5 Things To Know In Investing This Week: The Bond Bears Issue

We’ve now entered earnings season. Las Vegas Sands LVS misses the headline numbers, but looking a bit deeper, it was a great quarter. Starbucks SBUX misses badly. DKI thinks they’re focused on too many things that don’t affect the customer experience. Paul Tudor Jones and Stanley Druckenmiller are avoiding owning bonds joining DKI in our years-long concern about inflation reducing real returns in fixed income. We deny rumors that “PTJ” and “Druck” read DKI research, but if someone knows them, reach out and we’ll put them on the subscribers’ list. Michael Gayed of the @LeadLagReport interviews me and we discuss the real cause of inflation. Hint:  it’s not supply chain issues. We also talk about the long-term demand for uranium. Finally, in our investor education “Thing”, we talk about the difference between active and passive investing. As a portfolio manager, I favor active investing; however, we acknowledge the benefits of passive strategies for certain investors.

This week, we’ll address the following topics:

• Las Vegas Sands got unlucky at the gaming tables. That’s temporary.

• Starbucks sees same store sales down 7%. That’s a big problem.

• Paul Tudor Jones and Stanley Druckenmiller avoid Treasuries. DKI agrees with them.

• Michael Gayed of @leadlagreport and I discuss inflation and energy. Gayed does a great interview so check out more of his work.

• Active vs passive investing: fight!

With Andrew back from his trip, the 5 Things was at full strength this week. Alex has exams next week. Will that leave us without enough good content for the next episode? Will this be the end of the 5 Things? Tune in next week to find out!

Ready for a week of avoiding both Starbucks and bonds? Let’s dive in:

• Las Vegas Sands $LVS Earnings:

Las Vegas Sands announced 3Q earnings last week. Headlines looked bad. Revenue of $2.68B was below last year’s $2.80B and below analyst estimates of $2.78B. Adjusted property EBITDA was $991MM which was below the $1.12B we saw last year. Adjusted EPS of $.44 was below last year’s $.55 and fell short of analyst estimates of $.53. This seems bad, but doing some actual analysis, it was an excellent quarter.

High visitation during Golden Week plus excellent financial results gets a chart like this.

DKI Takeaway: Fortunately, the market saw through the “negative” headlines and the stock rose in aftermarket trading. I think they’re seeing what we are; a company about to put a lot of renovated rooms back into service in Macau and adjusting for luck at the gaming tables, the best results we’ve ever seen in Singapore. That plus record results for Golden Week in Macau and continued huge return of capital to shareholders confirms our positive thesis in the name.  Adjusting for hold (a measure of how lucky or unlucky the casino was at the gaming tables), earnings this quarter were above year-ago results despite thousands of rooms being renovated. We continue to see a recovering/recovered market with the stock at distressed levels.

1. Disappointingly Pumpkin Spicy Earnings from Starbucks $SBUX:

On Tuesday, Starbucks $SBUX reported disappointing Q3 earnings, with net sales of $9.11 billion, a 1% decline. Across the board, Starbucks saw declines in key metrics. In-store traffic fell 6% in the U.S. and 7% in their second-largest market, China. The company attributed their disappointing earnings to the “challenging consumer environment”. New CEO Brian Niccol, is working to turn the company around by simplifying the menu and broadening their internal marketing strategies. This is after replacing the prior CEO who wanted to work limited hours; something that isn’t an option for a large multi-national customer service business.

Original post by @texasrunnerDFW who is worth following.

DKI Takeaway: While Brian Niccol looks to reengineer the internal dynamics of Starbucks, here at DKI, we think there are multiple issues causing their domestic sales to decline. Over the past few years, Starbucks has aggressively involved itself in controversial social issues, which may alienate customers. Some people simply want to grab a coffee without engaging on the most controversial issues in society. Other brands and companies like Bud Light, Target, My Pillow and Goya have all faced customer backlash due to social and political issues. The new CEO is wisely focused on improving efficiency. In our opinion, the company should prioritize shareholder value and customer comfort over obsessive virtue signaling.

