Welcome back to our weekend reading.
This week has been a story of ‘coming back’, for better or for worse. As LL Cool J said in 1990, “don’t call it a comeback, I been here for years, rocking my peers and puttin’ suckers in fear”. Not exactly sure what that means, but it sounds good.
- Melbourne has emerged successfully from lockdown, to the relief of a grateful city and nation.
- The Nikkei has returned to the 30,000 level after 30 years of deflated levels, like the hero returning to glory in a Kurosawa (or Tarantino) film.
- Music industry veteran Irvin Azoff (manager of the Eagles and Bon Jovi) has spent USD $200m to acquire the rights to all songs and media content of the Beach Boys, looking to make the band relevant in the 21st century.
- And as if we didn’t have enough health scares to contend with, Ebola has reappeared in West Africa, with Guinea reporting an outbreak of the virus amongst at least seven people this week.
Let’s begin the entertainment and look back on the week.
World’s Most Expensive Blunder
We’ve all been there: you go to transfer a quick $50 to a friend for dinner, or rent payments, and without realising you’ve put the incorrect BSB. Nothing stings more than money that is just lost, unless of course you can get it back.
So we can only imagine the despair felt at Citibank after a US judge ruled they won’t be allowed to recover the almost half a billion dollars it accidentally wired to Revlon’s lenders.
Citibank, which was acting as Revlon’s loan agent, meant to send about $8 million in interest payments to the cosmetic company’s lenders. Instead, Citibank accidentally wired almost 100 times that amount, including $175 million to a hedge fund.
In total, $900 million USD was sent out mistakenly.
Citibank filed a lawsuit in August seeking the return of its funds, but it still has not received $500 million from 10 investment advisory firms after the accidental transfer. A court ruling said that due to the reputation and size of Citibank, lenders were justified in believing the payment was intentional. It took the bank itself nearly 24 hours to recognise their mistake.
But hey maybe Citi can write off that $175 million to the hedge fund as charity work – they might’ve needed it after the GameStop debacle.
Back to the Future
The Nikkei 225 passed 30,000 this week, a level which has not been matched since 1990.
Back in those days Japan was considered a market leader, certainly it was a larger blip on America’s radar than China. How times have changed.
Jesse wrote a great note on investing in Japan on Monday that covers some of the background and development of that economy, but the consensus seems to be that the return to 30,000 does not attribute itself to the bubble-like market conditions we saw in 1989 when it last happened.
Take a look at the comparative market cap of some of Japan’s biggest companies to the megacap giants of the S&P 500:
It may seem nonsensical to the modern investor, familiar with Japan as a safe-haven position, that thirty years ago Japan was trading at a P/E of over 70 and the market was accelerating at paces which resemble the rally from March lows we are living through now.
An insight provided by the smartest man on the desk, Jesse Imer, has been that a change in the Bank of Japan’s purchasing of local ETFs has provided much needed momentum and can be attributed to a large portion of the growth in the Nikkei.
The Great Vaccine Boom
President Biden has invoked the Defence Production Act, a law established in during the Korean War to allow the president to expedite the supply of materials and services for national defence. Funny how we’ve gone from the ‘War on drugs’ to the ‘War for drugs’.
Pfizer and Moderna both agreed to sell more doses of their vaccine to the U.S. after Biden invoked the law, which could force their production within national facilities. The result is an extra 300 million doses each of the vaccines by the end of July, which would cover all American adults.
Source: Our World in Data, 18 February 2021
The US is currently sitting at 17 doses per 100 people, well above the global average of 2.42 doses per 100 people.
Biden also used this platform to press for the approval of his $1.9 trillion pandemic relief plan and a $15 minimum wage to be rolled out gradually across the country.
Without commenting on specific politics, it seems the new president is tasked with pushing several plans uphill whilst trying to bring the health of his economy and people back on track.
Pandemic Part 2?
Not to tempt fate, but surely the world wouldn’t get hit with two deadly viruses at once, right?
At least three people have been reported as fatalities to a new outbreak of Ebola virus in Guinea, West Africa. Seven people in total tested positive after attending the funeral of a nurse who had died from the same disease.
Guinea is currently the largest exporter of bauxite, a rock which is the world’s main source of aluminium and gallium. The hope now is that they do not become the world’s largest exporter of Ebola as well.
West African governments are now increasing ‘anti-Ebola measures’ as Guinea tries to track down patient zero, likely a patient treated by the aforementioned nurse.
Double Standards at Renaissance
Renaissance Technologies have attracted some negative attention this week for the stark contrast drawn between their staff-only fund, and the fund open to the regular public.
The Renaissance Technologies ‘Medallion Fund’, open only to current and former partners of the business, posted a 76% gain over 2020. Outstanding performance by any metric.
But the Renaissance Institutional Equities Fund, open to those with the poor taste to not be a member of Renaissance staff, lost over 22.6% during the same period. Similarly the newer Institutional Diversified Alpha Fund lost 33.58%, apparently diversifying ways to lose money.
