What we’re reading (11/10)
“Americans Have Never Been In So Much Debt” (CNN Business). “American households are carrying record amounts of debt as home and auto prices surge, Covid infections continue to fall and people get out their credit cards again. Between July and September, US household debt climbed to a new record of $15.24 trillion, the Federal Reserve Bank of New York said Tuesday. It was an increase of 1.9%, or $286 billion, from the second quarter of the year.”
“‘The End Of The GE We Knew’: Breakup Turns A Page In Modern Business History” (Wall Street Journal). “General Electric Co., the company that for more than a century stood as a beacon of U.S. manufacturing might and management prowess, will split into three public companies, drawing the curtain on an era of modern business—the dominance of industrial conglomerates. The decision, announced Tuesday by Chief Executive Larry Culp, ends the myth that GE wielded a magic touch to run companies better, and make everyone richer, through its management of varied enterprises around the world.”
“Uber, DoorDash And Similar Firms Can’t Defy The Laws Of Capitalism After All” (The Economist). “[L]ook deeper and evidence is mounting that business flywheels are not defying the laws of capitalism. The money that went into building them recalls the railway mania among other past speculative investment crazes. The nine firms that have gone public so far [Uber, Lyft, Didi, and six delivery firms, including DoorDash, Delivery Hero, Meituan, and Zomato] collectively raised more than $100bn…[s]eemingly bottomless pits of investors’ cash went to subsidising rides and deliveries to juice demand. This reached absurd points: a pizzeria could make money by ordering its own food for a discounted price on DoorDash (which then paid back the regular amount).”
“Zillow Insiders Are Blaming An Internal Initiative Called Project Ketchup For The Company’s Home-Flipping Failures” (Insider). “The employees' accounts suggested that Zillow's iBuying problems had less to do with a glitch in its computer-driven, algorithmic approach to purchasing homes or unpredictable swings in prices and more to do with the overexuberance of human managers. Employees said leaders at the company failed to heed signs that Project Ketchup was prompting it to pay too much for homes and damaging key business relationships with contractors who fixed up properties before Zillow relisted them.”
“Hertz Raises $1.3 Billion in ‘Re-IPO.’ The New Stock Will Start Trading Soon.” (Barron’s). “Hertz Global Holdings, the rental car company that emerged from bankruptcy earlier this year, said late Monday that its offering raised more than expected at nearly $1.3 billion. Hertz sold 44.52 million shares at $29 each. It had planned to offer 37.1 million shares at $25 to $29 each, a prospectus said. The shares are set to trade on the Nasdaq under the ticker HTZ on Tuesday. At $29 a share, Hertz is valued at $13.7 billion.”
What we’re reading (11/9)
“Randal Quarles To Resign From Fed Board, Expanding Biden’s Options To Shape Agency” (Washington Post). “Quarles served a four-year term as the Fed’s vice chair for supervision that ran through mid-October. He was known for leading the charge to ease restrictions on the banking system put in place after the Great Recession, which was spurred by a financial crisis within the largest Wall Street banks. The banking cop role was created under the 2010 Dodd-Frank overhaul of the regulatory system.”
“CalSTRS Offers Rare Look Into How Much Pensions Pay to Invest” (Institutional Investor). “According to the report, last year CalSTRS paid, excluding incentive fees, 46.7 basis points (on its total assets), while 14 global peers paid 49.2 basis points on average. In addition, 43 pension funds general paid 61.5 basis points on average. The report tracks all expenses the pension paid to have its investments managed, including operational and other charges directly deducted from funds and carried interest — incentive fees.”
“Investors Take Aim At Private Equity’s Use Of Private Jets” (Financial Times). “Investors say they routinely find themselves billed for extra costs, such as the hiring of private jets, in addition to the standard “two and 20” — a 2 per cent annual management fee and 20 per cent performance fee — charged by the managers of private equity groups, known as general partners or GPs.”
“Chinese Junk Bond Yields Top 25% As Property-Market Strains Intensify” (Wall Street Journal). “The biggest selloff that China’s international junk-bond market has ever seen has wiped out around a third of bondholders’ wealth in just six months. The steep and rapid decline shows how regulatory curbs on borrowing, extremely dislocated credit markets, and slowing home sales have combined to pressure more Chinese property developers, which account for most of China’s high-yield issuance.”
“Wonking Out: Is The Great Resignation A Great Rethink?” (Paul Krugman, New York Times). “As [labor economist Arindrajit Dube] says, there’s considerable evidence that ‘workers at low-wage jobs [have] historically underestimated how bad their jobs are.’ When something — like, say, a deadly pandemic — forces them out of their rut, they realize what they’ve been putting up with. And because they can learn from the experience of other workers, there may be a ‘quits multiplier’ in which the decision of some workers to quit ends up inducing other workers to follow suit.
What we’re reading (11/8)
“Biden's Fed Calculus” (Axios). “President Biden has more than economics on his mind as he weighs his choice to lead the Federal Reserve: His pick will impact inflation, face the cruel judgment of financial markets and somehow need to find 50 votes in deeply divided Washington…[t]he case for Powell: [m]arkets know, like and trust the former private equity executive….[S]ome Republicans are vowing to block Brainard, calling her too liberal, and hinting at an ugly confirmation fight. The case for Brainard: She’s an actual economist and actual Democrat, and is more aligned with Biden on a range of fiscal, monetary and regulatory issues.”
