#178 - How Wealthy Families Stay Wealthy In Canada (Real Estate) and Netflix's Future
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Transition from rate worries to earnings misses
Lessons from studying successful family real estate investing
How Netflix makes money and the next act under new management
Why is apple finally building a touch screen for the Macbook?
Recommendations and Predictions
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
The S&P 500 closed on Friday right where it was in mid-May 2022, but for VERY different reasons. Back in May, Fed policy was the big story. Now, it is uncertainty over 2023 corporate earnings.
The S&P net margins (net income/revenues) in Q4 2022 are expected to be back to 2019 levels (11.2 – 11.4 pct). Margins peaked in Q3 2021 and have been declining since… This is giving investors cause for concern.
US corporate bond spreads right now (IG: 130 bp, HY: 439 bp) are very close their 2015 – 2019 average (133 bp, 456 bp). Like equities, this market is not discounting a recession…
US Q4 corporate earnings season is off to a poor start, with just 65 pct of companies beating estimates. That is lower than the 1-, 5- and 10-year beat percentages of 75, 77 and 73 pct.
Analysts are cutting their 2023 S&P 500 earnings estimates by the largest amounts since Q3 earnings season. Current year estimates are still 3.6 pct above 2022 near-actuals, however.
Q4 US GDP comes out on Thursday, and the Atlanta Fed’s GDPNow model is still looking for this report to beat consensus (3.5 vs. 2.6 pct).
So… whats up with the VIX? Like the CBOE VIX Index, the “VIX of” the NASDAQ (VXN) is sitting right on its long-run average today. That is both strange and very telling. Strange, because we face much more uncertainty about Big Tech earnings/outlooks than average. Telling, because it says markets are discounting any further Fed policy uncertainty and are solely focused on future earnings power. It’s likely that the US large cap tech stocks continue to outperform over the near term as they play a little catchup after last year’s drubbing.
How Netflix Makes Money:
Q1 FY23 Guidance:
Revenue +4% Y/Y (+8% fx neutral)
Operating margin 20%
The operating margin was 20% fx neutral (high end of target)
Operating cash flow: $2.0B (6% margin)
Free cash flow: $1.6B (5% margin)
Netflix share of TV time (December 2022)- Streaming overall accounts for less than 40% of viewing across all markets.
TV time in the US:
Streaming is 38%.
Netflix alone is 8%.
💸Reformed Millennials - Post of The Week
ALL about Volatility:
Since the start of the year, the NASDAQ has outperformed the S&P 500 by a considerable margin:
S&P 500: +3.5 percent
NASDAQ Composite: +6.4 pct
NASDAQ 100 (the QQQ ETF): +6.2 pct
So what has the “VIX of” the NASDAQ 100 been telling us about how the options market is thinking about any further rally in US tech stocks?
The idea is the same as the CBOE VIX Index math we regularly discuss with you. When implied volatility (IV, what the VIX measures) is elevated, markets are usually worried about negative near-term catalysts. When IV is low, markets see smoother sailing ahead.
Over the last 13 months, the CBOE VIX Index has been a reliable indicator of US equity market tops (VIX below 20) and bottoms (VIX over 30).
Why? Because the VIX measures investors’ “mood”. When it is high, they are skittish, and this has tended to be a good entry point for a trade. When it is low it means the market has become too complacent about interest rate/earnings risk. Those periods have been near term tops.
Here is some long run data about the NASDAQ VIX Index (VXN) that is important to understand:
Since its start in February 2002, the VXN has averaged a daily closing reading of 25.1. The standard deviation around that mean is 11.6 points.
Like the VIX, the VXN has signaled market lows were near once it gets to over 3 standard deviations from the mean (59.9). This occurred in September 2001 (VXN of 72), November 2008 (81), March 2020 (80).
Also like the VIX, VXN rarely sits at its long run average for very long. It can be well below 25 for years (2004 – late 2007, 2013 – mid-2015, 2016 – 2017). It can also remain above 25 for a year or more (almost the entire last 12 months, for example).
The funny thing is that the NASDAQ 100 VXN closed on Friday at 24.5, almost exactly on that long run average of 25.1. Here is the most recent data for that index:
The long run average for the CBOE VIX Index (back to 1990) is 19.7 with a standard deviation of 8.0.
The VIX closed on Friday at 19.9, also very close to its long run average.
Takeaway: Both the VIX and VXN are very close to their long run averages, which is both strange and quite telling about the current US equity market setup. As we discussed in Markets, investors have largely put Fed Policy worries behind them. Right or wrong, both Fed Funds Futures and 2-year Treasuries signal an imminent peak for Fed Funds and then a slow decline. This leaves future corporate earnings as the only genuine uncertainty. As a result, the VIX/VXN are back to their long run averages.
Takeaway: We still think the NASDAQ can continue to outperform the S&P 500 over the near term. Big Tech earnings will almost certainly be “meh”, as we discussed last week. Even still, a more favourable rate picture should help the NASDAQ. On top of that, US large cap Tech was hit exceptionally hard relative to the S&P 500 last year. It should therefore still have some runway to outperform.
🎙Podcast & YouTube Recommendations🎙
Best Video I watched all last week was a chat between Howard Lindzon and Raul Pal at Real Vision
Real Estate Links - Moses Kagen - How I became a RE developer
Clean Tech Primer and Forward guidance from Business Breakdowns:
🔮Best Links of The Week🔮
"Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting and debate how much higher to raise them after gaining more confidence inflation will ease further this year. They could begin deliberating at the Jan. 31-Feb. 1 gathering how much more softening in labor demand, spending and inflation they would need to see before pausing rate rises this spring. In recent public statements and interviews, Fed officials have said slowing the pace of rate increases to a more traditional quarter percentage point would give them more time to assess the impact of their increases so far as they determine where to stop." Source: WSJ
"After a brutal year for technology stocks, individual investors have lost their appetite for buying the dip, with one notable exception. They are still scooping up shares of Tesla. Individual investors’ net purchases of a basket of eight popular tech stocks hit a recent peak in November, before dropping sharply through the end of the year, according to Vanda Research. Buying has since picked up slightly in the new year as tech shares rebound." Source: WSJ
"FTX’s new chief executive, John J. Ray III, said he is looking into the possibility of reviving the bankrupt [digital asset] exchange as he works to return money to the failed company’s customers and creditors." Source: WSJ
"[NFLX] founder Reed Hastings is giving up his CEO role but will stay on as chairman, the company announced alongside its earnings report Thursday... [NFLX] matched Wall Street’s revenue expectations and posted millions more subscriber adds than anticipated." Source: CNBC
"So what's on deck for moviegoers in 2023? Looking down the barrel of this year’s lineups, we’re seeing superhero movies; sequels; threequels; adaptations of well-known books, from a classic YA novel to a bestselling nonfiction tale of murders in a Native American community; superhero movies; new twists on old characters (like, say, Dracula’s longtime henchman); the tale of a bear on a killer drug-fueled bender; superhero movies; a few outrageous comedies; some intriguing biopics on conflicted men; and more superhero movies." You can read all the details about 34 upcoming movies the Rolling Stone singled out here.