Market Talk, November 21st 2021
Market Talk is a free Sunday issue, where I share a curation of the best things I have consumed during the week.
Each Sunday I will share:
• The greatest articles I have read during the week
• The best pieces of company-related insights I have consumed over the week
• One stellar podcast or interview
This week I intend to share some ‘Thoughts from the Quarter’ for Starbucks and PLBY Group.
In the schedule of ‘Thoughts from the Quarter’ I still have a few comapnies I want to share thoughts on. Following that, earnings season is over for me, and the variety of content will shift more so into more creative avenues, as well as the next Company Spotlight issue.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 69 down from 83 last week.
The CBOE VIX closed at 17.92, down from 16.28 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Fincredible.
Articles of the Week
Here is a shortlist of a few interesting pieces that I have read over the course of the week, to feed your mind.
Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) The Great Stock Market Takeover Boom
Length: Moderate Read
This was a fascinating read. Schroder put together a concise report to understand the boom in M&A activity that we have seen in the US over the last decade. With many companies boasting healthy cash balances, the private dry powder being close to ATHs, and borrowing costs historically low, they also question whether this boom looks set to continue into the new decade.
Shroder’s research found that, between 2011 to 2020, 38% of companies that were listed on the US stock market at the end of 2010 had de-listed before the decade concluded. 23% were acquired by another public company, and 57% of those acquirers went on to underperform their peer group following the acquisition.
9% of listed US companies were acquired by private entities, and 6% were de-listed for other reasons (bankruptcy, breach of conduct, etc). A great report to get deeper into the weeds of activity in this space, premiums, performance, and implications.
“Companies which bought companies which were small relative to themselves fared much better than those which went bigger. This likely reflects the greater challenges in integrating a larger deal – it takes up more management time and can be more disruptive to corporate culture at both organisations. The average company in the first quartile of acquirors, based on the size of the target relative to the size of the acquiror, outperformed its industry group in the one to three years after acquisition.
This covers acquisitions which were less than 9% of the acquiror’s size. In contrast, all larger acquisitions have been associated with underperformance. Interestingly, there is not a dramatic difference in underperformance depending on whether an acquisition was medium-sized or very large. Results are less positive for the median acquiror in the first quartile than the mean. But the same broad conclusion holds that companies performed better, on average, in the aftermath of smaller acquisitions.”
2) Arlington Value Capital Letters 2008-2017
Length: Dense Read
Source: (Arlington Value Capital)
Long-term readers will know that I am always on the prowl for subject matter like this. After having a chat over Zoom with Nick Green, he recommended Arlington’s letters to me. Arlington, one of the few funds that churned out positive returns in 2008 (10.6% net of fees, relative to the S&P’s decline of 37%), had a pretty impressive track record until their closure in 2020. It was said that Allan Mecham stepped down for health reasons.
Nevertheless, these letters make for some tremendously valuable reading. One to store somewhere and reap value from for years to come.
“Our investment mentality puts a premium on figuring out ‘what-to-avoid’ rather than ‘what-tobuy’ (We are an exciting lot to be around!). We prioritize the simple and easy, and quickly discard the complicated. These straightforward principles helped us stay focused in a handful of companies that were resistant to the financial malaise in 2008. When we analyze a business, we pay close attention to the qualitative and intangible variables – such factors are often difficult to ‘model’. We are uneasy with fancy numerical models and broad diversification, which have almost ubiquitous acceptance by the high priests of modern finance.
In both cases we believe one is susceptible to gaining a false sense of security, which can result in mental slothfulness and neglect. In the case of models, analysts tend to overweight what can be measured in numerical form, even when the key variable(s) cannot easily be expressed in neat, crisp numbers.”
3) Market Game Theory
Length: Moderate Read
Source: (MacroOps Musings)
A tantalising perspective on the game we all love to play. Likening the stock market to a “beauty contest” game, where participants are selecting their choices based on the perceived average choices of the collective, the author suggests that “In the real world there is no such thing as market equilibrium or intrinsic value. These are PhD constructed mumbo-jumbo. They’re predicated on the grossly asinine assumptions of rational participants and perfect information.”