“Investors Are Betting That Pfizer’s ‘Game-Changing’ Antiviral Pill Will Reduce Demand For COVID Vaccines” (Fortune). “On Monday, stocks of vaccine makers in Asia fell in the wake of U.S. pharmaceutical giant Pfizer’s announcement that its new antiviral pill called Paxlovid is 89% effective in reducing risk of hospitalization or death from COVID-19…Investors appear to believe that the introduction of highly-effective treatment options may reduce some global demand for COVID-19 vaccines, which are currently the main proven tools on the market to prevent hospitalizations and deaths related to the virus.”
“Rich Millennials to Financial Advisers: Thanks For the Golf Invite, But You Can’t Invest My Money” (Wall Street Journal). “More rich young investors are opting to go without a traditional financial adviser. Instead, they are betting they can get good-enough investment options from do-it-yourself digital platforms that are cheap and easy to use. Many also want to invest in riskier assets, like cryptocurrencies and tech startups, that mainstream advisers often don’t offer.”
“Elon Musk’s ‘Ticking Tax Time Bomb’” (DealBook). “Elon Musk appears to have used an impending stock option deadline to make a political point. Over the weekend, the Tesla C.E.O. surveyed his millions of Twitter followers about whether he should sell a chunk of his shares in the electric car company. “Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock,” he tweeted, committing to abide by the results of the poll.”
“The 2000s Housing Bubble Was Greatly Exaggerated” (Full Stack Economics). “[Mecatus Center Scholar Kevin] Erdmann argues that policymakers misdiagnosed the causes of the housing boom, and that led to catastrophic policy errors. In particular, because the Federal Reserve thought housing was overvalued in 2007, it didn’t cut rates fast enough in response to the housing crash. That helped turn what might have been only a mild, industry-specific downturn into a severe, economy-wide recession. And that recession, in turn, made the housing crisis bigger than it needed to be, since many previously solvent homeowners lost their jobs or saw their mortgages go under water.”
What we’re reading (11/7)
“Investing When Everything Is Expensive” (Morningstar). “Previous bull markets forced them to either 1) join the crowd, accepting that the consensus had correctly identified future trends, or 2) retreat into solitude, by buying that which had become neglected. The latter approach came with no guarantee, but at least it offered the solace of low prices. Today, there is no analogous choice. Yes, some investments are cheap, for example energy stocks or emerging-markets debt, but they account for only a small part of the global financial markets. They cannot form the whole.”
“Government-Bond Swings Burn Wall Street Investors” (Wall Street Journal). “A rapid U-turn in government-bond markets has sparked deep losses for some of Wall Street’s biggest investors, a stark demonstration of how even small shifts in expectations for economic growth and central-bank policy can upend the most carefully laid bets. Behind the losses are recent abrupt moves in government-bond prices. With central banks signaling plans to end their extraordinary stimulus measures, short-term bonds have tumbled in price, sending yields—which rise when prices fall—to touch their highest levels since March 2020.”
“Will We Be Sorry We Shut Down?” (City Journal). “It’s not clear…that everyone will experience the return to normal as a liberation. The pandemic caused us to worry, but it also delivered us for a while from a still-greater worry: the anxiety of freedom. To parody Pascal, who explained that the misfortune of humanity consisted in the inability to sit quietly in one’s room, alone, we might say that the misfortune of humanity after Covid will perhaps be to be shut up in one’s room—and like it.”
“Peloton's Founder Is No Longer A Billionaire After The Stock’s Violent Post-Earnings Sell-Off” (Insider). “John Foley's net worth fell to about $850 million during Friday's session as investors dumped shares and drove a sell-off that extended as far as 35%, Bloomberg first reported. Foley would still stand to gain if he exercised those options even after the sell-off, according to Bloomberg. He's also pledged 3.5 million shares as collateral for a personal loan, according to a regulatory filing.”
“The Man Who Called Bullshit On Uber” (Mother Jones). “Horan says he’s occasionally seen other companies use ‘these totally bullshit accounting games.’ But he adds they are the equivalent of a neon sign reading ‘Danger! Management Isn’t Trustworthy—Don’t Invest Here!’ In 2020, for example, Uber reported a net loss of $6.7 billion on $11.1 billion of revenue. But according to the company’s adjusted profit measure for the year, it came up $2.5 billion short. More than $4 billion in losses were accounted away.”
What we’re reading (11/6)
“October Jobs Report: Strong Rebound As U.S Economy Adds 531,000 Jobs” (Wall Street Journal). “The U.S. labor market sprang back to life in October after a summer slowdown, with employers briskly adding jobs and nearly 200,000 women joining the labor force. The economy churned out 531,000 new jobs last month, the biggest gain in three months, the Labor Department said Friday. Restaurants, consulting firms and factories all boosted hiring, suggesting broad strength across the economy.”
“The Jobs Numbers Take the ‘Stag’ Out Of The Stagflation Scare” (New York Times). “The story of the American labor market is less murky than it seemed just a few weeks ago. The new jobs numbers Friday present a straightforward, sunny view: Despite it all — the virus variants, the reopening struggles — Americans are going back to work at a rapid clip.”
“The Working Class Is On Strike” (The Nation). “Now more than ever, the rich are getting richer while the workers are left with crumbs. Just look at John Deere, which is expected to make over $5.7 billion in profits this year, and the CEO took home $15.6 million in 2020—a 160 percent raise from 2019. And last year Kellogg’s authorized $1.5 billion in stock buybacks to pad its shareholders’ pockets, yet these corporations and executives want to cry poor when it comes to sharing the wealth with the workers who created it.”
