Monday, January 4, 2021

Monday Morning Links

  • Today, America's five largest companies by market capitalization are all well-known technology and internet businesses: in descending order, Apple, Amazon, Microsoft, Alphabet (the parent company of Google), and Facebook. Historically, being one of the top companies by market cap has been a contrary indicator, both for the company itself and for the industry to which it belongs. In 1980, right before a decade-long decline in oil prices, six of the top ten were oil companies. In 2000, at the peak of the dotcom bubble, six of the top ten were computer and internet companies. I think history will repeat and that none of today's Big Five will grow enough to justify its current market cap. So I want to lay out the risks, as I see them, of investing in these companies and popular tech stocks in general. [y0ungmoney]
  • 2020 was a big year for the Conboy Lab at Berkeley, which proved that all the weird past findings about “young blood” extending life were not actually due to any elixir in the blood of children (thank goodness). Rather, the rejuvenating aspects of young blood experiments were due to the dilution of harmful factors in old blood. By mechanically removing plasma and replacing it with saline and enough albumin to replace what was taken out, they diluted aged blood factors in both mice and humans and were able to rejuvenate germ layer tissues and improve cognition by reducing neuroinflammation. These findings are exciting not only because they represent a scientific advance in understanding aging, but also because they herald the first real anti-aging product that could come to market. Therapeutic plasma exchange is FDA-approved (not for aging, but for a bunch of other conditions). I imagine there remain prohibitions on advertising that it can add years to your life, but it is safe, and a doctor can prescribe it off label. It’s also cheap. An automated plasmapheresis machine—which lets you do treatment after treatment—can be bought online for under $3,000. That is less than the cost of a single transfusion of young blood sold by the startup Ambrosia. How long until someone opens a clinic offering plasma dilution? I bet someone tries it in 2021. [elidourado]
  • For all the advances in civilization, from believing in demonic spirits all the way to understanding mRNA at a machine-code level of detail, covid is running wild much like it would have back in the Middle Ages—partly, yes, because modern transportation helps it spread, but partly also because our political and regulatory and public-health tools have lagged so breathtakingly behind our knowledge of molecular biology. [Scott Aaronson]
  • The cumulative changes in the real value of the pound since the Second World War has been so great that most people are now completely disorientated when attempting to compare prices over any period of time. Have we become richer? Is the cost of that once-in-a-decade purchase reasonable? Far from telling us where we stand, our pay cheque has become an opiate to protect us from unpalatable reality. In my own effort to regain my financial bearings I have become increasingly addicted to the Mars Bar. The Mars Bar is a currency for our time: it is a long-established basket of staple commodities (cocoa, vegetable fats, milk solids, sugar) packaged with great consistency in the form of an ingot. As such it is a reliable unit of account certainly more reliable than gold, which is prone to speculation and it preserves a remarkably constant real value. I have measured my wealth in Mars Bars since an early age, though the motive for doing so has changed. [FT]
  • The main driver of delivering the number to Welch was GE Capital. The game at GE Capital was the same as what prompted Buffett to sell his Freddie/Fannie shares in 2000. GE was one of the few, safe blue chip companies with a AAA rating. Welch used this rating to basically borrow 100s of billions of dollars and buy higher yielding assets with the money. So GE bought everything from real estate, private label department store credit card programs and payday lenders in foreign countries. As long as the yield on the financial assets purchased was 400 to 500 bps higher than the cost of the money that GE could raise to back those purchases, GEC was an easy way to grow overall profits. That ‘borrow at AAA rates to buy BB assets’ trade was something that seems to have been a popular profit juicer in the 1990s and 2000s up until the GFC, when the AAA rating essentially disappeared. [canuck-analyst]
  • “The population of homeless people at the lake is different,” agrees Mitch O’Farrell, the L.A. city councilman representing Echo Park, who has the unenviable task of balancing his constituents’ liberal idealism with the more pragmatic challenge of keeping the park from being destroyed. He believes that many of Echo Park’s new homeless are free spirits who are homeless by choice, preferring to live on their own terms outdoors rather than accept the city’s offer of temporary shelter. “They are resistant to the standard ways of doing things,” he says. And, O’Farrell adds, they believe that as long as they stay in the park, connected to one another, they have power. [LA Mag]
  • The stock is down from ~$90 to ~$60 since 2014, which makes some investors wonder what the problem is, especially since this is such a high quality company. Was there really some kind of disaster that I’m glossing over? If you look at a chart of Magellan’s valuation, you’ll quickly see the culprit. Magellan traded at 23x EBITDA in 2014! That’s insane for a pipeline company! The end of the chart is inaccurate due to the aforementioned asset sale, but the valuation is ~13x as of now. While the company steadily grew EBITDA and earnings, it just took a long time for the intrinsic value to catch up to the price. At 23x you were assuming huge growth and a super low discount rate. At 13x you’re assuming no growth, as I’ve shown in previous sections. You can see that the last time Magellan traded at a similar valuation was in 2010 when markets were still reeling from the Great Recession. [Concentrated Compounding
  • Now that we have covered the important aspects of the energy infrastructure business model, we are ready to examine why they have underperformed so significantly since 2014. In some cases, a large drop in market prices is a reaction to assets that are justifiably no longer needed – think of something like Blockbuster, for example. In other cases, the market is simply correcting an overvaluation, too much leverage, and/or moderately weaker earnings. In the former case, you can be looking at a value trap. In the latter, you can often find market overreactions and significant value. Looking back on the assets themselves, it is clear that many energy infrastructure companies have very valuable asset bases. The problem with the stocks was overvaluation paired with too much leverage and weaker than expected cash flow, which combined to turn the prior narrative of ever-expanding dividends on its head. [Concentrated Compounding]
  • I feel a great comfort and relief knowing that there were others who lived and died and thought and fought so long ago; I feel less tyrannized by the present day. I learn much about the way our society really works, because the system-origins—military, religious, political, colonial, agricultural, financial—are all there to be scrutinized in their infancy. I have gained perspective. The language in which the book is written is rich and complete, as the language of today is not. I find out how little I know. I am inspired by the will and erudition which enabled Gibbon to complete a work of twenty-odd years. The guy stuck with things. [Iggy Pop
  • I think the opportunity is to buy anti-bubble, value stocks (energy, tobacco, banks, coal, and timber are some cheap sectors) while simultaneously betting against the Robinhood bubble. I think that most of the 19 stocks that I posted above are worthless and a handful are maybe worth 0.1x the valuations they currently trade. That makes it a $1.5 trillion short opportunity, as big as the housing bubble shorts (including the mortgages) were when I started this blog. [CBS]

1 comment:

CP said...

America is Rome. Of course, why shouldn’t it be? All of Western life and institutions today are traceable to the Romans and their world. We are all Roman children for better or worse.

The best part of this experience came after the fact – my wife gave me a beautiful edition in three volumes of the magnificent original unabridged Decline and Fall, and since then the pleasure and profit have been all mine as I enjoy the wonderful language, organization and scope of this masterwork.