Robert Cote, principal at Cote Capital Management, joins the podcast to discuss his model of technology investing, how it’s different than venture capital, and which areas of new technology that he is most excited about.
Content Highlights
The last 20 years have seen venture capital focus on software companies, almost to the exclusion of anything else. Therein lies the opportunity (1:09);
Hardware has been overlooked and can become the focus of technology investors again. One example is manufacturing (6:39);
Use of nanocarbon has created one specific advancement in the area of solar technology (8:50);
Unfortunately, this technology is not investable through public markets (12:22);
Another example: textiles, specifically textile recycling (17:08);
Background on the guest and his investment process (22:56);
There is transportation-related innovation as well. No, not self-driving cars (36:31);
Something from the realm of augmented reality: X-ray technology for surgery (38:57):
Barry Knapp of Ironsides Macroeconomics rejoins the podcast to discuss his surprisingly sanguine view of the economy in 2023: Why cyclical stocks should outperform the technology and defensive sectors, and why he’s expecting inflation to drop to 3.5% by the second half of the year.
Content Highlights
Inflationary recessions are different from deflationary ones. The last four were the latter. If there is a recession this year, it will be the former (02:18);
Earnings downside is limited in this scenario, by 5% based on what happened in similar situations in the past, and earnings should actually go up (5:56);
Tech margins should continue to be under pressure but economically-sensitive cyclical stocks should see margin expansion (10:50);
The US labor market has actually started to weaken considerably — and not due to Fed policy (12:18);
There have been some big adjustments in the labor market post-pandemic (16:47);
The ‘wealth destruction effect’ from tech stocks selling off is negligible (27:35);
One point of concern: the deficit. This is where the implosion in wealth could affect things (32:59);
The coming budget battle in Congress is worth paying attention to (34:41);
The ‘higher for longer’ Fed interest rate hike thesis has gained traction. What this means for stocks (43:27);
The following is an amended version of the Oct. 28 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.
It’s been a brutal week for tech stocks. Disappointing earnings from Google (GOOG), Facebook né Meta (META), and finally Amazon (AMZN) sunk those stocks to levels not seen in years. In the case of Meta, you have to go back to late 2015. In Amazon’s, 2018.
For whatever reason this did not hit other parts of the market as the Dow Industrial Average rose for the fifth straight day on Thursday and is on track for a 4% gain for the week. The S&P 500 (SPY) is looking at a gain of 2%. Red October? The Dow is due for its largest monthly percentage gain since January 1987. (The Dow’s gains have been more dramatic than the SPY, but “Dow” didn’t rhyme with “fly” or any other cool word I could come up with).
Why Just Tech Stocks?
What to make of the tech earnings? Amazon and Google were probably the most worrisome, as both lowered their outlooks. On paper, that doesn’t speak well to the B2B sector (ad spending in Google’s case) or consumer spending in Amazon’s. We’ve said for some time that the US consumer is one of the last things holding up the global economy. If Amazon thinks Americans are going to buy less stuff, especially during the holiday season, then that can’t bode well.
So why has this the sell-off been limited to tech stocks? Investors could be short-sighted or maybe the lack of panic is perfectly justified. For one, none of this means consumers are reining in spending. Remember that Amazon’s online sales are still expected to grow on a year-over-year basis, just by less than previously anticipated. The company has been losing some business to in-person retail all year. This isn’t 2020 and we aren’t forced to order everything online for home delivery. Consumers have returned to shopping in stores as Covid fears have abated.
Google’s ad spend concerns may be due more to a secular move away from web-based search. Most of the action is on social media platforms nowadays (maybe not Facebook anymore, but TikTok etc) so it would make some sense for Google to be losing market share here.
Zuck’s Mad Gamble
Not an actual quote
As for Meta/Facebook, those issues appear to be company-specific. It turns out that having a tone deaf sociopath with absolute control leading the company is not always a good thing. Maybe a lesson for Twitter (TWTR), though unlike META Twitter has never really found much favor with investors. Also, for all of Elon Musk’s flaws there are no reports that he is going to turn Twitter into a multi-billion dollar gamble on the metaverse (whatever that is).
Tech may be dreck again (or maybe just big tech) but that doesn’t mean the consumer is slowing. Nor should it detract from the solid business other companies are doing. Most earnings have been positive and many companies have even raised outlooks. So it makes sense that those parts of the market are moving higher.
Enter the Fed
There is now renewed talk that next week’s FOMC meeting will include ‘pivot language’. This talk may in fact be helping risk appetite going back to last week. It may also be hopelessly naive as the Fed simply can’t risk having inflation continue to run wild. Yeah there may be political pressure on the Fed to stop with the rate hikes, but if inflation keeps running rampant the fallout will be far worse for the Fed and the economy alike.
This is very much next week’s story. For now enjoy the latest rotation out of tech stocks. It stands to reason that this could persist for all the reasons mentioned. The good news is this alone does not definitively portend bad things for other parts of the market. Whether that set-up is constructive for further risk-taking is an entirely different question of course.
