Gravitas Spark CrowdFunding

Category: General

  • Democracy Winning Voters and Investors

    Democracy Winning Voters and Investors

    Pretty depressing week, eh? Not even a DryRobe can warm the spirits. Our leaders have clicked their heels three times this week and eventually told us, “There’s no place, but home.” Soon we will fantasize about the simple things in life and once again appreciate basic freedoms. That’s maybe not a bad thing. In fact, far far away from the Emerald Isle there’s a storm brewing with fantasy-like good news possibilities. Not Kansas this time, but Texas.

    Early Presidential election voting has started in some US states and one data point just jumped off the page this week. Voter registration in Travis County, Texas, has rocketed to 97% of the county’s estimated 850,000 eligible voters. Yes, US elections have dominated international headlines through every Presidential cycle, not just Trump’s, but has never captured the full attention of US voters. Turnout, even in the highly polarised 2016 election, was just 55.5% of eligible voters. The brutal fact is that more than 100 million of the 250 million eligible US voters didn’t vote last time. The issue is more complex than a simple desire to vote. Frankly, voter suppression has been a fact of life for many citizens. Moreover, despite Trump delusions and Fox fake fears, voter fraud is negligible. Here’s a few headlines to give a flavour of the ongoing battle to vote, and a sense quite a few of the missing 100 million have had enough:

    • Long Lines Mark The First Day Of Voting in Georgia – Washington Post

    • Ohio’s Quarter Mile Early Voting Lines? – The Guardian

    • Federal Court Sides With Texas Governor Limiting Mail Ballot Drop-off Sites – CNBC

    • Californian Republican Party Admits It Placed Misleading Ballot Boxes Around State – New York Times

    • Record Early Turnout With Three Weeks To Go – Reuters

    Despite waiting times of up to 10 hours, suspicious failures of voting equipment and a mis-match of facilities for urban and rural voting communities, a whopping 14 million people have already cast their ballots in the first few days of the election. The most egregious example of Texas Governor Abbot’s suppression attempts is the provision of one drop box for mail-in votes for a population of over 4 million in Harris County. This less-than- subtle suppression wheeze is disguised as a policy of one drop box venue per county. Except, per the Guardian, Harris County “has – and this is not a typo – 2,780,000% more residents than the least populous” county. JR Ewing would be impressed. Urban voters less so, but they are fighting back with the most basic of freedoms despite the challenges.

    The US has difficult days ahead but renewed civic engagement by its citizens and a determination to utilise the right to vote is an encouraging start. The other encouraging news is that financial markets are reasonably relaxed about a potential Biden win on currently huge polling leads. So much for Trump claims of markets loving his Presidency. In fact, this period of policy chaos could soon feature in financial textbooks as Exhibit A in the all-too-common experience of investors confusing causation with correlation. Maybe markets like democracy after all?

    Indeed, the phenomenon of huge numbers of new retail traders opening investment accounts can be considered a democratization trend too. Thanks to user-friendly technology platforms and almost-free commissions the likes of Fidelity, Schwab and Robinhood have introduced millions of users to financial markets for the first time. No longer the preserve of big banks, hedge funds and private wealth managers, financial markets are opening up and the little traders are making their mark. The numbers do not lie; individual trader activity now accounts for an estimated 20% of all trading volume, and up to 25% on days of heavy volume. That is double the levels of retail activity seen in 2019. Of course, there are concerns that extraordinary levels of activity in sophisticated derivates/options markets, “hot” IPOs and SPACs might not be the best place to begin one’s investing life but that misses two key catalysts. The arrival of super fast technology on any mobile device and fee-free entry are structural changes which can’t be reversed. Hi-tech investor platforms and low costs are massive drivers of investor engagement. It is not just a Wall Street phenomenon. Consider the following:

    Peer-to-peer and marketplace lending has invested/funded more than €40 billion of loans to SMEs and property companies in the UK and Europe since 2011.

    UK equity crowdfunding platforms, Crowdcube and Seedrs, have introduced hundreds of thousands of investors to SME and start-up companies with almost €2.5 billion of monies invested.

    The Irish Venture Capital Association(IVCA) recently published its survey results showing the highest levels of investment in Irish start-ups on record in Q2 2020.

    That last survey caught the eye with investment totals of €363 million up 58% compared to the same period 12 months earlier. However, first-time funding for start-ups fell by 60%. This was understandable in the middle of maximum pandemic uncertainty but also highlights the opportunity for individuals without access to fee-charging venture capital funds. Think back to our earlier observations on opportunities presented by technology and zero commissions.

