Yield Curve Predictive Power

  • With yield curves falling to new cycle lows earlier in the summer it is interesting to think about their predictive power.
  • This piece from the Bank of England blog is worth reading.
  • As the chart below shows – the predictive power of yields has indeed fallen over time but interestingly has started to increase recently.
  • There is more in the article for those interested, explaining why this might have happened.

AT&T

  • Elliott have gone activist on AT&T.
  • They have set up this website – https://activatingatt.com/
  • Elliott made the investment in AT&T – among  its largest ever – because it exhibits a unique combination of historical underperformance, a  depressed  valuation, well-positioned  assets and  a clear path forward to generate extraordinary value  for shareholders and other stakeholders.”
  • h/t Market Folly

Revisionist History

  • Periodically we will recommend some podcasts for our readers.
  • An excellent podcast worth special mention is Revisionist History
  • Malcom Gladwell gives a new perspective on history – especially how things have come to be the way they are and why more efficient approaches have been left by the wayside.
  • Even though the subject matter isn’t finance, ranging from country music to basketball, these stories are valuable …
  • In investing a sense of scepticism and perspective are paramount.

WeWork

  • Lots of journalists have now poured over the S-1 of WeWork.
  • In the meantime investors have continued to push down the valuation of the upcoming IPO.
  • Reuters latest suggests just $10bn down from $47bn (when Softbank invested).
  • Of the gems discovered in the S-1 (h/t FT, FTAlphaville), such as the fact that related party transactions are rife, the founder’s shares carry 20x the votes and his wife would have been involved in the succession planning, one particularly stood out:
  • FT pointed out that the company paid $5.9m in stock to founder Adam Neumann in return for using the “we” trademark!
  • (This has since been returned according to the updated filing today).

Aldi in the UK

  • A very well researched article from the Guardian on Aldi in the UK.
  • Aldi and Lidl competition, along with a dose of hubris, over-spacing, and using back margin (profits from suppliers) was the downfall of the UK domestic supermarket share prices.
  • They have since learned and adapted. Every crisis is an opportunity.

US Gambling

  • In the last two years the US has started on a path to legalising online gambling.
  • As is usual in the stock market there was initial euphoria, talk of a $300bn market, and bidding up of European gambling shares.
  • The reality of course is more nuanced – yes the opportunity is big but there are substantial hurdles to overcome and strong competition from well funded US Casinos and Media companies.
  • There is a good recent Freakonomics episode on US sports gambling.
  • With European gambling company shares since languishing (partly due to other reasons like increased regulation in the UK) and US legalisation progressing – perhaps it is time to take another look?
  • Hype cycles do eventually come good. A classic chart.

Biotech Investing

  • Always interesting to read about investors making big returns.
  • Here is an article from 2018 on one such fund – Perceptive Advisors.
  • They invest in biotech, a notoriously difficult area of the stock market.
  • They run a very concentrated portfolio for biotech – which explains the outsized returns if you can get things right.
  • The edge seems to be understanding ‘perception’ of corporate events in biotech against reality.
  • It will be interesting to see if their success continues now that the firm is managing >$4bn.

Lists worth reading

  • From 2018 but still a really amazing list of things learnt last year.
  • Highlights:
    • Advertisers place a single brown pixel on a bright background in a mobile ad. It looks like dust, so users try to wipe it off. That registers as a click, and the user is taken to the homepage.
    • In Uganda, half the population is under the age of 15.
    • US nuclear testing between the 1940s and 1970s may have killed as many Americans (from radioactive pollution) as were killed by the bombs dropped on Hiroshima and Nagasaki.
    • AgriProtein is a British company that operates two fly farms in South Africa. Each farm contains 8.4 billion flies, which consume 276 tonnes of food waste and lay 340 million eggs each day. Those eggs (maggots) are dehydrated, flattened and used as animal feed. The company is worth $200m, and they’re planning to open 100 more factories around the world by 2024.
  • All references and related articles found in the link. h/t Medium.

US Consumer

  • Bank of America Merrill Lynch uses their credit/debit card data to check the pulse of the US consumer. Their latest report had this to say:
  • The consumer is beginning to worry. Since our last update in mid-August, the BofAML US consumer confidence indicator (USCCI) decline by 3.8 points to 50.1 based on data through September 9. It briefly dipped below the 50 breakeven level during the survey period indcating that the consumer is growing increasingly pessimistic
  • h/t Calculated Risk

Productivity

  • How far productivity has come in 10 years 2020 US Census edition …
  • We were able to verify 65% of addresses using satellite imagery — a massive accomplishment for us,” said Census Bureau Geography Division Chief Deirdre Bishop during the briefing. “In 2010 we had to hire 150,000 people to verify 100% of the addresses in the field, this decade we will only have to hire about 40,000 employees around the nation to verify the remaining 35% of addresses.
  • h/t Calculated Risk

E-cigarettes

  • The FDA announced about 2 years ago that it “plans to begin a public dialogue about lowering nicotine levels in combustible cigarettes to non-addictive levels” . This is still ongoing through the comprehensive plan.
  • E-cigarettes (along with other alternatives) were meant to be a saviour of the industry.
  • Unfortunately there have been a series of deaths reported in the US linked to E-cigarettes, with 3 more over the weekend.
  • Center for Disease Control and Prevention (CDC) put out a statement advising the public to stop using these products while they investigate.
  • The ability of tobacco firms to keep their existing profit pools, built on years of price rises, is looking even less likely.

Oaktree Memos

  • Reading what other respected fund managers do is very important.
  • Howard Marks has made a name for himself as a distressed debt investor and founder of alternative asset house Oaktree.
  • His memos found here are always worth reading for their commentary on market cycles and economics.
  • Most importantly they are a great source of common sense in financial markets.
  • The latest memo (from July) is a perfect example of this – how to understand the Fed’s actions in the current environment.
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