Welcome back to the Lumida Ledger. Here’s a preview of what we cover this week:

• Macro: Economic Pulse Check, Housing Starts Resiliency, Resilient Labor Market, State of the Consumer, China’s Decline & The Race for AI

• Markets: 60/40 Portfolio Performance, Magnificent 7, Passing on Instacart, Favorable Energy Backdrop, Why Some Brands Can Coast

• Company Earnings: Banks (MS, GS, BAML), Tech (Tesla, Netflix, ASML), Industrials (United, American Airlines) Real Estate (Prologis), Healthcare (J&J)

• AI: Broadcom’s New Chip 

• Digital Assets: Larry Fink Crypto a “Flight to Quality”, Bitcoin ETF, SBF & George Stephanopoulos Interview

Check out Ram’s Interview with family office investor Angelo Robles.

We loved this line: “Ozempic is a metaphor for the United States. The US is overweight (Debt/GDP) and needs to cut the fat and get into better condition. But the US across any KPI of national strength, is still the global leader with no close rival."

We discussed:

• Is the US in Decline?

• Why Buffett likes banks, and why owning a private bank is a great asset

• What the highest risk-adjusted return investments are?

• Examples of how PE firms are benefiting from Distressed CRE

• Open AI’s $86 Bn valuation. Why we are passing, and our focus on the Silicon Layer

• Big Tech stocks: Microsoft, Google, Netflix, Tesla, and Apple

• How opening banking to technology firms would revitalize earning growth

We recently launched our new Longevity & Legacy podcast.

In this week’s episode, our Co-Founder Justin Guilder interviews Dr. Ian Russinoff about how individuals are using concierge medicine to improve health outcomes and extend longevity.

We discussed:

• How customizable care plans aim to reduce stress and enable clarity for legacy planning

• The latest advancements in screenings and biomarkers to optimize healthspan

• The role of exercise, sleep, nutrition in living healthier for longer

• How concierge medicine can provide improved medical access leading to better healthcare outcomes and enhanced longevity

For anyone interested in taking a more proactive approach to your healthcare, have a listen!

Fiduciary vs. Broker

The SEC released examination priorities.

The SEC made clear that hybrid advisor-brokers who are dually registered (SEC as advisor; FINRA as broker) will face increased scrutiny.

They are focused on wealth managers that have a dual license of fiduciary and broker-dealer - which presents conflicts of interest.

Ram and Justin founded Lumida as a fiduciary because we believed clients deserve conflict-free financial advice.

There are inherent conflicts of interest when the same firm acts as both an investment adviser and a broker-dealer. And the vast majority of clients are not informed of the difference.

In the brokerage world, advisors are only required to recommend "suitable" products, not necessarily the best ones for a client.

Their compensation often comes from commissions based on what clients buy.

This creates an incentive to recommend proprietary funds or products that pay the advisor more, rather than what's best for the client.

Dual registrants can maximize their fees by exploiting their hybrid status.

For example, selling commission-loaded products in a brokerage account, then transferring to an advisory account with ongoing asset-based fees.

We provide transparent, fee-only advice tailored to each client's financial goals. We receive no commissions and we do not sell proprietary products (like ETFs).

While growth continues in the hybrid model, we firmly believe separating advisory and brokerage services is better for consumers.

If you are looking for independent, fiduciary advice, and an endowment-style approach to investing we encourage you to reach out to us.

Our prior post on “buyside (fiduciary) vs. sellside (brokers)” also may be worth a read.

Macro

Why is the US economy doing better than expected despite high rates?

The US economy continues, on average, to beat economists expectations. And the earnings growth expectations for the S&P 500 are 0%. The analysts are dour as well.

Here are the main reasons:

• Consumers & Corporates termed out debt (e.g, locked in low rates).

• Fiscal spending from CHIPS Act & Inflation Reduction Act

  • After years of decline, manufacturing is an upswing now

  • Fiscal policy is running counter to monetary policy (It’s like giving gas while tapping the breaks)

• Private credit is growing and buffering declining bank credit growth

  • The addition of KKR, Apollo, and Blackstone to the S&P 500 show how important private credit is to the real economy

• There is holdover stimulus from the $2 Tn CARES act.