    Now think about democratization of start-up investing. Would it surprise you to know the Spark Crowdfunding platform saw a 75% increase in new investor accounts in the same Q2 period? After this read you won’t be surprised to know that the combination of an easy-access technology and no fees is a big winner. But, not the only winner. An individual investor can be a Dragon in the start-up Den for as little as €100 and find the next Palantir or Snowflake. Of course, most readers might never have heard of these companies a few years ago but it’s difficult to ignore Snowflake having a higher market value than the once mighty BP right now! It might even irritate you.

    The good news is you’re probably already at home and don’t need to kick or click your heels in frustration. Just click on www.sparkcrowdfunding.com and familiarise yourself with exciting companies like Motarme, Horsepay, HaloSOS, BusterBox and Frequency. No fantasy trips to Oz required, just follow the crowdfunding road to great start-ups, interesting opportunities and financial democracy.

  • Charting the Next Era of Change

    Charting the Next Era of Change

    Dr. Tony “Holocaust” Houlihan will try and change government minds again this week on Covid-19 curtailment strategies. Change seems inevitable. Indeed, the timing of change seems to be the only area of dispute between NPHET and the politicians. In business and financial markets, change is omnipresent but again strategy shifts are often resisted. Sometimes for too long. Look at IBM which has just decided to break itself in two.

    Founded 109 years ago, IBM was as recently as 1980 the most valuable company in the world. The global pandemic can’t be blamed for this remarkable strategic decision but there is no doubt Zoom was a catalyst. In recent months this video conferencing upstart has attracted a market value of over $130 billion and left IBM in the dinosaur dust at a mere $117 billion valuation. IBM spent too long defending a hardware business; the future and focus should have been cloud software. However, IBM is not alone in its strategic sclerosis.

    Exxon Mobile(XOM) as recently as 2013 was the most valuable company in the world. Zoom is almost as valuable as XOM but the real zinger this week was watching wind and solar power company, NextEra, surpass the market capitalization of the Rockefeller fossil fuel descendent. Quite remarkable. But, also an embarassing reminder of the costs of hubris, climate change denial and sipping the Trump kool-aid. NextEra is now the most valuable energy company in the US and the following chart painfully captures the strategic miss by XOM executives.

    XOM should have gone shopping for renewable energy assets years ago. Then again shopping has changed too with Ocado just overtaking Tesco as the UK’s most valuable retailer with a £21.7 billion valuation. Tesco executives must be scratching their heads with a 27% share of the UK grocery market compared to Ocado’s hi-tech delivery share of….. 1.7%! This writer must confess to similar confusion but the chart below points to some pretty impressive confidence from financial markets:

    Investors have perhaps decided that retail is moving rapidly towards being a service attached to a technology platform. We shall see. However, we have more conviction, and have written so previously, in the world of banking. It is interesting to note that Europe’s relatively small technology sector has now exceeded the value of the region’s enormous banking system. See the chart below and think about that €800 billion valuation of Europe’s entire banking sector.

    Yes, that €800 billion figure resonates with us. It happens to be only slightly more than the current market value of a single social media platform company, Facebook. How will that comparison chart loook in the years to come? We certainly won’t have to wait 109 years like IBM to see banks change dramatically. But, perhaps the more interesting question is what will Facebook look like in the next decade. Only 10 years ago we watched the Facebook start-up story, “The Social Network”. The corporate skulduggery detailed in that version was at the playschool end of the spectrum compared to what we (and most US and UK voters) know today. The ugly truth of supra-sovereign power was already apparent in this 2017 chart below:

    The brutal truth is that Facebook exerts more influence than entire countries. China might be the focus of US geopolitical worries today given its huge consumer market and outsized influence on the world economy. However, one wonders will a probable Democrat President in the White House initiate a more robust discussion about breaking up Facebook. In America, the home of capitalism? Really? Never? Think again and revisit history.

    In the same year that IBM was founded, another huge US monopoly was broken up. The Republican Presidency of William Howard Taft in 1911 witnessed a successful antitrust case brought by the US Justice Department against the Rockefellers and Standard Oil. What a year it was. The world’s largest company was broken up and a future global number one, IBM, began its corporate journey. However, IBM wasn’t the only global number one company to begin its corporate life that year. One of the 34 independent oil companies spun out of Standard Oil was…….. Exxon. Fuel for thought me thinks. Whither Facebook and its influencing spawn in 2021?

