Market Talk, September 5th 2021
September 5th, Edition 22
Market Talk is where I round up some of the data from public markets over the past week in a bitesize format.
Each Sunday I will share:
• The best pieces of company-related insights I have consumed over the week
• The greatest articles I have read during the week
• One stellar podcast or interview
Coming up this week, I will be sharing a research piece on Apple this Monday, followed by an issue on Thursday which will be either A) a research piece on PayPal or B) an issue discussing the history of the Frappuccino and the importance of outside perspective.
As a side note, for those who maybe are not aware, I have cemented a fixed schedule for the subscriber post cadence, so you now have a better understanding of when I will be posting. This means I will be posting every Monday, and every other Thursday, as well as weekly Market Talk issues on Sundays.
I have been posting with this cadence for the last three weeks now.
📈 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
Africa & Middle-East
🛢️ Commodities 🛢️
💷 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 54 up significantly from 50 last week.
The CBOE VIX stands at 16.41, up from 18.29 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Earnings Whispers.
Source: (Earnings Whispers)
🕵️ Company Insights 🕵️
Here, I will share a handful of interesting, company or industry-specific, pieces that I have read over the last week.
1) Robinhood in the Crosshairs of the SEC
Source: (Financial News, Barron’s, CFA, Bloomberg)
Robinhood shares took a little tumble during the week after Gary Gensler, the chairman of the SEC, suggested that the banning of payment for order flow is “on the table” (Barron’s) suggesting that the practice represents “an inherent conflict of interest.”
“Payment for order flow (PFOF) is the practice of market makers paying brokers (typically retail brokers) to route their clients’ order flow to them in exchange for payments. PFOF enables internalisation of retail order flow by market makers. Internalisation includes broker/dealers internally executing client order flow as principal, using their own risk capital, on a systematic basis.” -
The CFA Institute
This practice, which sees Robinhood collect fees for the directing of orders to certain brokerages for trade execution has been a controversial topic, particularly because Robinhood, in particular, make a considerable component of their revenues from PFOF, whereas for most brokers this is not their primary revenue driver. In Robinhood’s most recent quarter, ~80% of the company’s net revenues came from PFOF in orders for stocks, options and cryptocurrencies.
Gensler cites that the practice, which is illegal in the UK, Australia and Canada, attacks the transparency of public markets. The need to improve transparency was one of the core reasons the FCA opted to banish PFOF from the UK more than 5 years ago.
“Transparency benefits competition, and efficiency of markets. Transparency benefits investors.” - Gary Gensler, SEC Chairman
In the case of PFOF “they get the data, they get the first look, they get to match off buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s.” - Gary Gensler, SEC Chairman
In Other News:
2) Intuit Considers Acquisition of MailChimp
Source: (Reuters, Fast Company)
Intuit is one of those businesses that I look at and wonder why I don’t own it. A steady compounder with both legs wedged in the financial software space, who recently declared interest in acquiring the email marketing company, Mailchimp for a figure upwards of $10B.
If successful, this would represent the largest acquisition for Intuit to date, and likely require some form of external financing as the company held just $3.8B in cash and securities as of July 2021.
With no official announcement from the company, this could simply be speculation or another item in the rumour mill, but this would be an interesting deal for Intuit. Currently dominant in the tax-related financial software space, the acquisition of Mailchimp doesn’t strike me as a natural fit for their business. This could be a way to offer marketing services to a range of Intuit’s smaller business clients.
3) Twitter Launch the Superfollow
Source: (Twitter Blog, TechCrunch, The Block)
This week, Twitter unveiled the long-awaited Superfollow feature to a small batch of hand-picked users across the US and Canada. For some users on iOS mobile, you may now see a pinkish/purple emblem on their profile page (below) which indicates the user has set up superfollows.
Upon clicking the emblem, the user will be directed to the creator’s superfollow information page (below) which details the type of content they plan to share on their exclusive feed. Prices appear to be fixed at $2.99, $4.99, and $9.99 per month for now.
