August picks available soon
Just a reminder that we’ll be publishing our Prime and Select picks for the month of August at the end of this week. As always, we’ll be measuring SPC’s performance for the month of July, as well as SPC’s cumulative performance, assuming the sale of the July picks at the closing price on the last day of the month (Friday, July 31). Likewise, performance tracking for the month of August will assume the August picks are bought at the open price on the first trading day of the month.
Stay tuned for the new picks and the performance updates.
What we’re reading (7/28)
“Jeff Bezos Has Been On A Collision Course With D.C. For Years—This Week’s Hearing Marks A New Chapter” (CNBC). Anticipated highs are in the mid-90s for Wednesday in the nation’s swampy national capital, but it may get even hotter than that as the Amazon chief steps into the hot seat on Capitol Hill. Expect lots of posturing. It’s an open question as to whether lawmakers even understand, and are therefore likely to ask, the right questions. Either way, should be fun to watch.
“Wall Street Turns A Blind Eye to Atrocities Committed In China” (MarketWatch). The author rightly points out that “[m]utual-fund companies and financial advisers, stuck in the rote mindset of knee-jerk diversification, urge clients to invest more in underperforming Chinese and emerging markets equities...[and] [i]ndex providers have accommodated them by raising the weighting of mainland Chinese stocks in their emerging markets and international indexes.” All of this despite what amounts to the “most extensive ethnic cleansing since World War II” being visited upon the inhabitants of Xinjiang by the Chinese government in real time.
“Fed Extends Emergency Lending Programs By Three Months” (Wall Street Journal). When the economic impact of the covid-19 pandemic started becoming clear, the Fed announced nine emergency lending programs intended to stabilize credit markets and ensure the “plumbing” of the financial system would continue to function in the event of a deepening crisis. Until now, several of those lending facilities were set to expire in September.
“‘Un-Investable’? Airlines Could Double In A Year, Fund Manager Says” (Yahoo! Finance). Anything is possible, but I wouldn’t bet my retirement on it. We still think the airlines are, by and large, garbage stocks.
“DJ D-Sol Delights The Socially-Undistanced Masses” (Dealbreaker). This may come as a surprise for the uninitiated, but the current CEO of Goldman Sachs (David Solomon) moonlights as a DJ under the pseudonym “DJ D-Sol.” A recent show in the Hamptons (of course) is drawing the ire of some in Albany.
What we’re reading (7/27)
“Google To Keep Employees Home Until Summer 2021 Amid Coronavirus Pandemic” (Wall Street Journal). Google CEO Sundar Pichai reportedly made the decision, which will affect nearly all of Google’s 200,000 employees, after an internal debate among executives last week.
“2020 Is The Summer Of Booming Home Sales—And Evictions” (Washington Post). “Nearly 15 million homes sold nationwide in April, May and June, according to new data released this week by the Commerce Department and National Association of Realtors. Meanwhile, 12.6 million renters say they were unable to pay rent last month, according to the latest Household Pulse survey from the U.S. Census.”
“The World’s Biggest Coronavirus Vaccine Study Begins, A U.S. Trial That Will Include 30,000 People To See If The Shots Really Work” (CNBC). Volunteers will get two doses of the of the experimental vaccine developed by the National Institutes of Health and Moderna. Of course, some will get a placebo.
“Credit Suisse Invested $100 Million In Ant, Expects Windfall” (Bloomberg). Credit Suisse apparently put about $100 million into Ant Group—the Chinese fintech company that owns Alipay, the world’s largest mobile and only payments platform—during its last funding round in 2018.
“Gold Prices Hit Record As Dollar Drops” (Wall Street Journal). Futures contracts for delivering gold in August 2020 reached $1,938.10 per troy ounce, surpassing the previous intraday high of $1,923.70 from September 2011. The decline in the dollar is apparently adding to the momentum.
What we’re reading (7/26)
“A Potential Deal For State Pension Reform” (Forbes). State and local governments were exempted from the 1974 Employment Retirement Income Security Act (ERISA) because they were assumed to be “model employers” that wouldn’t shortchange their employees’ pension funds the way their private sector counterparts had. That assumption proved faulty, though, as governments “have used overoptimistic investment return assumptions, taken excessive investment risk, and often failed to make their full annual contributions. Pension trustees often have not acted as true fiduciaries on behalf of pension participants, collaborating with government officials – often the very people who appointed them – to reduce current contribution costs, even if doing so left fewer resources available to pay future pension benefits.”
