AIA Free Weekly Email 7.9.24
Global central bank rate cuts starting to kick in
Big fan of Smead Capital Management. Cole Smead discusses why the coming peak of the Permian oil supply growth and the opportunity in long-life oil assets are valuable. He also explains why returns on the S&P over the next decade could be zero or a loss.
https://www.bnnbloomberg.ca/video/investing-in-the-energy-sector~2944157
Here is the chart from the St. Louis FED website that Mr. Smead referred to in the video.
I have also included a chart below highlighting the S&P 500 bear markets and market recoveries.
It appears that when households have 20% or more of their assets in equities, the market has had pretty big bear markets. Conversely, when the holdings of equities by the public are at extreme lows (1982), this has been the start of serious bull markets.
Of course, this is not the only indicator we should go by, but I wanted to illustrate the point that when households have a significant amount of their net worth in equities, it is usually a sign that the uninformed, less sophisticated money is in the market. That’s where we are today as I have read an article that many Millennials and Gen Z folks have upwards of 90% of their assets in stocks.
Keynote Q&A with Bob Robotti, Robotti & Co.
Bob Robotti is one of the best value investors of our era. He is largely unknown to most investors, but I have been following him for years. He does not give many interviews, but this is an excellent opportunity to get introduced to him and his investing philosophy.
All You Need to Know about Coal
I have been invested in coal and consider it a long-term opportunity. The consensus in the West is to demonize coal and coal-powered plants. But the global east and south see coal generation for electricity as a quick, cheap, and reliable way to bring electricity to the masses. The opportunity is that because coal is demonized, it is not receiving the necessary investment, yet demand continues to increase. That means a floor under prices and above-average cashflow and earnings for well-run companies in this space. In the interview, they talk about several coal companies if you want ideas in this space.
As I have mentioned publicly in the past, I personally like Glencore (Copper and coal). I am looking at adding coal to the Dividend Portfolio, as there are some great yields in coal companies.
Global manufacturing is set to re-accelerate thanks to monetary tailwinds
The tailwind of global rate cuts looks like it will start asserting itself in increased economic activity worldwide (increasing global PMI). I have been talking about this for months and now it seems various more mainstream commentators are saying something similar.
I will add the PMI data to my central bank tracker to watch the correlation between more rate cuts and higher global PMIs.
Crescat Capital June Monthly Letter
Cisco Systems was the most valuable company in the world at the peak of the dot-com bubble in March 2000. Its stock price had reached a high of $80.06 per share giving the company an enterprise value (EV) of $548 billion or 5.5% of US GDP and 37 times sales. Investor exuberance over tech stocks was high. The future economic promise of the Internet for the world economy was strong, but the forward earnings growth rates implicit in tech stock valuations were not achievable. Stocks had overshot. Tech earnings were getting ready to inflect sharply downward in the course of the normal business cycle. Cisco’s stock price would fall 89% over the next two-and-a-half years.
The stock price has yet to return to its prior high in the 24 years since. Advancements in AI technologies today portend enormous productivity benefits for the long-term growth of the economy, just like the Internet did in 2000. But valuations among the leading technology companies are even more stretched today than they were then implying future earnings growth rates that once again should prove impossible to achieve. For instance, Nvidia recently earned the most valuable company in the world status with an EV of $3.3 trillion, a record 11.7% of total US GDP at its recent peak on June 18, more than twice as high as Cisco’s achievement in 2000. It also has an even richer multiple of 41 times revenues. We think it has impossible future growth expectations to live up to.
History repeats itself, first as tragedy, second as farce. - Karl Marx
In his famous quote, Karl Marx asserted that history has a tendency to repeat itself, and when it does, it does so initially as a tragedy, but later as a farce. This profound statement encapsulates the cyclical nature of human events and societal patterns, highlighting the parallels between tragic occurrences in history and their subsequent, often absurd, reenactments.
Of course, this time could be different, but I would not bet on it. Remember, “price is what you pay, value is what you get.”
The most important distinction between price and value is the fact that price is arbitrary and value is fundamental. For example, consider a person selling gold bars for $5 a piece. The price of those gold bars is, in this instance, $5. It's an arbitrary amount chosen by the seller for reasons known only to them. Yet, in spite of the fact that those gold bars are priced at $5, their value is so much more.
This happens a lot in the stock market. The examples may not be as immediately noticeable as $5 bars of gold, but they are often quite extreme in their own right. You see, the price of a stock is determined by a list of factors it would take years to even read through. Many of these factors are driven by human characteristics and emotions, such as fear and greed, market tendencies and events so distantly related that trying to unravel the correlation between those events and the stock's price would make your head spin. All of these things can and do affect the price of a stock, sometimes to a large degree but rarely do they significantly affect its value.
The good news for investors is that, at some point or another, a stock's price almost always levels back out with its value. Investors such as Warren Buffet have used this truth to make billions.
Understanding this concept of price and value is fundamental to investing successfully in the long term.
To your investing success,
John Polomny
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I wonder if we will see a similar pullback in % terms with NVIDIA as we did with Cisco... Hopefully some of that capital flows back into uranium.. !