Global Market Comments
October 23, 2020
(11 SURPRISES THAT WOULD DESTROY THIS MARKET),
(SPY), (USO), (AMZN), (MCD), (WMT), (TGT)
Global Market Comments
October 23, 2020
(11 SURPRISES THAT WOULD DESTROY THIS MARKET),
(SPY), (USO), (AMZN), (MCD), (WMT), (TGT)
Note to readers: Sorry for the short letter today but PG&E is about to turn off my electric power to reduce the risk of a wildfire during these high, hot winds from the east so I’m sending you just a few quick thoughts.
The Teflon market is back.
Bad news is good news. Good news is good news.
What could be better than that?
However, there are a few issues out there lurking on the horizon that could pee on everyone’s parade.
Risks of an asymmetric outcome right now are huge. Let me call out the roster for you.
1) The China Trade War Escalates – Every day economic advisor Larry Kudlow tells us that the trade talks are progressing nicely, and every day the administration pulls the rug out from under him with new sanctions. The last chance to avoid the next recession is upon us. A trade deal is the rational thing to do. Oops! There’s that “rational” word again.
2) Economic Data Gets Worse – After a great data run into the fall, they are suddenly rolling over. All of the forward-looking data is now 100% terrible.
3) The Fed Raises Interest Rates– This has been the world’s greatest guessing game for the past three years. Jay Powell has just promised NOT to raise interest rates for three years, so an increase would be completely out of the blue and have an outsize impact. The Fed lives in perpetual fear of the American economy going into the next recession with interest rates near zero! That would leave them powerless to do anything to engineer a revival.
3) Another Geopolitical Crisis – You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about North Korea, ISIS, Al Qaida, Afghanistan, Iraq, Syria, Russia, the Ukraine, or the Chinese expansion in the South China Sea.
Every one of these black swans has been a buying opportunity of the first order, and they will continue to be so. At the end of the day, terrorists don’t impact American corporate earnings, nor do they own stocks.
4) A Recovery in Oil – The next drone attack against Saudi Arabia could send oil really flying. If it recovers too fast and rockets back to the $100 level, it could start to eat into stock prices, especially big energy-consuming ones, like transportation and industrials.
5) The End of US QE – The Fed’s $4.5 billion quantitative easing, relaunched in March, could end as soon as it gets the sense that the economy is recovering too fast. That would take the punch bowl away from the party. Anyone who said QE didn’t work obviously doesn’t own stocks.
6) A New War – If the US gets dragged into a major new ground war, in Iran, North Korea, Syria, Iraq, or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.
7) US Corporate Earnings Collapse – They already have for the sectors of the economy where you can’t socially distance, like movie theaters, restaurants, and airlines. A much higher third wave of Covid-19 would do the trick nicely, bringing a new round of lockdowns. Do you think stocks (SPY) will notice?
8) Another Emerging Market (EEM) Crash – If the greenback resumes its long-term rise, another emerging market debt crisis is in the cards. Venezuela and Argentina are just the opening scenes.
When their local currencies collapse, it has the effect of doubling the principal balance of their loans and doubling the monthly payments, immediately.
This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.
9) A Trump Victory – Since the stock market has spent the last six months discounting a Biden win, the opposite result would be a total out of the blue shock. Count on a 10% dive in the (SPY) immediately, and 20% eventually. Polls can be wrong. Who knew?
10) Inflation Returns – Steep tariff increases on everything Chinese is rapidly feeding into rising US consumer prices. What do you think the Amazon (AMZN) wage hike to $15 means? If McDonald’s (MCD), Walmart (WMT), and Target (TGT) join them, we’re there. This is a stock market preeminently NOT prepared for a return of inflation.
I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.
Try a 10-mile hike with a heavy pack every night in the mountains. It works for me.
Down the Ambien, and full speed ahead!
“Every recession sows the seeds for the next business recovery, and every recovery sows the seeds of the next recession,” said hedge fund manager Leon Cooperman of Omega Advisors.
