The Week That Matters (6th-10th Nov, 2023)
"And by decent wages, I mean the wages of decent living." FDR Roosevelt
Be careful who you listen to.
This newsletter has argued that we should be more optimistic about US equity markets for the following reasons:
Seasonality effect - the third year of an election cycle tends to finish strong.
Real interest rates peaked a couple of weeks ago.
The US Dollar might have peaked too.
Inflation is in the rear-view mirror. 5 Year/5 Year Forwards are at 2.35%-ish, down month on month. Ignore what the Fed’s Mary Daly said this week. The Fed is always behind the curve.
The tech earnings recession is over. And importantly, the semi-conductor cycle has bottomed, as noted by TSMC a few weeks back. (See the AMAT share price).
Unfortunately, yesteryear’s financial titans, who should be spending time with their grandchildren, waste too much time on the conference circuit, scaring people about the future. Up until recently, it was Stanley Druckenmiller who had been prolific with his doom and gloom narrative (has he been right about much since the 1990s?). This week, it was Ken Griffith’s turn to sound the alarm bells.
Market making is a fantastic business and Ken Griffith has, without doubt, excelled at it, most recently providing “free” trading for the Robinhood crowd, but Ken Griffith talking about interest rates is like the venture capital firm, Sequoia, producing reports on the macro environment, as it did last year.
Venture capital’s reason for existence is identifying secular growth opportunities while market making is about spotting pricing anomalies using incredibly powerful computers. They both should have little to do with the direction of the economy. And didn’t Ken almost lose his shirt in 2008 anyway?
The US won’t default!
It’s not just old timers who get it wrong a lot. The track record of the rating agencies (Moody’s, Standard and Poor, Fitch) is terrible at spotting credit risk. Didn’t we all learn that in the movie, The Big Short?
The pundits will no doubt make a huge deal about the Moody’s downgrade of US debt. But it is just noise. Why are they even rating US debt? The US will not default. It can print money to pay interest and redeem bonds as they mature for a long time to come.
Interestingly, Blackrock recently said they estimate private credit AUM to have risen from just over $200 billion in 2008 to over $1.6 trillion today, with just under half of it made up of direct loans! For the author, that’s something that the agencies should be all over rather than US sovereign risk.
Fallen Angels
For the author, Ray Dalio has always come across as someone who is clinically depressed. Why else would he have more principles than all the Greek philosophers put together? His book, Principles, is like a 12 step program for investment professionals. His first and only principle should be generating alpha for his LPs. Judging from his stats, it clearly isn’t. He was always a marketer first, an investor second, no?
His theories are also a tad plagiaristic and indulgent. How much of his long debt cycle theory is based on Strauss-Howe generational theory? And won’t his big idea unravel soon? He has based a lot on China becoming a truly global player (his kids had to learn Mandarin apparently). China turning inward seems like a more likely outcome now, doesn’t it?
The author has also wondered why he never saw any Bridgewater trades during his career in finance. He might have been in the wrong divisions but he has asked a lot of people and the answer is always the same. They never saw any Bridgewater flow. Interesting, right?
“The Fund: Ray Dalio, Bridgewater Associates, and the Unravelling of a Wall Street Legend,” was released this week. The author hasn’t read it but it would seem there are some salacious details in it. He is buying it this week. He wants to know what the urine story is all about.
To be fair, Ray Dalio was not the only investment star to get caught up in the crossfire this week. Warren Buffet was accused of trading his PA ahead of moving positions in the Berkshire Hathaway portfolio.
Some of the author’s friends LOVE Warren Buffet (yearly pilgrims to Omaha) but the author does not view him as being the warm, salt-of-the-earth character he is often portrayed as. The truth is he has always been on the sharp side of things and has not been wedded to his investment principles on countless occasions. In fact, he has shown enormous versatility when he has spotted a deal.
His best years, in terms of performance, were arguably during the 1960s when his Father was a Senator! When his father did retire from politics, he actually lost his nerve. If he hadn’t found Charlie Munger, he might not even be the household name he is today.
The author knows criticizing Buffet is like criticizing Mother Theresa but we should remember Christopher Hitchens did exactly that in the 1990s. We need a tell-all book about the big guy, followed up by one on Jamie Dimon, our generation’s Jack Welch. Let’s go!
Three stocks that support a bullish thesis
The author would suggest the following stock earnings and price action this week are reasons you shouldn’t be too bearish:
UBER (UBER US)
The author has argued before that Uber might be one of the breakout stocks of the year. Uber is break even now and it is run by the very competent, Dara Khosrowshahi, who transformed Expedia.
Uber is THE success story of the post cloud VC era. If we’re really honest, there aren’t many. Most of fintech, for example, has been a big waste of time and money. But Uber’s success highlights one thing about tech. We live in a winner-take-most world. When a company reaches a critical mass, its scale becomes a huge barrier to entry. Isn’t that why some of the businesses that were started in the late 1970s/early 1980s have effectively become natural monopolies? (Microsoft, Apple, Oracle, Qualcomm, maybe even Cisco).