“Pricing Power Is Highly Prized On Wall Street” (The Economist). “A growing number of companies are raising prices as costs for labour and raw materials rise, often with no ill effects. This summer PepsiCo, an American food giant, lifted prices for its fizzy drinks and snacks to offset higher commodity and transport costs; it plans further increases early next year. Ramon Laguarta, the firm’s boss, suggested in an earnings call in October that customers do not seem bothered. ‘Across the world consumers seem to be looking at pricing a little bit differently than before,’ he said.”
“Kroger Looking Into Fake Press Release Touting Acceptance Of Bitcoin Cash” (Reuters). “Kroger Co is looking into the publication of a fake press release, claiming the acceptance of bitcoin cash at its stores, the grocer said on Friday, after becoming the second major retailer in recent weeks to get entangled in a crypto hoax. The release, which said the grocer would accept the cryptocurrency this holiday season, appeared on Kroger's investor relations page and was later deleted. The company said the page, which gets automatically updated, receives a direct feed from PR Newswire (PRN), where the fake release also appeared.”
What we’re reading (11/5)
“Fed Chair Powell Seen Visiting White House On Thursday” (Wall Street Journal). “Federal Reserve Chairman Jerome Powell was seen visiting the White House on Thursday, according to people familiar with the matter. Mr. Powell’s term leading the central bank is set to expire next February. President Biden told reporters on Tuesday that he would announce decisions ‘fairly quickly’ on whether he was offering Mr. Powell another term or tapping someone else to succeed him.”
“‘The Great Resignation’ Misses the Point” (Wired). “[P]erhaps what’s most notable about the name the Great Resignation is that its main substance—resignations—may be the least consequential thing about the moment that it’s come to represent. The real takeaway is why people are leaving their jobs in the first place—rampant stress, the shift to remote work, a forced reckoning with what matters in light of the pandemic—and what resigning is leading them to do next. Taken on its surface, the Great Resignation foregrounds the language of job status, but misses a parallel, arguably bigger story: the radical realignment of values that is fueling people to confront and remake their relationship to life at home, with their families, with their friends, and in their lives outside of labor.”
“Zillow Torched $381 Million Overpaying For Houses. Spectacular.” (Slate). “On the one hand, Zillow’s failure is a typical infuriating business story. Some execs dreamed up something they could not execute, it blew up spectacularly, and the most obvious people to suffer from their decision are the many employees they’ll fire. (Zillow’s shareholders are also losing, which happens when companies release news of this kind on earnings calls with their investors.) On the other hand, I hope they try again? Or that another company does it better? The idea of selling houses like they’re something less complicated than houses is worth someone getting right, even if Zillow came nowhere close.”
“Redfin Execs Attempted To Distance The Company's Home-Flipping Business From Zillow's Recent Implosion — Without Ever Mentioning Zillow” (Insider). “Executives at real-estate brokerage Redfin never mentioned Zillow by name during an hourlong earnings call with investors and analysts on Thursday. But make no mistake: Zillow's home-flipping debacle was top of mind for everyone involved. Redfin executives spent much of their time attempting to distance their own "instant buying" business, RedfinNow, from the soon-to-be-defunct Zillow Offers, while reassuring investors that the company would avoid the kinds of mistakes that led to Zillow suffering hundreds of millions of dollars in losses on homes.”
“US Productivity Dropped To Its Lowest Level In 40 years” (CNN Business). “[Productivity] decreased at a seasonally adjusted annual rate of 5% between July and September. That's the sharpest decline since the second quarter of 1981, the Bureau of Labor Statistics said Thursday, when the United States was in the midst of a 16-month recession. In the third quarter of this year, output increased by 1.7%, while hours worked jumped by 7%.”
What we’re reading (11/4)
“When Will America’s Oil Industry Open The Taps?” (OilPrice.com). “So now that oil companies are rolling in the dough will they increase production to help out the world’s energy supply squeeze? Don’t count on it. ‘Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. confirmed this week that, for the most part, they’ll spend their windfall profits on share buybacks and dividends,’ Bloomberg recently reported. While capital expenditures will increase in 2022, the report continues, ‘the increases come off 2021’s exceptionally low base and within frameworks established before the recent surge in fossil-fuel prices.’”
“Billionaire Investor [Charlie Munger]: Democrats’ Plan To Tax Stock Buybacks Is ‘Literally Insane’” (CNN Business). “‘I don't think the dividend policies of American corporations ought to be determined from Washington,’ Munger told CNN. The Biden administration fired back after Munger's criticism.”
“Where Are All The Truck Drivers? Shortage Adds To Delivery Delays” (Wall Street Journal). “Truck driver Chris Wagner pulled his big rig into a grain processing plant in Sidney, Ohio, on a recent afternoon to pick up a load bound for the Chicago suburbs. He’d lost his scheduled place in line because of delays at an earlier delivery, so it was 10:45 p.m. before the plant was ready to load his trailer. By then, the clock had run out on his federally mandated 14-hour workday, so Mr. Wagner couldn’t pull up to the dock. He slept that night in his truck on the plant’s lot and left empty-handed the following morning, unable to reschedule the pickup.”
