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.
Sand Key Lighthouse, Key West, Florida
This lighthouse is located 6 nautical miles southwest of Key West. The lighthouse was originally constructed in 1827 and was automated 111 years later. The lighthouse was deactivated in 2015 and stands at 109 feet tall. The lighthouse was added in the U.S. National Register of Historic Places in 1973.
American Shoal Lighthouse, southeast of Saddlebunch Keys, Florida
This lighthouse is just offshore from Sugarloaf key. The lighthouse was completed in 1880. The lighthouse was automated in 1963 and deactivated in 2015. In late 2021 the U.S. General Services Administration put out an invitation for bids for the auction of the lighthouse. The lighthouse was sold for $860,000 on May 22, 2022 to an undisclosed bidder.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Tensions heat up
Tensions heated up in the Middle East on Tuesday as Iran launched missiles at Israel. Global equity markets moved lower in response to this news. Oil prices spiked approximately 4% on this news and are back above $70 a barrel as of this writing. Despite the pullback in oil prices over the last summer, we remain bullish on energy producers as most majors have a break-even cost in the $40 a barrel range. This was the largest daily upward move for oil in over a year. Energy analysts highlighted the risks of this conflict to the oil industry. The conflict could reportedly take up to 1.5 million barrels a day of Iranian exports off the market.
Numerous analysts highlighted how this conflict could reintroduce inflation to the world through higher energy prices.
Iran launched this barrage of attacks against Israel due to Israel’s ground attacks in southern Lebanon. Israel has attacked south Lebanon to push Hezbollah forces farther from the Israel-Lebanon border. Hezbollah is an Iranian-backed militant group classified as a terrorist group by most Western nations. Israel is choosing now to attack Hezbollah as the group is reportedly reeling since their leader’s death on September 27th. Hezbollah’s leader was killed by the Israeli Air Force during an air strike on Hezbollah’s headquarters.
The White House and Defense Department confirmed these Iranian attacks and stated they would actively defend their ally, warning of “severe consequences for Iran”.
We are unsure if this will de-escalate in the coming weeks as we are not geopolitical experts, but we are monitoring the situation closely. However, we will warn many experts to believe Israel will retaliate substantially. Israel could target critical Iranian assets which could have grave impacts on global trade and the energy industry as a whole.
For now, we continue to maintain our long energy thesis through North American equities.
Gold prices also moved higher on the news of the conflict.
Disclaimer: MacNicol & Associates Asset Management holds various companies that operate across the energy sector and its sub-industries as well as both physical gold and gold mining companies.
Supply chain union strikes
A massive dockworker strike at ports along the U.S. East Coast and Gulf is underway including Montreal. The strike is expected to wreak havoc across the global supply chain which is already tight this year due to the conflict in the Red Sea, a drought in Panama, and the Baltimore bridge collapse.
American consumers will be hit the hardest and could see shortages among popular products if the strike persists.
Workers from Maine to Texas went on strike on Tuesday in a dispute over wages and automation. The move by the International Longshoreman’s Association (ILA) is the first in almost 50 years (1977). The ILA represents 45,000 port workers. The ILA is striking at 14 major ports (36 total) after talks broke down with the United States Maritime Group over the last few days. The strike could cause up to $5 billion in economic damage per day. According to The Conference Board, the 36 ports handle 25% of the U.S.’s international trade, worth $3 trillion annually. Nine of the busiest ten ports in the U.S. are located on the East Coast or Gulf.
Analysts across the industry believe duration will amplify the impact, as a drawn-out strike will cause shock waves across the American and global economies. A short-term strike will not be felt by consumers in a significant way. Some shipping companies have already warned of surcharges of $1,500 and $3,000 a container in the event of a strike, according to analysts.
According to news outlets, the union is asking for a 77% pay raise for its employees over the next 6 years. The U.S. Maritime Alliance has reportedly offered a 50% raise to workers over the 6-year life of the contract. At one point, the union made comments that would suggest they would accept a 61.5% raise but have since reverted. To put things into perspective a 77% raise in wages is approximately a 12% pay bump per year. The union is also asking for better benefits for its members and is opposing the use of new automated technologies at ports.
Historically, unions have been successful in the short term when resisting automation but over the long term, automation usually is unavoidable as it increases efficiency for the economy and companies. We presume some of these dockworker jobs will become automated in the future. This is an unfortunate truth but something we as portfolio managers cannot ignore. Across the world, some ports have become highly automated using 5G and AI.
According to a 2020 report by the Waterfront Commission, more than half of the longshoremen in New York made more than $150,000 per year. The ironic part of this entire strike is that the union leader reportedly makes over $900,000 per year and has owned yachts in the past.
We are not experts on strike action, employment law, or the current financial situation of dockworkers so we cannot come up with an opinion on the actual strike. We will say that it seems like this union boss who reportedly has mob ties is lining his pockets while dockworkers bust their butts every day. We will also warn our readers about the economic consequences of this strike, the potential economic impact is huge, prices could spike, global trade will slow, and the world could see a real slowdown due to this strike. The strike, coming weeks before a tight presidential election, could also become a factor in the race if shortages begin to affect many voters.
The Biden administration might be forced to intervene if the strike continues. The Biden administration has the Taft-Harley Act at its disposal which would force dockworkers back to work. However, Biden has said he will not do that as he believes in collective bargaining and does not believe in the Taft-Harley Act. Breaking the strike would be a politically dangerous move for Biden as his vice president, Kamala Harris, runs to succeed him in the Oval Office. Currently, the Biden administration is encouraging both parties to negotiate and assist with the margins of this deal.