This comes after the partial launch of the Ticketed Space, which allows creators to charge entry to private Twitter Spaces. Interestingly, for every $4.99 earned through the superfollow function, Apple collects ~$1.50 of that sale, the creator receives ~$3.39, whilst Twitter collects ~$0.10.
So, whilst the creator and Apple are certainly the largest benefactors from this new product feature, the hope for Jack Dorsey (who cites that superfollows are not a direct focus) is that Twitter can manifest a stronger influx of creators on the platform which, alongside their “fanbases” will plump up Twitter’s mDAUs.
I would think that the end goal here is to convert these creators, who can now more readily monetise their audiences, to power users who may have a higher propensity to pay for Twitter subscription products down the line, such as Twitter Blue and any new tiers that are introduced to that service. Thus, Twitter appears to be playing the long game here by taking care of its users first and hoping the ROI follows.
In Other News:
Twitter Blog: Introducing $uper Follows
4) Apple Acquire Classical Music Streaming Business, Primephonic
Source: (Apple Newsroom)
A small acquisition, with no disclosed fee, but Apple entered the M&A markets this week to pick up Primephonic, the “renowned classical music streaming service that offers an outstanding listening experience with search and browse functionality optimized for classical, premium-quality audio, handpicked expert recommendations, and extensive contextual details on repertoire and recordings”.
In this deal, the Primephonic app will be retired next week, and fully integrated within Apple’s classical music segment, before a stand-alone app, dedicated to classical music, is launched in 2022.
5) Sea Limited Launch in India
Source: (Reuters, TechCrunch)
Fintwit’s favourite commerce, payments, and gaming business, Sea Limited are reportedly embarking upon their latest notch towards the goal of global domination by launching in India.
After the success of their arrival in Brazil in late 2019, Sea Limited is expected to begin the roll-out of Shopee (their commerce wing) across India soon, promising free shipping and zero commissions for buyers and sellers. That’s aggressive, for a business that appears to care more about expensive, bottom-line crunching, customer acquisition tactics. Whether or not Shopee’s aggressive discounting model will materialise into retention is another matter, but for now, the company are solely focused on market share acquisition.
The success in LatAm, which saw Shopee launch in Chile, Mexico, and Colombia shortly after Brazil, has been touted as a case study for their entrance into India. Despite already having a team in India, where Free Fire (Sea Limited’s flagship gaming asset) is already immensely popular, they are yet to leverage commerce into the market.
The relative struggles of other large commerce players (Amazon and eBay to name a few) suggests this won’t be quite as easy as Sea bulls claim it to be. See this article from TechCrunch.
6) Reddit Sights IPO
Source: (Markets Insider, New York Post)
The social platform, Reddit, are apparently hiring bankers ahead of a proposed $15B IPO later this year.
“Reddit most recently raised money in a private fundraising round in August at a valuation of $10 billion — meaning that an IPO at a valuation of $15 billion would represent a dramatic 50 per cent increase in the company’s valuation in just a matter of months.” - New York Post
📰 Brain Food 📰
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) Importance of ROIC: “Reinvestment” vs “Legacy” Moats
Length: Moderate Read
Source: (Saber Capital Management)
Written back in 2016, John Huber gives the reigns to Connor Leonard (a friend) to write about the core differences between a reinvestment and a legacy moat.
Connor details how investors can spot businesses with strong moats that can protect earnings power whilst simultaneously exhibiting attractive reinvestment runways to compound their future earnings power.
H/T to Leandro for sharing this article with me earlier in the week.
“Outstanding companies are often described as having a “moat”, a term popularized by Warren Buffett where a durable competitive advantage enables a business to earn high returns on capital for many years. These businesses are rare and form a small group, however I bifurcate the group further into what I classify as “Legacy Moats” and “Reinvestment Moats”.
I find that most businesses with a durable competitive advantage belong in the Legacy Moat bucket, meaning the companies earn strong returns on capital but do not have compelling opportunities to deploy incremental capital at similar rates.
There is an even more elite category of quality businesses that I classify as having a Reinvestment Moat. These businesses have all of the advantages of a Legacy Moat, but also have opportunities to deploy incremental capital at high rates.”