Global Market Comments
October 22, 2020
(IS AIRBNB YOUR NEXT TEN BAGGER?),
When the pandemic hit in February, I figured Airbnb was toast. Global travel had ground to a halt, and competitors like Wynn Resorts (WYNN) and Hyatt Hotels (H) saw their share prices plunge to near zero.
Instead, the opposite happened.
While the big hotels continue to roast in purgatory, Airbnb catapulted to a new golden age, and how they did it was amazing.
They turned all travel local. Instead of recommending that I visit Cairo, Tokyo, or Rio de Janeiro, they suggested Carmel, Monterey, or Mendocino, all destinations within driving distance. It worked, and the company is now moving from strength to strength.
My neighborhood in Incline Village, NV was almost always deserted outside of holidays. Now it is packed with Airbnber’s awkwardly moving in every Friday only to flee on Sunday.
As a result, Airbnb promises to be one of the biggest IPOs of 2021. And while the pickings have been thin lately, the world’s largest hotel deserves some close inspection.
How would you like to get a 90% discount on all of your luxury hotel accommodations?
During my most recent trip to Dubrovnik in Croatia, I rented an 800-square foot, two-bedroom, two-bath home inside the city walls for $300 a night.
A single, cramped 150 square foot room in the nearest five-star hotel was $600 night.
All that was missing was room service, a hand out for a big tip, and a surly attitude.
Sounds like a massive, game-changing disruption to me.
Thank you, Airbnb!
I was not surprised to hear that the home-sharing app, Airbnb, was given a $31 billion valuation in the latest venture capital funding round.
The big question for you and me is: Will the valuation soar tenfold to $300 billion, and how much of a piece of that will you and I be allowed to get?
To answer that question, I spent six weeks traveling around the world as an Airbnb customer. This enabled me to understand their business model, their strengths and weaknesses, and analyze their long-term potential.
As a customer, the value you receive is nothing less than amazing.
I have been a five-star hotel client for most of my life, with someone else picking up the tab much of the time (thank you, Morgan Stanley!), so I have a pretty good idea on the true value of accommodations.
What you get from Airbnb is nothing less than spectacular. You get three or four times the floor space for one-third the price. That’s a disruption factor of 7:1.
The standards are often five-star and at the top end depending on how much you spend. I found out I could often get an entire three-bedroom house for the price of a single hotel room, with a better location.
Or, I could get an excellent abode in rural settings, where none other was to be had, whatsoever.
That’s a big deal for someone like me who spends so much of the year on the road.
You also get a new best friend in every city you visit.
On most occasions, the host greeted me on the doorsteps with the keys, and then introduced me to the mysteries of European kitchen appliances, heating, and air conditioning.
Pre-stocking the refrigerator with fresh milk, coffee, tea, and jam seems to be a tradition the hosts pick up in their Airbnb orientation course.
One in Waterford, Ireland even left me a bottle of wine, plenty of beer, and a frozen pizza. She read my mind. She then took me on a one-hour tour of their city, divulging secrets about their favorite restaurants, city sights, and nightspots. Everyone proved golden. Thanks, Mary!
After you check out, Airbnb asks you to review the accommodation. These can be incredibly valuable in deciding your next pick.
I had one near miss with what I thought was a great deal in London, until I read, “The entire place reeks of Indian cooking.”
Similarly, the hosts rate you as a guest.
One hostess in Dingle, Ireland shared a story about picking up her clients from town after they got drunk and lost in the middle of the night. Then they threw up in the back of the car on the way home.
Guests forgetting to return keys are another common complaint.
Needless to say, I received top ratings from my hosts, as fixing their WIFI to boost performance became a regular and very popular habit of mine.
After my initial fabulous experience in London, I thought it might be a one-off, limited to only the largest cities. So, I started researching accommodations for my upcoming trips.
I couldn’t have been more wrong.
