What we’re reading (9/19)
“Justice Ruth Bader Ginsburg Dead At 87” (CNN). “Ginsburg was well-known for the work she did before taking the bench, when she served as an advocate for the American Civil Liberties Union and became the architect of a legal strategy to bring cases to the courts that would ensure that the 14th Amendment's guarantee of equal protection applied to gender…Once she took the bench, Ginsburg had the reputation of a ‘judge's judge’ for the clarity of her opinions that gave straight forward guidance to the lower courts. At the Supreme Court, she was perhaps best known for the opinion she wrote in United States v. Virginia, a decision that held that the all-male admissions policy at the state funded Virginia Military Institute was unconstitutional for its ban on women applicants.”
“Trump Weighs Barrett, Lagoa For Court Seat” (Politico). “As he put two men on the Supreme Court during his term, Trump also interviewed Judge Amy Coney Barrett of the U.S. Court of Appeals for the Seventh Circuit…Barrett is considered the leading contender because of her conservative credentials, Trump’s interest in picking a woman and the fact that she’s already been interviewed…[b]ut Trump is also considering two other women who he had not interviewed but emerged on his expanded list this month…[o]ne is former Florida Supreme Court Justice Barbara Lagoa…[a]nother is Allison Jones Rushing, an appeals court judge in her late 30s who would be among the youngest justices ever to serve on the court, ensuring a conservative in the seat for even longer than others.”
“Investors Could Be Overplaying The Election As A Lasting Driver Of The Stock Market, History Shows” (CNBC). “In order to treat an election as a specific catalyst for investment moves, one would have to handicap the result, anticipate the makeup of Congress, intuit the key policy priorities, evaluate the likelihood of them becoming law, estimate their economic impact and then determine how much of this decision tree has already been priced into financial markets. Sound doable?”
“Companies’ New Back-To-Work Dilemma: Who Comes First?” (Wall Street Journal). “International Business Machines Corp. prioritized scientists working in quantum computer labs when it reopened a New York research hub earlier this summer, figuring they had the hardest time doing their jobs from home. Payroll processor Automatic Data Processing Inc. has relied upon a dashboard that offers a regularly updated view of who’s willing to come in and who’d prefer to stay home. Such a mix of technology, local regulations and subjective factors like employee sentiment is guiding reopening decisions at several companies.”
“An Overview Of Crypto Algo Funds” (City A.M.). I’m not endorsing crypto as an asset class, but this is still a pretty good read. “Digital asset funds can be the easiest way to get exposure to crypto markets with a ‘set & forget’ strategy for investors while making short and long term gains. There are serious gains to be made in this new industry, and the findings of my own journey supporting digital asset clients over the past four years can help curious investors understand what to look for in a digital asset fund and what to run away from.”
What we’re reading (9/18)
“Female-Managed US Funds Outperform All-Male Rivals” (Financial Times). “All-women and mixed-gender US fund teams outperformed all-male portfolio management teams so far this year, according to a Goldman Sachs analysis that raises fresh questions about the investment industry’s progress in addressing its gender diversity problems…[s]o far this year, female managed funds on average delivered returns of -57 basis points compared with their benchmarks. All male run funds performed worse, with average returns of -164bp.”
“America’s Offices Sit Half-Empty Six Months Into The Covid-19 Pandemic” (Wall Street Journal). Data from Brivo, a company that provides access-control systems for workplaces, shows that “unlocks” at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third.
“The Market Isn’t Convinced The Federal Reserve Can Achieve Its Inflation Objective” (CNBC). The Fed has an explicit inflation target of about 2 percent a year. But that target is an average that applies to a basket of goods. Ideally, that average isn’t achieved by way of financial asset prices rising a lot with wages being flat. “For the past decade or so, the Federal Reserve has been quite effective in helping to create inflation, just not the kind that it normally targets. The Fed’s perpetually easy monetary policy, consisting of historically low short-term interest rates and trillions of dollars in bond buying, has coincided with a huge swell in asset prices, stocks in particular. What it has not driven is the kind of inflation central bank officials like to see – higher wage pressures, for instance, that help improve the standard of living as well as signal a vibrant economy not caught in the slow-growth trend that has persisted since the financial crisis.”
