InSight

Market InSights:

Tesla added to S&P500

Today is the last day that Tesla will not be part of the S&P. S&P Dow Jones Indices has announced Tesla’s addition Friday after the market close. Tesla will officially trade as a member of the S&P 500 by the time the market opens on Dec. 21. Today’s buy of Tesla at the market close will likely be the biggest buy order ever.

This means Tesla joins the S&P at today’s closing price, the volatility is already high because it is also the quadruple witching quarterly options expiration.

Some highlights you should know about TSLA’s inclusion:

  1. The addition of Tesla will cause the largest rebalancing ever of the S&P 500 ever – Tesla is the 9th largest company by market capitalization. Because most of the investments that track the SP500 are weighted by market cap, they will be adding more TSLA than anything else. It will represent about 1.5% of the index going forward. 
  2. The liquidity for Tesla will increase, as these passive funds enter the space, the access to TSLA will increase. Both to borrow and trade the access to TSLA should see some much needed liquidity.
  3. This will stabilize the historically volatile stock. The swings both directions on Tesla have been pretty epic over its lifespan. Expect that to temper somewhat. This won’t change Elon’s flagrant tweeting, or the inherently volatile relationship this company has with investors, but over time, such a large holding from passive tools like SPY will bring the range down on its intraday swings. Inversely, TSLA will start to bring its price instability to bear on the SP500 adding to its aggregate volatility.
  4. If you own exposure to U.S. Large Cap ETF’s and mutual funds, you will own more TSLA going forward. There is nothing you need to do to get the exposure. If you already own the TSLA stock outright, it is adding to the exposure. It’s likely time to rebalance.
  5. The SP500 will get a shot in the arm on the P/E ratio – expect this to jump suddenly, there is nothing wrong with the readout, TSLA’s PE (today) is close to 1300. Meaning you have to pay $1,300 for every dollar TSLA earns. Before today the PE on the broader SP500 was 37 (already high) and expect the bellwether that is Tesla to cause that further distortion. This inclusion may permanently impair any comparisons you or your broker has made to the PE of the SP500.
  6. Inclusion of TSLA, will cause some forced selling of other names of make room. Fund will have to make room for Tesla, and will push out 1.5% from the other names to make room.

The closest similarity we can draw is when Yahoo was added. It too was not a member of an S&P small or midcap index prior to its inclusion and had a similar rush to buy when it was included in 1999. As a reminder, this was considered the beginning of the “tech bubble” by many. Yahoo stock rose 50% between the announcement and its entry into the index at the time. 

Some funds have been adding to the TSLA position, in anticipation of this inclusion, but many passive funds are not allowed to until today, as close to the close as possible.

