BEACONS OF THE WEEK
The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.
Pokonji Dol Lighthouse, off the coast of Hvar, Croatia submitted by Dave and Diane MacNicol.
This lighthouse was built in 1872 and stands at 15 feet tall. The lighthouse is located on Pokonji Dol, an inlet 500 meters off the coast of Hvar, Croatia.
Lanterna, Zadar, Croatia, submitted by Dave and Diane MacNicol.
This lighthouse is located on the coast of Zadar. It is a historic landmark and tourist attraction for many on an annual basis.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Oil limit down
On Monday, oil prices pulled back by 4-5% on geopolitical news. Tensions between Israel and Iran heightened over the weekend, but the oil market shrugged it off. This comes after Israel launched an aerial attack against Iran and did not target oil or energy facilities in the country. Many traders believe there is no major risk that this conflict will escalate and impact Iranian oil production. The U.S. has pushed for a resolution between the two parties over the last week due to fears of escalation. On the surface even Israel does not want escalation, a spokesperson for Israel said the country is not interested in expanding the conflict over the weekend.
We agree with this sentiment. Israel has shown that when it wants to be aggressive and send a message, it is not afraid to do so. We believe there should be a risk premium for oil, but it has disappeared in recent weeks due to demand worries, recession fears, and overproduction from OPEC.
We think after this sell-off, many investors should consider adding high-quality oil and gas producers with low costs, and clean balance sheets to their portfolios. We think the risks we outlined above are over amplified by today’s market participants, and despite lower spot prices, the industry is in a strong position. Many quality companies in the industry remain highly profitable and are producing strong cash flows despite lower oil prices.
Despite traders expressing relief now in terms of geopolitical risk in the Middle East, the situation is far from resolved and could escalate at any point.
Bonds, bonds, bonds
Yields, yields, yields. Treasury bond yields continue to perk up and it has left many investors questioning why this has happened. Despite the Federal Reserve slashing rates last month at its previous meeting by 50 basis points (0.5%), rates have moved up over the last month.
The Federal Reserve cut its policy interest rate by 0.5% on September 18th, since then the U.S. 10-year Treasury yield has increased from 3.7% to above 4.3% (as of Tuesday morning).
This spike has been caused by several things.
For one, demand has been weak for U.S. Treasuries. Two recent treasury auctions saw weak demand.
The second driver has been the prospect of a rising federal budget (after the election). Many investors believe the fiscal situation could get even worse, regardless of who wins the election. Despite the large $1.8 trillion U.S. federal budget deficit, neither candidate for the White House has made tackling it a major campaign priority.
Treasury note auctions have accelerated over the last 5-10 years. Many believe the Treasury Department’s quarterly borrowing plans which are set to be released Wednesday will see record large debt sales.
Investors are growing weary of an expanding deficit. The government is relying on these added Treasury auctions and demand has slowed, what happens if they go no bid eventually?
The other factor that has led to higher yields has been reduced fears of a recession. After an encouraging jobs report in September, some believe the FED will slow their interest rate cuts in the coming months and years.
Rising yields have led to a sell-off of U.S. bonds from investors. We warned our readers earlier this year that now is not the time to buy bonds (despite pending rate cuts). Fast forward to today and the iShares Core US Aggregate Bond ETF is down year to date and is down 3% over the last month. This sell-off in U.S. bonds has also expanded into other developed nations as investors dump bonds for safer assets or higher-yielding assets.
The U.S. bond market has also seen elevated volatility over the last month. According to analysts, it has rarely been this volatile outside of market shocks or unexpected events. Some analysts believe a driver of this elevated bond market volatility is the tight Presidential race.
Chinese economy hurting everyone
The Chinese economy has been hurting for quite some time. The economy has major obstacles to overcome to continue its rapid growth.
Over the last few years, the middle and lower classes have been impacted greatly. However, according to the Financial Times so has the top 1%. Since 2021, China’s billionaire list has shrunk by 36%.