“Our Ultimate Stock Pickers’ Top 10 Dividend-Yielding Stocks” (Morningstar). You’ll find most of Stoney Point’s picks don’t even pay dividends, much less big dividends, but, for what it’s worth, “Warren Buffett at Berkshire Hathaway (BRK.B) has spoken highly of companies that return capital to shareholders and is not against investing in and holding higher-yielding names.”
“The Wayback Machine And Cloudfare Want To Backstop The Web” (Wired). “The web is decentralized and fluid by design, but all that chaos and ephemerality can make it difficult to keep a site up and online without interruption. That's what has made the Internet Archive's Wayback Machine feature so invaluable over the years, maintaining a history of long-forgotten pages. Now its deep memory will help make sure the sites you visit never go down, through a partnership with the internet infrastructure company Cloudflare.”
What we’re reading (9/17)
“The Billionaire Who Wanted To Die Broke…Is Now Officially Broke” (Forbes). The inspirational story of Chuck Feeney. “Charles “Chuck” Feeney, 89, who cofounded airport retailer Duty Free Shoppers with Robert Miller in 1960, amassed billions while living a life of monklike frugality. As a philanthropist, he pioneered the idea of Giving While Living—spending most of your fortune on big, hands-on charity bets instead of funding a foundation upon death. Since you can't take it with you—why not give it all away, have control of where it goes and see the results with your own eyes?”
“Fed Sets Higher Hurdles For Rate Increase” (Wall Street Journal). “The Federal Reserve pledged to support the economic recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years.” Zero percent for three years, what a world. Note: that’s zero percent for the U.S. government, not for you, but all debt, including yours—scratch that, all securities—should be correlated. In any case, If you haven’t refi’d lately, now’s as good a day as any (and, by the way, a good friend of/advisor to SPC is a refi expert, so do let me know if you’re interested in any pro tips).
“A Low Profile Investors Who Bet On Snowflake Eight Years Ago Is Up More Than $12 Billion After IPO” (CNBC). Snowflake (ticker: SNOW)—the cloud-based data-warehousing startup—was founded just eight years ago. Yesterday it went public at a value of +$70 billion. How’s that for value-creation?
“Is The Coronavirus Crisis Finally Over? A Nobel Laureate Says It Might Be” (Issues & Insights). “Stanford biophysics professor Michael Levitt, who won the 2013 Nobel Prize for Chemistry, says the pandemic might have come to an end…Levitt has a strong record predicting how the virus runs its course. He ‘began analyzing the number of COVID-19 cases worldwide in January,’ the Los Angeles Times reported in March, ‘and correctly calculated that China would get through the worst of its coronavirus outbreak long before many health experts had predicted.’”
“A Simple Eviction Moratorium Sows Confusion Around The Country” (New York Times). “Fending off an eviction could depend on which judge a renter in financial trouble is given, despite a federal government order intended to protect renters at risk of being turned out. The order, a moratorium imposed by the Centers for Disease Control and Prevention, is meant to avoid mass evictions and contain the spread of the coronavirus. All a qualifying tenant must do is sign a declaration printed from the C.D.C. website and hand it over to his or her landlord. But it’s not as simple as it sounds: Landlords are still taking tenants to court, and what happens next varies around the country.”
What we’re reading (9/16)
“#1536 - Edward Snowden” (The Joe Rogan Experience). Former CIA contractor turned whistleblower Edward Snowden was back on Joe Rogan’s wildly popular podcast this week for another 2.5-hour interview (he was on in late 2019 as well in an episode that generated tens of millions of views/downloads). Interestingly, around the 100-minute mark Snowden opines that the internet should be regulated as a public utility.
“The Best Stock In The S&P 500 is 105 Years Old” (CNN Business). “Apple, Amazon and Nvidia get all the attention on Wall Street, but those alluring tech titans have been left in the dust this year by a 105-year-old air conditioning company. Carrier Global's stock has been on fire since it broke away from United Technologies this spring to become an independent company. Carrier is up a stunning 143% on the year, easily making it the top stock in the S&P 500, according to a tally by Refinitiv.”
