July Week 5 Part 1 - Hello Kettle, It's Pot calling ...
China Risk;
More Macro;
Monster Tech;
IPOs / Banking Risk Management
In a change of regular service, I am going to split this week into two, given that it has been something of a monster week.
To that end, my portfolio review will be in Part 2, whereas this is my general observations & cursory thoughts. Wonder which will get more engagement.
The picture is better in Part 1 (if I may say so)
The charts below are taken from the excellent SharePad
Public Service
This week A Memo from Howard Marks, after quite a hiatus (unless I have missed some).
Now some people might think, a memo such as this and the conclusions thereon are a sign of capitulation and we must be close.
I have a lot of sympathy for the permabear view (sharing it myself), but as an investor (and a human (just)), we need to adapt to the circumstances around us and I agree with a lot of the insights.
Expecting a high quality small cap industrial to trade at a single digit multiple - times have changed & we need to adapt.
There is a reasonably strong argument to make that macro/fiscal policy will result in Gold being a good investment over the next decade, but if Gold is the best place to be over a decade, you are likely looking at a decade of low (real) returns.
Buying a fantastic company at a lower valuation than a higher valuation will result in better returns.
As an aside, why have all these commentators been feeding us these fake yields & returns?
Valuation for me is a lot to do with risk management and to that end, the starting multiple matters.
If I believe the market is 50% above reasonable value, but I am absolutely fine with a 50% drawdown, I would suggest going "all in" is reasonable in the context of risk management & if you are OK with a 100% drawdown, then why not lever up.
If I accept relative valuations, I have no issues filling my portfolio with great companies that will be fine - maybe won't shoot the lights out - but I learned over time (read losses) to reign in my ambitions.
Cursory Market/Macro Observations
Quite the week for Macro & Market Observations, with China regulatory risk, Monster Tech & Central Bank speakers.
So we have had China regulatory crackdown on business - it has been going on for a while and you can see it in the share prices of Dragon Tech over the last few months.
I'm not a China watcher nor a China Bull and I have never visited (would love to).
I am not sure how many people who speak about China on TV know China in any depth.
I am more of a numbers person - Numbers tell me that China/EM have political risk, DM have economic risk.
One of those is a blow up risk that is harder to manage, but if you can be on the right side of it, the payoffs are good.
Please do read my rambles on the subject, but you might find this podcast more informative/interesting:
Dip Buyers Beware
The issues that seem to be the cause of this "crackdown" are:
- Treatment of drivers at Didi (think there have been similar issues at Deliveroo/Uber maybe);
- FinTech acting as a loan broker on behalf of state owned Banks (and by extension state guarantees) - I recall some minor issue arising because securitisation of some guys called Fanny Mae & Freddie Mac
- Anti Trust Issues around dominant market positions / use of data / preventing competition - not heard anything like that about US tech companies becoming too dominant.
From what I can tell, the big difference seems to be that Chinese authorities actually got things done beyond posturing.
Of course, we have had calls about China being uninvestable as a result of political risk.
Well, I present GBP against JPY, CHF, EUR & USD since Autumn 2015:
Incidentally, chart watchers might see a bowl - I still think bowls/cups/saucers are all things I eat/drink out of.
On Friday (or was it Thursday), we had accusations of the plunge protection team coming in to support the market.
I am not sure, but I don't think valuations in more developed markets would be where they are without existing institutional support & a (perhaps mistaken) belief, that in the event of any issues, there will be institutional support forthcoming.
Its probably OK because our institutions are independent!
Don't want to see it, but I'd be interested in the reaction if policy pronouncements resulted in Monster Tech fell 20% in a week (20-25% of S&P 500 / 30-40% of Nasdaq 100).
Would there be a walk back or at least an effort to ease financial conditions by Central Banks?
Central Banks spoke - it is interesting that there seems to be real fear in suggesting in person at least that interest rates may rise/tapering may come.
