SITALWeek #191 5-5-19

SITALWeek #191

Stuff I thought about last week 5-5-19

Greetings – my 1999 dotcom “spidey-sense” is starting to tingle a little more than usual these days as a junk food veggie burger company rides up 70% on an IPO, Berkshire invests in Amazon after its internal managers underperform the S&P 500 for a decade, and Softbank is considering IPO’ing its $100B venture fund. Don’t miss the big renaissance taking place for the mighty aluminum can. Is the value of your Tesla going to rise 5 fold? Vanguard has a patent on avoiding mutual fund taxes. And, what magic tricks teach us about investing. As always, respond back with any feedback.

[Please read important disclaimers at the bottom of this post]

Stuff about Innovation and Technology

Ball Corp reported this week that global beverage can shipments accelerated to 8% growth over Q1 2018, driven by 20% growth in specialty can sizes. The sustainability-driven aluminum can renaissance is just getting started, and the material continues to see an expansion of end markets, including potential to replace the ubiquitous plastic cup. Makers of alcoholic and non-alcoholic beverages are just beginning to shift existing and new drinks from PET to aluminum. It’s estimated that around 70% of all aluminum is still in circulation due to its infinite recyclability. Ball is the largest can maker in the US, Europe, and South America. One growing bottleneck is in filling capacity to meet demand. It’s been a long time since this industry was talking about bottlenecks. "Beverage can growth appears to be accelerating to levels that are stronger and more sustainable than in the past 25 plus years.”

Elon Musk made the point to investors this week that Teslas will appreciate in value to $150,000 or more (he claimed 5x) as they transform into productive assets as autonomous robo-taxis and make their owners money. We can make a few assumptions to understand this seemingly outrageous, but possibly true suggestion starting with the 100 hours a week Elon has suggested your Tesla can operate as an autonomous taxi on its network. Part of these hours will be downtime as a car moves from a dropoff to a pickup or goes to charge. But let’s say this could generate maybe $500+ weekly after Tesla’s take rate for the car owner. This will come with some obvious wear and shortened battery life – hard for me to put a number on that, but let’s say you end up with a 40% margin after costs including electricity, which would be $200/week or $10,000/yr. If that’s over five years with some meaningful discount rate (not to mention, whose insurance covers this!?), I think you can at least make a case you might be able to drive a Tesla for free (or at least very low cost) by renting it to Tesla’s robo-taxi service. It’s all hand waving and guessing for now, but this idea that a car might not lose its value would be a large paradigm shift to say the least. And, as we are more likely to see lower overall car ownership and the rise of autonomous fleets like Waymo, you can quickly see how productive these assets could be, or on the flip side, how much cheaper it might be to use a robo-taxi service compared to owning your own (non auto-fleet) vehicle. So, if you are buying a Tesla today, you might actually be providing funding with a predictable IRR to Tesla’s taxi service if this version of the future comes true. And, as the WSJ points out, Lyft and Uber’s driver availability problem isn’t getting any easier.

Gen Z (7-22 year olds) loves the mall according to a study (funded by shopping centers): “Around 95 percent of them visited a physical shopping center in a three-month period in 2018, as opposed to just 75 percent of millennials and 58 percent of Gen X, according to an International Council of Shopping Centers study. And they genuinely like it; three-quarters of them said going to a brick-and-mortar store was a better experience than online, ICSC found.” Related – this article suggests real world retail’s slowdown has more to do with private equity mishandling of assets. That’s probably true in some cases; however, what seems obvious from both of these articles is that there is a large subset of retail use cases that can provide what consumers want and possibly save some malls.

Walmart is stepping up investment in originals to air on its Vudu streaming service with the reboot of “Mr. Mom” premiering as an ad-supported (mostly product placements) show this summer. Amazon is investing $7B a year in video content for Prime members on top of its new investment for 1-day shipping. Walmart has suggested it will counter the 1-day shipping as well, but, frankly, doesn’t have the logistics footprint to do that beyond the limited SKUs found in their stores. It’s not clear to me that the Amazon video investment is paying off, and, if Walmart is serious about video, they’d be better off acquiring a large pool of library content and studio capabilities like CBS+Viacom. (Meanwhile this tech-driven Walmart store concept is loaded with creepy cameras – a stark contrast to the slick and integrated Amazon Go stores which have lightyears better tech in them.)

Amazon’s freight brokerage platform went live with initial indications that it undercuts incumbents like C.H. Robinson by around 30%. No doubt that logistics for other companies will be funding Amazon’s push into 1-day and ultimately same-day delivery for everything they sell.