We are not sure what will happen, but Biden and Harris might have to act if this issue persists for a few weeks and voters notice price hikes and product shortages due to this strike action.
Either way another bullish sign for the shipping industry. We hope you are long shipping.
Defense stocks new all-time highs
On Tuesday, defense stocks surged on news of Iran attacking Israel. The fear across the world sent defense stocks like Lockheed Martin to all-time highs.
Lockheed Martin is an American aerospace and defense manufacturer that boasts a market capitalization of $143 billion. The stock is up 48% since Hamas attacked Israel and reignited major conflict in the Middle East last October.
Numerous U.S. politicians have been buying up defense stocks throughout this year.
Ironic that some politicians who support these conflicts are the ones approving military contracts with companies like Lockheed Martin. Washington is truly an insider’s paradise.
Short sellers caught bag holding
The recent Chinese equity market rally fueled by government support, stimulus, and lower interest rates has reportedly led to $7 billion in losses for short sellers of U.S.-listed Chinese ADRs.
According to S3 data partners, gains for these short sellers have been erased. Many of these short sellers were not shorting these companies due to flawed fundamentals or failing business strategy, they were shorting due to Chinese uncertainty, and geopolitical risk.
The Hang Seng index was up 6% on Wednesday and is up close to 30% over the last month.
Although we have mentioned the attractive valuations in China over the last year, we never acted as buying Chinese equities presents our investors with too much risk as we have seen over the last 3-4 years. Certain investors who can stomach the risk could consider buying China but need to understand it will be a volatile ride. Valuations remain very attractive despite China’s recent run.
The only exposure we have to China is the exposure the iShares Emerging Markets ETF has to China. We own EEM for some clients as we are betting on emerging market growth over the next 5-10 years after a few years of underperformance. Over the last 3 years, the annualized performance of EEM is -6%. We see that trend changing. We could stomach this China risk as it’s only one position for our investors, making it a low percentage exposure and China only represents 28% of that ETF. This makes our individual China exposure a fraction of 1% which we have the appetite for.
India makes up the second largest exposure in the ETF at about 20%. We are bullish on India (as you know) as well as the other basket of emerging markets moving forward and have the added torque of China bouncing back through their stimulus. We think these economies and companies have huge growth prospects, and trade at attractive valuations which drew us to this space over the last 1-2 years.
Disclaimer: MacNicol & Associates Asset Management holds the ETF, EEM in various client accounts.
SoftBank all in again
SoftBank made a big investment, and it seems their funding tap has turned back on. The Japanese multinational investment holding company has been a beacon of liquidity for private companies since its founding in 1981. That funding accelerated over the last 10-15 years. SoftBank has a $184 billion portfolio and as of earlier this year was invested in 477 companies. The company’s Vision Fund posted its first quarterly profit in almost 3 years to the end of 2023 and has enjoyed a stronger 2024 after struggles in 2021, 2022, and most of 2023. SoftBank infamously invested $14 billion into WeWork during the 2010s before the company collapsed. The company also had other large losses in its portfolio in 2022.
Fast forward a few quarters and SoftBank is back. The company is reportedly investing $500 million into OpenAI. OpenAI is currently attempting to pivot from a non-profit with a for-profit subsidiary to a for-profit enterprise. The investment from SoftBank comes in OpenAI’s latest fundraising which values OpenAI between $150-160 billion. SoftBank is joining existing investors like venture fund Thrive Capital, and Microsoft in this new $6.5 billion raise. According to the Financial Times, OpenAI asked investors to at minimum invest $250 million into the company. Reportedly Apple dropped out of the funding round last week, perhaps they know something that we do not or perhaps they think they can do better than what OpenAI can moving forward.
Before this funding round, OpenAI’s notable investors include Reid Hoffman, Peter Thiel, Elon Musk, Jessica Livingston, Microsoft, Y Combinator, and Khosla Ventures.
The valuation of OpenAI is the third highest for a private company in the world only trailing ByteDance (TikTok’s parent company), and SpaceX.
Last year, when the AI hype began, SoftBank said it was going on the offensive in AI and would be investing heavily in the industry.
As a part of OpenAI’s pivot, the non-profit arm will own a stake in the for-profit enterprise. The restructuring will remove caps on investor returns. CEO Sam Altman who previously has said he has no equity in OpenAI will be granted a 7% stake in the company. This makes Altman a multibillionaire overnight. Quite the pivot for a guy who always pushed for OpenAI to remain a not-for-profit, said he does not care about money and has repetitively said that his main concern in AI was its impacts on humanity.
During this funding round, OpenAI has asked its investors not to invest in competitors in the space like Elon Musk-backed xAI. It seems Altman and OpenAI are a tad nervous over competition and know somebody will challenge them. Perhaps all the corporate shenanigans like this restructuring, the board shuffling, and executive changes over the last year are impacting OpenAI’s focus.
All this funding and restructuring news over the last week has taken attention away from something that happened last week to OpenAI. The company saw its CTO, CRO, and Post-Training Director resign within a week. The company only now has 2 of its original 11 founders left at the company.
Reportedly, OpenAI leadership has been pushing employees to create commercial applications for their technology so they can be monetized.
We think the OpenAI story is quite murky right now as people with no information. We also think that there is way too much drama surrounding this company. Perhaps, they will prove us wrong and one day become the world’s most valuable company, or perhaps one day their valuation collapses and these large investors are forced to write down their investments. The one thing we will say is the funding over the last year and a half in AI is a tad similar to the funding Internet companies saw in 1998 and 1999. Just a thought……
MacNicol & Associates Asset Management
October 4, 2024
The Weekly Beacon -October 4 2024