  • Ulster and Irish Banks Say No

    Ulster and Irish Banks Say No

    No, Ulster Bank is not quitting the Irish market but its parent, Nat West, is conducting a “strategic review”. So, that’s a yes then. Forgive the cynicism but it has been a very strange week. The Donald wants to stay in the White House in perpetuity and UK lorry drivers are about to have a similar but involuntary experience of inertia in Kent.

    Was it only a few short days ago that the UK government was prepared to break international law to defend the internal integrity of the United Kingdom? Now, it looks like the county of Kent will have its own borders. We never saw that plastered on the side of a red bus; good-bye “Garden of England”, hello “Herbaceous Border”. Of course, Brexit will continue to exasperate most Europeans but another “B” word is potentially a far bigger danger. Europe’s banks are in trouble again. Check out this performance chart (from The Daily Shot) of European banking shares:

    In the past 12 months Europe’s bank sector has under-performed the broader European equity markets by a whopping 30%. Negative interest rates, pandemic destruction of loan books, lack of new business and competition from 38 digital challenger banks are a huge headwind for all European banks, not just Ulster Bank. The banking sector is now smaller in value terms than Europe’s relatively small technology sector which tells its own structural story. However, there’s another story developing.

    Most readers can understand that banks are quick to say “No” when economic conditions are difficult. What is less understandable is the tortuous and time consuming nature of most loan applications. The banks justify the bureaucracy on compliance and regulatory grounds. But, apparently not for all customers. A new investigation by the International Consortium of Investigative Journalists(ICIJ) has just hit the headlines. Leaked documents have identified $2 trillion worth of transactions between global banks linked to money-laundering and other criminal activities since 1999. Apparently, banks can say “Yes” when the profits are pretty good. Curious compliance, not. Closer to home we should be more curious too.

    The government has set up funding schemes for the SME sector where local banks take on a small proportion of the risk, as little as 20%. But it isn’t little enough for our banks it seems. The latest figures show that, of the €2.5 billion ‘available’ to SME companies for funding through pandemic difficulties, just €180m has actually been drawn down by just over 1,000 companies. For context and contrast, the UK government has just released its own figures. In one scheme alone, almost €15 billion was borrowed by more than 60,000 firms. As a sanity check, our economy and population is approximately 1/10th of the UK. Clearly, something is not working in Ireland. Indeed, Ulster Bank was one of the three pillar banks in the flagship €2 billion Credit Guarantee Scheme launched by government.

    Now think about that “strategic review” at Nat West and wonder how enthusiastic Ulster Bank is to extend its loan book to companies in real pandemic trouble. It is not too difficult to imagine AIB and Bank of Ireland are not exactly enthusiastic to add risk to their creaking loan books and plunging share prices. Furthermore, get your heads around that €180 million of funding “support” and the ESRI estimates of between €6 and €10 billion of lost SME business in the March-June period alone. The Irish banks are quick to trot out the line that Irish companies are reluctant to take on additional debt in uncertain times. Ponder that very briefly, and then watch Michael Gove in Westminster shamelessly blaming UK business for not having export paperwork “ready for Brexit” and the Kent lorry-park. Different failures, similar deflection.

    Our government needs to show a bit more curiosity as to why UK businesses are accessing funding at a far quicker pace and in much larger size. Ulster is not the only one saying No.

  • Nikola Says It’s Better To Travel Than Arrive

    Nikola Says It’s Better To Travel Than Arrive

    I once dated a girl called Nikola, with a “k,” as Ross O’Carroll Kelly would say. On our first date she introduced me to one of her mates as “JFK”. Momentary confusion was allayed when she added, “….as in the airport, not the President – lots of baggage!”. Gotta giggle. Indeed, we need a few laughs this week as Dublin stares down the barrel of Level 3 pandemic restrictions on travel. Meet another Nikola. This one is a truck company and it caught our eye previously in a June column here. These were our thoughts then….

    “Nikola Corp makes hydrogen and battery powered trucks. Not one truck has been produced yet, we don’t know who will make them and the company has zero revenues to date. The Nikola share price doubled on Monday and the value of the company now exceeds $33 billion. That is now $3 billion higher than the value of the 117 year old Ford Motor Company and its annual revenues of $150 billion. Punchy stuff.”

