Alchanati Campbell & Associates
Bank CEO and Director Sentiment on Negative Rates.
Does being smart make you rich? 80% of wealth is owned by 20% of the people. Intelligence is measured by IQ, where the average is 100, but nobody has an IQ of 1,000. Or, hard work is measured by the hours you work where some people work more hours than average, but nobody works a million times more hours than the average. But when being rewarded (earning), some people get millions or billions more than the average ($$$$). The wealthiest people are not the smartest or most talented or most hard working, they are the luckiest according to a study.
Debt and Equity. What is the cheapest financing option, a company selling debt or a company selling equity? The answer is debt financing. Reasons: you get an income tax benefit on the interest component that is paid to the lender. If the firm goes bankrupt, equity investors lose everything, but the debt holder has the first claim on company assets. You do not give away ownership or a stake in the company. The cost of equity is more expensive due to its riskiness (cost of debt is lower than the cost of equity). Generally, companies in stable industries with consistent cash flows use debt financing (taking out a loan or selling bonds) more than equity financing (selling shares of the company).
The UC Endowment Fund. Strategy, keeping with set fundamentals and standards, and being able to adapt and innovate quickly can easily differentiate the best-performing funds with the worst-performing funds. The UC fund thanks its “agility” for their investment success. Agility means the ability to move quickly and easily, and their agility allows them to find investment opportunities and prosper. “We move quickly and hold what we believe to be lucrative assets for the long term,” (2018-2019 Annual Report). With the current economic environment plus the instability and uncertainty in geopolitical events and climate change, agility is a strength. As of the beginning of 2019, the fund’s assets under management totaled $126.1 billion with a 1-year return of 8.2% for their endowment portfolio and a 1-year return of 6% for their pension portfolio. The UC Endowment Fund believes in: less is more, risk rules, creativity pays, concentrate and build knowledge. Interestingly, they recently adopted a sustainable strategy and are starting to sell out of their fossil fuel assets and starting to buy into ESG investments. The fund has been performing well, cutting costs, leveraging, building and cultivating better relationships, and this has been partially due to the leadership. The CIO and Treasurer of the fund, Jagdeep Bachher, has said, “Leaders are measured by how they lead when things turn bad.” The biggest determinant of returns is asset allocation. They are changing their investment strategy to a concentrated set of assets that they understand deeply, they are reducing their number of investments, and their main focus is risk management and growth. In order to perform well as an endowment fund or an investment fund, this is a great model to follow.
Business Ethics. We all know that the bottom line for a business is the cash they bring in. At the end of the day, a typical business exists only to generate profit. That is how a capitalist society operates. Accordingly, there exist some extreme lengths that people will go to in order to make money. Often times, these measures are taken as a result of a conflict of interest between an individual and a company. Ethical considerations have to be made, and it is important to not fall victim to moral myopia (where you let your own unethical behavior slide due to some false rationalization) or ethical fading (where you are so focused on one aspect of a situation, such as the potential revenue, that you lose sight of ethical considerations).
Recently, there was a revelation about a giant company that is the epitome of all ethical issues fusing into one perfect storm. Boeing, who is now infamous for several fatal crashes that took the lives of hundreds, is the perpetrator here. The crashes happened last year, but it was revealed last week that the malfunction in the design was known about as early as 2016. A message conversation between two Boeing executives/pilots showed that they knew the plane was malfunctioning. We are no aviation experts here, but the MCAS was erroneously engaging itself frequently, and causing planes to nosedive. Even though they were aware of this, either they or other upper management would not bring it to light in front of the FAA. They were too concerned about competing with Airbus and making money. As a result, hundreds of people are now dead, and the willingness to accept unethical behavior is to blame.
Quantum Supremacy. In November 1939, John Vincent Atanasoff flipped the switch on the world’s first electronic digital computer and fostered in the digital age, an age of untold potential that connected people and spread information across the world allowing for a period of unprecedented technological development and economic growth. As of this week, Google had claimed “quantum supremacy”, marking the beginning of the end of the digital age as the world prepares for the quantum age. Quantum supremacy is a term used to mark the point at which quantum computers have passed the capabilities of the current computer architecture and is something physicists have been after for decades. The latest test of Google’s Sycamore quantum computer proved that it could complete a complex calculation in 200 seconds. The reason this is such a big deal is that it would currently take the world’s best supercomputer roughly 10,000 years to complete that same problem. That makes Google’s Sycamore computer an unbelievable 1.5 trillion times faster. The reason is traditional computers use bits to process data where the data can exist as a one or a zero, quantum computers process data in quits which can exist as a one, a zero, or a zero and one simultaneously. This small processing difference allows the processing power of a quantum computer to scale exponentially. Physicists even believe that quantum computers will double Moore’s law, meaning the power of these computers could quadruple every couple of years. Google’s achievement has allowed the U.S to surpass China as the world’s leader in quantum computing, but this lead won’t last long. Quantum computers have the potential to make an entire country un-hackable or hack into the communications of any other country, so the first country to truly reach and apply this technology will instantly have the most secure military possible. The U.S may not remain in 1st place for long, as China is already years ahead of the U.S in Quantum communication technologies, has launched the first quantum satellite, and is investing billions of dollars more than the U.S into quantum computing.
Tesla's Profitability. Big news for Tesla this week as they achieved their first profitable quarter since last year, earning $143 million. Tesla short-sellers, on the other hand, lost $1.5 billion. Despite being a company that is valued at over $50 billion, Tesla is still largely running like a “Silicon Valley start-up”, focused on growth rather than profits, taking on large amounts of debt, and making “bet the company” business discussions. Shareholders have been (somewhat) patiently waiting for Tesla to transition to a company that is focused on earning regular profits and achieving steady and sustainable growth. Tesla may finally be at a place to allow this to happen. Tesla has $5.3 billion in cash, is earning an automotive gross margin of 22.8%, while their energy business is growing, and their new Shanghai Gigafactory has started production for the Chinese market. With the lessons learned from producing the Model 3, Tesla’s management believes that they will be able to easily and efficiently scale production for their new crossover utility vehicle, the Model Y. In other news, Tesla owners will get some significant updates in the comings weeks. Tesla’s engineers have found another way to increase the efficiency and power of their vehicles and will send a free update giving Model 3s 5% more power, while the standard range plus will receive a mileage boost to around 250 miles per charge; other Tesla models will also receive a power increase around 3%. Tesla recently released “smart summon”, which allows owners with the full self-driving package to summon their car from within a parking lot to come pick them up. While this update was impressive, many drivers reported minor flaws, with some reporting major flaws in the software. Thanks to Tesla’s large fleet of cars and their neural net commuter, Tesla has compiled data from over 1 million smart summon uses and will send an update next month to improve its “smart summon” software.
Our Rights. With the rise of authoritarian leaders across the world, it is important to remember that as citizens of the United States of America we are endowed with certain rights. As long as you do not infringe on the rights of others you are allowed the freedom to express yourself, speak freely and worship as you wish. You have the right to vote in elations once you are 18 years old and run for office once you are of proper age. The right to vote comes with the responsibility to participate in the democratic process, which means if you don’t agree with the course of action your government is taking you should educate yourself on the process and on potential candidates who intend to change this process and then vote for them. In criminal or civil circumstances; you have the right to sue anyone, you have the right to a fair trial in front of a jury of your peers, you have the right to not be subject to unreasonable search and seizure of you or your property, if arrested or accused you have the right to remain silent, and you have the right to a speedy trial, legal counsel and to face your accusers.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.