#154 - Leo's Are Manifesting A Recession
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Instagram Caves Into Kardashian Shame
Apple and Amazon Earnings
Recessions are Self fulfilling Prophecies
WE NEED MORE IMMIGRATION
Boomers Lose the Work From Home Battle
Justin Trudeau Cancels Farmers
The case for traveling before Retirement
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"no one panic until her (Nancy Pelosi) husband starts buying Lockheed and Raytheon.”
There was lots of talk last week of a ‘bottom’.
If we have bottomed…fantastic. There will be lot’s of gains in the future.
What I do not want to do is chase stocks when the indexes are below the 200 days moving averages.
We see more stocks from various sectors setting up. This earnings quarter, the market reaction to earnings has been predominantly positive – many names didn’t sell off after missing estimates and cutting guidance; many broke out after stronger than expected earnings. This is a notable change in sentiment compared to the previous two earnings quarters.
Other than Facebook (META), all mega caps had positive reactions to their earnings this season – TSLA, GOOGL, MSFT, AAPL, AMZN.
Why does it matter? Those stocks can only be moved by institutional money.
Two new Bills in the making have given a significant boost to two groups of stocks – semiconductors and clean energy.
Those are shaping up to be among the current market leaders.
The Fed has given signs that interest rate increases will slow down if the economic data requires it.
They are paying attention to inflation and jobs data primarily. GDP was negative in the past two Qs, so the US is basically in a recession. The market reads this as a reason for the Fed’s tightening to become a lot less aggressive.
Crazy how things change.
Last month, the market felt absolutely despondent…. with most indices up almost 10% in July (the S&P was up ~9%; the Russell was up ~10.5%) and having their best month since November 2020 (when COVID vaccines came out), things certainly aren’t as fearful…. but I feel like there’s still a lot of value out there.
RM’s Thoughts on Taiwan:
I'm against the forever wars and generally am skeptical about the use of military.
But defending Taiwan makes sense for Americans' concrete economic interests, freedoms, and sovereignty.
First and foremost, China's ambitions are almost certainly not limited to Taiwan. Rather, they appear to seek first hegemony over Asia and global preeminence from there. How do we know? Well, they say it pretty openly now. Plus they're building a power projection military.
If China achieves this goal, you can be very confident that Americans' prosperity and liberties will suffer.
Why? China will have a controlling influence over more than 50% of global GDP. It will be the gatekeeper and the center of the global economy.
To simplify a bit: Everybody, every company will have to dance to their tune. If you don't, they'll block you from trading there. The yuan will be the dominant currency. Chinese regulations will be the baseline. Chinese companies and universities will be the world's best.
In that context, you can bet Europe, the Middle East, Latin America, Africa will orient toward Beijing. They need growth! They'll need to play ball. So America and its allies will have a choice: Play ball or go it alone.
But China will have a strong incentive to push us down. The USA is the only country that can challenge their ascendancy. So China will have strong reason to demote us down the value chain, if only to weaken the only plausible counter to Beijing's preeminence.
Certain US elites and favored interest groups would prosper under this model, but not the society as a whole. The US and Canadas economic security would be subject to Beijing's diktat, and our freedoms would clearly suffer as a result. Economic power is political power.
To take just one example: Many Americans have big concerns about the social media companies (I do!). But our debate assumes that we can change things in Washington or state capitals. Not if PRC is hegemon. Then the social media companies will be Chinese or subsidiaries.
Or we could try to go it alone. But then we'll be what, at most 20% of global GDP. But with China as the determinant of the rest, it'll try to isolate us and bring us down as the challenger. Autarky will be a much, much more pinched life for Americans. We'll be a lot poorer.
Why does Taiwan matter for this? Well, it's critical to the defense of Japan, the Philippines, South Korea. And it's a reasonable bellwether for them of how much they can rely on the US. If Taiwan falls, it will be much harder to prevent China from dominating Asia.
And preventing China from dominating Asia is manifestly in Americans' very concrete interests.
People might want to help Taiwan for other reasons: democracy, shared values, sympathy. But those are not the bottom line for Americans. It's in our own interests.
