- Lumida Ledger
- Lumida Ledger: Risk to Soft Landing, Banks Outperforming Apple, Fixing Disney
Lumida Ledger: Risk to Soft Landing, Banks Outperforming Apple, Fixing Disney
Welcome back to the Lumida Ledger. Here’s a preview of what we cover this week:
Macro: Fed, Unemployment, CPI
Markets: Semiconductors, Unprofitable Tech
Company Earnings: Bank Funding Costs, Disney, Apple
AI: Competitive Landscape, Google, Softbank
Digital Assets: Banking-as-a-Service, Coinbase Bonds
We believe we are on the precipice of a changing world. We’ll be a keynote speaker this week at the 1640 Investor Forum in Southampton. We look forward to sharing our non-consensus investing views on AI, digital assets and longevity for UHNW investors. Reach out to Ram or Dimitri if you’re around to connect.
It’s been over a year since the Fed started raising rates.
Where are we now? Unemployment is lower, GDP is higher, and the consumer is beating expectations.
The Fed has more work to do.
Sometimes in life you get exactly what you expect. The CPI print came in meeting expectations.
Source: WSJ, Labor Department
We see a lot of folks commenting on how ‘CPI ex-shelter’ trend shows the Fed mission is nearly done.
Core CPI Ex-Shelter is like Adjusted EBITDA.
It looks pretty, and shows trend - but that’s it.
Don’t get distracted by Core CPI ex-shelter. This metric excludes three “pocketbook” categories: housing, food, and energy. The Fed can’t ignore that.
Yes, inflation is coming down.
But the last leg will be slow and sticky with a resilient consumer.
We see that in record YTD oil prices, labor strikes at UPS and in Hollywood, and bulk dry freight - a leading indicator for goods and economic activity.
tl;dr Don’t expect rate cuts in Q1 as markets expect.
Also, we expect a hot CPI print in August.
On the jobs front, jobless claims came in higher than expectations. This is mostly noise - there’s no breakout - the consumer is hanging in there and it shows in the discretionary spend across Travel & Leisure.
We continue to look at this chart to gauge risks to the ‘soft landing’ narrative.
Two weeks ago we made our underweight equities tactical call on Aug 1st. Since then markets are on pace for 2 down weeks in a row.
Big Tech has rallied due to PE expansion. Next quarter earnings need to show up.
We saw last quarter that end-user demand for AI at the Big Cloud Providers has not materialized.
Markets are giving advance credit. We believe certain players (like Google) have a better risk reward in Big Tech than other players (like Meta).
What about our tactical call now? We still expect weakness in the weeks ahead, but we’re in a bull market when you look out 6 to 12 months. A lot will turn on how Nvidia reports on August 24th.
Take a look at semiconductors. Semis are a leading indicator.
Whether its CHIPS Act, Tesla, Big Tech, or AI - semiconductors are the market tell to focus on.
And here’s where the Van Eck Semiconductor ETF (SMH) sits today.
We also noted that the climate is set for a ‘new narrative’ to emerge. There is dueling over what that narrative should be. We believe it will be ‘hot landing’ (e.g., slowing growth combined with sticky inflation).
Lastly, markets are punishing unprofitable IPOs that use Adjusted EBITDA. We continue to advise sticking to quality. Nvidia - a real company growing earnings and revenue (albeit at high valuations) is down only 5%.
Meanwhile Upstart, Affirm and SoFi are down 20 to 40%.
JPM’s equity strategy team has a new narrative - and it is decidedly bearish. Take a look here for more:
Here’s a statistic that supports our tactical view: after the Nasdaq 100 ends 100+ day streaks of closes above its 50 day moving average, there has been 10 such streaks of closes above the 50-day prior to this one.
In the week following the end of those streaks, the Nasdaq 100 was lower nine times for an average drop of 2.04%.
Over the next month, the average move has been - 0.65%.
tl;dr markets are due for a breather
Moody’s cuts ratings on 10 banks citing higher funding costs and CRE risks. This is called ‘rear view mirror’ driving. The ratings agencies dump this kind of news after markets have recovered somewhat to avoid adding to risks.
