#171 - Black Friday Was BOOMIN, Home Depot Business Model and The Future of Professional Sports Is In Disney's Hands
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Home Depot Breakdown
Fighting the Good Fight with Brian Johnston
Big 4 Accounting Firms and How Much They Make
Can Apple Even Buy Disney?
Elon vs. Apple
Crypto Is Killing the Luxury Car Market
Recommendations and Predictions
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The Black Friday Adobe Analytics Report was all the rage this last week.
Adobe Analytics, which measures e-commerce by tracking transactions at websites, has access to data covering purchases at 85% of the top 100 internet retailers in the United States.
Black Friday week was ROCKING this year.
Initial numbers from Adobe Analytics, the data and insights arm of software company Adobe Inc, showed shoppers are expected to spend between $9 billion and $9.2 billion online on Friday, topping its forecast for a modest 1% rise to $9 billion.The recent US house price bubble was not as bad as the mid-2000s, 29 pct over long-run trend versus 40 pct. Still, prices need to drop by 15-20 pct over the coming years to get back to trend.
Black Friday is set to surpass $9 billion in online sales for the first time, as consumers come to value the ease and convenience of shopping from home.
More Americans placed orders through their smartphones over the holiday, with mobile shopping expected to drive 53% of Black Friday online sales. Mobile orders accounted for 55% of online Thanksgiving sales.
Cyber Week, which runs five days from Thanksgiving to Cyber Monday, is expected to generate $34.8 billion in online spending, up 2.8% from the year-ago period, according to the report.
BUT… Apollo came out with a chart that shook investors to the core.
BAD VIBES ALERT.
And it set off an argument of whether vibes can compound. Whether we can send ourselves into a recession just by thinking it…
Were sitting near the 6month highs on the Dow and 80% away from the highs on the Nasdaq…
The market is pricing a recession in.
How bad that recession gets will determine how far the multiple compresses from here.
1: The recent US house price bubble was not as bad as the mid-2000s, 29 pct over long-run trend versus 40 pct. Still, prices need to drop by 15-20 pct over the coming years to get back to trend.
2: The Q4 rally in non-US currencies has stalled out, a sign global investors’ risk appetites have moderated.
3: US Energy stocks have decoupled from commodity prices, but analysts are still raising their estimates for 2023 and the group remains cheap and a hedge against an inflationary oil shock.
The Dow is outperforming the S&P 500 by 10.2 percentage points YTD (-6.8 pct versus -17.0 pct), more than 2 standard deviations from the long run average relative performance spread. The last time this happened was in 2001, as investors fled former high-flying dot com stocks and went back to more traditional names. The same thing is happening now and could continue. The Dow has significant weightings in Health Care, Industrials, and Energy names that are working just now.
Barring a big rally on Wednesday, November was another rough month for US Big Tech, but a surprisingly good one for non-US tech names. S&P large cap/small cap Tech was up 1.2/1.3 pct this month, but ASML was up 23 pct, Taiwan Semi +29 pct, and Tencent +39 pct. Most of these non-US names came into November down 40 pct or more, recovering some ground this month.
Despite having much larger market caps now than in 2017 – 2019, Apple, Amazon and Google are +30 pct more volatile now than pre-pandemic.
NYC hedge funds are getting short Energy stocks, so let’s talk about that idea. We can see their logic. WTI crude is down 11 percent in the last month, but the XLE ETF (S&P 500 Energy sector) is hanging in, actually up 1 percent over that timeframe. Moreover, XLE is up 63 percent this year, by far the biggest winner of any sector.
The problem with shorting Energy stocks here is that Wall Street analysts’ estimates for 2023 are still going up. Here are the 8 largest names by weighting in large cap S&P Energy (68 pct of the group), along with how much analysts have increased/decreased their 2023 EPS estimates over the last 30 days, and each name’s current forward PE ratio based on those numbers:
ExxonMobil: +5 percent revision to 2023 consensus estimates, to $11.38/share
PE based on 2023 estimate: 9.7x
Chevron: +1 percent, to $13.47/share
Schlumberger: +1 percent, to 2.98/share
EOG Resources: -1 percent, to $15.39/share
ConocoPhillips: +1 pct, to $13.47/share
Marathon: +7 percent, to $4.43/share
Pioneer: flat, at $27.75/share
Valero: +4 percent, to $17.73/share
The average revision to 2023 estimates over the last 30 days is 2 percent to the upside, and the mean 2023 price/earnings ratio is 7.3x. In Datatreks opinion, that is a tough setup for a short call. Generally speaking, you want to short/underweight expensive names when analysts’ estimates are coming down. The Energy sector fits neither of those criteria.
