October picks available now
The new Prime and Select picks for October are available starting now, based on a model run put through Today (September 29). As a note, I will be measuring the performance on these picks from the first trading day of the month, Tuesday, October 1, 2024 (at the mid-spread open price) through the last trading day of the month, Thursday, October 31, 2024 (at the mid-spread closing price).
What we’re reading (9/26)
“The Fed Slashed Interest Rates Last Week, But Treasury Yields Are Rising. What’s Going On?” (CNBC). “With its larger-than-normal cut last week, the Federal Reserve sent a clear message that interest rates are heading considerably lower in the future. The Treasury market, though, hasn’t been paying attention.”
“Justice Department Probes Server Maker Super Micro Computer” (Wall Street Journal). “Super Micro Computer, the server maker that saw its business take off with the artificial-intelligence boom, is being probed by the Justice Department following a critical report by an activist short-selling firm, according to people familiar with the matter. The probe is at an early stage, the people said. A prosecutor at the U.S. attorney’s office in San Francisco recently has contacted people potentially holding relevant information.”
“Was Jack Bogle Right About Smart Beta All Along?” (Morningstar). “Among this year’s 10 bestselling strategic-beta offerings, funds that have outgained Vanguard Total Stock Market Index over the past five years have received 80% of net new sales. Five of those 10 funds openly market themselves as growth portfolios, while two more favor high-quality companies that trade like growth stocks. That development, it must be confessed, evokes Bogle’s concern about ‘hot factors.’ It seems that after many years of holding out, strategic-beta investors have decided if they can’t beat growth funds, they should join them.”
“No ‘Get Out Of Jail Free Card’ For Caroline Ellison” (The Intelligencer). “On Tuesday afternoon, Judge Lewis Kaplan sentenced Caroline Ellison to two years in prison and three years of supervised release, announcing his decision came in the same courtroom where, hardly six months earlier, he sent Sam Bankman-Fried to prison for a quarter-century. Ellison had been the star witness against the crypto mastermind — flawed, but extremely clear and devastating — who had helped the government convince 12 jurors to render SBF guilty in a highly complex case. That’s why Ellison’s sentence was a surprise.”
“OpenAI Turmoil Is A Bad Look For Its Huge Funding Round, VCs Say. ‘I Would Vote With My Feet.’” (Business Insider). “At OpenAI, leadership shake ups are becoming something of an autumnal tradition. Less than a year after the ousting and rapid reinstatement of CEO Sam Altman, the company behind ChatGPT has seen three of its top leaders resign suddenly in the same week it moves to close what could be the largest funding round in the history of Silicon Valley.”
October picks available soon
I’ll be publishing the Prime and Select picks for the month of October before Tuesday, October 1 (the first trading day of the month). As always, SPC’s performance measurement for the month of September, as well as SPC’s cumulative performance, will assume the sale of the September picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Monday, September 30). Performance tracking for the month of October will assume the October 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 (Tuesday, October 1).
What we’re reading (9/8)
“We Will See More Spikes In Inflation” (The Market). “In Mr. Rogoff’s [Harvard Professor of Economics and Public Policy Ken Rogoff] view, the global financial markets are facing fundamental changes in the coming years. ‘I think we’re at a turning point. We’re entering a period where volatility is just going to be higher,’ he says. ‘We’re not going back to this world of very reliably low inflation and low interest rates.’”
“In Praise of High-Volatility Alternatives” (Cliff Asness, AQR). “Everyone knows that it’s compound returns over time that matter, and everyone knows that volatility (‘vol’) is a drag on compound returns. E.g., 30% up and then 30% down is 9% down; 50% up and 50% down is 25% down. And, to go to extremes, one -100% means compound returns are -100% forever (there’s no compounding your way out of Hades). But there’s a caveat that often gets left out. What everyone knows is true is only true if we are discussing an investor’s whole portfolio. If anyone believes that only compound returns matter for the components (I’ll call these ‘line items’) of the whole portfolio, particularly modest-sized line items, particularly diversifying ones, then they are actually wrong.”
“Apple Looks To AI To End iPhone Slump” (Wall Street Journal). “Will artificial intelligence help Apple sell more iPhones? That question looms over the tech giant Monday as it holds its annual fall product event, where it is set to unveil a new generation of iPhones. The iPhone 16 lineup isn’t expected to have many new hardware features—beyond the usual faster chips and improved cameras. Instead, Apple is expected to promote its new AI feature, called Apple Intelligence, as a main selling point. So far, consumers have yet to embrace AI capabilities as a primary reason to upgrade. Apple’s leading smartphone rival, Samsung, has heavily promoted its latest devices’ AI capabilities. AI was only a minor selling point for carriers after the initial batch of sales, according to surveys BayStreet Research conducted at U.S. carrier stores.”
