Good Morning,
One week to Thanksgiving and it's looking a little grim weatherwise. My old friend La Nina is in full effect and whilst I'm happy to have invested off the back of her hard work (long food & soft commodities, fertiliser, long Aussie cattle) I really want a clear day to bring family and friends together for us to give thanks for what we have. Ironically for me that would include the La Nina weather cycle of 2020/2021.
That's something to think about.
Quick note: The BIP Show had Dan Housden of Recon Technologies explain the cyber threat environment for investors and businesses in a world where hackers can take down a company. It's a fascinating podcast for anyone interested in the space from a functional or investment perspective
I fear I may have to downgrade my turkey to a pre-roasted one and focus on the butter and seasoning due to time restraints too. We all make concessions somewhere.
Speaking of concessions (and buying things) the Thanksgiving season has the market thinking about all those things that are the backbone of the US and Global economy. Namely buying stuff...
I've spoken on Ausbiz a LOT recently about how important it is to keep an eye on margins with the Twin Devils of rising input costs (supply chain & commodities) and rising labour costs.
The FT's "Unhedged" column put a piece together on it and annoyingly it looks a lot like the sort of thing I would write. So in an effort to avoid plagiarism I'll run a quick summary for those that don't have an FT sub.
It's a good overview of the big box retailers regarding their margins in third quarter reporting. Target and Walmart reported last week and whilst revenues were strong there was a big issue for margins.
Let's check the results for Target vs consensus:
Hmmm some trouble with margins you say. Let's check in on Walmart, who made headlines by being one of the companies to charter its own vessels to ship goods.
Sales up 9.2% year on year which was great but it's all for nothing when you have this...
Gross margins off a bit. Bad. There were some other bits and pieces in there but the margins received the focus. And when you're keeping prices low to entice shoppers to come every basis point counts. Hiring 200,000 people to help with supply chain issues into the holiday rush is a double edged sword.
Damned if you do, damned if you don't.
Then you have Lowe's with a beat on consensus and and increase on sales by 2.2% but here's the win:
But remember all this is moot unless the market actually reacts to it. What's the point having a thesis unless there's an actual, relevant response?
What am i an economist?
I've put Lowe's, Target and Walmart of a common base back to mid September when all this started to really become 'a thing' and the difference is glaring. Lowe's well up, the others off.
And this in an environment when a cashed up US consumer is doing what it can to revenge spend at pace.
So the trade is a pretty simple one: If you think what's going on now will be going on through the last quarter of the year (i.e. right now) then please do not hold the retailers that have margin pressures.
I know that sounds really obvious and it's weird I have to write it.
Then play the tape to the end. Eventually this revenge spending eases off for goods and supply chain issues even out (as they have to) and whilst workers will be let go and/or paid less the relative decline in sales will also be consistent across the board.
Even if the US consumer keeps it up the tendency is going to be towards services and leisure instead of goods.
Semis Check In
Last week I noted that semiconductors had hit an exit signal I didn't take because everything was going too hot.
After then talking to that point on Ausbiz I realised how strange that sounded. I think semiconductors are due to become a flooded market and that the narrative for some semis makers will be less on semi shortages and more on the amazing Metaverse they contribute to.
I'm long META (the Metaverse ETF) and realised now was a good time to find the exit on semis since they have many of the same names.
Instead of simply cutting it for a profit I set a trailing stop, meaning the exit point will climb if the ETF keeps rallying. I made it a little generous at 2.5% (so the ETF needs to drop 2.5% from any new high it makes.
Good news is it kept rallying and it's still held, showing how valuable the Interactive Brokers platform is that we use to do these things.
Finally...
I'm staying on the cutting edge following these guys. They're called Spinlaunch and they have another way to get things into space (which is all the rage now).
They use a spinning technique to generate enough centrifugal force to start the launch. Mach 11 a few km's into the air so this isn't for amateurs. Watch on the link above
All the best,
James
James Whelan | Investment Manager
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