Amazon is looking to produce breaking crime stories based on footage from Ring (owned by Amazon) doorbells installed in customers’ homes. Here is the job opening:

“The Managing Editor, News will work on an exciting new opportunity within Ring to manage a team of news editors who deliver breaking crime news alerts to our neighbors. This position is best suited for a candidate with experience and passion for journalism, crime reporting, and people management. Having a knack for engaging storytelling that packs a punch and a strong nose for useful content are core skills that are essential to the success of this role.”

Hulu held an event for advertisers this week where they indicated that they now have 28M subscribers. The company also announced some big changes to ads that will make the platform much more user friendly: binge advertising, for example, will allow advertisers to offer every 3rd show commercial free, or, more creatively, DoorDash could buy a slot when you are a few episodes in to recommend ordering some food to binge on as well. There will also be new static ads on the pause screen, which will help fund a new cap of 90 seconds on ad breaks.

Online pet supplies company filed for an IPO as Petsmart and private equity backers float a minority of the shares to the public (mainly to fund the heavy losses at the $3.5B revenue e-commerce company). The general reaction was one of cynicism, but this is a play for scale, customer service, and the ability to serve a specialized, large niche of retail through a focused online effort. While Chewy’s margins remain negative, this is mostly due to investment in growth. The company also has optionality in pet pharmacy and other areas, including private label.  While it might pay to be skeptical, there is value in attacking specialized markets like the pet supplies industry; however, the complication here is the Petsmart ownership: can the parent company shift its own retail base from supplies to services to help the online subsidiary compound network effects, or will there be existential tension?

Single-chip digital radar is closer to becoming a reality, which would allow for “cognitive radar” – multiple radar chips combining their data for a better picture – for autonomous cars.

Hillsboro, Oregon police are using Amazon’s facial recognition tools extensively. Most of this story is troubling, and I believe Amazon, in their quest to get data to hone their algorithms, is simply being too aggressive in allowing this type of high-stakes experimental use as part of their terms of service. The police can even upload an artist sketch (based on the potentially unreliable recollections of a witness) into the database, so, if you walk into an Ace Hardware and happen to resemble a suspect, you better have a good attorney. I’ll reiterate my point last week about going long sunglasses and hat makers until the US law enforcement gets a better handle on appropriate use of this new technology.

Code for America used an algorithm to find and expunge over 8,000 cannabis-related criminal convictions (now obselete thanks to CA Proposition 64) in San Francisco. The organization has also reduced the time to qualify for food stamps from an hour to minutes and has other projects underway to speed up government bottlenecks.

This week’s reports from industrial suppliers Cognex (machine vision for logistics, manufacturing and other industrial applications) and National Instruments (testing/measurement tools and software for a range of end markets) disclosed soft results. While the results were inline with similar reports from the semiconductor supply chain, there is hope building nearly unanimously for a 2nd half 2019 recovery. Some of that optimism is easy to understand and explain, but most of it seems to be built only on hope, as end markets like autos remain weak, and there appears to be no trade deal is in sight (more on that below in the Macro section).

Google launches CallJoy, a cool AI assistant for small businesses that answers phones, directs calls, takes messages etc. Soon, if you have an Android phone, Google’s AI Duplex service will call Google’s AI CallJoy and have a conversation with itself. CallJoy comes from Google’s in-house incubator.

Miscellaneous Stuff

If you want to learn more about investing, then study how magic tricks work. Magic tricks are about misdirection, storytelling and the shortcomings of the human brain. This encompasses all you need to know to make better investing decisions: stock prices and their movements are misdirection – they contain no material information related to the long term value of a business. Stories told by others (and stories we tell ourselves) are hindrances to good investment decisions because they obscure the Truth. And, cognitive bias will often hide the Truth from you. So, if you want to get a stock right for the long term, don't look where the magician wants your attention to go, instead find where the ball is really hidden. Here is an excellent new class out from Penn & Teller on Master Class, which has some great intellectual content on magic that will make you a better investor. As Teller says, the lie you tell yourself is the most believable.

A Rocky Mountain Institute editorial in the NYT proposes phasing out natural gas for heating: replacing gas boilers with heat pumps (with an electrical drive, they work like reverse a/c condensers; we have an LG system in our house that does heating and cooling this way – I am a little skeptical that heat pumps will work well in cold climates for typically-constructed houses) and gas stoves with induction units. This lofty suggestion would also seem to require a much more robust electrical grid or a significant increase in distributed battery storage. Nonetheless, it’s an interesting suggestion with potentially big ramifications.

