Man in the Arena...No More?

Yesterday evening ESPN reported that after 22 seasons, 7 Super Bowl wins (10 appearances)  and over 86,000 passing yards, Thomas Edward Brady Jr ("Tommy"), was retiring. As the tributes poured in the news was seemingly confirmed by Brady's company, TB12...

...or was it? Because not long after the company deleted the Tweet and there were reports that Brady has, in fact, not made a decision. Brady has stated he didn't want his retirement plans to divert attention from the playoffs. And yet, here we are. The biggest NFL news of he day is whether or not Brady comes back for a 23rd season and not about the divisional championship games today. And why not? He's has literally had the careers of three Hall of Famers as this graphic shows:

Remarkably, this season was one of his best as led the NFL in both passing yards and touchdown passes. So, yeah...we'd love a 23rd season, but if not...thanks for all that you did for the game! He was the quintessential "Man in the Arena."

What is Bangladesh?

That's a question Amy Schneider will likely not forget anytime soon. The 42-year-old engineering manager's 40-game winning streak, second only to Ken Jennings' 74-wins way back in 2004, came to a dramatic end after she couldn't correctly guess the game's "Final Jeopardy." Librarian Rhone Talsma, however, did know what was the only country whose name ends with an "H", and overtook her to become the new champion. The popular Schneider had "rocketed to TV fame over the past two months...and even led to a bump in ratings for the long-running game show; earlier this month, “Jeopardy!” was the most-watched non-football program on TV." But don't feel too bad for her, she leaves "with $1,382,800, the fourth-highest regular season winnings ever behind Jennings ($2.5 million), James Holzhauer ($2.4 million in 32 games) and Matt Amodio ($1.5 million in 38 games)."

For those still curious about Bangladesh, here's a few key factoids:

                                Source: Leading Edge

How the U.S. Economy Works

Deficits, stimulus, bubbles...confused about how our economic system works? Let comedian Mo Amer explain it:

Pandemic Stocks See Red

Global equities are having a very difficult start to 2022 as inflation crashes the decade-plus liquidity party. Investors fearing the Fed will not only take away punch bowl but also turn off the lights are fleeing stocks. Nowhere is this sentiment more evident than among growth companies that flourished during the COVID-19 pandemic. The Visual Capitalist has great chart showing the state of some popular pandemic and tech-centric stocks in January:

                                        Source: The Visual Capitalist

NASDAQ: Then and Now

The Tech sector has had a great dozen years, propelled by ultra-low interest rates and investors' growing appetite for risk. The NASDAQ Composite (QQQQ) has thrived in the anemic post-GFC economic environment, gaining nearly 21% per year since 2009. However, inflation is now a real threat to the economy, which means potentially tighter monetary conditions in the near future. Many Tech stocks, with expected profits far into the future, are long duration assets that are particularly sensitive to interest rate movements, akin to bonds. Since hitting a peak in mid-November, the QQQQ has fallen over 14%. But that's the whole index; underneath some erstwhile high-flying themes are getting hit harder. Cybersecurity stocks (represented by the HACK ETF) are down over 19%, software/ SaaS companies (SKYY ETF) are down about 25%, and worst of all, fintech stocks (FINX ETF) are down over 33%.  

Source: Yahoo Finance, Mantabye

When the "dotcom" bubble burst in 2000, the NASDAQ ultimately fell 80% over more than 2 years. We are nowhere near that, but how does the current pace of Tech decline compare to 2000? Much better, (for now) as shown below.

Source: Yahoo Finance, Mantabye

That's not surprising, given that today AAPL, MSFT, GOOG, AMZN, TSLA, and FB make up 42% of the QQQQ (as of 12/31/2021). With exception of Tesla, the other five companies are among the most profitable in the world. What is comparable to the 2000 NASDAQ's rate of fall is the drawdown in Bitcoin, which has fallen ~40% in almost as many (business) days. Makes sense. 

Biden To the Fed: Do Your Job!

The post-Global Financial Crisis ("GFC") environment has long been plagued by low growth and deflationary pressures. Supported by by ultra-low interest rates, growth hungry investors have for years piled into risky assets like cryptocurrency and companies with questionable "growth-at-all costs" business model. Profits? What's that?...Investors merrily did so because of the justified belief that the Federal Reserve had their backs. The stock market is, of course, not a part of the Fed's dual mandate of stable prices and maximum employment. However, successive Fed regimes have been wary of any negative feedback loop a declining stock market might have on the real economy and typically responded to market volatility with injections of liquidity. The Fed's obsession with the so-called "wealth effect" has contributed to growing economic inequality, even by the Fed's own admission. But suddenly, some would say predictably, inflation is back after four decades (admittedly, this blog was firmly in the transitory camp). The Consumer Price Index rose to a 39-year high of 7.1% in December, well above the 3.2% average over the past 42 years and the 1.8% per annum since the GFC. 

