Friday, March 26, 2021

This week's interesting finds

Your interest rate exposure is higher than you think

Treasuries bull market that began in 1981 has finally ended

 “Bull market” and “bear market” are colloquialisms, not an official thing, and they’re more associated with stocks. But the rule for investors and journalists who use the terms is usually this: A bull market ends when something falls 20% from peak to trough, and the resulting bear market is over when it rebounds 20%. The Bloomberg Barclays US Long treasury Total Return index had roared by 4,562% between September 1981 and March 2020 without ever seeing one of those 20% losses. That streak finally ended this month. 

ESG ratings

Correlation of most widely held “ESG stocks” with growth is near all time high and differential has never been wider. 

Update on QE from the Bank of Canada 

Canada’s central bank has been buying a minimum of C$4 billion in government bonds each week to keep market interest rates low to support the economy, accumulating more than C$250 billion of the securities over the past year. Since March 2020 the Bank of Canada’s bond purchases represent over 35% of the total amount of Government of Canada bonds outstanding, a rate of purchases higher than Sweden, the UK, US and Euro area Central banks. The Bank of Canada currently holds over 40% of all Government of Canada bonds outstanding! 

Central Banks around the world are in unprecedented territory, in terms of the amount of their governments’ bonds that they own. BoC Governor Tiff Macklem has said that when holdings rise above 50%, “market functioning could get distorted”. It will be interesting to see what the impacts on bond yields and markets will be when these Central Bankers begin to slow the pace of stimulus bond buying.

12% of global trade waiting on one lonely shovel

In case you’ve not already heard, a ship captain plowed his boat into the wall of the Suez Canal. They’ve been trying to dig it out for a few days now. 12% of all global exports pass through that canal, and it’s creating a bit of a log jam.

Friday, March 19, 2021

This week's interesting finds

Greensill-owned bank declared insolvent, causing losses for small German towns 

Local governments deposited money at Greenshill Bank to escape negative interest rates at their usual banks. 

A German court on Tuesday declared that a small bank tied to a collapsed U.K. finance company was insolvent, triggering losses for dozens of small German towns. 

Around Germany, at least 12 towns with a combined €200 million, equivalent to about $238 million, in deposits are in the same situation. Individual depositors are covered by insurance. 

Among them is Mengen, a tiny municipality in southwestern Germany. Like most towns that put money into the bank, Mengen was trying to avoid the small losses that come with negative interest rates.

Mengen’s mayor, Stefan Bubeck, said the town wasn’t trying to get a high interest rate, just avoid the negative rates. The town “didn’t want our deposit to decrease,” he said. Mr. Bubeck fears most of the money invested will be lost. “We are shocked.” 

The bank offered a 0.6% interest rate, compared with a minus-0.5% rate offered by other regional lenders the town used. 

Other towns have said they shifted reserves to Greensill for even lower rates to avoid the guaranteed losses of negative rates. 

Howard Marks: 2020 in Review and Positioning for 2021 

Most investors felt that the beginning of 2020 was a time of clarity: the economy and the stock market were both expected to continue advancing. While everyone knew they wouldn’t do so forever, nothing seemed poised to make them stop. And then came the strongest exogenous shock we’ve ever seen – the novel coronavirus – proving once again that we never know what’s going to happen (and that even though we can’t predict, we should prepare). Today’s environment, in contrast, seems to be characterized by a lack of clarity. Experts are expressing highly divergent opinions regarding the outlook for U.S. markets, with strong arguments both bullish and bearish. 

The biggest risk of all is the possibility of rising interest rates. Rates have declined quite steadily for the last 40 years. This has been a huge tailwind for investors, since a declining-rate environment lowers the demanded returns on assets, making for higher asset prices. The linkage between falling interest rates and rising asset valuations is a good part of the reason why P/E ratios on stocks are above average and bond yields are the lowest we’ve ever seen (which is the same as saying bond prices are the highest).

But the downtrend in rates is over (if we can believe the Fed’s assurance that it won’t take nominal rates into negative territory). Thus, while interest rates can rise from here – implying higher demanded returns on everything and thus lower asset prices – they can’t decline. This creates a negatively asymmetrical proposition. 

