Friday, February 19, 2021
Stock trading volumes in Hong Kong have soared to four times those on the London Stock Exchange (LSE), as large technology stocks attracted a soaring appetite from foreign investors.
% of IPO that are unprofitable
Developers behind the world’s largest planned green hydrogen project hope a growing global thirst for emission-free fuels will pay dividends
The initiative—a joint venture of Neom, U.S. chemical company Air Products & Chemicals Inc., and Saudi Arabia’s ACWA Power—will invest $5 billion to build what will be the world’s largest green hydrogen production facility. Another $2 billion will be invested in distribution infrastructure in consumer markets around the world, primarily to fuel industrial vehicles and public buses.
Plans call for the sprawling facility, which isn’t yet under construction, to produce 650 tons of green hydrogen a day starting in 2025. The facility’s output will dwarf that of a green hydrogen plant in Québec that produces about nine tons a day, making it the largest such facility in the world. The Neom project exemplifies the Kingdom’s ambitious plan to diversify away from oil and natural gas and showcase Neom as a global hub for technology and green energy.
Frame adversity as a challenge, and you become more flexible and able to deal with it, move on, learn from it, and grow. Focus on it, frame it as a threat, and a potentially traumatic event becomes an enduring problem; you become more inflexible, and more likely to be negatively affected.
Friday, February 12, 2021
Israeli experts are confident the vaccines rather than lockdown measures brought the numbers down, based on studying different cities, age groups and pre-vaccine lockdowns.
Over the last 12 months investors have flocked to buy shares of newly listed tech companies, believing in the potential of upstarts to transform their sectors. That excitement has given newer firms valuations several times higher than established companies in the same industries—even when those older companies have far more revenue and profits.
Airbnb for example was the largest tech IPO in 2020, with a valuation of about $47 billion at the time it went public in December.
Having since grown to $117.7 billion, Airbnb’s market capitalization makes it more valuable (on paper) than many top hotel chains combined. Marriott, Hyatt and Hilton’s combined market capitalization is roughly $40 billion shy of Airbnb’s, despite their higher revenue.
The recent boom and bust in a number of stocks illustrates how capital markets over the short-term can be driven by flows and investor positioning, rather than by the underlying fundamentals of businesses. Some argue that the primary causes of this market dysfunction are the prevalence of passive investing and leverage.
The effort to squeeze short-sellers took GameStop’s share price well beyond any rational fundamental valuation. It soared by 23 times within 11 trading days as those who had bet the price would fall were forced to buy shares to cover their obligations.
One factor that made the GameStop squeeze so profound was passive ownership. About one quarter of the available shares were owned by passive investors. These funds run on autopilot. As new money comes in, it is allocated to keep a constant balance among a specific combination of individual stocks or other assets. As GameStop’s price rose to ridiculous heights, those passive funds were almost certainly buying to maintain their balance.
Passive funds have a much greater impact on prices because active investors can be patient in deploying their capital and are sensitive to the prices they pay. Passive funds have little discretion whether and at what price to buy — they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they do not sell.
Leverage linked to low interest rates turbocharges these unhealthy dynamics.
People have long been conditioned to see whether companies have “beaten” their expectations. And as Savita Subramanian of BofA Securities Inc. demonstrates here, the percentage of S&P 500 companies beating estimates for both sales and profits is very nearly at the record set in the third quarter of last year.
Specifically on sales, the number most directly tied to the performance of the economy, more companies than ever before are outstripping forecasts.
We should know by now that the earnings forecast game is a little silly. Particularly in the U.S., CFOs have grown adept at talking down expectations ahead of results, and then reaping the positive performance bump when they “beat” a lower bar.
Morgan Housel examines why GameStop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.
Stuck at home with just some cash and free trades
Source: BofA Global Research, @WallStJesus
Goldman’s non-profitable tech index is approaching 250% year-over-year performance
Tom Brady wins another one
Friday, February 5, 2021
Retail investor frenzy in Korea
Source: Company financials
Friday, January 29, 2021
Exploding retail activity
The number of retail investors has been growing since commissions were broadly cut to zero in late 2019.
Demand is coming through in multiple ways but it’s arguably in the options market where retail traders are having the most impact.
Option volumes have exploded, and at the same time retail is growing as a share of the overall market. Retail was already a big player in the options market, accounting for 40% to 45% of contract volume pre-COVID, but that figure rose during 2020 to over 55% of the market by the third quarter.