“OpenAI Is Fighting To Keep Cofounder Ilya Sutskever’s Files Secret” (Business Insider). “OpenAI apparently doesn't want anyone poking around its former co-founder’s computer. Lawyers in a high-profile copyright lawsuit between OpenAI and book authors are fighting over whose files should be subject to discovery. In a heavily redacted letter to the judge filed on Thursday in New York federal court, lawyers for the Author's Guild said OpenAI has objected to including six current and former employees as ‘custodians’ in the lawsuit. A custodian refers to someone in possession of relevant evidence that would need to be turned over during the discovery process.”
“Jittery Home Buyers Want The Election To Be Over Before They Make Their Move. ‘Nobody Knows What’s Going To Happen.’” (MarketWatch). “Fall is traditionally a slower time for home sales, but this year, buyers seem extra wary. Uncertainty over the presidential election, questions over the direction of the U.S. economy, and confusion about new rules for home-buying brought on by the National Association of Realtors legal settlement have some buyers hitting the brakes on what could potentially be the biggest purchase they will ever make. Not to mention the possibility of a Federal Reserve interest-rate cut on the horizon. Applications for mortgages fell in August to the lowest level since last October, when mortgage rates neared 8%. The decline in applications was “puzzling,” given that it followed a sharp drop in rates[.]”
What we’re reading (9/7)
“Jobs Slowdown Frustrates Investors Who Wanted Certainty On The Fed” (Wall Street Journal). “The August jobs report was just good enough to keep markets guessing what the Federal Reserve will do this fall. That could be a problem. The Labor Department said Friday that the U.S. economy added 142,000 jobs last month, below expectations for 161,000 but up from the prior month. The unemployment rate ticked down to 4.2% from 4.3%. But beneath the surface there were more worrying signs.”
“Wall Street Is Worried About Carl Icahn” (New York Times). “Shares in Mr. Icahn’s company started tumbling in May 2023 when Hindenburg Research, the short-selling firm run by Nate Anderson, published a report questioning Icahn Enterprises’ financials. Among other things, Hindenburg accused Icahn Enterprises of having a ‘Ponzi-like economic structure’ and paying a dividend it couldn’t afford. (It has since cut its dividend.) He also questioned Mr. Icahn’s use of personal loans backed by the stock.”
“The Less-Efficient Market Hypothesis” (Cliff Asness, Forthcoming in the Journal of Portfolio Management). “Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion. I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons. I offer three hypotheses for why this has occurred, arguing that technologies such as social media are likely the biggest culprit. Looking ahead, investors willing to take the other side of these inefficiencies should rationally be rewarded with higher expected returns, but also greater risks. I conclude with some ideas to make rational, diversifying strategies easier to stick with amid a less-efficient market.”
“There Are Limits To Investor Appetite For Pod Shops” (Dealbreaker). “We were very eager for the launch of former Point72 Asset Management President Doug Haynes’ new hedge fund. And not simply because Haynes has never actually managed money: He went from [consulting] to lead Steve Cohen babysitter, for as long as the authorities required Cohen to have a babysitter, anyway, and then back to consulting. No, it’s because we couldn’t wait to see how this self-professed expert on the use of language would deploy it on Norias Research Group’s whiteboards (irreproachably, if the arbitrator is to be believed) and with the firm’s female employees, if in fact it had any. Alas, in spite of an appetite for multi-strategy hedge funds so insatiable that pensions and endowments began starting their own in-house to fill their demand, no one else was nearly as eager as we were.”
“Viral Videos Of People Stealing Money From Chase ATMs Were Just Plain Check Fraud” (CNN Business). “A number of viral TikTok videos had some people believing they could get “free” cash from Chase ATMs. But it was just a glitch – and those customers were actually committing fraud, according to the bank. Over the weekend, videos appeared on the app showing people depositing checks for large sums of money at Chase ATMs and then making a withdrawal for a smaller yet substantial amount, leading them to believe they had discovered a bug and were hitting the jackpot. The problem is that this is just a form of check fraud, a criminal offense. Chase said in a statement to CNN that the issue has “been addressed” and warned people not to try it.”
August performance update
Here with a performance update for August.