“Big Tech Funds A Think Tank Pushing For Fewer Rules. For Big Tech.” (New York Times). “Google, Amazon and Qualcomm finance a George Mason University institute teaching a hands-off approach to antitrust regulators and judges.”
“Thinking Of Claiming Social Security Benefits Early? The 2020 Recession Could Offer One Good Reason To Do So” (USA Today Money). There are a lot of “ins” and “outs” when it comes to deciding when to tap into Social Security, but one circumstances in which it could make sense to claim the benefits early is if it allows you to avoid realizing unanticipated market value losses resulting from a downtown occurring right before, or early in, retirement.
“Quantitative Digital Asset Investment Firm Cambrian Asset Management Closes Seed Round” (Cambrian Asset Management). More “smart money” flowing to quant funds. Not surprised at all.
“Stocks And Recessions: Assessing Recent History” (Wall Street Journal). A nice look what history has to say about whether the recent rise in equities foreshadows calamity on the horizon. Caveat emptor: the underlying health crisis causing the recession we’re in is unlike anything we’ve seen before. We (humans) can’t help trying to tease out patterns from history (or, more cynically, impose patterns on history), and are easily able to do it, even when no such patterns exist.
What we’re reading (7/25)
“Does A Raise Or Remote Work Sound Better?” (Wall Street Journal). “In a Stanford survey of 2,500 Americans in June and July, half of respondents said the ability to work from home two to three days a week in a post-Covid world was equal to getting a pay increase of 10% or more. Another 17% said it was like getting up to a 9% raise.” It’s worth noting, as we pointed out this week, the data do not suggest companies would need to slash pay in order to make working from a home a regular thing. By shedding unecessary leasing costs, companies could do both work-from-home and raises.
“The Models Were Wildly Wrong About Reopening Too” (American Institute for Economic Research). The famous May 2020 Imperial College London paper that reportedly predicted a “catastrophic rebound of COVID-19 fatalities” in its reopening scenarios has turned out to be pretty far off the mark in said fatality predictions, even if new infections are increasingly rapidly.
“Investing Should Be Like Gambling. Here’s how not to go wrong” (CNBC). This article throws a bunch of punches at “hyper-gamified” investing platforms (read: Robinhood) but entirely misses the more important point that the strategy the author ostensibly advocates—the traditional investment approach predicated on researching a few companies in depth and valuing them better than the whole market in all its wisdom—has resulted in most investors, “market pros” and amateurs alike, underperforming the market. If you really want investing to be less like gambling, using tested, bias-free stock selection tools might be a better approach.
“A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks” (New York Times). “Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street—areas that Dodd-Frank left largely untouched.”
“Ordinary People Invested In Hedge, Private Equity Funds Unsure That More Ordinary People Should Invest In Hedge, Private Equity Funds” (Dealbreaker). “Jay Clayton—in addition to letting as many hedge funds as possible keep as many of their investments as possible secret—is racing to give as many people access to alternative investments as possible, regardless of the wisdom of doing so. Simultaneously, the Labor Department has opened the doors even further, allowing 401(k) plans to include private equity funds.”
What we’re reading (7/24)
“Amazon Met With Startups About Investing; Then Launched Competing Products” (Wall Street Journal). The Journal interviewed more than two dozen entrepreneurs, investors, and deal advisors who said that Amazon appeared to use the investment and deal-making process to acquire proprietary information to help it develop competing products.
“Vanguard Comes To Defense Of The 60/40 Portfolio As It Forecasts Stock Market Returns For The Next Decade” (MarketWatch). Vanguard is forecasting U.S. equities will return four to six percent annually, on average, over the next decade (apparently, similar to a recent Goldman Sachs forecast), which works out to a total return in the range of 48-79 percent (1.04^10 years-1=0.48; 1.06^10 years-1=0.79). That’s pretty much in line with average annual historical U.S. stock market returns, but maybe a little lower, depending on the measurement period.
