What we’re reading (9/4)
“SoftBank’s Bet On Tech Giants Fueled Powerful Market Rally” (Wall Street Journal). A few days ago, I pointed out that it looked like August’s big gains for the market were driven by the S&P 500’s biggest four stocks (AAPL, MSFT, AMZN, FB). The question is, why? Reportedly, at least one massive investor had its proverbial foot on the gas. “Investors watching the vertigo-inducing rise—and this week’s fall—of technology stocks are buzzing about a single trade, a giant but shadowy bet on Silicon Valley big enough to pull the market up with it. The investor behind that trade, according to people familiar with the matter, is Japan’s SoftBank Group Corp., which bought options tied to around $50 billion worth of individual tech stocks. Investors and analysts, aware of the activity but in the dark as to who is behind it, say it has turbocharged the tech sector, whose sheer size drives broader market moves.”
“Worries Grow Over A K-Shaped Economic Recovery That Favors The Wealthy” (CNBC). I’m not exactly sure what “K-shared” looks like on a line chart, but I certainly share the general underlying unease.
“A Society Of Tinkerers” (Epsilon Theory). A interesting kind of macro-social thought piece noting how vapid certain aspects of today’s “culture of entrepreneurship” are. Not the first time this has been observed, and I saw it first-hand living in Silicon Valley for two years. The punchline: we need more “tinkerers,” but not just any tinkerers, tinkerers that want to tinker with stuff that’s actually important. “There’s got to be a way to help humans help humans that’s compatible with making money, or we’re doomed. Herein lies our chance to establish a different enterprising mindset. We need new ways to explore problems that matter. We need to share hands-on knowledge with society so that anyone who wants to tinker with problems can tinker with problems.We need an alternative to the zero-sum speculation that poses as celebration of entrepreneurship.” Note: the author seems have something against “speculation,” which is exactly what Stoney Point is about…still digesting that part.
“Jimmy Lai vs. China” (The Daily). An episode from the New York Times’s wildly popular podcast The Daily this week covered an interview with billionaire Hong Kongese liberal (in the classical sense) activist and entrepreneur Jimmy Lai, discussing his rags-to-riches story and his decades-long fight against the Chinese Communist Party’s ruthless authoritarianism. I can’t get enough of it. Here’s a guy who could sit quietly and enjoy his billions in total comfort basically broadcasting to the world he’s willing to die (that’s not hyperbole) to move the needle an inch in the interest of freedom. What a hero.
“Can You Control Your Happiness? New Study Gives A Scientific Backed Answer” (Forbes). “The study found that control over our happiness changes as we age, and no differences in gender were noted. Namely, the amount of control we have over our happiness decreases in our mid-life and increases as we grow older again. This finding corresponds with the well-researched U-curve in happiness (e.g., Professor David Blanchflower at Dartmouth College). In general, this curve indicates that happiness generally decreases from age 18 and reaches peak unhappiness at approximately age 47. From there, the happiness levels gradually increase again. Respondents in the current study indicated that they feel less in control of their happiness when they are between 30 and 60 years old. Control over happiness increases at an older age again. Since control over happiness is linked to higher happiness levels, this result matches the U-curve of happiness that is observed around the world. The common interpretation on the perplexing happiness U-curve is that as we age our focus turns away from social competition and toward social connection, and life becomes more precious, fragile and fleeting.”
What we’re reading (9/3)
“Stock Market Bloodbath: Dow And Nasdaq Plummet In The Worst Day Since June” (CNN). Yesterday in our August 2020 monthly performance update, I articulated why, by just looking at the base rates, you shouldn’t extrapolate the market’s +6 percent performance in August into the future. That prediction was prescient, it turns out, at least for today.
“‘We Could Have Another 10% Fall, Easily,’ El-Erian Warns After Big Sell-Off” (CNBC). “Wall Street could be headed for correction territory if there is a shift in investor attitude, Allianz’s chief economist [formerly of the IMF and PIMCO] Mohamed El-Erian said after the biggest market decline in months. Investors have taken a liquidity approach to the market and buying the dips, thanks to stimulus action from the Federal Reserve. That mindset will be tested in the coming days as market fundamentals come into play, he said in an interview on CNBC.”
“A Furniture Maker’s Five-Month Struggle With Covid. ‘You Can’t Really Have A Plan.” (Wall Street Journal). A microcosm for the entire economy right now: “[e]fficient production—the usual standard—took a back seat to virus-resistant production. ‘You can’t really have a plan,’ said Alex Shuford III, Century’s chief executive. ‘You wake up the next day and try to do the right thing.’”
“The Economy Needs Help” (Dealbook). The Dealbook crew at the Times provides the low-down on the economic policy discussions happening in Washington right now.