  • That is evidenced by above average bank balances and low savings rates

• The US continues to gradually shift from a cyclical to service oriented economy

• My Amazon Prime and Costco bill (we are doing our part)

Where do we go from here?

Our view is that the US economy is strong. But it is gradually slowing like watching an ice cube melt.

Eventually the corporate debt maturities will hit in 2025. The CHIPS Act and IRA Act is still in the early stages of spending.

Markets are already discriminating between public securities that rely on debt financing and those that do not.

No one knows how exactly the Fed and Congress will adjust monetary and fiscal policy.

Where we stand today there is no recession nor one in the immediate future.

Bank of America CEO on the State of The Consumer

Each quarter we tune into the comments (and data) from the big banks to gauge the health of the consumer.

Brian Moynihan had a detailed interview on the health of the consumer.

The bank sees consumers spending at a 4% to 4.5% annualized growth rate for the month of September. The number has gradually slowed down from the 8 to 9% growth rate we saw in 2022 after the massive CARES Act stimulus.

4 to 4.5% spend growth is the same spend trend we saw in 2017 to 2019. That’s normal and sustainable.

This slowdown in spending is consistent with our thesis that the US economy is growing but at a slower rate.

Housing Starts

U.S. single-family housing displayed a resilient comeback in September Housing starts jumped 7% in September.

Overall, housing starts accelerated at 7.0% to a rate of 1.358 MM units. This was slightly below economists' expectations, who had projected a bounce back to 1.380 MM units.

Jobless Claims

Jobless Claims drop again to new lows.

Again, there’s no recession here folks. We haven’t had levels of unemployment this low since the 60s.

One day this will change, but that time is not now.

The labor market is resilient.

Retail Sales

Retail sales in September soared 0.7% surpassing expectations for 0.3%

And consumers continue to stretch their legs and spend money on restaurants, travel and leisure. (But they are avoiding old brands like Disney.)

On China’s Decline and Race for AI

Business Insider wrote an article titled “The era of China’s global dominance is over”.

‘Getting rich isn't China's big project anymore; the project is power.'

Our view is a bit different. First, China never achieved global dominance.

The country that created Jack Ma, an incredible entrepreneur, was sidelined because he remains a threat to power. Central power is the priority, not economic emancipation.

That said, China equity valuations are now at 10 year lows. And leading indicators are positive. We’ve seen that for several weeks in a row now.

We believe cheap small cap growth stocks in China may represent an interesting opportunity.

We spoke to an analyst this past week who has 15 professionals on the ground in China.

Their observation is that the China consumer is starting to consume more home grown brands.

The local version of Nike, for example, is growing quickly.

We don’t have an investment in China - but we do recognize non-consensus and out-of-favor sectors - and China fits the bill.

Buying the index is not the right way… we may do an interview with this analyst in the coming weeks. Stay tuned for that.

Non-Consensus Call:

An investor with a long-term view of 3 to 5 years can do well identifying quality firms at sound valuations (and good accounting) in China.

Commercial Real Estate

It’s not Brookfield.

PIMCO just walked away from a portfolio of hotels.

I spoke to our preferred CRE manager earlier this week.

They are about to close on a transaction acquiring assets at 40 cents on the dollar.

The previous owner (a big firm you would recognize) wanted to reposition a major shopping center into multifamily. They invested tens of millions. But they couldn’t get the permits.

And rates going higher make the project uneconomical.

Now, the private equity operator is clever. Here’s what they are doing.

They are talking to Costco. Their plan is to sell the parking lot and let Costco bear the costs of developing it.

At the same time, they are reaching out to retailers to lease up vacancies and maximize occupancy of the shopping center.

This is the hustle and creativity you see from smaller private equity operators.

The firm that is selling is a big bank and it’s just not a priority for them. They can afford to lose $50MM and it doesn’t matter for them.

