#166 -Buy in October and Get Yourself Sober, Dear Zuckerberg From Brad Gerstner and How The NDP Take Alberta
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Kanye has been canceled
UK Political Turnover
Brad Gerstner Altimeter letter to Mark Zuckerberg
The NDP’s success in Conservative Alberta
Jagmeet Singh NDP call Bank of Canada tightening a mistake and without evidence
Hashtag BanTikTok Picking up Steam
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Chinese Internet stocks are down another 16% this week on news that communism still doesn't work…
We are at the start of the 5th move lower for the VIX after a high above 30 in the current year. Stocks have always rallied when this happens. Key VIX levels to watch: 24 and 20.
The Atlanta Fed GDPNow model expects Thursday’s Q3 report to show an upside surprise. The likely sources of that beat are not, however, indicative of a sustainably strong US economy.
US office occupancy declined last week and remains below 50 pct. This says workers still have the upper hand over employers and suggests wage inflation remains a thorny problem.
Data: US large cap Growth stocks have underperformed large cap Value by a statistically unusual amount (2 standard deviations) over the last 50 days. When this has happened in the past, Growth went on to outperform. Since the S&P 500 is more Growth than Value, this also suggests further upside for US large caps.
2: Why does the Fed have a 2 pct inflation target? Because it worries about deflation taking hold in a recession. In the last 4 recessions, CPI has declined by 2-5 percentage points.
Disruption: PredictIt, a small-money wagering site, is showing user-generated odds of 89 percent that the Republicans will take back control of the House in this year’s midterm elections. The probability of a similar outcome in the Senate is just 66 percent, however. The odds are closest for Pennsylvania and Nevada, and if Democrats can win those 2 states then their chances of holding the Senate dramatically improve.
Why is 2 percent inflation the Fed’s “magic number”,
and might they change it to a higher target rate? from Nick Colas at Data Trek
Before we do the math here, it is worth remembering why the Fed does not have a zero percent inflation target. That would, in theory, be better than a slow devaluation of the dollar’s purchasing power.
The one-word answer is “Japan”. That country struggled with deflation in the decades after the bursting of its 1980s real estate/stock market bubble. Deflation is a bad thing, economically speaking, because it encourages consumers to defer spending since they know goods/services will be cheaper in the future. A little inflation goes a long way to assuring that consumers do not take expected future price changes into account when making spending decisions. High inflation, such as we have now, actually encourages current consumption because consumers expect prices to be much higher in the future.
Now, here is the math. The chart below shows headline CPI inflation back to 1985. We have annotated the graph to show the declines in CPI in percentage point terms through each of the last 4 recessions. In order, they are: 1990 – 1992 (-2.6 points), 2000 – 2002 (-2.2 points), 2007 – 2009 (-5.5 points) and 2020 (-2.0 points).
Every recession back to the early 1980s except the “Great” one saw inflation decline by 2.X percentage points, and that is why the Fed has a 2.0 pct inflation target. They do not want to fight both a recession and deflation at the same time. By targeting 2 percent inflation across an economic cycle, they reduce the odds of the latter even in periods of slack demand.
On a related note, there is a lot of chatter at present about the Fed moving their inflation target to 3 percent, perhaps as early as next year. This might give them some leeway to not prosecute their war on inflation quite so aggressively, or so the thinking goes. We ran the math with CPI data back to 1948, and at a statistical level there is actually no difference between 2 versus 3 percent. The standard deviation of annual inflation since just after the end of World War II is 3 points. One more point is therefore mathematically irrelevant, and 3 percent might be better anyway since the historical record shows 2 percent is not quite enough to eliminate the chance of a deflation-ridden recession.
At the same time, we doubt the Fed will change its inflation target. Going to 3 percent doesn’t make its life any easier over the near term and raises a host of questions about its credibility.
Takeaway: The Fed’s 2 percent inflation target is there for a good historical reason, and is unlikely to change any time soon. As the old saying goes, “you dance with who you brung”, and 2 percent is the Fed’s date to the party, for better and/or worse.