Just the Kona Coast on the big island of Hawaii had an incredible 50 offerings, including several bargain beachfront properties.
The center of Tokyo had over 300 listings. The historic district in Florence, Italy had a mind blowing 351 properties.
Fancy a retreat on the island of Bali in Indonesia and tune up your surfing? There are over 197 places to stay!
Airbnb has truly gone global.
Airbnb’s business model is almost too simple to be true, involving no more than a couple of popular applications. Call it an artful melding of Google Earth, email, text, and PayPal.
While no one was looking, it became the world’s largest hotel at a tiny fraction of the capital cost.
The company has 2 million hosts worldwide, and 100 million customers. That supply/demand imbalance shifts burden of the cost to the renters, who usually have to fork out a 12% fee, plus the cost of the cleaning service.
Hosts only pay 3% to process the credit card fees for the payment.
The tidal wave of revenues this has created has enabled Airbnb to become San Francisco’s largest privately owned “unicorn”,
To say that Airbnb has created controversy would be a huge understatement.
For a start, it has emerged as a major challenge to the hotel industry, which is still stuck with a 20th century business model. There’s no way hotels can compete on price.
One Airbnb “super host” in Manhattan at one point managed 200 apartments, essentially, creating out of scratch, a medium sized virtual “hotel” until the city caught on to them.
Taxes are another matter.
Some municipalities require hosts to pay levies of up to 20%, while others demand quarterly tax filings and withholding taxes. That is, if tax collectors can find them.
Airbnb may be the largest new source of tax evasion today.
In cities where housing is in short supply, Airbnb is seen as crowding out local residents. After all, an owner can make far more money subletting their residence nightly than with a long-term lease.
Several owners told me that Airbnb covered their entire mortgage and housing cost for the year, while paying off the mortgage at the same time.
Owners in the primest of areas, like mid-town Manhattan off of Central Park, or the old city center in Dubrovnik, rent their homes out as much as 180 days a year.
It is doing nothing less than changing lives.
That has forced local governments to clamp down.
San Francisco has severe, iron-clad planning and zoning restrictions that only allow 2,000 new residences a year to come on the market.
It is cracking down on Airbnb, as well has other home sharing apps like FlipKey, VRBO, and HomeAway, by forcing hosts to register with the city or face brutal $1,000 a day fine.
So far, only 1,675 out of 9,000 hosts have done so.
Ratting out your neighbor as an off the grid Airbnb member has become a new cottage industry in the City of the Bay.
Airbnb is fighting back with multiple lawsuits, citing the federal Communications Decency Act, the Stored Communications Act, and the First Amendment covering the freedom of speech.
It is a safe bet that a $31 billion company can spend more on legal fees than a city the size of San Francisco.
The company has also become the largest contributor in San Francisco’s local elections. In 2015, it fought a successful campaign against Proposition “F” meant to place severe restrictions on their services.
An Airbnb stay over is not without its problems.
The burden of truth in advertising is on the host, not the company, and inaccurate listings are withdrawn only after complaints.
A twenty something year old guy’s idea of cleanliness may be a little lower than your own.
Long time users learn the unspoken “code”.
“Cozy” can mean tiny, “as is” can be a dump, and “lively” can bring the drunken screaming of four letter words all night long, especially if you are staying upstairs from a pub.
And that spectacular seaside view might come with relentlessly whining Vespa’s on the highway out front. Always bring earplugs and blindfolds as backups.
Researching complaints, it seems that the worst of the abuses occur in shared accommodations. Learning new foreign cultures can be fascinating. But your new roommate may want to get to know you better than you want, especially if you are female.
In one notorious incident, a Madrid guest was raped and had to call customer service in San Francisco to get the local police to rescue here. The best way to guard against such unpleasantries is to rent the entire residence for your use only, as I do.
Another problem arises when properties are rented out for illegal purposes, such as prostitution or drug dealing.
More than once, an unsuspecting resident woke up one morning to discover they were living next door to a new bordello.