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Kevin Taylor

Exploring the Groundbreaking Achievements and Capabilities of Google’s DeepMind

Google’s DeepMind has established itself as a leading force in the field of artificial intelligence (AI) research and development. With a mission to “solve intelligence and then use that to solve everything else,” DeepMind has made remarkable advancements in machine learning, reinforcement learning, and other areas of AI. This article will delve into the achievements and capabilities of DeepMind, showcasing its groundbreaking contributions and potential implications for various industries. AlphaGo: Mastering the Game of Go DeepMind gained global recognition in 2016 when its program, AlphaGo, defeated the world champion Go player, Lee Sedol. The ancient game of Go had long been considered an immense challenge for AI due to its complexity and the vast number of possible moves. However, DeepMind’s AlphaGo utilized a combination of deep neural networks and reinforcement learning to surpass human expertise and achieve a superhuman level of play. Healthcare Innovations DeepMind has also made significant strides in the healthcare sector, collaborating with leading medical institutions to develop AI-powered solutions. For instance, in 2018, DeepMind partnered with Moorfields Eye Hospital to develop a deep-learning algorithm capable of detecting eye diseases, such as macular degeneration and diabetic retinopathy, from retinal scans. This technology demonstrated an accuracy comparable to that of expert clinicians, highlighting its potential for enhancing early disease diagnosis and treatment. Furthermore, DeepMind has worked on predicting patient deterioration in hospitals by leveraging AI algorithms to analyze medical records and vital signs. This research aims to enable healthcare providers to identify patients at risk of deteriorating, allowing for timely interventions and improved patient outcomes. Accelerating Scientific Discoveries DeepMind has been at the forefront of accelerating scientific research through AI. One remarkable achievement is the development of AlphaFold, an AI system designed for protein folding prediction. In the field of biology, understanding protein structures is crucial for comprehending their functions and developing targeted treatments. DeepMind’s AlphaFold leverages deep learning techniques to predict protein structures with exceptional accuracy, surpassing all other methods during the CASP13 competition. This breakthrough has the potential to revolutionize drug discovery, bioengineering, and other areas of life sciences. By providing researchers with highly accurate predictions of protein structures, AlphaFold significantly expedites the process of identifying potential drug targets and understanding the mechanisms of diseases. Ethical Considerations and Advancing AI Safety DeepMind is committed to addressing the ethical and safety implications of AI technology. In 2017, it established the DeepMind Ethics and Society (DMES) research unit to explore the ethical challenges and impact of AI on society. DMES conducts interdisciplinary research and engages in discussions with policymakers, experts, and the public to ensure the responsible development and deployment of AI systems. Moreover, DeepMind has actively participated in advancing AI safety. It co-founded the Partnership on AI, a collaborative initiative focused on addressing the global challenges associated with AI development and deployment. DeepMind’s research on reinforcement learning has also contributed to the development of techniques such as reward modeling, which helps in aligning AI systems’ objectives with human values. Google’s DeepMind has continually pushed the boundaries of AI research, achieving groundbreaking milestones and fostering advancements in various domains. From conquering complex games to revolutionizing healthcare and scientific discoveries, DeepMind’s capabilities have showcased the transformative potential of AI. As DeepMind continues to explore new frontiers, its commitment to ethics and safety serves as a reminder of the importance of responsible and transparent AI development. The achievements of DeepMind signify a promising future where AI and human intelligence synergistically solve some of the world’s most challenging problems.

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Boulder Risk Management, investment
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Our ‘InSight’ on Environmental Risk Management

