Rally Continues On Earnings; Caveat Being Corona

“Nothing will build trust as fast as these four words: Do what you say.⁣⁣”
― Richie Norton.”

We are living at a very special time in the course of humanity. Consider the possibilities these days: You can eat a plant-based burger so you don’t hurt animals. You are able to ride in an electric car. There are all kinds of new drugs to help cure terrible diseases, aided by technology that researches human DNA and RNA to come up with the most viable treatment. We have technology that enables you to speak and see your family in a millisecond at a very minimal cost. It is very conceivable in the near future, there will be driver-less cars, flying cars, and, wait for it, space travel for the paying public. 

Along those lines, public company Virgin Galactic has doubled in the last month. It is planning on offering space travel and is backed by billionaire Richard Branson. It competes with a Jeff Bezos-backed entity and one from Elan Musk as well. Both of those are private companies. More importantly, from my point of view, is the fact that investors are so willing to invest their hard earned capital on what is the most speculative enterprise one could imagine. It is instructive and tells you about the risk appetite that prevails in today's market. If markets are, at their core, a function of the balance between fear and greed, well, we know which one currently is dominating. Why might this be the case?

One does not have to go any further than where interest rates currently stand, which is a paltry yield of 1.588% on the 10 yr Treasury Bond. Shorter time frames earn you even a smaller figure. If you consider that inflation usually averages 2-2.5% per year, owning a Treasury bond or fixed income instrument of a shorter duration locks you into a negative rate of return, assuming the inflation estimate is accurate. Naturally, people are typically risk averse and don’t like losing money, so they either trade bonds for quick profits, or they look at other assets for income or capital gains possibilities. It helps justify space travel investments (or others of the quite speculative nature), which may not come to fruition for many years. Of course, when the stock doubles in a month, the reward more than justifies the risk, at least for those willing to plunk down their hard earned capital. Now, space travel is on the extreme end of the risk spectrum, and there are plenty of investments which have less outcome variability. So, it’s a matter of matching your approach and risk appetite and building a portfolio that satisfies your individual situation.

People are all over the place as far as what their circumstances may be and how they want to approach investing.  From my perspective, maybe more important is owning things where you have a high probability that the management team will do what they say. You want a business strong enough to withstand the vast majority of economic environments. As an example, you need to own enterprises that can survive something like the Corona Virus issue in China, which is clearly going to drag down growth in that country. Let’s turn to the trust issue, and another high profile example, that being of Tesla and Mr. Musk.

This week, we found out that, low and behold, Tesla is going to issue more stock, a cool $2 billion worth. Interestingly, two weeks ago, Elan made public announcements saying they would not raise more capital. His public statements are an example of a situation where what he says and what the company ultimately does are not identical. He also has a historical record of being inconsistent with his statements and the company’s actions. If you are a stockholder, it has worked out quite well right now. Some analysts believe he should sell more stock to raise whatever he needs for all his global expansion plans, a sum of around $5 billion. The company can obviously just say it has the right to change their capital-raising plans based on market conditions, which is certainly justifiable.

From an investment perspective, however, speaking for myself, I have to be able to count on what management teams and companies say they are going to do, and then watch as they execute. Without trust, it makes investing capital very difficult. The Tesla story might be the most high profile situation in the market and there are lots of great investors lined up on both sides. The trust issue makes it even more compelling.

On the earnings front, Cisco led the way this week with a nice beat, along with health care giant CVS. Shopify soared with their results, and toy giants Hasbro and Mattel posted nice numbers. Under Armour disappointed again, while Denny’s tasted good and Hilton provided a sound report so investors could sleep easy.

Mr. Powell reported to the House of Representatives that the Fed was paying close attention to the Coronavirus outbreak, both in China and domestically. On the political front, feel the Bern’s narrow win in New Hampshire and strong financial position makes him the favorite to consolidate the Democratic party, although there is plenty of apprehension, and rightly so, about him being the nominee. Moderates are divided about which candidate to back and Mr. Bloomberg looms large as Joltin' Joe and Senator Warren are on life support. With Nevada and South Carolina coming shortly and the big event closely after, that being Super Tuesday at the start of March, we may know fairly shortly who will have the honor of going up against the Donald in November.