So today’s high asset prices may be justified at today’s interest rates, but that’s clearly a source of vulnerability if rates were to rise. (Note that today’s 1.40% yield on the 10-year Treasury note is up from 0.52% at the low in August 2020 and from 0.93% in just the last seven weeks.) 

Samsung and TSMC dominating semi conductor & capital expenditure cycle  

IC insights provides semiconductor industry capital spending forecasts by company for 2021 and the latest global forecast for spending through 2025. What may appear most shocking, given that Intel was one of the two largest spenders every year until 2015, is that Intel has failed to keep pace with the spending ambitions and technology advances of Samsung and TSMC. Intel spent about HALF of what Samsung spent on capex in 2020. The sheer magnitude of Samsung’s spending over the 2017-2020 time period is unprecedented in the history of the semiconductor industry. At $93.2 billion, this amount was more than double the $44.7 billion spent by all the indigenous China semiconductor suppliers combined over this same timeframe. 

With no other companies presently able to match these huge spending sums, Samsung and TSMC will likely put even more distance between themselves and their competition this year with regard to advanced IC (Integrated Circuits) manufacturing technology. 

Without extremely quick and decisive action by other IC producers or governments, “Samsung and TSMC are well on their way to world domination of leading edge IC process technology the cornerstone of all of the advanced consumer, business, and military electronic systems of the future”.

Tesla has a sudden UK Dilemma 

Today, the UK abruptly changed its EV incentive program to reduce the grant towards a new EV from £3,500 to £2,500 STARTING TODAY (March 19, 2021). The key part is that the price cap for eligibility will drop from £50,000 to £35,000 meaning the Model 3 which starts at £40,000 will no longer be eligible for the grant. In the government press release, they comment that the number of EVs under the cap of £35,000 has increased by +50% since 2019 as more cheaper models have come to market and they note that half the EVs on the market are indeed under £35,000. The change reportedly came abruptly and automakers were only informed today. Guess which BEV is under £35k? The Volkswagen ID.3. But also of note the Hyundai Kona, the MG ZS EV, the Peugeot e-208, the Corsa E, the Nissan Leaf, the BMW i3, the electric Mini, the Skoda Enyaq, the upcoming Mercedes EQA, … the list goes on. The UK was Tesla's third most important market after the US and China last year selling close to 24,000 units. 

This is all a very familiar story to us as it’s exactly what happened in the Netherlands in 2019-2020 as the incentive program phased out. The Dutch were also the 3rd largest market for Tesla in 2019 selling some 31,000 units that year but then it all changed. Ever since, the demand from our Dutch friends has waned off selling a mere 8,600 cars in 2020, down some -72%. So Tesla UK has a face-off: either drop the price of the Model 3 under £35k which will inevitably hurt margins, something it did in China when the incentives dropped or hope consumers still think Tesla Model 3 is a superior vehicle and is worth the extra premium without the grant. But no doubt volume would drop. 

Source: Mirabaud Group

Expectations and returns

Some lessons to chew on

Stories matter more than anything, but be wary of them for that reason. Stories persuade and influence like nothing else, we are all storytellers even if we haven’t realized it yet. 

Groupthink and conformity drive far too much behavior. They are everywhere. We are wired to social conformity – it’s what kept us alive for millenia on the savannah. Being thrown out of a group was literally death for our ancestors. So we do everything we can – without even knowing it – to preserve group harmony and often the status quo.

Bias is both real and hard to spot. The way we think, act, speak – so much of it is pre-determined by the configurations of our brains and the specific world we’ve been raised into. Lesson (1) is that this is true, lesson (2) is that it so much of it is beneath the surface and hard to recognize especially in ourselves. Once you realize this, psychology becomes one of the most valuable fields to understand so much of what goes on.

Friday, March 12, 2021

This week's interesting finds

Calculating your COVID stimulus payment

The Washington Post put together a simple calculator for a family to figure out how big the checks are that are coming their way. For example, a family with two parents (one who works and makes $110k per year) and three kids will get $8400. 

Calculator link

Consumers are left with massive pent up savings. 