The question, of course, is why would analysts be bumping their numbers as oil prices fall? If you’ve ever known an analyst in this space, you know that they are a cautious lot when it comes to predicting future commodity prices. They have burned many times over the years, given the inherent volatility in the energy commodity complex. They will wait a long time before revising their earnings estimates to incorporate structurally higher oil and gas prices. And, even when they do, their moves are usually small and incremental.
Takeaway: In addition to the points above, there are other reasons to still like Energy now. First, it remains the cheapest group in the S&P 500 at 10.0x future 12-month earnings versus the index’s 17.2x multiple. Put another way, Apple and Microsoft, with 6.5 and 5.4 percent weighting in the S&P 500, are both larger in terms of market cap than the entire Energy sector at 5.2 pct. Second, XLE’s dividend yield is 4.0 percent, more than double the S&P 500’s 1.6 pct. Lastly, Energy remains a cheap portfolio hedge against a geopolitical event that causes an oil shock.
💸Reformed Millennials - Post of The Week
What Is Elon's Starlink?
There’s no shortage of concerns surrounding Elon Musk’s ability to run both Twitter and Tesla, but he is also still working on other hugely innovative projects which get less attention. News that his aerospace company SpaceX bought one of Twitter’s largest advertising packages to promote its satellite internet service, Starlink, in Australia and Spain.
Starlink is one of the most novel disruptive tech stories out there, so today we have an update on this under-appreciated part of Musk’s business portfolio.
First, for those unfamiliar with it, here’s a brief description of Starlink:
It is an internet service provider which uses a constellation of satellites in low-earth orbit (LEO) to offer access to “high-speed, low latency internet on an as-needed basis at any destination where Starlink provides active coverage” (source: company website). The company started with residential users in October 2020 and has continued to expand its service for other use cases over time. Here they are and what they cost:
Starlink for residential customers in rural or remote areas across the world: $110 per month, in addition to an upfront cost of $599 for the hardware.
Starlink Business: $500 per month and $2,500 for the hardware.
Starlink for RVs: $135 a month and $599 for the hardware.
Starlink Maritime: $5,000 a month with a one-time hardware cost of $10,000 for two high-performance terminals.
Starlink Aviation: $12,500 - $25,000 a month with a one-time hardware cost of $150,000. The company’s website says it is taking reservations and will start deliveries in 2023.
Swarm: “provides the world’s lowest cost, global connectivity for IoT devices” for $5 a month.
Over the summer, T-Mobile announced a new partnership with SpaceX and Starlink to virtually eliminate cellular service “dead zones”.
In addition to these services, SpaceX just added a new revenue stream:
Starlink used to offer unlimited data for its customers. It recently implemented a new policy that will give its users “Priority Access” with the fastest speeds until they reach one terabyte of data a month between 7am and 11pm. After that, they will be downgraded to “Basic Access” with slower speeds.
The company said under 10 pct of its customers hit one terabyte each month, but they can now opt to be automatically charged $0.25 per additional gigabyte for residential users and $1 per additional gigabyte for business clients.
Takeaway (1): Starlink is a terrific example of the classic paradigm of disruptive innovation.
The company’s goal is to offer faster connectivity across a more expansive coverage area – including the most remote regions of the world – than traditional broadband satellites. It started off with basic internet service at reasonable prices to underserved (remote) communities. As SpaceX has improved its technology and launched additional satellites, Starlink has moved up the value chain to serve not just residential customers but also enterprise, vehicles, boats and airplanes. The company has grown its global subscriber base at a steady clip this year with now half a million users (residential and enterprise) as of June versus just 145,000 in January and 250,000 in March.
