Eats Beats Expectations

Employment data out of the US on Friday showed that their unemployment rate spiked to 14.7%, the highest since the Great Depression. Many market participants were expecting unemployment to be as bad as 16%, so 14.7% could be considered a 'market beating figure'. Even though the employment data was terrible, it was already priced into market prices, and global markets managed to finish Friday in the green. The market is expecting that many of the unemployed will be rehired over the next two quarters. If reality differs from the expectation, then you will see market prices adjusting accordingly. As it stands, infection numbers are slowing and countries are talking about opening up. This positive news has been driving equity markets higher over the last few weeks.

On Friday the JSE All-share closed up 1.97%, the S&P 500 closed up 1.69%, and the Nasdaq closed up 1.58%.

Byron's Beats

Last week Uber released their Q1 results. For very obvious reasons, this is a company heavily impacted by a pandemic. Bookings for the quarter came in at $15.8bn, ahead of expectations of $15.7bn. This was because of a massive increase in Uber Eats (up 54%) while rides declined 3%.

Monthly Average Users increased 11% to 103 million. Margins increased as they left eight unprofitable markets for Eats. Fortunately, South Africa was not one of those markets.

Rides in April (this current quarter) dropped 80%. Ouch! But in the first week of May rides globally picked up 12%.

We see this period as an opportunity to streamline its business (close non-profitable markets) and expand on its Eats business where they are doing well. Mobility will be impacted for a while to come but keeping vehicle's sterilised and screening drivers is manageable. A lot more than the airlines. Besides, people may prefer an Uber ride to a train or a bus?

Alternatives like their scooter rental business, which keeps the rider separate from others and outdoors, should also thrive. They recently merged their scooter business with Lime whilst adding a further $170m to the venture. Speaking of cash, they are sitting on $11bn in cash, which they deem more than enough to weather this storm.

It won't be a smooth ride but we see Uber as a good recovery bet.

One thing, from Paul

I wonder what the future will look like, once Covid-19 becomes a receding memory? Some think that life will never be the same again, but I believe that it will be much like it is now. I read somewhere that Carnival (NYSE:Carnival) Cruise bookings surged 600% after announcing its August relaunch. Shanghai Disneyland tickets sold out for its opening day, within a few hours.

What will change in the investment markets? There has been a massive expansion in public (government) debt. According to a Bloomberg compilation, more than $8 trillion in fiscal recovery or stimulus measures have been taken worldwide. To date there has been adequate demand from savers for these debt instruments, but in the long-term higher government debt levels will lead to a sizeable increase in the tax burden on corporations, high earners and the wealthy.

Secondly, it is unlikely that governments will allow interest rates to exceed inflation for a long time. This is sometimes referred to as "financial repression" and it is how major nations ran down debt after World War II. My takeaway: never, ever buy government bonds. It is also pointless to hold excess cash in savings at a bank. You will just be going backwards.

That leaves the equity market. Lower long-term borrowing costs will be good for private companies, and equity valuations in particular. Those sectors better able to innovate and adapt to the new post-coronavirus world will fare better and "creative destruction" will force corporate failure and defaults elsewhere. Big companies are better than small ones. Focus on the strong listed corporations who are doing well in the current economy. Avoid the ones that are joining the line for handouts, asking for government bailouts.

Michael's Musings

Even though I am an equities guy, I still like to keep track of what happens in the property market. I enjoy seeing how prices change between neighbourhoods; income categories tend to react differently to changes in the political and economic landscape.

Last week FNB released their data on house prices for April. As expected they are lower, along with most other assets - House price growth slows to decade low as coronavirus throttles demand. The forecast is for the housing market to contract by 5% in 2020 with transaction volumes decreasing 45%. Reading those numbers it is a reminder why property can be a tough place to be invested.

A 5% drop in price is not much, but in if you consider that most people buy with only a small deposit and then a massive bond, that 5% suddenly becomes more significant compared to the money invested. The other problem with property is how long it takes to get your money out. During the good times, you can expect to wait around three months. During this period, maybe six months? Maybe a year? Lastly, during tough times, you might also have problems with tenants paying rent.

As I said, we are equity guys, so are biased on the topic. Here is a closing thought -the only reason that people think property is a great investment is because it is the only asset class where they invest long enough to see the power of compounding.

Bright's Banter

This morning I was listening to another 'The Knowledge Project' podcast. This was the 82nd podcast that Shane Parrish recorded for his Farnam Street blog. The guest was a gentleman by the name Bill Ackman.

Bill Ackman is the legendary activist investor, founder and CEO of Pershing Square (NYSE:SQ) Capital Management a very focused hedge fund. Ackman's most recent trade was turning $27 million into $2.6 billion when he was hedging his portfolio against the coronavirus wipeout that eventually happened early March.

Pershing Square currently manages just over $8 billion using their activist investment strategy. They buy into companies which they try add value to by becoming involved at board level.

This was a master class on how to approach success, life and investing. How to bounce back from failure, lessons to teach your kids about money, how to stay hungry and motivated even when you have everything you need, and so much more.

Signing off

An important update out this week from Tencent with their quarterly update out on Wednesday. These results will have a significant impact on the Naspers and Prosus share price. The JSE All-share is higher this morning and the Rand is looking stronger at $/R18.25.

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