The idea is that human’s (investors in this case) natural collective thinking is what produces the winners and losers in the short to medium term. Linking this back to Soros’ reflexivity thesis, as well as some discussion surrounding the subject of narrative driving returns, and you have yourself a great piece. It made me think, a lot, and that’s what I look for in the material I consume.
“Keynes likened profitable investing to a common newspaper game of the time, “in which the competitors have to pick out the six prettiest faces from 100 photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole: so that each competitor has to pick, not those faces that he himself finds prettiest, but those he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view… We have reached the third degree where we devote our intelligence to anticipating what the average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.
It doesn’t matter if you’re a value investor or growth focused or a technical trader or you use sun cycles and Fibonacci lines — the goal is all the same. You buy an asset because you think it will go up. And it will only go up if others also at some point, think it will go up. Therefore, to be a successful investor/trader, you need to be good not at identifying what you think are attractive assets, but rather at identifying what other market participants will think is an attractive asset in the future but are underestimating now.”
4) Farnam Street: October Letter
Length: Moderate Read
Source: (Farnam Street)
Candidly, I mostly read Farnam Street’s letters because they are so wonderfully weird (I consider ‘weird’ to be a word that has positive connotations) and packed with lessons in history, psychology, human nature, and eventually conclude in a fashion that relates to the activity of investing.
This quarter, the discussion centred around noise, why humans are often so bad at decision-making, the development of human communication, the velocity of the transmission of human culture, and groupthink.
“Group polarization is the basic idea that when groups of people work together, they often end up at an extreme position compared to their original inclinations. Group enthusiasm creates more confidence, unity, identity, and extremism. Studies of juries making punitive damage awards in product liability cases show that group discussions lead to larger dollar amounts than when individuals assign their own awards for damages. One study found 27% of juries awarded a higher amount than even the most severe single member’s punishment. Whether you vote red or blue, it’s uncontroversial at this point to observe how group polarization is impacting politics in the U.S. for the worse.”
Other Items I Read This Week
Note: ($) indicates there is a paywall on this content.
• Ark Invest: A Framework for Valuing Bitcoin
• The Irrelevant Investor: How Much Does Inflation Cost?
• A Wealth of Common Sense: The Current State of the Economy & Markets
- FYI, the above document is 136 pages long, so I have not read all of it, but there is a lot of great information in there.
• Not Boring: Let's Buy the US Constitution
• Aikya: Adtech: Investing for the Long-Term
• Invest Karo India: Rise of Indian SaaS Industry
🕵️ Company Insight 🕵️
• The Science of Hitting (ABNB): Airbnb: A Travel Revolution ($)
• Value Situations (KMR): Kenmare Resources Plc: Inflection Point
• Twitter Developer Blog (TWTR): Twitter API Version 2
• Baillie Gifford (PTON): Peloton Chief’s Long-haul Growth and Affordability Workout
• Sleepwell (SPOT): Spotify Finds A Way into Audiobooks
- The full white paper can be found here.
Podcast of the Week
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
Bored Ape Yacht Club
If you enjoy the ‘Business Breakdowns’ podcast, then you will be pleased to know that the team have created a new channel called ‘Web3 Breakdowns’ to specialise in the products, companies, and concepts which fall under that category.
This maiden episode focuses on NFTs, using the Bored Ape Yacht Club collection as the lens from which to explain the broader landscape of NFTs projects. Joined by Eric Golden, former PM at Fidelity, and Bored Ape owner, Patrick does a great job of breaking down the base layer of understanding for noobs such as myself.
Whilst I am not an avid frequenter of the NFT space, nor do I own any (or really understand them well enough to have an opinion), I am always keen to learn more about things I either A) don’t understand or B) instinctively feel the urge to dismiss.
Side Note: Gannon Breslin and a few other folks have created ‘The Drop’ media group which, amongst other things, runs a great newsletter for all things NFT. You can find a link to the prior posts and the enrollment link here.
Host: Patrick OShaughnessy
Guest: Eric Golden
Thank you for reading Market Talk and have a great week,
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