“Economists Warn Americans That Money Withering To Ash In Their Hands Could Be Sign Of Recession” (The Onion). “‘We found that numerous $5 bills suddenly turning into a powdery residue that slips through your fingers may be one of the strongest indicator that our country is heading toward a significant period of decline,’ said lead researcher Kevin White, who recommended that Americans prepare for what may be looming ahead by attempting to fruitlessly grab at the charred remains of their savings as it blows away with the wind and spirals off into the horizon.”
August 2020 performance update
Hey folks, here with the latest performance update. We’ll keep it short: Prime was up in August (but not as much as the market) and Select was about flat. My high-level takeaway is that the performance of all three of the putative portfolios we track here (Prime, Select, and SPY) was affected to an unusual degree by outliers for better or worse (i.e., one or a handful of stocks performing very differently than the rest within each portfolio). If I’m right about that, it means it would be worthwhile to be very cautious extrapolating August’s results out in the future—which probably seems pretty sensible to anyone following events unfolding in the world outside of Wall Street. A few callouts on this front:
The big outlier for Prime was Southwest (LUV), which was up 22.21 percent in the month. Outliers on the upside are good, obviously. I’m especially pleased with this one because (1) it was the top-ranked stock in SPC’s algorithm last month and (2) because it provides prima facie evidence that SPC’s model may be doing a good job at differentiating among operationally “similar” companies, such as companies in the same industry, since United and American were among the lowest-ranked stocks in the sample universe. As I noted almost two months ago, while most of the airlines are “garbage” stocks, Southwest is different.
On the other hand, outliers on the downside are never fun. In the case of the Select picks this month, that was Cisco (CSCO), which was down 10.44 percent, apparently mostly falling after a bad earnings call on Aug. 12. Mixed with the good results among the Prime stocks, the set overall ended the month pretty much exactly where it started. Nature of the beast, that’s why the Select picks are free—they’re just not quite good enough to be Prime.
As for SPY, that’s a big basket of stocks, but it was really just an explosive month for the four biggest stocks in the index: Apple (AAPL), which was up 26.28 percent; Microsoft (MSFT), which was up 12.99 percent; Amazon (AMZN), which was up 11.59 percent; and Facebook (FB), which was up 19.25 percent. Those four companies alone made up almost 20 percent of the market value of the entire S&P 500 at the start of August. The rest of the index (excluding these four tech behemoths) was up 3.9 percent for the month based on my calcs.
Overall, there’s no doubt about it: if the market is going to return 6.39 percent in a month (an annual rate of 110.3 percent = 1.0639^12-1)—you really should just be in the market. It’s just that simple. But I wouldn’t expect returns like that from the market in an average month. Historically, the average monthly return on the S&P 500 is 0.62 percent since January of 1928 (an annual rate of 7.7 percent = 1.0062^12-1).
That’s all for now. You can check out the position-level August performance for our Prime and Select picks on our performance page and our picks for September here to get in on the action. Of course, if you haven’t already, follow Stoney Point on Twitter for the latest updates (@StoneyPointCap).
Prime and Select Picks v. SPY
(Aug. 3 - Aug. 31, 2020)
What we’re reading (9/2)
“U.S. Debt Is Set To Exceed Size Of The Economy For Year, A First Since World War II” (Wall Street Journal). “Policy makers have compared the fight against the coronavirus to a military war effort, and approved roughly $2.7 trillion in spending since March for testing and vaccine research, aid for hospitals and economic relief for businesses, households and state and local governments. Federal revenue fell 10% from April through July, compared with a year earlier, as fears of the virus and widespread business shutdowns brought economic activity to a standstill, and firms laid off millions of workers.”
“DraftKings Shares Pop 5% After Michael Jordan Joins Betting Company As Board Advisor” (CNBC). MJ—current chairman and owner of the Charlotte Hornets—is joining DraftKings as a special advisor to the board. Apparently he got equity in the deal. Per the DraftKings CEO: “Michael Jordan is among the most important figures in sports and culture, who forever redefined the modern athlete and entrepreneur…[t]he strategic counsel and business acumen Michael brings to our board is invaluable, and I am excited to have him join our team.”
“Why Buffett’s Bet On Japan Could Turn On Higher Inflation, Weakening Dollar” (Reuters). Surely, the Oracle of Omaha would never describe his investment strategy as a “global macro” strategy, but in some sense that’s exactly what his latest big trade looks like: “Berkshire Hathaway Inc's $6.2 billion (4.6 billion pounds) foray into Japan's five largest trading houses [conglomerates that own an extremely diverse range of businesses] may signal billionaire Warren Buffett's expectation that inflation and a falling U.S. dollar may make international equities more attractive when economies worldwide recover from the coronavirus pandemic.”
“Apple More Valuable Than The Entire FTSE 100” (BBC). New-world tech is in, old-world oil companies and banks are out. Obviously, AAPL had an absurdly good August. At the same time, according to the chief market analyst for Markets.com, “[t]he FTSE 100 is a dinosaur, full of rather lumbering old-world stocks with precious little growth to offer…[but it is also] a very good proxy for the global economy, which we know is on its knees.”