We continue to believe investing in distressed commercial real estate is the highest risk-adjusted return opportunity.

Meaning, regardless of the news headlines or direction of rates, this is the investment we expect to generate 3 to 4x MOIC tax efficiently.

And they’ve delivered that performance before.

Reach out if you are a qualified client and want to learn more about our private equity firm that is taking subscriptions for a handful of more weeks.

You can also learn more on our landing page.

Markets

60/40 Portfolio Has It’s Worst Run in Decades

The 60-40 stock-bond strategy faces its most challenging year in decades due to rising interest rates and inflation.

Bonds, once a hedge against stock downturns, are faltering alongside equities.

Lumida takes an endowment style approach to investing, with a focus on alternative investing.

The reason Harvard and Yale’s endowments do well is because they are diversified beyond equities and fixed income.

That’s our specialty: distressed CRE, niche private credit funds, private equity, and digital assets.

There are several interesting ways to generate uncorrelated returns in today’s environment.

Yields on 10-year US Treasuries reached near 5% and fresh 16-year highs

We removed our tactical underweight on equities issued on Aug 1st and started buying semiconductors for the reason we identified in the previous newsletter.

"At long last, Semiconductor stocks are down 10%. And earnings growth expectations for this sector is the highest across all sectors. The market was dumping semis and tech this past two months, and yet earnings are going up. We believe now is the time to start legging into semiconductors."

We picked up Broadcom (AVGO) and ASML at the gap down Monday open panic. Both are up since then. ASML reported earnings this week and beat on revenue and earnings.

Recent IPOs are Underwater

Investors in recent IPOs have lost money.

- Instacart

- ARM

- Klaviyo

- Cava

Were any of these truly extraordinary?

How many of you bought these stocks b/c your 'Advisor' was commissioned to sell it to you?

There is good news for future IPO investors.

The late-stage buyers will go on strike and insist on better valuations.

Wall Street caters to the buyside more than the corporate issuer.

The buyside needs to participate in each and every IPO, whereas a company IPOs only once.

This crop of IPOs was a dud.

We were critical of Instacart here. We like ARM but not the valuation. This is the opposite advice of Morgan Stanley and Goldman Sachs - the two leading tech M&A Bankers.

Can you spot the conflict?

The next year’s crop should do better.

The late-stage buyers (e.g., T. Rowe, Wellington, Fidelity, etc.) will go on strike and insist on better valuations.

It's a cycle.

Note: Warren Buffett does not typically purchase IPOs.

Be skeptical of what Wall Street sells. Wall Street will generate the fees regardless, you have to hold the bag.

Magnificent 7

We’ve written about how there is a lot of ‘geriatric Big Tech’.

Meaning there are old tech companies that are not posting the 25% growth numbers any more.

Last reported quarter there were over 130 US companies with EPS Growth exceeding 25%.

Only 1 of the Magnificent 7 passed the screen - Nvidia.

Meanwhile, there are over 125 companies that are growing earnings faster than 25%. (And many are also cheaper than Nvidia!)

If you invest in what everyone is talking about, on average, you will underperform.

Invest in the ideas that everyone will talk about tomorrow.

That’s the heart of non-consensus investing.

We Still Like Energy

Energy has been an incredible diversifier for tech stocks.

The aggregated put/call ratio for the Energy sector surged higher, indicating fear amongst traders, and then it reversed.

Similar reversals led to excellent returns and win rates regardless of the market environment.

Past is not a prologue, but if we like the fundamental story, these technical setups help to refine entry points.

What’s Working in Markets

High quality stocks (e.g., profitable earnings growth) and low volatility stocks.

What’s not working is unprofitable tech: firms like SoFi, Upstart, and Affirm

This is a factor driven market.

Why Some Great Brands Can Coast

Check out this data on consumer brand media spend.

Notice Beyond Meat, which is Beyond Cooked, is growing YOY ad spend. Classic brands like Hershey's are pulling back media spend.