Wild parties that trash the dwelling, annoy the neighbors, and bring in the police is another worry. One such event in my San Francisco neighborhood resulted in a shoot-out that left five dead. Airbnbs are now banned in that area.
Of course, the million-dollar question is “When will the company go public?”
The current “unicorn” philosophy is to milk the company for all its worth, and take it public when it is about to go ex-growth.
That’s what happened to Twitter (TWTR), which grew exponentially, and then saw shares dive a gut-churning 72% after its initial public offering.
On seeing the massive crowds of new tourists packing Europe last summer, my conclusion is that the travel industry is entering a hyper-growth phase. Blame the emerging middle-class Chinese who seem to be everywhere.
That means that whatever price Airbnb goes public at, there may not be a ten bagger left for you.
But a two or three bagger may be possible.
The real shock came when I left Airbnb and stayed in a regular hotel. Include the fees and the cleaning charges, and the service is no longer competitive for a single night stay. Total costs now regularly run double the posted one-night price.
In any case, most hosts have two or three night minimums to minimize hassle.
When I checked in at a Basel, Switzerland five-star hotel, all I got was a set of keys and a blank stare. No great restaurant tips, no local secrets, no new best friend.
“It is fine to have the longest view in the room, as long as the thing at the end of the vista is a gigantic hill of money,” said John Lanchester of The New Yorker magazine.
Global Market Comments
October 21, 2020
(WHY YOU MUST AVOID ALL EV PLAYS EXCEPT TESLA),
Markets live on fads. Once a certain investment theme takes hold, the imitators start coming out of the woodwork in droves.
In 1989, all of the largest Japanese banks stampeded to issue naked short put options on the Nikkei Average by the billions of dollars when the index was at an all-time high. It then fell by 85%.
I remember signing the paperwork on a $3 billion deal for the Industrial Bank of Japan on behalf of Morgan Stanley. It’s been 31 years, but I’m still waiting for those investors to come after me.
Then there was the peak of the Dotcom Bubble in 2000 and no less that five online pet food delivery companies raised billions. (remember those cute sock puppets?) Every one of them went under.
So, what has been one of the biggest fads of 2020?
That would be electric vehicles.
You no longer have to wear Birkenstocks, grow your hair long, and smoke pot to drive an electric car. They are about to become a major part of the American economy. According to Adam Jonas at Morgan Stanley, EVs account for 1.3% of the total car market today and will grow to 10% by 2025 and 25% by 2030.
I have been involved in Tesla since its earliest days back in 2003. Then it was one rich man’s hobby, with technology that was a reach at best, and unlikely to ever see the light of day as a public company. There it remained for seven years.
Then they brought out the Model S in 2010, which I snapped up as fast as I could, picking up chassis no. 125 at the Fremont factory. My signature is still on the wall there. If it worked this had the potential to be a real car. If it didn’t, I would wind up with $100,000 worth of inert aluminum, steel, silicon, rubber, and copper.
The trials were then only just beginning for Musk. He faced nervous breakdowns, sleeping in factories, and SEC prosecutions. After a decade of abuse, suddenly everything clicked. Total Tesla production soared to over one million units and the shares leaped 150-fold to $500 from their post IPO low of $3.30. That move financed a lot of retirements among my readers.
I remember what Steve Jobs once told me; “Like many overnight successes, this one took decades to pull off.”
Suddenly, making electric cars looked easy. Raising money to finance them looked even easier.
Enter the hoards, which I list below, a roll call of the shameless:
Nikola Badger – Roll out is expected in 2021 and has a hydrogen fuel cell power source that hasn’t a hope in hell of ever becoming economic. As I never tire of explaining to investors, while electric power is digital and scalable, hydrogen is analog and isn’t. Maybe that’s why the stock is down 83% since June. Too many unbelievable promises and no actual functioning model. Gravity was their only actual power source.