You always hear what you want to hear, but for me the key takeaways were:
- Recovery is better than we expected, inflation is higher & less transitory than we expected (adjusted inflation is OK) but our policy has not changed in response to this because employment has not recovered;
- On the above, I think over 2020 and throughout my time investing, I have found it shocking how willing people are to support asset prices & push on a string as it were;
- At the risk being completely wrong, if I save in a bank & the bank lends it - money circulates - it has "velocity" & increases "transactions" - I put savings in the FTSE 100 - less so.
- I have no desire to lend to the bank at current interest rates, but if they paid me 3-4%, I might not bother holding something like Tesco/GSK/Gold?
- That said, it was nice to take some action as a result of CB watching:
- Bought some Gold - which I view as an alternative to cash, not an alternative to Stocks;
- I may well need to increase risk tolerance and run less cash in portfolio; and
- As for wife's portfolio - the current cash allocation is irresponsible especially in the context of portfolio objectives - I made some purchases & will be looking at other things.
- As I noted last week, I was debating something like a Ruffer Investment Company, who I think are better able to manage any macro concerns I may or may not have.
- More inflation data (PCE this time) in the week & GDP prints suggest that there might be something to the transitory narrative - all time high year on year and rising month on month - but below Wall Street Expectations - Oh Wall Street.
- Who knows - maybe these smart people with great resources/data (CBs not Wall Street/City) - know what they are doing after all!
Monster Tech put out their reports - and oh my WOW!!! (AGAIN!!!!).
Lucky Monster tech doesn't really need institutional support!
I don't have much to say, other than to say make clear that $8 Trillion is beyond my analytical capabilities.
Few things I noticed:
Microsoft (I hold):
- Azure disappointed the market with 51% growth;
- If recruitment is to be disrupted, I think LinkedIn has a shot - 51% growth;
- Products revenue grew at 5%, Service revenues at 30% - where the returns to scale tend to be (cough Tesla cough)
- Deferred Revenue = FY revenue, half of it recognised in next 12 months!
- Supply chain issues and shortages
Alphabet (I hold, but is not in the portfolio I include in reviews)
- Revenue up 60% (sure soft comparatives) & a 35% operating margin
- YouTube - a 7bn revenue business had 83% growth - 83% - 20% of quarterly revenues.
- There are 62 companies in the FTSE 350 with Revenue above £5bn
- 3% plus forecast free cash flow yield
Facebook (I hold, but is not in the portfolio I include in reviews)
- Revenue up 56% YonY (soft comps), but 10% quarter on quarter - last quarter was not soft
- Operating income up 10% Q on Q and 101% Y on Y - 42% operating margins;
- Interesting comment that Video is half the time - reduces ad impressions - expect growth to come for price/ad, whereas in this quarter impressions & price per ad went up;
- Literally half the world is on a facebook product - some interesting things in Video (under monetised - note YT growth)
- Quest - VR apps - social/metaverse - next big thing in mobile internet - immersive - will cost a lot of money and starting on e-commerce - WhatsApp enabled payments
- As it turns out, they guided far lower year on year growth going forwards, which Wall Street didn't like.
Amazon (I hold, but is not in the portfolio I include in reviews)
- Free cash flow down 62% & even more after lease repayments but Operating Cash flow up 16% Suggests some serious investment in the quarter
- Net sales up 24% YonY, 10% QonQ - Quarter included Prime to $113bn - 440bn TTM
- Operating Income up 32% YonY, down on quarter - TTM 29.6bn - 7% margin
- US (half business) - sales up 22%, Op Income up 45%, Intl sales up 26%, Op Income down 53%
- AWS sales up up 37% YonY, Op Profit 32% - why are those margins down?
- As it turns out revenues missed wall street estimates as did guidance - shares got hit by 7%
- Is Amazon guilty of underinvesting and are now catching up?
Apple (I Hold, via BRK.B - not in portfolio I review)
- I let uncle Warren review these results on my behalf.