Prime: +1.86%
Select: -0.53%
SPY ETF: 2.01%
Bogleheads Portfolio (80% VTI + 20% BND): +1.74%
There was a lot of excitement about a potential “rotation” back toward value stocks (and small caps) at the start of the month. I don’t have a good sense of what the prevailing sentiment is now. Market participants are clearly very focused on the implications of the impending end to the latest rate hiking cycle, which Fed Chair Powell has made clear is happening now. All else equal lower rates obviously raises asset prices and facilitates economic activity generally, but “all else” is never equal and there are now at least some concerns about the prospective economic weakness motivating the rate cuts. Of note, though, Stoney Point’s model — the ingredients for which are various value indicators (some novel and some not) — performed very well in the year or so following the last round of significant rate cuts in 2020 at a time when underlying economic weakness was surely much more acute or at least uncertain, which you can see in the chart below.
(Admittedly it hasn’t done so well since!)
Total Performance History
September 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, I will be measuring the performance on these picks from the first trading day of the month, Monday, September 2, 2024 (at the mid-spread open price) through the last trading day of the month, Monday, September 30, 2024 (at the mid-spread closing price).
September picks available soon
I’ll be publishing the Prime and Select picks for the month of September before Monday, September 2 (the first trading day of the month). As always, SPC’s performance measurement for the month of September, as well as SPC’s cumulative performance, will assume 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 (Friday, August 30). 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 (Monday, September 2).
What we’re reading (8/29)
“Feuding Founders Of Two Sigma Hedge Fund Stepping Down” (Wall Street Journal). “The founders of mega hedge fund Two Sigma are stepping down as co-chief executives in a bid to resolve a yearslong clash that had riven the $60 billion quant-trading powerhouse. Disagreements between John Overdeck and David Siegel, first reported by The Wall Street Journal, were so intense and distracting that they inhibited decision-making, according to people at the firm. Things got so bad Two Sigma felt compelled to disclose the strife to investors. Over the years, the relationship between the two had evolved “from irritation to cold war to hot war,” according to a person familiar with them.”
“SpaceX’s Risky Mission Will Go Farther Into Space Than We’ve Been In 50 Years” (Vox). “The team will spend five days aboard SpaceX’s Crew Dragon vessel, and will travel 870 miles away from Earth, in the farthest crewed mission since 1972’s Apollo 17 spaceflight to the moon. That distance will put the craft more than 200 miles inside the Van Allen radiation belts — regions in space that encircle the planet and are highly radioactive. They were detected on the first US space mission, in 1958, and their highly charged, energetic particles can damage spacecraft instruments.”
“What’s Going On With Leveraged Treasury Trades” (Capital Flows and Asset Markets). “Reading the excellent article by Brian Meehan of Bloomberg Intelligence, ‘Basis Trade Growth Is Massive’, I was reminded just how stupid clearinghouses really are. If you ever meet a head of a clearinghouse, I can assure it was not brains that got them to this key position in global finance. As the article points out, their is now a USD 1.2 trillion notional short position in US treasury futures. You should not read this as the market being bearish on treasuries. It is a levered trade to make a ‘risk free’ return on the difference in price between off the run treasuries and treasury future positions. For every short position in the treasury futures, there should be a long position in the physical market.”
“Wobbling Trump Trades, Harris Rise Have Wall Street Rethinking Bets” (Bloomberg). “Indexes from Goldman Sachs Group Inc. that track trading strategies for each party show the Democratic one started outperforming the Republican one right around the time Biden stepped down as candidate. And options positioning shows traders are paying more for protection against volatility around Election Day, even though overall volatility is expected to remain below the long-term average.”
“Fare Evasion Surges On N.Y.C. Buses, Where 48% Of Riders Fail To Pay” (New York Times). “Every weekday in New York City, close to one million bus riders — roughly one out of every two passengers — board without paying. The skipped fares are a crucial and growing loss of revenue for the Metropolitan Transportation Authority, which is under severe financial pressure. New York’s long-running fare evasion problem, among the worst of any major city in the world, has intensified recently; before the pandemic, only about one in five bus riders skipped the fare.”
What we’re reading (8/25)
“U.S. Treasuries Not The Safe Bet They Once Were, Research Says” (Reuters). “Long touted as hands-down the world's "safe haven" securities, the behavior of U.S. Treasuries during and after the COVID-19 pandemic calls that label into question, suggesting they are little different from the debt issued by the likes of Germany, Britain, France, or even big corporations. That's the key finding of new research presented at the Kansas City Fed's annual research conference in Jackson Hole, Wyoming. It examines a shift in investor behavior in that period that raises questions about the ‘exorbitant privilege’ the U.S. government has long enjoyed to borrow broadly on the global market even as federal budget gaps grow ever wider.”
“Mortgage Relief Is Coming” (Calafia Beach Pundit). “[T]he market expects the funds rate to fall 200 bps over the next 12 months. Thanks to these anticipated cuts, the 10-yr Treasury yield has fallen to 3.8%, down significantly from a high of 5.0% last October. 30-yr fixed mortgage rates—which are driven primarily by the 10-yr Treasury yield—have fallen from a high of 7.8% last October to just under 6.5% today.”
