KJP
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Mentioned on other threads by me and a few others, but I think apartments deserve their own thread, but don't think they all individually deserve their own thread.
No hard science to my picks here, diversification is protection against ignorance and when these stocks fell at the pace they fell, I'm not going to kid myself and say I went through every companies filings or built up a property by property, city by city valuation.
Broadly, these companies have
a) very low leverage, thus a decline in share price is a decline in enterprise value/asset value
b) high occupancy in (mostly) higher barrier to entry high housing cost markets
c) high income yuppie renters (example: EQR's average income renter is makes $165K, that's not a waitress or uber driver), does a coder at GOOG lose her job from COVID-19, what about a big law associate in DC? maybe a financier in NYC does.
d) cap rates blew out to 6% or more (this changes by the day); investment grade spreads have blown out as well, but these have well-termed out debt. once credit stabilizes, these guys are going to print some incredibly low-cost debt as multi-fam debt (agency and corporate IG) will in my view be a safe haven in an otherwise tumultuous commercial real estate credit world (hotels, some office)
e) 4-5%+ divvy yields that appear sustainable.
Risks:
a) rents will surely come down as new supply hits a weaker economy (but these buildings will remain full, in my view)
b) I think one should haircut NOI 5-15%, not 30%
c) these weren't cheap beforehand from a public or private market perspective; i was previously an apartments hater as I thought it was one of the steamier parts of the real estate and real estate finance world. a 30%-40% move down in prices (which at low leverage flows straight to the asset level) makes me an apartment lover (in basket form at 10-15% lower prices than today's levels, but we'll probably get a few more bites at the apple)
Another bite at the apple is now here as EQR approaches the 3/23 low. Have your thoughts changed at all?
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Rosetta Stone
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Started some MRTN, and bought a few more BRK as I had cash freed up from other sales.
Curious what interests you about MRTN? TL trucking is a pretty rough and tumble industry.
MRTN just posted outstanding results, and after following(like with a lot of names) for some time decided to use some cash to put it in the portfolio. They are incredibly well managed, have an impenetrable balance sheet, have refined the business to be primarily temperature controlled transport rather than competing for everything under the sun. As such they've been able to hold reasonable leverage on pricing and grow revenues much more consistently than the "peers". Theyre basically a trucking company that doesnt really have the problems most trucking companies have, and this has historically been the case.
Someone recently blogged on ODFL and how despite being in what is typically a "commoditized" business have earned very good returns on capital. Marten doesn't seem to earn returns on capital or achieve operating ratios similar to ODFL. Do you think their business is improving so that returns on capital and operating ratio continue to improve?
Marten and Old Dominion are not in the same segment of the industry, are they? Old Dominion is primarily a "less than truckload" (LTL) shipper. In that model, route density (i.e., local economies of scale) are key. If you routes are denser, and thus your trucks are more full, than your competitors, then you will win. I believe Marten, on the other hand, is much more of a specialized (temperature controlled) truckload shipper. Truckload shippers can't exploit the benefits of route density in the same way as LTL shippers, so their potential competitive advantages, even when well managed, do not appear to be as large as the potential competitive advantages of the LTL model.
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the typical American worker has harvested very little (if anything, vs real wage growth) from the corporate adjustment. So, contrary to what's implied in your post, the trickle-down has not occurred after the 2017 Tax Act.
This macroeconomics thread is getting dangerously close to skirting the line with the politics thread. There's much I respectfully don't agree with in your post about using NIPA profits that is too long and wonky to get into here (perhaps after I've had my coffee we can go over to the IRS's data on corporate income tax filings which is a much better source - though only current to 2013, unfortunately).
But I wanted to highlight your assertion up above in bold. There is no doubt in my mind that the American worker benefited greatly from the 2017 Tax Act. To prove it, let's roll the film.
One way to test this hypothesis is to look at Federal FICA taxes - particularly Social Security taxes. These are paid by both the employer and employee (self-employed pay both ends) for annual employment income up to ~$137k. The salary cap helps to make it a good indicator of general employment levels because it is not skewed by the 1% getting large bonuses in "good years" the way employment income taxes withheld at the source are.