The herd has arrived
Much of this volume has been driven by investors congregating on sites like Reddit’s WallStreetBets forums. On January 26th, GameStop was the most traded stock in the U.S in terms of trading value. More GameStop shares traded by value than even Apple. Frenzied investors pushed GameStop’s market cap to an eye-popping $25 billion from a little over $1 billion at the start of the month.
Having the ticker symbol “GME” was helpful even if you are in Australia. A relatively small Australian mining company called GME Resources, which has the same ticker symbol as GameStop (but in Australia), was mistakenly rewarded by the retail crowd with a 20% up day.
Trading volume in the most expensive stocks has skyrocketed
Friday, January 22, 2021
EdgePoint Podcast: Tye’s takes on 2020
Tye recently did a 30 minute investor-friendly interview which is now available in an easily downloadable podcast. Tye discusses:
1. Why short-term underperformance is required for longer-term outperformance
2. 2020 performance: a tale of two markets
3. Why we won’t invest with the herd
4. Our ongoing commitment to getting your clients to their Point B
5. Tesla, TE Connectivity and more….
or listen on Apple or Spotify
Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism.
Mr. Klarman also said the Fed’s policies had exacerbated economic inequality, referring to a “K” shaped recovery that has seen “the fortunes of those already at the top bounding swiftly upward, while those at the bottom remain on a downslope without end”.
“With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,”
“But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.”
Using Tesla as an example, Mr Klarman said shares in the “barely profitable” electric carmaker had soared “seemingly beyond all reason”, briefly making the company’s founder Elon Musk the richest person in the world. Low interest rates have made projected cash flows more valuable, he said, a point many investors have unwisely used to justify valuations on companies that sit far above historic norm.
Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets. Assets in these funds have grown at an average of 45% annually over the past three years.
In the fourth quarter of 2020 alone, thematic ETF assets shot up 78% to $104 billion. Quirky rules of portfolio construction can also crop up. At the U.S. Vegan Climate ETF, the size of any single stock position is limited to 4.5%. Yet Tesla Inc., the fund’s largest holding, has mushroomed to 7.9% of total assets.
Investors pursuing themes that seem obvious should remember that if a theme appeals intuitively to you, chances are it appeals to millions of other investors too, making a fund’s underlying holdings more expensive.
These funds tend to launch months after a theme has gotten hot—amid a crescendo of media hype and stocks earning eye-popping returns. In other words, investors have a natural tendency to buy at exactly the wrong time, and these funds can make that even worse.
“Well, I’ve got a tip for you. If you think you’ve spotted a theme that other investors haven’t fully appreciated yet, ask yourself how come there’s already a thematic fund for it.”
This year, stocks priced below $1 have performed the best, followed by those between $1 and $2, and so on. It looks remarkably like investors are treating a low-price share as an indicator that the stock is a bargain, and a higher price as a sign that it is worse value for money.
The share price on its own carries virtually no useful information: It depends entirely on how many shares the company has issued.
The pattern of lower-priced stocks doing better is perhaps brought on by the rising popularity of trading by individual investors, who are more likely to be new to the stock market and regard a low-price share as cheap, even though it should be irrelevant to a company’s prospects.
This week’s charts
Who needs earnings?
Global stimulus in response to COVID-19
The balance sheets of developed market economies are now approaching wartime conditions
Chad and Jenny are the newest financial stars of TikTok. As Chad puts it: "I see a stock going up and I buy it. And I just watch it until it stops going up, and then I sell it. " "Up is good. down is bad. I just ride the upward trends and when they start going down jump off lol."
In a bull market, lots of stocks go up. You can probably find a few even if you have no clue what you're doing. As the old saying goes, even a blind squirrel can find an acorn once in a while.
In the late 1920s, trading stocks, often with borrowed money and without doing any research, became a national obsession. The same mania struck in 1999 and early 2000.
Investing can be simple, but it isn't easy. It isn't a mindless joyride. It is a process, not a game; you win by persisting over the course of many years, not by racking up the most points in the least amount of time.
Being cooped up has led many investors to conclude that they can perceive which themes, or broad trends, are likely to dominate the market for years to come. That can make it harder to remember that other investors may have spotted the same themes even earlier, driving prices dangerously high.
You should keep your investing simple. But you should never let anybody fool you into thinking that investing is easy.