When a brand becomes synonymous with a verb or a noun that’s a defining moment:

• Google is to Search

• Kleenex is to Tissue

• Coke is to Soda

• Tylenol is to acetaminophen

• Band-Aid is to bandage

• Xerox is to photocopy

Then the brand has a cultural ‘lock-in’.

The brand becomes interchangeable with the category or action. The second best opportunity for a brand is to be the exemplar for the category.

When startups started saying ‘We are the Uber of “x”, then Uber is the exemplar.

Are there exceptions? Yes, Zoom.

Zoom hit ‘verb status’. But it’s not sticky.

Why?

The same reason Microsoft was able to defeat Netscape Navigator in the Browser Wars.

The primary customer relationship is intermediated by the OS. It’s the same concept as ‘platform risk’.

Apps rely on the Apple Store to access customers. Sometimes they get rug-pulled, as when Twitter cut off its API.

Or when Amazon chooses to roll-out their own version of a hot-selling 3rd party product.

Brands have longevity, except when access is intermediated by a 3rd party (which happens often in technology).

Company Earnings

We outline earnings across the following sectors.

• Bank: Goldman Sachs, Bank of America, Morgan Stanley, Citizens, Truist

• Tech: Tesla, Netflix, ASML, TSMC, Lam Research

• Industrials: United Airlines, American Airlines, Freeport-McMoRan

• Real Estate: Prologis

• Healthcare: Johnson & Johnson

We’ll start with Bank Earnings:

• Goldman Sachs

• Bank of America

• Morgan Stanley

• Citizens

• Truist

Goldman Sachs (GS) Q3 2023 Results:

• Beats Earnings by ~3% & Beats Revenue expectations by ~5%

• $11.8 Bn in total revenue, down ~1% YoY & up ~8% QoQ

• Net earnings: $2 Bn, down ~33% YoY & up ~69 QoQ

Key Takeaways:

• Retreating from consumer banking businesses

• Focusing on core strengths: investment banking & wealth management

• Recent significant IPOs include ARM & CART

• $1.5 Bn, amid debt & equity underwriting gains, weighed down by a decline in completed M&A transactions

Bank of America (BAC) Q3 2023 Results:

• Beats Earnings by ~10% & Beats Revenue expectations by ~1%

• $25.2 Bn in total revenue, up ~3% YoY & flat QoQ

• Net earnings: $7.8 Bn, up ~10% YoY & up 5% QoQ

Consumer Spending Insights:

• Consumer banking unit revenue: $10.5 Bn, up ~6% YoY

• Spending on debit & credit cards: up ~3% for the quarter

CEO Brian Moynihan's Comments:

“We added clients & accounts across all lines of business in a healthy but slowing economy. U.S. consumer spending is still ahead of last year but continues to slow."

Lockheed Martin Corporation (LMT) Q3 2023 Results:

• Beats Earnings by ~2% & Beats Revenue expectations by ~1%

• $16.8 Bn in total revenue, up ~2% YoY & ~1% QoQ

• Net earnings: Adjusted earnings of $6.77 per share, down ~1.5% YoY

Morgan Stanley (MS) Q3 2023 Results:

• Beats Earnings by ~7% & Roughly Matches Revenue expectations

• Revenue: $13.2 Bn up 2% YoY & down 1% QoQ

• Net earnings: $2.4 Bn, down ~9% YoY

Key Takeaways:

• Investment-banking Revenue: ~$938 MM, down 27% YoY

• Fees from M&A advising: Dropped by more than 30% YoY

• Trading revenue: Fell 4% YoY

• Wealth Management: ~$6.4 Bn, up 5% YoY

>> It’s all about wealth management folks. That’s the business line that is growing.

Citizens Financial Group (CFG) Q3 2023 Results:

• Misses Earnings by ~7% & Misses Revenue expectations by ~1%

• Revenue: $2 Bn, down ~7% YoY & down 4% QoQ

• Net income: $430 MM, down ~32% YoY & down 10% QoQ

• Stock Down ~3% pre-market

CEO Bruce Van Saun: “We will continue to play strong defense given the external environment while advancing important strategic initiatives.”