“The Economy Looks Rough. The Stock Market Doesn’t. Here’s why That May Make Sense” (Intelligencer). Another hot take on this issue. The explanations offered here for why equities continue to be up? (1) Expected out-year corporate profits are arguably higher than before, (2) common measures of stock market performance (S&P 500, DJIA) are relatively heavily concentrated in large, globally operating companies with extensive footprints in countries that have managed the covid-19 pandemic better than the U.S., and (3) interest rates have continued falling.
interest rates have continued falling.
“How Accurate Are Prediction Markets?” (JSTOR). A nice overview of the history and current thinking on prediction markets—the “marketplaces” of prediction that aggregate “bets” on various events (e.g., who will win the 2020 U.S. presidential election) and have been postulated as producing forecasts more accurate than the predictions of supposed experts. The idea is that when you have skin in the game by way of your bet, you may be less prone to the biases to which experts regularly succumb.
“This Man Owns More Land Than Anyone Else In America” (24/7 Wall Street). 2.2 million acres in Colorado, Maine, New Mexico, and Wyoming—about 2x the size of the state of Rhode Island. It’s good to be media tycoon John Malone.
What we’re reading (7/23)
“Goldman Sachs CEO David Solomon On US Economic Outlook: ‘We’re In For A Bumpy Ride’” (CNBC). GS chief sees persistent high unemployment, slower growth, and a weaker dollar ahead.
“Microsoft Reports Record Revenue To Wrap Up A Record-Breaking Fiscal Year” (MarketWatch). MSFT shares apparently up 34 percent this year despite the S&P 500 being up less than one percent amid the covid-19 crisis. Reportedly, the company’s “Azure cloud-computing offering and cloud-software offerings have become more essential as its corporate customers sent employees home to work remotely.”
“Pfizer, BioNTech Get $1.95 Billion Covid-19 Vaccine Order From U.S. Government” (Wall Street Journal). The deal is apparently for about 100 million doses, with an option for 500 million more, assuming in-development vaccines in question get cleared by regulators. No details on pricing per dose, but Americans to receive it free of charge.
“The Amazon Critic Who Saw Its Power From The Inside” (New York Times). The story of Tim Bray, the engineering whiz/polymath and Amazon alum. who resigned in May citing “a vein of toxicity” in the company’s culture and is now calling for anti-trust intervention.
“Overserved” (Epsilon Theory). Hilarious commentary about the ridiculousness of investment marketing materials ubiquitous on Wall Street (in this case, related to SpaceX’s N-Series funding round).
What we’re reading (7/22)
“R.I.P. Cable TV: Why Hollywood Is Slowly Killing Its Biggest Moneymaker” (Variety). You know it. I know it. Cable is dying. This article is a thorough pre-mortem.
“Bill Ackman: ‘We Are Long-Term Bullish On America’ But Betting Against High-Yield Companies” (CNBC). On “Squawk Box,” Ackman said that his hedge fund, Pershing Square Capital Management, is approximately “98% long.” Also said he’s wary of highly levered stocks right now.
“U.S. Existing-Home Sales Roses 20.7% In June” (Wall Street Journal). Low rates and peak homebuying season juiced the market in June: “Demand was strong from apartment renters seeking more space, young families moving to the suburbs and wealthy city dwellers looking for second homes, brokers and economists say. At the same time, the supply of houses for sale remained low, as the pandemic has made potential sellers cautious about letting people tour their homes.”
“Slack Accuses Microsoft of Illegally Crushing Competition” (New York Times). In a complaint reminiscent of the Internet Explorer-related anti-trust issues MSFT stared down back in the ‘90’s, Slack filed suit before the European Commission arguing that “Microsoft has illegally tied its collaboration software, Microsoft Teams, to its dominant suite of productivity programs, Microsoft Office, which includes Outlook, Word, Excel and PowerPoint.”
“Was Citadel Securities Not Supposed To Sit On Client Orders To Fill Its Own?” (Dealbreaker). According to FINRA, over a two-year period until Sept. 2014, Citadel removed hundreds of thousands of large securities orders from its automated platform so that the trades had to be manually reviewed by actual humans. In the meantime, Citadel made the same trades on its own account.
What we’re reading (7/21)
“For Some Stocks, Bad News Is Good News” (Wall Street Journal). “Shares of many technology and pharmaceutical companies have looked like safety plays during the pandemic. Other stocks that have long been considered defensive bets during a downturn, such as those of real-estate and utility companies, have suffered steep losses.”