“Nerds Send Kodak Shares Back On Lift Hill Part Of The Roller Coaster” (Dealbreaker). “Whatever’s happened to Kodak shares over the past month-plus, one’s things very clear: None of them had anything to do with fundamentals. First it was rumor. Then it was Peter Navarro. All along, it was powered by day traders who know the name ‘Kodak,’ saw it was going up and gave into their crippling FOMO. Indeed, Kodak’s fundamentals remain exactly the same or worse today than they were before some self-serving and eventually untrue whispers about something that would ‘change the course of history for Rochester and the American people’ began to emanate from Kodak’s press office. And yet, Kodak shares nearly jumped back into the double digits yesterday. What gives?” Turns out hedge fund D.E. Shaw & Co. took a 5.2 percent stake in the company.
What we’re reading (9/1)
“Walmart Tries Again To Find Its Answer To Amazon Prime” (Wall Street Journal). “Walmart Inc. is trying again to build a membership program that can rival Amazon Prime, the Amazon.com Inc. service with more than 150 million members. On Sept. 15, the retail giant will launch Walmart+, a $98-a-year membership that includes free grocery delivery, a discount on gas from Walmart parking lots and the ability to check out via a mobile phone in stores.”
“Job Growth Expected To Slow Sharply Over The Next Decade, Labor Department Says” (CNBC). The BLS estimates an annual growth rate in new jobs of 0.4 percent for the 2020-2029 period, compared to the 1.3 percent annual growth rate in the 2009-19 period, citing a decline in the active labor force and an aging population.
“Child Care Has Always Been Essential To Our Economy—Let’s Start Treating It That Way” (The Hill). U.S. Representative Katherine Clark and U.S. Senator Lisa Murkowski make the case for congressional action to expand access to childcare. Stoney Point agrees.
“Here’s An Overlooked Way To Play The ‘Stuck-At-Home’ Trend In The Stock Market” (MarketWatch). “As Americans have been forced to stay at home for work, school and even visits to the doctor, shares of cloud-services providers have soared. But there’s something else going on that points to a long-term trend investors need to know about: a housing shortage outside cities, and a boom in home renovation and improvement.”
“Delta And American Follow United In Permanently Dropping Some Change Fees” (New York Times). We’ll see how “permanent” this really is, but for the moment it shows exactly why competition is important (for consumers) and also demonstrates a fundamental point about valuing stocks: when you’re thinking about a company’s cash flows over the long, long term, canonical economic theory says you cannot earning excess returns on capital (in excess of your cost of capital) indefinitely—eventually, competition will whittle the excess returns to zero. A little “inside baseball” here, but few people modelling stock professionally on Wall Street—so far as I can tell—get this right in their valuation assumptions, perhaps because it’s an insight from economics, not finance theory per se and it’s very easy to unwittingly assume ROIC > cost of capital forever unless you peel back some layers in your valuation model.
What we’re reading (8/31)
“Steven Mnuchin Tried To Save The Economy. Not Even His Family Is Happy” (New York Times). A lot of interesting content in this article, but perhaps most interesting of all is that, as “[t]he stock market continued to crater” in the early days of the covid-19 pandemic, “[i]n an early-morning phone call that week with David Solomon, the chief executive of Goldman Sachs, Mr. Mnuchin discussed the draconian idea of shortening trading hours at major stock exchanges in an effort to ease the sell-off, according to a person briefed on the call. Mr. Solomon said such a move would worsen the panic.”
“Inside Silicon Valley’s Doomed Creative Culture” (New York Post). A look at Saleforce-owned AKTA founder John Roa’s new book A Practical Way To Get Rich …And Die Trying.
“The Fed Finally Realizes That Inflation Isn’t Coming” (Washington Post). “More than Congress or the White House, the Fed has staved off financial collapse during the pandemic and the lockdowns. Its guarantees to buy everything from municipal bonds to stocks and to lend hundreds of billions of dollars to midsize companies halted the spiraling panic in markets in early April. Its assurances alone brought calm, and it has not even had to do much of what it was prepared to do. It has also lent liberally to foreign central banks, which kept the global financial system stable, buoyed equity markets and pacified bond markets.”
“The Woman Leading The Fight Against Putin ‘24/7’ After Poisoning Of Navalny” (The Telegraph). “[W]ith opposition leader Alexei Navalny in a coma in a German hospital after another suspected poisoning, the telegenic lawyer finds herself [32-year-old Lyubov Sobo] at the helm of his anti-Kremlin organisation.”
“Insider Trading Is Rife With No Regulators In Sight” (Bloomberg). “There's no end to the parade of corporate transactions preceded by trading underlying their selective disclosure. And there's no sign regulators see the possibility of insider trading in at least a dozen of them during the past year, including Google's offer for Fitbit, LVMH's plan to buy Tiffany, Avaya's strategic partnership with RingCentral, and Stryker’s taking over Wright Medical. That's too bad because financial markets provide the clearest signals of people profiting from confidential information.”