The issue is that Taiwan is a very important but not genuinely existential interest. It's something we should do, but it's not worth fighting to the last man. So we should act to avoid that choice. We can do so by having a military that can defend Taiwan at a tolerable cost.
But we're not doing that right now. Instead we're frittering away our focus and resources on other things instead of laser-focusing. This is profoundly ill-advised and irresponsible.
Success would be laser-focusing on being able to defend Taiwan, China seeing that, and never trying to attack the island because they realize they'd fail. This is possible. Mao wanted to conquer Taiwan but never tried because he knew he'd fail.
If we could convince Beijing they'd fail now, they'd be unlikely to try. Then our anti-hegemonic coalition in Asia would stand up and survive. Then we'd have a good power balance. Then we'd have a strong basis for our economy to prosper: market share, a strong dollar, etc.
Work From Home
Like it or not, it seems that remote work is a trend that is here to stay.
The numbers are telling. As of this spring, only 38% of NYC office workers were in their office on a given day based on this survey by the Partnership For NYC (a leading business group in NYC). The numbers are similar in the Bay Area and Los Angeles. Some cities around the US have much higher numbers but I have not seen any city higher than 70% on this score.
Remote work is here to stay, with 78% of employers indicating a hybrid office model will be their predominant post-pandemic policy, up from just 6% pre-pandemic.
We all know that people are nicer to each other in person. Email and slack and zoom don’t bring out the best in people. Having a meal together does.
So what should we do about this quandry?
💸Reformed Millennials - Post of The Week
Apple Q2 22' Earnings - This tells an important story about how the upper middle class economy is performing and where big is shifting their businesses.
From the Wall Street Journal:
Apple Inc. reported an almost 11% decline in profit after weathering supply constraints and shutdowns in China, although iPhone sales continued to grow, remaining resilient despite economic challenges. The better-than-expected results for the quarter ended in June followed a pattern of tech companies that posted a drop in profits but managed to assuage investor concerns about their strength in uncertain economic times.
This was, under the circumstances, a very impressive quarter from Apple. There were also lots of interesting tidbits to pick up across their business lines.
iPhone: This comment from Tim Cook on the earnings call really said it all as far as the iPhone business is concerned:
From an aggregate point of view, looking at it worldwide, looking at the data on iPhone for the June quarter, there’s not obvious evidence in there that there’s a macroeconomic headwind. I’m not saying that there’s not one, I’m saying that the data doesn’t show it. Where we can clearly see that in the Wearables, Home and Accessories area. And so I would differentiate those two.
Two factors shield the iPhone from an economic slowdown:
first is the fact that Apple primarily sells to more affluent customers, who may be less likely to feel economic pain in a slowdown, or suffer acute impacts from inflation;
the second is that a smartphone is, for nearly everyone, the most important device in their life. .
The other factor that appeared to be driving iPhone strength was the easing of silicon (semiconductors) shortages; Cook said up-front that “Our supply constraints were less than we anticipated at the beginning of the quarter, coming in slightly below the range we discussed during our last call.” This tracks with other earnings which point towards an imminent chip glut.
Mac: The Mac was down 10% year-over-year and 29% sequentially; that the largest sequential drop in my earnings spreadsheet, which goes back to 2013. The reason is the Shanghai lockdowns; from Cook:
For last quarter, what we saw was when the COVID restrictions hit in the Shanghai corridor, we lost the primary source of supply for Mac units. And that was either running at a reduced rate or down completely for the majority of the quarter. And so it was a very big impact to the Mac business. We felt good, frankly, that we were able to, by the end of the quarter, get this back to where we were down 10 points. But the negative 10, I would classify as being driven by supply. And of course, FX feeds into this as well because of the translation issues around the world. There’s also some impact because of the business in Russia, but those are the three kind of reasons that I would tell you. In terms of testing the demand, you can’t really test the demand unless you have the supply. And we were so far from that last quarter that, you know, we have an estimate of what we believe demand was, but it is an estimate. We recognize how the industry is doing. We think that we’ve got a great story with the Mac, getting M1 out and now M2 out, we have a very, very strong offering for the back to school season. And we’ll see how we do this quarter. We’ll report back in October.
