What we’re reading (9/9)
“Bad News, Bulls: Bank Of America Sees Stocks Flatlining Through 2022” (Fortune). “The S&P 500 has posted a mighty rally so far this year, having already more than doubled from pandemic lows last year while reporting massive earnings growth. But some more bearish strategists aren’t convinced the party can go on into 2022. Bank of America, for one, is now predicting stocks will largely flatline through next year.”
“LuLaRoe Exposed: Inside An Alleged Billion-Dollar ‘Pyramid Scheme’” (Vanity Fair). “According to a 2019 suit filed by the Washington state attorney general, [the LuLaRoe] multilevel-marketing company is…a pyramid scheme that bilked thousands of people out of millions of dollars. According to the attorney general’s office, LuLaRoe made some of their retailers believe that if they invested between $500 and $5,000 in startup costs, they could ‘rescu[e] their families during financial crisis.’ (The suit was settled in 2021.)”
“Why U.S. Housing Prices Aren’t As Crazy As You Think” (A Wealth Of Common Sense). “There are structural and market forces that are causing these price gains, even if it all feels out of hand. You have household formation among the biggest demographic (millennials), generationally low interest rates, constrained supply from a lack of homebuilding following the housing crash and a pandemic that induced people to buy. But there’s another reason the housing market isn’t as crazy as you think — housing prices in the rest of the developed world have outpaced prices in the U.S. for some time now.”
“Digital Currencies Pave Way For Deeply Negative Interest Rates” (Wall Street Journal). “The main monetary power of the digital dollar comes from the abolition of bank notes. If people can’t hoard physical money, it becomes much easier to cut interest rates far below zero; otherwise the zero rate on bank notes stuffed under the mattress looks attractive. And if interest rates can go far below zero, monetary policy is suddenly much more powerful and better suited to tackle deflation.”
“American Probe Into German Company Elicits German Probe Into German Company” (Dealbreaker). “The Bundesanstalt für Finanzdienstleistungsaufsicht sounds terrifying. Generally speaking, it’s not, unless you are a short-seller or journalist with the temerity to uncover potential wrongdoing at a German company. If you’re one of those German companies, however, it’s usually a cuddly teddy bear. Much as it would like to, however—and certainly much as Allianz CEO Oliver Bäte would like it to—BaFin simply can’t ignore the growing number of U.S. regulatory probes in the same way it ignored the growing stack of client lawsuits over the company’s collapsed Structured Alpha hedge funds. And so, with regret, and belatedly as ever, the Germans are opening a probe of their own.”
What we’re reading (9/8)
“Elliott Management Has A More Than $1 Billion Stake In Citrix Systems” (Wall Street Journal). “Activist hedge fund Elliott Management Corp. has a more than $1 billion stake in Citrix Systems Inc. and wants the software company to take action to boost its lagging stock price, according to people familiar with the matter…[w]hile Elliott’s exact demands couldn’t be learned, it previously called for Citrix to focus on its core offerings and better allocate capital when the investor built a stake of more than 7% in June 2015. Jesse Cohn, Elliott’s managing partner who oversees its U.S. activist investing, joined Citrix’s board the following month as part of a settlement agreement.”
“Wall Street's Hottest Investor Is Betting Big On A Handful Of Stocks. Critics Say She's Playing With Fire” (CNN Business). “Some tech stock veterans also wonder if Wood is just an investing flavor of the month, comparing her to once-popular portfolio managers like Kevin Landis of Firsthand Funds, Alberto Vilar of Amerindo and Garrett Van Wagoner, who ran a popular emerging-growth fund in the late 1990s. Many of those tech funds imploded following the 2000 bubble…is Wood destined for similar ignominy?”
“Gensler’s Brewing Battle With Robinhood Could Prove Bloody” (New York Post). “[I]t’s never a smart thing to pick a fight with your chief regulator…[b]ut Robinhood isn’t picking the fight…the people there know what Gensler has proposed recently — a possible banning of something known as Payment for Order Flow, or PFOF — has existential ramifications for the brokerage firm. The firm makes most of its money through the practice. Its stock tanked last week on Gensler’s comments to the financial publication Barron’s about a possible ban.”
“The Debate We Should Be Having About The Federal Reserve” (The Hill). “[One] area of concern relates to financial distortions associated with the injection of excess liquidity via prolonged periods of quantitative easing by the Fed and other major central banks. Measures originally intended for financial emergencies are now being deployed by monetary authorities to achieve traditional macroeconomic goals. This in turn has caused financial markets to become addicted to a never-ending stream of easy money to sustain ever higher asset prices. Unsurprisingly, it has also encouraged speculative excesses. Unconventional Fed policies might unintentionally be contributing to a rise in inequality.”
“Investors Are Ignoring The Parallels Between Stocks Today And ‘Heady’ Years Of 1929, 1999 And 2007. Do This Next, Says Strategist.” (MarketWatch). “The S&P 500 is trading at a lofty 22.5 times forward earnings and its price-to-sales ratio of 3.1 times is far costlier than in 2000. The Nasdaq-100 tracking QQQ exchange-traded fund is trading at a 70% premium to its 200-week moving average, the biggest since 1999/2000…[t]he last time SPACs were as big as they are today? That’s right 1928/1929…[s]imilar to 1920 and 2000, margin debt has shot to new highs…Individual investors make up 20% of average daily volume for stocks, twice the level of two years ago. Many big market tops of the past — 1929, 1999/2000 — were marked by big jumps in investor activity.”
