January Week 4 to February Week 3: Monster BS
In a change to the usual format, which is already diverging from the usual format, the review covers a fortnight and is split in two parts.
So here is Part 1 - Public Service & Macro
Edit
This has been drafter for a while, so as it turns out, this is covering 4 weeks of my musings on the Macro dramas.
Portfolio updates will follow - covering the last week of Jan & 1st week of Feb and a two for one edition covering February Week 2 & Week 3.
Public Service:
Tech bubble, luck, infinite capital whatever the case maybe - an impressive gentleman with a very different approach to investing from which lessons can be taken (about resilience as much as anything else).
Of the various bits of public service - I think this maybe the most serving.
Market/Macro Observations:
With two weeks of coverage, we have Central Banks & Bonds, Geopolitics & asset allocation & our Monster Tech saviours.
Volatility
Market have been volatile & UK really is holding up - thank the market gods for creating dinosaurs before they created software - may even be something the Victorians did for us!!
Two weeks ago, I said whether Monster Tech or the FED could save us - think Monster Tech started great and then Mr Powell messed it up.
Then Google rocked up & Facebook stole their thunder (how very Noughties??).
The FED is behind the curve and doesn't know what its doing and they told us as such.
Humility isn't the worse trait one can have.
The BoE raised interest rates & some people even thought it should have been double that.
Even the ECB suggested that they might at some point be open to changing the language around monetary policy.
Bond yields be crazy & I will let Chris Rock borrow this one from me if he wishes:
Germany walks into a capital market,
It pays to borrow money 😁😁
But seriously, that volatility huh - What's up with that?
Biggest intraday comeback/drawdown/reversal since 2008/2009 - this is the kind of thing that makes me a permabear.
2008 was a month after Lehman going bankrupt & the world losing a few billion every other day it felt like.
I guess CBs are now reaching the stage where they are going to be taking a few billion (trillion?) out of the (bond) market.
My anecdotal observation (for me & FinTwit): the inclination to speculate is dwindling & confidence is shaken.
Ukraine
Meanwhile there are tensions between Russia & NATO & sadly for Ukraine, it has to deal with the fall out.
Never fear though - European leaders are speaking to Russian leaders to resolve the issues and come up with a security pact - worked out OK for Poland I guess.
But rather than idiotic & insensitive comments & bringing it back to shop.
Not great in terms of the price of oil/energy - My portfolio & I are consumers of energy.
Other than oil/materials/banks - I also don't have any utilities exposure (Telecom + is one that got away).
Utilities isn't a sector I want to own (too much government), but being diversified means holding things you don't like.
Obviously there have been some announcements on the energy price cap (which was raised by 50% - hope that is transitory), but some people will get a rebate on their council tax but will pay more in national insurance & energy firms will provide a loan for a part of the price rise.
I have no real idea how this will impact the sector - hence don't want to own it!
Maybe the best method is getting exposure to Russia - cyclical & cheap and levered to the areas that I lack exposure?
Probably "uninvestable" but if I was a hedge fund, I'd certainly start looking at $ denominated Russian corporate debt like Gazprom.
Brazil looks like it is making a transition to investable.
Moving onto Monster Tech - most people have meaningful exposure whether they know or care.
Now actually moving on to Monster Tech - the last time I said it was The Good (Apple, Microsoft, Google), The Bad (Amazon) & The Ugly (Metabook).
The same applies and far better analysis than I can come up with is available elsewhere, albeit some services charge.
I have repurchased Amazon & Google (damn near bottom ticked) if you believe me & I await getting slapped down for showing off!
I also purchased some Paypal, which I had bottom ticked until I hadn't!
Apple is left to Uncle Warren, Uncle Charlie & Uncle Larry - but hard to disagree with Uncle Warren when he says Apple is quite possibly the best business he has ever seen.
Amazon
Not quite as impressive as the market would have you believe in my view - Passive investors might say Thank Monster Tech, Amazon might say Thank AWS.
Or is it the increase in Amazon Prime fees (add maybe $7bn in revenue which should drop to Operating Profit - about 25% uplift). I for one have no intention of giving up my Amazon Prime Membership.
Yr on Yr growth in the quarter is a pedestrian single digits (>20% on TTM Basis) & they made a loss in the quarter (Lord Sugar must be angry). AWS on the other hand gets you 35% growth & is a whopping 75% of operating profits.
They have made some huge capital investments as well as P&L investments - they are certainly investing in the customer offer and very hard to say (given recency bias) that those investments won't work out and they are funded with tax deductible and very cheap debt!
Almost as if Amazon is a low margin retailer rescued by the cloud, or you give them the benefit of the doubt & say scale economies returned (before the scale economies are received!)
On the other hand, Advertising is a pretty high margin, cash generative business.