Source: The St. Louis Fed, Mantabye

Now the Fed has to choose between its Congressional duty and Wall Street. Quite the quandary! President Joe Biden, for one, has no confusion about where the Fed's focus should be as inflation becomes voters' biggest concern. He helpfully reminded Fed Chair Jay Powell of his duties this week:

And Wall Street may be starting to feel that the Fed might actually listen to him:

Source: Yahoo Finance, Mantabye

How Much Sport is There in Professional Sports?

The long MLK weekend had six NFL wildcard matchups under the expanded play-off format. Sure, five of the six of the game were uncompetitive (though the Cowboys vs 49ers game made up for some of that). But that's not the point. While there were six games of 60 minutes each, how much football did we actually see? Well, according to a study from the WSJ from a decade ago, the average amount of time the ball is in play on the field during an NFL game is about 11 minutes! Where does the rest of the time go? Here's a helpful graphic from the Journal:

If there's so little actual football in a football game, what do the networks do with the other 190 minutes in a typical broadcast? Not surprisingly, "commercials take up about an hour. As many as 75 minutes, or about 60% of the total airtime, excluding commercials, is spent on shots of players huddling, standing at the line of scrimmage or just generally milling about between snaps." All this is facilitated by the fact that in American football the clock is allowed to "run for long periods of time while nothing is happening. After a routine play is whistled dead, the clock will continue to run, even as the players are peeling themselves off the turf and limping back to their huddles. The team on offense has a maximum of 40 seconds after one play ends to snap the ball again."

But what about the other major sports? Are the dynamics the same in basketball, baseball, soccer, etc.? Well, as this well-sourced post from the National Arms Race shows, things are not quite as bad in the other sports:

                                    Source: nationalsarmrace.com, Mantabye

In American football there's only 5.8% of action time in a 3-hours plus broadcast. Commercials take up about 75 minutes of the 190 minutes. Cha-ching! Football is truly the quintessential capitalist sport. Baseball, America's official pastime, comes close to football in its lack of playing time, with 18 minutes of actual baseball in a typical 176-minutes broadcast. By contrast, soccer is action-packed. In a typical 115-minutes broadcast there is 58 minutes of action! That's 50% of action time. It also means there is comparatively little time for the all-important ads. While 40% of a football game's coverage is devoted to commercials, only 16% of time is devoted to ads in soccer. Socialist sport!

                                    Source: nationalsarmrace.com, Mantabye

Spider-Man: Catching $$ Like Flies

 Spider-Man, Spider-Man
Friendly neighborhood Spider-Man
Wealth and fame
He's ignored
Action is his reward

Perhaps for the Spider-Man of old...Today's Spidey is spinning a huge web of money. Spider-Man: No Way Home has grossed $1.54b worldwide in less than a month and already ranks as the #7 all-time box-office earner, just shy of parent Disney's 2019 Lion King remake (#6) and 2015's Jurassic World (#5) at ~$1.65b each. But it's not just on the big screen that Spider-Man is a hot commodity. According to WTAJ, a single page of artwork from a 1984 Spider-Man comic book sold for a record $3.36 million at auction this week. Page 25 from Marvel’s “Secret Wars No. 8” issue had the first appearance of Spidey’s black symbiote suit (see below). The previous record was $657,250 for art from a 1974 issue of “The Incredible Hulk” teasing the first appearance of Wolverine.

Spider-Man, Spider-Man
Does whatever a spider can...

...To him, life is a great big bang up

Wherever there's a hang up

You'll find the Spider-Man

Was Boss Baby Right about the Impending Economic Collapse?

Back in 2017 the Boss Baby tried to warn us about the impending demographic catastrophe in that (in)famous 'puppies are evil' presentation (see below). Despite being a box-office hit, not many people paid attention to the wunderkind's dire warnings. Not anymore. The Pope has taken notice and has commented that choosing pets over children is "selfish and diminishes us." 

Pope Francis' strong words were not well-received by many couples of fur babies, but he has a point. According to the Census Bureau, the U.S. population grew at the slowest rate in recorded history in 2021. And that trend was largely consistent across the world for several years, as shown in the chart below. Thanks again, millennials! (Are they really the most narcissistic generation? Umm, it's complicated, but there is a serious debate about it!) Anyways, a graying population has serious implications, not just slowing economic growth...but also national sadness? As Tyler Cowen writes, "a significantly growing population is a kind of macroeconomic free lunch." And he wouldn't say that lightly...he's an economist after all.

Meanwhile, the American Pet Products Association’s annual survey reveals that millennials are now the biggest cohort of pet owners in the U.S. And young pet owners are more likely to dote on their pets as if they were children, as research from AlphaWise and Morgan Stanley shows. 

There is good reason for that. The average millennial has experienced slower economic growth since entering the workforce than any other generation in U.S. history, even though they are the best educated and, arguably, the hardest working generation in the workforce today. It's not that they don't want kids, most do, someday...but kids are so expensive. According to Bloomberg, the average cost of raising child in the U.S. born in 2015 is $233,610. By comparison the lifetime cost of owning a dog or cat is $36,568 and $16,252, respectively. For an overworked and financially insecure generation, pets make a lot of sense. 