Fisker – If at first, you don’t succeed, why not fail again? This had double the number of parts of a conventional international combustion engine. Its chief claim to fame was that it got a free factory from the government in Joe Biden’s home state and the fact that Justin Bieber drives one. More flailing at the wind.
Aspark Owl – A $3.2 niche supercar with appeal to maybe three car collecting Saudi princes.
Bollinger B1 – Is a $125,000 SUV expected from a Michigan startup with only a 200-mile range. Why not pay nearly double the cost of a Tesla Model X and get half the performance?
The Byton M-Byte – Is a $45,000 crossover car from a Chinese start up. China has actually been building electric cars longer than Tesla, but they have a tendency to breakdown or catch on fire. Quality and safety problems have until now kept them out of the US, and probably always will.
Genesis Essentia – A Croatian-based startup with a major investment from South Korea’s Hyundai. It will most likely never get off the drawing board. The last time Croatia built cars was for the Austria Hungarian Empire during WWI.
Rivian R1T – A startup with a reasonably priced truck and up to 400 miles of range that will only make it because they have a 100,000-unit order from the largest shareholder, Amazon (AMZ). It’s perfect for local deliveries.
By now, virtually every major car manufacturer has or is about to roll out its own entry in the electric car race. I list them below, skipping those that are more than two years out over the horizon. Notice the profusion of the letter “e” in the names.
They include the Porsche Taycan, Audi eTron, Jaguar I-Pace, Austin Mini Electric, Fiat 500e, Kia Niro EV, BMW i3, Chevy Bolt EV, Hyundai Kona Electric, and the Hyundai Ioniq Electric, Ford F-150 Electric, Ford Mustang Mach-E, and Nissan Ariya.
Not one of these comes even close to the price/performance and battery density of the Tesla cars. Tesla is a decade ahead of the competition and is accelerating its lead. At best, they will sell a few electric cars to those who are intensely loyal to their brands and lose money doing it.
In the meantime, Tesla hasn’t been sitting on its hands. Elon Musk plans to bring out a $25,000 model in two years that will bar entry to the field any other competitor. It is bringing out its own $250,000 supercar, the Tesla Plaid, which will go zero to 60 MPH in 1.9 seconds and have a 600-mile range. The Tesla Cyber Truck at $40,000 has the specs to take on the enormous US pickup market. Did I mention that the company is on the verge of developing technology that will improve battery performance by a staggering 20-fold?
So Tesla is branching out to suck up every profit in every branch of the entire global auto industry.
And this is what most traders, especially the short sellers, got wrong about Tesla. The data is worth more than the car. The miles driven provide a springboard from which the company can offer very high value-added and profitable services, like autonomous driving. Not even Alphabet (GOOGL) can replicate this.
When I bought my first Tesla more than a decade ago, I knew I was betting on the company. The big risk was that General Motors (GM) would step in with their own cheap electric car and drive Tesla out of business.
In the end (GM) did that, but too little, too late. It’s Chevy Bolt EV didn’t hit the market until the end of 2016. Today, it offers a boring design, lacks autonomous driving, possesses only a 259-mile range for $36,620, and is subject to recall, thanks to recurring battery fires (click here for the link).
The quality is, well, Chevy quality.
This year, Chevy will sell under 20,000 Bolts. Tesla is approaching 500,000. It’s too late to close the barn door after the horse has “bolted,” as GM is earning. Over the past decade, Tesla shares are up 150 times. GM shares are nearly unchanged during the greatest bull market of all times.
It is competing against Teslas that are 20 years from the future, are fully autonomous, goes to street-to -treet autonomous driving next year, and upgrades itself once or twice a month.
Make mine Tesla, please, which will soon become the world’s first trillion dollar car company. Don’t waste your time or money on the others, either as a driver or investor.
“The car business is hell,” said founder Elon Musk, when announcing he would sleep in the Fremont Tesla factory until Model S production reached 2,500 units a week.
Global Market Comments
October 20, 2020
(WHY SPAC’S ARE A SCAM)