“Yelp Data Shows 60% Of Business Closures Due To The Coronavirus Pandemic Are Now Permanent” (CNBC). “As of Aug, 31, 163,735 businesses have indicated on Yelp that they have closed. That’s down from the 180,000 that closed at the very beginning of the pandemic. However, it actually shows a 23% increase in the number of closures since mid-July. In addition to monitoring closed businesses, Yelp also takes into account the businesses whose closures have become permanent. That number has steadily increased throughout the past six months, now reaching 97,966, representing 60% of closed businesses that won’t be reopening.”
“U.S. Retail Shopping Grew At A Slower Pace In August” (Wall Street Journal). U.S. retail spending rose 0.6% in August for the fourth straight monthly increase, but at a slower pace as some extra unemployment benefits ran out. The increase reported by the Commerce Department marks an eased pace than earlier in the summer when spending rebounded sharply from steep declines that occurred early in the coronavirus pandemic. July’s gain was revised lower, to a 0.9% increase from an earlier reading of a 1.2% rise.”
“This Isn’t Just JPMorgan’s Problem” (Dealbook). “JPMorgan Chase sent some of its workers home this week after an employee in its trading unit in Midtown Manhattan tested positive for the coronavirus, a person familiar with the matter told DealBook.”
What we’re reading (9/15)
“For Ray Dalio, A Year Of Losses, Withdrawals And Uneasy Staff” (Bloomberg). This article is generating a lot of buzz in the investments community this morning. Bridgewater’s flagship Pure Alpha II fund is down 18.6 percent year-to-date. But that’s not all, according to Bloomberg: “[t]hose losses, the worst in a decade, top a sprawling list of troubles that has plunged Bridgewater into a round of crisis management, according to more than 25 people with knowledge of the firm’s inner workings.” Worth noting: Mr. Dalio will be on air this afternoon, ostensibly to respond to the article.
“Finance Chiefs Prioritize Employee Retention As Coronavirus Pandemic Drags On” (Wall Street Journal). “Keeping staff has become a key focus for companies as they navigate the current economic downturn. Finance chiefs at these businesses are safeguarding employee retention programs from broader cost-cutting efforts for fear top-ranking employees might leave…[e]ighty-eight percent of senior managers ranging from vice presidents to C-Suite executives said they are worried about losing high-performing office professionals, up 7% from last year, according to a survey by staffing agency Robert Half International Inc. More than a third of those attributed their anxiety to staff cuts and planned pay freezes, the survey said.”
“The Federal Reserve Will Stay On Hold Until 2023, According To CNBC Survey” (CNBC). “In the first CNBC Fed Survey since the Federal Reserve announced its new, more dovish monetary policy strategy, respondents now forecast no rate hikes from the central bank until 2023. The results are a potential first sign that the Fed’s new strategy of allowing inflation to run above its 2% target for an unspecified time have had an immediate impact on the rate outlook.”
“U.S. Blocks Imports Of Chinese Goods It Says Are Made With Forced Labor” (Washington Post). “The Trump administration has banned the import of certain apparel and computer parts from China, saying they are made by forced laborers from the Xinjiang region. The move adds five new Chinese entities to an import blacklist the United States has used several times in recent years to combat what it calls China’s widespread practice of forcing ethnic minorities from the Xinjiang region to work under involuntary conditions.”
“The 20-Year Hunt For The Man Behind The Love Bug Virus” (Wired). “The love bug virus was unleashed on May 4, 2000. It was simple, but devastatingly effective and highly contagious. Once infected, many of the user’s files would be overwritten with copies of the virus, so that whenever the victim tried to open the files, they’d reinfect their system. The virus also tried to steal people’s passwords. But the true genius lay in how it spread. Once infected, the victim’s computer would send an email to everyone in their Microsoft Outlook contacts book. The emails read: ‘kindly check the attached love letter coming from me,’ and attached was a copy of the virus, disguised as a text file with the title ‘love-letter-for-you.’”