Once again, let's ignore 2018 which was a bridge year (due to federal govt year-end being Sept 2018).
YEAR TOTAL SS Taxes
2019: $773,220 M
2017: $690,709 M
2016: $668 372 M
2015: $660 956 M
For reference 2018 was $693 831 M (though the new corporate tax rate was in effect partially that year). Social security tax collections jumped 11.4% from 2017 to 2019, almost all of it once the full effect of the corporate tax cuts kicked in. It really is too bad that the virus has wrecked the economy because job creation (by this measure continued to be strong in 2020. If I take y-t-d numbers through Feb, 2020 (from Oct 2019 start of Fed govt new fiscal year), social security tax collections jumped again another 9.5% vs the same period in the 2019 fiscal year (Oct 2018-Feb 2019).
Let's face it, employment income was booming - that's a fact. And it is all due to the 2017 Tax Act and the cut to the Federal Corporate Tax Rate.
wabuffo
Wabuffo: Can you link to the source for your annual Social Security tax numbers? I tried to find it in the 2019 Data Book linked to in the prior post (https://www.irs.gov/pub/irs-pdf/p55b.pdf) but only found total FICA taxes (e.g., Table 1), which don't appear to be the numbers you're using.
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There have been plenty of press reports on current testing delays, but I have a personal anecdote on the issue. A non-immediate family member of a friend had some mild but suspicious symptoms, spoke with a doctor and then got tested. She was told it would take 5-7 days to get the results, and it's now day 6 with no results yet. The test occurred in the DC suburbs of Virginia. I don't know if demand for testing supplies in the currently hardest hit places (e.g., FL, AZ, TX) is lengthening testing times in other places, but it's hard to see how "test and trace" is going to be effective if it takes a week to get a test result.
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The biggest disagreement I have is that I think the Fed will do absolutely anything to avoid a deflation trap. In fact with the latest round of interventions they are hinting how determined they are. Those interventions are not just another round of QE (which isn’t necessarily inflation-inducing for reasons correctly discussed in the interview), they are a step toward some real money printing.
In terms of "money printing", I always think in terms of this short-hand rule about US monetary operations:
1) US Treasury spends - creates a new reserve in the private sector banking system (money printing)*
2) US Treasury issues debt - swaps a reserve in the private sector banking system for an interesting earning asset. (asset swap)
3) Fed does a repo (or lends) - swaps a private sector interesting earning asset (collateral) for a reserve in the private sector banking system or vice versa (asset swap).
I think its pretty clear that money printing comes from the US Treasury (and not the Fed).
wabuffo
Coming back to this after watching the video of Day Dalio in the other thread and I think I understand your position better this time around. Thanks for sharing your insights!
I've been leaning towards the bolded part of your comment myself. Don't fight the Fed works until it doesn't and the fact that we had 50+% declines in 2000 and 2008 depsite Fed stimulus suggests sometime "it doesn't".
To no one in particular -
I'm trying hard to reconcile Ray's "no one will want to own bonds and stocks can trade @ 40x earnings" with Hoisington's "unproductive debt = deflation and lower rates" and I think the primary difference is probably timeframe.
My main thesis has been it's the backstop of unemployment benefits @ $+600/week that has resulted in this rebound. Also, backdoor unemployment benefits via PPP loans which is subsidize employment so unemployment is underreported. All of this is the Treasury - not the Fed - and this money has the potential to circulate. Most likely, these programs are reduced/end soon so I think results are probably in Hoisington's favor in the short-to-medium term. There will be a huge income hole and some reconciliation to debts/liabilities must occur - and liabilities are still growing dramatically relative to incomes so the reconciliation grows more painful by the day.
This is deflationary and a credit negative. Interest rates go lower, credit spreads go higher, equities probably go lower (but maybe won't get "cheap" as I previously hoped) and Fed/Treasury will step in once again to mitigate.
