'Buy the Umbrella' - Issue #37
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things I’ve been reading and thinking about during the week.
If you missed last week's issue, you can find it here.
Quotes
"A smooth sea never made a skilled sailor".
— Franklin D. Roosevelt
“Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.”
— Peter Lynch
Chart
Total return performance year-to-date
Deutsche Bank put together this helpful chart that illustrates the returns in 2022 up to the end of July. Only three assets are up for the year: Brent crude oil, WTI crude oil and the Commodity Research Bureau Index (the CRB index includes 19 commodities, with a 41% weighting towards agriculture and 39% weighting towards energy commodities).
Investor Letter
Brookfield Asset Management, a publicly listed global alternative asset manager with over $750 billion of assets under management, has positioned itself to benefit from the recent market adjustments to higher inflation and interest rates.
In particular, their infrastructure, renewables and real estate assets are benefiting from inflation due to the way their cash flows are structured and the increasing replacement cost of assets they own.
In the second quarter shareholders letter, Brookfield's CEO Bruce Flatt points out that despite the recent increases, interest rates are expected to remain favourable to businesses as they are likely to stay low relative to historical levels:
"Despite two historic Fed rate increases—with probably more to come—short rates are only at 2.5% and long rates are less than 3%. Once this period of adjustment passes, rates are expected to settle at historically “low-ish” levels, which should still be very conducive to business."
In addition, Flatt adds that even if the U.S. falls into a recession, balance sheets are fairly strong:
"Whether this causes a recession is not important in our view, as balance sheets for individuals and companies are in a good position to withstand this shift, and before we know it, we expect to be in a recovery."
Price and value are rarely the same
The goal of the value investor is to take advantage of the gap between price and the true intrinsic value of those assets. Over the longer term, the price of a security will gravitate towards its value.
"Value investing is, in essence, the arbitrage between 'Price' and 'Value'."
Over the short term there are multiple reasons for why the price of an asset would not equal to the value of a business.
"Assets prices are usually dependent on the supply of and demand for capital, which in turn is heavily influenced by investor sentiment. In robust markets, there is generally more capital than there are assets. This forces Price higher, even to the point where it far exceeds Value." There is no doubt that, in hindsight, this described many technology and “growth” stocks in 2020/2021. On the other hand, in stressed markets, if a sale has to be made, the Price received for an asset can be far below its Value. We are starting to see some of these situations emerge. In summary, Price is often influenced by the news of the day, market sentiment, the availability of capital, and other factors that may or may not have any relevance to the Value of a specific security.
How is the value calculated? It is the net present value of the future cash flows of a business or asset, based on assumptions for future growth discounted at an appropriate rate for that particular investment.
The difficulty in ascertaining Value is that there is no absolute value for anything, so there will always be a wide range of views over an asset’s growth profile, profitability, and the appropriate discount rate.
Thoughts on global infrastructure
Brookfield believe there is an incredible investment opportunity in the sort of assets they invest in due to the massive buildout of global infrastructure needed.
From a demand perspective, global infrastructure is aging, and less public capital has been invested than is required to keep up with the pace of population growth. In addition, there are major tailwinds for investors in the form of the tens of trillions of dollars needed for the backbone of the Internet and Mobile Infrastructure; Energy Transition; Reshoring of Critical Infrastructure; and the Rewiring of European Energy.
Given the size of this expected buildout, it will require requiring tens of trillions of dollars, 20 years and will produce an incredible investment boom. The record debt-to-GDP for most developed nations will require their governments to lean on private capital providers to fund much of this infrastructure.
For example, U.S. and European semiconductor buildout programs, initiated by their respective governments, require upwards of $100 billion to localize production.
Earnings Commentary Insights
Softbank posted its largest-ever quarterly loss of $23.4 billion following their big tech sector bets
Masayoshi Son, Softbank's Chairman and CEO admitted that "When we were turning out big profits, I became somewhat delirious and looking back at myself now, I am quite embarrassed and remorseful".
Interestingly, the company has now systematized its investment decisions and empowered experts, rather than relying on Son's hunches.
Softbank's Vision Funds presentation is worth a read given their size and reach. They also separately disclosed that they had sold their Uber stake for a $5.6 billon gain.
Articles
Wall street faces billion-dollar losses on private equity buyout debt
Investment banks are believed to be sitting $80 billion of commitments backing leveraged buyouts that they may have to unload at a discount. Deals include Citrix, Twitter, Morrisons and Jetblue.
The Financial Times notes that Deutsche Bank had to sell its high-yield bonds backing the buyout of packaging firm Intertape Polymer Group at just 82 cents on the dollar, one of the steepest discounts in two decades for a new junk-bond issuance. By dropping the price, the overall yield on offer (a bond's price moves in the opposite direction to its yield) rose to more than 14%.
China's youth unemployment rate rises to 19.9%
This represents the fourth consequent month of rising unemployment for youth in the country.
Until next time...
Thank you for reading this week’s issue. If you found it interesting, consider sharing it with someone who would enjoy it.
Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week.