What we’re reading (9/14)
“Oracle Wins Bid For TikTok in U.S., Beating Microsoft” (Wall Street Journal). “Oracle is set to be announced as TikTok’s “trusted tech partner” in the U.S., and the deal is likely not to be structured as an outright sale, the people said. The next step is for the White House and the Committee on Foreign Investment in the U.S. to approve the deal, said one of the people, adding that the participants believe it satisfies the concerns around data security that have been previously raised by the U.S. government.” Oracle shares rose after reports of the deal, suggesting the market expects they got a bargain.
“Amazon And Walmart’s Emerging Delivery Drone Battle Escalates With Zipline Deal” (CNBC). “Walmart announced Monday that it’s partnering with Zipline — a company best known for its medical drone operations in African countries like Ghana and Rwanda — to launch a delivery service of select health and wellness products in the U.S. The company says its intention is to later expand the partnership into offering drone delivery of general merchandise.”
“There’s A Hidden Weakness In The Stock Market” (CNN Business). CNN reports that while the market value-weighted S&P 500 is up 3 percent this year, “[a]n Invesco S&P 500 ETF (RSP) that equally weights all of the index members is down more than 6% this year.” (Emphasis added.)
“UBS Chairman Explors Merger With Credit Suisse, Report Says” (Bloomberg). “The chairmen of UBS Group AG and Credit Suisse Group AG are exploring a potential merger to create one of Europe’s largest banks, Inside Paradeplatz reported, citing unidentified people inside the two lenders. The project, nicknamed Signal, is being driven by UBS Chairman Axel Weber, who is working on it with his counterpart at Credit Suisse, Urs Rohner, the Swiss finance blog said. Weber has discussed the idea with Swiss Finance Minister Ueli Maurer and an agreement could happen by early next year, according to the report.”
“Section 230 Is A Government License To Build Rage Machines” (Wired). “Section 230 of the Communications Decency Act protects ‘interactive computer services’ like Facebook and Google from legal liability for the posts of their users. This is often portrayed as an incentive for good moderation. What is underappreciated is that it also provides special protection for actively bad moderation and the unsavory business practices that make the big tech platforms most of their money.”
What we’re reading (9/13)
“The Tax Moves Day Traders Need To Make Now” (Wall Street Journal). “If you’re one of the millions of day traders who have jumped in and out of markets this year, check your taxes now. Being a taxpayer may not be top of mind, but not paying attention could dent your bottom line next April…[m]any new traders likely aren’t aware they are trading in taxable accounts, where each sale has tax effects. (Robinhood customers can’t trade within retirement accounts such as traditional or Roth IRAs, where sales aren’t taxable.) Next year, many will be surprised to receive long tax forms for 2020.”
“Ray Dalio, In Economic Club Of New York Address, Speaks Of Threats Beyond The Pandemic” (Institutional Investor). “According to Ray Dalio, the coronavirus pandemic was a blow to the system. But in his view, Covid-19 isn’t the biggest game changer. Instead, the Bridgewater Associates founder said Thursday that he sees the convergence of monetary policy, social and economic gaps, and the rise of China as forces that could change the world.”
“Wall Street Has Wanted An Apple Bundle For Years — Soon it Might Get One” (CNBC). “For Apple investors, the most exciting product the company could release this fall isn’t a new version of the iPhone or Apple Watch: It’s a bundle that tie some of the company’s subscription services together and give users with a discount for subscribing to more than one at the same time.”
“2020 Is The Year Of The SPAC” (Crunchbase). “If direct listings were the most-talked-about way to go public in 2019, SPACs are the new direct listings. Special purpose acquisition companies (SPACs) have been popping up in SEC filings left, right and center, with high-profile names often attached to them: venture capitalist Chamath Palihapitiya, former Speaker of the House Paul Ryan and LinkedIn co-founder Reid Hoffman have all launched these ‘blank-check’ companies.”