All this intervention takes 18-24 months to really hit the economy. Starting sometime in mid-to-late 2022 we'll probably see the green shoots of inflation. You'll have an improving economy, improving demographics, stimulus sloshing around, and rates near 0%. This is probably the environment stocks can make the run to 40x earnings in as per Day Dalio. It's also when the USD is probably losing its relative advantage over other developed currencies with the Fed's repression in full swing. So stocks remain high until the combo of currency debasement and prior stimulus work inflation sustainably above 4ish%?
Do any of you have thoughts on how this plays out differently?
There are even more variables to consider. For example, the U.S. economy is not a closed system, and the effects of trade and transnational supply chains on domestic inflation is not fully understood. (See, e.g., https://www.bis.org/publ/work602.pdf ) To the extent the US has been importing deflation via accessing lower cost production from overseas, what happens if there are increasing tariff or non-tariff barriers to that trade?
Also, what if policy changes are enacted in the US (e.g., strengthening unions) that increase the percentage of income that goes to labor (https://fred.stlouisfed.org/series/W270RE1A156NBEA )?
I don't know how to assess the likelihood of any such changes happening or their effect on inflation if it did happen. In short, I have no idea whether we'll have a 1% (or lower) or 5% (or higher) inflation rate in 5 years. I have to invest with the knowledge that either outcome is possible.
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So my feeling is... No matter what the US politicians could have done, you wouldn't have been able to stop this virus. Especially given its size, connections with the rest of the world, and the two points above, etc.. There are inherent reasons why the spread could not be stopped. You could wish and vent all you want how the US admin. could have prevented this crisis, but in reality, I don't think it was possible. You are right, this virus doesn't give a fuck, and you might just have to see it run its course.
I think you're letting "US politicians" off the hook. President Trump remains very popular among the Republican base. If he said it's very important to (i) wear masks, and (ii) avoid crowded indoor spaces, I believe that would make a major difference, not only in how people actually behave, but also in the cover it would give to Republican state- and local-level officials with respect to the pace and scope of reopening various venues. In many ways he has done the opposite by choosing not to wear a mask in public, urging rapid and broad reopening, and holding indoor rallies. I acknowledge, though, that, so far at least, this is a counterfactual that cannot be proven.
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Public school districts in the US are starting to announce tentative school plans for fall 2020. Several large suburban districts are requiring parents to choose between part in-class, part online (2 or 3 days a week live) or all online (e.g., Fairfax in Virginia), while others are requiring parents to choose between 5-days a week live and full online (many districts in the Philly suburbs). Typically, parents must submit their choice by a July deadline and stick with it for at least a semester, though all in-school instruction is subject to actual conditions in the fall.
I understand that the 2 or 3 day/week in-school schedule is intended to lower class sizes (only 50% of students attend each day) to aid with social distancing. But if children ultimately attend some type of group childcare on the days they're not in school, presumably with at least some children who are not in their class, the split schedule may be counterproductive.
I understand that many parents were quite frustrated with the makeshift online instruction offered in March - June this year because it was both half-baked and required significant parental oversight, essentially requiring parents to simultaneously teach, keep the house in order, and work at their regular jobs. I don't think that's sustainable and quality in all three of those areas will inevitably suffer.
The President's most recent immigration proclamation also appears to have effectively ended the ability to hire a new au pair from outside the country, making childcare even more difficult for some families, though I suspect this affects only a very small number.
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I agree with educating children on finances. But would even go further. Just like you have a driving test before you drive, have a test with basic information about stocks, biases, etc. and only if they pass they should be able to open a trading account for stocks and options. Else they would only be limited to broad index or active funds.
Vinod
This is an excellent idea. While maybe annoying, is there any reason at all it doesnt make sense to mandate an individual with limited investing experience take a brief online tutorial/course prior to being permitted to open a trading account? Doesnt even have to be pass/fail, just a basic intro of "hey this is what you're getting in to".