Guidance for Q1 2022 - 3-8% growth, single digit at upper even allowing for FX and Operating income down by a third at the upper end.
If I had to guess, this may go the way of Facebook - the first time they announce investments & growth rolling over, people think Re-Investment Runway and the second time they think, what is wrong with you Zuckerberg.
Interesting that there were no buybacks in 2019, 2020 or 2021 but 20% of the buyback completed Jan to Feb 2022.
The founders leaving the role of Chief Executive did not work out all bad for Google, Microsoft or Apple investors (just saying!)
Facebook
Talking of growth rolling over, the avatar formerly known as Facebook disappointed the market. Now obviously when a mega cap falls 25% you buy it and stick it in your pension.
On the other hand, this is a company that is losing revenues (20%+ growth) to a large incumbent fast growing competitor (TikTok), challenges with their relationship with a key distributor, while dealing with AntiTrust issues!
User up 8% / 9% yr on yr for family of apps Daily 2.8bn, Monthly3.6bn, FB up 5% & 4% 1.93bn & 2.91bn - Quarter on quarter growth has stalled (and can't really rise from here!)
20 & 37% revenue growth - Q1 guidance 3-11% growth $33.7bn, $118bn - Q1 Guidance 27-29bn
Guidance not appreciated - 3-11% growth - competition for screentime & engagement methods (Video/Reels) less monetisable - although if you sit in 2024 and look at this company from 2019 to 2023 - doubt it will be the worse CAGR you can get.
TikTok is doing to Facebook what Facebook did to Google - interestingly while Facebook was eating Google's lunch (in mobile no less), Google owned 3 of the 5 apps used most!
Interesting things to see in Facebook commerce (and International), where I understand in some countries the internet is Facebook.
To be honest, if you ignore the "revenue investments" and the guidance, this was a monster quarter but guess those accounting standards are a little less worthless.
Ridiculous cash generation with a challenged business under regulatory pressure - very tobacco.
Spending a lot of money on the Metaverse and will likely throw it away because Mark Zuckerberg is the Warren Buffett of Social Media - VR Labs has quadrupled revenues in two years (just saying!).
Microsoft
Dropping the Mic one more time - is there any business they are in that does not grow.
20% revenue growth, Gross margins flat - operating profit up 25% - no real dramas QonQ or HY. 90+% recurring - 1.4bn devices running Windows 10 or 11 (~1.6bn Apple devices)
Still a rock solid balance sheet - 97bn in revenues delivers 40bn Operating Profit, all of which flows to operating cash & 30% free cash flow - could be $60bn after SBC. $27bn to be recognised just from deferred income!
All businesses firing, investments in cloud engineering, gaming & LinkedIn, commercial sales - Cloud 28%, Productivity/Business 21%, Personal Computing 15% - all have operating leverage & lower margin improvement where they have invested in R&D.
Really is firing - dominant position and large installed base - delivering multiple solutions - and I dare say these companies will become the next universities & the providers of IT robotic process automation
Security business revenue - $15bn run rate - 45% growth on the year (interesting, building in design) - margin guidance upgraded from start of year - growth in tact (note seasonal weakness in Q3 & Q1)
Lots of legal risk / technology & technology disruption risk but still a number of growth drivers - 60bn free cash - 2.2 trillion M/Cap not egregious - but probably need it sub $250 to be interested (which might happen as don’t think Q3 will be as good QonQ)
Technicals not looking good, but that is not unique to Microsoft.
Interesting side note - Revenues US/ROW roughly 50/50 whereas US M/Cap much larger than 50%. Expect US Monster Cap are not their biggest customers.
Google
$258bn revenues (up 41%) - every region up 40% except US (39%). 90% increase in operating profit to 78bn and 31% operating margin, probably does have soft Comps. Traffic Acquisition costs up 30% (less than revenues)
Cost of Sales up 25% - server equipment less depreciation - also part of the margin improvement is due to operating on lower cost base in prior year - higher content costs in Youtube as well
78bn Operating income translates to same Operating Cash flow & one third used for CapEx - free cash at $50bn - probably should have similar valuation to Microsoft - bit more regulatory/legal risk probably
Another bullet proof balance sheet, $82bn repurchased in last two years ($50bn in current year) - Youtube growth a little light compared to prior year but expect that had tough comps, 20:1 stock split, not sure why / late to party / TOP?
Google Cloud growth out performing AWS & Azure, albeit from a far lower base, Other bets still a cash drain - but not sure it is fair to treat that as waste. Ignoring soft comps, Quarter on Quarter high teens every region except Asia
Investments in AI - Pathway AI (multi task learning), Pixel langugage detection/translation (actually useful innovation on a phone!!) & protein mapping - Youtube seems to be turning into a platform type business - 15bn views daily!!
