[Market Madness] Edition 0110
Approaching a New Junction
Busy Bees this Week
Administrative topics and a general market recap
Well folks, we have a lot to cover this week! A lot happened on many different fronts, across economic data, the Fed’s new decision, the rise in the U.S. stock market indices, the shuffling of the components in the Dow Jones Industrial Average, and many citizens still digesting the information from both parties’ national conventions and a nation reeling after another incident of police violence (more on this in General Banter).
Markets around the world mostly ended the week up, with the exception for the FTSE 100, but not down by much. Trade appeared centered around potential COVID 19 vaccine and treatment developments as well as the Fed’s announcement to change their strategy surrounding their dual mandate of high employment and low inflation. Going into the end of the week, we saw markets move up and treasury yields move up, a sign of bond selling activity.
Here are some general themes that we will cover off on in this edition:
Tesla (Solar Power Ecosystem)
Macroeconomics
Stock Market Rebound
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In the meantime, if you are interested in my thought process throughout the week as I collect news and ideas for the Sunday publication, please check out my Walling page where I brainstorm and mind-map each week’s edition!
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: +2.71%
S&P 500: +2.95%
NASDAQ: +3.20%
Asia and Europe 5 Day Performance
Nikkei 225: +1.43%
Hang Seng: +1.98%
FTSE 100: -0.22%
DAX: +2.08%
Rates, Spot Prices, and ‘Good to Knows’
U.S. Dollar Index: 92.31
US 10 YR: 0.734%
Crude OIL: $42.98
Spot Gold: $1,964.07
Market Madness Portfolio: +14.62% YTD
TEDRATE: 0.15
LIBOR (3 month): 0.246%
COVID 19 Global Cases: 25,042,382 (updated Aug. 30, 2020)
Dow Jones shuffle
The times have surely changed, and not just because of COVID 19. This past week, we saw a re-shuffling of the companies within the Dow Jones Industrial Average. Exxon Mobil is going to be leaving the index after having been in the Dow for 92 years and will be replaced by Salesforce. The reaction appears to be two-fold. One, many are seeing it as a change of times where technology and IP firms dominate traditional, longer standing companies, and two, this shift reflects the continuing struggle seen in the energy sector, particularly around crude oil. The last several years have been a major shake-up for valuations and worth of companies. Back in 2013, Exxon Mobil was the U.S.’s largest company, but quickly fell behind the likes of Apple, Amazon, and other tech giants.
“Exxon’s removal is a 'sign of the times,' Raymond James said, as the company — and energy sector broadly — falters, a weakness made all the more apparent by strength in technology names.” (excerpted from CNBC article)
A major catalyst for this removal of Exxon Mobil was Apple’s decision to split 4-for-1. Their split would reduce the Dow’s exposure to the information technology sector, according to CNBC, and thus would need to fill in the gap with another IT company.
Something that is also really important to note is this thought piece I found on TradingView. In this piece, the author writes about the relevance to the S&P 500, but it applies generally across the U.S. equities markets as well. Essentially, the author of the post is suggesting that there is a great deal of concern to be had for decreased market breadth. “Market breadth refers to how many stocks are participating in a given move in an index or on a stock exchange. An index may be rising yet more than half the stocks in the index are falling because a small number of stocks have such large gains that they drag the whole index higher.” (excerpted from Investopedia article). What we are seeing because of these massive tech firms value is that their basically acting as Atlas (a titan in Greek Mythology depicted as holding the world on his shoulders), holding the entire market up on their shoulders. The problem, then, becomes apparent when these companies begin trading in the opposite direction, i.e. down.
As we approach all-time highs in the S&P 500 and NASDAQ (with the Dow Jones about to recoup all 2020 losses in the coming trading sessions), we cannot help but ask what is propping everything up so much and what do we stand to lose if the support of the market collapses? And even on top of that, since the majority of the heavy hitters in tech that are these major index representatives are the ones leading the index recoveries, that doesn’t mean the whole index is going up. If these companies are the only ones gaining, that means the rest of the index is all losing, and that isn’t a good indicator of a stock market recovery. This will be something that is likely to come up again and again as we approach this new impasse of new all-time highs after the COVID 19 bounce back. Whatever happens next, who knows.
Read more here, here, and here.
Tesla: my hope for a solar ecosystem (an editorial)
I’ve more informally pitched this idea around to my friends and colleagues but have yet to firmly publish something on paper about it. (As a disclaimer, this is not an endorsement of or for Tesla or any of its subsidiaries, nor will this be a fundamental analysis of the company nor an analysis of the current leadership and structure of Tesla. This is simply my consultative idea for how Tesla could really command the next 50 to 100 years in solar technology. Nothing here is investment advice nor based on light research and synthesis.)