    Then, earlier this month the giant GM announced a $2 billion deal involving an 11% equity stake in Nikola Corp and its assistance in manufacturing the start-up’s battery-electric and hydrogen fuel cell truck, The Badger. Roll on to this week and a little-known equity research group with an intimidating name for travellers, Hindenburg, dropped a few bombs on the $20 billion valuation of Nikola. Hindenburg alleged that a corporate video “Nikola One in Motion” was an elaborate ruse. Rather than an electric truck cruising at high speed, it is claimed that Nikola had a truck towed to the top of a hill and then simply filmed it rolling down the same hill. The research group further accused the founder and Chairman of Nikola, Trevor Milton, of a career-long record of deception and misleading partners about the existence of its proprietary technology.

    Suffice to say Nikola’s share price cratered by 40% over the next few trading sessions losing $8 billion of its value. But, there are still $12 billion worth of promises left in Nikola. GM is standing by its investment but the potential for serious red faces and career car crashes for board members and senior GM executives must be high. To add fuel to investor concerns the SEC and US Department of Justice have both opened investigations into possible fraud. One wonders will the Badger ever arrive? In fact, a wider perusal of market action this week did prompt memories of that old trading adage that it’s better to travel than arrive ie trade on future promises rather than actual delivery. Our current concern is that some of our critical trading partners are giving promises way too much weight.

    In the political arena about 40% of the US population have cult like faith in the “stable genius” of Donald Trump and his lawless disorder of bleach and bluster. Closer to home, Boris Johnson, 9 months after landslide-winning electoral promises, has been forced to potentially breach international law to deliver Brexit. Boris usually does better with 9 month “oven-ready” buns but, not for the first time(or 7th?), Brexiteers appear undeterred. As always, we would look to financial markets as a more reality-balanced environment with real money at stake. However, we are a little concerned as future profits/delivery appear to be growing into very very large promises…..

    Check out the IPO of Snowflake this week. This company is a leader in cloud based data platforms. A hot space so the IPO was going to be hot. Sure enough, the IPO was priced at $120 per share rather than the initial guide of $85. So, that equated to a franchise valuation above $30 billion rather than the initial thinking of $20 billion. What’s another $10 billion, eh! Well…… try another $50 billion. On its first day of trading Snowflake shares traded as high as $313 per share. That’s a market capitalization of $88 billion and more than the value of 431 members of the S&P 500. Snowflake has delivered sales worth $403 million over the last 12 months. The ratio of peak first-day valuation to sales was 219 times the last year’s worth of sales. That’s a helluva lot of promises. But there’s more.

    SPACs are back. Special Purpose Acquisition Companies. Often referred to as “Blank Cheque” companies, investors park funds in these IPO’s on the promise the money will be spent to acquire companies in specific sectors or themes. There is a double-whammy of risk here. One, the money is not fully spent and two, the vehicle over-spends on poor acquisitions. Year-to-date investors have parked $30 billion in these promise trucks. In pandemic-free 2019 that number was just $13 billion. One suspects many of these vehicles will, like the Badger, look good on camera but never arrive. Of course, we have written many times about the positive aspects of confidence but one must be wary of weighting the unknown future too heavily. The good news is that there will be opportunities in more boring stories. How about transport, with no hydrogen or hot air?

    FedEx the logistics giant is valued at $65 billion. It delivered $69 billion of sales last year – yep, that’s a sales multiple of less than 1x compared to Snowflake on more than 200x. Yesterday, FedEx reported fiscal 1st quarter results which saw profits up 60%, volumes up 30% and sales up 13%. Sounds like they do the travelling and arriving rather well. Maybe the first Nikola got it right – weight the logistics over the personality!

  • 9/11 Lessons on the Cost of Fear

    9/11 Lessons on the Cost of Fear

    Mike DiAgostino was the calmest broker with whom I ever worked. Our derivatives trading desk in Hong Kong in the mid-‘90s often had its panic moments which lead to fearful paralysis or worse, expletive-filled finger pointing. Mike taught me early that angry blame-shifting was not just a waste of time but could be very costly if a market was moving fast. As we pass the 19th anniversary of the horrific events of 9/11 and face the challenges of a global pandemic are we in danger of repeating the fear-filled mistakes of the post 9/11 period?

