End of the Bull Market?

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Question of the week 

The WSJ asks:

“Is this a healthy correction in a bull market with further to run, a reset lower in belated recognition of this year’s geopolitical risk, or the start of a new bear market?”

Our view: Trying to figure out how deep a correction will be or how long it will last is a waste of time because it is out of our control. All we can control is our behavior. Let’s focus our attention on deploying money into investments that we believe offer more upside than downside.

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Time to buy housing stocks?

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Companies to Watch

Paypal is growing at 21% and we still don’t know much about Braintree and Venmo. Braintree and Venmo are two assets Paypal owns. PayPal doesn’t give us much information on the performance of those two businesses. Paypal’s future growth will depend on how well they grow and build defensible businesses with Braintree and Venmo.

Paypal’s three main businesses

• B2B = Business to business

• B2C = Business to consumer

A quick look at their earnings

  • Excluding the sale of a loan portfolio, revenue grew 21%; in line with expectations. EPS rose 17%, beating analyst estimates and the company raised full-year guidance.

Greater opportunities

Paypal’s traditional product is the button you see when buying something online. (see above)

Estimates say this button accounted for 86% of last year’s revenue. However, analysts have good visibility as to the growth of this product, thus there is not much room for upside surprises.

The bigger growth driver for Paypal will be Braintree and Venmo.

Braintree is B2B (business to business) product that specializes in mobile and web payment systems for e-commerce companies such as Uber and Airbnb.

Braintree processed 1.64 billion transactions in the third quarter, up 33% from a year ago.

Venmo is a B2C (business to consumer) product that allows you to pay and request money from your friends. Verto analytics estimates that Venmo has 10 million unique monthly users as of August.

According to the WSJ, 24% of Venmo users have used the app in a way that generates money for the company. This is up 17% from a year earlier.

Both of these products, Braintree and Venmo, have a macro tailwind as both digital payments and the use of mobile apps to manage money grows in the coming years; especially with millennials.

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IPO Profile: Roku + A Podcast Recommendation

Even though I don’t regularly invest in IPO’s, I keep a watch on ones I think are interesting.

Here’s one I am thinking about.


Roku

Quick facts

Roku (ROKU) is the market leader for internet TV devices with 37% market share. This is the same as last year and up from 33% two years ago.

• Apple is in second with 15% market share; down from 19% two years ago.

• Google’s chromecast slipped to 14% market share; down from 18% a year earlier and 21% two years ago.

• Of all households with broadband internet, 40% own a TV streaming device; up from 6% in 2010.

Roku’s origin story

Roku has an interesting origin story.

From a 2013 article in Fast Company:

“Roku began life inside Netflix as project Griffin. Netflix wanted to build a player that subscribers could hook up to their TV to stream movies and TV shows from the web.

Netflix believed it could fundamentally change how the company delivered content to its customers, who were used to waiting days for DVDs to arrive by mail.

In December 2007, the device was weeks away from launching and Netflix CEO Reed Hastings was having serious second thoughts.”

The problem? Hastings realized that if Netflix shipped its own hardware, it would complicate potential partnerships with other hardware makers. “Reed said to me one day, ‘I want to be able to call Steve Jobs and talk to him about putting Netflix on Apple TV,’” recalls one high-level source. “‘But if I’m making my own hardware, Steve’s not going to take my call.’”

In the end, Hastings decided to spin the company out into a sperate entity called “Roku”.

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Should You be Buying Emerging Market ETFs?

Good Wednesday, hope your week has been productive.

Today | 9 items


1. Chart of the day

(Data: money.net, chart: Axios)

2. Investors are pulling out of emerging markets

Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 — withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand so far this year, according to data compiled by Bloomberg.

Why are they pulling money out?

Investing in emerging economies is considered riskier than investing in U.S. stocks.

Since interest rates in the U.S have been near zero since the financial crisis, investors have looked to other countries for better investment returns.

However,

The Fed (federal reserve) has started raising interest rates. In doing so, its attracted money back to the U.S and away from emerging economies.

In addition, investors are worried that trade disputes and tariffs could have a negative effect on Asian economies.

Should you be a buyer?

It depends on your investment objectives. Here are two questions to ask:

• Are emerging markets currently a part of your allocation?

• Emerging markets carry a higher degree of risk. Can you accept the greater potential return for greater volatility?

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Cannabis Follow-Up, A Long-Shot, and Gold

Good Friday. Here is today’s memo:

Today | 4 items


1. How to invest in cannabis (reader question)

Important

This is a new and developing market. If you are going to put money at risk it needs to be money you can afford to lose.

In addition, you need to have a 10 year+ time frame. If the upside in this industry is as large as people think it is, it will take time to develop and grow.