A weak economy, depressed equity markets, and major government crackdowns have led to this phenomenon. The list has also seen a high rate of churn as many older entrepreneurs have dropped off the list making way for new members. Many of the older members who have dropped off the list are property developers and operate in real estate.
The report estimates fortunes at the end of August and does not account for September’s rally.
7% of the members on the list are members of China’s top political advisory body, the Chinese People’s Political Consultative Conference or its rubberstamp parliament, the National People’s Congress.
Government crackdowns have impacted the Internet and E-commerce sectors while a cratering real estate sector has impacted China’s once flourishing property market.
The number of billionaires in China has fallen for 3 consecutive years, peaking in 2021 at 1,185 – this year’s number was 753.
Chinese stocks have flattened out after a volatile few weeks last month. The iShares MSCI China ETF is down 1% over the last month and is up 27% year-to-date. However, the ETF is down 16% from its September high after investors were disappointed with the volume of stimulus earmarked for equity markets from the Chinese government.
Early innings in uranium
We will not bore you with details in this entry. We talk about uranium and nuclear energy a lot in this publication. It was one of the first major topics we covered. This week, we simply wanted to share a chart that Bank of America shared with its clients that looks at today’s uranium bull market compared to past uranium bull markets.
The chart paints a picture that we are in the early innings for this bull run, and uranium has more room to run on the upside. On the macro side, this time is different, demand is expanding, acceptance is increasing, and investment is increasing in the space. We think the upside for uranium is higher than previous highs.
The two previous bull cycles for uranium occurred in the 1970s and during the early to mid-2000s.
The fundamentals are there. The supply-demand imbalance is real and even tech giants are jumping into the market to secure clean and reliable energy through a series of acquisitions, and investments.
For all those who say it’s time to take profits, we beg to differ. This will be a long-term trade where prices appreciate, and equities move higher.
Disclaimer: MacNicol & Associates Asset Management holds shares of various uranium miners and a physical uranium trust across various client accounts.
When servicing debt becomes expensive
The U.S. government is feeling the effects of higher rates.
The U.S. now spends as much on interest as they do on national defense. According to data from the U.S. Treasury, defense spending and interest spending are equal for the first time in three decades.
Interest spending is expected to surpass $1 trillion over 12 months in the coming months.
How will the government account for this rising expense? We assume they will finance it through a deficit originally but will then be forced to cut spending in other areas.
U.S. politicians have added on debt for decades and have financed their policies through deficits, and now we are sitting on a major debt bubble that nobody in Washington will address.
Super Micro disaster
Super Micro Computer shares slid heavily on Wednesday morning on news that their accountancy firm was resigning. Ernst & Young resigned on Wednesday after being hired as Super Micro Computer’s auditor in March 2023. As of this week, EY has not issued any report on SMCI’s June 30, 2024, financial statements. For those of you unfamiliar with Super Micro Computers, it is a U.S.-based technology firm that sells hardware solutions. Super Micro makes computers that companies use as servers for websites, data storage, and other applications, including AI algorithms. The company’s customers include Nvidia, AMD, and Intel.
EY put out a statement on why they were resigning: “We are resigning due to information that has recently come to our attention which has led us to no longer be able to rely on Management’s and the Audit Committee’s representations and to be unwilling to be associated with the financial statements prepared by management, and after concluding we can no longer provide the Audit Services by applicable law or professional obligations.” EY also mentioned governance as an issue at SMCI and its board independence.
Super Micro said they disagree with EY’s move to resign and are actively looking for a new auditor.
This is Super Micro’s latest challenge over the last few months. Shares have dropped 58% over the last six months. The challenges they have faced this year have included deteriorating profit margins, a report from activist short seller Hindenburg Research alleging accounting fraud and other issues and delaying the filing of 10K’s and other mandatory disclosure documents. SMCI is also rumored to be under federal investigation.
This is not the first time SMCI has run into trouble with regulators. It paid a $17.5 million penalty to the SEC in 2020 after being accused of improperly recording revenue.