Climate change has emerged as a pressing global issue, triggering a paradigm shift in the way organizations approach risk management. The recognition of climate-related risks and their potential impacts on operations, supply chains, regulations, and reputation has prompted a growing need for effective climate risk management strategies. In this blog post, we will explore the concept of climate risk management, its significance in the face of a changing climate, and the key steps organizations can take to mitigate these risks and ensure long-term sustainability. You won’t hear about the BEST, you WILL hear from the rest The best companies at managing their climate change risk are companies you’ll never hear about. In the vast landscape of companies striving to effectively manage their climate change risks, there are some unsung heroes that have gone above and beyond, despite not receiving widespread recognition. These companies have demonstrated a remarkable commitment to sustainable practices and proactively addressing climate-related challenges. While they may not be the household names dominating headlines, their efforts serve as a testament to the possibilities of responsible corporate action. One such company is Novo Nordisk, a Danish pharmaceutical firm that has made significant strides in integrating climate change considerations into its business operations. Novo Nordisk has set ambitious targets to reduce its carbon emissions and has been recognized as a global leader in sustainability. By investing in energy-efficient technologies, transitioning to renewable energy sources, and engaging suppliers to adopt sustainable practices, the company has managed to minimize its environmental impact. Additionally, Novo Nordisk actively collaborates with stakeholders, sharing best practices and knowledge to inspire and encourage others in the industry to follow suit. Another commendable example is Interface, a global modular flooring company based in the United States. Interface has embedded sustainability into its core business strategy and aims to have a net-zero environmental footprint by 2020. The company has taken innovative measures to reduce its greenhouse gas emissions, such as implementing renewable energy projects and using recycled and bio-based materials in its products. Interface’s sustainability vision, known as “Mission Zero,” not only encompasses environmental considerations but also emphasizes social responsibility and circular economy principles. By continually pushing the boundaries of sustainable practices, Interface demonstrates that profitability and environmental stewardship can go hand in hand. These exemplary companies prove that effective climate change risk management is not limited to the spotlight-grabbing giants of the industry. Through their commitment, innovation, and collaboration, they serve as inspiring models for businesses worldwide, demonstrating that proactive measures to mitigate climate risks can yield positive environmental and financial outcomes. As more companies emulate their efforts, the collective impact can lead to a more sustainable and resilient future for our planet. You will hear about some of the companies that fail to have environmental risks managed well – and it affects their stock prices Volkswagen (VWAGY): In 2015, Volkswagen was embroiled in a scandal known as “Dieselgate.” The company admitted to intentionally manipulating emission tests to meet regulatory standards, leading to significantly higher emissions from its vehicles than reported. This failure to address climate risks and comply with emissions regulations not only resulted in financial penalties and a loss of trust from customers but also tarnished VW’s brand reputation and led to a significant decline in its market value. Pacific Gas and Electric Company (PCE): PG&E, a California-based utility company, faced severe consequences due to its lack of preparedness for climate-related risks. The company’s inadequate management of vegetation near its power lines contributed to the ignition of multiple wildfires in recent years, including the devastating Camp Fire in 2018. The resulting property damage, loss of life, and legal liabilities forced PG&E to file for bankruptcy and face intense scrutiny over its failure to implement proper climate risk management practices. Adidas (ADDYY): In 2011, Adidas, a major sports apparel and footwear company, faced supply chain disruptions due to extreme weather events in Asia. Floods in Thailand, where many of its suppliers were located, resulted in factory closures and disrupted production. Adidas experienced delays in product delivery and lost sales, revealing the vulnerability of its supply chain to climate-related risks. This incident emphasized the need for companies to assess and address the potential impacts of extreme weather events on their supply chains and take proactive measures to build resilience. BP (British Petroleum) (BP): BP, a multinational oil and gas company, faced a significant environmental disaster in 2010 when the Deepwater Horizon oil rig exploded in the Gulf of Mexico. The incident resulted in one of the largest oil spills in history, causing extensive ecological damage to marine ecosystems and coastal communities. The company was criticized for its insufficient risk management practices and failure to adequately prepare for and respond to such an event, highlighting the importance of having robust climate risk management plans in place for the oil and gas industry. At InSight, we focus on managing climate change balance sheet risk Understanding Climate Risk: Climate risk refers to the potential adverse impacts of climate change on an organization’s assets, operations, and stakeholders. These risks encompass a wide range of factors, including extreme weather events, sea-level rise, shifting weather patterns, regulatory changes, and shifts in public perception and consumer preferences. Organizations must assess the vulnerabilities and exposure of their operations to these risks to understand the magnitude of the challenges they face. Developing Adaptation Strategies: Incorporating climate risk management into an organization’s overall risk management framework is essential for building resilience and ensuring business continuity. The first step is to conduct a thorough assessment of the potential impacts of climate change on various aspects of the business. This assessment should consider both physical risks (e.g., damage to infrastructure, disruptions in supply chains) and transition risks (e.g., regulatory changes, market shifts). Based on this assessment, organizations can develop adaptation strategies tailored to their specific circumstances. These strategies may include investing in resilient infrastructure, diversifying supply chains to reduce dependencies on vulnerable regions, implementing energy-efficient practices, and exploring low-carbon business models. It is crucial to involve stakeholders from different

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Kevin Taylor

The Wizard of OZs: What you should know about opportunity zones.