“This Billionaire [Leon Cooperman] Says The U.S. Stock Market Is Overlooking The Rapidly Growing National Debt” (CNN Money). Another ‘notable and quotable’ personality taking a stab at arguing the market is “overlooking” fundamental economic factors. But before you jump on that bandwagon, consider what you have to believe in order to believe that’s true: that the entire stock market is missing something that you’re seeing?
“The Hidden Risk In Your S&P 500 Index Fund” (MarketWatch). Punchline: the S&P 500, being a capitalization-weighted index, is heavily weighted toward FB, AAPL, NFLX, MSFT, AMZN, GOOG. Recall, from our blog post here that when you have a cap.-weighted portfolio, you’re implicitly adopting a “momentum” strategy.
“Investors Juggle Earnings, Eurozone Recovery Package, and Covid-19 Cases This Week” (Nasdaq). Lot of news set to drop this week. As the article points out, “[w]hen we close the books on July next week, just over 300…S&P 500 names will have reported their June quarter results, which means before too long we will have a firm handle on how second-quarter earnings are shaping up and also the degree to which EPS expectations are changing for the second half of 2020.”
“Good Debt Vs. Bad Debt: Why What You’ve Been Told Is Probably Wrong” (CNBC). The fundamental rule of investing is that a good investment is one in which the payoff on the investment, when adjusted for time and risk, exceeds the cost of the investment. You might call such investments “net present value (NPV)”-positive investments. While main street has historically considered some investments, like getting a college degree or buying a home, “good investments,” as an economic matter, there’s good reason to think there are no categories of investments that are automatically NPV-positive. If there was, someone would be making that investment already, raising the “price” of it, and reducing the net present value for anyone else that comes along next.
What we’re reading (7/19)
“Earnings And Fiscal Debate Could Be Catalysts For Stocks In The Week Ahead” (CNBC). Earnings season is in full swing and Congress will be mulling over a potential new trillion-dollar stimulus.
“Academic Project Used Marketing Data To Monitor Russian Military Sites” (Wall Street Journal). In a neat experiment, researchers at Mississippi State University were able to use commercially available cellphone data to track the whereabouts of Russian officials after they visited a sensitive missile test site in August 2019. Similar data have been used to reveal the locations of sensitive U.S. forward operating military bases.
“Is The ‘Great Rotation’ In The Stock Market Under Way As Coronavirus Cases Surge? Or Is It A False Dawn? Here’s What Experts Think” (MarketWatch). “Value”-styled strategies seems to be beating “growth”-oriented strategies once again.
“Fixing The World’s Most Inefficient Market” (Forbes). “Unlike financial markets, which exchange billions of dollars daily, the labor market is rife with human error, inefficiency, and devoid of the sort of transparency and common language that efficient markets require.”
“What Risk Isn’t” (Of Dollars And Data). In finance, “risk” is taken to mean the standard deviation of returns—that is, the average deviation (up or down from the mean, or average, return). Moreover, risk is generally assumed to be undesirable. As many have pointed out, however, it’s kind of silly to treat above-average returns as undesirable. The author here draws a line between volatility and risk and argues, a la Rumsfeld, that volatility is a known unknown, while risk is an unknown unknown. It might all be semantics though: if returns are normally distributed, above-average returns don’t manifest in isolation; rather, they can only exist in the presence of other periods of below-average returns that are equal in magnitude.
What we’re reading (7/18)
“John Lewis, U.S. Congressman And Civil Rights Icon, Dies” (Wall Street Journal). “John Lewis, the champion of civil rights for Black Americans whose activism brought him from the bloodied streets of Selma, Ala., to the marble halls of Congress, died Friday. He was 80 years old.”
“The Wealthy Loaded Up On Stocks In March—Now They’re Selling, Warns ‘Fortress Bank For Billionaires’” (MarketWatch). UBS’s head of global family offices says a number of its high-net worth clients, including a group of families with an average net worth of about $1.6 billion, bought the dip in March and are now moving the gains out of public markets to illiquid private assets (real estate and private equity).
