The Week That Matters (Feb 26-Mar 2, 2024)
"It's a long way to the top if you want to rock and roll." Bon Scott, AC/DC
Bubble talk is silly.
Back in November, the author got lucky and was able to attend the Sohn Conference in Sydney. As he described it at the time, he loved the stock pitches but thought the panel discussion sucked.
Panel discussions are self-serving at the best of times. They tend to work well in Y Combinator style settings because the start-up world is often based, at least at pre-seed level, on smoke and mirrors. Unfortunately, panel discussions have become part of the broader investment world. It’s a shame. Real investing doesn’t need cozy discussions, full of anchoring and confirmation bias. It needs analysis based on critical thinking, valuations and cash flow generation.
The discussion at the Sohn Conference was disappointing because it was full of financial platitudes while it lacked any discernible differentiated opinion. The representatives on the stage came from the largest asset managers in the world. They presumably had access to all the latest research on the economy and the world’s best corporates. They were in a perfect position to give the audience some insightful nuggets about what might happen next.
Unfortunately, all they could agree on was private credit might be the best investment over the next five years. None of them argued that the market had bottomed in September, and it was time to think through which growth names to go long, as this newsletter did. Public equities actually seemed to be a dirty word.
The author mentions this as he still believes the average asset allocator around the world is OVERWEIGHT private credit and is SHORT growth (read US tech) and Japan. This wouldn’t have been such an issue if the market hadn’t melted up the way it has but the move is now probably freaking the average institutional allocator out. The move in crypto didn’t help sleeping patterns either this week as risk appetite is clearly back. And if Nasdaq has a 1000 point move over the next couple of weeks, then those first mortgages yielding 9% in his or her private credit sleeve might feel like a huge opportunity cost.
Valuations matter but so does money flow and positioning. We spend an awful lot of time thinking about what the flows from a Bitcoin ETF can do the price of bitcoin. We don’t spend enough time thinking through what the 10–15-year love affair with David Swensen’s style of investing means for money flows from institutional investors into public equities, if the market continues to motor higher.
The market might get tricky post the CPI print on March 12th but talk of a bubble is hugely premature. If you don’t believe the author, Bank of America has a brilliant report on the history of bubbles. They compare today’s move with moments like John Law’s Mississippi Bubble, the Nifty Fifty Bubble of the late 1960s and the previous Bitcoin Bubble in 2020. The good news is what we have seen thus far is very tame relatively speaking. Are we just getting started? The author thinks we are on the cusp of a major bull market that will last for the rest of the decade. (Not financial advice)
This is either 2010 or 2016.
The author has argued that this is either 2010 (broad based earnings recovery) or 2016 (multiple expansion driven by China turning things around). Perhaps it’s a combination of the two. What is clear is we seem to be seeing an earnings recovery and it’s across all sectors. As mentioned last week, we need to see an earnings inflection to justify valuations for the broader market. The author is starting to think that’s happening in full splendor now.
Tech is obviously the focus for everyone. We have discussed at length how the semiconductor cycle has bottomed out and is recovering. This week we got more evidence that the recession in the cloud industry is also coming to an end. The best leading indicator for cloud stocks is the net new ARR added in a quarter. Isn’t there reason to be optimistic? The author believes the street is too bearish on many cloud names. But it’s just not tech!
Daimler Trucks announced amazing earnings, for example, this week. Like many industrials (CAT, DE, CMI, PCAR), it is also seeing new highs for its share price. Interestingly, it announced a huge buyback. Japan gets a lot of attention for its corporate sector’s proactive shareholder focus (buybacks, share cancellations), but it’s happening everywhere. The idea that the bull market we have seen is solely dependent on Nvidia is laughable.
Growth Investors Rule
Jerome Powell’s attempt at being Paul Volcker did achieve one positive thing. It made good growth companies better. An environment where interest rates were elevated meant companies had to shed the “growth at any cost” mantra pushed down to them by greedy venture capitalists in Silicon Valley. Market share no longer became the only goal. Free cash flow, profitability and better balance sheets became the focus.
Two of the author’s favorite names, Shopify and Uber, were good examples of this trend. Shopify ditched its logistics business and Uber focused finally on becoming cash flow positive. What’s going to stop it now?
Cathie Wood is not a popular person these days, but she is right about one thing. We live in an age of rapid secular growth (digitalization, data and healthcare, AI). We just have better companies to choose from now. Watch for a return of a Tiger or a Baillie Gifford. Cathie Wood might be vindicated in the end. By 2030, her returns might be better than the returns of Andreesen Horowitz (AH). Her stats are marked to market. What do you think AH’s blockchain fund of 2018 has returned?
Small Caps?
This newsletter has criticized people, who talk about the Russel 2000 all the time and has argued in favor of a large cap focus. We live in a winner-take-most economy. Category-killer products, if they can scale, compound and become increasingly important in our daily lives. That is why the Magnificent 7 deserve to outperform. The Victorians had steamships, railways, and telephones. We have Apple, Google and META.
But the author is starting to warm up to some of the smaller names. It would seem that despite Jerome Powell’s best intentions to destroy small business, many of them are doing better than expected and importantly some are seeing EPS growth. It’s still early to get too excited perhaps but there are many names that could be multi-baggers this year if the earnings picture becomes clear.
One part of the small end of town that has been decimated is the commodity related stuff. Despite having the good fortune of living in Australia, the author tends to avoid mining names. For the author, commodities are merely a trade. They are horribly cyclical and do not compound. That being said, from time to time, he has conviction. He is bullish the uranium price and has owned the stocks for a while. He even picked up more Cameco recently. (Not financial advice)
One bit of news recently got him thinking about the broader space. The FT recently announced Elliott, the US activist investor, is setting up a company to hunt for mining assets worth more than $1 billion.
When a hedge fund announces a new fund strategy, the author tends to worry. It’s often a way to hide poor performance from its core fund but Elliott is different. Elliott has moved into different asset classes with ease in the past and nailed it. Is it therefore time to think through what an infrastructure boom globally could mean for some of the explorers around the world? If China is going through what Japan went through in the 1990s, will it have to build, build and then build? Could the price rout for global lithium producers be coming to an end? Answers on a postcard. The author has been wrong about this space before.
As always, thanks for reading. If you get a chance, look up John Law (pictured above). He deserves a movie. The Mississippi Bubble was a low point, but he had an amazing mind and had access to the wealthy and the powerful of Europe that would have given Jeffrey Epstein a run for his money. Wishing you the very best this week to you in business, trading and family! Until next week.
Best regards
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
Thx Mateen for this week’s comments