I think the best argument against it is empirical rather than philosophical -- it wouldn't actually do anything to change people's behavior, but it would allow those who wish to do so to say that appropriate steps were taken and "You were warned. It's on you." In short, it seems to be a symbolic act, rather than a real effort to solve a problem.
That being said, my objection could be tested by some type of randomized trial to see if the proposal has any effects. If it actually does change outcomes in a good way, then I see no reason not to do it.
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Likewise, we expect recent high school graduates who join the Army to obey the laws of war despite extreme conditions. We expect police in their early 20's to exercise restraint and good judgment at all times, even under duress, under penalty of jail if they don't meet that standard.
OT? I am afraid that our expectations in both of these cases are too high. In fact, I am afraid that our expectations of human behavior in general are too high. Whether applied to young people in their 20s, or people in general, or "highly rational" investment professionals frequenting certain investment forums, or even people at the highest levels of business or politics.
Yeah, that makes me a misanthrope. :-\
That is why caveat emptor should be the only law for adults. This was an adult who made his own decisions (and misunderstandings) and chose to not ask anyone for help. Unrestricted gambling and drugs should be available for adults as well, both online and off. It isn't a brokerage's responsibility to baby sit its clients. Or at least, it shouldn't be.
KJP I think you are a lawyer right?
Your argument doesn't make that much sense to me. Yes there are casinos and there is gambling. But Robinhood is not a casino, it is a brokerage. Gambling on stocks (while legal in the UK) is not legal in the US. Should Robinhood choose to convert to a casino, sure they can go and lay out the craps tables. But while they are a brokerage shouldn't they have to obey the laws and regulations governing brokerages?
I don't know all of the facts of this particular case. My comment was directed to self-directed transactions, not transactions driven by recommendations subject to suitability obligations, e.g., FINRA Rule 2111 or the new Best Interest Regulation. What laws and regulations do you believe Robinhood is violating (there may be many, but I'm trying to clarify exactly what you're referring to)?
Alternatively, we don't have to get bogged down in the weeds of broker-dealer regulation, because I agree with you that a broker-dealer should follow the law as it stands and can, in certain circumstances, be liable if it doesn't. My comment was more directed to what I understood to be the thrust of several commenters on this thread who were discussing what the law should be and and, in particular, what we should permit individual investors to do, rather than directed to your comments, which as you note were directed at compliance with the law as you currently believe it to be, rather than an opinion about what the law should be.
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Likewise, we expect recent high school graduates who join the Army to obey the laws of war despite extreme conditions. We expect police in their early 20's to exercise restraint and good judgment at all times, even under duress, under penalty of jail if they don't meet that standard.
OT? I am afraid that our expectations in both of these cases are too high. In fact, I am afraid that our expectations of human behavior in general are too high. Whether applied to young people in their 20s, or people in general, or "highly rational" investment professionals frequenting certain investment forums, or even people at the highest levels of business or politics.
Yeah, that makes me a misanthrope. :-\
You may be right. In any event, holding that view would at least be consistent with greater regulation in general of many activities.
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In the United States legal gambling is not only lawful but rampant, whether its live at the craps table or Sundays on FanDuel. Many state governments are also into gambling up to their necks via lotteries and tax revenue from legalized gambling. For example, New York State alone had $10 billion in lottery sales last year. (Source: https://www.statista.com/statistics/388238/sales-of-lotteries-by-state-us/)
Despite the known issues with people who are addicted to gambling, the United States not only permits this activity but actively promotes it. Why would we focus on shutting down something like Robinhood before shutting down casinos, lotteries, and FanDuel?
More broadly, I am skeptical of the argument that people buying options or shorting on Robinhood don't understand the general point that they're engaged in risky activity. Likewise, we expect recent high school graduates who join the Army to obey the laws of war despite extreme conditions. We expect police in their early 20's to exercise restraint and good judgment at all times, even under duress, under penalty of jail if they don't meet that standard. Why do we not expect a 20 year old to be responsible for his or her own voluntary investment/gambling decisions?
