A uniquely boutique investment and wealth management advisory.

Good evening,

I’ve barely left my house all week and the ASX 200 has marched on to further new highs, hitting an intra-week high of 7,335 points, before closing at 7,312 points this afternoon, up +0.23% on this time last week and now up almost 7.7% this quarter (which closes out 30 June).

Technology outperformed as the yield curve started to flatten out again and growth was once again, on the menu for investors.

(For the next paragraph, I’m sorry for all the long time readers who I’m repeating this for but we’ve literally had hundreds of new subscribers in the past few weeks and I don’t think any of them get this stuff.)

OK for you new lot, this chart above is important. It’s the difference between what pa return you’d get lending the US government money for 10 years vs 2 years (if you don’t understand term premium, you’ll need more help than this newsletter can provide.) What does that tell us? It tells us how much extra return we require, at any given time, to lock up money risk-free for a long time, vs a short time. Given the depth of liquidity available in this market, it’s a really good indicator (in fact, predictor) of the business cycle, which is a really good predictor of inflation.

As you can see, inflationary expectations have been rising since the start of 2020, recently reaching a maximum spread of 160bps and holding a fairly steady spread in excess of 140bps, until about the 4th of June when spreads have fallen to 129bps today. 30-day chart below might be clearer.

I can hear a bunch of you say “who cares”… well while you’re scanning the business section of news.com.au for stock tips from some bloke who doesn’t measure his returns, the rest of us are pondering the question, is this peak inflationary expectations? Here is the rate of change (yoy%) on the GS Commodity Price Index Future and the US 10yr Breakeven Inflation bonds.

Good evening

The ASX 200 closed at another record high, 7295 points, up 0.49% from yesterday and up 1.61% on this time last week. Energy and Utility stocks are playing catch up to the rest of the market and were the best performers.

I had a client call me this arvo (g’day KN) asking if it’s time to sell because the market is at a new high?

Despite the intuition, the market making a new high is a POSITIVE predictor of forward-looking returns.

Since 1992, when the market has made a new high, 200 trading days later, the average return is +5.41%. This compares to the average 200-day rolling return of +4.81% over the same period.

And in any case, the market still isn’t that expensive. If the oil price is doing this there’s a heap of significant earnings upgrades in that Energy sector…

Energy sector has materially underperformed, got a lot of catching up to do.

Regardless, earnings in aggregate for the ASX 200 still haven’t exceeded the pre-COVID levels

And yeah a PE on 18.7x times isn’t cheap in absolute terms, but regular readers know that this is a meaningless number. You need to think about growth, you need to think about the risk-free rate and the equity risk premium. I’m not going to explain this again tonight (new readers can go back through the archives and figure it out) but what you need to know is that there is comfortably 500-1000 points upside still left in this rally based on current earnings forecasts.

The real long time readers and professionals know, the secret to timing the market is that you can’t time the market, and trying to do so is a fool’s errand.

Good evening

The ASX 200 index closed only 18 points off its all-time high as small and mid-cap stocks recovered from their recent underperformance in emphatic style, lead by the OG tech stocks (CAR +10%, REA +7%, SEK 7%) and some other high-beta names.

We talked about new highs on the market a few times in recent weeks and despite a falling iron ore price, the industrial companies have just started to outperform in the last 2 weeks…

The 2 best stocks in the world on sale

If you want to know what a good company looks like, you can start by finding a company that is in a monogamous relationship with a high-value customer.

If you want to know what a great company looks like, it’s a company with a monogamous customer relationship that dominates a high-value category or sector.

If you want to know what a once-in-a-generation company looks like, it’s a company with a monogamous, high-value customer relationship in a category that they invented.

The two companies below fit this once-in-a-generation description, yet, both are down 20 to 30% in USD terms over the past 12 weeks.

Airbnb (ABNB US$143.17)
The stock reached $219 a share post-IPO before falling c.35% as the yield curve steepened, growth stocks were sold off and the pandemic recovery got complicated.

Let’s face it, low-quality businesses don’t trade on 15x EV/Sales (consensus FY21) in the same way dinner at Attica isn’t cheap, but both are certainly worth the money. Airbnb isn’t just a company, it’s a way to travel, to create unique experiences and in the case of hosts, a platform to run a profitable business.

You probably neglected to read the analyst earnings call transcript from the 13 May, but there were some extraordinary remarks made by CEO Brian Chesky.

“In Q1, our revenue was $887 million. This was an increase of 5% year-over-year, and it exceeded Q1 2019 levels as well. But here’s the most important fact. Our business improved without the recovery of two of our strongest historical segments, urban travel and cross-border travel. We expect the return of urban and cross-border travel to be significant tailwinds over the coming quarters.”

“new hosts that join Airbnb, 50% of them get a booking within four days of activation.”

“on Airbnb, you can make $8,000 in the United States on average if you have one listing, which is five times you can make what an average American got in a stimulus check.”