“Mathematicians Open A New Front On An Ancient Number Problem” (Wired). Do odd perfect numbers exist? A BYU Professor is on the beat: “The Greek mathematician Nicomachus declared around 100 CE that all perfect numbers must be even, but no one has ever proved that claim. Like many of his 21st-century peers, [BYU Professor Pace] Nielsen thinks there probably aren’t any OPNs. And, also like his peers, he does not believe a proof is within immediate reach. But last June he hit upon a new way of approaching the problem that might lead to more progress. It involves the closest thing to OPNs yet discovered.”
What we’re reading (9/12)
“A ‘Tidal Wave’ Of Covid-Related Workplace Lawsuits Could Be On The Way” (CNN Business). “The nature of the coronavirus-related disputes vary, from allegations of wrongful death as a result of unsafe working conditions to wrongful termination for trying follow governors' orders to accusations that employers are using Covid-19 as a pretext for terminating employees for discriminatory reasons.”
“Goodbye, Open Office. Hello, ‘Dynamic Workplace’” (Wall Street Journal). “Cramming cavernous spaces with as many desks as they could hold might have increased serendipitous interactions, but it almost certainly reduced productivity and helped spread communicable diseases, including coronavirus…[c]ue the ‘dynamic workplace,’ a pivot away from the open plan, built on the idea that with fewer employees coming to work on any given day, offices can offer them more flexibility of layout and management. While open offices and dynamic workplaces share similar components—privacy booths and huddle rooms to escape the hubbub, cafe-like networking spaces, etc.—they’re philosophically distinct. One is intended to be a place where people come (at least) five days a week, and get most of their work done on site. The other is planned for people rotating in and out of the office, on flexible schedules they have more control over than ever.”
“Stocks Appear To Be Experiencing A Textbook Correction As Payback For An August Overshoot Rally” (CNBC). U.S. stocks are definitely down so far in September. But that doesn’t mean the characterization of month-to-date performance as a “correction” is accurate. Information changes constantly and, with it, so too should asset prices. The August gains could have been right then, but wrong now, in light of new information. There’s a huge debate about this in finance academia.
“How Big Oil Misled The Public Into Believing Plastic Would Be Recycled” (NPR). “[W]hen Leebrick tried to tell people the truth about burying all the other plastic, she says people didn't want to hear it. ‘I remember the first meeting where I actually told a city council that it was costing more to recycle than it was to dispose of the same material as garbage,’ she says, ‘and it was like heresy had been spoken in the room: You're lying. This is gold. We take the time to clean it, take the labels off, separate it and put it here. It's gold. This is valuable.’ But it's not valuable, and it never has been. And what's more, the makers of plastic — the nation's largest oil and gas companies — have known this all along, even as they spent millions of dollars telling the American public the opposite.”
“Gundlach Says High-Yield Bond Defaults May Almost Double” (Bloomberg). DoubleLine Capital’s Jeffrey Gundlach (the, or one of the, so-called “bond kings”) reportedly thinks “[h]igh-yield bond default rates may double as companies struggle with a protracted economic downturn even as the Federal Reserve props up valuations.” Per Gundlach: “It’s foolhardy to believe that one can have this kind of a shock to an economy and it just gets healed through a one-shot deal [from the Treasury].”
What we’re reading (9/11)
“JP Morgan Top Brass Tell Trading-Floor Staff To Come Back To The Office” (Wall Street Journal). “[F]or many bank executives, the past six months have proved what they previously thought was impossible: Trading could take place seamlessly outside the walls of densely populated office towers. Remote-login systems worked and home internet connections didn’t fail. Goldman Sachs Group Inc. kept Zoom channels open all day to bring the trading floor, with its noisy squawk boxes and hoots, to employees’ home offices. JPMorgan, which is building a new skyscraper in Midtown Manhattan, has been more aggressive than some of its peers about bringing workers back to the office.”
“Rio Tinto CEO Resigns After Destruction Of 46,000-Year-Old Sacred Indigenous Site” (CNN Business). “Rio Tinto (RIO) CEO Jean-Sébastien Jacques has resigned as the mining giant continues to face pressure from investors for blowing up a 46,000-year-old sacred Indigenous site in Australia to expand an iron ore mine.”