What we’re reading (9/7)
“World Shares At Record High As Investors Count On Fed Largesse” (Reuters). “Global stocks inched higher on Tuesday to a record high for the eight straight session as investors wagered the U.S. Federal Reserve is likely to delay the start of tapering its asset purchases after the soft U.S. jobs data…[t]he latest rally, which started after Federal Reserve Chair Jerome Powell's dovish speech at Jackson Hole Symposium late last month, received a further boost from a surprisingly soft U.S. payrolls report on Friday.”
“Traders Return To London Metal Exchange’s 144-Year-Old Ring” (Wall Street Journal). “Staff from the exchange’s eight dealing firms arrived early for work Monday, 18 months after Covid-19 swept through London and the 144-year-old LME closed the open-outcry ring for the first time since World War II. Dealers checked if equipment that matches trades and ‘squawks’ orders back to their head offices was working before commencing trading that would determine prices used in metal contracts world-wide.”
“Inside Instacart's Frenzied Summer Of Unsuccessful Dealmaking With Uber And DoorDash” (Business Insider). “Instacart's frenzied summer of unsuccessful dealmaking raises new questions about its business. While the grocery delivery service quadrupled in size last year due to the pandemic lockdown, it's now dealing with the reality of what its business will look like in less extraordinary times—and a more competitive landscape.”
“David Autor's Mix Of Insight, Error, And Confusion” (The Library of Economics and Liberty). A retort to the NYT op-ed from MIT economist David Autor that was featured in ‘What we’re reading’ yesterday. “It’s true that those who plan to work the fry station at White Castle shouldn’t plan on doing well in the labor market if they want that job long term. But surely Autor knows that the vast majority of people who take those jobs while young are not in those jobs 10 or even 5 years later. Those jobs are a stepping stone to better jobs and can teach young people some basic labor market skills: being punctual, taking responsibility, taking direction, and organizing their time, to name four important ones. That means that there actually is a lot of future in working the fry station at White Castle. Imagine that Autor had said: ‘There’s no future in going to middle school, grades 6 to 8.’ Everyone would see the problem with that reasoning. You won’t do well if you plan to be, and succeed in being, in middle school for the next 10 years. But everyone understands that middle school is a step on the way to better things.”
“Opportunity Unraveled: Private Information And The Missing Markets For Financing Human Capital” (Daniel Herbst and Nathaniel Hendren, working paper). “Investing in college carries high returns, but comes with considerable risk. Financial products like equity contracts can mitigate this risk, yet college is typically financed through non-dischargeable, government-backed student loans. This paper argues that adverse selection has unraveled private markets for college-financing contracts that mitigate risk.”
What we’re reading (9/6)
“Good News: There’s A Labor Shortage.” (David Autor, New York Times). “Many employers are alarmed about the current labor shortage — the phenomenon of a labor market with more job openings than unemployed workers. There are two supposed problems, they allege. First, that the labor shortage is caused by government benefits that discourage work. And second, that the shortage will harm the economy. Both claims are wrong.”
“Aluminum Hits Decade High After Guinea Coup Imperils Bauxite Supplies” (Wall Street Journal). “Aluminum prices rose to their highest level in 10 years Monday after a military coup in mineral-rich Guinea threatened to snarl the lightweight metal’s supply chain. Three-month aluminum forward contracts on the London Metal Exchange rose 0.9% to $2,757 a metric ton, their highest level since early 2011. Shares of mining companies and aluminum producers also jumped.”
“Your 401(k) Is Pocketing Fees On Your Investment. Many People Don’t Realize It.” (Washington Post). “Many people don’t realize they are paying multiple fees that generally fall under two categories: administrative fees and investment-related fees. Bundled into those charges are expenses for legal, accounting and record-keeping services. You might be paying for access to customer service help or investment advice. Funds that are actively managed might incur higher fees. If you work for a small company, your plan fees and expenses might be higher. ‘Fees remain a huge issue in the 401(k) industry,’ said Edward Gottfried, director of product at Betterment’s 401(k) business. ‘They’re frequently too high and rarely transparent enough to retirement savers.’”
“Renaissance Execs Will Pay $7 Billion to Settle a Decade’s Worth of Disputed Taxes. Here’s What Jim Simons Earned During That Period.” (Institutional Investor). “By any measure, Renaissance Technologies’ $7 billion settlement with the Internal Revenue Service is stunning and historical…[t]he dispute stems from the tax treatment of certain options transactions undertaken by Renaissance’s legendary Medallion fund from 2005 to 2015, according to the letter. No other Renaissance fund engaged in this practice. ‘The dispute turned on whether the options should be respected as separate instruments for tax purposes or, as the IRS contended, disregarded so as to treat the Medallion entities that held the options as if they actually held the individual securities positions in the option portfolios,’ Renaissance explained in the letter.”
“Lyft, Uber Say They Will Defend Drivers Sued Under Texas Abortion Law” (Los Angeles Times). “Lyft Inc. and Uber Technologies Inc. pledged to pay legal fees for drivers who are sued under Texas’ new restrictive abortion law, which threatens to hold anyone who helps a woman obtain the procedure legally liable.”
What we’re reading (9/5)
“How Close Is The U.S. Economy To Normal?” (Morningstar). “[T]he surge in delta-variant coronavirus cases will only moderately delay the return to normal. Vaccinated individuals are mostly safe from severe illness, while those who haven't received vaccines largely aren't concerned about coronavirus risk.”
“U.S. Ports See Shipping Logjams Likely Extending Far Into 2022” (Wall Street Journal). “Leaders of some of the busiest U.S. ports expect congestion snarling maritime gateways to continue deep into next year, as the crush of goods from manufacturers and retailers looking to replenish depleted inventories pushes past shipping’s usual seasonal lulls.”