For some time now, it has been hard for me to see Tesla as simply another car company that just happens to be fully in the EV space. A lot of the groundbreaking abilities from Tesla, in my opinion has been in battery storage and optimization, and not necessarily the design of the car from a performance or ergonomic perspective. Of course, the secret sauce for Tesla is how the two (vehicle design/performance and electric battery storage/power system) integrate. What is actually more interesting to me about Tesla than their cars is their plans for solar panels, something they hardly discuss publicly or their stock is traded around.
Back in 2016, Tesla announced their full-stock acquisition of Solar City, a firm that was founded by Elon Musk’s cousins, Peter and Lyndon Rive. As you may or may not know, Solar City’s bread and butter is solar panels. As a subsidiary of Tesla, I would assume this affords them both a larger global platform in addition to greater R&D (research and development) funding capacity.
On Telsa’s website, they offer two ‘flavors’ of solar panels, a “Solar Roof” where the roof shingles are individual panels, and more traditional “Solar Panels” which is what one would normally expect for a home solar solution. Both systems work to create a miniature home ecosystem where you have a backup home power reserve that also feeds into a charging platform for your Tesla car and an option to sell additional generated power back to the grid for a monthly electric bill statement credit. This is a very smart system.
If my last understanding of the system is still accurate, the solar roof option is still not widely available across the U.S., but the solar panels are. My thesis would be that if Tesla would devote more resources to advertising and marketing this product to the masses, they could really twist the arm of consumers who are on the fence about going solar. Tesla has built a reputation already for being premiere in the marketplace with their vehicles, and if the quality translates into their solar panels, then many people could be sold with just the name alone. There are tremendously smart scientists and developers working for Tesla under R&D and they could absolutely use this as a competitive advantage moving forward.
I’d say there seems to be a general consensus across different professional communities that the future needs to move in a more renewable environment, and that it has already started with the push to more widely available and cost-sensitive EVs. There are already several tech startups working on the ‘Tesla killer’ vehicle and major auto manufacturers are developing all-electric cars as well. The competition is going to drive the purchase price way down because consumers will have nearly endless choice; it will no longer be just Tesla and one or two other competitors. But, what these other auto manufactures do not have is the same level of power storage and battery developments that Tesla does. Not only from the car’s perspective but from an entire ecosystem — home power generation and storage as well as car power and storage. This provides them with a way to tap into consumer’s wallets in more ways than one and in ways that other automobile manufacturers cannot.
I’m not sure if Tesla is currently set up in a way to capture and compete on this advantage, but I think if this is taken seriously and really invested in by the firm, they can really make an impact on renewable energy for decades to come.
Quick Takes
To fill in the gaps
Japan’s Prime Minister, Shinzo Abe, to retire over health concerns. (via CNBC)
Donnie and company authorize emergency use for plasma treatment for COVID 19. (via CNBC)
Behind the scenes of the upcoming AntGroup IPO and valuation. (via WSJ)
TikTok taps back at U.S. government challenging the recent ban issuance by Donnie. (via WSJ)
TikTok U.S. CEO, Kevin Mayer, to leave the company in the wake of ongoing political storm surrounding the company. (via CNBC)
U.S. Republicans set out a plan to release a smaller than expected stimulus package in the coming weeks. (via CNBC)
The GOP, in Donnie’s image, is likely to be different for a long time. (via WSJ)
Walmart backs Microsoft’s pursuit of TikTok. (via WSJ)
American Airlines to cut 19,000 jobs by October 1 amid poor recovery path for airlines and weak overall demand. (via WSJ)
MGM to lay off 18,000 previously furloughed workers. (via CNBC)
At landfall, Category 4 Hurricane Laura ravages the south. (via CNBC)
General Banter
What’s on my mind
On another front, the U.S. continues to reel from the ongoing fight for racial justice in the wake of the new police shooting of Jacob Blake in Wisconsin and the shooting of two innocent souls by the hands of a 17 year old and his AR-15 amid the protests in the streets. I’m scared and disgusted as a citizen to see these happenings and the actions by those who look to turn meaningful and peaceful protests into violence, which no one is looking for in the real meaning of the marches and protests.
My hope is that we can all wake up tomorrow and make it our mission to be kind to one another, if only just for one day, but hopefully for a lifetime longer.
We also mourn the loss of a truly gifted and groundbreaking actor, Chadwick Boseman. Please watch this beautiful video of a speech he gave in the past.
Also, unhappy with this new taxpayer bill:
Reader’s Corner
A place for suggestions
The reader might be interested in this old classic that I just discovered myself for anyone interested in another book on the stock market. I’ve been enjoying Reminiscences of a Stock Operator, and you might as well.
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Behind the Madness
You’ve made it through the madness. I’ve worked really hard to ensure that you leave this page having learned something, and I hope that benefits you in your daily adventure. Thank you again for checking in.
Publishing Schedule: every Sunday
In the meantime, if you are interested in my thought process throughout the week as I collect news and ideas for the Sunday publication, please check out my Walling page where I brainstorm and mind-map each week’s edition!
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