Market Musings – FB, Oil, Biotech & more

I wrote a lot about crypto lately, definitely more than it is represented in my portfolio. In the meantime, have collected thoughts on some more traditional assets.

Then the war happened. Most of the considerations you will read are still valid, mine is not exactly the blog for day-traders, but keep in mind that when I wrote some passage below I (we) was living in a different world.

FB/META

I hate the product. I hate it because of the effect it has on our society. Whenever I review an ESG score provider or an ESG portfolio, this is my first question: what about Facebook?

I am more than happy to see the stock crushed. But as J.C. Parets (@allstarcharts) says, we are here to make money, not to be right. Weeks ago the European regulator re-iterated its intention to suspend FB ability to transfer EU data to the US. FB replied that they would pull their apps from the EU market if that was the final decision and I commented to my wife this was a less credible threat than BoJo negotiations around Brexit. Fuckyeah FB will lose its second (if not first) market and we would live in a better world? Sign me it!

She told me I was a fool. Well, that’s the point of view of someone running a business that spends 90% of its marketing budget on Insta. There was a period when I was spending hours on Tumblr; if I lose access to Twitter tomorrow I would be pretty pissed and miserable. But I think nothing compares to my wife, and her demographics, link to the Gram. It is work and life for her.

I have many group chats with friends on Whatsapp. My employer’s disaster recovery plan is even (partially) based on a Team chat there. I do not remember on the back of which mishandling by Mark&friends, probably BLM, I tried to move my friends’ conversations on Signal. I think one joined. I deleted FB Messenger and lost contacts with at least two guys…in a world where we still have emails, phone calls (!!), SMS. FB grip on our lives is quite something.

Started from an earning report, now we here:

Last quarter FB reported bleak results, but most probably you already know it so I will save myself a recap and push on the ‘skip button’. At the current price FB P/E is 14; in my language, pretty fricking cheap. Google has never been under 15 while MSFT spent only the last 5 years of Ballmer’s tenure as CEO below that level. Not sure these comparisons would add any value, since they are all very different beasts, but I hope it gives you the context.

FB is an ad money machine with billions of users. Or it was? The problem with P/E is that it can grow for two reasons: P goes up and/or E goes down. At this moment, the market is not really convinced that E. FB is not a company built on newness, at least not in the last 10 years. FB the app is a stale cadaver where you can only find your parents and a bunch of Nazis (sometimes the two also overlap). Instagram was acquired, not developed internally, and prospered so far only copying someone else innovations (Snap, TikTok, etc). Whatsapp cannot be monetized, at least not at a level comparable to the other apps. And ‘Meta’, the Oculus-based future of FB is as of now a 10 billion sinkhole.

But at 14 P/E? That’s as much value-ish as this thing can be. Even if the metaverse bet never pays off, there is still plenty of juice to be squeezed out of the ad business before all users move to the next sexy app. Problem is, the stock is still falling like the proverbial knife and it doesn’t pay any dividend: the metaverse sinkhole might get even bigger (and faster) in the future.

OIL

I started to trade commodity-related ETNs ages ago because “unlike stocks, commodities price can never go to zero”. I have to put that quote of mine next to the other all-timer “who the f**k is going to buy negative-yielding bonds???”. Finance might be a soul-less job but you have to appreciate the irony.

Commodities are characterized by long cycles: they usually come under your radar, via financial media, after a big one is just about to end, so you can enjoy all the multi-years long ride down. Here is the RJ/CRB Index (from a EUR investor point of view):

The CRB is the boomer commodity index of choice, the S&P500 of this asset class. The RJ/CRB is a revision of the original index that has a higher weight to oil for these reasons.

Little aside. Commodities cycles for EUR investors are more mellow, less extreme because commodities are inversely correlated to USD: when the USD goes up, their prices tend to go down and vice versa. I read the reason a 1000 times and forgot it on every occasion (I got contango/backwardation concepts though, so kudos to me :P). Anyway, commodities are priced in USD, so from a EUR point of view, their price is less volatile.

In the long term, commodities are a bet against human ingenuity. The price of one element cannot go up forever because we will ultimately find an alternative to it or a better way to source it / grow it. If an element stays relevant for humanity, its long-term price should only follow inflation. Cycles are by-products of over and under investments. Think about timber: if you stop planting trees today, the timber shortage will happen several decades down the line; and that shortage could only be filled after more decades. In this sense, agricultural commodities are a good ‘hedge’ against climate change: if crops cannot be cultivated anymore in traditional places because they became too hot (or destroyed by a hurricane or flooding), by the time new crops are planted and harvested the long-investor is already rich. If negative oil taught us anything, commodities can become hot potatoes quite fast and are therefore prone to extreme spikes.

Oil is at a very interesting junction now, only exacerbated by Putin’s decision to invade Ukraine. If an investment company has a 2040 carbon-neutral pledge, they have to reduce their investment in anything oil-related today. Western oil companies, the Shell, Exxon and so on, have to transition to other businesses today. And to do so they are investing $0 in future production. It is a long wave that is gathering power little by little every day. Vanguard launched a SustainableLife range of products where each fund:

“has updated its investment policy to include the following sustainability criteria; net-zero commitments, engagement with portfolio companies in support of the fund’s net-zero commitments, exclusions of ESG risk factors (including avoidance of sectors such as thermal coal extraction, oil sands, etc.), and good governance assessments.“

Some of the funds in my ISA are now ESG. Would I have personally chosen the switch? Probably not. And yet here we are. Go check all the big insurer websites out there, Axa, Allianz, Aviva (not sure why I choose all names that start with ‘a’): they will not touch anymore anything that is not ESG. While we can debate forever what is ‘S’ and what is ‘G’, defining what is not ‘E’ compliant is pretty simple. On the other side, you have cities like London where spotting an electric car is no anymore a novelty. An Uber driver told me that his e-car monthly lease is less expensive than the tax he was paying just to drive around the city on a gas tank. Or you can do like yours truly and live without a car, which is something I can do because of the city infrastructure, not because I am a Hamish FIRE integralist.