“Froth In The Stock Market Makes Impending Correction Look Almost ‘Obvious,’ Miller Tabak Strategist Says” (CNBC). “‘There’s a huge amount of froth in the marketplace right now much like we’ve seen in other important tops of the market that only became obvious in hindsight,’ Maley told CNBC’s ‘Trading Nation’ on Thursday. Maley sees warning signs in today’s market that look similar to red flags during the 1999-2000 and 2007-2008 peaks. During the dotcom bubble, for example, he says stocks shot sky-high no matter the fundamentals much like AMC and GameStop have this year.”
“The Everything Bubble & TINA 2.0” (FTX Research). “If global central banks and governments are going to continue to print money, investors are faced with a TINA [There Is No Alternative] 2.0 predicament, where cash is literally burning a hole in their pockets, pushing them not just into risk assets, but further out the risk curve, exacerbating wealth inequality along the way, leading to even further risk taking. So are we in an everything bubble? There’s most certainly pockets of excess in nearly every corner of the financial markets, but there’s also ample opportunity.”
“Stocks Actually Perform Better When Investors Are Uncertain About Economic Policy, Despite Fears To The Contrary, Says A Wall Street Chief Strategist” (Business Insider). “Investors have been trained to believe that the stock market hates uncertainty, but historical performance tells a different story, according to Leuthold Group chief investment strategist James Paulsen…[u]ncertainty is high now among investors as they wonder when the Fed will taper its monthly bond purchases (and by how much), when the Fed will raise interest rates, and whether Congress will be able to spend as much as President Biden wants them too.”
What we’re reading (9/4)
“Wall St Week Ahead Investors Grow Wary As Stocks Hit New Highs” (Reuters). “Investors are girding their portfolios for potential stock market volatility, even as equities hover near fresh highs after logging seven straight months of gains…[i]n derivatives markets, the gap in price between the front month Cboe Volatility Index futures contract and the VIX index itself is higher than it has been about 85% of the time over the last five years. This suggests some investors expect the calm in stocks to give way to more pronounced price swings in the coming weeks and months.”
“What Every Investor Should Understand About Stagflation—But Often Doesn’t” (Wall Street Journal). “The prospect that inflation’s recent spike may be more than transitory, coupled with the possibility the economy will grow slowly, has raised the specter of the ‘stagflation’ era of 50 years ago. But be careful about making investment decisions based on what happened in that era—marked by a combination of stagnant growth and higher inflation. While the general outlines of the stagflation era are widely known, there are many misconceptions about how particular asset classes fared.”
“Bitcoin Miners And Oil And Gas Execs Mingled At A Secretive Meetup In Houston – Here’s What They Talked About” (CNBC). “On a residential back street of Houston, in a 150,000 square-foot warehouse safeguarding high-end vintage cars, 200 oil and gas execs and bitcoin miners mingled, drank beer, and talked shop on a recent Wednesday night in August…Bitcoin miners care most about finding cheap sources of electricity, so Texas – with its crypto-friendly politicians, deregulated power grid, and crucially, abundance of inexpensive power sources – is a virtually perfect fit. The union becomes even more harmonious when miners connect their rigs to otherwise stranded energy, like natural gas going to waste on oil fields across Texas.”
“What You’ve Lost In This Bull Market” (Wall Street Journal). “You probably feel safer riding your bicycle fast if you’re wearing a helmet. You’d be more inclined to take curves on a mountain road at high speed in a sturdy SUV than you would in a compact car. In much the same way, the low-interest-rate policy of the Federal Reserve and other central banks around the world has made the market environment less risky—thereby prodding investors into behavior that’s more risky.”
“Network Effects Are Overrated” (DealBook). “The problem with this [network effects] narrative is that it ignores the numerous ways in which the new digital platforms actually make businesses more vulnerable to competitive attack compared with the analog models that they have disrupted. The ease with which customers can switch undermines captivity and the asset-light nature of these businesses both lowers entry barriers and the level of activity required to break even.”
What we’re reading (9/3)
“U.S. Payroll Growth Slowed In August” (Wall Street Journal). “U.S. hiring slowed sharply in August as the surging Delta variant dented the pace of the economic recovery. The U.S. economy added 235,000 jobs last month, the Labor Department said Friday, falling far short of economists’ estimates for 720,000 new jobs. Job growth last month was also down from upwardly revised monthly payroll gains of 1.1 million in July and 962,000 in June.”
“Get Ready For A Possibly Record-Breaking Rush Of IPOs This Fall” (CNBC). “The IPO pipeline this fall is filling up quickly. The IPO market has already had its busiest year since the internet bubble in 2000, and the fall will likely set a record. Roughly 90 to 110 initial public offerings are expected in the next four months, putting 2021 on track for about 375 deals raising $125 billion, according to a new report from Renaissance Capital. Should that happen, it would make 2021 the biggest year ever for total capital raised and the busiest year by deal count since the 2000 internet bubble.”
“Corporate America Is Lobbying For Climate Disaster” (Paul Krugman, New York Times). “Why does Mickey Mouse want to destroy civilization OK, that’s probably not what Disney executives think they’re doing. But the Walt Disney Company, along with other corporate titans, including ExxonMobil and Pfizer, is reportedly gearing up to support a major lobbying effort against President Biden’s $3.5 trillion investment plan — a plan that may well be our last chance to take serious action against global warming before it becomes catastrophic.”
