Fourth Quarter 2021

As Tchaikovsky summarized, inspiration and a strong work ethic tend to be highly correlated.  Given the world’s perpetual connectivity, keeping busy is rather easy, but that is not the same thing as being productive.  There are distractions aplenty in our everyday lives, but as Denzel Washington explained, “don’t confuse constant movement with progress.” Are we sounding too philosophical?  Don’t worry, we will stay in our lane.  The philosophical linkage to the financial markets is the surprising array of initial public offerings (IPOs) in 2021 that ended up being uninspiring.   From celebrity endorsed SPACs (Special Purpose Acquisition Company) that circumvent battle scarred listing requirements) to practically affixing “wouldn’t it be nice” as the core business plan, we have seen a colorful section of masterly marketed companies coaxing billions of dollars of capital from its zero-interest rate lair.

While floods of monies have rushed into IPOs this year, we are less sanguine on the immediacy of need for direct shipped organic baby food… None the less, Little Spoon was able to gather in $200 million of fresh capital.  Also in the IPO maze, an electronic flying taxi (see photo), labeled as urban air mobility, garnered a $7 billion market cap.  The time to final production for an electric air transport vehicle via the FAA process is daunting, never mind the serviceable market.  If flying taxis seem like an anomaly, how about plopping capital into a glamorous hot dog-based restaurant chain?  The IPO for Portillo’s Hot Dogs pushed the franchise to a $3.1 billion market cap.  Not to be outdone by a vegetable focused restaurant, Sweetgreen, which jumped to a $4.3 billion market cap.  Even Starbucks wasn’t immune, with a dynamic competitor, Dutch Brothers Coffee, coming in around $8.6 billion.    We noted the lowest price to earnings ratio of the group at 316x earnings; all of a sudden Starbucks seems relatively cheap at 32x earnings.

If NGA doesn’t put monies in these IPOs, why the preoccupation?  Well, it matters within the context of overall market dynamics, sentiments, volatility, and the skewing of relative comparisons.  As such, we evaluate the deals bankers are presenting, staying attuned to directional flows and to the types of securities being consumed in the financial markets.  The quality of the NGA diet, so to speak, hasn’t changed, but we can see from the caloric labels there’s a lot of “junk food” on the menu.  What typically follows these overvalued IPOs is a period of indigestion, in the form of pivoting capital once the IPO excitement wears off, trade restrictions are lifted, stock options are exercised, and last but not least the financial reporting gets real.  Analyzing deal flows lessens the risk of our making a knee jerk reaction during corrective periods and provides us the confidence to take on glaring opportunities in a mispriced world wholly distracted by any number of “busy” new offerings.

Thinking a bit bigger than Flippy, consider wind turbines, both onshore and offshore, and the related supply chain.  According to Bloomberg* estimates, creating wind turbines capable of 1 gigawatt of power (roughly the equivalent of two coal fired power plants powering 750,000 homes) requires 387 tons of aluminum, 2,866 tons of copper, and 154,352 tons of steel.  Additionally, the lithium-ion batteries needed to store that 1 gigawatt of energy require 729 tons of lithium, 1,202 tons of aluminum, and 1,731 tons of copper.  If that sounds like a lot of material, it is.  Add in a dash of nickel and a schtickle of manganese for strengthening and corrosion resistance, and we find that to electrify above the ground (and water), we still need to remove materials from below the ground.  Factor in the refining, transporting, connecting, monitoring, and maintaining that are all process integrated, and suddenly a nice cash loop emerges.  Source coders working from a San Jose basement can’t quite deliver these items, so it is the full innovative collection which has our investment ear.

We have conceded that the Federal Reserve Board has reinvented itself. That is, its historical independence is no longer applicable, and the usage of any meaningful fiscal discipline has termed out.  Yet, Fed board members are statistically well-informed, and no doubt mindful of the explicit budgetary cost of their raising interest rates.  It seems logical, therefore, that the Fed will continue to be slow to act, corralling rates while in full view of renewed inflation.  As to the fate of the U.S. dollar, perhaps the trajectory appears obvious but the pace less so.  Be mindful that we operate in a relative world of populist leadership, and with only three reserve currencies of any capacity (Dollar, Yen, Euro), there is no clear-cut “biggest loser” among them.  They are all profligate at the government spending level. Living in a world of crises and cross currents, be prepared for a glacial crawl downward for our dollar, but not a third world death spiral. So, our clients can thrive inside our borders by identifying earnings growth which stays in front of inflation’s torrid pace, as well as outside our borders via ownership of fiscally disciplined foreign companies.

Finally, with a decade under our belt as an independent advisor, we have been experiencing generational transitions within our client base.  While emotionally challenging to all, individuals and families are finding solace when they have a sound plan in place and an experienced team with known connections to the family.  The passing of a matriarch or patriarch is heart wrenching but getting lost in corporate bureaucracy or a static legal system adds unnecessary delays and stresses. In our experience, generational transitions can occur smoothly with proper up-front planning and advisor familiarity with intent. If you seek additional guidance in this area (including a generational pow wow), please let us know.  We are prepared to help.