Following some stellar returns over the past 30 days, many equity indices (Italy & Spain, both +25%, U.S. Midcaps +17%, FTSE 100 +17%, Korea’s KOSPI +16%) and some commodities (Brent Crude +31%, Heating Oil +29%, Cocoa +22%, Platinum +14%) are due for some mean reversion and little digestion……
the only clear ‘extreme’ that I see in macro global markets today is an Overbought Singapore Dollar (SGD) against the USD.
So at 0.7470, Sell your strong SGD and buy the weak, cheaper USD.
Incidentally, the Strait Times Index has risen 17% since the beginning of November.
A week ago I wrote this about Bitcoin’s price action.
The arrival of the Bitcoin cavalry saw it trade to 3 standard deviations above its weekly mean and thus it’s logical to assume that the ‘fat part of the trade’ has been seen.
Such a 3-sigma event is expected approximately every 3 years.
Earlier this week, it lurched a $1,000 higher to reach $19,500 before falling 11% in the past 2 days.
As I write this, it’s now trading at $17,180.
Whether you consider Bitcoin a currency (which is different to a store of value) or a speculative digital asset, its underlying price volatility makes it a most fascinating asset to monitor, both mathematically and behaviourally.
Over the next couple months, I expect Bitcoin to trade back to the $13,500 level and notwithstanding any upheaval, likely to hold $12,000 as illustrated by the trend lines in the chart below.
Incidentally, over the past 2 days ,XRP and Ethereum (other cryptocurrencies) have fallen 24% and 15% respectively.
Some reasons I am taking a shine to Airbnb’s IPO include;
a) Airbnb is the largest brand in hospitality.
b) It’s so ubiquitous in our vernacular that I simply choose to “airbnb it” on my next trip.
c) It has an incredibly large business moat with a huge network of supply (hosts) and demand (guests).
d) the 2 most gleaning lines that I picked up from its S-1 are;;
“Our hosts largely come to us organically with 79% of our hosts coming directly to our platform to sign up to host in 2019.”
“Most of our guests discover Airbnb organically, with approximately 91% of all traffic to Airbnb coming through direct or unpaid channels during the nine months ended September 30, 2020.”
This means Airbnb doesn’t really need to pay any third party sites including Google or Facebook, in order to direct traffic and potential customers their way, unlike the hotel chains and other associated accomodation businesses.
Such organic traffic is ‘golden’ and unique.
e) And the company is choosing to go public at a point at a trough in the travel and leisure industry.
Critics may focus on the company being “asset-light”.
Well, I say, why not ?
I don’t think I want to own shares in an accomodation business with relatively fixed costs, which in turn owns (or needs to service debt) properties and then manage and maintain these hard assets which are only (if not singular) in a selected few locations.
It’s not tempting to own shares in Marriott or Hilton?
Amongst the ‘asset light’ universe, Mastercard and Visa both trade near 22 times revenue.
If we take Airbnb’s $5 billion revenue and place it on 15 times multiple, you get a market cap of $75 billion, which is notably higher than the touted $30-$35 billion IPO valuation.
And if we look at ‘asset light’ Uber, which has a market cap of $88 billion, I somewhat dismiss their $13 billion of revenue when they are losing $5 billion per annum and have never had a profitable quarter.
While Airbnb have reported profitable quarters, with its most recent (Q3 2020) being $220 million and on track to be in the black in 2021.
Readers of my posts would realise that I am bullish Oil and am somewhat subdued about the prospects of Gold.
The Gold/Oil Ratio which illustrates how many barrels of oil are needed to buy an ounce of gold.
The chart below shows us a 50 year history and never has Oil traded so cheap relative to Gold. A distortion in the ratio (around April 2020) occurred recently when the price of West Texas Intermediate Oil went negative for a moment,
and thus I prefer to watch the price of Brent Crude.
While Gold bulls are calling for its price to double, I don’t see why I can’t make a similar claim for Oil especially when I present you with some historical analysis and while there is quite a deficit in supply and inventories.
Since 1900, Crude has averaged a 12-month gross return of 7% while Gold has averaged a 12-month gross return of 5%. Oil has generated a negative 12-month return 39% of the time while gold has generated a negative return 32% of time.
However, when the Gold/Oil Ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), Crude has returned 32% on average over the next twelve months (over four times its long-term average), while gold has returned 4% on average. Oil was lower only 13% of the time. On average, oil outperformed gold by 28% during these periods compared with 2% normally.
And so today, the Gold/Oil Ratio is trading at 41 which is still near an all-time record.
FYI, the 50 year mean of the Gold / Oil Ratio is 16.
Facebook’s IPO in May 2012 was a big event. As a private company, it raised $1 billion.
At the IPO, FB sold $16 billion worth of shares of which the company kept $6.8bn. The rest went to expenses, brokers and selling shareholders.
FB’s IPO market cap was $104 billion. For 2012, FB produced $5 billion in revenue and net profit of $1.3 billion.
AirBnb has raised $6 billion cash as a private company and it’ll “raise” $2 billion at the IPO (don’t yet know how much the company keeps – see selling shareholders).
It’s market cap at IPO will be $35 billion.
AirBnB has $5 billion revenue although it’s not profitable yet. That doesn’t matter ’cause the market these days is only paying for multiples on revenue.
Facebook’s stock price halved soon after the IPO to reach a low of $17.55 per share. Since then, it has risen to a price of $272 per share and boasts a market cap of $777 billion.