“Private Equity’s Potential Payday From Build Back Better” (American Prospect). “Legislation with the size and scope of the $4 trillion ‘Build Back Better’ agenda is like a Bat-Signal for lobbyists, urging them to swarm Capitol Hill without delay. Literally thousands of companies, organizations, and trade groups have lobbied on one or more of the bills in this package. But one industry’s representatives keep showing up over and over again, whether in formal lobbying sessions in Congress or more informal meetings: private equity.”
“Nobel Prize-Winning Economist Joseph Stiglitz Explains Why Today's Bull Market Isn't Sustainable - And Why He Welcomes The US Labor Shortage” (Business Insider). “The reason he welcomes the ongoing recovery towards maximum employment is that it would move the economy ‘out of this world of zero-interest rates.’ ‘It distorts risk-taking. It creates bubbles,’ he said about major US indices hitting record highs on a daily basis. ‘It would actually be a good move - have a tighter labor market and a restoration of interest rates to more normal levels.’”
What we’re reading (9/2)
“Should I Sell When The Stock Market Wobbles? Some Advice” (Washington Post). “A little more than a week ago financial markets appeared on the edge of a precipice, about to be overwhelmed by the delta variant’s insidious spread and the plateauing economic recovery. Yet just days later, the S&P 500 put in back-to-back record highs. Such market tremors and uncertainty are disconcerting for market professionals. But they are particularly nerve-wracking for private investors, especially perhaps for the 15% who only began investing last year. The question for non-professional investors is, when the storm clouds gather, should you stick or twist?”
“Active Traders Are Seeing Their Account Balances Continue To Rise” (CNBC). “A new Schwab report on self-directed brokerage accounts within 401(k) plans indicates that active traders have done well in the past year. The average account balance in the Schwab Personal Choice Retirement Account in June was up by 22%, to $348,183 from $285,616 a year earlier. The report includes data collected from approximately 174,000 retirement plan participants with balances between $5,000 and $10 million. While brokerage accounts are normally associated with active traders, the average Schwab trader isn’t exactly a rabid day trader. The average account made 13.8 trades in Q2, about one trade a week, down from 19.6 in the first quarter.”
“Enjoy the Calm, But Don’t Forget Volatility” (Fisher Investments). “While they are regular occurrences, substantial pullbacks draw reams of attention—and pundits’ explanations about why more trouble must lie in store. But letting this influence your portfolio decisions generally isn’t beneficial. If you can identify a bear market—a typically lasting, fundamentally driven decline exceeding -20%—early enough, taking action can help, allowing you to sidestep negativity and buy back in at lower levels later…[b]ut sentiment-driven wiggles are much more common. Timing them is flawed strategy, in our view.”
“Home Prices And The M2 Surge” (Calafia Beach Pundit). “The M2 money supply is now (as of the end of July) about $3.7 trillion above its long-term trend line. That extra $3.7 trillion can be found almost entirely in retail bank checking and deposit accounts, all of which are readily convertible into spendable cash. We have never before seen anything like this in the monetary history of the US. We have seen things like this in Argentina, however, where soaring inflation has always been preceded and accompanied by huge growth in the money supply. Milton Friedman must be rolling over in his grave these days.”
“SPAC Rout Erases $75 Billion In Startup Value” (Wall Street Journal). “The blank-check boom has turned into a rout. More than six months after the SPAC craze crested, a broad selloff has wiped about $75 billion off the value of companies that came public through special-purpose acquisition companies, according to a Dow Jones Market Data analysis of figures from SPAC Research. A group of 137 SPACs that closed mergers by mid-February have lost 25% of their combined value. At one point last month, the pullback topped $100 billion. The analysis doesn’t include companies that hadn’t closed mergers as of mid-February or those that are no longer trading.”
August 2021 performance update
Hi friends, here with a quickly monthly performance update. The key numbers:
Prime picks: -1.48%
Select picks: +0.31%
SPY S&P 500-Tracking ETF: +2.55%
Bogleheads portfolio (80% VTI + 20% BND): +1.82%
While pleased to the Select portfolio continuing its better 2021 than 2020, I am naturally disappointed by Prime’s August. On the one hand, we had a few big losers in the month (IPGP down 22.29%, TTWO down 8.23% possibly related to China gamer-crackdown news); on the other hand, that’s the nature of running a more concentrated portfolio than finance treatises would typically advise. Some down months are surely to be expected, but tough to swallow when the market is up as much as it was in the month. Frankly, if the market is going to rise relatively linearly (note the more or less straight black line below on a YTD basis), one would be hard pressed not to index hard on it. The history of financial markets teaches that the market overall doesn’t, however, tend to just increase linearly. It’s a long game and there are plenty of risks on the horizon (more China news, rate increases/Fed tapering asset purchases, growth re-forecasting, delta/lambda/other novel covid variants), so in the meantime I’ll look ahead and hope for better results in months to come in the event the rotation back to value stocks that some analysts think is likely to occur does in fact manifest.
Stoney Point Total Performance History
What we’re reading (9/1)
“The World Is Still Short Of Everything. Get Used To It.” (New York Times). “The Great Supply Chain Disruption is a central element of the extraordinary uncertainty that continues to frame economic prospects worldwide. If the shortages persist well into next year, that could advance rising prices on a range of commodities. As central banks from the United States to Australia debate the appropriate level of concern about inflation, they must consider a question none can answer with full confidence: Are the shortages and delays merely temporary mishaps accompanying the resumption of business, or something more insidious that could last well into next year?”