“Once A Startup Unicorn, Mattress Brand Casper Is Now Scrambling To Raise $150 Million As It Bleeds Cash” (Insider). “Casper is trying to raise as much as $150 million in a secondary offering as it confronts mounting losses, a plunging stock, and potential solvency issues. The mattress company and direct-to-consumer pioneer disclosed plans to raise capital through a variety of securities offerings in an S-3 filing on Oct. 25, and is seeking to raise $50 million in common shares and the rest through a combination of preferred shares, debt, and other instruments.”
“Kevin Durant Launches Second SPAC To Buy A Crypto Business Because Everything Is Perfectly Normal And Reasonable And It’s A Totally Sensible Thing To Do” (Dealbreaker). “Donald Trump’s nascent hacker’s dream of a social media platform is off the table, legally or otherwise. So, too, is WeWork, thanks to Shaquille O’Neal. SeatGeek’s no longer available after signing a deal with a SPAC backed by Brooklyn Nets star Kevin Durant. Still, Durant has got a taste for the blank check now and he can’t stop, even as there remain hundreds of SPACs desperately seeking dance partners, and the legal and regulatory future of the space remains very much up in the air.”
What we’re reading (11/3)
“Fed Dials Back Bond Purchases, Plots End To Stimulus By June” (Wall Street Journal). “The Federal Reserve closed a chapter on its aggressive, pandemic-driven stimulus when it approved plans Wednesday to begin scaling back its bond-buying program this month amid concerns that inflationary pressures could last longer than officials expected earlier this year. Fed officials agreed to wind down their $120-billion-a-month asset-purchase program by $15 billion each in November and December, a pace that could phase out the purchases entirely by next June.”
“Wall Street Hits Highs Again After Fed Confirms Tapering Plans” (Financial Times). “The S&P 500, which had slipped slightly earlier in the day, swung to a gain after the Fed’s announcement and extended its gains as chair Jay Powell spoke to reporters. Powell said the Fed could adjust the pace of its tapering but stressed that ‘we wouldn’t want to surprise markets’ and would provide ample warning ahead of any change. He added that the central bank would not rush to raise interest rates.”
“Zillow Thought It Could Rule The Housing Market. It Was Very Wrong.” (MarketWatch). “Zillow Group had a wealth of data, access to millions of dollars in capital and executives with the hubris to believe they could use these tools to outsmart both a volatile housing market and startups specializing in buying and selling houses. They failed, and lost more than half a billion dollars in the process.”
“On Elon Musk And The Dangerous Power Of Insecure Billionaires” (Paul Krugman, New York Times). “Elon Musk doesn’t think visionaries like him should pay taxes the way little people do. After all, why hand over his money to dull bureaucrats? They’ll just squander it on pedestrian schemes like … bailing out Tesla at a crucial point in its development. Musk has his sights set on more important things, like getting humanity to Mars to ‘preserve the light of consciousness.’ Billionaires, you see, tend to be surrounded by people who tell them how wonderful they are and would never, ever suggest that they’re making fools of themselves.”
“The Uses And Abuses Of Green Finance” (The Economist). “In principle, [Green finance] has a huge role to play in slowing climate change. Shifting the economy from fossil fuels to clean sources of energy requires a vast reallocation of capital. By 2030, around $4trn of investment in clean energy will be needed each year, a tripling of current levels. And spending on fossil fuels must decline. In an ideal world the profit incentive of institutional investors would be aligned with reducing emissions, and these owners and financiers would control the global assets that create emissions. If so, asset owners would have both the motive and the means to reinvent the economy. But the reality of green investing falls short of this ideal.”
What we’re reading (11/2)
“A World Running On Empty” (Paul Krugman, New York Times). “Probably the best parallel is not with 1974 or 1979 but with the Korean War, when inflation spiked, hitting almost 10 percent at an annual rate, because supply couldn’t keep up with surging demand…[during the pandemic] the composition of demand has changed. During the worst of the pandemic, people were unable or unwilling to consume services like restaurant meals, and they compensated by buying more stuff…[s]omething similar seems to have happened around the world.”
“Money Talks: The Couple Who Used Lessons From 2008 To Navigate 2020” (Vox). “Krystal: We realized ownership was extremely valuable, especially in a market that was growing. Then, in this situation, we realized the people who were doing really well were the people who had ownership. It made sense that people who own property, people who have income sources that aren’t tied to employers, are doing okay.”
“Zillow Stock Dives After Analyst Highlights Two-Thirds Of Homes Bought Are Underwater” (MarketWatch). “Shares of Zillow Group Inc. took a dive Monday, after KeyBanc analyst Edward Yruma highlighted how most of the homes the real estate services company purchased, with an aim to flip them, were now worth less than what they paid for them…Yruma said it completed an analysis of 650 homes in Zillow’s inventory, or about one-fifth of the homes owned, and found that 66% are currently listed below the purchase price at an average discount of 4.5%.”
“Farewell Offshoring, Outsourcing. Pandemic Rewrites CEO Playbook.” (Wall Street Journal). “With the machinery of international trade slowed, business leaders are ditching, at least temporarily, overseas partners and the conventional wisdom of the global economy in favor of reliability, even if it costs more. Some are moving workers and production facilities closer to home and relocating plants closer to suppliers. Others are buying their suppliers or bringing former contract work in-house.”
“Of Course Trump’s SPAC Deal May Have Broken Securities Laws” (Vanity Fair). “Just days after Donald J. Trump left the White House, two former contestants on his reality show, The Apprentice, approached him with a pitch. Wes Moss and Andy Litinsky wanted to create a conservative media giant. Mr. Trump was taken with the idea. But he had to figure out how to pay for it…. To get his deal done, Mr. Trump ventured into an unregulated and sometimes shadowy corner of Wall Street, working with an unlikely cast of characters: the former Apprentice contestants, a small Chinese investment firm and a little-known Miami banker named Patrick Orlando.”