September Prime + Select picks available now
The new Prime and Select picks for September are available starting now, based on a model run put through this evening (August 30). As a note, we’ll be measuring the performance on these picks from the open on Tuesday, September 1, 2020 (the first trading day of the month) through Wednesday, September 30 (at the closing price). If you’re following the strategy perfectly, you’d want to close out your August positions by end-of-trading tomorrow (Monday, August 31), and re-balance at start-of-trading on Tuesday (though some members do all of their re-balancing in one fell swoop).
You can check out the latest picks here here.
What we’re reading (8/30)
“United Airlines Scraps Ticket-Change Fees For Domestic Flights In Bid To Win Over Customers” (CNBC). I’m not saying this move is a response to my July 12 post arguing that UAL was a garbage stock, but I can’t rule it out.
“Tech Startup, Trying To Be Amazon For Farms, Runs Into Ag Gians” (Wall Street Journal). “Inside a packed arena last December, 2,700 farmers sipped coffee from paper cups and listened to remarks on the Midwestern economy: incomes down, costs up and bankruptcies rising. The speaker wasn’t a politician or an academic. He was Charles Baron, co-founder of Farmers Business Network, or FBN, a Silicon Valley startup that is trying to build an Amazon-like online marketplace for agricultural supplies.”
“New Yorkers Are Fleeing To The Suburbs: ‘The Demand Is Insane’” (New York Times). The burbs around NYC—in NJ, Westchester County, CT, Long Island—are experiencing “enormous demand” at all price points. In contrast, sales in Manhattan fell 56 percent. The Times attributes this entirely to covid, and doesn’t consider the influence of “riots”/“protests” (depending on your perspective) ongoing in major cities this summer (including here in the Nation’s Capital last night). But either way, as momentum for permanent remote work arrangements builds, will we see a reversal of the several-decades-old urbanization trend?
“TikTok Sale Could Need China’s Approval Under Revised Rules” (The Hill). Brand new “technology export rules” in place as of Friday in China could mean that ByteDance (TikTok’s Chinese owner) could need to get a “license” from the CCP before divesting the U.S. ops of the video app to the likes of MSFT or WMT.
“A Theory Of Natural Computation Through RNA” (arXiv at Cornell University). Indulge yourself in allowing your mind to be blown by this paper. I certainly haven’t read it at length, nor, frankly, do I pretend to understand it, but how about this from the abstract: “[i]t is therefore reasonable to assume that life has evolved - or possibly began with - a universal computer that yet remains to be discovered. The variety of seemingly unrelated computational problems across many scales can potentially be solved using the same RNA-based computation system. Experimental validation of this theory may greatly impact our understanding of memory, cognition, development, cancer, evolution, and the early stages of life.”
September picks available soon
Just a reminder that we’ll be publishing our Prime and Select picks for the month of September on 8/31. As always, we’ll be measuring SPC’s performance for the month of August, as well as SPC’s cumulative performance, assuming the sale of the August picks at the closing price on the last day of the month (Monday, August 31). Likewise, performance tracking for the month of September will assume the September 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 (8/29)
“Abe Defied Expectations To Build A Better Japan” (Bloomberg). “At a time when many world leaders are retrenching into nationalism, protectionism, racism, and authoritarianism, Abe defied expectations and became a champion of the embattled notion of liberalism. He leaves behind a legacy future Japanese leaders will struggle to match. But for the sake of their country’s continued strength, dynamism, and prosperity, they must try.”
“Warren Buffett And The $300,000 Haircut” (Wall Street Journal). The “Oracle of Omaha” turns 90 on Sunday. As this article details, “[f]rom the earliest age, Mr. Buffett has understood that building wealth depends not only on how much your money grows, but also on how long it grows.”
“Market Posts One Of The Strongest July-August Rallies In History As Hazard After Hazard Melts Away” (CNBC). For all you hear about how the market’s average P/E ratio is close to 30x and how that points to a bubble in equity prices, corporate profit margins are also at historically high levels.
“The Stock Market Is On A Tear, But Now Comes September, The Worst Month Of The Year” (MarketWatch). Mark Hulbert discusses the stock market superstition that September is a bad month for equities; but, as he notes, “[t]here is no plausible theory for why September should be awful for the stock market, and without such an explanation, data mining becomes far more likely [as an explanation for why people believe that]."
“Hedge Funds Wonder If EU Might Like To Do Something About All The Front-Running Going On Under Its Watch” (Dealbreaker). Brokers in Europe are said to be “front-running client trades with impunity from Lisbon to Riga and the Arctic Circle to the Mediterranean coast while hiding behind a loophole-protected euphemism.”