“Fidelity Wants to Add 9,000 Jobs by Year-End” (Wall Street Journal). “Fidelity Investments plans to hire another 9,000 employees this year to help its businesses keep pace with the surge in demand for stock-trading and other personal-investing services…[d]rawn to the market’s rally, individual investors have changed the fortunes of the brokerage industry. The no-commission stock trades and low-fee investment funds now offered by many firms have brought in plenty of new clients. They also have thinned money managers’ profit margins and forced them to compete on price. Traditional products, like stock- and bond-picking mutual funds, have been leaking client money.”
“Social Security Won't Be Able To Pay Full Benefits By 2034, A Year Earlier Than Expected Due To The Pandemic” (CNN Business). “Social Security will have to cut benefits by 2034 if Congress does nothing to address the program's long-term funding shortfall, according to an annual report released Tuesday by the Social Security and Medicare trustees….[b]y that time, the combined trust funds for Social Security will be depleted and will be able to pay only 78% in promised benefits…[t]he Covid-19 pandemic and economic recession are to blame for moving up the depletion rate by a year, driven by the big drop in employment and resulting decline in revenue from payroll taxes. The trustees also project a higher mortality rate through 2023 and a delay in births in the short term.”
“Wealthy Lobbyists Have Already Slashed Biden’s Tax Reform by Three-Quarters” (New York Magazine). “[President] Biden campaigned on a proposal to increase taxes on the wealthy by roughly $3.5 trillion over a decade. Nobody in Washington currently believes he will sign a tax hike anywhere close to that magnitude. The current predictions floating around — Politico’s tax newsletter is one publication that has used this estimate — peg the total at around a trillion, give or take. The most striking thing about the decision by moderate Democrats to scale back Biden’s plan by some three-quarters is that we have no idea what the rationale is.”
“Demographics, Wealth, And Global Imbalances In The Twenty-First Century” (Adrien Auclert, et al., working paper). “We use a sufficient statistic approach to quantify the general equilibrium effects of population aging on wealth accumulation, expected asset returns, and global imbalances…our model predicts that population aging will increase wealth-to GDP ratios, lower asset returns, and widen global imbalances through the twenty-first century. These conclusions extend to a richer model in which bequests, individual savings, and the tax-and-transfer system all respond to demographic change.”
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 today (August 31). As a note, we’ll be measuring the performance on these picks from the first trading day of the month, Wednesday, September 1, 2021 (at the mid-spread open price) through the last trading day of the month, Thursday, September 30, 2021 (at the mid-spread closing price).
You can check out the latest picks here, and stay tuned for performance results for August.
What we’re reading (8/31)
“Day Of The Unicorn Comes For Politico” (New York Sun). “As feats of publishing entrepreneurship go, it’s one for the record books, or at least the business school case studies — Politico, a Washington-centric mostly online news organization founded in 2007, will be sold to the German publisher Axel Springer for a reported $1 billion. If that sum is even close to being accurate, it’s staggering. Time magazine was sold in 2018 to Marc Benioff and his wife Lynne Benioff for $190 million. The Washington Post was sold to Jeff Bezos in 2013 for $250 million.”
“Are Value Stocks Cheap for a Fundamental Reason?” (AQR). “We have been discussing the attractiveness of the value factor for many months based on the unusually high value spread, which compares the valuation multiples of expensive stocks to cheap stocks. This metric is still extremely cheap… 90th+ percentile cheap across all regions…the current high value spread is forecasting high expected returns, not lower than usual fundamental growth rates for cheap versus expensive stocks.”
“Hotel Stocks Are Improving, but Risks Persist” (Wall Street Journal). “Hotel REITs are among the riskier real-estate bets because rooms turn over every day and travel is particularly vulnerable to economic swings. They were among the hardest hit when the pandemic began. New data suggest things are getting better. In the second quarter, hotel REITs’ cumulative funds from operations—an earnings metric widely used in commercial real estate—turned positive for the first time since early last year, according to the National Association of Real Estate Investment Trusts.”
“Robinhood Tanks After SEC Chair Tells Barron’s That Banning Payment For Order Flow Is A Possibility” (CNBC). “Shares of Robinhood dropped Monday amid several bouts of bad news for the brokerage app. Robinhood’s stock fell 6.9% to $43.64 per share after Securities and Exchange Commission Chairman Gary Gensler told Barron’s that banning the controversial practice of payment for order flow is ‘on the table.’ Gensler told the outlet that payment for order flow — the back-end payment brokerages receive for directing clients’ trades to market makers — has ‘an inherent conflict of interest.’”
“Why Do We work Too Much?” (The New Yorker). “In the modern office, stress has become a default metric for judging whether we are busy enough…[a]s the anthropologist James Suzman elaborates in his recent book, “Work: A History of How We Spend Our Time,”…‘[e]ver since some of our ancestors substituted their bows and digging sticks for plows and hoes, death by overwork has been a thing…[but what drives ‘death by overwork’ today is employees’] own ambitions refracted through the expectations of their employers.’”
What we’re reading (8/30)
“U.S. Gasoline Jumps, Oil Steady As Hurricane Ida Roils Supplies” (Bloomberg). “U.S. gasoline futures jumped and oil was steady after Hurricane Ida barreled ashore in Louisiana, disrupting energy supplies in the world’s largest economy at a time of rising commodity prices Gasoline for October spiked more than 4% higher in New York before paring gains, while West Texas Intermediate crude was little changed. Last week, WTI rallied 10% as investors wagered global demand would weather the setback posed by the spread of the delta coronavirus variant.”
