Big Cap Tech Investments- By NEIL SISKIND

People are suggesting that if you believe that we’ll have higher input costs and higher interest rates you should sell tech stocks.

Baloney.

It’s just the opposite (at least, for long term investors).

If there is inflation, and if there are higher costs of capital, it takes 2 things to survive in that environment:

Scale and technology.

Scale
Big cap tech companies have the scale to protect- and grow- earnings and, thus, their stock prices, in times of rising input costs and higher costs of capital.

Technology
As for anyone else trying to protect their own businesses from these things – they need the technology that (“certain”) technology companies provide- driving these certain technology earnings higher.

Great earnings trump the discount rates. Great earning overshadow the discount rates and make it less relevant, until yields go very, very high (over 4%). And even then, the cost of capital will be so high, that only the biggest companies will be able to grow earnings, and can, thus, grow market-share- so, while money should be allocated to Treasuries at such time, and, perhaps, gold and commodities, long term investments in (certain) big cap tech should be held or new investments made.

AirBNB Has Challenges to Revenue Growth- by NEIL SISKIND

AirBNB has a revenues ceiling for 3 reasons:

1. Local laws prevent short term rentals for existing homeowners, which get enforced in many cases (not all). For example, Boca Raton cracks down. West Palm Beach is less strict.

2. Interest rates and higher house prices makes it less profitable for short term owners- as their carrying costs are too high. This means less new rentals for AirBNB.

3. Low interest rates have added so much stock that it -like anything else, has a deflationary effect (lie REVPAR). Especially as hotels come back on line. Many homes for rent in one place- the places that allow it- has a limit until prices take a hit. This disinflation harms AirBNB commissions.

There will be base effects for sure in the next year, but I think there is a ceiling on new hosts. They would have to add new services- which is possible. I’m just pointing out that this is as much a real estate business as a travel business.

The Only Way We’ll Have Persistent 2%-Plus Inflation is Through Onshoring Legislation (or Executive Order) or a “De Facto” Onshoring Policy- by NEIL SISKIND

The conversion of i. labor restriction below what we experienced in 2019 that leads to wage growth, and ii. energy and commodity demand that outstrips supply, is the only path to 2% plus inflation- and the only path to this outcome is through legislation to mandate onshoring, or a large national infrastructure plan.

Legislation (Executive Order) has been signed mandating that certain critical products be manufactured inshore. Whether additional products are added to that list or if products beyond those deemed critical will receive a similar mandate is an unknown If a product is not directly related to national security, it could not be a law or Executive Order, it would have to be laws assessing penalties on imports- tariffs (this is an impossible scenario when trade deals are considered. In the case of critical products, extreme tariffs- or outright restrictions on imports would be required to protect domestic manufacturing).

An infrastructure plan will cause an enormous demand for labor, and that labor pool will be innately domestic labor. Because the labor will be skilled, it will cause wage growth as corporate America has to compete with the government (it would even create vast infrastructure imbalances and unfixable shortages in certain skills).

Combine either of the above causes of a significantly tighter US labor market with energy supply restrictions due to federal law, White House policy, and or corporate policy, then the principal of “demand destruction” would not be engaged , as it does with retail  consumers. And if China joins the infrastructure fray as a way to stimulate its government to offset weak internal consumer growth, prices in the commodity complex will skyrocket.

Rising commodity demand without “demand destruction” (which is more likely if/as domestic oil production and supply is constrained) and the U.S. govt (and it’s contractors) sucking-up domestic labor- both through a national infrastructure plan- is the only way we’ll get structural inflation; and if we do get such a national plan …

the idea of  inflation being “merely transitory” will be excised from the conversation.

And it appears that alternative energy development (at the expense of fossil fuels) not only as a political and social and environmental policy, but also as an infrastructure and job creator, is at the top of the Biden and Democrat agendas. It also appears that legislation to mandate the movement of “critical product” supply chains onshore is a priority- making domestic labor even more popular.

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Apps and SPACS- by NEIL SISKIND

  • A friend of mine wanted to develop an App. I explained to her that and app is an online business. The App doesn’t make money- the underlying company has to make money. The app is just a “method” of use. Same for SPACS. A SPAC is a “method”. It’s not a business. The underlying business has to be good. People hear these buzzwords and forget that these “methods” of doing things have to have good businesses underneath them. These are just methods of getting the service or the shares to users and investors. You can’t build or invest in a general “method”. There has to be a good business model and plan beneath it.

Small Businesses and Small Cap Stocks Have an Inherent Structural Flaw- by NEIL SISKIND

Small Businesses and Small Cap Stocks Have an Inherent Structural Flaw- by NEIL SISKIND

That flaw?