One thing to keep in mind.

In the U.S., while cannabis is legal in a handful of states, it’s still illegal at the federal level. Some banks and brokerages won’t take the legal and reputational risk of holding stocks that are illegal at the federal level.

Most of the investment products available for retail investors are based out of Canada and trade on their TSX exchange. Recreational marijuana will be legal in Canada sometime this fall, possibly August or September.

I am still new to this space and don’t have any insights yet. I will report what I am reading and a few investment options for you to look at.

ETFs

The largest ETF in this space is ETFMG Alternative Harvest ETF (ticker MJ) with $300 million + in AUM. You can buy this ETF at most U.S. brokerages.

The management fee is 0.75% or 75 basis points. For every $100 invested, you pay 75 cents.

Here are the top 10 holdings:

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Grubhub | Chart Art

Yum Brands Buys a $200 Million Dollar Stake in GrubHub. (Bloomberg)

From the article:

And that highlights how much GrubHub and others of its ilk — Uber Eats, DoorDash, Caviar — are becoming powerful gatekeepers in the dining industry. Restaurants should not underestimate what a paradigm shift this is for them. In these digital marketplaces, the primary customer allegiance will be to the app, not to the individual restaurant.

 

That means restaurants will have to think hard about how to market and merchandise their offerings in what will essentially be a fiercely competitive digital food hall.

Also from the article:

Why does this consolidation matter for restaurant chains? In some ways, it makes their lives easier, because they can focus on making their relationship with one platform really great instead of trying to do business with a slew of them.

 

In other ways, though, it could make their situation harder. Less competition among delivery providers could make it easier for those players to demand bigger commissions from restaurants.

GrubHub has a large lead and I think this will become a winner take all market(see McKinsey study below).

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Spotify and Dropbox are Set to IPO

Hope your day has been great.

In today’s update:

  • Spotify and Dropbox
  • Newell Brands
  • Pipeline Companies
  • Oil Chart

Spotify and Dropbox: Love Us, We’ll Change. (Bloomberg Gadfly)

These are the two biggest IPO’s so far this year. Ben Thompson’s take on Spotify and Dropbox are a must read if you want to better understand these two companies.

In addition, check out his podcast on Dropbox and Spotify.

My thought bubble

I don’t have insights into either business, however, the Bloomberg article noted that both companies were pitching investors that how they would earn money in the future is different than how they are earning money now.

From the article:

All of the Dropbox customers featured in the video are businesses — tiny, medium and large — not the individuals who make up the vast majority of Dropbox’s paying customers. Businesses also were the featured customers in Dropbox’s financial prospectus to potential investors.

This makes sense. What they provide to individuals, storage, is largely undifferentiated from say Gdrive. I use both. Frankly, I like Gdrive better. It’s not to say individuals can’t make a good business, but in order to grow in the future, they have to find another source of revenue.

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How Reinsurance Works

Hope your weekend has been relaxing. Here are a few of my notes from the previous week.

Enjoy!

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Any opportunity in reinsurance stocks?

The WSJ carried a story about how reinsurers’ profits have been hit by two things:

  1. Losses from catastrophes($135 billion, this includes regular insurance companies) in 2017.
  2. Rising competition from other parties willing to assume catastrophic risk.
(Source: WSJ)

What is reinsurance?

Reinsurance insures the insurers. They are not consumer-facing companies.

For example: Blue Cross is a consumer-facing health insurance company. Say they have a risk pool(policies) of $10 million dollars. They might pay for the first $2 million dollars of claims out of their own pocket and lay the other $8 million of claims off to a reinsurance company.

In order to do this, they pay said reinsurance company a premium. How much will depend on the amount of risk they are keeping and the amount they are passing off to the reinsurance company.

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How to Trade Volatility

Our goal is to watch what other investors are doing and find a way to take a position against them if the risk/reward is favorable. We are looking for mispriced bets.


Betting on volatility

This article from the WSJ discusses who is making the bet.

From the article:

Donald Pierce, the chief investment officer of the $9.3 billion San Bernardino County Employees’ Retirement Association, has been trading volatility for about six years, most recently by buying options on stock indexes, often with trades equivalent to about $300 million of risk for the plan.

 

Sometimes, Mr. Pierce buys products betting on rising volatility. Other times he sells these products, depending on his view of where U.S., Japanese, Russian, Brazilian and other markets are headed. Mr. Pierce says his trading has saved the county millions recently and that he will continue to make volatility trades.

He is making bets based on “his view” of the world. We don’t do that. There are too many variables that affect asset prices. We watch other investors, like Mr. Pierce, who like to make bets based on what they think will happen.

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