“Tiger Funds Rocked By Latest Peloton Woes” (Institutional Investor). “More woes for Peloton Interactive. Shares of the online exercise company — a Wall Street favorite during the pandemic-related shutdown — fell more than 6 percent Thursday in after-market trading after the company reported disappointing quarterly results [and] announced a sharp price reduction in its critical product[.]”
“Peloton Investors Face A New Reality As Fitness Company’s Costs Eat Into Profits” (CNBC). “Peloton investors were in for a rude awakening on Thursday. Many expected to see the connected fitness equipment maker report slowing sales. Gyms have reopened, and outdoor runs and vacations beckoned during the summer months. What investors hadn’t anticipated was a 20% price cut in the company’s top-selling product and a ramp up in marketing spending. Growth is slowing, and it’s less profitable growth.”
“Elizabeth Holmes' Trial Is Set To Begin: Here's What You Need To Know” (CNN Business). “Elizabeth Holmes, the disgraced founder and former CEO of Theranos, is set to go to trial this week, more than three years after being indicted on multiple federal fraud and conspiracy charges over allegations she knowingly misrepresented the capabilities of her company's proprietary blood testing technology.”
“New Life And Work Choices Revitalize Exurbs, Bringing New Strains” (Wall Street Journal). “Exurban areas, which include 240 counties as defined by the Brookings Institution, grew at almost twice the national rate over the past decade, a shift that began before the pandemic. There are signs it is accelerating this year as Americans prepare for an expected post-pandemic landscape where increased working from home reduces the need to commute.”
What we’re reading (8/29)
“How The Stock Market Can Ride An Economic ‘Hat Trick’ To New Highs Through Year-End, Even As The Threat Of A Correction Mounts, According To One Wall Street Chief Strategist” (Business Insider). “[I]f COVID-19 cases peak sooner than later, economic growth should begin to improve and force investor expectations higher, according to the note. Further, a weaker US dollar and further inflation could produce another bump higher for commodity prices. A rebound in economic surprises, a weakening US dollar, and rising commodity prices represents the trifecta of an economic hat trick that could power stock prices higher, according to [Leuthold Group strategist Jim] Paulsen.”
“Fed Faces New Challenge Spelling Out Employment Goals” (Wall Street Journal). “Assessing maximum employment, often described as the unemployment rate consistent with stable inflation, will be a delicate task for the Fed because officials concluded, in retrospect, that they overestimated it during the previous expansion and possibly raised interest rates too soon. Their deliberations figure to be more difficult now because of how the Covid-19 pandemic has upended normal economic activity—for example, by making it harder to determine how many people who left the labor force last year will return.”
“Wood You Look At That: Lumber Is Cheap Again” (Fortune). “What's going on? As lumber prices reached record levels this spring, many DIYers and builders simply stopped buying. At the same time, sawmills were upping production in order to cash in on the record prices. That, of course, was a prefect recipe for a correction. But now with prices still freefalling, buyers have little reason to jump back in. Thus that's why we've shifted all the way from a wood shortage to an oversupply. In a matter of three months, lumber has gone from exorbitant to relatively affordable levels.”
“OnlyFans And The Myth Of Owning Your Hustle” (Vanity Fair). “When OnlyFans, a social platform with over 130 million users, announced what essentially was a change in the company’s content guidelines last week, the backlash was swift…what OnlyFans’ betrayal of sex workers—followed by that abrupt reversal—[…] makes apparent is the central mythology undergirding the rising class of creator-driven platforms at large: the flawed belief that you, the creator, are ever the one in the driver’s seat.”
“Niall Ferguson On Why The End Of America’s Empire Won’t Be Peaceful” (The Economist). “[I]t is all too easy to see a sequence of events unfolding that could lead to another unnecessary war, most probably over Taiwan, which Mr Xi covets and which America is (ambiguously) committed to defend against invasion—a commitment that increasingly lacks credibility as the balance of military power shifts in East Asia. (The growing vulnerability of American aircraft carriers to Chinese anti-ship ballistic missiles such as the DF-21D is just one problem to which the Pentagon lacks a good solution.) If American deterrence fails and China gambles on a coup de main, the United States will face the grim choice between fighting a long, hard war—as Britain did in 1914 and 1939—or folding, as happened over Suez in 1956.”
What we’re reading (8/28)
“The Ghost Of Arthur Burns Haunts A Complacent Federal Reserve That’s Pouring Fuel On The Fires Of Inflation” (MarketWatch). “The Fed poured fuel on the Great Inflation by allowing real interest rates to plunge into negative territory in the 1970s. Today, the federal funds rate is currently more than 2.5 percentage points below the inflation rate. Now, add open-ended quantitative easing—some $120 billion per month injected into frothy financial markets—and the largest fiscal stimulus in post-World War II history. All of this is occurring precisely when a post-pandemic boom is absorbing slack capacity at an unprecedented rate. This policy gambit is in a league of its own.”
“Crypto Firms Want Fed Payment Systems Access—And Banks Are Resisting” (Wall Street Journal). “Cryptocurrency companies want to tap into the Federal Reserve payments systems that traditional banks use to move money around quickly. The banks are pushing back. The companies include Avanti Bank, which aims to provide custody services for institutional investors in cryptocurrencies, and Kraken, a cryptocurrency exchange platform. They say direct access to the Fed’s payment systems would allow them to more quickly and cheaply process orders from customers buying and selling digital assets. Currently they must partner with traditional banks that have accounts with the Fed.”
“Small Manufacturers Are The Most Optimistic” (Axios). “More small businesses in the manufacturing sector expect to see higher sales next quarter, relative to operators in other industries…[a] National Federation of Independent Business quarterly report released Thursday shows that a net positive 9% of small manufacturers said in July that they expected sales growth in the next 3 months.”