“Targeted Stimulus Crucial To Keeping US Recovery Going” (The Hill). “At the current recovery stage, broad stimulus is duplicative and ineffective. The major unemployment problem is opening up sectors stymied by consumer fears and lockdowns. Around $1 trillion of unused U.S. government funds remain for pandemic response, which should be retargeted from stabilizing capital markets and other macro purposes to direct relief for closed sectors and their structurally unemployed.”
“Peloton Crushes Estimates As Sales Surge 172%, Expects Strong Demand To Continue Into 2021” (CNBC). Peloton’s tech-enabled stationary bike and treadmill because “two of the hottest commodities for people looking to work out at home during the coronavirus pandemic.”
“Century 21 Files For Bankruptcy, To Close All Stores” (Fox Business). Apparently, Century 21 experienced big losses due to the coronavirus pandemic. It claims it was due a $175 million lifeline from its insurers, but its insurers have refused to pay. Reporting elsewhere that very few of these corporate insurance contracts specifically contemplate “pandemic risk” seems to suggest we should expect more litigation in this area as counterparties tussle over what exactly “force majeure” means in practice.
What we’re reading (9/10)
“U.S. Job Opening Leveled Off Late In The Summer” (Wall Street Journal). “The increase in the number of job postings, a real-time measure of labor-market activity, has slowed dramatically since late July, and last week stood about 20% below 2019 levels, according to data the job-search site Indeed.com shared with The Wall Street Journal.”
“Factors That Could Derail Stocks in Q4” (U.S. News & World Report). In short: a prolonged recessionary environment, deteriorating U.S.-China relations, sudden domestic economic policy changes. For the last one, the article really focuses on the prospects for higher corporate tax rates and a less permissive regulatory environment under a potential Biden Administration, but that doesn’t seem fair to me. It depends a little on your definition of “derail,” but while we might reasonably expect lower returns in a higher-tax environment, it seems like it should be pretty uncontroversial to expect lower volatility too. If you care about risk-adjusted returns instead of just gross returns, that could be a pareto improvement in market conditions.
“Urban Flight Means Home Improvement And DIY Trends Are More Than A Pandemic Bounce. They’re a New Habit” (CNBC). “In the research note, Wells Fargo senior equity analyst Zachary Fadem spelled out factors that have driven some people out of cities. Among them, he said, about 65% of early Covid-19 cases were concentrated in dense cities. People have sought out more space as they work and learn at home and as aspects of city life from public transit to high-end restaurants are unavailable or unappealing. He pointed to recent earnings reports by retailers that soared past Wall Street expectations, citing de-urbanization as one of the causes.”
“Northrup Grumman Wins $13 Billion Contract To Replace U.S. Ballistic Missiles” (Washington Post). NOC just won a massive USAF contract to replace America’s “aging stock of intercontinental ballistic missiles.” Treaty limitations cap the existing stock of actual nuclear warheads, but this deal is all about the “missile infrastructure that would be used to deliver those warheads[.]”
"43% Of Retail Investors Are Trading With Leverage: Survey” (Yahoo! Finance). The most interesting finding from this survey to me is not the use of leverage, but rather that 44 percent of respondents said they had been trying to “time the market.” That’s a surprising result in light of decades of research (discussed a bit in an earlier blog post here) that people tend to leave money on the table when they try to time the market.
What we’re reading (9/8)
“Apple Countersues ‘Fortnite’ Maker Epic Games, Seeks Punitive Damages” (Wall Street Journal). A few weeks ago, Epic Games—the maker of the wildly popular video game app “Fortnite”—initiated a lawsuit challenging the 30 percent commission Apple charges on in-app purchases for apps downloaded from Apple’s app store (Epic also sued Google). Now, Apple is suing back.
“Stock Futures Fall With Market Set To Continue Technology-Led Sell-Off” (CNBC). The market had a great August, but continued its recent plunge on Tuesday (especially the tech sector). As of this writing, looks like more of that ahead for Wednesday.