“Don’t Get Your Hopes Up About The Housing Market” (Business Insider). “[T]he impact of lower rates on affordability is complicated. On the one hand, lower borrowing costs would likely make mortgages cheaper for buyers and encourage builders to construct desperately needed new homes. But in the short term, a rate cut could trigger a rush of buyers to enter the market, overwhelming any new supply and driving up competition and prices. A rate cut ‘would probably result in more competition because demand would grow more than supply would,’ Daryl Fairweather, chief economist at Redfin, told Business Insider.”
“Why Is Rent So High? The Justice Dept. Blames A Tech Firm’s Algorithm.” (Washington Post). “The Justice Department and attorneys general from eight states are suing a Texas-based software company accused of using complex algorithms to enable widespread collusion in rents by landlords.”
“The Summer Is So Hot, Workers Are Wearing High-Tech Ice Packs” (Wall Street Journal). “New technologies for keeping people cool no matter the conditions are growing in popularity and sophistication. Used by soldiers on patrol, fast-food workers or mascots in costumes, what they have in common is simplicity, affordability and ease of use—all factors that have limited the deployment of this technology to date. These real-life Earth suits have the potential to keep people from suffering heat injury when the weather outside exceeds the temperature and humidity at which the human body can effectively cool itself.”
What we’re reading (8/24)
“How Costco Hacked The American Shopping Psyche” (New York Times). “In 2019, one quarter of U.S. consumers shopped at Costco. Today it is nearly one-third. Costco is the third-largest retailer in the world, behind only Amazon and Walmart. But the success of Costco goes far beyond hoarding. The company has hacked the psyche of the American consumer, appealing to both the responsible-shopping superego (‘Twelve cans of tuna for $18!’) and the buy-it-now id (‘I deserve that 98-inch flat screen’).”
“Preliminary Benchmark Revisions Wipe Out 30% Of Jobs Growth In The Past 16 Months” (Angry Bear). “Every month I write about the Jobs Report. But while it is timely, it is only an estimate. There is an actual census of over 95% of all employers that also gets reported, called the QCEW, and it is the “gold standard” of actual jobs growth (or loss). Its two drawbacks are that it is not seasonally adjusted, and it is reported almost 6 months after the end of the quarter it updates. Which is a lengthy introduction to saying that it was just reported through March of this year this morning. More importantly, the BLS preliminarily re-benchmarked all of its data beginning in March of last year. And which is a further introduction to saying that, as expected, job growth was a lot less late last year and earlier this year than we originally thought.”
“What We Know About Kamala Harris’s $5 Trillion Tax Plan So Far” (New York Times). “In a campaign otherwise light on policy specifics, Vice President Kamala Harris this week quietly rolled out her most detailed, far-ranging proposal yet: nearly $5 trillion in tax increases over a decade.”
“The Hell Of Self-Service Checkouts Is Becoming Kafkaesque” (The Telegraph). “The cost of living crisis hasn’t helped and supermarket chains are responding [to theft] with ever-more Kafkaesque security measures. For example, there are now shops where you can’t pass through an exit barrier until you’ve swiped your receipt. A friend recently went into a branch of Sainsbury’s on a futile quest for avocados, only to find she couldn’t leave as there were no assistants in sight and she had not forked out money. In the end, she had to buy some crisps solely to exit, which was effectively blackmail.”
“Messing Up The Closest Thing To A Sure Thing In The Stock Market” (Wall Street Journal). “Over the 10 years ended Dec. 31, 2023, Morningstar found, investors in the aggregate earned an average of 6.3% annually, or 1.1 percentage points less than the mutual funds and ETFs they owned. That echoes earlier findings from Morningstar and several academic and other studies. The consensus is clear: Investors typically underperform their investments, not just in mutual funds and ETFs, but in hedge funds and stocks as well.”
What we’re reading (8/19)
“Coming To A Cash-Strapped Company Near You: Creditor-On-Creditor Violence” (Wall Street Journal). “Grand alliances. Secret pacts. Betrayal. It’s all in a day’s work in the booming market for low-rated corporate debt. U.S. companies that struggle to repay their below-investment-grade bonds and loans have increasingly squeezed concessions from lenders by pitting them against one another. The private-equity firms and wealthy individuals who own most of the companies call the deals ‘liability management exercises,’ or LMEs. Debt investors call them ‘creditor-on-creditor violence.’”