No Pricing Power in the Internet age.

Large companies and small businesses get new business, primarily, in the same way (aside from direct proposals)- from the Internet.

Customers (businesses and individuals) shop based on price.

Large companies can offer lower prices, and can advertise those lower prices and advertise to get phone calls from people seeking lower prices in a bigger way than can small businesses.

Large companies can use low prices as loss-leaders to outbid their respective competition.

As long as customers can find all potential sources of products in one place – the Internet- then small businesses will have difficulty landing new customers or expanding their margins with existing customers.

The more advanced and sophisticated shipping gets, the less that geography and convenience will matter.

As for business services, the larger companies will benefit from scale to lower labor costs and win business.

When geography and service matter less than cost, when the Internet offers customers access to all available competitors offerings and prices, equally, and when the Internet removes proximity of a company to its customers from the equation, a small business (and a small cap stock) can never gain market share, and can never raise prices- even as its costs rise.

The Internet creates a structural condition which is a structural flaw in small businesses (and small cap stocks). They can’t lower prices low enough to compete with companies that have scale and economies of scale, and they can’t raise their prices high enough to cover rising costs. This is why you often hear small companies tout their higher level of service. But that is, often, not enough to survive- and it costs a lot of money to provide better service by paying more money to the labor that has to provide that better service, while losing time to make more sales. Better service for the same dollar of revenues as a larger company makes is no long-term survival strategy- and is surely no valid long-term growth strategy. In fact, larger companies, ultimately, by virtue of scaling with low prices, end-up in a good position to increase service levels and take away the only advantage that remained for their smaller competitors.

Safe ROI in Place of Safe Yield

If you own real estate or stocks, you can get dividends and rent, but you also can get ROI- appreciation. But- do people also buy “safe assets” just for the ROI, irrespective of yield, as a safe-haven yield replacement?

For example, I give my broker 4 stocks I would buy if they have down days- MSFT, APPLE, AMZN, MA- for example. And I give low prices to buy them at. If any of them fall to that price, I buy “with the idea that I can easily get 4% up from there”. So if I can’t get 4% on a Treasury, I pretty much know that if I buy MSFT or MA or APPLE on a very down day, I will get 4% higher (and/or more) from there at some point in the year in the form of ROI. There’s little risk to that as long as I’m willing to wait to buy low.

It’s just a strategy to use what is, largely, modest ROI expectations in safe companies to safely replace a safe haven. It can be even better than a dividend payer stock, which can lose principle. Plus, a company like AAPL has a small dividend to boot.

The key to replacing safe yield with safe ROI is that the investment has to be in: i. a very safe company with great cash flow and a great balance sheet, such that is a de facto safe haven; ii. a stock that tends to move a lot; iii. a company in the right secular trend; and iv. one has to be patient enough to buy at a low price. This is made easier when you have 4-6 stocks on your radar.

The Big Misconception About Tech Stocks, Valuations, and Interest Rates- By NEIL SISKIND

It’s the biggest misconception that high valuation tech will suffer most from rising interest rates (and form higher inflation). That is a mistake. Old thinking.

Here are 11 reasons that high valuation tech stocks (with good earnings), will do well in a rising interest rate (and rising inflation) environment:

i. Rising interest rates reflect a growing economy in which technology companies will benefit and thrive;

ii. Low growth (as rising interest rates slow the economy) requires high growth investments;

iii. low growth (as rising interest rates slow the economy) requires technology to maintain or lower costs- that’s earnings growth for tech companies;

iv. high inflation (which we won’t have, but for arguments sake), requires technology for better productivity- that means earnings growth;

v. high inflation requires investors to own stocks with pricing power (i.e. proprietary and high demand products);

vi. many of today’s technology companies with high P/E ratios have very strong balance sheets and strong cash flows;

vii. the large companies move into other industries, sectors, or products at-will;

viii. over the course of 2020, large cap companies, especially large cap technology companies, have taken enormous amounts of market-share in their respective industries;

ix. Rising borrowing costs favor large companies over their smaller competitors;

x. large companies, such as large tech companies, dominate their industries and have pricing power, and will way-outperform value stocks and cyclical stocks- or, will overtake or revolutionize companies in those categories; and

xi. the safe haven alternative (Treasuries) has to be very attractive (more than 2%) to outweigh the growth that a safe large cap tech stock “can” offer investors- especially stocks like AAPL that offer yield in addition to likely growth in market-share, revenues, earnings. and stock price.

“Some” allocation to Treasuries would be warranted and would occur if yields rise. But it would not be enough to change the technology company and stock growth propositions, and the investment therein- unless yields got to over 3%. And even then, it’s unlikely I’d sell my MSFT to buy a Treasury bond.