What we’re reading (11/1)
“G-20 Needs A ‘Sputnik Moment’ On The Global Economy” (Mohamed El-Erian, Washington Post). “central banks must now confront two policy requirements that would have been much easier to handle with better sequencing over a longer period: easing off the accelerator by reducing large-scale asset purchases (a QE taper) and tapping on the brakes through interest rate increases. The Bank of England has been the best at recognizing the underlying inflation dynamics and the urgent need to adjust its forward policy guidance. The Fed continues to notably lag behind, while the European Central Bank’s own sluggishness has a better economic rationale.”
“Even After A Weak Patch, America’s Economy Is Still In High Gear” (The Economist). “An end to stimulus would usually augur poorly for growth. Yet other factors could insulate the economy. The consumption of goods is about 15% higher than its trend level, partly because people have spent much less money than usual on holidays and restaurants and much more on sofas, exercise bikes and stay-at-home essentials. But with the pandemic now apparently petering out, people are buying experiences again—a fillip for growth, given that services account for nearly 80% of output[.]”
“How Robinhood Cashes In On The Options Boom” (Wall Street Journal). “In the 12 months through June, the 11 largest U.S. retail brokerages collected $2.2 billion for selling customers’ options orders, according to Larry Tabb, head of market-structure research at Bloomberg Intelligence. That was about 60% higher than their take from selling equities orders. During that period, major brokers were paid an average of about 16 cents for each 100 shares of their customers’ stock orders, compared with about 54 cents for equivalent-sized options orders, Mr. Tabb’s data show.”
“Jobs People Want — And Don't Want — After The Pandemic” (Axios). “Interest in IT and media jobs is surging, but no one wants to fill the sorely needed child care and home health roles…only around 37% of U.S. jobs can be done from home, per an analysis by economists at the University of Chicago. But more and more people are eager to secure those jobs for the flexibility they provide during the pandemic and beyond, says Indeed economist AnnElizabeth Konkel…Indeed's report shows that interest in loading and stocking jobs at warehouses has cratered 40%. Clicks for food service jobs are down 18%. And interest in personal care and home health jobs and child care jobs is down 33% and 15%, respectively.”
“Catastrophe Bonds Storm Into Mainstream As Climate Threat Grows” (Financial Times). “A cyclone that sweeps through Jamaica, a typhoon that hits China’s Greater Bay, an earthquake that damages Google’s facilities in California — just a few examples of the growing range of hypothetical events that investors are queueing up to underwrite. Catastrophe bonds were first created in the 1990s as a niche form of risk transfer from insurers to investors. They have expanded steadily to a market of more than $30bn in terms of debt outstanding.”
October 2021 performance update
Hi friends, here with a monthly performance update. Here are the monthly numbers:
Prime: -0.35%
Select: +6.54%
S&P 500-tracking “SPY” ETF: +6.56%
Bogleheads: +4.93%
It was a great month for U.S. stocks broadly — the best month year-to-date so far for the S&P 500 — and that played out in the performance of the S&P 500-tracking SPY ETF performance and in the performance of our Select picks, which basically performed in-line with the market as a whole. Prime was deeply disappointing. Basically our top picks (HPQ and HPE) turned out a fine month, but a few picks deeply enmeshed in supply chain issues related to the global chip shortage were hit hard (e.g., WDC and INTC, down 8.31 percent and 8.66 percent, respectively). Both of those companies reported quarterly earnings during the month and actually crushed EPS expectations, but the forward-looking outlook apparently left something to be desired. Our algo likely picked them up because their prices seemed low relative to real-time fundamentals, but it really is forward-looking fundamentals that matter, of course, and in turbulent times like this extrapolating trailing fundamentals into the future isn’t a safe bet. In repeated monthly samples over a multi-year hold period, one expects/hopes that base rates play out.
The month ahead should be interesting. There is a big Fed meeting this week that augurs potentially significant policy changes that should effect risk premia across all asset classes, including stocks. It could be a wild ride. Stay tuned.
Stoney Point Total Performance History
November Prime + Select picks available now
The new Prime and Select picks for November are available starting now, based on a model run put through yesterday (October 30). As a note, we’ll be measuring the performance on these picks from the first trading day of the month, Monday, November 1, 2021 (at the mid-spread open price) through the last trading day of the month, Tuesday, November 30, 2021 (at the mid-spread closing price).
What we’re reading (10/31)
“U.S. Prices, Wages Rise At Fastest Pace In Decades” (Wall Street Journal). “Consumer prices rose at the fastest pace in 30 years in September while workers saw their biggest compensation boosts in at least 20 years, according to new government data released Friday…[t]he reports point to a recovery caught between robust consumer demand and severe supply shortages, leading to a rapid uptick in inflation. They also put pressure on Federal Reserve officials as they prepare to meet next week.”
“Microsoft Surpasses Apple As The World's Most Valuable Company After The iPhone Maker's Stock Slips On Earnings Miss” (Insider). “The Windows software producer's market capitalization reached $2.46 trillion, higher than Apple's market cap of $2.43 trillion, making Microsoft the most valuable company. That title exchanged hands as Microsoft stock rose 1% to $327.50 Friday, while Apple dropped as much as 4% to $146.41 after the company late Thursday posted its first miss in quarterly revenue since 2018. Fiscal fourth-quarter sales of $83.4 billion were below expectations of $85 billion, hurt by supply-chain disruptions for semiconductors.”