    We must remind ourselves that the ‘War on Terror’ in the Afghan mountains of Tora Bora snowballed into an illegal war of error in Iraq, quagmire in Afghanistan and the implosion of Syria. The cost in lives was millions, the cost in capital was trillions. On a more positive note, the terrifying multiple hijacks of aircraft did not kill the tourism and air travel industries. We learned to live with the ongoing terror outrages perpetrated by Al-Quaeda and ISIS. Governments co-operated and committed to improved security at all airports. Confidence returned. But now it’s gone.

    Air travel passenger volumes remain severely depressed. Governments are flying solo with their own Covid-19 containment strategies and airline balance sheets are bleeding to death. Thankfully, there is confidence coming from financial markets as both IAG and Ryanair have announced plans to raise both debt and equity capital. Just like 2001, there is an urgent need for joined-up thinking at governmental level for a proportionate response to the health threat posed by Covid19. The Irish government response is currently an outlier, and not in a good way. However, in other areas the Irish pandemic scorecard is looking pretty good and crucially steering clear of the blame game. Not so elsewhere.

    The George W Bush administration gave birth to the Tea Party movement within Republican ranks and one shudders to think what new US “Taliban” will emerge post Trump. A toxic US political environment is now entirely fueled by cultural and societal fears. And, it’s not just domestic.

    China is the current geopolitical bogeyman. As the country of origin for the Covid-19 virus, it is an easy blame target but calm heads are required to avoid an uncontrolled economic and digital decoupling. Or war.

    Finally, we should be mindful of the dangers of a “K-shaped” economic recovery. Low interest rates and fiscal support cannot just benefit those with assets, or even jobs. Rocketing financial markets can provide euphoric headlines but have virtually no impact on the vast majority of developed economies’ populations. An acceleration in income inequality will ultimately lead to a damaging backlash, for everyone.

    Fear is understandable in uncertain times but leadership is required. Calm heads and clever use of technology can connect the world once again. Mike went back to New York and played his part in the early digital development of the financial derivatives market in the North Tower of the WTC. Cool guy, cool head. I am thinking of him today.

  • Brexit Clown Car Now A ClusterTruck

    Brexit Clown Car Now A ClusterTruck

    The satirical puppet show, Spitting Image, will soon be back on our screens after a 24 year break. It might struggle. The daily reality comedy show from Westminster surely can’t be trumped. Can a puppet really compete with the awfulness of Michael Govern Oven Ready, Dinghy Patel, Mark ne-Francois-pas, Lord Rayling of Failing or Jacob Rees-Mogg, Honourable Member for the 18th Century? These are just the minor characters but often they steal the show.

    I thought the Secretary for Health, Matt Hancock, would this week. When challenged by Sky News’ Kay Burley about newly appointed trade envoy Tony Abbot and his track record of misogyny and homophopia in Australian politics, the quick-thinking Matt was able to play defence with “but he’s good on trade”. Hold that gong. Enter Boris Johnson and his Svengali of Barnard Castle, Dominic Cummings with their latest Brexit wheeze.

    The UK Prime Minister and signatory to the Brexit Withdrawal Agreement is now claiming this international treaty is “contradictory” on Northern Ireland and “never made sense”. Incredibly, Boris Johnson is the very same man who negotiated the deal, signed it, prevented parliamentary scrutiny of it, campaigned and won an election on the back of it. Who needs Spitting Image? Well, possibly the financial markets. International providers of capital are not amused. There is extreme unease about a government going rogue and conceding they are breaking international law. No wonder the kingdom’s top legal civil servant, Jonathan Jones, has just quit. He’s not alone. Check out the following stories of UK fright and flight….

    Global Factory Growth Hits 21-month High; FTSE 100 Hits 3 month Low – The Guardian

    Pound Could Fall To Parity With Euro – Dow Jones

    So, those are equity and foreign exchange traders running for the exits. UK debt markets remain stable but there’s another risk emerging in the financial world. This snippet from an article in the FT caught our eye this week:

    Global regulatory body to harmonise ‘plethora’ of ESG standards

    The huge rise in popularity of funds that invest according to environmental, social and governance principles over the past decade has led asset managers to ask for more information on sustainability risks from their investee companies. This has given rise to a wide range of initiatives aimed at defining disclosure standards, such as the voluntary Task Force on Climate-related Financial Disclosures.

    One might think sustainability risks are not exactly relevant to Brexit. However, ESG scoring frameworks will ultimately look at the risk profile of individual countries where the rule-of-law (or absence of same) can impact a company’s ability to meet Social and Governance commitments. Now think about the latest noises from Westminster where Northern Ireland Secretary, Brandon Lewis, has just astonished MPs with an admission that plans to reinterpret the Brexit Withdrawal Agreement “does break international law in a very specific and limited way.” Well, that’s alright then.