We hope you did not back this pony, we certainly did not. In the end, strong governance at a company is extremely important and is often overlooked by investors.
Surging Trump
We have talked about this company before in early editions of this publication.
We bring this up because, on Tuesday, Trump Media (DJT) jumped 9% to surpass the size of the New York Times. DJT pulled back 15% on Wednesday morning but the stock is still up 179% over the last month. The company’s market cap is north of $9 billion.
$9 billion seems small but some investors value Twitter at $9 billion (Fidelity owns a tiny piece of X (Twitter) and marked down their investment recently which implied a valuation of $9 billion for X. Many other analysts peg Twitter’s valuation near $20 billion. Regardless of your thoughts on this, the fact that DJT is in the same region as Twitter (in terms of valuation is quite insane).
The DJT stock price movement pairs betting markets, political ideology, and meme stock era behavior from investors.
DJT’s market cap of $9 billion is justified by speculation and fandom from investors. The company reported assets valued at $356 million as of June 30th, a net loss, and only $837,000 in quarterly revenue. DJT operates numerous entities including Truth Social, an alternative to Twitter.
Buyer beware.
If you want an idea on how to play this, we think it could be a buy the rumor, sell the news event if Trump wins the election, as there is no real value in this company. Alternatively, many believe that DJT will tank if Harris wins next week. Just an idea for our active readers. For us, we would not touch this with a ten-foot poll.
Alphabet’s strong earnings quiet doubters
Alphabet shares were trading at multi-year lows in terms of earnings, many scooped up shares at what they saw as a discount. The depressed valuation Alphabet shares traded at was due to growth questions from investors, search engine dominance, and antitrust investigations.
On Tuesday afternoon, Alphabet posted quarterly results which shut up many of their doubters.
On the top line, Alphabet beat quarterly revenue estimates ($88.27B vs. $86.4B estimate). They also beat street estimates for earnings by a wide margin. Earnings per share came in at $2.12 versus a $1.84 estimate. Alphabet’s results represent a profit and sales increase of 37% and 15% year over year.
Advertising revenue beat analyst expectations and jumped year over year. CEO Sundar Pichai highlighted the growth of the cloud unit in Tuesday’s earnings call. Cloud revenue jumped 35% year-over-year. The run-up in cloud revenue comes as the entire industry is expected to grow its cloud business and ramp up investments in AI infrastructure. Alphabet plans to spend roughly $13 billion on capital expenditures for the current quarter as it did last quarter. According to Alphabet’s CFO, Alphabet intends to expand its ongoing cost-cutting initiatives by leveraging AI to streamline workflows, manage headcount, and optimize its physical footprint.
Alphabet essentially beat every single line item on their Income Statement.
Alphabet had a roughly flat headcount over the last year as the technology hiring spree officially ended. The only major miss by Alphabet during the quarter was on free cash flow. However, they missed due to heavy investment in AI infrastructure over the quarter.
We are pleased to see these strong numbers from Alphabet and will continue to watch them from here.
In other news, Alphabet was fined by the Kremlin on Wednesday for blocking pro-Kremlin YouTube accounts in Russia. The Kremlin fined Alphabet $2.5 decillion*. This fine is larger than the entire world’s GDP. It is larger than all the money in circulation on Earth. A decillion is a digit followed by 33 zeros. This is greater than global GDP for the next 100 years.
How many dollars is a trillion?
One trillion dollars is equivalent to a thousand billion, or million dollars multiplied by millions. A trillion is a 1 with 12 zeros after it, represented as 1,000,000,000,000 or 10¹².
*that’s 2.5 trillion trillion trillion dollars
Alphabet blocked these accounts to comply with U.S. sanctions on Russia.
Alphabet shares jumped 3% on Wednesday, fading slightly throughout the trading day.
MacNicol & Associates Asset Management
November 1, 2024
Click here for the PDF: The Weekly Beacon -November 1 2024