“Slower S&P 500 Earnings Growth Is Not Bullish — No Matter What Some Stock Market ‘Experts’ Are Saying” (MarketWatch). “Some exuberant analysts are trying to put a bullish spin on the dramatic slowing in the S&P 500’s earnings per share growth rate projected for the next several quarters. They are wrong…the stock market is forward looking, its performance in a given quarter will to a far greater extent reflect projected earnings growth several quarters hence.”
“Merrick Garland Is Looking To Nail Some Corporate A**es To The Wall” (Dealbreaker). “We can’t be sure that Credit Suisse’s absolute inability to get out of its own way was the final straw. Maybe it was Deutsche Bank’s routine refusal to live up to its promises to stop breaking rules/laws/etc. Whatever it was, the Justice Department has had quite enough.”
“Women May Be Better Investors Than Men…” (New York Times). “Over a 10-year period, [Fidelity’s] female customers earned, on average, 0.4 percentage points more annually than their male counterparts. That may not seem like a lot, but over a few decades it can add up to tens of thousands of dollars or more…[t]he source of women’s superior returns is the way they trade. Or, rather, how they don’t. Female Fidelity customers bought and sold half as much as male customers. Vanguard saw similar patterns over the same decade-long period when examining workplace retirement accounts that it manages; at least 50 percent more men traded in them than women did every year during that time.”
What we’re reading (10/29)
“U.S. Economic Growth Lagged In The Third Quarter, But Hopeful Signs Abound For The Rest Of 2021” (Washington Post). “The U.S. economy grew at a disappointing 2.0 percent annual rate in the third quarter as the delta variant peaked, but promising signs suggest 2021 is on track to notch the fastest full-year growth in almost four decades.”
“Facebook Changes Company Name To Meta In Focus On Metaverse” (Wall Street Journal). “Facebook Inc. Chief Executive Officer Mark Zuckerberg said the company changed its name to Meta to reflect growth opportunities beyond its namesake social-media platform in online digital realms known as the metaverse. ‘Over time I hope our company will be seen as a metaverse company,’ Mr. Zuckerberg said Thursday.”
“Bitcoin Miners Are Gobbling Up U.S. Energy” (Gizmodo). “There’s a big new presence slurping up power from the U.S. grid, and it’s growing: bitcoin miners. New research shows that the U.S. has overtaken China as the top global destination for bitcoin mining and energy use is skyrocketing as a result.”
“Why Are Natural Gas Prices High? Because Fracking Isn’t Really Profitable.” (Barron’s). “Normally, a spike in prices induces energy companies to increase production, but not this time. Energy prices fell by as much as 70% early in the pandemic. According to a New York Times report, energy executives are not willing to increase production because they are still experiencing the trauma from the crash, and Wall Street is hesitant to fund exploration because of new pressures to meet climate and ESG (environmental, social, governance) goals. But the truth is actually less complex: even before the pandemic, shale oil and fracking had not been profitable.”
“Muddy Waters’ Carson Block Says Wall Street Is ‘Thoroughly Compromised by China Money’” (Institutional Investor). “‘The government of China has co-opted much of the U.S. financial services industry — from the exchanges to the asset managers, investment banks and index providers,’ wrote [Carson] Block, a short-seller who is one of the most vociferous critics of Chinese companies that he sees as frauds that have been perpetrated on U.S. investors with little consequence for the scofflaws.”
What we’re reading (10/28)
“Third Point Has Big Shell Stake, Urges Energy Giant To Break Up” (Wall Street Journal). “The activist is the latest to pressure a major oil company to change its strategic direction, as the firms face calls to reduce fossil fuel investments and pivot to renewable energy amid concerns about climate change. Upstart hedge fund Engine No. 1 waged a successful campaign to win seats on the board of Exxon Mobil Corp. in May.”
“This Movement Is Taking Money Away From Fossil Fuels, And It’s Working” (New York Times). “And by this point, divestment has spread way beyond colleges and universities. Enormous pension funds serving New York City and state employees have announced that they will sell stocks; earlier this year, the Maine legislature ordered the state’s retirement fund to divest; and just last month, Quebec’s big pension fund joined the tide. We’ve seen entire religious groups — the Episcopalians, the Unitarian Universalists, the U.S. Lutherans — join in the call; the Pope has become an outspoken proponent (and many high-profile Catholic institutions have announced they will divest).”
“Cathie Wood Just Dumped Another $100-Plus Million In Tesla — Here Are The ‘Bargain’ Stocks She Likes Now” (MoneyWise). “Cathie Wood is known for investing in high-flying tech stocks. But she isn’t opposed to buying low and selling high. The ace stock picker of Ark Investment Management has been bullish on Tesla for years. Yet she’s been taking some profits off the table recently as shares of the electric car maker have soared.”
“‘I Quit’ Is All The Rage. Blip Or Sea Change?” (Lawrence Katz, The Harvard Gazette). “The number of people who switch from one job to another is what you would predict given the great opportunities. It’s always been true that people who switch jobs tend to get higher wage growth than people who stay put, but it looks unusually high right now…[b]ut a second issue — we see a lot of anecdotal and survey data on this — is, I think we’ve really met a once-in-a-generation ‘take this job and shove it’ moment.”