Brad Gerstner Letter To Mark Zuckerberg:
Meta needs to get its mojo back.
An Open Letter to Mark Zuckerberg and the Meta Board urging them to tighten their belt and sharpen their investment focus. The plan Brad outlines would 2x annual FCF to $40B, double down on AI, and put a cap on metaverse related investments.
The letter speaks for itself. The age of excess is over - big tech companies need to lose some weight and get into shape to earn the right to win the next major wave of innovation…
$META trades at a 12 P/E & less than 3X Price/Revenue, well below big tech peers. Why?
Earnings & Revenues don’t drive stock prices, FCF does (see @mjmauboussin). @altcap steps out on an unprecedented limb to highlight.
Last 5 years encouraged behavior that is hard to “unlearn.” But the best companies in the world have been able to do.
One challenge that I see with Meta drastically scaling down its operating expenditure budget is its primary competitor today already has similar opex budget (if WSJ reporting is correct). Some cost rationalization has been promised, but as a shareholder I don't want Zuck to take this full drastic approach that Brad outlined in his letter.
Especially when the primary competitor is flexing its opex budget to acquire new users and going on a hiring spree with higher than market comp structure. Opex growth should trail topline growth going forward, but a machete on opex today may not be positive for the long-term.
The game plan for investors should focus
💸Reformed Millennials - Post of The Week
Datatreks - Nick Colas on the future of Autonomous Vehicles:
When we looked at the NY Fed’s analysis of how Moore’s Law has helped US productivity growth since the 1960s. Their mental model was that the miniaturization inherent in Moore’s Law, rather than the more often cited “computing power/dollar”, is the reason disruptive technology influences productivity.
Simply put, the smaller the chip, the more places it can be used.
There is an often-cited observation that the modern car has more much computing power than the Apollo 11 mission that put people on the moon. This is true, and by a huge (million-fold, in the case of a Tesla) margin. The same holds for the typical smartphone, by the way. Even still, developing a fully autonomous vehicle has been a real challenge.
It is impossible to overstate how significant AV technology is, not just to the disruptive tech world, but the global economy at large. Take commuting in the US as one simple example. The typical American commutes 30 minutes each way, every day. The vast majority (75 percent) do so alone, which means they can do little else while driving to and from work. Moreover, they must own or lease the light vehicle in which they commute, and that expense is often their second largest monthly household outlay.
Autonomous vehicles would allow +100 million Americans to claw back a full hour of their day and, once AVs are operating as for-hire vehicles, possibly even reduce their monthly expenses. “Transportation as a service (TAAS)” could be a major productivity and wellness boost once it arrives at scale, as well as increasing disposable consumer income.
Autonomous vehicles will fundamentally alter demand for light vehicles. Using the US market as an example, in a typical year automakers sell 15 – 17 million new cars and light trucks (SUVs and pickups). Once commuters can use AVs for daily commutation with the TAAS model, demand for new vehicles should start to decline. This will happen slowly at first, since many car owners will still want a personal vehicle, but once it starts it will affect aggregate vehicle demand for decades thereafter. This is why car companies are so intent on developing AV technology; better to have at least a slice of this new but smaller market rather than be shut out altogether.
AVs are a central battleground between not just US and Chinese tech companies, but national governments are well. One of these two countries and the companies which operate in them will almost certainly be first to market with truly autonomous vehicles. The winner will own a powerful, globally scalable technology of similar importance to the original Internet or mobile computing. This will potentially create millions of jobs for the winner but leave the loser with an antiquated industrial base if they fail to be a “fast follower”.
There are many public companies for which autonomous driving technology is critical driver of long-term investment merit. Back in June of this year, Elon Musk said that AV tech is the difference between TSLA being “worth a lot of money or worth basically zero”. Uber and Lyft fit the same description, in my view. Both need AVs in order to automate the delivery of TAAS and move their business models away from simple ride hailing and food delivery.