What we’re reading (8/28)
“S&P 500’s Stunning Summer Rally Points to Best August Since 1986” (CNBC). The market’s been up for five straight months—12.7 percent in April, 4.5 percent in May, 1.8 percent in June, 5.5 percent in July, and 6 percent in August to date. A big part of August’s gain is due to one stock—Apple—being up 18 percent.
“What Is A Stock Split And How Does It Affect Your Portfolio” (Wall Street Journal). Speaking of Apple, its stock is splitting 4-for-1. That is, for every share you own of Apple before the split, you will own four after the split. Theoretically, splits (like buybacks) shouldn’t really affect value: if you had one share of a company’s stock worth $100 and now you have four shares worth $25 each, that’s still $100 in total. But there may be inefficiencies in capital markets that make that not so. If, for example, a split renders a high-priced stock like Apple more accessible to investors who previously couldn’t afford a single share, there may be reason to think that the post-split illustrative value would be $25.25 ($101 for four shares in total, or a gain of 1 percent). But as fractional share ownership proliferates you might expect even these effects to dissipate.
“Why Does Walmart Want TikTok? Look At How Teens Shop In China” (CNN Business). “The Chinese version of TikTok, known as Douyin, is one of several apps in the country that have tapped into the rapidly growing number of Chinese shoppers who like to buy stuff on social media platforms. Users of Douyin and Tencent-owned (TCEHY) rival Kuaishou, for example, can buy goods after watching short videos about products. They tune into live streams of influencers peddling everything from makeup to furniture. Users can ask influencers about products and get responses in real time, or they can click on steep discounts that are offered only in the apps.”
“Moderna and Pfizer’s COVID-19 Vaccine Candidates Require Ultra-Low Temperatures, Raising Questions about Storage, Distribution” (MarketWatch). Moderna’s potential vaccine requires storage temperatures of -4 degrees F, while BioNTech’s and Pfizer’s vaccines require storage temperatures of -94 F. Seems like a pretty big logistical hurdle to me.
“Shinzo Abe To Step Down As Japan’s Prime Minister” (Financial Times). Japan’s longest-serving prime minister in history—the man who gave us “Abe-nomics”—is stepping down due to health complications.
What we’re reading (8/27)
“Walmart Joins Microsoft’s Pursuit of TikTok” (Wall Street Journal). TikTok is asking for $30 billion for its U.S. operations. Originally, one would’ve thought MSFT had a big-time negotiating advantage over the sellers, given the Trump administration’s order requiring TikTok’s Chinese owner to divest U.S. operations. But the introduction of another well-capitalized bidder into the process changes TikTok’s relative bargaining position considerably. The clock is ticking, however.
“Ford and Fiat Chrysler Remain Under Federal Investigation In Union Corruption Probe” (CNBC). “Ford Motor remains under federal investigation as part of a multi-year corruption probe into the United Auto Workers union, according to the lead prosecutor on the investigation. U.S. Attorney Matthew Schneider told CNBC that the automaker and the UAW’s Ford unit remain targets in the probe, which initially started with Fiat Chrysler and its union counterpart.”
“America’s Coming Double Dip” (Project Syndicate). Yale economist Stephen Roach argues “there is a compelling case for another double dip in the aftermath of America’s devastating COVID-19 shock.”
“Fed Prepared To Let Economy Run Hotter” (NPR). In a pretty extraordinary policy change, the Fed says it will adjust its long-term approach to fulfilling its dual inflation/employment mandate (which has historically meant targets in the range of (1) ~2 percent inflation a la the Taylor Rule and (2) “full” employment). Going forward, it seems, the Fed may not “tap the brakes” preemptively to prevent the economy from overheating. This isn’t altogether inconsistent with things we’ve heard from notable central bankers before. As former Fed Chair Bernanke famously once said, jacking up interest rates is a relatively blunt tool for popping “bubbles,” and sound supervision by the legion of regulators under the Fed’s watch of may be a better way to do it.
“Even Corporate America Thinks The Stock Market Is Overvalued” (CNN Business). “A stunning 84% of Fortune 500 CFOs say the US stock market is overvalued, according to a survey released Thursday by Deloitte. That's up from the 55% who felt that way a quarter ago. Just 2% of finance chiefs say US stocks are undervalued.” CNN proffers this adds to the “mounting evidence” that the market is overvalued. But its not remotely clear from the article if the CFOs were asked to opine on the market as a whole or their own stock. If the latter, it’s a highly credible take, in my view—the CFOs know what the landscape looks like for their business extremely well and can readily compare that to their stock’s market price. If the former, however, I’m not sure there’s really any story here. Exxon’s CEO’s take on whether Twitter is overvalued probably has about the same “standard error” as anyone else’s.
What we’re reading (8/26)
“I’m Billy Graham’s Granddaughter. Evangelical Support For Donald Trump Spits On His Legacy” (USA Today). According to the granddaughter of Billy Graham, American evangelicals have no business supporting Trump, and the community’s leaders have led the flock astray by going full #MAGA.
