Hello friends, I apologize for the long break. I will do my best to get back on a weekly schedule.
This week-Amazon turns 20, the death or retail, and Facebook is producing original content.
To the new subscribers, check out my about me and investment philosophy page to get a better understanding of how I think.
My favorite quote I read this week
A novice trader once asked an old Wall Street pro why he had good judgement. “Well,” said the pro, “Good judgement comes from experience.” “Then where does experience come from?” asked the novice. “Experience comes from bad judgement,” was the pro’s answer.
Off the top
Nothing major happened in the markets this week. People freaked out on Wednesday and sold stocks. The apparent cause was instability in the White House. However, it was short-lived and there was no follow through to the downside on Thursday as stocks closed the week in the red but off their low prints.
This week, Amazon celebrated is 20th year as a public company. They went public on May 15th 1997, valued at $438 million. Twenty years later they are worth $460 billion.
The death of retail
In a little over three months, 14 chains have announced they will seek court protection, according to an analysis by S&P Global Market Intelligence, almost surpassing all of 2016.
Why is this happening?
Several factors-One, America built too many malls. In fact, we have 12x the amount of shopping center square feet than the 2nd place country. In fairness, we have way more people. The per capita figure is a more accurate comparison.
Another factor cited is the rise of e-commerce and in particular, Amazon.
The last factor, debt, is the gasoline being poured on the fire. Per Bloomberg:
Some retailers survived the Great Recession only because investors were throwing easy money at them, perhaps unwisely. These retailers incurred sharply higher debt in the years after the financial crisis, a type of financial life support now expediting their demise.
A few thoughts
When is the best time to buy stocks? When the news is good and the outlook rosy or when the news is awful and analyst are predicting your demise and no one wants to own them? The answer should be obvious, but pulling the trigger is difficult.
If you believe, as I do, that some retailers will come out of this and thrive, then you should be buying these stocks. The timing is the tricky part and you will never time the bottom. The supply and demand imbalance will need to get corrected and this could take years, so you if you are looking to buy in this sector, your time horizon needs to be 5 years + and you need to have the stomach for it.
Picking the winners out this space will be difficult. I would buy a basket of 10 or so companies to spread your bets. I would look to diversify across d/f sectors of the retail market. For instance, look to buy big box retailers like Target to specialty apparel stores like American Eagle.
The key to investing is buying assets when there is a gap between expectations and likely future outcomes. Expectations for retail stocks are pretty abysmal. If you wait for the numbers to get better and turn around, you will likely have missed the best time to buy.
The race for original content is on
Facebook to launch original programming. Facebook has kicked its push for TV-like shows into high gear and is aiming to launch its first slate of original programming in mid-June.
Why this is important
In addition to the TV networks, we now have Netflix, Amazon, Facebook, YouTube, and Snapchat all creating original content.
Content creators now have more choice when it comes to distribution. For the past few years, HBO, Netflix, Amazon have produced the premier shows. Now, in addition, to HBO, Netflix, and Amazon, Facebook, YouTube, and Snapchat will be bidding on premium content.
Watching live sports on Facebook, Twitter, and Amazon will become more common. Facebook agreed to stream MLB games on a weekly basis. Earlier this year, Amazon paid $50 million to stream Thursday night NFL games. Those same rights cost Twitter $10 million the previous year.
Who are the big winners?
Content creators and live sports. With more money bidding on original content and live sports, the price of said content should rise. Isn't that what basic economics teaches us? Too much money chasing too few goods, in this case, good quality content and live sports, prices should rise, right?
A little history
ESPN built their business buying sports rights when no one else was bidding on them. Per Stratechery(paywall):
In February 1979, ESPN (then ESP) signed an agreement with the NCAA to broadcast college sports; ESPN reportedly paid less than $500,000.
ESPN repeatedly acquired sports rights for far less than they were actually worth. This was not only the case with that initial NCAA contract, but in fact, after individual universities and conferences were allowed to negotiate independently of the NCAA, ESPN got even better deals.
The same thing happened with professional leagues and especially more obscure sports that were happy to get any rights at all (even as ESPN saw them as ways to secure dedicated subscribers that would pressure cable operators).
The bold part is the most important part for me. To their credit, they saw value in these rights before everybody else and built a loyal audience they could sell ads against. Now, the pillar they built their business on is under assault. Again, from Stratechery:
Thanks in large part to the rather tardy appearance of competition in the form of Fox Sports 1 in particular, as well as NBC Sports Channel and CBS Sports Network, ESPN has had to pay much more for sports rights in recent years.
The last line sums it up nicely. The rights to live sports content is no longer an undiscovered niche, in other words, no longer underpriced. Other networks realized that live sports are valuable because people don't like watching their favorite team on DVR.
Stories from the street
- Brookfield's Bruce Flatt: Billionaire Toll Collector Of The 21st Century. While Wall Street wasn't looking, accountant Bruce Flatt became a billionaire by assembling one of the world's largest portfolios of office buildings, power plants and infrastructure projects--and making Brookfield Asset Management the most powerful investment firm you've never heard of.
From the article:
Never put yourself in a situation where you have to sell something in an environment where you should be buying."
This guy and many like him built his fortune because he had the capital to take advantage of other's mistakes. The key takeaway for me: Save, don't over-leverage yourself, have patience, and act aggressively when you see a great opportunity.
- An epic trading tale from Norway. This story deals with second level thinking. Bond manager Howard Marks explained the difference between first and second level thinking this way.
First-level thinking says, "It's a good company; let's buy the stock." Second-level thinking says, "It's a good company, but everyone thinks it's a great company, and it's not. So the stock's overrated and overpriced; let's sell."
First-level thinkers see what's on the surface, react to it simplistically, and buy or sell on the basis of their reactions.
They don't understand their setting as a marketplace where asset prices reflect and depend on the expectations of the participants. They ignore the part that others play in how prices change, and they fail to understand the implications of all this.
My favorite podcast of the week
If you saw the move "The Big Short" you might remember this guy.
Patrick O'Shaughnessy interviews the real Danny Moses. In this interview, they cover his role in "The Big Short", the current state of sell-side research, and how his team at Frontpoint built their portfolio to bet against the housing market. FASCINATING.