We’d like to thank Moody’s for allowing us to add to banking sector positions at attractive valuations.
Fun Fact: JPM, MS, and UBS have all out-performed Apple who we put in the penalty box due to low earnings growth since the lows - by double digits.
We continue to like tilts to financials. Our conviction has only grown now that we have the benefit of earnings.
Also, Energy has outperformed Tech over the last 3 months as well. In fact, the energy sector is the cheapest globally. With energy prices on the rise and the demand for energy increasing - we continue to like the sector’s prospects over a multi-year horizon.
Source: Datastream, MSCI, IBES
One area where we are not seeing the consumer spend is Disney - whose stock price has gone nowhere in 9 years and is flat YTD.
Disney is losing subscribers in its streaming service. We don’t like Disney for the same reason we don’t like Netflix - competition is fierce and it’s a market share battle.
Disney has also missed the fact that kids live their lives now in the Digital Realm: Roblox, TikTok, and Youtube Kids.
Big Tech Earnings
We’re big fans of technology to improve quality of life and also the ability of banks to earn at scale.
We recommend looking at this post if you want to see which Big Tech firms we like based on valuation and earnings potential.
Recall in this newsletter back in July we called several Big Tech names ‘geriatrics’. The most geriatric of all is Apple. By that we mean the earnings and revenue growth is sub-par – or in decline.
We made this comment in our July 9th newsletter re: Apple: “The PE ratio for Apple is 32 with a 6% earnings growth expectation. Meanwhile, Taiwan Semiconductor has a PE ratio of 15 and over twice the earnings growth rate expectation of ~10% over the next 5 years”.
Take a look at Apple’s performance since July.
Apple is a great business. The buybacks are great. It is a consumer staple. Our point is that without double-digit earnings growth Apple’s stock will lag other Big Tech firms and the valuation does not reflect that.
This was a deep out-of-consensus call on the heels of Apple’s Vision Pro. We feel very good about this one.
Also, here’s a twitter thread showing how the Big Tech firms, including Apple, can jumpstart earnings by getting into the banking sector.
There’s a lot happening on the AI front. We recommend reading this thread which is how we see how competition playing out for 3 core customer segments: Consumer, Enterprise, Government / Defense.
Headline: We believe Google has a real shot of winning the battle for the digital personal assistant. Google can level-up the browser, gmail client, and search in a unified AI-first experience.
We also like Google from a valuation and growth perspective. But Microsoft with their acquisition of GitHub and the developer tools on OpenAI may win the developer market.
The good news? Softbank announced they are entering AI. Good for them. WeWork is on the verge of issuing ‘going concern’ risk. We need more venture funding to take our semiconductor positions into the stratosphere.
At the 1640 Society, we will share our non-consensus approach to investing in AI. One tactic? We like specific names in the Silicone Layer. There is no ‘build it and they will come’ bet - the CapEx spend is there now.
The bank regulators updated their non-objection requirements. What that means is if a Bank wants to offer crypto services or banking-as-a-service offerings, they need ‘non-objection’.
This requirement on crypto has been in place already - the expansion to banking-as-a-service is new. That regulation will slow down the growth of FinTech and Crypto firms that seek to access fiat ramps.
Exchanges like Coinbase, Prime Trust, and Kraken rely on Fiat Ramps to accept and move customer funds. The rule creates a barrier to entry and advantages incumbents.
Coinbase offered to buy its bonds for 65 cents on the dollar. Check our thread here. After we published this the offers on the bonds increase to 71 cents on the dollar.
Content update: We’ve been testing content on new channels like TikTok. Here is us diagnosing the issues with Disney and how to fix them.
Work with us: we are are looking for a junior offshore analyst to help us build more analytically-informed content. Send referrals here.
Meme of the Week
The service and experience from the current medical system is lacking. We talk to clients about strategies to stay healthier for longer to avoid doctors visits. Stay tuned for future content from us on the topics of longevity and legacy.
Quote of the Week
“The secret to so many artists living so long is that every painting is a new adventure. So, you see, they’re always looking ahead to something new and exciting. The secret is to not look back.” - Norman Rockwell
If you’re interested in learning more about Lumida’s wealth management services, please join our waitlist.
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