“Palantir Files To Go Public, Lost About $580 Million Last Year” (CNBC). The data analytics company founded by Peter Thiel “has released its prospectus to debut on public markets. The company aims to trade on the New York Stock Exchange under the symbol PLTR. Rather than sell shares through an initial public offering, the company intends to debut with a direct listing, the same unconventional route taken by Slack in 2019 and Spotify in 2018.”
“Vanguard Scales Back In Asia” (Wall Street Journal). Vanguard (the index fund company founded by Jack Bogle) is closing down operations in Hong Kong and Japan and focusing its Asia operations on Mainland China.
“Insiders Are Now Unloading Stocks—Here’s Why You Shouldn’t See This As A Sell Signal” (MarketWatch). It turns out the “insiders” that are selling are not really insiders, just large shareholders (so large that they have to report their buying/selling to the SEC). When you strip them out of the data, true insiders—e.g., corporate executives that you might expect to have better information about their stock than you—were net buyers in the first half of August.
“The Best Way To Play The Vaccine Races? Don’t.” (Fisher Investments). I tend to agree. “Markets are efficient and forward-looking, quickly digesting widely known information and then moving on. Given the amount of attention on vaccine candidates and clinical trials, basing investment decisions on vaccine news is the very definition of buying on widely known information. Presuming it offers any sort of an edge is to presume markets aren’t efficient at all, with a blind spot toward one of the most discussed news items on Earth. That strikes us as heat chasing and a recipe for error.”
What we’re reading (8/25)
“4 Takeaways From The 1st Night Of The Republican National Convention” (NPR). “The first night of the Republican National Convention was a little scattershot. It seemed to be partially about counter-programming the Democratic National Convention last week, partially intended to fire up the base and partially aimed at winning back some of those 2016 Trump voters who are having second thoughts.”
“Before Making Loans, Some Mortgage Lenders Ask, Do You Really Plan To Pay This? (Wall Street Journal). A revolutionary new tactic that beats the standard practice of “we don’t care, pay it if you want, or don’t, we’re selling your mortgage to JP Morgan for 80 cents on the dollar either way.” In all seriousness, this is a story about the unprecedented forbearance programs the government has opened up to borrowers, and lenders’ attempts to adjust to a new, less creditworthy “normal.”
“Exxon Mobil Replaced By A Software Stock After 92 Years In The Dow Is A ‘Sign Of The Times’ (CNBC). Indeed. S&P Dow Jones just announced the largest changes to the Dow Jones in seven years. Salesforce is replacing Exxon Mobile, the longest-serving constituent company, which has been in the index in some form since 1928. I’ll be re-watching PBS’s 1992 interpretation of Daniel Yergin’s classic The Prize in memoriam.
“Why It’s So Hard To Find Dumbbells In The US” (Vox). Of all the pandemic preparation items I tried to acquire on the internet in Feb./March (around the same time everyone else was doing the same thing), there are only two items that I ultimately couldn’t procure: (1) NIOSH-approved N95 particulate respirators, and (2) a solid set of dumbbells. The story of the broken supply chain for the former has been well-documented; until now, not so much for the latter. Alas: “‘[f]inding dumbbells that deliver within a reasonable time (less than a month) is like trying to acquire concert tickets for a pop legend without ever knowing when the tickets go on sale’.”
“Marble Ridge Founder Won’t Have To Fight Criminal Charges, Run Hedge Fund Simultaneously” (Dealbreaker). Dealbreaker has been all over this story. “When facing the possibility of prison, some hedge fund managers draw up elaborate contingency plans for that awful potential day. Marble Ridge Capital founder Dan Kamensky, who is on record acknowledging, ‘maybe I should go to jail’ and who now may have to confront a formal evaluation of that assessment for allegedly seeking to screw over his fellow Nieman Marcus bondholders, who he represented as a member of that troubled retailer’s unsecured creditors committee, has chosen to dispense with that need.”
What we’re reading (8/24)
“Many Companies Planned To Reopen Offices After Labor Day. With Coronavirus Still Around, They’re Rethinking That.” (Wall Street Journal). A survey of major companies employing some 2.6 million people revealed that nearly 60 percent had decided to postpone their back-to-the-office plans in light of recent upticks in covid infections and, apparently, backlash from employees.
“‘The Big Short 2.0’: How Hedge Funds Profited Off The Pain Of Malls” (New York Times). Mall defaults in the last several months have allowed some to profit handsomely from bets against their mortgages (Carl Icahn has netted $1.3 billion on the trade so far).
“Money Funds Waive Charges To Keep Yields From Falling Below Zero” (Wall Street Journal). “Money-management giant BlackRock Inc. is waiving costs typically borne by customers for certain money-market funds to prop up investor yields, said people familiar with the matter. Fidelity Investments, Federated Hermes Inc. and J.P. Morgan Asset Management are also ceding some fees to stave off negative yields. The moves are the latest sign of how a roughly $5 trillion piece of the financial system is bracing for new pressure as interest rates plummet. Fee waivers will hit the revenues of firms that shoulder the costs.”