We began writing about how Starlink is a long-term threat to a variety of global telecom and cable companies even before the service started beta testing back in 2020. Clearly, more and more companies are agreeing, with Starlink partnering with everyone from T-Mobile to Hawaiian Airlines and Royal Caribbean Cruises.
Starlink’s success hinges on the breakthrough technology of reusable rockets. This innovation enables SpaceX to launch satellites much more affordably than one-use rockets. Without it, satellite constellations have traditionally gone bankrupt. So far, SpaceX has launched roughly 3,500 Starlink satellites and hopes to lift as many as 42,000 satellites into orbit as part of its mega constellation.
The challenge now for SpaceX: it has produced the second generation of its Starlink satellites – which are larger and more powerful than its first iteration – but its current Falcon 9 rocket can’t handle sending them into orbit due to their heavier weight. Starlink 2.0 requires a heavy-lift SpaceX launch rocket, Starship, which continues to face delays. In fact, SpaceX is currently undergoing a reorganization at its Texas launch facility to try to speed up Starship development. The upshot here is that Starlink 2.0 needs Starship rockets to get into orbit to improve the service so it can scale more efficiently and quickly, and eventually turn cash flow positive. Back in February 2021, Musk tweeted that “once we can predict cash flow reasonably well, Starlink will IPO”. But that will largely depend on Starship, which is not ready yet.
Satellite-based internet service is hugely expensive to build out, but Starlink is well ahead of its competitors in large part due to SpaceX’s rocket technology. According to SpaceX’s site, it is the “only provider with an orbital class reusable rocket.” By contrast, other providers of internet-broadcasting satellites have struggled financially and progressed more slowly:
French satellite operator Eutelsat purchased its UK-based competitor OneWeb over the summer to join forces as they try to compete with Starlink.
OneWeb went bankrupt in 2020 before being reorganized by new owners. Since OneWeb does not build its own rockets, it had to sign a deal with SpaceX earlier this year to use its Falcon 9 rockets to launch its satellites. That was after they were no longer able to launch their satellites from Russia after it invaded Ukraine, given the UK’s support of the latter country. OneWeb has so far deployed 428 satellites in orbit out of its total planned constellation of 648.
Amazon’s low Earth orbit satellite internet business Project Kuiper plans to have a constellation of over 3,000 satellites but has not launched any yet.
In summary, Starlink’s competitors are far behind when it comes to sending satellites into orbit, a necessary prerequisite for basic service and coverage.
Bottom line: Elon Musk may have his hands full in public markets with Tesla and now Twitter, but he’s also busy in private markets working on SpaceX and Starlink. The latter two may not get as much attention as the former, but they are important to keep an eye on as they are creating new industries in the case of SpaceX and disrupting traditional markets in the case of Starlink.
Chinese Protests: from Bill Bishop
highlights my own
Since the start of the pandemic China has had several waves of massive outpourings of online anger, especially around the death of Dr. Li Wenliang, the Shanghai lockdown disaster and the Guizhou bus tragedy. But that virtual anger about Covid policies and censorship, among other things, did not cross into real world protests. Until the last few days, as people gathered publicly to express their anger and frustration in Shanghai, Beijing, Wuhan and other cities, and at many college campuses around the country.
The tragic fire in Urumqi that officially killed ten people may have been the proximate cause, but the deeper undercurrents include frustration with the endless and often capricious pandemic controls that are damaging lives and livelihoods and the massively constricted space for any sort of free expression.
China has hundreds protests every day around the country, but some of the protests over the last few days have been remarkable for their size, messaging, and geographic and demographic distribution. Perhaps most worrying for the leadership and the security services, for whom “political security” is task number one, are the gatherings at many universities around the country, given the long history of student movements in modern China.
The government has a playbook for dealing with these kinds of events and have been hardening the system for many years for just these kinds of threats. Today the police “flooded the zone” with massive presences in areas where there were protests over the weekend.