“We’re Burying Our Kids In Debt (Just Not The Way You Think)” (New York Times). “To keep the lights on, the School District of Philadelphia — like thousands of districts across the country — has increasingly turned to debt financing: They issue bonds to borrow money from financial markets, either with their own bonding authority or through municipal governments. Investment funds purchase these bonds, thus lending the funds to local governments or school districts, who promise to repay the loans, plus interest and issuance fees. Debt-financing public education has not only failed to provide schools with sufficient funds; it has also imposed long-term costs. What seems like a fix for school districts’ strapped budgets has actually trapped them in cycles of austerity, exacerbating the very inequalities public education is designed to address.”
“The Simple Tricks That Turned One Investor’s $70,000 Retirement Account Into A $264 Million Fortune” (Washington Post). “You can sometimes find fascinating information in footnotes — and that’s where I discovered the amazing investment returns of Ted Weschler, 60, a relatively low-profile money manager based in Charlottesville whose retirement account has outperformed the S&P 500 by hundreds to 1. Weschler, who operates out of a two-person shop located above a bookstore, has been one of Warren Buffett’s deputies at Berkshire Hathaway since 2012, where he manages billions of Berkshire bucks.”
What we’re reading (8/27)
“It’s Time For The Fed To Rethink Quantitative Easing” (Larry Summers, Washington Post). “The Fed is running quantitative easing at current levels not because anyone has analyzed that as appropriate given current conditions. Rather, there is a felt need to maintain credibility given previous commitments and a reluctance to accept the immediate pain and dislocation associated with changing course, coupled with faith in the ability to manage the situation down the road.”
“At The Jackson Hole Meeting, The Fed Ponders An Uneven Recovery” (The Economist). “Business cycles are never perfectly symmetric across time and space. Yet they have rarely been as uneven as the rebound from covid-19. Some parts of the global economy are straining to meet roaring demand even as others are limping along, battered by the spread of the virus. It is enough to take the fun out of monetary policy. Indeed, the Delta variant kept attendees of an annual symposium for central bankers from meeting in Jackson Hole, Wyoming, in the shadow of the majestic Teton mountains. Instead, they peered at their computer screens as they discussed how to shepherd an unbalanced economy through uncertain times.”
“Powell’s Benign View On Inflation Is Getting Pushback At The Fed, And Elsewhere” (CNBC). “The Fed chief devoted a long passage in the remarks [at Jackson Hole] to rebut the notion that inflation posed a longer-term structural problem to the economy. He attributed most of the current price rise to a surge in longer-lasting ‘durable’ goods that in pre-pandemic times actually had a long-running negative inflation rate. Moreover, he said there is evidence that one key area of inflation, used car prices, has stabilized and is likely to bring the overall rate much closer to the longer trend. Earlier Friday morning, the Commerce Department reported that the Fed’s preferred inflation gauge, the personal consumption expenditures price index, had expanded by 3.6% from a year ago, the fastest pace in about 30 years.”
“SEC Launches Review Of Online Strategies Used By Brokers, Advisers” (Wall Street Journal). “The Securities and Exchange Commission launched a wide-ranging review Friday of the online strategies that brokers such as Robinhood Markets Inc. and investment advisers use to interact with customers, aiming to determine whether tools like smartphone notifications are in the best interests of investors. The SEC solicited public comments Friday on ‘digital engagement practices’ in the financial industry. These include social-networking tools, investing games and contests with prizes, digital badges, and leaderboards, notifications, celebrations for trading and chatbots. Requests for public comment often represent a first step in the process of developing new rules to guide behavior in the industry.”
“America’s Big Oil Problem” (Project Syndicate). “For decades, the oil industry has produced manipulative studies and funded major marketing campaigns to convince the public that oil and “natural” gas were essential for economic growth and not harmful to the planet. It has also spent liberally to influence lawmakers at the national and state levels, including in California, a climate leader, thereby blocking climate-related legislation and policies. US lawmakers must start listening to voters, escape the grip of oil and gas lobbyists, and enact policies that recognize the scale of the climate crisis.”
What we’re reading (8/26)
“Why Is The Supply Chain Still So Snarled? We Explain, With A Hot Tub” (Wall Street Journal). “The global supply chain is an intricate ballet of container ships, airplanes, trucks and trains. The coronavirus pandemic threw it out of whack. This is why you often can’t buy the goods you want…Covid-19 infections caused by the Delta variant are adding fresh uncertainty. Supply bottlenecks, especially at ports, continue to delay products of all kinds.”
“Skin in the Game: FOMC Style” (Jupiter Asset Management). “We find it noteworthy that around 60% of Powell’s net investable worth is in (primarily US) equities, a share which is likely higher today given the stellar performance of said equities since the filing (+39% for the S&P 500). Equally noteworthy is what is absent from the portfolio. In particular, we find it interesting that Powell owns no Treasuries. True, there’s an exposure to a more tax-efficient version – municipal bonds –, but if Powell’s portfolio is a variant on the classic 60-40, there’s a very clear underweighting of nominal assets relative to that framework.”
“Inflation Could Stay High Next Year, And That’s OK” (New York Times). “[Adam] Posen [of the Peterson Institute for International Economics] expects inflation to be above 3 percent next year — nevertheless, he thinks that the Fed should keep short-term rates near zero. That’s because he thinks the burst of inflation will recede after 2022. And he doesn’t think another year of 3-plus percent inflation would be enough to embed expectations of high inflation in the minds of consumers and businesses.”
