Weekly Market Comment August 21 2020

More doe, less Morneau

Bill Morneau resigned as Canada’s finance minister, replaced by Chrystia Freeland. Freedland lacks Bay Street experience but, as one former Ontario finance minister put it, she was a journalist covering finance has strong political and negotiating skills with sound judgement and has got “better preparation to be finance minister than anybody would have gotten on Bay Street.”

Morneau, who was forced to repay $41,366 in travel expenses previously paid for by WE Charity, exhibited some judgement blind spots. But his boss has also exhibited shaky judgement at times, including a belief that the government could spend its way out of any problem, be it the coronavirus or environmental initiatives. Spending priority differences seems to be at the heart of the falling out.

Let’s hope that Mrs. Freeland, like Morneau, doesn’t share her bosses belief that tax and spending hikes have no upper bounds.

Parklandia is not a bad place to live

Our Parkland Fuel holding in Legacy Income Growth and Legacy Select is a gas station/convenience store operator that has holding up very nicely despite a 24% drop in fuel and petrol sale volumes. Sales of tobacco, alcohol and household essentials have been running in overdrive and the demand has continued into the 3rd quarter. Their CEO said something very interesting. He figures the pandemic may have permanently altered the shopping habits of some consumers to shop not at the big box retailers but at faster, smaller locations which are easier and safer to navigate. Investors can ponder that thought as they enjoy a 3.2% dividend yield.

One thing that’s also notable about gas station operations like Parkland and Alimentation Couche-Tard is that those will likely become ideal locations for electric car filling stations and these companies will one day make the pivot. But many are holding off making major investments because the filling station technology is still changing (read: improving) and there aren’t enough electric cars to make it economic. Eventually, as more and more EVs hit a critical mass, it will make economic sense.

Beware the worm in the Apple

Apple traditionally releases its updated phone models in September but the rumor mill (a cottage industry when it comes to Apple) can’t seem to decide if it will be September 8 or delayed by a few weeks to October. Regardless, this year will feature all-new designs and, most importantly, 5G. The company should see record sales as people like your author finally feel that upgrading an almost 3 year old phone (I’ve got an 8 Plus) makes a lot of sense. Such expectations have helped Apple cross the $2 trillion valuation mark.

But a more existential threat to Apple’s Chinese sales looms. Almost a third of iPhones are sold in China but President Trump signed a pair of executive orders that aimed to block any transactions between American’s companies and TikTok and WeChat. Banning WeChat especially risks blowing up Apple’s China sales, as a Bloomberg poll found 95% of Chinese respondents said they would stop using iPhones should such a bad materialize.

Worse, the app is very commonly used as a mechanism for Chinese tourists to make payments. Travel to America would become more difficult with such a ban. When asked if any of these threats to America’s most successful company were a concern, the administration responded “whatever.” In their defense, American services such as Facebook, Google, Twitter and YouTube are all banned in China.

Noteworthy links:

 

Musings Beyond the Markets

China’s version of the CDC (known as the China CDC), had every intention of spotting the next SARS-like pandemic early. But the federal agency doesn’t oversea local officials, many of whom did not want to report bad news and risk making their jurisdiction look bad. Many local governments resent Beijing meddling and preferred to deal with problems on their own. The China CDC was equipped with a state-of-the-art, real-time reporting and minoring system but such systems can only work if local authorities and doctors inputted outbreaks of disease in a timely manner. They didn’t.

While Beijing did not necessarily intend for such a break-down of reporting, they did make matters worse by disallowing any publication of research without their approval. It took unauthorized leaks in early January to force Beijing’s hand in releasing data.  The scientific world very quickly got busy after that but it could have all happened weeks earlier.

Wuhan was locked down on January 23 but one study by a group of in China, Britain and the U.S. estimated that a lockdown three weeks earlier would have reduced Chinese cases by 95%. Two weeks earlier? 86% fewer cases, and just one week earlier 66% fewer cases. China would have exported dramatically fewer cases to the world, now having killed approximately 750,000 million people worldwide.

 

Word of the Week

Somnambulist (n.) – a person who sleep walks. “It gave me no hope to see him doing these simple things with the sluggishness of a somnambulist. It proved nothing more than that he could go like this forever, our silent accomplice, little more than a resuscitated corpse.” - Anne Rice, The Vampire Lestat