The cost of capital for green companies is cheap and getting cheaper every day. The cost of capital for dirty ones is expensive and soon enough they will have a hard time even finding a bank that is going to lend them money. High oil prices are a further push to transition. A crazy czar is (hopefully) a push to transition.

For once, WallSt is pushing for the right change and MainSt is the one pushing in the opposite way. We starved oil companies of funds only to realize that, oh shit, 90% of our economy still runs on oil. Oil is not dead and will not be for a very long time. This is not a buy-and-hold opportunity though, especially not when oil is already above $100. On its LT downward trajectory, oil the commodity will offer plenty of other spikes like the one we are seeing now and oil companies will produce plenty of dividends before going green.

Thematic Indexes

I am not a great fan of thematic and sector indexes. We live in a complex world and more often than not a single company does multiple things at the same time: to use another ESG example, Tesco is considered by some investors as a tobacco company because they sell cigarettes. Being able to invest in a theme is great, in theory, because it is a straightforward proposition: I want to get exposure to the gaming industry because I think it has a lot of potential in the future but I do not want/cannot have exposure to a single stock. In practice, what you get is usually not only different but also unexpected, which makes it dangerous; the South Korea ETF is 22% Samsung, Luxottica in not in the Italian Index, Amazon is a Consumer Discretionary and not Tech company. And these are the examples I accidentally know while not researching this area since ages.

Months ago I listen to a podcast about legal cannabis in US: I have great expectations for the sector and what I heard was music to my hears. Unfortunately, there is this weird legal situation where, since weed is still illegal at federal level, companies that do business in the US can only be listed in Canada. And US-listed cannabis ETFs do not have exposures to those names but to some Canadian companies that…are not so good. Between an ETF ‘name’ and what it provides to investors there is the same distance as the bid/ask spread on Russian securities these days. Be careful!

Last week a friend of mine mentioned in his newsletter the below picture from Sentiment Trader and suddenly I thought “hey, might be the exception to the rule!”.

Biotech is not that new as a concept these days (I always find something to remind myself how old I am), it is actually well defined and the index, iShares Biotechnology ETF, is really diversified with almost 400 names in it. It is not exactly my cup of tea since my portfolio is getting messier and messier again after having bought the tenth ‘this will be my only exception outside my model portfolio’ position; but if you are already following the sector, this can be a great entry point.

For the active investors out there, another reasonable way trap to sin with sector/theme ETFs is cybersecurity. During the first lockdown Josh Brown mentioned it and I think he is absolutely right: the world is moving towards an hybrid work environment, part home part office, and investments in cybersecurity will become even more crucial. Plus, guess what…Putin! Cyberattacks are another one of our clown specialities so probably even more investments are coming in the future. But how to play it?

WisdomTree launched an ETF last year, $WCBR, which is quite concentrated: the index includes only 30 names (but there is not a single name above 10%). Microsoft, Google and other mega-caps like Salesforce will probably enter the sector but the average investor has already exposure to those names via the standard index funds. In principle, I like the idea of a more targeted fund that does not dilute the investment thesis with those big names; the main risk is that a player like Microsoft can muscle in and grab 80% of the market quite fast if they want, destroying $WCBR even if the original investment idea holds. The proposition to invest in a theme ETF is to save the investor some security due diligence…but that statement holds in reality?

P2P lending

I was going to write this part on very different assumptions. We were going to see, for the first time since p2p lending became a thing, how the asset class would perform in an environment with rising rates. The main appeal of p2p was to get (close to) double-digit returns in an otherwise negative rates situation. But when the base rate goes up, this appeal can vanish:

• lower risk, more established investment opportunites become reasonable again
• loan originators are presented with an upper bound on how high they can push rates: at a certain point, only the worst borrowers will find them attractive

Fewer loans will mean fewer origination fees, putting pressure on p2p companies’ profits (or future projections).

From a behavioral point of view, it was interesting to see that investors were not taking recent stock declines as an opportunity to move away from p2p into stocks. Instead, maybe comforted by the lack of mark-to-market appraisals, some platforms were displaying cash drag, too much money chasing too few deals.

Then Putin invaded Ukraine.

It is pretty much pointless writing anything because circumstances are so fluid that is impossible to even think what world is waiting for us at the end of this road. When I wrote the EstateGuru review as one of the first posts in this blog more than three years ago, I mentioned the risk of investing in Real Estate in an area that could see war because was neighboring Russia. Honestly, I just wanted to sound smart and I would have put that risk probability as something very close to 0. Unfortunately, Derek Thompson confirmed my hunch in his latest podcast episode. The only way Putin will exit the Kremlin will be with his feet in front of him: either because Russians will take care of him or war will.

It was a very bad risk assessment on my side. If anything will happen to the RE backed by EstateGuru, I think my last issue will be that investment. Most probably I would look for a way to survive a post-nuclear-conflict world…if we still have one.

What I am reading now:

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