“These Companies Plan To Make Working From Home The New Normal. As In Forever” (CNN). Facebook, Twitter, Square, Shopify, Box, Slack—big west coast/tech “tilt” on this list. And it makes sense: Zuckerberg built FB from his dorm room, so it’s not shocking he doesn’t see a strong productivity case for making employees show up in person. What will be interesting to see is whether or not the rest of the labor market moves in this direction. Huge cost savings in the form of foregone leasing expenditures to be had if so.
“What Banks Tell Us About Covid-Era Business: ‘Everybody Is, Bluntly, Struggling’” (Wall Street Journal). The Journal rightly points out that banks have “unrivaled visibility” into the health of U.S. consumers and businesses. And the accounting decisions the big banks are making now—setting aside an absolute truckload of cash as provisions for possible loan losses—signal banking executives think trouble could be ahead.
“The Radical Truth Is Bridgewater’s Not Responsible For Its 20.6% Loss” (Dealbreaker). New study (here) finds that unconventional monetary policy (“UMP”) (e.g., central banks buying securities in the open market instead of just moving benchmark rates up and down) is a priced risk factor for the hedge fund industry as a whole and at least 10 common hedge fund strategies in particular. Specifically, the authors’ study of announcements of new UMP actions calls into question “the claim about [hedge funds’] ability to perform ‘through thick and thin’[.]”
What we’re reading (7/17)
“The True Story Of The Heartthrob Prince Of Qatar And His Time at USC” (Los Angeles Times). Multi-hundred-thousand dollar jaunts to Las Vegas, a long-term stay at the Beverly Wilshire for an entire entourage, slush funds, DMV bribery, an organ transplant purchase, and approximately zero time in class—the gripping story of Qatari Prince Sheikh Khalifa bin Hamad bin Khalifa Al Thani’s (KHK’s) time in the City of Angels.
“Twitter Hackers Who Targeted Elon Musk And Others Received $121,000 In Bitcoin, Analysis Shows” (CNBC). BTC transactions are irreversible. But they are also public record. A review of the public ledger reveals the hack, which apparently involved at least one Twitter insider, only netted about $121K.
“Big Blank Checks” (DealBook). Special purpose acquisition vehicles, or “SPACs”—legal entities created to raise capital from public markets with this express purposes of acquiring as-of-yet identified takeover targets—are bigger than ever.
“U.S. Industrial Production Picked Up Again In June” (Wall Street Journal). Factories, mines, and utilities are starting to hum again. The index rose 5.4 percent from May to June on a seasonally-adjusted basis.
“Decade Of The Dollar At Imminent Risk As Uptrend Break Looms” (Bloomberg). Bloomberg says the dollar may be set to depreciate a bit off its long-term rise, but not everybody agrees. Credit Agricole’s FX analyst apparently still thinks the greenback is “the ultimate safe haven.” It’s worth noting the whole premise of Bloomberg’s point may be off—the chart the article itself cites doesn’t suggest a “decade-long uptrend” for USD. Rather, it suggests a pop in 2014, when oil prices fell of a cliff, and a flattening ever since.
What we’re reading (7/16)
“Goldman’s Traders, Bankers Keep Profit Steady While Rivals Falter” (Wall Street Journal). Traders like volatility (especially traders’ on banks so-called “FICC”—or, fixed income, commodities, and currencies—groups). But the piece of the story about GS’s stock price bouncing back better than other banks’ doesn’t necessarily mean GS’s traders’ performances have been stratospheric or anything. In fact, the bounce back may have little to do with the trading desks at all. Unlike the other mega-banks, GS does not actually do all that much actual “banking” (credit origination). Given the economic climate and the worries that a lot of personal and corporate loans are about to go bust, it’s not that surprising that true creditor-banks have been slower to rebound.
“Bank of America Profit Falls 52% As It Prepares For Coronavirus Defaults” (Wall Street Journal). Speaking of the credit origination side of the banking business being under massive pressure, BAC’s profit “tumbled” in the Q2 after the bank “set aside billions of dollars to prepare for soured loans.”
“A Brazen Online Attack Targets V.I.P. Twitter Users In A Bitcoin Scam” (New York Times). “It was about 4 in the afternoon on Wednesday on the East Coast when chaos struck online. Dozens of the biggest names in America — including Joseph R. Biden Jr., Barack Obama, Kanye West, Bill Gates and Elon Musk — posted similar messages on Twitter: Send Bitcoin and the famous people would send back double your money.”
