Weekly Market Comment Friday November 27 2020

It’s amazing what a few covid-fighting medical breakthroughs and elections clarity can do for markets. Clients will be pleasantly surprised at their November statements.

It’s ok, they can’t all be awesome

Another week, another vaccine test result. AstraZenica/Oxford University announced a 70-90% efficacy rate for their experimental vaccine candidate, though the true number is unknown yet because of dosage inconsistencies and disclosure irregularities.

They developed a more conventional vaccine, one that would be far cheaper than the mRNA vaccines developed by Pfizer and Moderna because it can be stored in an ordinary fridge.

But because of these disclosure problems, the Pfizer and Moderna vaccines hold a competitive edge. It’s unfortunate AstraZenica stumbled, but let’s not forget how rushed these development projects have been.

Chances are the U.S. will start using the Pfizer vaccine within three weeks, starting with front-line workers. The world economy needs a solution, as witnessed by Europe’s purchasing managers’ index (PMI) falling from 50 in October to 45.1 last month (a reading below 50 indicates economic contraction) while Canada’s slipped slightly from 55.6 to 55.5.

U.S. PMI for November continued its rise powerfully but the jobless increases these past two weeks remind us that covid continues to pester what has otherwise been a powerful recovery. 

What are “hard assets”? Stuff you can kick

There is a reasonable argument to be made that the central bank and government stimulus meted out to fight the negative economic effects of the pandemic will, but when the pandemic barriers eventually get lifted, it will cause inflation. Liberty Media Chairman John Malone, a savvy investor, recently told CNBC, “I’ve got to believe this will lead to devaluation of currencies, that hard assets…will increase in value in currency terms. I’m not sure I’m going to call this inflation, but it’ll look and feel like inflation.”

While gold prices have been lackluster after the summer’s excitement, not all mined metals are doing poorly. Dr. Copper, an economic bellwether, has been on fire:

 

copper futures chart

Our favourite copper play is in Legacy Aggressive Growth, named Pan Global. Their main property in Spain not only has revealed high grade, near surface copper showings that remain open in most directions, but Gruppo Mexico, Atalaya Mining and First Quantum have producing mines mere kilometers away.

Is the EV stock market craze a bubble? Not to those chasing them

Electric car companies exhibited some of the most bubble-like behavior this week that we recall seeing. Not only did a Tesla hit new highs, but EV stocks like Fisker (FSR), Plug Power (PLUG), and Ballard Power (BLDP) soared. Some of the most ridiculous moves we’ve seen were CIIC and SBE, which were SPACs that announced deals. Even Fisker (FSR), which faces fraud concerns, mustered a rally.

While these moves appear excessive and even irrational, it inspired us to buy a SPAC called Northern Genesis for several Legacy portfolios. As a reminder, SPACs, or special purpose acquisition company, are pools of cash raised by a management team that then goes shopping for an asset. If management knows what it is doing, it can be quite lucrative.

Our logic was pretty simple: we were able to spend $1 to buy 90 cents worth of cash in the bank (they have a war chest of $320 million), an extremely competent management team - including the former CEO of Algonquin Power, who grew the company over 8 times from 2008 to when he left earlier this year – and reports by Bloomberg that they’ve been negotiating vending in a Quebec-based EV bus company named Lion Electric.

If the deal fails to materialize, our investment will be backstopped by all that cash in the bank. If a deal does get announced, we think the stock in this current environment would go ballistic. It’s an excellent risk-reward investment. And if this deal fails to materialize, we know that they will eventually find another investment.

What kind exactly? We don’t know exactly but they have stated clearly that it would be a green industry. And with Biden winning and appointing John Kerry as special envoy for climate, green investments themes are hotter than ever.

Noteworthy links:

 

Musings Beyond The Markets

Challenging conventional wisdom is difficult. It’s especially hard when the challenge is totally counterintuitive and the belief widely and long held.

One such assumption that most of us hold and few of us have ever questioned is the effectiveness of television and online advertising. If it didn’t work, why would the world spend over $1 trillion a year on it and why are Facebook and Google – which derives almost the entirety of its revenue from selling advertising – be so wildly successful?

It turns out that there is quite a lot of evidence that the efficacy of such advertising is nowhere near as effective as the advertisers would have us believe. Not even close.

For example, eBay once spent $1 billion on annual advertising and decided to run experiments and studies into how effective their ad spending was. They previously believed that a dollar spent yielded $1.50 in return. But as their in-house economic researchers found, the number was closer to -$0.60 cents. In other words, they spent $1 to get 40 cents back.

Procter and Gamble, which has a huge advertising budget, experimented with cutting its advertising budget by $200 million to see what effect it might have on sales. As far as they could tell, it had no adverse effect at all.

All of this has been illustrated by the provocative cow tippers at Freakonomics, in their podcasts titled “Does Advertising Actually Work?”, part 1 and part 2. It’s well worth any advertiser, consumer and investor’s time.

If advertising isn’t nearly as effective as the world assumes and advertisers assure us, what might happen to the long-term revenues and profitability of Facebook and Google if ad ineffectiveness where to become more widely believed? And how much more profitable would big-spending companies be if they instead decided to curtail some of that apparently wasteful spending?

A lot more independent research is needed. But growing evidence suggest that sanctimonious executives like Mark Zuckerberg may be selling the world a whole lot of snake-oil.

 

Word of the Week

prepotent (adj.) – greater than others in power or influence. “No prepotent man will unsult other people for two consecutive seasons.” – Japanese proverb

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