While there have been some breathless claims using terms like “uprising” and “revolt” I think that is an exaggeration of the protests at this stage, and that the security services will succeed in nipping them in the bud. Some of the more vocal protesters have been or will be detained and some colleges are sending students home early for the Lunar New Year holiday. Families of some participants will be warned by security service personnel, academic cadres or employers. Beijing will likely make more examples of some local officials who have been overzealous with dynamic zero-Covid and reiterate/rework the recent "optimizations" to Covid controls, while pushing harder on propaganda work, censorship and political thought work. And “hostile foreign forces” will be blamed.
But no mistake, the fact that so many were willing to stand up publicly in spite of the likely personal costs is remarkable and meaningful.
But they are stuck with their Covid policy, cases are rising, and there are still too many unvaccinated vulnerable people and too under-developed of a health care system, so if the government were to say "ok, we give in, no more Covid controls" they would likely have a whole different set of economic and social stability issues, not to mention humanitarian and political/propaganda ones, once lots of people start getting really sick and probably many die. It is hard to see any good choices/outcomes over the next several months. Perhaps the government will finally do as many have suggested and push much harder on a vaccination campaign, with a target date for reopening.
There is always the chance that the protests spiral out of control. For all the stability maintenance work Beijing has done they really would have a hard time dealing with tens or hundreds of thousands or more people on the streets in one or more cities. I am not expecting anything like that to happen but you can’t rule it out, and I will bet the security services are not ruling it out. I was in Beijing in the spring of 1989 and no one knew how the protests would eventually spread, grow and evolve the goals. Still, in spite of how stirring these protests have been, I would be surprised if they continue in any meaningful way given how much work the system has put into dealing with just these kinds of contingencies, and how it has repeatedly demonstrated that when it comes to ensuring political security there is no bottom line.
Tweets From The Pod:
🎙Podcast & YouTube Recommendations🎙
🛢️ Natural resource firm Goehring & Rozencwajg walks through the history of energy and the current state of the energy transition (start at 6:38). Link
We estimate in 1900, it took nearly 70% less energy to meet a persons energetic needs than it did throughout most of history, despite the fact that per capita energy demand had grown by 50%.
Bill burr on with Conan: Conan O’Brien Needs A Friend
🔮Best Links of The Week🔮
"Despite inflation and geopolitical crises that have continued since the beginning of this year, the global smartwatch market shipments increased 30% YoY in Q3 2022, according to Counterpoint Research’s latest Global Smartwatch Model Tracker. During the quarter, India’s market grew 171% YoY to become the biggest smartwatch market in the world. Other markets also grew YoY, except China and Europe." Source: Counterpoint Research - LINK
"The world’s largest active volcano has erupted in Hawaii for the first time in nearly four decades, officials said. Mauna Loa erupted at 11:30 p.m. local time Sunday (4:30 a.m. ET Monday), the U.S. Geological Survey said. It was the first eruption since 1984, according to its Hawaii Volcano Observatory daily update." Source: CNBC - LINK
"Disney chief executive Bob Iger on Monday said he will focus on achieving profitability in streaming and take a “hard look” at costs during his first company-wide meeting since returning to the group’s top job last week." Source: FT - LINK
"Elon Musk has claimed that Apple is curbing advertising on Twitter and threatening to “withhold” the social media platform from its App Store, as the world’s richest man locks horns with the most valuable tech company. In a flurry of more than a dozen tweets on Monday focused on the iPhone maker, Musk wrote that Apple had “mostly stopped advertising on Twitter”, adding: “Do they hate free speech in America?” Source: FT - LINK
Musk Vs. Apple; Advertising, App Store Review, and 30%; Google Headcount. Twitter Inc.’s new owner Elon Musk on Monday declared war against Apple Inc. and a cornerstone of the iPhone business empire, setting the stage for a potentially bruising battle between the world’s richest man and the world’s most valuable company. Apple and its Chief Executive Tim Cook have the ability to hold great sway over Twitter’s potential success, as the iPhone maker is a major advertiser and tightly controls the software on its App Store. Source: Stratechery - LINK
#171 - Black Friday Was BOOMIN, Home Depot Business Model and The Future of Professional Sports Is In Disney's Hands