Fasten your seat belts, turbulence ahead
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Fasten your seat belts, turbulence ahead
The Curious Investor - Apr 26, 2021
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What the Market?
Mr. Market is getting ready to drink from the proverbial firehose. This week may overload Mr. Market with information as major earnings and economic data are released throughout the week. Albeit being an exciting time, it may bring some volatility to the markets this week, as is Mr. Market’s nature. Grab hold of something, turbulence ahead.
What’s driving the market?
100 Days into the Biden Presidency, Joe Biden will address Congress: President Biden’s speech is expected to focus on the economic recovery of the COVID pandemic and addressing global challenges, including climate change and economic competition. Biden will likely shed light on key figures of his first quarter as President, and lay the groundworks for his infrastructure and jobs plan. Market analysts will also be paying close attention to any ambitions to raise taxes, and hopefully some detail regarding his plans to nearly double the capital gains taxes.
Speaking of doubling the capital gains tax: Investors did not take Biden’s proposal to raise capital gains taxes too kindly. The President’s plan would almost double capital gains taxes to 39.6% for wealthy individuals. Despite the initial shock and drop of about 2% in equity markets, the market recovered relatively quickly as most believe the tax hike will be much lower than expected. Furthermore, equities have historically been unphased by such proposals. At worst, this should generate additional volatility in the short-term until a realistic proposal takes form.
What’s an investor to do?
Investor mindset:
Hang on for a volatile week ahead. The slew of economic data and earning reports may prove to be a molotov cocktail for Mr. Market. While most of the expected data is expected to be positive, any speed bumps may scare off some investors driving the bull run on US equity markets. In particular, any further developments on capital gains taxes and inflation data. Stay focused on the long-term directionality and avoid the noise.
Portfolio management:
There is still time to rebalance. This week’s corporate and economic data dump may provide insight into sectors that should reboot in the short-term and others that may benefit from the long-term plans and overarching direction the executive branch has for the economy. Pay close attention to earning reports and agglomeration of economic indicators that should provide solid entry and exit points for some positions.
Keep an eye on the economy:
FOMC meeting: Analysts expect the Fed to reiterate its commitment to a dovish economic recovery approach and acknowledge the improving economic environment. The Fed may also comment on the recent acceleration of inflation and suggest that it is a positive temporary signal of economic recovery. Any major changes to policy would be considered a surprise. Investors may also be looking for the Fed’s plans post recovery (e.g., ending its asset-buying program)
Q1 GDP data: Mr. Market is expecting a strong first quarter for the year (as high as 7% QoQ) pushed by the accelerating vaccination effort and subsequent economic reopening in addition to the impact of two stimulus packages in January and March.
The Curious Investor:
Uber, a play for the reopening movement? On the backdrop of an economic reopening, multiple stimulus packages, and an impending return to office life, ride hailing giant, Uber, is expecting an uptick in demand across its platforms, particularly in the US.
Recovering business lines:
Uber’s traditional ride-hailing service is expected to see a substantial increase in demand as the economy reopens, while its delivery business is expected to remain a high-growth area. With the worst of the pandemic behind us, analysts expect sustained 10%+ growth for the coming years.
Uber’s freight service connecting truck drivers with shippers already represents 9% of Uber’s total revenues and is expected to grow rapidly as the service rolls out globally.
Uber Pass: Uber’s membership program, is beginning to roll out globally and is expected to become the “Amazon Prime of mobility”. The service is expected to become a key driver for customer retention and increase the certainty of cash flows across its mobility and delivery services.
Autonomous driving: In light of the recent Congressional push for more autonomous vehicles, Uber is uniquely poised as an early adopter utilizing its vast network and existing infrastructure for when the technology becomes part of the mainstream, including its significant stake in Aurora.
Exploring new markets to boost growth and stickiness: Back in February Uber announced it was acquiring Drizzy, a leading on-demand alcohol marketplace for $1.1Bn. Drizzy is to be integrated into the UberEats platform to expand their product offerings in food delivery (a key revenue driver during the pandemic). Additionally, earlier this month, Uber’s CEO suggested exploring cannabis delivery once federal laws provide guidance. Simply put, the bigger and better the offering, the harder it is to replace it.