Investing: the greatest show on Earth 

“Investing is a broader field than it looks, and there is so much to learn about it outside of the narrow lens of finance. Greed, fear, risk, opportunity, and scarcity – the most critical topics in investing – reveal themselves in all kinds of fields. 

More important is this: If you find something that is true in more than one field, you’ve probably uncovered something particularly important. The more fields it shows up in, the more likely it is to be a fundamental and recurring driver of how the world works. 

Which is to say: Restricting your investment learning to the narrow lens of finance means you’re less likely to uncover the biggest and most important parts of investing, which are the ways that people think about things like risk and reward and show up in many fields”

A New ETF named FOMO targets everything from SPACs to volatility 

A filing this week with the U.S. Securities and Exchange Commission seeks to create the FOMO exchange-traded fund, named for the famous acronym associated with countless bubbles and market manias. 

The ETF from the Collaborative Investment Series Trust intends to invest in “securities that reflect current or emerging trends,” according to a registration statement. The fund, advised by Connecticut-based Tuttle Tactical Management LLC, will select its holdings based on a “proprietary tactical model,” the filing says. 

Electric vehicles (EV)

A study by Research Affiliates on Electric vehicles: 

    “In 2020, the market capitalization of the worldwide auto industry more than doubled. The driving force was the “big new EV market”. As a result, the stock price of virtually every EV specialist, including more established firms skyrocketed. Even the prices of traditional auto makers rose handily when they announced their own EV plans. In our view, today’s electric vehicle industry is a classic example of the big market delusion. The EV phenomenon will not change the fact that the auto industry will remain highly competitive and capital intensive, and not every company can be a winner. Further, it remains unclear how simply switching the means of auto propulsion will make the entire light EV market more profitable, an assumption that the market is currently making. We suspect that as EV competition heats up, many companies will fail, as was the case in previous industry booms – whether autos, airlines or technology – and with time the total value of the industry will recede to more reasonable levels.”

What's your vintage year?

When did you become an EdgePoint partner? Select your "Partner since" year and uncover a piece of EdgePoint history.

Let's take a walk down memory lane as we recall the major events and fun facts from your vintage year.

Friday, March 5, 2021

This week's interesting finds

FAAMG is still a big part of the S&P 500 Index 

FAAMG: Facebook, Amazon, Apple, Microsoft Google

Stimulus and Investing

Speculation in the markets

Hertz, the original meme stock is turning out to be worthless 

It’s the version of David versus Goliath that Wall Street will like. Day traders, snapping up penny stocks on the popular Robinhood app, sought to defy decades of convention and make money on bankrupt rental-car company Hertz. The craze sent shares soaring as much as 896%, prompting Hertz to briefly capitalize on the frenzy by issuing even more stock. 

E-mail Is Making Us Miserable

A study, published in 2019, looked at long-term trends in the health of a group of nearly five thousand Swedish workers. They found that repeated exposure to “high information and communication technology demands” (translation: a need to be constantly connected) were associated with “suboptimal” health outcomes. 

The need to interact with each other is one of the strongest motivational forces that humans experience. The flip side of an evolutionary obsession with social interaction is a corresponding feeling of distress when it’s thwarted. Our instinct to connect is accompanied by an anxious unease when we neglect these interactions. This matters in the office, because an unfortunate side effect of overwhelming e-mail communication is that it constantly exposes you to exactly this form of social distress. A frenetic approach to professional collaboration generates messages faster than you can keep up—you finish one response only to find that three more have arrived in the interim, and, while you are at home at night, or over the weekend, or when you are on vacation, you cannot escape the awareness that the missives in your in-box are piling up ever thicker in your absence.

It is useful, of course, that we can communicate instantaneously, with almost no friction or cost. But humans are not network routers. Just because it’s possible for us to send and receive messages incessantly through our waking hours doesn’t mean that it is a sustainable way to exist. Technologies serve us best when we deploy their new efficiencies with intention, with an aim to improve the human condition.

EdgePoint Photo Contest 

While most of Canada’s colour palette is 50 shades of grey right now, the Photo Contest Committee was blessed by an orange splash of colour from some of our partners. Below is the winning submission by our very own Jelena.