1. All Roads Lead to Inflation: Strategic Bets from Two Market Giants:

In a recent interview with CNBC, Paul Tudor Jones (PTJ) stressed that "all roads lead to inflation," emphasizing his strategic investments in gold and Bitcoin. He also noted that commodities are "ridiculously under-owned." He continued, “I own zero fixed income” reflecting a growing sentiment among investors that traditional fixed income is losing its allure. Stanley Druckenmiller, known for generating impressive returns over three decades with his former firm, Duquesne Capital Management, is also adopting a contrarian stance. He suggests the way for the government to navigate the current economic landscape is to “inflate your way out.” Druckenmiller is reportedly shorting U.S. Treasury bonds, which now account for 15% to 20% of his portfolio, effectively betting against the prevailing view that interest rates will continue to decline. (Although the Fed sets the overnight interest rate, longer-term yields are set by the market.) While the Federal Reserve aims for a "soft landing" by lowering interest rates, Druckenmiller warns that if inflation surges to levels seen in the 1970s, the Fed will be unable to cut rates as much as the market expects.

Druckenmiller and Paul Tudor Jones aren’t long Treasuries. DKI isn’t either.

DKI Takeaway:  We wish we could tell you that Druckenmiller and Paul Tudor Jones were DKI subscribers. We’ve been talking about higher inflation, trapped central banks, and the inability to save in dollars for three years. We’ve said that interest rates would be higher than the market expected leading to lower valuations for bonds. Nice to see respected investors like “Druck” and PJT coming to the same conclusion. If any of you know them, feel free to reach out. We’ll be happy to offer them a complimentary subscription to DKI. For the rest of you, if you’d like to be years ahead of most market strategists, you’re welcome to subscribe. 

1. DKI Sits Down with Michael Gayed from the Lead Lag Report:

In a recent conversation with Michael Gayed from the @LeadLagReport, I discussed the pressing economic issues that investors should keep in mind. I believe the current inflation surge is primarily driven by excessive government spending, which is illustrated by the fact that over 50% of all dollars in existence were created in just two years. This phenomenon, combined with debt monetization—where the Treasury sells bonds to cover government debts—fuels the inflationary fire, significantly increasing the money supply and pushing prices upward. Many tend to blame the Federal Reserve's low-interest rates for inflation, but if Congress continues its excessive spending, inflation will linger like an unwelcome guest. Shifting gears to energy, I see a bright future for uranium, driven by a surge in demand and supply constraints. As countries like India and China ramp up their energy needs, plus electrification and data centers in the west, I expect that uranium prices will increase in the coming years. The supply of uranium is already tight, with only about two to three years' worth of excess supply available to meet rising demand. Major producers are struggling to ramp up production, which could lead to a substantial supply crunch. Moreover, I highlight the recommissioning of decommissioned nuclear plants in the U.S., signaling a renewed interest in nuclear energy as a sustainable solution. As we face regulatory concerns over carbon emissions, nuclear power emerges as a reliable, carbon-free energy source. I suggest investors consider physical uranium rather than mining companies, as the latter carry inherent operational risks.

Listen to our conversation on The Lead-Lag Report’s YouTube Channel.

DKI Takeaway: Thanks to @leadlagreport for the great discussion which emphasized the need for long-term investment strategies, akin to practicing "time arbitrage." As market dynamics shift, those who remain patient and focused on the long game may achieve significant returns. This conversation serves as a timely reminder of the complex interplay between government actions, inflation, and emerging energy markets. In navigating these market challenges, it's crucial to remain informed and proactive—after all, few understand the nuances of these issues.

1. What’s the Difference Between Active and Passive Investing? 

In simple terms, active investors buy and sell individual stocks regularly, while passive investors typically hold diversified baskets of investments for long periods of time. One of the key differences between the two is that active investors frequently enter and exit positions in individual equities, whereas passive investors usually invest in mutual funds or exchange-traded funds (ETFs) infrequently. When comparing the two, most hedge funds and portfolio managers utilize active investment strategies, while many retail investors use passive investing strategies. Registered investment advisors as a group lean hard towards passive strategies, but the best ones are excellent active investors.

Image Credit to Canva Ai

DKI Takeaway: Many readers of the 5 Things use both passive and active strategies. At DKI, our current recommendations page is a long portfolio that is actively managed and hedged. While managing an active portfolio can be challenging, a hybrid approach with DKI assistance could provide a better hedge against future inflation and offer more exposure to potential 5-10x returns in individual stocks. Overall, combining a passive investment strategy combined with a DKI premium membership is an excellent way to focus on risk-adjusted returns. 

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