Comparatively to other recent “tech” IPO’s, Facebook’s value saw the majority of its appreciation as a public company.
Inversely, AirBnB has raised a lot of money as a private company at ever escalating valuations, so I say be careful being the absorbing buyer of the selling shareholder, however this stock could be a real crackerjack.
Incidentally, AirBnb, Uber etc etc are not “tech” companies.
On September 30th, 2020, I wrote a couple posts about the unloved and contrarian investment ideas which were U.K.’s FTSE 100 and Spain’s IBEX equity indices.
On the other hand, Spain’s IBEX has soared 19% up to 8,000 points.
In this note, I was figuring on a 45% advance spanning the next 2 or 3 years for the IBEX, yet the strength of the current rally, has produced nearly half of that return in just 7 weeks.
Although there is ‘air’ between today’s IBEX price and my 10,000 price target, but when an index (or asset);
a) capitalises 18 months worth of earnings in less than a quarter of a year,
b) produces a historically average 2 year return in under 2 months,
c) and trades to 3 standard deviations above its weekly mean,
………it’s prudent to manage and tweak the investment.
A bet that the Internal Combustion Engine still has 30 years of life
The Discount:
Colloquially, Platinum is considered more precious than Gold.
When it comes to pricing, Platinum has traded at either par or $200-$300 an ounce higher than the price of Gold.
In early 2015, Platinum started to consistently trade at a discount to the price of Gold.
Today, Platinum is trading at $1,000 below the price of Gold.
We haven’t seen such a percentage discount spread in 35 years.
Subjectively, there is a euphoria behind Gold’s prospects while Platinum is seemingly unloved which seems to have widened the discount.
Platinum (in orange) compared to Gold (blue line)
Production & Supply:
At least 70% of the world’s Platinum production is sourced from South Africa’s Bushveld region.
This allows us to easily monitor supply disruptions, labour disputes and political machinations.
COVID-19 has also seen the South African Government restrict mine production to a capacity of 50% and in turn, mining companies have elected to place various mines in ‘care and maintenance’.
Coupled with a latency in re-starting production, there is a distortion in price and supply upon us.
Industrial Use & a substitute for Palladium:
On the demand front, Platinum is used in ……..
jewellery, dental fillings, medical/laboratory instruments, turbine blades, computer hard disks, in the chemical industry (nitric acid, benzene, silicone), as compounds in chemotherapy drugs, as a catalyst making fuel cells more efficient and in motor vehicle engine catalytic converters.
Catalytic converters (in cars, trucks and buses) account for 50% of its utility.
On the topic of automobile catalytic converters, Palladium has been the preferred metal amongst manufacturers and rightfully so due to its lower price.
On an industrial basis, being Long Platinum is to take a view that the proliferation of vehicle electrification will take longer than suggested.
This is certainly a contrarian view.
Although, it has been noted that whenever Palladium trades at twice the price of Platinum, manufacturers opt for the cheaper Platinum substitute.
Today, Palladium is trading at $2,457 is trading nearly 3 times Platinum’s current price of $887.
The price of Platinum appears in orange, while Palladium is in blue.
Mean Reversion
Gold is currently trading at 64% above its 200 day moving average (on a monthly basis) while Platinum is 27% below its monthly 200 DMA. It is plausible to expect a convergence and mean reversion in both assets.
When pondering how this gap will narrow, a rising Platinum price seems more probable than a collapse in the Gold price in the current asset and ‘expected’ price inflation environment.
Correlation to CME Futures Contract Margins:
The case for an interim peak (for Gold) also lies in my historical analysis of futures contract margin requirements tend to coincide with an extreme in the price of Gold.
Platinum’s futures margin requirements are not reaching any historical peaks. In fact, I think there is growing probability that Platinum margins are decreased soon.
The Internal Combustion Engine (ICE)
It’s unlikely that automobile manufacturers will walk away from the capital expenditure spent on engine development and assembly, while synthetic fuels are making ICE’s even more cleaner.
Commensurate to introducing electric vehicles into their stable, auto companies have also made statements that they still expect the ICE to be part of their business for the next 30 years.
Incumbent industry and job protectionism is another topic that won’t dissipate anytime soon.
Electric Vehicles (EV)
While their purchase is subsidised in many jurisdictions, EV’s remain expensive and have yet to reach a pricing equilibrium making them affordable and a mass viable financial alternative to owning an ICE vehicle.
The EV charging network isn’t widespread and will require notable investment while facing a formidable fuel retailing industry. Range anxiety and the speed of re-charging also remains a challenge.
Hence, EV’s account for 2.5% of global car sales and 1% of the global car ‘population’.
Bloomberg New Energy Finance predicts that electric vehicles (EVs) will hit 10% of global passenger vehicle sales in 2025, with that number rising to 28% in 2030 and 58% in 2040.
I’m not hanging onto the past and while EV market penetration should grow; we are still making cars, trucks and buses with ICE’s.
Government & Tax
Government love things which they know how to tax; items such as tobacco, alcohol and fuel.
The fuel excise tax is a hefty component of many government revenues and the funds raised assist with maintaining not only roads & bridges, but also hospitals and schools.
EV’s are currently not providing a comparable revenue replacement for potential lost petroleum taxes.
Another challenge for governments is figuring out how to tax the electricity trickle from your residential power outlet, the solar panels located on your roof or from a public charging station.
We are now seeing governments announces “road usage taxes” for EV’s.