That last sentence sounds quite heartless in light of this suicide, which is indisputably a terrible tragedy. But, in my view, the people who are focused on the underlying effort at suicide prevention, rather than rushing to blame Robinhood, are on the right track.
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Perhaps the folks behind OneSpaWorld: http://yetanothervalueblog.com/2020/06/cruise-ship-pirates-how-osws-management-plundered-their-shareholders.html
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Seems these defense companies employ way too many people...
Maybe they have problems to lay-off people as govt contractor.
HII for example is 8bn mktcap but employ 40k. That’s only 200k revenue per employee.
Google, Visa etc is at least 10 times that
Even banks are higher.
Why would you expect the revenue per employee at company that builds submarines and aircraft carriers (Huntington Ingalls) to resemble the revenue per employee at companies like Visa or Google?
Put another way, the output of an a hour's worth of very highly-skilled software coding (i.e., code may be used and resold an infinite number of times -- labor output is highly scalable. On other other hand, the output of an hour's worth of a very highly-skilled welding creates a physical product that can only be sold once. The labor output is not scalable in the same way. So why would you expect the labor components of the two business models to be in any way comparable?
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They didn’t have Zoom back then though.
A lot of knowledge work (marketing, accounting, finance, law, programming) can be done remotely.
Today's brief can easily be written remotely. But how does a law firm develop tomorrow's partners, i.e., business generators?
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Why do Costco, Best Buy, TJ Maxx, Ross Stores, Burlington, Five Below and other thrive while
Macy's, JCP, Bed Bath and Beyond, J Crew, Abercrombie, etc are failing?
Search cost? Not offering something compelling? Theories? Anyone? Anyone?
I think you have two different groups in your "have nots". I believe the Macy's/JCP group originally thrived by occupying a pre-internet distribution bottleneck. They could charge full-price for a Ralph Lauren polo shirt because there was limited competition within reasonable driving distance. The internet has de-bottlenecked distribution for consumer goods. So, what purpose does a Macy's or JCP still serve? What problem is it solving for consumers? I also agree that the environment for many of their stores (e.g., dreary malls) isn't great.
JCrew and Abercrombie, on the other hand, are mass-market brands that are vertically integrated into legacy retail. In theory, if their brands were strong, they should be able to succeed regardless of what the distribution channel is. I suspect that, to the extent they are struggling, it's because mass-market brands go in and out of fashion, their price points are high relative to mass-market alternatives (weak brands?), and possibly they've got too many locations in outdated distribution channels. The latter point would be the easiest to test -- do the stores in what we think of as "good" locations produce better economics than the stores in "bad" locations?
As for the haves you list, they are almost all low-cost with a likely "treasure hunt" strategy on top to give consumers another reason to actually go their stores. Best Buy, on the other hand, seems to occupy a different niche. Perhaps it's the last-man standing in a niche were at least a decent portion of the consumers want to see many of the goods before they buy them. For example, if I want to go look at TVs, I'd go to Best Buy; I can't think of any other place close by that would be a better use of time in-person browsing time. But if I want to look at clothes, I have too many options to list.
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Note that business interruption is Traditionally only meant to pay in case it prevents the business from operating due to property damage , but apparently they will get tested by some lawyers. It’s much more harder to argue for paying when it is explicitly excluded, so I think lawyers will go after those that don’t have the Virus exclusion.
All policy variations are being tested, even those with virus exclusions. See, for example, this high profile case involving Travelers: https://www.law360.com/articles/1265750/travelers-sues-geragos-law-firm-in-virus-coverage-dispute
For an overview of the various theories insureds are pursuing, see here: https://www.law360.com/pennsylvania/articles/1273308
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I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers. If we invert this, there are companies that act like leeches. One example is Seamless. Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring. I feel that Seamless is particularly a leech. What are others?
By "leech" I assume you mean a business that provides far less value to its customers than it charges. Unless there is some regulatory capture or market failure, how does a business like that last? In other words, why would customers keep using it. For example, if Seamless is truly a leech, why are restaurants doing business with it?
