13 Nov Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +1.3% |
| Nasdaq | +2.8% |
| Aussie All Ords | +0.0% |
The positive buying sentiment continued last week. Up until Wednesday at least. That 7 session winning streak was the best for 2 years.
But a poor 30-year bond auction brought it to an end on Thursday. In fact, it was the single worst 30-year auction since at least 2011 and shows a reduced appetite for buying US debt. Less buyers mean yields up and as we have seen in the last 3 months, higher yields mean lower stock prices.
Until buyers had to play catch up on Friday and ended the week on a high.
Shortly after that auction on Thursday, Powell spoke at an IMF event. He stated his view that he believes there is a long road ahead in getting inflation back to the 2% target and that the FOMC is “not confident” in having reached interest rates that will bring inflation back to that target. While not dismissing the risk of overtightening, Powell went on to reiterate that “if it becomes appropriate to tighten policy further, we will not hesitate to do so”.
US rates are at 5% and their inflation is at 3.5%.
Contrast that to our RBA and new Governor Bullock.
Whilst a horse race was stopping the nation, Bullock stopped my take-away coffees with another interest rate increase which will take even more of my tight weekly budget.
Australian rates are now 4.35% and inflation is 5.4%.
But, rather than being worried about inflation like the US, Bullock is choosing to stick her head in the sand and hope it all turns out ok in the long run.
In her statement, she basically said no more rate rises unless there is a change to the long-term forecast of inflation. That forecast is for inflation to return to 2% by 2025.
We all know how good the RBA is at forecasts and if we listened to them we would still be on zero rates now. So I pay as much attention to their projections as I do to who is getting kicked out of the Big Brother house this week.
But she has me scared. Very scared. About what happens in the second half of next year.
How can she sit there comfortably with 5.4% inflation and just 4.35% rates while Powell is not confident his 5% rates will deal with his low 3.5% inflation?
By choosing to not act now, she will be forced to act twice as hard later. That’s going to hurt.
I was expecting a different outlook from the RBA. One where they say they are willing to keep raising rates until inflation is beaten. That would have given good support to the little Aussie battler. Instead, we got the opposite. A hawkish Fed and dovish RBA. That puts my bottom in the Aussie dollar call in question.
I still think the AUD heads higher, it’s just going to take longer than I expected.
One stock I own and One I am going to buy
I have been an owner of TradeDesk (Nasdaq:TTD) for a couple of years now and it has done well for me.
The Trade Desk is a technology company that specialises in providing a platform for digital advertising. The platform is designed to optimize and streamline the process of buying and managing advertising inventory in real-time through programmatic advertising. Programmatic advertising involves the use of algorithms and automated systems to buy and optimize ad placements, enabling advertisers to target specific audiences more effectively.
That’s nice, but what you really want to know is earnings have increased 700% in the last three years.
It announced earnings on Thursday. Net Income went up to $39million from $16million last year.
Still growing nicely. I like it.
But the market did not and sold it down 30% on the news. Seems harsh to me. It was because of this:
Jeff Green, Trade Desk’s CEO, said on the earnings call that “starting about the second week of October, we began to see some transitory cautiousness around certain advertisers.”
“We saw some reduction in brand spend in verticals such as automotive and consumer electronics, for instance, specifically around cell phones and media and entertainment,” Green said. “Some of these industries have been recently impacted by strikes, such as the U.S. auto industry.”
TTD forecast revenue of $580 million next quarter, which is lower than the analysts expected $608 million.
What’s $20million between friends?
I see no reason for this massive overreaction and it means you guys can now buy TTD at about the same price I originally paid for it 3 years ago.
This next one I do not own. But I will be buying some this week.
B. Riley Financial Inc (Nasdaq: RILY)
RILY is an investment bank. It has a number of divisions including investment banking, corporate finance, research, wealth management, and sales and trading services to corporate, institutional, and high net worth clients.
There has been a bit of news recently that has seen the stock price seriously depressed.
It took a dip at the beginning of the year when the market had a mini-crisis around regional banks but promptly recovered to over $56 a share.
But recent events have sent the share price down to around $25.
Back in August, Riley was part of a consortium that bought out a company called Franchise Group Inc. The CEO of Franchise Group is Brian Kahn. Kahn has been linked by the media to a hedge fund called Prophecy Asset Management.
The co-founder of Prophecy, John Hughes recently pleaded guilty to defrauding clients of $ 294 million.
That news led to a significant increase in the number of shorts betting against Riley, currently running at 21% of the book.
I smell opportunity here.
The link is tenuous. Hughes is the bad guy, not Kahn and Kahn is not Riley, just the CEO of one of their many investments.
The CEO of Riley, Bryant Riley, has known Kahn since his first investment in Franchise Group in 2018. He has known Kahn long enough to work out if he is a fraudster. You do not get to build a $1billion investment bank if you cannot see a bad character. This is what he had to say about Kahn on the earnings call:
“I know that today a statement came out from Brian denying any involvement in what happened with Prophecy, and that’s good enough for me,” Riley said in the company’s earnings call. “So, I want to just be crystal clear. I believe we are going to make a lot of money for our shareholders in Franchise Group. We would have bought all of Franchise Group. We are a huge fan of that business.”
Riley announced profits last week. Total revenues increased 48% to $462.3 million during the three months ended September 30, 2023 from $312.1 million during the three months ended September 30, 2022.
They also announced a dividend payment of $1 per share payable if you hold the shares prior to November 20 which is next Monday. $1 per share is 4.0% of the share price. Seeing as they pay 4 times per year that could equate to a dividend yield of around 15% per year.
Summary – share is depressed on rumours. The large short float means an awful lot of buying should they decide to cover. Imagine what happens if the SEC makes a statement clearing Kahn? So we can buy now around $25, pick up a 15% yield while we wait and once these rumours pass, even if the stock recovers to October prices, pick up a 50% capital gain.
Next Week
Things will slow down next week. The calendar will be quiet on the economic front but earnings will continue.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.