“Marjorie Taylor Greene Invested As Much As $50,000 In The Trump SPAC Before Its Stock Plunged” (CNN Business). “Georgia Rep. Marjorie Taylor Greene bought as much as $50,000 worth of shares in a shell company that is merging with former President Donald Trump's new media venture, according to a financial disclosure form. Greene, a Republican and Trump supporter with a history of conspiracy theories, bought shares of Digital World Acquisition Corp. on Friday when they were skyrocketing to breathtaking levels. Days later, the Trump SPAC (Special Purpose Acquisition Company) plunged in value.”
What we’re reading (10/27)
“Buyout Firms Set Record For Loading Companies With Debt To Pay Themselves” (Wall Street Journal). Hence, my private-equity focused blog post a few weeks ago…“Private-equity firms are taking advantage of a frothy credit market to pay themselves record sums with borrowed money, a controversial practice that critics say benefits buyout-firm executives but can harm portfolio companies. Companies backed by U.S. private-equity firms have taken on $58.5 billion in dividend-recapitalization debt this year through Oct. 20, S&P Global Market Intelligence’s LCD unit said in response to a Wall Street Journal data request.”
“The Bond Market Is Waking Up” (Calafia Beach Pundit). “It looks like the bond market is beginning to wake up to the reality of higher inflation. Yields have moved significantly higher in recent days, and inflation expectations are rising. That the stock market is taking this in stride—so far—suggests that higher interest rates are not necessarily bad for the economy. I think we are still in the early innings of the adjustment to higher interest rates. There's a lot more to this story that will play out soon.”
“Tesla Joins An Exclusive Club” (DealBook). But! “It has a junk bond rating…[r]egulators had accused its C.E.O. of securities fraud…[i]ts sales and earnings are far lower than others.”
“Billionaire Tudor Jones: This Is The ‘Single Biggest Threat’ To Stocks And Society — Protect Yourself Now” (Yahoo! Finance). “The stock market has bounced back after a sluggish September, but a billionaire hedge fund manager says it would be a mistake to drop your guard. Paul Tudor Jones, who runs Tudor Investment Corporation, told CNBC last week that runaway inflation remains ‘the single biggest threat to financial markets and society in general.’ ‘If we don't immediately shift to attack it,’ Jones warns, ‘we run the risk of getting back into the '70s, where it was the single most important issue for multiple presidents, multiple Fed chairmen.’”
“3-D Printed Houses Are Sprouting Near Austin As Demand For Homes Grows” (Wall Street Journal). “A major home builder is teaming with a Texas startup to create a community of 100 3-D printed homes near Austin, gearing up for what would be by far the biggest development of this type of housing in the U.S. Lennar Corp. and construction-technology firm Icon are poised to start building next year at a site in the Austin metro area, the companies said.”
What we’re reading (10/26)
“David Tepper Shuns Stock Market: ‘Sometimes There’s Times To Make Money…Sometimes There’s Times Not To Lose Money’” (MarketWatch). “‘I don’t think it’s a great investment,’ Tepper [founder of Apaloosa Management] told the business network, referring to his view on the stock market, with the Dow Jones Industrial Average, and the S&P 500 index near record highs on Friday. ‘I just don’t know how interest rates are going to behave next year,’ Tepper added. ‘I don’t think there’s any great asset classes right now,’ said the owner of the National Football League’s Carolina Panthers. Tepper said that he didn’t ‘love stocks. I don’t love bonds. I don’t love junk bonds,’ referring to markets he felt were overvalued.”
“America Inc And The Shortage Economy” (The Economist). “If you look only at the scale of the profits cranked out by American businesses, they seem to be indestructible…[y]et as earnings season gets into full swing this week, bosses and investors are watching for signs that three related worries are biting: supply-chain tangles, inflation, and hints that a long era of profitable oligopolies is giving way to something more dynamic and risky.”
“Jeff Bezos’ Blue Origin Plans ‘Business Park’ In Space” (Financial Times). “Jeff Bezos’s space exploration company Blue Origin has announced plans to launch a commercial space station into low-earth orbit in the latter half of this decade…[a]ccording to a promotional website, the station, to be called Orbital Reef, will be an ideal location for a ‘space hotel’, ‘film-making in microgravity’ or ‘conducting cutting edge research’. Those on board would experience 32 sunsets and sunrises each day, the company said.”
“Billionaire Leon Black Is Being Investigated By The Manhattan D.A., Sources Say” (Vanity Fair). “Black’s personal and professional lives have been in a tailspin since January 2021, when the billionaire announced he was stepping down as CEO of private-equity giant Apollo following the emergence of his ties to Epstein. An investigation commissioned by Apollo’s board disclosed that Black had paid Epstein $158 million in fees between 2012 and 2017—after Epstein pleaded guilty to soliciting prostitution from a teenage girl. Black’s massive payments to Epstein for purported ‘tax advice’ and ‘estate planning’ struck many on Wall Street as amounting to a preposterously inflated sum for such services.”
“The Hostile Mediator Phenomenon: When Threatened, Rival Partisans Perceive Various Mediators As Biased Against Their Group” (Omer Yair, Public Opinion Quarterly). “Rival partisans tend to perceive ostensibly balanced news coverage as biased against their respective sides; this is known as the ‘hostile media phenomenon’ (HMP). Yet complaints of hostile bias are common in contexts besides the media (e.g., law enforcement and academia). Does a process similar to the HMP occur outside the context of news coverage?…[a]n additional study (N = 2,172) shows that both Democrats and Republicans perceived the social network Facebook to be biased against their side.”