This is important to remember when everyone says the Magnificent 7 are getting toppy. The author doesn’t think that’s the case at all. In the lower interest rate environment the author envisages, stocks that can compound (high ROIC) will surprise everyone by how well they perform. There is no point wasting your time with silly main street businesses that have small market caps. Rather celebrate the fact we live in a Victorian Age of tech and buy the large cap, tech compounders.
FERRARI (RACE US)
The author has argued before that although neo-liberal economics has not created a fair society, it has generated a lot of money! Rising house and share prices and rapid growth in emerging markets has created widespread wealth on a scale unseen in human history. We are still a few years away from the world John Maynard Keynes predicted in Economic Possibilities for Our Grandchildren (1930) but we don’t need to be that far away from it, if we get the right policies in place and stop all the bloody wars.
Wealth is a strange dynamic as once it reaches a critical mass, it doesn’t go away that quickly. Look at the UK. The wealth it accumulated from the 17th-19th Century from colonialism gave it some buffer to get through the 20th Century despite some terrible strategic decisions (e.g. getting involved in the First World War).
The US is fantastically wealthy, despite all the bearish commentary out there. Think household wealth, think IP, think universities. So is Japan. The wealth generated in Japan from Japanese boom from the 1960s was a miracle. China, to be fair, might still be poor on a GDP per capita basis but its pockets of wealth are extreme.
Ferrari plays right into that theme. It is one of the world’s leading luxury brands. It shares the key characteristics of all great luxury goods companies : pricing power, brand power, perceived store of value, & exclusivity. And it seems to be CRUSHING it.
It’s not just Ferrari, of course. Embraer, arguably one of the best companies in Brazil, makes very popular private jets for the exceptionally well-heeled. The management is super optimistic about sales going forward. The ADR is ERJ. (Not financial advice).
This brings the author to the luxury brands in Europe. Someone once said “fashion is to France what the gold mines of Peru are to Spain.” LVMH was susceptible to profit taking when it reached a market cap of E500 billion earlier in the year. But doesn’t the sell off create a buying opportunity? The French are the best in the world at summer vacations, striking and fashion, no?
NINTENDO (NTDOY US)
Nintendo is “discovered” by value investors every three years but it’s one for the growth investors right now. Given the positive direction Japan has taken and the Nikkei’s underperformance vs the S&P500 in USD terms, it is my suggestion that the Boston accounts might start buying the stock in earnest again, following the company’s earnings this week. Nintendo raised its full fiscal year profit forecast to 420 billion yen ($2.8 billion) from the 340 billion yen ($2.3 billion) estimate it gave in May.
Nintendo is emblematic of the latent potential in Japan. It has an amazing franchise and has $10 billion of cash on its balance sheet but there has always been a feeling it isn’t doing enough for its shareholders. But there are positive signs emerging (isn’t that the case across all of corporate Japan?). A few years back, Nintendo embraced a subscription model (it could do more with it) but more importantly, perhaps, there is a lot of evidence that it is slowly becoming a new Disney of sorts, moving from just being a simple video game maker to a dominant entertainment conglomerate. When a stock’s ROE is higher than its forward PE, it is surely worth a look, no? (Not financial advice)
The Case for Labor Representation
The author has as much disdain for Hollywood as Ricky Gervais does, but Fran Dreschner has always been a favorite of his since she was in The Nanny, which she produced! And her speech, after Hollywood writers succeeded in getting better pay, is an important one.
A lot of people have been indoctrinated to believe unions are always bad. They are not. They serve a purpose. You don’t need to be a Socialist to see that (the author isn’t one and he hates Marxism). You just need a brain (not even a heart!).
We completely ignore how unions are playing a part in Japan getting out of its deflationary funk. Wage increases are important as it brings back a joie-de-vivre to an economy. It brings back animal spirits. It helps people feel optimistic about life.
Powell has done everything possible to hurt the working poor with his reckless rate hikes. It is a shame. For a brief moment in 2021, it seemed the low pay end of town might see an improvement in their conditions for the first time in 40 years. Unfortunately, the media made us worry about the impact of a higher wage for a Starbucks worker as if it really was that significant for the broader economy. Higher wages might have hurt the bottom line for SMEs but what do you think the higher cost of capital has done to the average small business? Isn’t that why you avoid IWM at all cost?
As always, thanks for reading. I have added to positions over the last couple of weeks but it’s all simple stuff - large cap technology stocks and some high growth software names. As always, DO YOUR OWN RESEARCH. None of this is financial advice.
I wish you the best with trading, business and family this week. We all have much more in common than the media allows to believe when the war drum is beating.
Shalom (Hebrew), Salaam (Arabic), Shlama (Aramaic)
Mateen
DISCLAIMER: None of this is financial advice. The opinions expressed are purely my own opinions and it is imperative for you to do your own research. They do not represent the views of any company I am associated with.
I am reading the Dalio book now. Its very interesting. He is one of those people you mention who predicted market calamity for many years before it happened. His principles don't seem to have a lot to do with his money making, more about management of other parts of the business. They also had to re-tool the ratings to ensure he was always the smartest as at one point he was mid-tier in his own ratings framework (and clearly that wasn't something he was willing to accept).