“Bankrupt Retailers Face Another Hurdle: Getting Rid Of Inventory” (Washington Post). “Firms that specialize in winding down stores say liquidating now is markedly different from what it was before the pandemic. Companies are offering deeper discounts to win over consumers — with sales starting at 40 percent off instead of the usual 20 percent — as well as other incentives. Even then, results can be spotty: Proceeds from liquidation sales have fallen about 25 percent since the novel coronavirus took hold, according to Jim Schaye, chief executive of retail liquidation firm Eaton Hudson.”
“AstraZeneca Puts COVID-19 Vaccine Trial On Hold Over Safety Concern: Stat News” (Reuters). “AstraZeneca Plc has paused a late-stage trial of one of the leading COVID-19 vaccine candidates after a suspected serious adverse reaction in a study participant, health news website Stat News reported on Tuesday.”
“‘Deep Regrets’—Billionaire Admits He Lost $41 Million Daytrading Stocks” (MarketWatch). A good reminder that there’s no shame in just buying the market. Let’s hope Stoney Point’s picks do better than Japanese Billionaire and internet sensation Yusaku Maezawa’s.
What we’re reading (9/7)
“‘We’re Certainly In A Bubble,’ Strategist Warns—But Don’t Expect It To Pop Anytime Soon” (CNBC). Stanhope Capital CIO Jonathan Bell thinks the tech rally in 2020 has involved a little “irrational exuberance.” As the article points out: “[s']hares of Amazon have shot up 78% so far this year, leading the so-called “FAANG” stocks. Shares of Apple and Netflix have skyrocketed 65% and 59%, respectively, while shares of Facebook and Alphabet have risen 38% and 19%, respectively, this year.” For what it’s worth, those numbers pale in comparison to TSLA, which was up over 400 percent between March 23 and September 2.
“Sudden Volatility In Tech Stocks Unnerves Investors” (Wall Street Journal). The Nasdaq was down 6 percent over the course of just two days last week. “‘Momentum is nice on the way up, but it’s painful on the way down,’ said Gene Goldman, chief investment officer at Cetera Investment Management. He has been lowering investments in tech while increasing positions in beaten-down value sectors that appear cheap like the financial and industrial groups.”
“European Stocks Rebound Following Wall Street Tech Sell-Off” (Yahoo! Finance). U.S. markets are closed today (9/7) for Labor Day, but European stocks are trading and apparently rebounded a bit following the sell-off at the end of last week in the U.S.
“DOJ Updates Merger Remedy Guidelines For First Time In Nearly A Decade” (Axios). In most U.S. mergers of a particular size, antitrust regulatory authorities (FTC or DOJ) get a chance to object to (and potentially litigate over) whether or not the deal will be reduce competition in a particular market. Often, acquiring entities and the antitrust authorities will agree on an antitrust “remedy” whereby the buyer will be allowed to complete the at-issue acquisition provided that they divest one or more pieces of the target company to somebody else (to preserve competition). In the latest guidelines, the DOJ makes explicit that divesting to private equity funds—long a counterparty of concern to the regulators because of their weak track record running businesses divested as a result of antitrust agreements—is OK in many circumstances.
“Russian Opposition Leader Alexei Navalny Was Brought Out Of An Induced Coma After Poisoning By A Nerve Agent, Berlin Clinic Says” (Washington Post). “Alexei Navalny, who was poisoned last month with a chemical nerve agent similar to Novichok, was brought out of an induced coma, and his condition has improved, German doctors said Monday. A statement from the Charité clinic in Berlin said he was responding to voices, but it was too early to know the long-term impact of the poisoning.”
What we’re reading (9/6)
“Ex-World Bank Head Robert Zoellick: ‘The World Could Look Like 1900 Again’” (BBC). “Robert Zoellick pointed to the rift between the US and China as a serious threat to the global economic recovery. Mr Zoellick, one of America’s most senior public officials, has advised six US presidents during his career. He told the BBC co-operation was ‘the only way the global economy will emerge from the recession.’ Mr Zoellick, who was also the US deputy secretary of state, said his biggest concern was the escalating tensions between the US and China. ‘I think [the relationship] is in freefall today and I don’t think we know where the bottom is, and that is a very dangerous situation,’ he told the BBC’s Asia Business Report.”