What is a Qualified Opportunity Zone Property? The 2017 Tax Cuts and Jobs Act created special tax incentives for those willing to risk their own capital to improve and develop the real estate in traditionally underinvested sections of the country called opportunity zones. The goal was to raise long term capital by incentivizing investors that historically wouldn’t invest in these types of opportunities due to the inherent risk. They’re designed with the purpose to benefit the denizens of those locations and investors looking for sizable tax incentives to commit capital. The Qualified Opportunity Zone program is the solution that provides that tax incentive for private, long-term investment in economically distressed communities. What makes it a Qualified Opportunity Zone (QOZ)? The definition for this type of zone is “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” The process for designation of the OZ is pretty straight forward. All 50 states are allowed to submit a list of blocks of low-income tracts across their state based on census data. The Treasury then approves their inclusion in the program or not (most were approved). Plans are now in place with municipal and state governments to commit to projects that bring new construction projects into these areas. What are some unique risks you should be familiar with before you invest in an OZ? Market Liquidity – the markets for these investments are immature. There is a sizable pool of available capital for investment, but most of it is from long view institutional investors. The long term, committed and disciplined capital on the ask side, and the insurability for most investors in this space supplying the bid likely means that the spreads widen and limit overall liquidity for investors. Vehicle Liquidity – The types of vehicles offering exposure to this space are limited, largely non traded REITs. These agreements have a very long view of the investments and capital and few offer the liquidation windows and frequency temperamental investors might be used to. Asking yourself what kind of liquidity and income requirements do you have in your investment plan is more important than ever. Investors seeking income starting day 1 may need to find investments that reflect that and will see their upside limited as a result. Those seeking to “time the market” through this development will be frustrated by the duration of these investments.  Investment Risk – investment in “economically-distressed communities” carries a very unique risk that the investment will not perform on par with other parts of a city or market. Their unique performance risk with these investments will never go away, simply put you are buying into a major turnaround story in some parts of the country that may never come. This is mitigated by a few factors, the managers selecting and overseeing the projects are more important than ever. Picking the right project, with the right builder, in the right neighborhood is more important than ever.  Intent – why are you committing capital to these projects? Is it only for income? Are there parts of the country that have an emotional connection to their success? Is this a good attribute or a negative? I think it’s important to have a real honest sense of purpose in these investments. Not only to help understand and mitigate the risks involved but to help you price in the purpose of this investment. More and more people want to know that the dollars they are investing are being used for societal benefit, but make sure you are handicapping that expectation appropriately. Tax – The tax benefit for OZ’s has a pretty long ark, and the year over year benefit changes over time. Before you enjoy the tax benefits afforded here you should confirm a couple of assumptions. First, that your tax liability is ample enough to enjoy the full benefit, second, that your tax strategy for the next decade marries well with the long term requirement of this investment and third, there are no alternative strategies for a similar tax benefit with less inherent risk. Confirming these three elements of taxation and its accompanying strategy is an essential step for your CFP and CPA before you should consider the upside of this program.  Statutory Risk – the Tax Cuts and Jobs Act (TCJA) is current law, and planning for current law is not the issue. Tracking and making sure this new tax strategy stays intact going forward should be on an investor’s mind and having a plan of action if and when conditions change is part of the monitoring process for both your entire plan and this specific investment. Laws change and this opportunity is set to expire 12/31/2026.  Regulatory Risk – as I said before, the inclusion of a region in an opportunity zone is pretty straight forward, but the regulatory requirement for maintaining that acceptance by the U.S. Treasury is still important. Making sure that the project, builder, and fund all stays focused on the regulations that keep it inside the tax purview is eminently important. Selecting a manager that is versed in the regulations and will do the property due diligence to stay in the lane is important. The risk is the loss of the tax benefits you have likely priced into your expectations.  Opportunity Zones have the ability to be truly transformative for communities and investors. A fantastic marriage of social benefit, long term capital investment, and tax benefit make for an appealing place to see a reasonable return. But taking advantage of this program for non-institutional investors is going to have a few parties you should consult to confirm the investment is right for you: a CFP to confirm that this investment works in your personal financial plan a CPA that understands the full tax benefits of this investment an estate plan that can accommodate the long duration of this type of an investment an investment manager that understands and mitigates the risks as best as possible an investment advisor that helps

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Financial Planning Dentist
Boulder Risk Management, investment