“Alex Karp Has Money And Power. So What Does He Want?” (New York Times). “He’s not a household name, and yet Mr. Karp is at the vanguard of what Mark Milley, the retired general and former chairman of the Joint Chiefs of Staff, has called ‘the most significant fundamental change in the character of war ever recorded in history.’ In this new world, unorthodox Silicon Valley entrepreneurs like Mr. Karp and Elon Musk are woven into the fabric of America’s national security.”
“If The World Had A Hyperscale Datacenter Capital, It Would Be... Northern Virginia” (The Register). “If the internet can be said to have a geographic location, then perhaps it is Northern Virginia, which has the largest share of the hyperscale datacenter capacity within which the world's data is stored. Hyperscale companies accounted for 41 percent of the entire global bit barn presence last year, and this share is increasing, as The Register reported recently. Figures from Synergy Research Group show that Northern Virginia – close to Washington DC, and where the CIA is headquartered, FYI – accounts for nearly 15 percent of that entire hyperscale capacity – at least double that of where the next largest concentration can be found in Beijing, China.”
“Home Depot Issues A Warning About The Economy” (CNN Business). “The home improvement giant, a bellwether of consumer spending and the housing market, lowered its sales expectations for the year. It said customers were spending less on home improvement projects, pressured by higher interest rates and concerns that the economy is getting worse. Home Depot’s business is closely tied to the housing market, and high interest rates are putting a brake on housing turnover and consumers financing larger projects.”
“Private-Equity Firms Desperate For Cash Turn To A Familiar Trick” (Wall Street Journal). “Private-equity firms eager to pay their investors are returning to an old habit: loading up companies with risky debt. The rush into junk debt is letting buyout firms deliver payments to investors—and themselves—during a sharp slowdown in deals that is making it hard to sell portfolio companies. The transactions, which rely on low-rated debt, are known on Wall Street as dividend recapitalizations.”
What we’re reading (8/18)
“The CEO Who Made A Fortune While His Hospital Chain Collapsed” (Wall Street Journal). “Steward Health Care System was in such dire straits before its bankruptcy that its hospital administrators scrounged each week to find cash and supplies to keep their facilities running. While it was losing hundreds of millions of dollars a year, Steward paid at least $250 million to its chief executive officer, Dr. Ralph de la Torre, and to his other companies during the four years he was the hospital chain’s majority owner.”
“How A.I. Can Help Start Small Businesses” (New York Times). “[F]or some entrepreneurs, generative A.I. is already a game changer. It is helping them write intricate code, understand complex legal documents, create posts on social media, edit copy and even answer payroll questions. The result, they say, is that A.I. allowed them to get their companies off the ground more quickly, and more efficiently, than they would have without it.”
“Perspective Into The Pentagon’s U.F.O. Hunt” (New York Times). “Luis Elizondo made headlines in 2017 when he resigned as a senior intelligence official running a shadowy Pentagon program investigating U.F.O.s and publicly denounced the excessive secrecy, lack of resources and internal opposition that he said were thwarting the effort. Elizondo’s disclosures at the time created a sensation. They were buttressed by explosive videos and testimony from Navy pilots who had encountered unexplained aerial phenomena, and led to congressional inquiries, legislation and a 2023 House hearing in which a former U.S. intelligence official testified that the federal government has retrieved crashed objects of nonhuman origin. Now Elizondo, 52, has gone further in a new memoir. In the book he asserted that a decades-long U.F.O. crash retrieval program has been operating as a supersecret umbrella group made up of government officials working with defense and aerospace contractors. Over the years, he wrote, technology and biological remains of nonhuman origin have been retrieved from these crashes.”
“‘Dr Doom’ Files To Launch ETF Based On His Calamitous Outlook” (Financial Times). “Nouriel Roubini, aka Dr Doom, has been dishing up his downbeat takes on the global economy and markets for decades. Now investors will finally get the chance to see how his gloomy insights translate into financial returns as Roubini, who earned his Dr Doom moniker for foreseeing the 2008 global financial crisis, turns to managing money for the first time at the age of 66.”
“Insider Trading By Other Means” (Harvard Business Law Review). “For more than thirty years, one of the most prevalent strategies for insider trading has gone undetected and unaddressed. This Article uncovers the techniques by which executives and directors sell overvalued stock worth more than $100 billion per year, shifting losses to ordinary investors. The basic idea is that insiders conceal their suspicious trades by publicly reporting them (as they are required to do) in ways that confuse or discourage investigators. We develop a taxonomy of concealment strategies, complete with suggestive examples. We then empirically test our taxonomy using a database of essentially all stock trades since 1992. We find that insiders who trade using the subterfuges we describe outperform the market by up to 20% on average. Worse yet, we find evidence that this simple subterfuge works. Essentially no one has ever been prosecuted for undertaking one of these suspicious trades. Nor do journalists or scholars seem to appreciate them. Accordingly, we call for scholars and prosecutors to cast a wider net in their studies and market surveillance, then discuss implications for the design of insider-trading reporting requirements and related legal rules.”