“Why TikTok Will Lose” (Dealbook). The folks at dealbook think TikTok’s lawsuit against the Trump Administrations executive orders (among which is an order for TikTok’s Chinese owner, ByteDance Ltd., to divest its U.S. assets) is “a delaying tactic, at best.”
“Joel Greenblatt on Tesla: ‘I really can’t explain it’” (CNBC). I don’t normally take these sensational hot takes from purported experts too seriously, but when Greenblatt is up to the plate, it’s a different story. Greenblatt is the author of The Little Book That Beats The Market, which espouses a systematic, scientifically rigorous stock-selection model that you might rightfully argue was effectively a quantamental strategy before quantamental was cool.
What we’re reading (8/23)
“Home Sales Surged 24.7% In July, With Prices Hitting An All-Time High” (CNN Business). For the second time in a row, home prices grew a double-digit percent on a month-over-month basis. Why? The article itself is all about Millennials and remote workers relocating to the burbs, but that doesn’t seem like it would explain the magnitude of the price increase, particularly in a wage-depressed, recession-like environment. The more likely culprit: historically low mortgage rates that have fallen sharply recently. There’s a lesson here for stocks: asset prices in general tend to be extremely sensitive to baseline interest rates (recall that it’s not just home prices that are up, stocks are way up too).
“Apple Fires Back In Court, Says Epic Games CEO Asked For Special Treatment” (CNBC). This mammoth legal battle between Apple and Fortnite-maker Epic Games just gets juicier. “In its filing, Apple alleges that Epic Games asked for an individual arrangement with Apple, producing three emails from Epic CEO Tim Sweeney that bolster its claim.” From an economic perspective, most interesting is that Epic requested the ability to create its own third-party app store for iOS. Apple can claim it charges everybody the same 30 percent all it wants, but if it disallows a third-party app store, it really has no economic basis to claim that 30 percent is a market price (i.e., a competitive, non-monopolist price) in my opinion.
“ETF Boom Fuels Gold’s Sharp Rise” (Wall Street Journal). “[W]ith the rush into gold has come an increase in volatility that many traders don’t welcome. Both metals have dropped about 6% or more from peaks hit this month and are recording bigger daily swings than normal, suggesting that gold and silver have joined U.S. tech stocks among the most crowded trades in markets—creating the risk that months of outperformance could vanish in a day or two of frenzied selling should market or economic conditions turn.”
“TikTok Plans To File Suit Against Trump’s Order on Monday” (Bloomberg). On August 6, President Trump ordered TikTok—the wildly popular Chinese-owned video app—banned in the U.S. with 45 days, and subsequently gave it a 90-day deadline to divest U.S. operations. TikTok plans to challenge the order in court, noting that “[w]hat we encountered instead was a lack of due process as the Administration paid no attention to facts and tried to insert itself into negotiations between private businesses.”
“Well, I Guess Anyone Can Run A SPAC” (Dealbreaker). Former Speaker of the House Paul Ryan is forming a special purpose acquisition company (“SPAC,” also known as a “blank-check company”) and is seeking to raise $300 million in an upcoming IPO.
What we’re reading (8/21)
“New York City Is Dead Forever” (New York Post). A controversial recent article by former hedge fund manager James Altucher. Central to the apparent thesis: execs/managers are realizing their employees are actually more productive working from home, so why lease the real estate? (As we wrote about here)
“Airbnb Picked A Terrible Time To File For An IPO” (Barron’s). Airbnb formally filed registration statements with the S.E.C., kicking off a process that will eventually lead to its long-awaited initial stock offering. But, at least on the surface, this would’t exactly seem like a great time for a travel/lodging/leisure IPO. Perhaps they’re betting trends turn around and quickly.
“Biden Finally Has His Big Moment” (Politico). The former vice president gave a rousing speech on the final night of the Democratic National Convention. All eyes on the GOP as its convention gets underway next week.
“Struggling Retailers Rush To File For Bankruptcy As Fears Of A Second Wave Of Coronavirus Linger” (CNBC). “Over a two-week span in early July, seven retailers, including The Paper Store, Brooks Brothers and Lucky Brand, filed for bankruptcy protection. J.Crew, Neiman Marcus and J.C. Penney and four other retailers had already filed in May. Lord & Taylor and the off-price shop Stein Mart led another wave that hit earlier this month. Some would say it has been a flood, but what’s coming could be a tsunami.”
“Hedge Fund Marble Ridge To Shut Down” (Wall Street Journal). A relatively large distressed debt fund is shutting down after a DOJ bankruptcy watchdog report revealed a managing partner at the firm tried to suppress an auction for a piece of Neiman Marcus’s e-commerce business, MyTheresa, during Neiman’s chapter 11 proceedings (reportedly, he wanted to buy the shares himself at a big discount).