“Dividend Cuts May Mean Rethinking Your Retirement Strategy” (CNBC). 63 S&P 500 constituents cut dividends in Q2. Historically, high-dividend stocks have offered somewhat bond-like characteristics (regular stream of cash flow with relatively low volatility) but in a non-bond asset class (equities). But companies have needed the liquidity in the weaker-cash flow environment brought on by Covid, so they’re paying out less of it.
“Retail Sales Rise For Second Straight Month” (CNN). Retail sales up 7.5 percent month-over-month. BUT, there were also over a million new unemployment claims just last week, symptomatic of the mixed bag that the traditionally salient macroeconomic data has been lately.
What we’re reading (7/14)
“Moderna Shares Jump As Much As 16% After Company Says Its Coronavirus Vaccine Produced ‘Robust’ Immune Response” (CNBC). Big pop in Moderna’s share price after some peer-reviewed Phase 1 clinical data published in the New England Journal of Medicine.
“Arbitrators Rule Bridgewater Had Something To Fear From The Truth, And So Made Stuff Up” (Dealbreaker). More on Bridgewater’s assertion of trade secrets misappropriation against a few former employees that started a hedge fund. The folks at Dealbreaker astutely point out the arbitrators’ findings kind of, sort of imply Bridgewater may not really have any “proprietary practices to charge such lavish fees on that $140 billion” in assets under management.
“Vox Media Preparing Round Of Layoffs As Business Fails To Improve Amid Coronavirus Pandemic” (CNBC). Vox was a full 40 percent off its Q2 revenue target, expects to be 25 percent off full-year 2020. Another sign of the damages COVID has done to ad revenues.
“It’s Time For Investors To Stop Buying Stocks That Are ‘Stunningly Decoupled’ From Reality, Economist [Mohamed El-Erian] Warns” (MarketWatch). Allianz Chief Economic Adviser (formerly of PIMCO and the IMF) is apparently a little bearish on equities. Apparently, even he’s blaming a “new generation” of traders (read: Millennials). But that’s a pretty unsophisticated argument for a guy with such stature and pedigree.
“JPMorgan’s Profit Plunges As Credit Costs Spike On Economic Uncertainty” (CNN). 51 percent “plunge” in Q2 profits as the bank juiced up reserves in anticipation of forthcoming loan losses.
What we’re reading (7/13)
“Robert Shiller Warns That Urban Home Prices Could Decline” (CNBC). More from Nobel Laureate Robert Shiller (of Case-Shiller Home Price Index fame). Per Shiller, the “benefits of city living,” such as restaurants, museums or theater shows, are increasingly questionable, especially in a climate elevated asset prices across the board.
“Bridgewater Loses Claims It Brought Against Ex-Employees Who Launched Hedge Fund” (Wall Street Journal). Besides being the biggest hedge fund in the world and popularizing the unique managerial philosophy known as “radical transparency” (a nice euphemism for all kinds of authoritarian labor practices), “bwater” is also known for asserting trade secrets misappropriation against ex-employees when they branch off to do their own thing. This time, Bridgewater lost.
“Nasdaq Sinks 2%, And Broader Stock Market Ends Negative In A Stunning Monday Reversal In The Final Hour of Trade” (MarketWatch). Things got a little spicy out in Silicon Valley on Monday afternoon.
“Tesla Stock Is More Than 100% Overvalued, Warn Top Wall Street Analysts” (Observer). We don’t exactly have a lot of confidence in Wall Street analysts here at Stoney Point, but we also don’t expect Tesla to find its way into our Prime picks any time soon.
“Kanye West at 2% In First National Poll Since Announcing Presidential Run” (Spin). To be “radically transparent,” not exactly sure if this is fake news or not. But if you’re on the long-volatility side of the market, things could be looking up for you.
“How Dollar Stores Became Magnets For Crime And Killing” (ProPublica). Dollars stores are having a day—but, allegedly, on the backs of poor communities.
What we’re reading (7/12)
“Wall Street’s Earnings Forecast: Cloudy With a Chance of Turbulence” (Wall Street Journal). S&P 500 constituents have been pulling guidance (their advice to the Street on upcoming earnings results) as a result of the Covid pandemic, resulting in the widest dispersion in analysts’ estimates since before Lehman went down in 2008.