“Is There A Link Between Vaccination Rates And Opening Up International Air Travel?” (OAG). “For a while I imagine many of us assumed this would be so: The more people were vaccinated the more we’d be able to fly where we want. However, the data seems to show that it isn’t quite that simple. At OAG we’ve been looking at the correlation between vaccination rates by country and international air capacity for each country relative to where capacity was two years ago. What we see is that vaccination rates in and of themselves are not a guide to how easy international air travel is. It’s clear that government policy (or lack of it) is a much more important determinant of airline recovery.”
“There’s A Battle Brewing Over Salaries For Remote Workers — And It Could Change The Way Everyone Gets Paid” (Business Insider). “The fight over remote compensation — whether employees can take their big-city wages with them wherever they choose to live — is the next big battle in the war over working from home. Some companies have rejected the hardline stance, telling employees who relocate that they can keep their coastal salaries. Others, including Reddit and Spotify, are going even further: In a radical departure from traditional compensation policies, they plan to eliminate all geographic differences in US salaries, paying every employee as if they lived and work in San Francisco. It's hard to overstate how consequential this shift in compensation could be, not just for those of us who work from home but for cities and states all across the US.”
September picks available soon
We’ll be publishing our Prime and Select picks for the month of September before Wednesday, September 1 (the first trading day of the month). 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 (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Tues., August 31). Performance tracking for the month of September will assume the September picks are bought at the open price (at the mid-point of the opening bid and ask prices) on the first trading day of the month (Wednesday, September 1).
What we’re reading (8/25)
“Companies Strike While The Stock Market Is Hot” (Wall Street Journal). “U.S. companies are rushing to cash in on soaring stock prices. It isn’t just the white-hot market for initial public offerings. Companies are returning to the public markets to issue shares and raise cash from investors at the same time that existing shareholders are tapping the public market to unload their stockholdings at a record clip.”
“Record-High Stock Prices Are Increasing The Risk Of ‘Fragility Shocks' In The Next Few Months, Bank Of America Says” (Business Insider). “Record-high stock prices and a possible change in Federal Reserve policy have heightened the risk of ‘fragility shocks’ hitting equities in the coming months, Bank of America analysts said. Last week's sell-off on Tuesday and Wednesday was a sign that investor sentiment remains nervy and could be vulnerable to bigger shocks in the future, analysts including Riddhi Prasad and Benjamin Bowler said in a note on Tuesday.”
“Mortgage Rates Fall For The First Time In 3 Weeks, But Demand Is Still Light” (CNBC). “After rising for three weeks, mortgage rates came back down a bit last week, but it didn’t seem to have much effect on mortgage demand. Total application volume rose 1.6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.03% from 3.06%, with points falling to 0.29 from 0.34 (including the origination fee) for loans with a 20% down payment.”
“Where Are The Borrowers?” (DealBook). “The job of a banker, an old joke goes, can be summed up by the 3-6-3 rule: Gather deposits at 3 percent, lend them out at 6 percent and be on the golf course by 3 p.m. These days, banks pay next to nothing in interest, yet they are awash in deposits. They also offer loans at rock-bottom rates, yet see little demand from borrowers. What are they doing with the money instead? Bingeing on bonds, The Times’s Matt Phillips reports.”
“How Blackstone Built The Perfect Pandemic Portfolio In Real Estate” (Fortune). “On a spring day in 2019, the chief of property investments in the Americas for private equity powerhouse Blackstone was gazing down from the rooftop terrace of the 14-story, avant-garde Netflix building on L.A.’s Sunset Boulevard—the streaming giant’s creative headquarters. The jammed parking lots, the parade of technicians, writers, actors, and producers rushing from office towers to low-slung studios, all told Meghji that this buzzing epicenter for content creation exemplified one of the best real estate opportunities on the planet. ‘This wasn’t just another cluster of office towers,’ he recalls. ‘It was critical infrastructure for making the online entertainment that was already exploding in a new way[.]”
More covid origins news…
Interest in “alternative” explanations for covid’s origins (explanations that were previously considered heterodox but apparently no longer are) seems to be continuing to gather momentum. At first blush, this whole story wouldn’t seem relevant to investors. On the contrary, I think, the potential implications in terms of the credibility and reliability of various institutions and experts are profound, and especially so for those weighing choices about whether to trust their assets to supposed experts versus letting algorithms, data, and machines to the thinking.
In light of previously suggesting on this blog that arguments privileging the belief that the novel coronavirus could not have escaped from a lab were quite weak as a logical matter (see here), the following seems relevant! Not sure what he means by “other perspectives,” but that’s a far cry from language like “Coronavirus almost certainly came from an animal, not a lab leak, top scientists argue”. To wit (emphasis added):
The director of the National Institutes of Health said Monday it appears Covid-19 originated from an animal, but he didn’t rule out the possibility that scientists at the Wuhan Institute of Virology were secretly studying it and that it could have leaked out from there.
It’s still unknown if the virus leaked out of a Wuhan lab, NIH director Dr. Francis Collins said Monday in an interview on CNBC’s “Squawk Box,” adding that the World Health Organization’s investigation into the origin of the coronavirus has gone “backwards.”
“The vast evidence from other perspectives says no, this was a naturally occurring virus,” Collins said. “Not to say that it could not have been under study secretly at the Wuhan Institute of Virology and got out of there, we don’t know about that. But the virus itself does not have the earmarks of having been created intentionally by human work.”
The WHO investigation has been made harder by China’s refusal to participate, says Collins.
“I think China basically refused to consider another WHO investigation and just said ‘nope not interested’,” Collins told CNBC’s Squawk Box