    If it were not so serious it would be comedy gold. Expect tough days ahead for puppets, satire and the rest of us.

  • An Apple A Day Keeps Capital Away …….?

    An Apple A Day Keeps Capital Away …….?

    Swimming is the new banana bread I am told. My fellow swimmers in the Forty Foot this morning might argue this is a healthier, if colder, development of our pandemic response. Not so in financial markets. Things are hotting up dramatically and possibly not in a healthy way. As of today, Apple is now worth more than all of the blue chip companies listed in the UK’s flagship FTSE 100 index, combined.

    Yep, the corporate empire of Boristan and Elgar’s “Hope and Glory” has just been trumped by a $2 trillion mobile ring tone. On a less flippant note, investor capital flows are chasing an ever smaller opportunity set. Big is not only beautiful, but grows bigger every day in a fundamentals vacuum. For illustration, yesterday Apple Inc and Tesla Inc executed a stock split. This administrative exercise has no impact on the valuation of either Apple or Tesla, it merely creates more shares with a lower price. Not last night. Here is what happened.

    Apple Inc’s valuation increased by $72 billion.

    Tesla Inc’s valuation increased by $51 billion.

    The combined additional value of $123 billion generated in just one day’s trading exceeds the entire market value of IBM.

    This additional $123 billion “franchise” value would equate to the FTSE 100’s second largest stock, BHP Billiton.

    Of course, there will always be “hot” stocks and sectors like technology. A global pandemic has certainly focused investor minds on the winners. Our worry is that governments and central banks might be doing the same. Check out the US corporate debt market. Federal Reserve support of debt markets has triggered a wave of borrowing by large US companies with total corporate debt soaring to $10.5 trillion. Ultra low interest rates definitely help but one wonders whether investor capital is being steered into the right places?

    The Bank for International Settlements (BIS) appears to share our fears according to this Bloomberg article:

    Companies with annual revenues above $1 billion dominate corporate borrowing now more than any time in at least a decade, according to the Bank for International Settlements. These firms account for 78% of global issuers of dollar bonds so far this year, according to data compiled by Bloomberg.

    “Led by easier access to bond markets, large firms significantly increased their borrowing,” BIS researchers Tirupam Goel and José María Serena wrote this month in a report about credit during the Covid-19 crisis. “The rest of the firms faced bottlenecks due to their reliance on a strained syndicated loan market and hurdles in switching to bond markets.”

    You may have read lots of the financial commentariat debate the prospects of a “V shaped” recovery. However, the colder reality for many smaller firms is no access to funding as banks tighten lending conditions. This opens up the possibility of what some are calling a lopsided “K shaped” recovery where large firms attract nearly all available investor capital and crowd out smaller firms. Ultimately, the overall economy suffers when capital is misallocated on a grand scale. Current headlines may gush about record, even bananas, valuations but the outcome could be far from healthy for economic recovery. As small firms fail and job losses continue it will not just be the streets of Portland hosting inequality protests…..

  • Is There A Sequel To The FAANTAM ‘Menace’ ………..?

    Is There A Sequel To The FAANTAM ‘Menace’ ………..?

    I can remember working in Tokyo when the grounds of the Japanese Imperial Palace had an implied valuation greater than the entire state of California. Fun times and fantasy didn’t last. Sadly, only Hollywood can deliver entertaining sequels for decades. Financial markets are thrilling investors right now but I’m beginning to wonder whether we are entering fantasy territory? Let’s revisit Japan and California again.

    The combined value of just three Californian companies – Apple, Alphabet(Google) and Facebook – plus Microsoft, up the road in Seattle, currently exceed the value of the entire $4.7 trillion Japanese economy. We didn’t even need to include the $1.5 trillion Amazon in that calculation but bear with us. Here are a few other fantastic data points driving current markets.

    • These same five companies have delivered 35% returns to investors year-to-date. The next 495 biggest stocks have declined by 5% in the same period.

    • The FAANG stocks – Facebook, Apple, Amazon, Google and Netflix – recently hit a new 22% high as a percentage of the value of the overall S&P 500 index.

    • The Wall Street Journal reported this week that 78% of the S&P 500 returns over the past 5 years came from the technology and e-commerce sectors.