- If one of the best controlled supply chains in the world is having issues, I worry what happens if a customer that is not 30-70% of your sales turns up.
- I am pretty loyal to Google & Microsoft, but if I was loyal to Mac & my equipment broke down, I would be far stickier than I am (and the equipment would cost a great deal more to replace!)
- 4% free cash flow yield, the best business WB/CM have seen,.
- Growing in higher margin areas (albeit dependent on product release cycles) & new lines and a lot more financial engineering to come - HMMM
These are amazing companies and as far as a do nothing sleep easy relative value portfolio is concerned, I don't think you can go far wrong owning these (based on present conditions).
It is a valuation risk I am more comfortable with than the likes of Pinterest - to pick a company at random.
Incidentally, one thing that was common for Microsoft & Google was increased useful life of servers/equipment - which could be interesting or gaming the accounts. I don't think Amazon did this.
As I said, $8tn - beyond my analytical capabilities.
As for missing Wall Street expectations / guidance - Oh Wall Street, What are we to do with you?
But if I was taking over from Jeff Bezos, I think it would be sensible to calm things down a little!
Imagine if it was a negative print - I shudder to think!
If these companies weren't throwing away all this (tax deductible) money to build what may or may not be the next big thing (pretty talented management teams I think), their operating margins would run closer to 60% and imagine them regulatory apples!
I have been somewhat critical of passive investing recently but I'd be pretty comfortable if these were my largest holdings.
My concern with passive investments is not reflected in Monster Tech allocations, but rather how passive investors (or more accurately), how the presence of an insensitive buyer can impact market activity / participant behaviour.
The charts below show Tesla since it was added to the S&P 500 (give or take) vs S&P 500 ETF; and
Memestocks vs Russell 2000 ETF (GameStop & AMC) since the half year rebalance & they became its largest constituents.
It would not surprise me if " Dumb Retail Apes" gamed the market to force Blackrock & Vanguard to purchase "Sh1tCos".
And Finally - more public service;
Stockopedia released an excellent guide on IPOs available here
There have been so many IPOs recently - so I think it is worth a read.
Pictures can be worth a 1000 words so, but below is the YTD of Renaissance IPO ETF versus S&P 500 & Nasdaq ETFs.
Of course, I could pick different dates and it might look better, but then I would not be creating the response I want from including this picture!
This was also the same week that Robin Hood made it's public market debut.
I am cynical at the best of times and haven't verified the below, but I encourage anyone interested to read this thread and thank the gentleman responsible even if you disagree.
If you believe there are rules & fiduciary duties to prevent this from happening, you would be right.
If you think these will protect you, I encourage you to read
I am not an Amazon affiliate (nor do I have any interest in the success or failure of this book).
It is not a short book but riveting (and for those who are/have been in the industry), not surprising.
I do want to clear something up though (feedback from a friend):
It has been brought to my attention that I am somewhat disparaging of an industry that gave me a lot (and indeed some of my former colleagues & friends).
I explained that I was being facetious - I also said, there is truth in all jokes.
But to be perfectly clear:
Some of the nicest, most honest & smartest people I know work in financial services
Nicer (at least less judgmental) than a lot of professions where "nice" is the default adjective.
When things happen, rather than maliciousness, it is more a case of "Everyone else is doing it" / "FOMO" / and in some very rare cases "An order is an order"
At the risk of playing fast & loose with the word interesting (one squarely for nerds), the below from Matt Levine on Credit Suisse & Archegos exemplifies things very well:
It made me chuckle, especially the line:
"Nor is this a story of individual stupidity or greed or recklessness; people generally had the right facts and were trying to do the right thing and kept each other in the loop. It’s just that they sort of kept each other in the loop as a substitute for actually doing anything. The processes were all moving along nicely, which gave everyone a false sense of security that they would produce the right result. Unfortunately the processes were slow and Archegos blew up quickly."
Adieu, Until Part 2
Comments
Post a Comment