Blain’s Morning Porridge 25th October 2018.

Blain’s Morning Porridge  – 25th October 2018

“The more you can sustain that magic bubble, that suspension of disbelief, for a while, the richer we will become..”

A lecture on Financial Evolution, but first..

In the Headlights this morning – see for some of the stories I’m watching:

Global Stocks take a pasting: So much for gains on my investment portfolio this year. Should we fear the current volatility? Or see it as opportunity? The spanking over the last few days feels like a full blooded correction is underway – where does it end? And when is the moment to put the buying boots on? More philosophically; is there anything about the trends – especially in Tech Stocks – we should consider in greater detail? (Some more on this below). Some of my chart-watching pals fear we could be in for a further slide, followed by a false rise before… Armageddon.. oh well… anyone for the last few choc-ices then?

UK Retail: Debenhams joins the list of UK high street casualties. Shock, horror and blame the internet, Amazon and Ebay.

Or, and dare I say it, perhaps the collapse of the high street is more about the dowdy state of the stores, their uninterested staff, and their struggle to sell cheap tat cheaper in the face of killer rates and greedy landlords?

I increasingly think the death of the high street could prove an 0pportunity – a chance to reinvent, refocus and re-brand. Consumption patterns and spending are changing, but the new world is not necessarily just the internet. Build it and they will come.. (Extra points for the film.) There will always be a place for good shops. As evidence I point to the success of a new high-end butcher that’s just opened on the cheap parade at the far end of our village – it’s sold out by mid-morning.

The buying experience is changing.. shops have to adapt and lead it. The internet is creative destruction, not the end – it’s a stimulus to the sector to evolve. Pick your winners carefully.

And since we are on the theme of evolutionary finance.. Back in the real world:

Very interesting question from a reader yesterday. He asked why am I so negative on Netflix? Easy answer is because I doubt their finance model and after using it for years, I’m not convinced its a great product. (Stop! Every time you say you don’t believe in Netflix, a pixel dies..)

My chum answered that since Netflix was launched 17 years ago, the returns to investors have been phenomenal. I asked him to guarantee me future returns will remain as positive. Unfair of course, especially on the day when the Nasdaq saw its biggest decline in 7 years, and analysts are checking their charts for direction on where we go next: down, down or further down. (Actually, I suspect a bit of up…)

One basic issue about all stock valuations is belief. Do you believe a stock will perform? You can choose the stocks you buy on the basis of the time-honoured dart/list of stocks approach or by exhaustive analysis of all the factors. Netflix – like so many other tech stocks – wins because it spotted/created a new market niche and wiped out the previous incumbents of their market niche – like blockbuster and other video stores. They then expanded that niche by evolving it further – spawning demand for binge-watching and box-sets. Ok.. bored of them now.. Give me another season of Vikings!

Where I struggle with the approach is the finance – Netflix and others may have identified and created whole new forms of consumption, and are monetising it through subscriptions. Without massive subscription growth.. its in trouble. And even then, the cash flows will become mature – which doesn’t justify current multiples.

Some of the new tech giants are unboundedly profitable – from creating whole new ecosystems in data, adverting and demand. Apple has nailed it – selling expensive stuff folk can’t get enough of. But, the financial models of others remain stuck in the early stage investment phase – designed to attract speculators. Hence all the comments about Netflix’s stock valuation being able to sustain unlimited spending on programming to attract subscribers into infinity.

The suspension of disbelief that is required to think that companies burning through cash while their equity valuations will continue to rise on a stratospheric trajectory only works in a real bull market. That’s what went wrong in 2000 – the bubbly bust when the illusion was shattered.

My concern is speculative tech stock valued in the billions, when their revenues justify millions, could deflate quickly on a range of factors. These include their new niches not proving as bountiful as expected, the next new-new thing overtaking and replacing them, and the dangers of a liquidity squeeze in a crashing market.

Layer on top of that the fact these stocks are riding on belief – if that wavers then the tons of money that now sits in indices and is driven by emotionless Algos could swing dramatically. Sure indices simply follow market sentiment.. Algos follow trades..

And finally.. 

With the help of Gabby, the very helpful barrista on the ground floor coffee shop, I am patenting a new coffee: “The FatBoy”. It’s an Americano with an extra shot filling the cup about 2/3 full. Then top up with foam – basically a grown up Machiacco. Willing to franchise it to interested coffee shops, and will be giving the recipe to Manon later today..

Bill Blain

Ofifce Details – Shard Capital – 44 0207 186 9902