2) Irrational Exuberance?
Length: Light Read
Source: (Tidefall Notes)
Trevor Scott, of Tidefall Capital, is a somewhat infrequent poster of longer-form substack-like material, so whenever he has something to say, I like to read it.
In this 4-minute read, he breaks down some of his thoughts on the fallacies of market timing and seeks to answer the question of whether or not stocks looking expensive at this point in time, taking into consideration the interest rate environment.
Using data, Scott attempts to identify if there are any parallels between today’s market environment and the bubbles of before.
“It all begs the question where are we in the market cycle?
It’s difficult not to think that we are somewhat in a period of “irrational exuberance” which is a well known phrase of former Federal Reserve chair Alan Greenspan that was used to describe the late 90s tech bubble.
However, the irony of Greenspan’s quote is that he made it back in 1996; almost 4 years before the tech bubble blew up in 2000. From Greenspan’s warning, the Nasdaq nearly quadrupled from 1300 to 5132!
There’s a saying in the stock market that being early is the same as being wrong. The truth is if you were a public fund manager in 1996 and invested in-line with Greenspan’s speech, you would have been fired well before any pullback.”
3) Hyper-connected Networks: Seedbeds of Growth
Length: Moderate Read
Source: (Baillie Gifford)
Back in 2019, Baillie Gifford realised a paper titled A Case For Growth, which explored the idea that despite a decade-strong run for growth stocks, there were still fish in the barrel. Two years later, Dave Bujnowski revisits that assertion with a focus on the internet, the cloud and disruption.
For anyone interested in businesses that are looking to severely disrupt legacy business models through an interconnected Network, I highly advise reading this one.
“So What Are The Investment Implications?
For starters, this question will remain front of mind in my research agenda for the next decade:
Which systems are about to go through a phase shift whereby participants will inevitably transform from independent to interconnected? What are the new hubs?
It may seem like ‘everything’ is now connected, but there are still systems that have yet to transform (or are at least at an extremely early stage). Gyms → Peloton. Used car dealerships → Carvana and Vroom. Databases → Snowflake. Internal combustion cars → Tesla. Indeed, this Paretian lens is a particularly useful tool to have handy for optimists – like Baillie Gifford – who ask not what ‘will go wrong?’ with a company but rather ‘what could be possible’ if things go particularly right?
These companies already seem wildly successful, but what if a power law is now forming inside each of their markets, none of which have ever seen anything like a power law?”
4) The Everything Bubble & TINA 2.0
Length: Dense Read
Source: (John Street Capital)
John Street Capital (Anonymous) is a fantastic writer on all things finance, micro, macro, payments, and investing in general. Whenever there is a new post on his blog, I typically drop what I am doing and read it.
In this issue, he provides a sumptuous rundown of how the covid pandemic has impacted the market, focussing on both the aggregate level and between individual asset classes. He then runs through the responses from investors, policymakers, and consumers peppers excellent commentary throughout.
No stone is unturned in this one.
“If you turn on the TV, or read the financial press, financial pundits & investors alike are talking about “The Everything Bubble.” There are multiple stages of financial bubbles, & while each mania has its own nuances, in retrospect there are almost always commonalities that the market & market participants experience.”
🍬 Ear Candy 🍬
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.
John Street Capital on the Markets, Retail Investing, Regulation and Why He’s Bullish on Crypto
Panic With Friends
You may notice that the fourth featured article on Brain Food is authored by the same guest that appears in the recommended podcast this week, John Street Capital.
The man who Howard Lindzon refers to as “one of the top 5 smartest people I know”, is anonymous on the internet but possesses a profound understanding of everything from infrastructure, technology, payments, banking, corporate development, venture capital, trading, and more.
In this episode, the discussion centred around liquidity, private and public markets, exchange and crossover funds, why John Street is bullish on crypto, DeFi, regulations, buying the dip, retail investing, Coinbase, Citadel, Robinhood, and Square.
Host: Howard Lindzon
Guest: John Street Capital
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