Regulatory Risk - is the gig economy too big to fail? The global regulatory environment remains the biggest challenge for Uber in the short-term. The UK and US have already enacted numerous regulations and it is unlikely that there will be major changes in the short-term. The biggest question is whether gig-economy workers must be classified as full-time employees or contractors. Gig economy employers like Uber have noted that if they are required to treat drivers as full-time employees they will not be able to afford to pay for thousands of drivers who may lose their jobs and those that remain will lose their flexibility to work when and where they want (as it happened in NYC). Over time, more regulation is expected as the gig economy continues to grow and Uber should benefit against its competitors due to its size and global scale. Although classifying drivers as workers or employees poses a short-term financial strain, it drastically reduces the company’s driver acquisition and incentive costs (more fixed than variable operating costs). So far, Uber has done well navigating regulatory hurdles and adapting without compromising its business model.
Cleaning up its act: During the last year, Uber has divested from non-core businesses to focus on high-value products for its customer base while cleaning up its balance sheet. Uber recently divested from its money-losing “flying taxi” and autonomous vehicle units. The company opted to remain involved with significant equity exposure to the acquiring company’s but chose to focus on its main business. This allows Uber to benefit in the long-term without committing resources to the development of these technologies in the short-term. Additionally, Uber should benefit from its equity stakes in Didi (15%) and Grab (16%), expected to go public shortly. Both equity positions are valued around $9bn, or about 60% below what the market is pricing Didi and Grab at.
Concluding remarks: Uber has a history of losing money from the get-go. Recently it’s CEO commented that they expect the company to become profitable on an adjusted quarterly EBITDA basis by the end of 2021. Uber aims to achieve this through substantial improvements to operating expenditures and sustained sales growth in core businesses (our expectation would be closer to mid/late 2022). Although a bit pricey at current levels due to a recent bull run, we believe the company has strong potential for both short-term and long-term growth due to the economic reopening in the coming months and as a leading player in the growing mobility space.
Upcoming IPOs:
Website builder Squarespace files for direct listing
Earnings Calendar:
Tech: Microsoft, Pinterest, Facebook, eBay, Apple, Google, Amazon, Twitter, GrubHub, Tesla
Consumer Cyclical: MGM Resorts, Molson Coors, Domino’s, Yum Brands, Starbucks, Royal Caribbean, Keurig Dr. Pepper, JetBlue, Six Flags, Sherwin-Williams
Consumer Defensive: Altria, Caterpillar, 3M, Kraft-Heinz, McDonalds, Mondelez, Thermo Fisher Scientific, P&G
Financials: LendingTree, Visa, Mastercard, FiServ, Capital One, Bank of America, T Rowe Price, S&P Global, Intercontinental Exchange, Moody’s, Wells Fargo, Berkshire Hathaway
WTM Watchlist
Economic Calendar:
Monday: ECB speeches, US durable goods orders
Tuesday: Bank of Japan’s Interest rate decision and outlook report, US Housing Price Index, Consumer Confidence and Redbook Index, FOMC Meeting
Wednesday: Australian CPI, OPEC Meeting, ECB President speech, Federal Reserve interest rate decision, monetary policy statement and press conference
Thursday: Eurozone economic bulletin, consumer confidence and business climate, US Jobless claims, Q1 GDP figures, Japanese CPI, unemployment rate and industrial production
Friday: Chinese PMI, Eurozone CPI, Q1 GDP figures, unemployment rate, US personal spending, Consumer Sentiment Index, Purchasing Managers Index and Personal Consumption Expenditure Price Index
If you didn’t know, now you know
There have been a series of nightly clashes in Jerusalem as Israeli police attempt to keep two groups of protesters apart, Palestinian youth and ultra-nationalist Israeli’s. Additionally, a peace rally was held minutes away from the protest site by Israeli peace activists. The violence escalated when Palestinian militants fired 36 rockets at Israel after a call from Gaza’s rulers, Hamas, for a joint Palestinian resistance in Jerusalem. Israel retaliated with air strikes, though no casualties were reported on either side of the border.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
3-2-1 by James Clear. One of our favorite newsletters, every week Atomic Habits author, James Clear, sends out 3 short ideas, 2 quotes, and 1 question to ponder.
There’s a Name for the Blah you’re Feeling: It’s Called Languishing by Adam Grant. Renowned psychologist and famed author of best sellers like Originals and Think Again, provides a humane introspection into how most of us are feeling about the pandemic. A must read for those feeling at a loss of energy and direction.
Good News!
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Disclaimer
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.