“Amazon Bans Foreign Plant Sales To U.S. Amid Global Seed Mystery” (Wall Street Journal). “Amazon.com Inc. is barring foreign sales of seeds into the U.S. after thousands of suspicious packets, many postmarked from China, arrived at households around the world this summer. The move by Amazon comes as the mystery seeds led U.S. officials to raise alarms about the ease with which seed sales can occur on e-commerce sites, creating potential threats to U.S. agriculture.”
“U.S. Considers Blacklisting China’s Largest Chipmaker As Tech Tensions Escalate” (CNBC). The Commerce Department manages an unassumingly named “entities list” that restricts the foreign entities on it from receiving certain good produced domestically. DoD is in talks to add Semiconductor Manufacturing International Corporation (SMIC)—China’s largest manufacturer of semiconductors—to the list.
“Elon Musk’s Brother Kimbal Made More Than $8 Million Selling Tesla Shares 2 Days Before He Bought Them” (MarketWatch). Sell high, buy back low, pocket $8 million. Further proof that TSLA is an absolute circus of a stock.
“Tesla (TSLA) Excluded From S&P 500 Reshuffle Despite Being Worth 9x All 3 New Firms Combined” (Electrek). Speaking of TSLA being a circus, it looks like the gentry at Standard & Poor’s agree: S&P surprised some people this week when it announced that it would be replacing H&R Block, Coty, and Kohl’s from the index this week with Etsy, Teradyne, and Catalent—read: “not Tesla”—despite the fact that Tesla is worth nine-times as much as the latter three combined. Here, Elektrek makes a pretty good point: “I won’t pretend to understand the S&P committee, but if your goal is to be representative of the US stock market, I would think that Tesla should be included. It generates tens of billions in revenue per year, has been profitable for 4 quarters in a row, and it is worth over $300 billion.”
What we’re reading (9/5)
“The Stock Market Shakeout Is Likely Not Over Yet, Even With Friday’s Comeback” (CNBC). “Stocks reversed some of their worst losses Friday, but they are still expected to be choppy in the week ahead as investors return from the long Labor Day weekend…[i]nvestors took profits in tech names in the past week, amid worries that the market and Nasdaq, in particular, had become too frothy…[t]here are a few economic reports in the coming week, with the most important Friday’s report of consumer inflation[.]”
Justice Department Reportedly Plans To File Antritrust Case Against Google As Early As This Month” (The Verge). The Department opened its probe into Google last June, apparently focused on possible anti-competitive behavior in the internet search business. Separately, the Department opened a bigger probe into “big tech” writ large last July.
“Big Oil Just Isn’t As Big As It Once Was” (Washington Post). ExxonMobil’s market cap is about 1/3 of what it was in 2008, when it was ~$500 billion. GOOG, AMZN, AAPL, FB, and MSFT are each worth more than the top 76 energy companies combined.
“This Market Mayhem Will Test Robinhood’s Newbie Investors” (CNN Business). “The sudden return of turbulence on Wall Street is a rude awakening for newbie investors who grew accustomed to a stock market that went almost exclusively in one direction: straight up…[b]ut markets don't go straight up forever. On Thursday, the Dow plummeted more than 800 points, or 2.8%, and the S&P 500 suffered its biggest one-day drop from a record high since May 1999[.]”
“Oh, Is Disclosing The Source Of Half Our Revenue On A Page Called ‘How We Make Money’ A Big Deal?” (Dealbreaker). Speaking of Robinhood, the new-ish trading platform wildly popular with Millennials that all of us can and should thank for essentially forcing commissions to go to zero across the brokerage industry: “[u]nfortunately for Robinhood, disclosing conflict-of-interest-sounding sources of roughly half of your revenue is the kind of thing the SEC can be a real stickler about, and so it’s likely to have at least $10 million less to spend[.]”
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.”