MAGNIFICENT 7: A GIANT SUCKING SOUND

Hear that? It’s the sound of money being sucked into the Magnificent 7 (Nvidia, Microsoft, Apple, Alphabet/Google, Amazon, Tesla, and Meta/Facebook).

So much so that the Magnificent 7 are now bigger (by market cap) than ALL the world’s energy, basic materials, utility, and transportation stocks combined. Take a look…

And it’s not just compared to boring, stodgy stocks like these (who needs energy, anyway, right?). With the exception of the US, the Magnificent 7 are now bigger than any stock market in the world.

But even within the US, the gap between the “Mag 7” and the rest of the market is widening.

Since the start of 2022, you have just about broken even if you have been invested in a basket of large cap stocks (as measured by the S&P 500 in white below). But if you actually dared to venture into smaller cap stocks, you’re in the red right now.

The Magnificent 7 and Nvidia in particular remind us a lot about Cisco during the dot-com boom when networking equipment was all the rage.

As you can see in the above chart, it ended in tears. But here’s what is really interesting…

Even though Cisco’s stock price crumbled some 80% during the dot-com bust, its earnings didn’t. Actually, come 2003, Cisco’s earnings were actually higher than in 2000.

And look at 2010 — the stock price was still down some 70% from its dot-com highs, but earnings and revenue were hitting new records. And yet, for whatever reason, investors decided that they would pay such a high multiple for Cisco’s earnings.

It might take some time, but the market tends to find a way to sort out excess returns.

  R.I.P. SHORT SELLING

“The reports of my death are greatly exaggerated.”

Whoever actually came up with that old chestnut was onto something — at least when it comes to investing.

Whenever the press of popular opinion declares an asset class, industry, or strategy as being dead and buried, our experience tells us to get wary.

You might remember the famous “death of equities” cover that marked the beginning of a long bull market in stocks. Or when the same magazine more recently declared inflation dead (hint: it wasn’t).

Based on this Bloomberg piece, short selling might be the next “victim”?

Here’s an excerpt from the article:

Jim Chanos quit after failing to raise capital. Carson Block’s firm launched its first long-only fund. Andrew Left dubbed his kind “a dying breed.”

These are bad times to be a bear on Wall Street.

After taking hits on multiple fronts, short sellers — who borrow and then sell stocks in a bid to profit from price declines — are in retreat. Thank the gravity-defying bull market, lingering regulatory threats, a day-trading horde randomly squeezing shares like GameStop Corp. ever higher, and more.

Short interest in a typical member of the S&P 500 is hovering around the lowest levels in more than two decades, according to Goldman Sachs Group Inc. Assets in funds with a short bias have slumped to $4.6 billion from $7.8 billion in 2008, HFR data show, during a period when equity hedge funds overall nearly tripled in size. Activist campaigns like those pursued by Block and Left — where investors seek company flaws and bet against them before making their findings public — launched at the slowest pace in a decade in 2022, with only a tiny uptick last year.

Against that backdrop, a succession of high-profile players has dialed back their short-selling activity, and some have turned away from the business — including the most famous of them all.

“Our fund side of our business was just dwindling — people just didn’t want to invest,” says Jim Chanos, the legendary short seller renowned for calling Enron Corp.’s demise. “Investors — primarily institutional investors — have just given up on the fact that there’s going to be excess returns on the short side.

With the Magnificent 7 going parabolic, short selling might seem like a dying profession. But we can’t help ourselves and draw parallels (again) with the dot-com boom, namely, when the crowd came for Buffett in 1999. This is from Barron’s:

In fairness, Buffett’s Berkshire Hathaway was down some 40% from its peak, while the rest of the market raced higher, with tech stocks leading the way. But look at what happened once the dot-com bubble burst (Berkshire in yellow and the S&P 500 in white)…

The S&P 500 dropped some 40% while Berkshire soared close to 50%.

Whenever the press of popular opinion tells you that — in no uncertain terms — an investing strategy is dead and buried, odds are it is about to come back to life (and often in a big way). The same way, if all the talk in town is a strategy or a stock being the “only trade in town,” then Mr Market is going to teach investors a good lesson.

  DRUCK ON COPPER

Stan Druckenmiller’s recent comments on copper caught our attention.

Here’s the gist of Druck’s argument:

“Copper is a pretty simple story, takes about 12 years, greenfield to produce copper, and you got EVs, the grid, data centers, and believe it or not munitions. These missiles all got enough copper in them and the world’s getting hot that we just think the supply-demand situation is incredible for the next five or six years,” Druckenmiller said in the CNBC interview.

But when you look at the market, one of the two things must be true — either Druck is wrong or most investors are too enamored with the Nvidia’s of the world to care about copper.

Right now, copper miners (and copper in general) are as unloved as they were during the height of the TMT bubble some 25 years ago (well, near enough).

Here’s copper’s performance against the S&P 500 — flirting with all time lows.

But even broadly speaking, copper is a good proxy for the themes we’ve discussed here ad nauseam — hard assets vs financial assets/value vs growth/inflation vs deflation, etc.

It’s worth noting that copper both tend to do well in periods of high inflation. This is a chart Chris shared in his recent Rebel Capitalist Live presentation:

In other words, if you think that the world is going to go through a period of high inflation over the next 10 years (as we do), then copper and copper miners (as well as energy) make a lot of sense.

  CHECKING IN ON COAL

You just can’t make this up…

From the article (emphasis ours):

The Biden administration has just signed an economic suicide pact that would require the United States and six other Western democracies to shut down its coal power plants by 2035, while China, India and the rest of the world currently have more than 1,000 new coal power plants in the planning or construction phase. The no-coal pact allows all nations but the Suicidal Seven to continue using as much affordable coal power as they like.

To put things in perspective, Insider member Ananth shared this chart illustrating coal consumption over the past decades.

Our hunch is this — coupled with the net zero initiative ideology — explains why many (if not most?) Western analysts and talking heads think coal is dead and on the way out (sound familiar?). Coal use in their backyard has been going nowhere but down, so surely it must be true.

But as you can see, Asian countries (in orange) have more than made up for whatever coal the West gave up. In fact, just two countries (China and India) single handedly pushed global coal use to an all-time high last year.

And it doesn’t look like this trend will reverse itself anytime soon as those countries keep burning coal like there’s no tomorrow. Here’s India (h/t to Insider member Claus for this chart)…

It’s no surprise coal stocks have been very good to investors over the past couple of years.

One obscure coal miner that we hold in our Dividend Portfolio is up 88% so far. But wait, there’s more. It’s not just capital gains. Many coal stocks also pay fat dividends. With dividends reinvested, that 88% becomes 235% — just so you can appreciate the power of dividends.

  WEEK’S HUMOUR

Credit for this one goes to Insider member Lynn.

And this one from member Claus. Honest marketing above all else!

Have a great weekend!