Wall Street Lunch: Microsoft Engineer Says AI Tool Creates Dangerous Images

Summary:

• A Microsoft employee said its AI tool is creating inappropriate images and the company is not taking appropriate action.
• CrowdStrike, JD.com beat Q4 results; Foot Locker extends timeline for target margin growth by two years, provides weak 2024 guidance.
• Check out Oppenheimer’s technical analysis on top Buy-Sell sector pairs.

Listen below or on the go on Apple Podcasts and Spotify

This is an abridged transcript of the podcast.

Our top story so far

A Microsoft (NASDAQ:MSFT) employee working on artificial intelligence said the company’s Copilot Designer image generator is creating violent and sexual images, and the company is not taking the appropriate actions.

The tool, previously known as Bing Image Creator, has shown demons and monsters next to terminology for abortion rights, teenagers with assault rifles, underage drinking and drug use, and sexualized images of women, according to Microsoft AI engineer Shane Jones. CNBC, which reported the story, said it has recreated the images on its own.

“It was an eye-opening moment,” Jones said. “It’s when I first realized, wow, this is really not a safe model.”

Microsoft has not yet responded to a request for comment from Seeking Alpha.

Jones reported his findings internally in December, but Microsoft referred him to OpenAI, the creator of the AI tool DALL-E 3 used for the Copilot Designer image generator. When he did not hear back from OpenAI, Jones posted on LinkedIn and asked the startup to take down DALL-E 3.

In today’s trading

Stocks and bonds are choppy, with focus on Fed chief Jerome Powell’s appearance before the House Financial Services Committee.

In his prepared remarks, Powell walked the familiar line of warning against cutting rates too soon as it aims for its 2% inflation target and waiting too long and weaken what has been a resilient economy and labor market.

Most Fed watchers called it more of the same. But Grecory Daco, Ernst & Young chief economist, says the tilt was hawkish due to noisy data in January.

He says: “Given the Fed’s extreme data dependence, the fact that noisy January data is not fit for policy calibration, and the fact that most policymakers have retained a hawkish bias in their recent communication, the odds now clearly favor a June onset of the policy easing cycle.”

He still expects 100 basis points of cuts this year, though.

When asked about the potential number rate cuts this year, Powell said it “will depend upon the economy.” As to what it will take to start cutting rates and how much more confidence the Fed needs that inflation is heading toward its goal, he said: “We have some confidence in that… We want to see a little bit more data.”

In economic data this morning, the January Job Openings and Labor Turnover Survey, or JOLTS, showed a decline in openings to 8.863 million, a tad lower than the consensus of 8.9 million.

The quits rate was more interesting, falling to 2.1% from 2.2%, the lowest level since August 2020.

Renaissance Macro Research says: “Hawks on the FOMC can no longer point to the labor market as a rationale to be hawkish. In January, the total quits rate sank to… a fresh cycle low. This means that labor cost pressures are likely easing (with all deference to the last average hourly earnings print).”

Among active stocks

CrowdStrike (CRWD) rallied after the cybersecurity firm reported fourth-quarter results and guidance that were both better than expected.

J.P. Morgan analyst Brian Essex says: “We recently highlighted a framework for CRWD to reach $100 billion in market cap which the company is progressing toward faster than we expected with better growth, profitability, and free cash flow.” He reiterated his Overweight rating and bumped his price target to $371 from $350.

JD.com (JD) rose after fourth-quarter results beat estimates and the company announced a stock buyback program worth up to $3 billion.

The Chinese online retailer saw non-GAAP net income per American depositary share grow about 10.1% year-over-year to $0.75. Net revenues increased 3.6% year-over-year to $43.11 billion.

Canoo (GOEV) shares fell as the mobility company announced plans to execute a 1-for-23 reverse stock split of its common stock, which will become effective on March 8, 2024. No fractional shares will be issued in connection with the split.

Foot Locker (FL) tumbled as the company extended its timeline for target margin growth by two years and set expectations for 2024 that suggest sluggish sales and a profit that is below Wall Street’s expectations.

CFO Mike Baughn: “We maintain conviction in the longer-term earnings potential that our Lace Up plan will generate and reiterate the 8.5%–9% EBIT margin target communicated at our March 2023 Investor Day. Given our lower starting point exiting 2023, we expect a two-year delay in achieving that goal and now see reaching that target by 2028.”

In other news of note

Palantir Technologies (PLTR) was in focus after the U.S. Army confirmed that a subsidiary of the enterprise software company won a two-year contract to begin phase 3 of its next-generation targeting system.

TITAN is the Army’s next-generation deep-sensing capability platform. It uses artificial intelligence and machine learning to afford shooters in the field support beyond line-of-sight targeting.

The $178.4 million agreement is for the development of 10 TITAN prototypes, including five advanced and five basic versions, and the integration of new critical technologies, and the transition to fielding.

Palantir and defense contractor Raytheon (RTX) were both awarded $36 million, 14-month contracts to work on phase 2 of the prototyping; however, the Army only went with Palantir for the final phase.

And in the Wall Street Research Corner

Oppenheimer’s technical analysis team is out with their top Buy-Sell sector pairs. They combine a top-buy idea and a top-sell idea from stocks in the S&P 500.

They say the market could experience a broad-base breakaway instead of a cycle’s end. “Because along with narrow breadth at a major top, we’ve found weakness is typically concentrated, too—a ‘culprit’ sector is often already down 20% year-over-year.”

Among the trade ideas are

In energy (XLE): Buy Diamondback (FANG); Sell Chevron (CVX).

In consumer discretionary (XLY): Buy Lululemon (LULU); Sell Starbucks (SBUX).

In technology (XLK): Buy Monolithic Power Systems (MPWR); Sell Cisco Systems (CSCO).

And in financials (XLF): Buy Blackstone (BX); Sell Prudential (PRU).

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