Amsterdam will ban anything with a tailpipe by 2030 within city limits. Next year, they are starting with a ban on diesel cars older than 15 years, and the city will continue to gradually phase out all emitting vehicles, including busses, boats, and mopeds.

The meat supply chain is under increasing scrutiny and is now a hot political issue: this article has a great overview of what’s happening in the meat debate. Clean meat – grown in labs from cells fed nutrients similar to an animal’s natural diet – is something I’ve mentioned in the past as an important development for the global food supply chain. However, don’t confuse clean meat with veggie burgers made mostly from junk food ingredients like Beyond Meat, which IPO’d with a $3B valuation this week.

Willie Nelson Interview Excerpt:

“They say people who smoke pot have a short-term memory. Maybe that’s good, you know?


Because [otherwise] you start remembering a lot of negative things that you’re not supposed to remember. And the next thing you know, you’re back drinking whiskey.

So weed helps you forget about stuff you don’t wanna think about.

Yeah. What’s more important is, there’s nothing I can do about what happened a while ago. Nothing I can do about what’s going to happen in a minute. Right now? I can try to pretty much control everything.

Are there times you don’t remember stuff that you wish you had remembered because you were high?

Oh, probably. But I forgot it.

Stuff about Geopolitics, Economics, and the Finance Industry

Redfin reports the 2nd sequential quarterly drop in home sales over $2M, indicating something fishy in high-end home markets. The recent changes to state and local tax deductions are a probable culprit, and the decrease in allowed mortgage interest deductions is likely having an impact as well. The moves are highly location dependent, but the total market for homes over $2M dropped 16% in Q1. Related: California’s population growth was the slowest in recorded history in 2018 at .47%.

Vanguard holds a patent on a tax avoidance mechanism for mutual funds. I believe that the current double taxation of mutual fund assets makes no sense. If you are going to pay capital gains when you sell a fund, why are you also paying gains when a manager sells something inside that fund first? ETFs get around this, and apparently so does Vanguard with the trick explained in this article. Vanguard’s patent expires in 2023, but, by then, it seems unlikely there will be much left of the taxable account mutual fund industry as active ETFs come online along with the existing passives trend.

“...thanks to an obscure loophole in the tax code, ETFs almost always avoid incurring taxable gains.

The rule says that a fund can avoid recognizing taxable gains on an appreciated stock if the shares are used to pay off a withdrawing investor. The rule applies to both ETFs and mutual funds, but mutual funds rarely take advantage of it because their investors almost always want cash.

ETFs use it all the time, because they don’t transact directly with regular investors. Instead, they deal with Wall Street middlemen such as banks and market makers. It’s those firms, not retail investors, that expand the ETF by depositing assets or shrink it by withdrawing. These transactions are usually done with stocks rather than cash. The middlemen, in turn, trade with regular investors who want to buy and sell ETF shares.”

Shareholder proposals are causing companies to cave early to demands for improving their social and environmental responsibilities.

After a decade of underperforming the S&P 500, Buffett’s in-house managers buy into Amazon for the first time...oh my.

Don’t blame robots and AI for taking jobs: it’s more likely just a policy failure as the current rate of job obsolescence isn’t any higher than it has been for past technology shifts.

Softbank looking to IPO its $100B Gambling Fund so investors in it can cash out...umm...Bloomberg refers to this as “unusual” – yeah, that’s a good word for it. The Softbank VC fund holds a position in soon-to-IPO WeWork, which reports the made-up figure “community adjusted EBITDA” for earnings.

Trade war with China has so far resulted in 40 Taiwanese companies with operations in China pledging to bring cash and investment back to Taiwan with $6.7B in investments and 21,000 new jobs. This shift will seem a little circular if and when Taiwan slips back under China’s control. Speaking of the trade war with China, it seems like we’ve seen headlines monthly for a year that a resolution is just around the corner. The latest from the FT indicates Trump has dropped his high-priority cyber theft provisions to hasten a deal. Right now the US has record low unemployment and China is suffering, so I don’t know what Trump’s rush would be. As I’ve written extensively in the past, the US-China-Taiwan situation is highly complex. And, it wouldn’t surprise me to see conclusion of negotiations delayed until the next election cycle so Trump can make headlines in summer 2020.


Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. I may own long or short positions in stocks discussed in this newsletter. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress, especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny sorry.