What we’re reading (8/17)
“The Extreme Renters Who Own Nothing, Not Even Their Jeans” (Wall Street Journal). “Brittany Catucci rents everything she can. Like lots of 20-somethings, she doesn’t own the place where she lives, a three-story townhouse in Emeryville, Calif. But she and her boyfriend, Eric Markley, also rent their queen-size bed, Catucci’s work clothes and repair tools from Home Depot or AutoZone.”
“New Real Estate Rules Sow Confusion, At Least in Short Term” (New York Times). “The changes that went into effect this weekend decouple the two commissions: Sellers are no longer expected to pay buyers’ commissions, though they can still choose to do so, and the proposed commission split can no longer be advertised on the online database commonly used to sell homes, the M.L.S.”
“Inside The $93 Million Wall Street Heist That Stemmed From Russia” (CNBC). “The money Vladislav Klyushin made from stolen financial information literally piled up, filling a safe with stacks of hundred-dollar bills. At one point, he was hoarding over $3 million in illegal gains. In less than three years, Klyushin’s cybersecurity scam amassed more than $93 million. His company, M-13, acted as a front for Russian hackers to steal information under the guise of protecting it, getting their hands on American corporate earnings reports before the rest of the world could see them. Then, they traded based on that insight, buying and selling stock from well-known American companies like Skechers, Snapchat and Roku.”
“Alleged Ponzi Scheme Salesman Either A Bad Speller Or A Literate Masochist” (Dealbreaker). “There are some notable things about the nine-figure fraud allegedly perpetrated by St. Augustine’s Russell Todd Burkhalter. For one, his Drive Planning’s pitch deck noted that the “bridge loan opportunities” offered were backed by $113 million in cash and real estate—in other words, one-third of the money he raised, such that he could conceivably have actually backed those “opportunities” with that amount of collateral and still had nearly $200 million to spend on Ponzi payments and other things.”
“Democratic Favor Channel” (Dealbreaker). “A large body of literature in economics and political science examines the impact of democracy and political freedoms on various outcomes using cross-country comparisons. This paper explores the possibility that any positive impact of democracy observed in these studies might be attributed to powerful democratic nations, their allies, and international organizations treating democracies more favorably than nondemocracies, a concept I refer to as democratic favor channel. Firstly, after I control for being targeted by sanctions from G7 or the United Nations and having military confrontations and cooperation with the West, most of the positive effects of democracy on growth in cross-country panel regressions become insignificant or negatively significant.”
What we’re reading (8/15)
“Stock Indexes Rally After Data Calm Economic-Slowdown Fears” (Wall Street Journal). “The S&P 500 climbed 1.6% Thursday, rising for a sixth consecutive session. The tech-heavy Nasdaq Composite added 2.3%, while the Dow Jones Industrial Average rose 1.4%, or about 550 points. A trio of fresh data points reassured investors that consumer spending, the backbone of the U.S. economy, is holding up.”
“Investors Are Piling Into This Area Of Fixed Income For Protection Against Election And Market Volatility — And For Lower Taxes” (Business Insider). “Dan Close, head of municipals at the $1.2 trillion global investment manager Nuveen, is seeing increased appetite for these government-backed debt instruments. While 2022 and 2023 saw large net outflows from the muni market, 2024 has seen $12 billion of inflows year-to-date.”
“The Change That Realtors’ Powerful Trade Group Resisted For Decades Is Finally Happening” (CNN Business). “Starting this Saturday, the days of the standard 6% commission — two to three times what agents make in other developed economies — are effectively over. Sellers, who historically have paid both the listing agent and the buyer’s Realtor, will be on the hook for their agent’s fee. Buyers and their agents will negotiate a compensation plan upfront. ‘It’s a partial deregulation of a marketplace that was regulated not by government, but by the industry,’ said Stephen Brobeck, senior fellow at the Consumer Federation of America, a nonprofit advocacy group. ‘In the long run, it’s going to be a very good thing.’”
“The Unraveling Of A Crypto Dream” (New York Times). “But Mr. Pierce’s vision of a crypto-fueled economic turnaround has yet to materialize, according to hundreds of pages of court records and interviews with more than two dozen people familiar with his efforts in Puerto Rico. His business partners have turned on him, and some colleagues say he is running out of cash. There is no clear evidence that the arrival of tech entrepreneurs has helped the local economy.”