This specific quarterly result for this specific business is, by a substantial margin, the most pain that Apple has ever felt for its dependence on China. As I understand it Apple has two primary Mac suppliers, but both make the Mac in the Shanghai area; that means that when the entire metropolitan area was locked down earlier this year Apple had nowhere else to make Macs.
Services: This is the one area of the company that benefited from the Shanghai lockdown; from a question at the end of the call:
A quick follow up on the lockdown in China during the June quarter. did you actually see any noticeable negative effects on your App Store revenue for the region or any positive effects? Like maybe more gaming downloads?Tim Cook: China had very good results on services last quarter. So they grew strong double digit, better than the company average. And they set a new June quarter revenue record during the quarter.
What was more interesting was Apple’s advertising business; while the company doesn’t break out the numbers in its results, Cook said in response to a question:
When you then look at services, there were some services that were impacted, for example, like digital advertising was clearly impacted by the macroeconomic environment.
Both Cook and CFO Luca Maestri brought this up several times in the call, and I was initially a bit surprised; after all, you would expect some portion of the advertising money that, post App Tracking Transparency (ATT), is not going to Facebook et al would go to Apple instead. And that, to be clear, might have happened: Services was up 12% year-over-year, and neither Apple executive actually said that advertising was down (and Apple, I would add, is very incentivized to talk down their advertising business).
APPLE’S NEW ADVERTISING SLOTS
Apple is introducing two new App Store ad slots, one of which addresses this issue; from 9to5Mac:
Apple is expanding its advertising business and adding two new ad slots to the App Store. Currently, the App Store has two ad slots: one on the main ‘Search’ tab and one in the Search results. The two new App Store ads announced today will bring advertisements to the App Store ‘Today’ homepage, as well as to individual app pages.
It’s not yet clear how finely targeted the ‘Today’ ad can be; even that ad placement, though, depends on consumers opening the App Store. The hole in Apple’s advertising offering remains demand generation, and the most obvious way to do that is through ads in other apps (Apple would likely claim that all ads it served on the iPhone are first-party data, just like all purchases are). This is also the type of ad that most benefits from data about what a consumer has previously purchased.
This is context for a curious presentation Apple released in May; again from 9to5Mac:
Apple’s Search Ads business is becoming an increasingly important part of its Services revenue. In a presentation to advertising clients today, obtained by 9to5Mac, the company emphasizes that even as Search Ads continue to grow, the vast majority of users are opting for an experience that doesn’t rely on personalized advertising…Apple’s emphasis in today’s presentation, according to a slide deck obtained by 9to5Mac, is that Search Ads rely very little on personalized targeting, and conversion rates are virtually unaffected.With iOS 15, Apple added a new prompt when a user opens the App Store for the first time. The prompt explains personalized ads “help you discover apps, products, and services that are relevant to you.” The prompt gives users the ability to turn on personalized ads or to turn them off. According to data aggregated by Apple, 78% of iOS search volume on the App Store came from devices with personalized ads turned off. This effectively means that 78% of users are opting to “Turn Off Personalized Ads” when they see the prompt for the first time in the App Store. Furthermore, additional data from Apple indicates that the average conversion rate between users with personalized ads enabled and personalized ads disabled is nearly identical. For customers who opted in to personalized ads, advertisers see a 62.1% conversion rate. Among users with personalized ads disabled, that conversion rate is 62.5%.
This isn’t a complete surprise: the reason why search advertising is so effective is because instead of having to discern what the user wants the users themselves go to the trouble of telling you explicitly with their search term.
I continue to believe we haven’t seen the end of Apple introducing new ad inventory, and I don’t think it will remain limited to Apple’s apps for too long.
🐦 Twitter Thread of The Week 🐦
Leveraging Brand through Equity Ownership. A master class from Lebron as he hunts a NBA franchise in Las Vegas from Joe Pompliano
🔮Best Links of The Week🔮
✍️ Dario Perkins on the nightmare scenario for Central Banks.
✍️ Benn Eifert on bullsh*t in investing. - Noah Opinion
✍️ Written Q&A with Michael Mauboussin on the investing process.
📺 Howard Marks discusses the current market environment and how it compares to past bear markets.