    • Tesla is not even included in the S&P 500 because, up until this week’s quarterly results, it had failed to make profits for four consecutive quarters….ever. At its recent $300 billion valuation Tesla is the tenth biggest company in the world by value. That’s $100 billion more than Toyota which sold 10.6 million cars in 2019. I kept the ‘0.6’ in that figure because Tesla didn’t even reach that mark and probably won’t this year either.

    Clearly, this concentration of euphoria in such a small number of stocks causes some unease and resonates with veterans of the TMT fantasy party of 1999. Perhaps we have seen this movie before or this is the original ‘FAANTAM Menace’ like its Star Wars contemporary which had its first release, ironically enough, in 1999 too.

    The FAANTAM stocks – Facebook, Alphabet, Apple, Netflix, Tesla, Amazon and Microsoft – are my own $7 trillion(!) creation but I’m struggling to see how any sequel could thrill investors to the same extent. Right now investors are enjoying the possibilities of these companies dominating their respective global markets for years to come. They could be right but do not be too surprised to see potentially darker sequels. Here are two potential contenders for an eventual trilogy:

    Inflation Strikes Back: Yes, some inflation is a good thing. But too much inflation and things go horribly wrong quickly. Why? Equity markets might look a little stretched but debt markets are incredibly vulnerable if interest rates rise to counter inflation. The IIF estimates total global debt will reach $257 trillion in 2020 as central banks and governments reflate a pandemic crippled economy. Global equity markets, for perspective, are valued at around $90 trillion.

    Revenge of The Dragon: China is being battered on the political front at the moment. UK moves on Huawei, Australian C19 fury, US consulate closures, Indian military skirmishes and Hong Kong protests are pushing China further into an isolated corner. The back lash from China could be very painful given their critical positioning in global trade. All the FAANTAM valuations assume singular global trade and technology platforms. Clearly, a world divided into two different trade and technology ecosystems is not a friendly one for equity valuations.

    Unlike Hollywood, there will be no great appetite to view those sequels.

  • A Big Jack Needed For Punctured Economics

    A Big Jack Needed For Punctured Economics

    Jack Charlton saved my Dad’s business. The economic text books won’t make the specific connection but my Dad remains convinced. Back in the early ’80s Ireland was crippled with terrorism, perma-recession, huge government deficits, whopping interest rates, rampant inflation, political chaos and misguided currency policies. The Emerald Isle was not exactly an investment capital paradise. Every day my Dad dropped me to school on his way to a small food factory on Distillery Road in the shadow of Croke Park, and one day I was particularly troubled in the car.

    The Irish Times headlines and sport were the daily balance of conversational fare but no sporting story could offset that day’s assault of gloomy economic and political news. The concerned eleven year old asked, “How will Ireland get better Dad?” The response took a while and was initially downbeat, “The country has gone sour”. There was a further pause, and then a more upbeat prediction, “There is great talent here but the country needs to see and feel what success looks like. Confidence is everything for countries and economies. Ireland will find it.” Confidence. So true. So powerful.

    Fast forward 10 years and Jackie’s Army had visited Germany in ’88 and surprised all in Italia ’90. Dreams literally happened. My Dad’s business survived the 80’s and Ireland cranked up the international investment welcome message with an army of goodwill ambassadors following a Geordie’s football team. A strange combination, impossible to predict a decade earlier. Even Irish food factories attacted US multi-national attention by 1990. Confidence is everything. Fast forward to today.

    Jack Charlton’s funeral is this week and the global economy is gripped by a pandemic, huge human death tolls, massive job losses, soaring debt and increasing geopolitical tensions. Plenty of sour. However, this is not the ‘80s. Cynicism and pessimism are, of course, to be found. But….. confidence remains. The data does not lie. Here are a few things which caught my eye in recent days.

    • China: Yes, China faces a more challenging trade environment as tensions develop with the other economic and technology superpower, the US. But check out the most exposed major export economy to China. The DAX share index in Germany has just turned positive for the year. Clearly, markets are discounting a less chaotic future for China than headlines would suggest.

    • Europe: The agreement by EU nations on a pandemic economic recovery deal was tortuous but remarkable in one respect. For the first time ever EU governments have agreed to share the credit risks of the rescue funds required for countries with weaker balance sheets. This sends an important signal of confidence in those challenged economies of Spain, Italy etc.