November picks available soon
We’ll be publishing our Prime and Select picks for the month of November before Monday, November 1 (the first trading day of the month). As always, we’ll be measuring SPC’s performance for the month of October, as well as SPC’s cumulative performance, assuming the sale of the October picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Fri., October 29). Performance tracking for the month of November will assume the November 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 (Monday, November 1).
What we’re reading (10/25)
“Psychoanalyzing The Housing Frenzy With Redfin’s CEO” (Curbed). “[C]onstruction of new housing [after the Great Financial Crisis] slowed to a crawl and inventory continues to drop. By this time in 2019, Redfin had 1.1 million active listings; now it has little more than half that. This shortage is what primed the real-estate market for its current boom, but what touched things off was the Federal Reserve’s decision to stimulate the U.S. economy with near-zero interest rates last spring. ‘The beneficiaries of that were exclusively wealthy people,’ Kelman told me. ‘When you’re shoveling several hundred billion dollars into mortgage-backed securities, you have to keep interest rates below 3 percent[.]”
“Tesla Surpasses $1 Trillion In Market Value As Hertz Orders 100,000 Vehicles” (Wall Street Journal). “Tesla Inc. crossed $1 trillion in market value Monday…[i]nvestors pushed the electric-vehicle maker over the line after Hertz Global Holdings Inc. ordered 100,000 autos to be delivered to the rental-car company by the end of next year, a bulk purchase that promises to expose more mainstream drivers to Tesla’s technology…‘Wild $T1mes!’ Tesla Chief Executive Elon Musk tweeted Monday afternoon. He added, of the Hertz order: ‘Strange that moved valuation, as Tesla is very much a production ramp problem, not a demand problem.’”
“A Boston Beer Exec Explained That ‘Millions of Cases' Of Truly Will Be Destroyed Because Discounting Is ‘Just Not What We Do’” (Insider). “Jim Koch, the chairman of Boston Beer Company — which produces Truly, along with Samuel Adams, Dogfish Head, and Twisted Tea — told CNBC on Friday that the company overestimated the popularity of hard seltzers. Boston Beer got "aggressive" about buying raw materials like flavors and cans and adding extra capacity to produce Truly, Koch said during an interview on ‘Closing Bell.’”
“The New Billionaire Tax In Democrats’ Sights” (DealBook). “Billionaires could be taxed on unrealized capital gains on their liquid assets, Democratic officials said yesterday. It would affect people with $1 billion in assets or those who have reported at least $100 million in income for three consecutive years, according to news reports. That would ensnare perhaps 700 taxpayers — or the wealthiest 0.0002 percent — but Democrats hope it would generate at least $200 billion in revenue over a decade. It would cover not only stocks, but also other assets like real estate. (Individuals could claim deductions for annual losses in the value of their assets.)”
“PayPal Says It’s Not Looking To Buy Pinterest Right Now, Shares Jump 6%” (CNBC). “U.S. payments giant PayPal said it is not currently interested in buying social media platform Pinterest. Responding to what it called ‘market rumors,’ the financial technology company said Sunday in an update on its website that it is ‘not pursuing an acquisition of Pinterest at this time.’”
What we’re reading (10/24)
“Bull Market Okay Until Interest Rate Push Comes To Shove” (Briefing.com). “When the stock market's worst-performing sector is up 6.2% for the year in mid-October, it almost goes without saying that the stock market has had a good year…The stock market has shown that it can tolerate rising interest rates at these nominally low levels. What it has some difficulty with is a rapid rate of change in interest rates. When rates rise gradually, it is billed as an expression of confidence in the economic outlook. When rates rise quickly, it is viewed as a nervous expression of inflation pressures and the specter of the Fed being forced to raise rates to keep inflation in check.”
“Big Tech Stocks Are The Market’s Superstars But Rising Rates Could Bring Them Down” (MarketWatch). A nice summary of some recent research on the differential impact of rate changes across not just different sectors, but across companies of different sizes. Much of the media commentary about the impact of rates (including the article title here) posits that tech companies are particularly sensitive because they are long-duration stocks (i.e., the contribution of extra long-term cash flows to their current prices is comparably high). The research here apparently shows it isn’t just tech, but rather the top 5% in almost any industry is more sensitivity to rates.
“Congressional Democrats Take Aim At Private Equity” (Axios). “Congressional Democrats are again taking aim at private equity, but they don't have much more firepower than the last time around…the big differences between 2019 and 2021 is that Democrats control both the Senate and the White House, and that they aren't distracted by presidential primaries. But there's no reason to think the Stop Wall Street Looting Act will meet a different fate, particularly as Democrats continue to squabble over their signature legislation.”
“Maybe The Metaverse Can Save Facebook. Maybe.” (Insider). “Next week, the company is expected to announce a huge rebrand, which will focus on its expansion into the so-called metaverse. It's a "genius" and "classic" move in the world of branding strategy that could help Facebook, experts told Insider, but ultimately it may not be enough to save the company's reputation.”
“Trump’s Tech SPAC Could Make Him Billions With Meme-Stock Frenzy” (Bloomberg). “News late Wednesday that the former president’s nascent media enterprise, Trump Media & Technology Group, is planning to go public via a special purpose acquisition company has sent retail investors into a frenzy, even with few details released. The stock gain drove the implied value of the new venture to more than $8.2 billion.”