“The only constant is change, is my first rule”, said a professor of economic history to Spy over a congenial, albeit dry, lunch this week. “The second rule is that business people do not simply wake up in the morning, read bad headlines and collapse back into bed if they are scary. No, they start making a plan.” His point was a simple one – optimists win over time and most entrepreneurs are optimists by nature. No matter how terrible the news, someone, somewhere is making a plan to profit out of the current and expected future circumstances. Gloomy headlines sell newspapers but often hide opportunity in plain sight.
Every investor, sooner or later, works out that listed companies have all sorts of tricks to make their numbers look good, reckons Spy. It starts with Ebitda and before you know it the list of “exceptional items” in the annual report is longer than the Mandarin Oriental’s wine list. What is an investor to do? Look at cash. Real hard cash; you can’t fake that. Pacer, an American ETF manager, has a suite of funds it has named Cash Cows – these are variations on the same theme – and they all focus on the “free cash flow” of firms. Rather simply, it is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. It represents the cash that a firm generates after spending the money required to maintain or expand its asset base. The Russell 1000-focused version is listed in US and has the ticker COWZ. If you don’t have the time to work which US firm is actually making money, Spy can’t think of any easier short cut.
Hat tip to Pictet Asset Management. The Swiss manager has been looking at different forms of AI and what is required to make them tick. In an insight piece, worth reading in full, the manager argues that there is a massive power and process difference between “AI training” and “AI inference”. AI Inference is the clever bit the user experiences such as asking ChatGPT to explain something to you and getting a (half) sensible answer. The problem is, AI inference generates a huge amount of heat from its data centres, and so thermal cooling systems are going to be required at scale to cope. This investment represents a huge investment opportunity. A great example of an active manager looking beyond the obvious to capture value.
China’s stock market has been playing catch up this year. Perhaps almost unnoticed, it has managed to surpass the rather strong performance of the S&P 500. The MSCI China ETF is now outperforming the S&P 500 on the year after rallying over 30% from its low in January. That is not to say that China does not have challenges in its property market coming out of its ears which may put a dampener on the rally. But the old adage “buy when a market is out of favour” rings true, again.
The Dow Jones Industrial Average managed to go through a Big Round Number yesterday. The iconic index surpassed 40,000 for the first time. Many consider the Dow an anachronism with its price-weighted composition, and yet it remains a strong argument for active management. Over the decades the index with its minor adjustments and portfolio shuffles has generated vast returns for its followers. It has taken 42 months to reach its latest 10,000 point milestone. It has taken just 908 trading sessions to add 10,000 points. From 20,000 to 30,000 it took 999 trading sessions and that was positively pacy compared with the 5000 trading sessions it took from 10,000 to 20,000. All data according to Bloomberg.
Is the electric vehicle boom collapsing? Tesla has managed to create a highly efficient set of factories, which is all well and good when you are selling cars faster than you can make them. According to the company, however, Tesla produced 46,561 more vehicles than it delivered to customers during the first quarter of 2024 in the US. Their unsold cars are piling up in empty parking lots, at airports, and practically wherever else the company can find places to store them. Ferrari famously said that its annual production “will equal demand minus one”. That keeps their prices high. Expect massive discounting ahead from Tesla. If you want one, there has surely never been a better time to ask for a decent discount.
How do you beat inflation? According to Barclays, on a twenty year-view, it has to be equities. Their researchers have concluded that over that time span, regardless of intervening crises and crashes, equities manage to always outpace inflation. This even takes the 1929 crash, Dot Com bust, 70s oil shocks, the GFC, etc into account. The road may be bumpy with stocks, but the outcome is more certain in the long run. Interestingly that is not true of any other asset class.
Spy wishes Singapore’s former prime minister, Lee Hsien Loong well. The man who has led Singapore for the last twenty years stepped down this week with a track record that most people would envy. He may not quite have filled his father’s shoes in global political stature, but he has made Singapore even more economically vibrant, practically the default location for most multi-national firms’ Asia headquarters and seen the city state become a competitive global financial centre. In a riveting family saga, he became his own man.
Until next week…
