Iron and Steel

Jeff Bezos, Bruce Lee, and Chuck Akre Walk into a Bar…

Alex here with your latest Friday Macro Musings…

Latest Articles/Podcasts/Videos —

A Monday Dozen — Alex’s latest chart pack featuring this week’s most interesting macro charts. Check this post out to get a fresh update on how markets are positioned and where equities are most likely to travel from here.

Articles I’m reading —

@investing_city compiled and shared on the twitters all of Amazon’s annual Shareholder Letters (link here).

Bezos is one of the most lucid thinkers in business. His Shareholder Letters are chock full of gems on how to run a company. I suggest you start with my favorite two (1) the 2004 letter where he gives the best explanation that I’ve come across on why free cash flow per share is a significantly better gauge of a businesses’ health than earnings per share (link here) and then (2) the 2017 letter where he dissects the concept of “high-standards” and how one can apply them (link here).

Patrick O’Shaughnessy said this 1996 paper titled “Increasing Returns and the New World of Business” was one of the most interesting papers he’d read this year, and I can see why. As the title suggests, the paper talks about how the new economy of ‘bits’ flips the old economic law of “diminishing returns” on its head. It’s a good read and apparently was edited by Cormac McCarthy. Here’s the link and a cut.

In his book Microcosm, technology thinker George Gilder remarked, “The central event of the twentieth century is the overthrow of matter. In technology, economics, and the politics of nations, wealth in the form of physical resources is steadily declining in value and significance. The powers of mind are everywhere ascendant over the brute force of things.” As the economy shifts steadily away from the brute force of things into the powers of mind, from resource-based bulk processing into knowledge-based design and reproduction, so it is shifting from a base of diminishing returns to one of increasing returns. A new economics—one very different from that in the textbooks—now applies, and nowhere is this more true than in high technology. Success will strongly favor those who understand this new way of thinking.

Lastly, this one isn’t investing related but it’s something I reread every once in a while and thought I’d share it with you guys. It’s from Maria Popova’s wonderful blog Brainpickings where she shares some writings from Bruce Lee’s personal diary. Here’s the link and a cut.

I know that I have the ability to ACHIEVE the object of my DEFINITE PURPOSE in life; therefore I DEMAND of myself persistent, continuous action toward its attainment, and I here and now promise to render such action.

I realize the DOMINATING THOUGHTS of my mind will eventually reproduce themselves in outward, physical action, and gradually transform themselves into physical reality; therefore I will CONCENTRATE my thoughts for 30 min. daily upon the task of thinking of the person I intend to become, thereby creating in my mind a clear MENTAL PICTURE.

I know through the principle of auto-suggestion, any desire that I PERSISTENTLY hold will eventually seek expression through some practical means of attaining the object back of it; therefore, I will devote 10 min. daily to DEMANDING of myself the development of SELF-CONFIDENCE.

I have clearly written down a description of my DEFINITE CHIEF AIM in life, and I will never stop trying until I shall have developed sufficient self-confidence for its attainment.

If you’re interested in learning more about Bruce Lee’s philosophy, I recommend picking up his book The Tao of Jeet Kune Do. It’s a fav of mine.

Charts I’m looking at—

 A new global rate cutting cycle has begun… chart via NDR & @MacroCharts.

The big question, of course, is whether this is the start of a rate cutting cycle into a recession or a rate cut sans recession?

My money is on the latter.

Podcast I’m listening to —

The latest Invest like the Best interview with Chuck Akre of Akre Capital Management is so so good. Chuck has decades of experience in compounding wealth and shares a lot of the wisdom he’s picked up along the way. He talks about the pricing power of dominatrices (seriously, he does) and also covers his firm’s “three-legged stool” model for what they look for in a company, which are:

  1. An extraordinary business
  2. Talented management
  3. Great reinvestment opportunities and track record

Smart and simple is often best and a lot of what Chuck preaches is patience and a long-term investment horizon. Like ole’ Mr. Omaha says, “The stock market is a device for transferring money from the impatient to the patient.”

Here’s the link to the podcast and here’s a link to a Talk at Google Chuck did a few years back, which I also highly recommend.

Video I’m Watching —

ValueDACH published this great Q&A with two talented up and coming value fund managers, Steven Wood of Greenwood Investors and Fred Liu of Hayden Capital. They breakdown a few of their favorite holdings and explain why they like them, stocks like Zooplus, TripAdvisor, and Berkshire. Here’s the link and h/t to our resident value investor, Mr. Bean, for the find (sidenote: if you’re not already, you should most definitely follow Mr. Bean on twitter here).

Trade I’m considering —

This is a TARGET RICH environment, especially for us macro traders. Lots of moving parts and excellent setups happening at the moment. Fun times…  Anyways, I shared this one the other day in our internal forum. It’s a Russian steel stock, Mechel (MTL). Yea, I know, typically not something you want to touch even with a ten-foot pole and your least favorite friend holding. But hear me out… take a look at a chart of the ruble when you get a chance. It’s breaking out against the dollar. That’s good for Russian stocks.

I’ve been looking at steel companies in general over the last month. There’s a lot of deep value stocks in the space if you know how to weed out the terminally leveraged. Plus, the global steel industry is just about to come out of its deepest capital cycle trough in history, which usually makes for a good time to buy.

The big unknown, of course, is China which is not only the largest consumer of iron and steel but the largest producer, as well. There’s always a big risk there because you never really know what’s going on but the CCP has publicly stated that it’s a top priority of theirs to reduce pollution and cut the supply overhang which both equates to closing mills. Also, India is just entering the Wealth S-curve and that means exponential demand growth in a country of 1.3bn people is only getting started.

Anyways, it’s a purely speculative play. Do it for a trade and not an investment but cyclical stocks are always just trades, regardless. The chart setup is fantastic. It looks like it’s getting ready to run. Reminds me of the last time I pitched this stock, which was in the first MIR (Macro Intelligence Report) that we sent out to readers in the Fall of 16’. The stock was trading for around $2 then and shot up over 200% in the following months.

Quote I’m pondering —

Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason, and is conducive to the good and benefit of one and all, then accept it and live up to it. ~ Siddhartha Gautama

Amen.

If you’re not already, be sure to follow me on Twitter: @MacroOps. I post my mindless drivel there daily.

Have a great weekend.

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