What we’re reading (8/19)
“Student Call For Colleges To Cut Tuition Costs As School Year Begins Online” (CNN). Watch for litigation in this area in the near future. Per NYU marketing prof. Scott Galloway: “Universities have backed themselves into a corner…[w]e have raised tuition on average 2 1/2-fold over the last 20 years. I think Covid-19 was just the straw that broke the camel's back, where families across America are saying, ‘Enough already. We're not going to pay $58,000 for Zoom classes.’”
“A TikTok Ban Is Overdue” (New York Times). Columbia prof. Tim Wu—one of the sharpest minds on the antitrust issues that may well dominate the political-economic discourse in the U.S. in the next decade and the author of the best op-ed I’ve read all year—is back with another thought-provoking piece in the Times: “In China, the foreign equivalents of TikTok and WeChat — video and messaging apps such as YouTube and WhatsApp — have been banned for years. The country’s extensive blocking, censorship and surveillance violate just about every principle of internet openness and decency. China keeps a closed and censorial internet economy at home while its products enjoy full access to open markets abroad.”
“How Can Wall Street Be So Healthy When Main Street Isn’t?” (Associated Press). Of the numerous recent hot takes speculating about why the stock market seems to be so out of sync with from economic reality lately, this one comes closest to the mark in my opinion. The main point as I see it (and reading between the lines a bit): the adverse economic effects of covid are concentrated in the non-publicly traded part of the corporate economy. Large-cap equities’ stocks are doing just fine because their underlying businesses really are actually doing just fine.
“‘Semiconductors And Software Are Really The Future Of Cars,’ Analog Devices CEO Says” (CNBC). The automotive industry is continuing its long march toward an inevitable future when cars are just computers on wheels, for better or worse.
“EU Not Just Going To Take U.K.’s, Hedge Funds’ Word On Things” (Dealbreaker). “As it turns out, without interference from the Anglo-Saxons, the Germano-Gallic impulse to regulate alternative investments can proceed unmolested—and can be imposed on those Anglo-Saxons, anyway, if they’d like to maintain any clients across the Channel.”
What we’re reading (8/18)
“No Applause, No Crowds: Democrats Begin A Most Unusual Convention” (New York Times). The Democratic Party’s convention is off and running. Night one featured Bernie Sanders and Michelle Obama, among others.
“Boeing Offers Second Voluntary Layoff Package to Employees” (CNBC). Boeing employees in the company’s commercial airplanes division, services division, and corporate offices are reportedly getting offered voluntary layoff packages, with pay and benefits, as the company continues suffering the covid crisis’s overall effects on air travel and demand.
“Hedge Fund Finds Two Ways To Lose Money On Tesla” (Dealbreaker). A weird lawsuit involving some weird ties between an SF-based hedge fund and a former Tesla technician who has been publishing reams confidential Tesla documents on the web since leaving the company.
“5G Smartphones Could Crush Your Home Wi-Fi. So Where’s The 5G?” (Wall Street Journal). 5G is coming and is going to enable “blazing fast” mobile network access speeds.
“John Boehner Would ‘Rather Set Himself On Fire’ Than Get Involved In the 2020 Election” (The Week). “Boehner retired from Congress in 2015 and has since exuded a ‘boy, am I glad I'm not a part of this anymore’ energy in interviews, sometimes enjoying a cocktail while doing so.”
What we’re reading (8/17)
“What’s Happening In Belarus?” (BBC). “Belarus has been shaken for days by widespread mass protests, triggered by an election which was widely thought to be rigged massively in favour of the incumbent, longtime leader Alexander Lukashenko.”
“Uber And Lyft Could Shut Down In California This Week. It May Not Help Their Cause” (CNN). A court in California recently ordered Uber and Lyft to reclassify drivers as employees (and not benefitless “independent contractors”). In response, Uber and Lyft are threatening to shut down their services.
“Interior Secretary Approves Oil Drilling In Alaska’s Arctic Refuge” (Wall Street Journal). The Trump administration approved an oil leasing program for the Arctic National Wildlife Refuge—an area the size of South Carolina located in northern Alaska. It’s not at all clear we need more oil now, in the midst of worldwide oil glut.
“UNC Abrubtly Halts In-Person Classes After Coronavirus Outbreak On Campus” (CNBC). UNC is transitioning entirely to remote learning after a covid cluster broke out in the first two weeks of on-campus classes.
“At Homeland Security, I Saw Firsthand How Dangerous Trump Is For America” (Washington Post). A spirited op-ed from Miles Taylor, who served at the Department of Homeland Security in the Trump Administration from 2017-2019, including as chief of staff. “Like many Americans, I had hoped that Donald Trump, once in office, would soberly accept the burdens of the presidency — foremost among them the duty to keep America safe. But he did not rise to the challenge. Instead, the president has governed by whim, political calculation and self-interest."