“I don’t think business travel is ever coming back the way it was before the pandemic.

“…the bigger trend is going to be flexibility…because of the world of Zoom means a world where we can work anywhere, is a world where many people are also choosing to live anywhere.”

Brian talks about 3 trends emerging, and I’ll summarise:
People can travel anytime. This is why we have a Flexible Dates feature where instead of saying I want to travel from July 5 to July 10, you can say I want to go somewhere for a weekend, a week, or a month anytime this summer. We’ve had over 90 million people use this feature and as more people use this feature, the conversion rate goes up.
Increasing length of stay. In 2019, 14% of Airbnb trips were more than 28 days. In 2020, its now 24%.
And the third is people are now travelling everywhere. Airbnb revenue is more distributed than ever before, people are going to small towns, rural communities and many of which don’t have hotels.
Airbnb is in my view, one of the ultimate winners from the pandemic. While Zoom (ZM) might be the immediate beneficiary, Airbnb (ABNB) will be the lasting winner on the back of these changing trends and shift in consumer preferences. You can see it in the Google Trends data already…

No reason Airbnb (ABNB) stock won’t trade in line with the widest-moat, fastest growing and most innovative reoccurring revenue businesses on the planet – 20x EV/Sales NTM. Analysts agree with me $222 consensus price target or 30-40% upside from here.

Spotify (SPOT US$240.26)

I think SPOT continues to be underappreciated by most investors. Like Airbnb, they are the ‘category killer’ for audio streaming, be that music (which they already own/dominate) or podcasts (where they are quickly establishing a lead). Sales and earnings have been upgraded in the last 2 months, Bank of America added it to their US conviction list, Morgan Stanley call it “the most compelling” with shares back at a 3-year historical average ratio of 4x EV/Sales AND the consensus price target is $426 per share (37.5% higher than the current price).

Spotify and streaming more broadly has a long way to run, and Spotify has exceeded street estimates for growth, meeting 2022 targets in 2020.

Source: Citi Research

Very rarely do you get the opportunity to buy two companies of this quality at these prices. Might be something worth investigating….

Good afternoon,

Long time readers will know I do my best work in this note after a couple of drinks and I just had a couple of cold beers at my local with my best mate Dan, so you’re potentially in for a treat this evening.

ASX 200 closed relatively flat after a strong open, ending at 7030 points, which equates to a +0.23% gain for the week.

This week really was a reversal of recent weeks, with energy and materials selling off in favour of pure more traditional growth names, Industrials outperformed Resources c. 3%.
Investor Behaviour

I was listening to a podcast with one of my all-time favourite authors, Daniel Kahneman where he was, as usual, discussing how irrational humans are when making judgements.

Linda is a liberal arts student who’s engaged with a range of female empowerment not-for-profits and support groups. When Linda grows up is it more likely that Linda is:
a) A bank teller?
b) A feminist bank teller?
If you answered b), you’d be wrong. A feminist bank teller is also a bank teller. Intuition has led you to ignore basic probability.
Those who didn’t ignore the basic probability still had to mentally juggle or fight their intuition, and proving Kahneman’s point that we all battle our own brains every day.

I regurgitate this example as we all think we are rational, and everyone else isn’t, a bit like most of us thinking we are above-average drivers, we all make errors in logic.

Reluctance to get the COVID19 vaccine because of blood clotting risk (6 in a million chance of blood clots, lower than the rate of clots in unvaccinated people) vs chance of dying from COVID19 in Australia (35 in a million, 5.8x more likely) doesn’t make any rational sense, but because its not perfect, its open to unfair criticism.

The same goes for autonomous vehicles, we are so sensitive and reactive to any kind of death or injury involving an autonomous car, yet we accept injuries and death on our roads at the hands of human error every day. Autonomous vehicles must be significantly better than humans before we are willing to accept them on our roads.

Kahneman points out we are much more responsive to things that are intentional (like the vaccine or a self-driving car) than when they are natural (like not injecting a bit of disease into your body to build immunity or being distracted while driving).

For many people, reading forums/free/cheap information and making your own investment decisions at home based on ‘common sense’ seems natural, rational. After all, we think that everyone else who’s buying and selling on the exchange that day is like us. But this is an error in logic.

The same people often think that getting an advisor is a waste of time because “what could they possibly know that I can’t read online” and “they don’t get them all right either” This is true, we don’t. But these are errors in logic (Dunning-Kruger and false dichotomy) not dissimilar to the autonomous vehicle argument above.

Anyway, suggest you go and get yourself a copy of “Thinking Fast & Slow” by Danny Kahneman and while I haven’t read it yet, I’m sure his new book “Noise” is a beauty as well. You’ll learn more about investing and markets reading this sort of thing than any of that “learn how to trade/technical analysis/the secrets of Warren Buffet” bullshit you’ve probably got on your shelf.