“Tax-Free Tips” (Marginal Revolution). “If the demand for labor is inelastic, the value of a wage subsidy is captured primarily by the employer. The wage subsidy arrives, and the employer does not start trying to hire more labor as a consequence. After all, the demand for labor is inelastic. Since the demand for labor has not gone up, the net wage does not go up in the final equilibrium. The employer can just keep the subsidy, or if the subsidy is given to the worker, the employer can lower wages (or the quality of working conditions), leaving the previous net wage intact and the worker will not leave. So if you think minimum wage hikes are a decent idea, you also ought to think that non-taxed tips will benefit the boss, not the workers.”
What we’re reading (8/14)
“Venture Capital’s New Reality Check: ‘A Ton Of People Looking To Get Out Everywhere’” (Business Insider). “During the zero-interest-rate years, the ranks of the VC industry swelled…Now, the market downturn has cast many aspects of the industry in a harsh light. Rising interest rates, delayed initial public offerings, and a slump in public markets have hit the venture industry hard…Poor fund performance has made carry worthless, a growth-stage principal said. Many investors received meaningful carry in funds only a few years ago. But funds from the pandemic years didn't perform well because many companies were overvalued.”
“Mars’ Biggest Deal Clinched By Secretive, Deep-Pocketed Family” (Reuters). “A running joke among residents of McLean, Virginia is that the most secretive organization headquartered in their Washington D.C. suburb is not the Central Intelligence Agency, but rather a confectionery and pet products company. Here, the second-richest U.S. family runs Mars Inc, maker of M&M's candies and Pedigree pet food, out of a nondescript building with no corporate logo or any other identifying signage. The CIA's offices, on the other hand, even have a parkway exit sign…Mars, flush with cash and dominant in the food categories it is active in, decided to place its biggest ever bet on expansion -- the $36 billion acquisition of snack and cereal maker Kellanova it announced on Wednesday.”
“In Mars Megadeal, Big Food Wants To Get Bigger” (Wall Street Journal). “The agreement, one of the biggest on record among food makers, comes as consumers are balking at higher grocery prices and scrutiny is growing over the potential health impacts from processed food. Conditions are ripe for a fresh wave of consolidation as food companies’ sales growth slows and their stock-market valuations are depressed, according to Wall Street analysts and consultants. Pandemic-era pantry stocking and sharp price increases that continued in its aftermath fueled a sales boom for food companies. That growth has cooled, prompting executives to search for new ways to boost their businesses and cut expenses.”
“What Should We Do About Google?” (New York Times). “[C]onsider the remedies imposed on AT&T, the greatest tech monopoly of the 20th century. In 1956, the Justice Department settled a major antitrust suit against AT&T by requiring the company to stay out of computing — and to license, free, all of its 7,820 patents.”
“Temasek Spent Billions On US Tech Stocks Before July Selloff” (Yahoo! Finance). “Temasek increased the value of its holdings in 11 big tech firms by $3.3 billion in the three months ended June 30, according to an analysis of its two most recent 13F filings. The vast bulk of the increase — some $3.2 billion — went into six of those firms: Microsoft Corp., Apple Inc., Nvidia Corp., Alphabet Inc., Meta Platforms Inc. and Amazon.com Inc. By the end of July, however, most of those companies saw their stocks slide amid concern about the extent of AI-related gains and fears of a recession. Alphabet and Amazon’s share prices have fallen by about 12% since the end of June, while Microsoft’s are down around 7% over that period.”
What we’re reading (8/13)
“Markets Might Have Recovered. Investors’ Nerves Haven’t.” (Wall Street Journal). “[M]y guess is last Monday’s plunge shifted the psychology again. That’ll mean sellers appear more quickly when prices rise, and buyers are more reluctant to join in when prices fall. Watch out below.”
“Wall Street’s ‘Fear Gauge’ Might Be Lying To You About Last Week’s Market Turmoil” (Financial Times). “Based on the CBOE VIX’s intraday peak of 65.73, the market event that has been branded the ‘Summer Selloff’…was, as wags have been keen to point out, apparently one of the most significant volatility events to have ever hit US stocks. So was Monday August 5th really an event on par with the Covid-19 crash, the heights of the Notorious GFC, or Black Monday?”
“Starbucks Replaces CEO Laxman Narasimhan With Chipotle CEO Brian Niccol” (CNBC). “Starbucks announced Tuesday it’s replacing CEO Laxman Narasimhan with Chipotle CEO Brian Niccol, sending its stock soaring 24.5%, its best day ever. Chipotle’s stock fell over 10% on the news that Niccol would leave after a successful tenure at the burrito chain.”