So, Boss Baby was only partially right. Sure, puppies are cute, but if The Baby Corp wants to increase market share, they've got to find a way to make babies less expensive!

The Year in Markets: 2021 Edition

A couple of great charts from the Visual Capitalist showing how major asset classes performed in 2021 (click below to enlarge). It was another strong year for developed market stocks. The S&P 500 was up nearly 27% beating 2020's impressive 15.5% gain, with every sector positive. The MSCI EAFE (developed markets xUSA) was up close to 8% (versus +5% in 2020). But the year's best performing asset was Bitcoin, up nearly 60%, which is great...but far less than the nearly 380% the digital coin gained in 2020. Of course, now that Bitcoin has gone mainstream (as evinced by its nearly $1 trillion market cap and constant market tracking on CNBC alongside major stock indices), such triple-digit returns are unlikely, even as its volatility and correlation to public equities goes up.

Energy also had a great 2021, after struggling mightily in 2020. Oil was up over 56% after dropping more than 21% last year. Energy was also the best performing sector in the S&P 500, up nearly 48%, followed by Real Estate (+42.5%), Tech (+33.4%) and Financials (+32.5%). The "weakest" S&P 500 sector was Utilities, up only 14%.

What didn't work in 2021 was fixed income and EM stocks. Treasuries and bonds fell 2.5% and 1.2%, respectively, as inflation and interest rate volatility jumped. The benchmark Bloomberg Barclays US Aggregate Index declined by 1.5%, its first annual loss since 2013 and only for the fourth time in nearly 40 years. EM economies are beneficiaries of low US interest rates and so, naturally, rising rates also hurt EM stocks. Surprisingly, last year's best performers silver (+47.4%) and gold (+24.6%), struggled in 2021, despite a long history of being an inflation hedge. Perhaps because of Bitcoin?   

The First Trillion is Always the Hardest

Earlier this week, Apple became the first company to reach a three trillion-dollars market capitalization. Putting that into some sort of context, that's the equivalent of almost 11 Disneys, 6 JP Morgans or 3 Facebooks. In fact, according to the NYT, Apple is bigger than "Walmart, Disney, Netflix, Nike, Exxon Mobil, Coca-Cola, Comcast, Morgan Stanley, McDonald’s, AT&T, Goldman Sachs, Boeing, IBM and Ford" combined. The company accounts for 7% of the total value of the S&P 500.

Apple's three-trillion milestone is also remarkable for how quickly it happened. It took Apple 42 years to be worth $1 trillion. Then took only 2 years to cross the $2 trillion mark and just 16 months to reach $3 trillion. (Click image to enlarge)  

                                                Source: NYT

Sure, almost $500 billion of share-buy backs in the last few years have helped to goose its stock price; but more importantly Apple has become, enviably, both a safe-haven for investors in periods of stress and a growth company in good times. A company for all seasons.

Apple's biggest source of revenue is, of course, still the iPhone, but the business is so much more as we noted in prior post. Driving growth is its services business that has a 70% operating margin and is poised to be worth $1.5 trillion alone. Now is there is also a certain bit of hype backing the $3T valuation, with investors believing Apple will keep launching best-selling products as it explores new markets like self-driving electric cars, augmented-reality glasses and possibly the Metaverse. That's a lot of game-changing technologies. Any company would be lucky to make even one work, let alone two or three. We shall see. 

Heads I Win, Tails You Lose

Wall Street firms raked in record IPO fees in 2021, even as Main Street investors incurred the worst performance for newly public companies in years. It wasn't just a good year for investment banks, it was a great year: according to Dealogic, Goldman Sachs, JPMorgan, and Morgan Stanley among others, combined to register IPO revenue of about $9.8 billion, including special-purpose acquisition companies, or SPACs. The IPO revenue total compares with $4.995 billion from 2020, $2.1 billion in 2019 and $1.95 billion in 2018." And it wasn't just a few mega-deals driving revenues, both the dollar volume of deals and the number of IPOs, over 1,000, were at record levels.

Yet, for the average investor buying into the fantasy of Silicon Valley's unicorns, things turned out very differently. Over two-thirds of 2021 IPOs are underwater. Renaissance Capital's IPO ETF was down 9% and the SPAK ETF 24% on the year, even as the broader market had an excellent year, including the NASDAQ. (Click to enlarge)

Source: Yahoo Finance, Mantabye

While Wall Street brought new companies to the public steadily throughout the year, IPO returns, and certainly that of SPACs, seem to have peaked sometime in early Q1 2021. Oversupply always dilutes quality, but how many of 2021's grow-at-any-cost, cash burning companies were really viable in the first place? Then again, that's the game.

                                                                             Source: Yahoo Finance, Mantabye