My contribution: ESPN, AMC Networks, Viacom, MSGN, etc. They were exploiting a legacy distribution system and are now losing customers hand over fist and the barriers to distribution fall.
I think industry structure acts as the enabler of Seamless' leech status. At one point, Seamless was a niche provider of a "seamless" way to order meals for I Banking analysts working really late hours in the office. Since time is money, the few restaurants that are on Seamless' platform that got the orders truly got access to a new source of revenue versus those that are not on the platform. As time goes on and Seamless went more main stream, they held onto the 20-30%. Now every John and Jane orders from Seamless. That's why if you go to restaurants, they will ask you to call direct or order direct from their websites. This is probably the best sign that a company is acting like a leech.
To get back, there are lots of restaurants and they are afraid to lose sales to another restaurant. So they bid up prices to get the order flow. This is usually 20-30% of the actual order. Being from the food industry, this is likely fine if this was an "one time" CAC to acquire a new recurring customer. But restaurant diners are generally promiscuous and tend to try different restaurants. Hence, they don't stay loyal customers. So the restaurants have to constantly pay up to get that order flow. Most customers probably aren't aware of the take of Seamless and feels that the transaction is Seamless. The TAM could be so much larger if Seamless decided to take 3-5% of a transaction which is much more sustainable for a restaurant. Unlike e-commerce such as Amazon where Amazon is providing the warehousing, i.e. rent and logistics, restaurants still have to pay rent which is 10% or higher, the 20-30% take rate on a gross margin that is 40-60% really cuts into the profits before adding cooks and other overhead. It is simply unsustainable. But the leeches keep leeching because restaurants are low barrier to entry but high barrier to exit business much like small hedge funds. There are lots of passionate hedge funds managers (one man shops), but the barrier to exit is very high.
I don't use Seamless (not in my area?), I use Grubhub. I can see that restaurants would think them as a leech. IMO the restaurants are mostly forced into this no-win situation that they do lose orders if they are not on a platform. Yeah, some outstanding restaurants can leave the platform and get the same orders through their phones or websites. But for most restaurants I will just order from their competitor that is on the platform. So I'd stay with platform rather than staying with the restaurant. (And I would pretty much never call a restaurant if they are not on a platform and they don't have website - calling just sucks.) Yeah, it sucks for the restaurant, but that's how it is.
What is it about the platform that causes you to continue to use it?
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rent-seekers and monopolists. Cable monopolists. Uber.
It's interesting that both Seamless and Uber are mentioned here. I assume the view of them as "leeches" arises from viewing them from the perspective of suppliers (restaurants, drivers) rather than the perspective of users. But those companies provide a lot of value to users. Of course, they're also squeezing another part of the value chain by getting scale on the demand side.
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Value to customers is somewhat subjective, right? Some people might think ESPN is the best value for money they can get.
Absolutely. So, if you were buying ESPN a la carte there's no issue. If it wasn't worth it to you, then presumably you wouldn't buy it. That whay it's the now-unraveling bundle that I was referring to.
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I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers. If we invert this, there are companies that act like leeches. One example is Seamless. Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring. I feel that Seamless is particularly a leech. What are others?
By "leech" I assume you mean a business that provides far less value to its customers than it charges. Unless there is some regulatory capture or market failure, how does a business like that last? In other words, why would customers keep using it. For example, if Seamless is truly a leech, why are restaurants doing business with it?
My contribution: ESPN, AMC Networks, Viacom, MSGN, etc. They were exploiting a legacy distribution system and are now losing customers hand over fist and the barriers to distribution fall.
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Huntington Ingalls
Paramount Group
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Does anyone know a place where I can find older annul reports for obscure companies?
I'm specifically looking for 2007-2012 for a company called Meritage Hospitality Group that trades OTC.
During that period, Meritage was filing its disclosures with OTC Markets. They're available here: https://www.otcmarkets.com/stock/MHGU/disclosure
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Huntington Ingalls Industries.
What are you buying today?
in General Discussion
Posted
Equity Residential