“Get Ready For an Awful Earnings Season” (CNN Money). Speaking of earnings reporting, CNN is reporting that “analysts predict that earnings for the S&P 500 plummeted nearly 45%, which would be the biggest drop since a 69% plunge during the depths of the Great Recession in the fourth quarter of 2008. Revenues are expected to have fallen more than 10%. Retailers, energy companies and industrial firms likely reported the biggest declines in sales and profit.”
“Not An Earnings Care In The World — At Least Not Yet” (The Briefing). Another hot take on the upcoming earnings season. The author points out the irony in earnings likely to have fallen off a cliff while the S&P 500 keeps going up. Recall, though, it’s not earnings that matters for share prices, per se, but rather cash flows, and future cash flows at that. If you slash capex and headcount at the same time your earnings are going down, the overall hit to cash flow may not be all that bad.
“Hedge Funds Duel In Bankruptcy Court Over McClatchy Newspapers” (Dealbook). A couple of hedge funds are vying to take control of one of the “nation’s largest and most decorated newspaper chains” in its Chapter 11 restructuring proceedings.
“The Tech Stock Rally Is Getting Scary. Why There’s No Way To Escape It” (Barron’s). Per Barron’s: “Like an Escher drawing hanging in a student’s dorm room, the stock market has begun to look rational and irrational simultaneously. Nowhere is that more obvious than in the Nasdaq Composite. The tech-heavy index has gained 18% this year, after practically ignoring the explosion of Covid-19 cases in places like Florida and Texas. It ended the week with three consecutive highs, and for good reason[.]”
What we’re reading (7/10)
“How Is Rent The Runway Still in Business? Founder Moved Quickly, Cut Deep” (Wall Street Journal). Rent the Runway went hard in terms of scaling back in the face of COVID. Per the Journal “[t]he company’s costs were slashed by 51%, and half the workforce was furloughed or laid off.” Apparently, the cuts are paying off (for the shareholders, it should be noted, obviously not for the furloughed).
“Stocks Generate Big Gains and Bigger Questions” (New York Times). The Times isn’t buying the rebound: “[a] powerful rally during drastically deteriorating economic conditions has left the market richly valued and facing great uncertainty.”
“Supreme Court Rules that About Half of Oklahoma is Native American Land” (NPR). In a 5-4 decision (Gorsuch, Sotomayor, RBG, Kagan, and Breyer in the majority), SCOTUS ruled that “about half of the land in Oklahoma is within a Native American reservation.” Huge implications for past and future state criminal cases in regions (including much of Tulsa) occurring in now-explicitly Native American lands.
“When Wall Street Analysts Scream ‘Buy,’ the Smart Money is Already Way Ahead of Them” (MarketWatch). Wall Street analysts (the ones that write research reports in equity research groups at major investment banks and independent research shops) tend to be “followers [rather] than leaders.” Hulbert (the author) points out some good reasons why. Another possible reason he doesn’t mention: the analysts want to stay on executives “good sides” so they get that next call to go golfing or to Tahoe or to Art Basel, et cetera. This ought to be obvious to anyone who’s read an earnings call transcript that starts off with the effusive “before I get to my question, just want to say, really great quarter guys, really impressive” or similar congratulatory nonsense.
“Could the United Kingdom Become an Emerging Market?” (CNN Money). According to CNN, “[s]ome analysts on Wall Street are beginning to wonder whether a volatile currency, declining global clout and a reliance on foreign investors could relegate the United Kingdom to ‘emerging market’ status.” Awfully silly conjecture, in our opinion. See the previous article: said “analysts” are often terribly wrong.
What we’re reading (7/9)
“Palantir, One of Silicon Valley’s Oldest Startups, Files to Go Public” (Wall Street Journal). For half a decade, the data analytics company co-founded by Peter Thiel and credited with helping the U.S. kill Osama bin Laden has “teased the market” with potential stock offering. Now, the company has announced it has submitted draft registration papers with the Securities and Exchange Commission to do just that.
“Understanding the Pandemic Stock Market” (Project Syndicate). A thoughtful article by Nobel Laureate Robert Shiller. Per Shiller: “stock-market movements are driven largely by investors’ assessments of other investors’ evolving reaction to the news, rather than the news itself. That is because most people have no way to evaluate the significance of economic or scientific news. Especially when mistrust of news media is high, they tend to rely on how people they know respond to news. This process of evaluation takes time, which is why stock markets do not respond to news suddenly and completely, as conventional theory would suggest. The news starts a new trend in markets, but it is sufficiently ambiguous that most smart money has difficulty profiting from it.”