    • Investment: Typically, investment capital is scarce in recessionary times and provided only by the very large institutions. Not so right now. An army of retail investors is driving share prices of hot stocks like Tesla and the mega-technology names to new highs on an almost daily basis. Yes, there is cyncism that this will end badly. In one trading session this week the combined value of Facebook, Apple, Alphabet, Netflix, Tesla, Amazon and Microsoft increased by $291 billion. News did not drive this. Confidence in the future did. One can only hope the FAANTAM confidence continues and does not become the ‘FAANTAM Menace’ for private investors’ trading accounts.

    • Valuation: Valuations of companies can be calculated using lots of different multiples of profits, cash flows and sales but all are doing the same thing; discounting the future. Currently, there are 500 companies in the US with valuations even higher than the FAANTAM club. The median multiple of sales in this group of 500 is 13x and on average net income is currently negative. Now that’s confidence; investor belief that current losses will turn into profits.

    So despite, a challenging global economic environment it is clear there remains encouraging levels of confidence out there. That is a much better starting point than early ‘80s Ireland but one suspects there will be tough days ahead. Inspirational leadership will help. The Tangerine Tyrant in Washington will not. As we say good-bye to Jack we should remember the transformative powers of confidence. One image always stays with me of how confidence can just grow.

    My Dad didn’t live to see Ireland play the mighty Italy in the Giants Stadium in 1994 but 80% of the crowd that day were Irish. It was magical and unexpected. They must have been confident. They were right. So was my Dad. Thanks Jack.

  • Corporate Activity is the Long View Tell

    Corporate Activity is the Long View Tell

    The pubs are back and so are the heroic trader tales, growing by the billion every day. By now readers may have heard about a new army of day-traders investing their stay-at-home savings in financial markets. There are some pretty good tales too; the Nasdaq hitting all time highs, gold flying to record prices, Chinese stocks up 10% in 48 hours, Amazon trading over $3,000 per share and Tesla up 42% in just 5 days. Whoop whoop. Welcome to a financial world with $10 trillion of central banking largesse.

    Tesla might win the trader-tastic trophy this week given it is now the most valuable car company in the world. Elon Musk’s electric vehicle franchise is currently worth almost $250 billion or, to put it in a more domestic context, that’s the gross national product(GNP) of Ireland from as recently as 2017! Tesla has lost almost one billion dollars in each of the last two years so investors are certainly taking a very long term view on cash returns from this business of making……automobiles. Or possibly not.

    The vast majority of buyers of Tesla stock through the pandemic lock-down are “trading” a short term view of further upside and hoping to exit with a quick profit. Nice if you can do it, yet all retail trading website disclaimers state clearly that most don’t. The track record of longer term investors is much better and this article is focused on a particular type of buyer, the corporate strategic buyer. These guys don’t have the luxury of a quick exit . They are in for the long haul and therefore their mergers and acquisitions (M&A) activity is a better barometer of confidence in the future. Clearly, a global pandemic has hit C-suite confidence but the data suggests some cautious optimism. Here are a few data tells:

    • Bloomberg tells us the first 6 months of 2020 saw global M&A activity fall by 50% to $1 trillion. But that’s still $1 trillion of long-term wagers on the future.

    • The Asia-Pacific region showed remarkable resilience with just a 7% decline compared to the similar period in 2019.

    • According to Crunchbase global venture funding in younger companies was $129 billion in H1. That’s also just a 7% slip from last year.

    • And at last, Warren Buffett is dipping into his $137 billion cash pile at Berkshire Hathaway to buy a gas pipeline from Dominion Energy for $10 billion.

    • The FT is also citing data from Refinitiv showing private equity(PE) firms upping their activity. These firms are also long-term thinkers and they accounted for 16% of all M&A activity in H1. That’s the highest share for PE since 2007 and they have another estimated $2.5 trillion to spend.

    It is not all dreamy optimism. US activity has collapsed by 90% and 44 deals have been pulled. That contrasts sharply with previous periods of turmoil and possibly reflects an executive pool truly exhausted by all that Trumpy winning. We just won’t go there today… and one can only hope Florida’s school children take the same view.

    But let’s finish on a more upbeat note and return to our previous theme of a possible surprise recovery for the “sick man” of financial markets, Europe. We note with interest that European deal activity has slipped by just 15% in 2020 so far. It is early days yet but, when Buffett and Europe are leading again, there are grounds for longer term optimism. Natural gas and Europe are quasi-inflationary bets so it won’t be just us watching carefully. Indeed, feel free to listen to the day trader tall tales but we can assure you the bond trader tales could be seismic….and very very real.