One Week

It's been One Week since you since you sold off hard. Five days since you laughed at equities. Saying, "Get that together, come back and see me." Well, equities rebounded quite well and I think the Barenaked Ladies would be impressed.

It was a good week for equities, commodities, bonds and Bitcoin. For many equities indices the magnitude of turnaround was a rare event in the 2 to 3 sigma area. Everyone seems to be ready for a Fed cut, but there's also ECB, BoJ, BoE, and Norges banks meeting next week.

Best of the Week

A brilliant learning experience on risk. If you're an expert, then skip it, but I think anyone can learn something from this, as the thought process here was helpful. The session explores thinking about risk. Not "what" to think, but "how" to think. Covers what risk is, how it's not quantifiable even after and event, where it comes from, what forms it comes in and it's relationship with asset quality and return. Howard shares a lot of good quotes, both from others and himself. My favorite of those is below and it's why risk is not easy. Other point Howard made was regarding the forms of risk, and he noted that there were something like 24 or 25 different kinds. We get a master class on the mindset for risk. There are no formulas here, which is why I loved it. Watch time: 36 minutes

How to Think About Risk with Howard Marks

Best of the Rest

I was going to write this one up, but my colleague Peter Smith had already done so in our Customer Strategy intra-net site. So here you go. Quick highlights below if you're short on time, but highly recommend a listen and this podcast series from Goldman.

Growth of Private Equity:

Private equity has expanded to a trillion-dollar global industry, with Blackstone alone managing $1 trillion. Private equity financing has evolved, with Blackstone placing $5 billion in debt for an Emerson deal in 2022. “The private equity industry has institutionalized... but there are more players, making it much more competitive.”

Investment Strategy:

Blackstone’s shift in 2014 from value investing to growth-focused sectors like technology, healthcare and leisure was pivotal. Focused heavily on tech disruption: “We avoid legacy industries disrupted by technology; you must be in the right ‘neighborhood’.” Investment strategies now focus on creating long-term value through hands-on operational changes: "Today, it's much more competitive. More capital. More firms. Better intermediation. More financing. More accessible financing. And so, the way one generates returns today is doing something to the businesses that you buy".

Global and Sectoral Trends:

The U.S. economy is slowing, with wage growth down to 3-4% and pricing pressures increasing. Blackstone sees India as a significant growth market since 2005, with Japan emerging from slow growth. Energy demand, especially in electricity, is a strong investment focus: “Electricity demand is growing at 3%, outpacing current infrastructure.” Inflation pressures are decreasing, with companies’ input costs nearing zero, indicating stabilization.

Negotiation and Leadership:

Negotiation is about building long-term relationships while securing necessary terms: “It’s not about keeping score; it’s about getting the deal done.” Baratta emphasized teamwork at Blackstone, stressing collaboration rather than individualizing mistakes. He highlights the importance of maintaining valuation discipline: “You can pay too much even for a great business, as 2021 showed.” Leadership success comes from transparency and ownership across the team, ensuring shared responsibility in both wins and losses.

Listening time: 40 minutes

Goldman Sachs Exchanges: Great Investors - with Joe Baratta, Blackstone's Global Head of Private Equity

I thought this was a good one for helping guide you to a widely mentioned, can't miss quality of a company. As the article mentions, this is popular with Warren Buffett. The qualitative characteristics are brand power, network effects, cost advantages, high switching cost, intangible assets, and scale. These are almost required to develop a moat, but the quantitative factors might help alert you at what companies to look for those that help develop the moat. Quantitatively were looking for Earning consistency, and Buffett has noted that as stable earnings growth over an extended period. The other measures are Return on Equity averaging 15% and Return on Total Capital averaging 12% over the last ten years. I went to LSEG Workspace to run a quick screen. I also used a EPS screen with average growth of 10% over last 10 years. There's more I can do with this, but I wanted something simple. I also added Starmine's Earnings Quality rank over 50 looking for some assurance EPS isn't achieved by playing games. Finally, as a point of reference I add the ARM Score, which looks for momentum in Analyst Revisions over a number of measures and periods. There were just 731 companies globally that meet the screen. Run a multi-factor rank and you're ready to go looking for the qualitative.

Finding Wide Moat Stocks: A Qualitative and Quantitative Guide

A quick chart from Jeff Weniger, CFA , head of Equity Strategy, highlighted the recent outperformance of value. Though it hasn't been a straight line, especially for the S&P 500. I used Datastream charting to take a look at a few more growth to value indexes. In the second, chart I'm looking at the change of the ratios over the last two years.

Value Indexes Started Outperforming 3-4 Years Ago

Inflation has been increasing and Yen weakening, so the Bank of Japan wanted to come off zero. Seth Carpenter , Morgan Stanley's Global Chief Economist and Chetan Kishore Ahya , Chief Asia Economist discuss the turmoil caused by the initial aggressive statements from Governor Ueda. They backed off a bit after realizing their impact on financial conditions. Chetan believes another rate hike is coming in December or January. Seth also commented on the uncertainty around the Fed in the coming months. This is always a wonderfully informative and quick listen. Listening time: 6 minutes

Bank of Japan’s Role in Market Volatility

Continuing along the Rates discussion and the shorter podcast. This content is a little old, but as I try to do, this has a little bit of time before it becomes out of date. Michael Feniger joined TJ, Thomas Thornton , on BofA's Global Research Unlocked to chat about construction markets. Construction spending is running at near record levels driven by the recent fiscal spending. It's not all positive though. There's weakness in warehouses, retail shopping, and private office. If we move into a rate cutting environment, there's some benefits to housing and commercial construction. Manufacturing construction spending is growing due to some of the reshoring. There's seismic shift in the construction market with the big getting bigger. There's a huge increase in mega projects ($1B+), but that is slowing. There's a lot of content packed into this sub 20 minute episode. I liked this on in particular because it causes you to think about how rates and political environments might have large impacts on specific areas of markets. Listening time: 18 minutes

One for the Road

Glue Guys is a new podcast. The idea of this is to relate sports to business and business to sports while trying to make others better. "Glue Guys explores the qualities that make individuals become better leaders, teammates, and humans alongside a trio with those same ambition." I enjoyed this intro the podcast and listened to one episode already. Going to be adding this to my schedule. Listening time: 83 minutes

What Makes A Glue Guy?

Thanks for reading. Have an amazing week and remember to not pass us a momentum to call or hug a loved one, you never know when the last time you will see them is.

This post is dedicated to Cheryl Franus . I hope heaven is in need a good librarian and there's all the Cabernet Franc you can drink.