Note guidance is weak - no longer benefit from Soft Comps & there was a recovery + booming demand environment - will be putting even more into CapEx - aggressively investing in Cloud given size of market opportunity
When it comes to Monster Tech - I can't imagine this being the optimal place to maximise returns over the next 12 months.
They have almost certainly gotten ahead of themselves but if you were to ignore the valuation and look at the business performance, I think there is very little to complain about.
These are amazing businesses doing amazing work and adding real value - note that changes at Apple are reducing ad effectiveness - i.e. making it harder for businesses to find customers.
I appreciate my capital allocation decisions are meaningless for these companies but they have done a great deal for me and I think they do a great deal for society (perhaps not all of it good).
A lot of the commentary talks about how legislative changes may hurt small businesses which is a very interesting take for companies called out as Monoply/Oligopoly businesses exercising too much market power.
I am happy to lock all these away although with the length of the legal issues & the business / technological complexity, I find it (and always have found it) hard to own them in the size they deserved (but as it turns out, that was not so bad with Facebook!).
Facebook has some genuine challenges - network Maths in reverse I expect is going to get ugly just as fast - time will tell. I am questioning the Occulus/iPhone comparison - maybe Apple was successful with a closed system because the phone in effect became an extension of the individual (unlike the Mac). If they get anywhere close to where they have been historically, I imagine it is a screaming buy!!
Jobs
There was also some jobs data but the data was so complicated because of statistical changes that anyone commenting on it before today is probably not worth listening to. I'd say it was akin to Amazon results - great headline but less good under the surface.
Maybe bad news is good news or good news is bad news or the FED will just do its things.
What is probably most disconcerting (for people who want a healthy economy) is that wages are not keeping pace with inflation, although if I was a central banker, I would not be too unhappy if demand is reduced without having to make seismic shifts in interest rates.
Inflation
Ooh - this just is not becoming transitory huh - even being an inflationista, I am getting a little surprised by these prints and given the situation on Russia's western front, it could become even more problematic - especially those pesky non-core food & energy costs.
Many years ago, someone told me it is not a good idea to minute things unless absolutely necessary because a stupid off the cuff comment could become a headline.
Central bankers released their minutes - guess they have learned to be more careful about what they say.
A note on personal finance and asset allocation
An occupational pension has (without my request) decided to switch from 50:50 UK : Developed World to 90:10 Global Low Carbon Equity Tracker (excludes fossil fuels) & Emerging Market.
If anything these moves would further encourage me to add UK / Brazil / Russia / Energy and reduce World & EM passive funds.
Call me crazy but the last decade has been great for US and less so for other parts of the world.
I expect US was not the place to be from 2000 to 2010 (a decade during which RBS became the biggest bank in the world (briefly)), so the place that has been great the last decade is probably not the best place for the next decade.
Russia/Ukraine
So the situation seems to have escalated since I made my flippant comment above and quite frankly I do not know enough about the circumstances to be able to comment.
Normally, this would not preclude my offering an opinion, but I think this matter is more sensitive than that.
Under such a scenario, I resort to Game Theory/Incentives and given that I would not want to be Ukraine.
For sanctions to be effective, the sanctioning public would need to take some pain - is there willingness to deliver that pain - and really how much cost am I willing to bear to assist Ukraine?
The fact that I don't want to answer the question speaks volumes.
In the meantime, I do sometimes wonder (hope), that western leaders are politicking (haven't heard about Partygate, Inflation concerns - blame it on the Russians, I'm Mr Macron, Monsieur President & Superpower broker).
Clearly this is not grounded in evidence, so my new hope is that my cynicism is a function of old age not a lack of trust.
From a market perspective, it does seem to be a case of War On War Off which creates its own challenges and does provide a ready made explanation to the talking heads.
A lack of defense / materials and a portfolio where materials/energy are costs, I expect cannot be good for the businesses.
The beneficiaries are pretty far outside my circle of competence, but it might be worth looking into & developing some competence.
Ignoring market effects, I sincerely hope that the situation is resolved without significant costs to anyone, especially the people who are in the eye of the storm.
And Finally
The reason this is all getting finished today is I am going away early tomorrow morning - in effect today is the deadline. I left it until the last minute and now it will all probably be rushed (very deadline driven & think I work better under pressure).
Makes me understand why I made such a horrible employee and I should apologise to some of my erstwhile bosses/colleagues)
Part of the reason it has worked out this way is I was overwhelmed (and behind) on the January/February and then remarkably underwhelmed in the two weeks that followed.
Therefore writing/typing it up was a chore and then a non-event. The solution to this would be discipline!
Why am I still doing it (other than to satiate my adoring audience) - discipline.
The next installment once the backlog is up will likely be another two week special because of my travels and it is going to be pretty hard to provide Macro BS given internet will be patchy (at best), but in exchange, I might be able to share some underwater images from the Red Sea.
Adieu
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