Takeaway: for all its disruptive promise and global profit potential, developing truly autonomous vehicle technology has been painfully slow despite the billions of dollars invested by leading US and Chinese companies.
There is a fundamentally good reason for that: it is a huge challenge. The environment in which an AV must operate is inherently unpredictable because it is optimized for human operation of an incumbent technology and any machine-created errors can be fatal.
My own opinion is that truly autonomous vehicles will eventually be commonplace, but not over the next 3-5 years. This is a much more difficult technological challenge than even putting a man on the moon.
Gavin Baker - Beliefs Loosely Held Twitter Thread:
My favorites from the 23 tweet thread:
Actual inflation #’s are more important than the Fed. The market will trade on the former even more than the latter. This is likely to be the first recession in living memory with positive nominal GDP growth and healthy consumer balance sheets. Prior playbooks may not work.
“Upgrading” a portfolio during a bear market sounds smart but just ensures underperformance when it ends. The time to “upgrade” was before the bear market began.
Growing FCF per share is the best way to create value. EV/FCF is my preferred valuation metric although GAAP P/E invaluable in bear markets for putting in a valuation floor.
Impact of IDFA/ATT will steadily recede from a targeting/measurement perspective but will be a long, long time before we get back to 2020 levels of ROAS. This massively advantages the dominant eCommerce incumbent who was previously suffering from 1000s of small DTC nicks.
Crypto needs to develop multiple real world use cases outside of remittances and “store of wealth” for non USD countries.
Nouriel Roubini - Odd Lots: Nouriel predicts a crisis worse than what occurred in the 1970’s as central bankers capitulate, break the economy and the world descends into ww3.
How The Alberta NDP Competes In One of Canada’s Most Conservative Provinces - Odd Lots
🔮Best Links of The Week🔮
"Federal Reserve officials are barreling toward another interest-rate rise of 0.75 percentage point at their meeting Nov. 1-2 and are likely to debate then whether and how to signal plans to approve a smaller increase in December... Some officials have begun signalling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy. They want to reduce the risk of causing an unnecessarily sharp slowdown. Others have said it is too soon for those discussions because high inflation is proving to be more persistent and broad." Source: WSJ
"Chinese President Xi Jinping broke precedent Sunday by paving the way for his third term as president, and the likely appointment of a premier with no prior experience as vice premier... Foreign businesses and investors have turned cautious on China after Beijing’s crackdowns on internet tech companies and stringent [pandemic] controls in the last two years. The Chinese Communist Party’s 20th National Congress this month was watched closely for its signals on how much Xi might consolidate his power." Source: CNBC
"Japanese authorities are likely to have spent more than $30bn last week in their second intervention in a month to prop up the yen after it fell to a fresh 32-year-low against the dollar... The intervention conducted on Friday came after the yen hit ¥151.94 to the dollar, causing it to briefly surge to ¥144.50 during a typically quiet time of the week for trading. The yen closed around ¥147 on Friday. During a visit to Australia over the weekend, Fumio Kishida, Japan’s prime minister, said the government would take “appropriate measures” to address excessive volatility in currency markets." Source: FT
"Rishi Sunak will on Tuesday enter Downing Street as Britain’s youngest prime minister in modern times and its first non-white leader, with a vow to get to grips with the “profound economic challenge” facing the country. Sunak is being urged by chancellor Jeremy Hunt to press ahead with a new debt-cutting plan next week, ahead of a crucial interest rate-setting Bank of England meeting on November 3." Source: FT
"Apple on Monday increased monthly and annual subscription prices in the U.S. for its streaming services Apple TV+ and Apple Music. It also raised prices for Apple One, its bundle. Now, a monthly individual subscription to Apple Music costs $10.99, versus the previous price of $9.99. Competitor Spotify currently starts at $9.99 a month. Access to Apple TV+ costs $6.99 per month, more than the previous price of $4.99 per month." Source: CNBC