At Tanuki Capital, we are dedicated to meeting every Sunday to discuss markets when the news is quiet and the ticker tape has stopped. It provides us a valuable opportunity to talk about the major events of the past week, put them in context of the broader market, and pontificate about what may lie ahead.
This practice was inspired by the Japanese tradition of Radio Taiso (calisthenics), in which employees at many of Japan's largest corporations collectively stand-up and stretch for 10-15 minutes before the start of the workday.
We believe the collective stretching of our minds on Sundays stimulates us for the week ahead, and we wanted to share our market taiso with the SA community on a semi-regular basis. As with any weekly exercise, there are varying degrees of results, but we believe it is the regularity that bears fruit.
Our market Taiso is loosely organized into the following silos:
1) US markets (NASDAQ:QQQ); (NYSEARCA:SPY); (NYSEARCA:DIA); 2) Energy/ Commodities; 3) China/ Emerging Markets; 4) Japan; 5) Banking/ Capital 6) Wildcard Topics. Not all topics are covered every week.
- Lending Club (NYSE: LC) continues to show problems with its business model. The automated underwriting systems used by LC and other P2P lenders failed to detect multiple loans by different P2P lending houses to the same borrower. This practice is known as stacking. We contend that human judgment cannot be replaced by algorithms. In the end, Fintech, as the next great revolution in finance, may amount to little more an unregulated industry known for undisciplined loan origination practices.
- The weak IPO market appears to be waiting for an Uber listing for revitalization. The Chief Marketing Officer of Iron Source, an"IPO-ready" Israeli private tech firm, was quoted saying: "We are ready to act once the market changes. We are waiting for one of the giants, such as Uber, to put life in the markets."
- Spotify who will likely be pressured into an IPO within the next year signaled that the company was not for sale should a private buyer emerge. Despite a weak IPO market and annual loses exceeding US $200 million and growing, Spotify's Co-founder had this to say:
"My selfish ambition with Spotify is just trying to show…that we can create one of those super companies here in Europe. The No. 1 advice I tell everyone is 'don't sell', because that's the biggest problem we have. All these things could grow gigantic if you just kept the course and kept doing what you're doing,"
This reinforces an ever growing perception that Unicorn executives are better suited at stoking their egos than profits.
- Fortune reported a potential tie-up between Uber (Private:UBER) and Chrysler-Fiat. The deal would suggest Chrysler-Fiat has no plans to launch its own ride sharing service. This tie-up bring into focus that Chrysler-Fiat determined it was not worth using its own capital to compete with Uber. However, it raises the question of whether it is responsible for other tech and automobile companies to deploy capital to produce duplicative technologies such as autonomous driving and ride-sharing?
- WeWork, a Unicorn tech start-up credited with revolutionizing the leasing of office space, announced that it was laying off 7% of its workforce and implementing a hiring freeze citing a "talent assessment". Either way you read it this is bad for WeWork. They either are cutting costs to reduce capital burn or management engaged in such poor hiring practices that 7% of the workforce was deemed "untalented".
China/ Emerging Markets
- Saudia Arabia's US $3.5 billion investment in Uber makes sense for a country that is trying to diversify away from oil. However, we can't help but remember when EM market sovereign wealth funds invested heavily in US banks right before the 2008 sub-prime market collapse. Is Saudi Arabia's investment a sign of a market top for Silicon Valley unicorns?
- The Economist published an interesting article pointing out growing problem of unproductive infrastructure spending in Africa. Much of Africa's Chinese led rail infrastructure investment will likely deteriorate due to poor construction quality/ planning and a lack of upkeep due to the lack of profitable operation.
- This trend we are seeing in wasted capital for African infrastructure appears to mirroring similar trends in the US tech space in which investments in autonomous driving and gig economy app based platforms are increasingly redundant likely reducing the long term return for the capital invested. Will welook back on the post 2009 "recovery", driven in largely by technology (unicorns), energy (shale/ deep water drilling) and government infrastructure investment, as the "Three Card Monte" recovery?
- India's Smartphone Market: What's good for India may be bad for Apple (NASDAQ: AAPL). Smartphone sales are expected to grow 29.5% in India in 2016, but the average selling price is $70 and 50% of the market is under $120 per unit. With Apple unable to win a "state of the art" technology exemption from the Indian Government, iPhones will continue to be priced high and Apples next big growth market may not be so big after all.
SA Article of The Week
SA Contributor 720 Global put out an interesting read titled: Loan Delinquencies Signal For Caution
Graph of The Week
With less than two weeks until the British referendum on EU membership, we wanted to highlight that the race is tight. According to the below graphic from the Telegraph, Brexit risk is real.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes only.