“Wirecard May Have Laundered Money In Addition To Making It Up” (Dealbreaker). Besides the saga of the $2 billion that doesn’t exist, which has now been widely discussed in the media, apparently some of the non-made-up money passing through Wirecard may have been laundered. Sounds like the FBI is in on the action, which (allegedly!) involves a German national living in Florida operating an unlicensed money-transferring business serving illicit online gambling profiteers.
“Once You’re Out of the Market, It’s Tricky Getting Back In” (New York Times). Time in the market beats timing the market, as they say: “…instead of abruptly abandoning stocks when they decline, shrewd investors will view market drops as an opportunity to buy — and have the financial wherewithal to withstand short-term losses. But many people act against their own interests[.]” It’s all fake losses until you sell, right?!
“Producer Price Index: What To Know In Markets Friday” (Yahoo! Finance). U.S. producer prices (a measure of prices based on prices received by producers for their products rather than the prices paid by consumers, like the CPI) fell off a cliff at the start of the Covid-19 pandemic, but they’ve been coming back.
What we’re reading (7/8)
“How the Second Half of 2020 Could Be Even ‘Messier’ Than the First” (New York Daily News). The incremental $600 weekly unemployment benefit under the CARES Act expires and TBD if Congress will extend it. Mortgage delinquencies are rising fast and protections for borrowers/renters are running out. And then, among other worrying economic trends, you have additional social volatility ahead in election season. Looks like it will be as important as ever to have a sound stock-selection approach.
“China is Storing an Epic Amount of Oil at Sea. Here’s Why” (CNN). China has 73 million barrels of oil floating on 59 different vessels—three-quarters of global oil demand. Apparently, for the same reason wildcatters far and wide were getting into the oil game in 1H 2020: unprecedentedly low crude prices.
“Sequoia Capital Sails Through Fundraising to Close on $7.2 Billions” (Wall Street Journal). It usually gets tougher for asset managers to raise capital when the portfolios of the typical investors (“Limited Partners” or “LPs”) in those funds have taken a nosedive, but it seems that has not been the case for top venture funds like Sequoia recently. Apparently, LPs care about experience, and have some vague notion that experience and resilience are correlated (even though they are not as a well-document empirical fact in nature, and probably also in business, as this article we discussed a few days ago points out).
“Goldman Sachs Created a New Metric to Measure How US-China Tensions Impact Stocks, and Said That There's Still Money to be Made from the Conflict” (Business Insider). GS kindly made a “relations barometer” to help “investors” bet on and profit from the unraveling of the U.S.-China relationships. Seems like a very “vampire squid” thing to do…
“Here is Pedophile Billionaire Jeffrey Epstein’s Little Black Book” (Gawker). Dershowitz, Clinton, Courtney Love, Alec Baldwin, Ted Kennedy, David Koch, Courtney Love. It’s a big book. Take a look yourself here.
What we’re reading (7/7)
“How Investors Should Approach America’s COVID Uptick” (Fisher Investments). The epidemiological trends/developments obviously matter for markets/stocks (these developments affect all kinds of valuation inputs pertinent to measuring the present value of future cash flows). But political economic developments matter hugely too, and the policy response to the ongoing virus trends are very hard to predict.
“Our Cash-Free Future Is Getting Closer” (New York Times). Credit card companies, banks, digital payment processing platforms stand to benefit.
“Behind Oil’s Rise Is a Historic Drop in U.S. Crude Output” (Wall Street Journal). Productive wells still being shut and the very recent uptick in crude prices isn’t enough to turn U.S. producers back to profitability.
“Tesla Deliveries Beat Leads Analysts to Lift Price Targets” (Bloomberg). TSLA got a bump from analysts raising price targets after the company beat vehicle delivery expectations for the Model 3 and Model Y.
“Markets Soar, Even As Coronavirus Cases Explode” (The Hill). Lots of new COVID infections, but death toll not rising at the same clip. “Despite the coronavirus news, markets appear convinced that a full steam economic recovery is underway.”