What’s new
Administrative topics and an introduction
Well folks, we’re back for the August edition of Market Madness. I promise this edition is rock free, but all the linked articles rock and are very worth your time. The times are changing, we’re heading into the final stretch of 2021 (I can’t believe it)!
I’ve been spending a lot more of my time reading textbooks and studying up on some new financial areas to expand my understanding. Lately, I’ve been focused on fixed income and structured credit. I’m also doing some self-paced learning on the free Aswath Damodaran courses he posts on YouTube and on his website. I’m currently making my way through both the undergraduate and MBA levels of his valuations course. I took valuations at university, but I’m a bit rusty and I wanted to gain perspective from the true “legend of valuation.”
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
What’s been on my radar
Below are some posts I’ve made on Bookshlf (oldest to newest) that highlight some of the bigger picture topics that I have been paying attention to over the past weeks.
Amazon, but now it’s a BBS (Big Box Store)
A surprising release today suggests that Amazon is looking to break into the industry is nearly destroyed: brick and mortar storefronts.
Their first experiment with brick and mortar was with Amazon branded bookstores (I have one in my local outdoor shopping center), and now, we're seeing that they're looking to launch a series of "department" stores like the now extinct Sears. I find this move really interesting - I suppose it does speak to the idea that fully online retailing has not caught on like expectations in year's past were. According to recent data, particularly following the loosening of COVID restrictions, people are out and in stores making purchases. The consumer still votes with their feet after all.
Notable Quote: "Amazon is pushing into an area that has struggled for decades. Department stores were once big, exciting places to shop, where consumers could find everything from toaster ovens to evening gowns under one roof. But they have lost out to discounters, fast-fashion retailers and online players. A generation ago, department stores comprised 10% of retail sales, excluding automobiles, gas and restaurants, according to estimates by the consulting firm Customer Growth Partners. So far this year, they account for less than 1%."
Rating Junk Debt “as is”
This is a great article outlining the wave of corporate debt we saw during the pandemic. Due to such low borrowing rates, it makes sense for corporates to take on debt during an equity selloff. It makes even more sense when the Federal Reserve comes out and puts a backstop on corporate debt, essentially guaranteeing that these companies will remain afloat because the Fed will continue buying.
That, combined with the 'hunt for yield' has driven some of the riskiest debt to levels we normally see in long bond treasuries. As markets return to normal functioning, we are likely to see that these higher risk company bonds will start to selloff (raising rates again), and those companies are also likely to run into financial trouble as the party ends at the Fed backstop.
Notable Quote: "Sales of low-rated, “speculative-grade” debt have already reached $650bn this year, according to S&P Global Ratings, putting them on track to surpass all-time borrowing records with more than four months left to go in 2021. Companies of all types had already borrowed record amounts of cash in 2020 in an effort to ride out the coronavirus downturn."
Municipal Mania
I wanted to chat briefly about the rising threat of "impact weather" events and our aged infrastructure that is growing unable to handle the rapidly evolving climate and storm activity. This weekend, in the Northeast US, we were going to get hit with a category-1 hurricane (the first time since 1991). It did not end up hitting Massachusetts but made impact between Connecticut and Rhode Island as a tropical storm.
The preparation and news coverage leading into the storm suggested that needed to be additional National Guard and federal government resources to help up the defense on the coast and enable safe travel on flood-concerned roads.
I'm very bullish on the idea of the overhaul to US infrastructure, from roads to bridges and waterways. I'm not sure that the federal government needs to foot the bill for the entire thing, as state governments could very well issue municipal bonds and help stimulate the local state revenue streams all the while making strides toward improved infrastructure across the state.
Often time, we end up seeing these large-scale infrastructure projects go over time and over budget, costing taxpayers more than what was promised. For an unplanned expenditure for an infrastructure project at the federal level, we'd just be adding to the already insurmountable deficit, or we'd be asking the state governments to reach into their pockets to foot the difference.
Either way, alongside the actual infrastructure projects, I'd like to see some series monetary and time consideration placed on the management of the construction firms handling these projects. Ideally, we could see pitched proposals for these projects with an estimated deviation (+/-) on the pricing, so additional funding can be considered at the onset and not once the project is 1/2 or 3/4 completed and the money-well runs dry.
Editor’s Note: This was well-timed as we watched one of the strongest hurricanes hit Louisiana over the weekend. The outcome, albeit still a challenge for those living there, turned out much more successful than the previous storm, Katrina. The levees held up to the strong storm, but the flooding in suburbs was all but inevitable. As of this writing, over one million are without power. Now that the storm is over, the recovery process begins.
Supply Chain Scrunchie
I found this article to be a great teaching moment to understand all the “nooks and crannies” that go into making one, single product and how that can quickly go wrong when one of the input items cannot be sourced effectively.
This article the vibe of the late Anthony Bourdain’s or Margot Robbie’s appearance in The Big Short. Who would’ve thought that the supply chain for a hot tub was so large and scattered?
What I am reading now / plan to read
Here are some articles that I’ve saved and am making my way through in the last few days:
SPACs Are Having Their Day—in Court - WSJ
Crypto’s Tether Sheds Light, but Not Enough, on Its $63 Billion Reserves - WSJ
ownership, but also wtf are NFTs? | let's appreciate - YouTube (Kyla Scanlon)
Please let me know what you think of this new style. I really enjoy posting on Bookshlf. The community over there is strong, and I’ve gained a strong readership over there. The social media site itself is growing and tends to lend itself nicely to honestly curated and factual information.
I plan to keep this newsletter refreshing with different styles and reporting methods. I was complacent for too long but am excited for this next chapter.
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
[Market Madness] Edition 0146