressive cumulative free cash flow compared with other electric-vehicle makers:

4) I was sad to hear that Berkshire Hathaway (BRK-B) CEO Warren Buffett won't be on stage next year at the annual meeting: Warren Buffett will hand off Q&A to Greg Abel at next Berkshire shareholders meeting. Excerpt:

Greg Abel, Berkshire Hathaway's CEO-in-to-be, says he wants to make sure shareholders in Omaha and beyond are assured: Like always, there will be a shareholders meeting in Omaha next year the first weekend of May.

It will again feature the Q&A session in the CHI Health Center arena. It will, as always, include the Berkshire subsidiary booths and sales deals.

But there will be one big change: Warren Buffett will not be on the stage. The Berkshire chairman instead will be seated on the floor with the rest of the company's board of directors while Abel fields the questions.

For shareholders, it will mean no more of the wit, wisdom and humorous quips from Buffett that have helped turn him into an American icon.

Despite this, I definitely plan to go to Omaha next year anyway to reconnect with all my friends I missed this time around!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.