Sunday Finds + 3 Thoughts From Last Week

Podcast episodes on Microsoft and Interactive Brokers this week

Jan 15, 2023

Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.

Chit Chat Money Podcasts From Last Week:

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1. New Buy With Prime Data

Forgive me for focusing on Amazon so much, it is just a fascinating business and one I’ve been researching a lot more lately.

This week, the company came out with some new data regarding its “Buy With Prime” initiative:

In fact, Buy with Prime has been shown to increase shopper conversion by 25% on average, according to internal Amazon data. This data point measures the average increase in shoppers who placed an order when Buy with Prime was an available purchase option versus when it was not, during the same time period.

Buy With Prime allows merchants to add Amazon’s delivery and checkout capabilities off of the Amazon platform (i.e. to Shopify, WordPress, Wix, and Squarespace sites) for the first time in history.

Now, at the end of this month, the new service will be available to all merchants in the United States. I think this has the potential to be a masterstroke for Amazon’s retail business

Why? A few reasons:

It will help them catch up faster to the excess capacity built out in 2021 and 2022
The service positions Amazon in a much better light with merchants and customers, making it tough for its largest competitor (Shopify) to fight back without making themselves look bad to the two core stakeholders here (merchants and customers)
Gross merchandise volume flowing through Amazon’s platform will grow (the obvious one)

This will be a real test for Shopify, dare I say a moat test? A year or two from now, we’ll know whether they have passed. For the time being, the stock looks pretty darn risky at a trailing P/S of 9.37 (Source: Stratosphere.io).

2. Is inflation over?

(Guaranteed this will be a jinx. Someone hit the @remind-me-in-a-year button so I can dunk on myself)

Consumer prices fell by 0.1% from November to December. This brought the trailing twelve-month consumer price index (CPI) down to 6.5%. This TTM CPI will continue to fall unless we see a radical change from one of the major inputs to the index.

I think the great inflation scare of the last few years may be over. It really was transitory, huh? Well, no, not exactly in the original way the Fed put it, as they decided they needed to raise interest rates at the fastest pace in their history in order to stamp it out.

What does this mean for investors? It doesn’t change much for me. I like to look for companies that will do fine with or without inflation, so my strategy hasn’t changed.

Some might argue that — if inflation is stamped out — a few sectors like housing will benefit. The theory with housing for bulls (if you want to call them that) is that everything will be fine once the Fed stops hiking and mortgage rates normalize.

But I don’t buy it. Just because inflation goes away doesn’t mean the Fed is immediately going to bring rates back to zero, which means mortgage rates will probably be around 5% or higher in the best case scenario.

That makes the housing bubble worse than in 2007 but without the systemic risk from the banks to the global economy.

If mortgage rates actually stay above 5% for 2 - 3 years, it’s hard to see a path where real estate prices don’t experience a larger drawdown than in the GFC.

I’m just spitballing here, but I don’t think inflation going away changes the impacts that a 3% Fed Funds Rate has on the U.S. economy. Which is why the monthly reports don’t matter that much anymore.

3. Foreign exchange headwinds abating

Are we coming out of the foreign exchange debacle for U.S. multinationals? Some charts:

This will be good for any U.S.-based company (especially with its employees in the states) that earns a lot of its revenue internationally. In fact, if these trends hold or just stabilize, many of the companies talking about Fx headwinds last quarter could actually start benefiting from Fx in mid-2023.

See you next week,

Brett

***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***

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3 Good Reads

2022 Annual Letter - Concentrated Compounding

Charter is a great business with the best bundled offering of home internet and mobile phone service of any carrier, which is what initially attracted me to it. However, there has been plenty of new competition from two areas – some companies are building more fiber internet in direct competition with Charter’s internet offering and due to new technological advancements, wireless phone companies can now also offer home internet connectivity.
In my estimation, Charter will still be able to grow over time, even with this increased competition. If it does continue to grow, today’s prices will prove to be very cheap given the significant cash flows that the company generates.

Thinking About the Tail End - Neckar’s Mind and Markets

I found this simple yet profound. If you maintain the habit, all you need is time.
This applies to a lot of areas that compound. Whether it’s learning, investing, building, creating, relationships. If you manage to not interrupt the positive forces in your life, all you need is time to compound.

Warren Buffett: The Investor’s Investor (1979) - Investment Talk

The few businesses that Buffett thinks are worth owning often fall into the category he calls “gross profits royalty” companies, perhaps better called “gross revenues royalty” companies: TV stations, institutional advertising agencies, iron-ore landholding companies, [and] newspapers. Benefiting directly from the large capital investments of the companies they serve, they require little working capital to operate, and, in fact, pour off cash to their owners. The unfortunate capital-intensive producer - Chrysler, Monsanto or International Harvester - can’t bring its wares to its customers’ notice without paying tribute to the “royalty” holder: The Wall Street Journal, J. Walter Thompson, the local TV station, or all three. Other valid franchises Buffett likes include the large insurance brokerage agencies and some specialised ad hoc situations such as Sperry & Hutchinson Green Stamps.

1 Good Podcast

Was YouTube’s $2 Billion NFL Deal a Mistake? - Recode Media

For the first time in 3 decades, NFL’s Sunday Ticket - a subscription service that lets viewers watch many but not all of the NFL’s games each week - has a new home: YouTube TV. The deal will cost YouTube/Google/Alphabet $2 billion a year. Was it it worth it?
There’s no one better to answer that question than Sports Business Journal’s John Ourand. He joins Recode’s Peter Kafka to talk about the deal — and what it tells us about other moves by tech giants to get into big-time sports.