Friday, January 15, 2021
2020 Q4 EdgePoint commentary
This quarter, portfolio manager Andrew Pastor explores a deceptively simple (but effective) idea that’s difficult to do in practice – investing differently from everyone else.
This quarter, Derek Skomorowski talks about the risks of buying long-term government bonds in the current environment and why we focus on buying mispriced bonds of businesses that can withstand an economic shutdown no matter how long it lasts.
30+ year peak in duration of the bond market.
U.S. high-grade corporate bond investors have never been paid so little for taking so much risk
The “Sherman Ratio,” named after DoubleLine Capital Deputy Chief Investment Officer Jeffrey Sherman, shows the amount of yield investors earn for each unit of duration. It tumbled to as little as 0.1968 on Dec. 31 for the Bloomberg Barclays U.S. Corporate Bond Index, a record low in data going back more than three decades.
This is happening because the numerator (yield) has continued to tumble while the denominator (duration) increases. The average investment-grade corporate bond yield was a record-low 1.74% as of Dec. 31, compared with 2.84% a year earlier, while the modified duration on the index increased to 8.84 years at the end of 2020, just about a record high, from 7.96 years at the start.
The first week of 2021 demonstrated how potentially perilous this dynamic can be for credit investors. Investment-grade corporate bonds suffered their worst loss on a total return basis since August, and second-biggest decline since March, even though spreads narrowed and there’s no sign of broad stress in high-grade markets.
The blame for that weakness lies almost entirely with Treasuries. The benchmark 10-year yield increased by 20 basis points in the first five trading days of the new year, as investors expect a greater debt-funded stimulus with a Democratic sweep. It really doesn’t take much of a move higher in interest rates to wipe out the income return on the index or a fund tracking it.
Canada is vaccinating 0.12% of the population daily. Total vaccination as of yesterday (January 14th 2020) is 1.15% of the population. Israel is vaccinating 0.76% of its population daily and is at 22.4% of total population vaccinated.
Some global comparison below:
Interesting observation: Prince Edward Island has already administered 5102 vaccines or 3.2% of its population. They are running 283% better than the national average.
FOMO is real
Last week, Elon Musk recommended folks use Signal, an encrypted-messaging platform which isn't a publicly traded company. Investors and fans of Elon misinterpreted this tweet and quickly bought shares of Signal Advance (unrelated company). Signal Advance shares surged over 6000% in 3 trading sessions, pushing its market value to $3.164 billion from a mundane $55 million. This week the stock is down 80% as it was made apparent that Musk was tweeting about a different Signal.
Daily trading activity by individual investors in South Korea
Friday, January 8, 2021
Written by Mr. Grantham, co-founder of GMO:
“The market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent.”
“As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM.”
“This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.”
Caltech's President Thomas Rosenbaum interviews 2020 Distinguished Alumnus Charlie Munger on his accomplished career as an investor, businessman and attorney in this 1 hour video.
Risk is what you can’t see, think only happens to other people, aren’t paying attention to, are willfully ignoring, and isn’t in the news. A little surprise usually does more damage than something big that’s been in the news for months.
Daniel Kahneman says a key to investing is having a well-calibrated sense of your future regret, which might actually be the key to understanding all forms of risk. You know exactly how much risk to take if you know exactly when you will cry Uncle when things don’t work out.
When interest rates are zero stories about what the future could be are more important than what the present actually is. Interest rates tempt investors away from stories about future potential with promises of returns right now, this year. Once those returns fall to zero, stories about what could potentially happen years from now – even if it’s low probability – gain most of the market’s attention. And people are good at coming up with awesome stories. That’s part of why Tesla is worth two-thirds of a trillion dollars, and the market is at an all-time high with 10 million people unemployed.
An engineer can have a successful career knowing nothing other than engineering. Same for a chemist, meteorologist, or radiologist. Business and investing don’t work like that. They’re a little math, a little accounting, a little sociology, a little psychology, a few parts marketing, law, politics, game theory, history, statistics, biology, and public relations. That doesn’t make them harder than other fields; just more uncertain, prone to change, and with fewer experts.
Are wind, solar, and batteries the magical solutions to all our energy needs? Or do they come with too high a price? Mark Mills, Senior Fellow at the Manhattan Institute, analyzes the true cost, both economic and environmental, of wind and solar energy.
Residential mortgages in Canada
Some humour to start the year