An investor in Medallion claims the poor performance of the Institutional Equities Fund is that it is based on quantitative models which are not applied to the Medallion Fund. The unpredictability of market movements (keeping in mind that the job of a quant model is to predict market movements) has impacted the fund negatively – to quote directly, “there’s nothing wrong with the models. It’s just the world is wrong”
“Bitcoin as gold” vs … Gold
As Bitcoin’s price continues to rally, sentiment grows amongst high profile money managers that the cryptocurrency represents an alternative store of wealth to the former gold-standard, gold.
The latest gold bull to turn bearish is DoubleLine Capital boss Jeffrey Gundlach, who tweeted that he now sees Bitcoin as a better trade and a ‘stimulus asset’ as opposed to gold.
In the last two months gold’s price has slid significantly as the inverse to Bitcoin’s breakneck rally to USD $50,000. The narrative around the coin continues to be dominated a ‘Bitcoin as gold’ narrative, which faces less scrutiny than the possibility that the coin will become a payment system.
Both admittedly share a similar narrative of speculation with some slight real-world utility; gold has industrial applications but realistically is valued mostly on sentiment, Bitcoin might dream of the day that it is used as a regular currency but is currently valued on a mixture of market speculation and idolization of a certain automaker CEO. Speaking of which…
SpaceX To the Moon
Once just Elon’s pet project, SpaceX is now larger than almost any stock in the ASX 200, with a valuation of $74 billion USD after their latest fundraising round.
Last week SpaceX announced that it had completed a $850 million USD fundraising round last week, apparently to raise capital for its Starlink and Starship projects.
These funds were raised at $419.99, possibly because they knew Elon couldn’t resist the temptation to do something market-rocking with an announcement of raising capital at $420. Once again, if you don’t get it ask the nearest teenager with slightly reddened eyes.
The company has spent almost two years conducting ‘hop tests’ to validate landing procedures for the second stage of their Super Heavy/Starship rockets and has reported increasingly successful tests particularly in the latter half of last year.
Increasingly successful launch statistics can also be seen in their per year launch history, with a large portion of launches in the last three years being already used Falcon 9 rockets.
A Boon for Taiwan
After Japan pleaded with Taiwan to increase semiconductor production a few weeks ago, yet another major economic power has turned to the small nation for help in resolving the global semiconductor shortage.
President Biden’s top economic adviser liaised with the Taiwanese government this week to form a plan to ease the shortage, which is now affecting U.S car manufacturing plants and critical industry reliant on the key components.
This is, of course, a boon to Taiwan Semiconductor Company (2330-TPE and TSM:NYSE), the largest foundry in the world and producer of chips for Apple’s phones and computers.
The stock jumped 5.70% on the re-opening of the Hong Kong exchange on the back of this continuing news of the world’s dependence on Taiwan to produce these precious chips.
Although the world is collectively realising the near-monopolistic position that Taiwan holds, production of semiconductors is not something that can be set up overnight. It’s not quite rocket science, but it’s close – and rockets probably need semiconductors as well.
US Treasuries Make a Comeback
Jesse provides some insight into the latest rally in US Treasuries:
10y US Treasury yields have traded 1.27-1.32% this week, the latter a 12m high for the YTM.
5 times this week so far the market has tested yields above 1.30% and in all 5 times 10y USTs have been heavily bought at this level, and rallied back below 1.30%.
This is a sign of some consolidation in the market, but is too early to say if the sell-off has ended.
Myself, I think 1.30% signifies some form of psychological level that investors are using to “buy the dip” after each US bond market sell-off.
Interestingly, I thought it would come at 1.50%, but then if you think US inflation will average ~1% over the next decade then you’re likely enjoying buying US 10s at a real yield for once!
What I think is more pivotal, however, is that US TIPS (inflation linked) have move from -1.04% to -0.89% in the last week (~14bp).
In the last 3 years there’s been several equity market corrections when US TIPS yields move up 30bp in a short period.
Watch this space closely, it might be our best signal for an impending correction if/when TIPS surge higher (meaning less negative real yields)
Source: State Street
As anybody who read my notes last year will know, my taste in music is time-locked Bill Murray style between 1950 and 1970, but the Beach Boys never did it for me. Maybe it’s because my first exposure to them was Adam Sandler rom-coms, be careful who you make friends with and all that.
But my sentiment is clearly not shared because Irving Azoff, manager of the Eagles (a band I do like), dished out between $100-200 million USD to buy the rights to the group’s songs, photos and interviews.
“We think the Beach Boys is an underappreciated trademark,” Azoff said in an interview. “They are just not as important as they could and should be.”
The Beach Boys join a growing throng of artists who have cashed out of their catalogs in recent months, taking advantage of a hot market for music rights. But this deal is different from those made by Neil Young or Bob Dylan — whose songs fetched as much as $300 million — in that the band is giving Azoff’s company, Iconic, control over everything from their social-media accounts to their names, likenesses and life stories.
Next Week’s Speakers
Our morning calls are back up and running, thank you to everybody dialling in presently – for those who aren’t, we do encourage you to listen in for some unique content from some very capable speakers.
Have a safe and enjoyable weekend.
– Max and the Mason Stevens team.
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The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.