“How To Read A Riot” (Financial Times). “What makes somebody riot? Why do people throw bricks at police while being filmed by dozens of phones, knowing it could get them a jail sentence that ruins their lives? Their decision may be political…[b]ut in fact, riots are not purely political events. They are more emotional than that. To understand them as a simple matter of rational actors calling for specific policies is to miss out a lot about why riots start, how they spread, and how authorities should respond.”
“Reservoir Of Liquid Water Found Deep In Martian Rocks” (BBC). “Scientists have discovered a reservoir of liquid water on Mars - deep in the rocky outer crust of the planet. The findings come from a new analysis of data from Nasa’s Mars Insight Lander, which touched down on the planet back in 2018. The lander carried a seismometer, which recorded four years' of vibrations - Mars quakes - from deep inside the Red Planet. Analysing those quakes - and exactly how the planet moves - revealed ‘seismic signals’ of liquid water.”
What we’re reading (8/8)
“S&P 500 Jumps 2.3% in Best Day Since 2022” (Wall Street Journal). “The S&P 500 posted its best day in nearly two years after a better-than-expected jobless claims report helped ease fears that the labor market is weakening. U.S. stock futures and Treasury yields rose immediately after the release of data showing initial jobless claims, a proxy for layoffs, were 233,000 during the week ended Aug. 3, down from the prior week’s recent high of 250,000. That helped alleviate some of the concern about a U.S. labor-market slowdown that rattled markets after last week’s weaker-than-expected jobs report.”
“U.S. Mortgage Rates Drop Sharply, With 30-Year At 6.47%” (New York Times). “Mortgage rates have fallen to their lowest level in more than a year, a balm for prospective home buyers and sellers in a challenging real estate market. The average rate on 30-year mortgages, the most popular home loan in the United States, dropped to 6.47 percent this week, Freddie Mac reported on Thursday.”
“Is There An AI Bubble — And Is It About To Pop?” (Vox). “How much is the future worth? Usually to answer that question, you’d need to ask philosophers or economists. But if you’re a tech CEO, you have an actual number: about $1 trillion. That’s how much the tech industry as a whole is set to spend building out the artificial intelligence industry over the coming years. And even in Silicon Valley, where several companies have market capitalizations that start with ‘T,’ a trillion dollars is a lot of money. And while you won’t find more fervent evangelists for AI anywhere than in the C-suite of companies like Google and Microsoft, eventually, all that money has to be recouped. The alternative would be an economic meltdown of the sort we haven’t experienced for years.”
“Paramount’s TV Networks Are Collapsing In A $6 Billion Hole” (Business Insider). “On Wednesday, Warner Bros. Discovery told investors its TV business was in free-fall, and that it would take a $9 billion writedown on those assets. On Thursday, it was Paramount's turn: The entertainment conglomerate, which is about to be acquired by David Ellison and a consortium of investors, just took a $6 billion charge on its TV business. For context: Public investors value all of Paramount's equity at $7 billion.”
“Not To Be Sniffed At: Dolce & Gabbana Launches Luxury Dog Perfume” (HNGN). “No need to wrestle your dog into the bath anymore. Italian luxury fashion house Dolce & Gabbana has launched a new perfume for canine companions. The ‘alcohol-free scented mist for dogs’ is on sale for 99 euros ($108 USD) and comes with a free collar -- but also a warning from animal rights activists, who say it could cause pets distress.”
July (and June) performance update
Here with an overdue performance update (I was delayed in dealing with data provider issues for about a month or so — in short, IEX Cloud shut down its API for good).
For July:
Prime: +4.42%
Select: +2.06%
SPY ETF: +0.95%
Bogleheads Portfolio (80% VTI + 20% BND): +1.76%
For June:
Prime: -0.60%
Select: +0.14%
SPY ETF: +3.25%
Bogleheads Portfolio (80% VTI + 20% BND): +2.21%
June was another weak month for Prime and Select, but the rotation is July was notable and widely discussed. The AI megatrend driving the largest names in the S&P 500 seemed to deflate a bit and small-cap gains were explosive after years of weak returns relative to larger stocks. Those factors alone would not be likely to explain the outperformance of Prime and Select in July, but an improved outlook for value strategies more generally would.
August has been a bloodbath across U.S. equities so far, so let’s see how the rest of the month plays out.
Total Performance History
August picks available now
The new Prime and Select picks for August are available starting now, based on a model run put through Today (July 31). As a note, I will be measuring the performance on these picks from the first trading day of the month, Thursday, August 1, 2024 (at the mid-spread open price) through the last trading day of the month, Friday, August 30, 2024 (at the mid-spread closing price).