>> Regional banks have a difficult hand to play as deposit financing costs increase.

Truist Financial (TFC) Q3 2023 Results:

• Beats Earnings by ~2.4% & Barely Misses Revenue expectations by ~0.1%

• $5.6 Bn in total revenue, down ~3% YoY

• Net earnings: $1.07 Bn, down ~30.5% YoY

CEO Commentary:

• “The focus remains on core clients, optimizing balance sheets, and improving the capital position.”

>> Regional banks have it rough. When the Fed eventually eases, the regionals will be cheap. We’re not there yet.

Tech Earnings

• Tesla

• Netflix

• ASML

• TSMC

• Lam Research

Tesla (TSLA) Q3 2023 Results:

• Misses Earnings by ~9% & Misses Revenue expectations by ~3%

• ~$23.4 Bn in total revenue, up 9% YoY & down 6% QoQ

• Gross Profit: ~$4 Bn, down 22% YoY & down 8% QoQ

• Stock Down ~6.6% QoQ & Up ~9% YoY

>> We have been bearish on Tesla for months. Meanwhile, Morgan Stanley is putting out absurd $400 price targets. Higher rates slows demand by making auto sales harder to finance.

Netflix (NFLX) Q3 2023 Results:

• Matches Revenue Expectations and Beat Earnings by ~6%

• Revenue: ~$8.54 Bn, up 8% YoY & up 4% QoQ

• Net Income: ~$1.68 Bn, up 6% YoY & up 12.76% QoQ

• Total Memberships: ~247.15 MM, beat expectations by ~1.3%

>> We believe Netflix can crank out a few more years of earnings growth via price increases, but it’s best days are behind it. Why pay 40x PE for earnings growth of 6%?

Discover Financial Services $DFS Q3 2023 Results:

• Misses Earnings by ~18% & Beats Revenue expectations by ~2%

• Revenue: ~$4 Bn, up ~16% YoY & up ~4% QoQ

• Stock Down ~2.6% in after-hours

>> Avoid unsecured consumer lenders like Discover, Capital One, SoFi, Upstart, Affirm. Increasing defaults and a weakening low-income consumer will pressure earnings.

Key Takeaways:

• “We are seeing some indications of stress,” with credit cards showing increasing delinquencies & higher loan balances, CFO John Greene

>> Avoid consumer lenders.

ASML Q3 2023 Results:

• $7 Bn in total revenue, up 15% YoY & down 3% QoQ

• Net earnings: $1.9 Bn, up 11% YoY

• Stock Price: Closed at ~$608, Down 12% QoQ & Up 43% YoY

TSMC Q3 2023 Results:

• Beats Earnings by ~10% & Beats Revenue expectations by ~1%

• $17.2 Bn in total revenue, down ~10% YoY & up ~13% QoQ

• Net earnings: $6.69 Bn, down ~24% YoY

On China:
"Due to the persistent weaker overall macroeconomic conditions & slow demand recovery in China, customers remain cautious in their inventory control. That's why we expect the inventory digestion to continue in Q4”

Lam Research (LRCX) Q3 2023 Results:

• Beats Earnings by ~11.9% & Beats Revenue expectations by ~2.1%

• $3.48 Bn in total revenue, down ~31.0% YoY, up ~8.5% QoQ

• Stock Down ~3.2% YoY

• Guidance Update: Lam Research expects FQ2 2023 revenue between $3.4 Bn and $4 Bn

Key Takeaways:

• CEO Timothy Archer: "Lam continues to deliver strong results despite a cyclically soft year for wafer fabrication equipment spending."

• China with the highest Revenue distribution at 48%

Industrials Earnings

• United Airlines

• American Airlines

• Freeport-McMoRan

United Airlines (UAL) Q3 2023 Results:

• Beats Earnings by ~9% & Beats Revenue expectations by ~0.2%

• $14.4 Bn in total revenue, up ~12% YoY & up ~2% QoQ

• Net earnings: $1.1 Bn, up ~21% YoY & flat QoQ

• Stock Down ~5% premarket trading Wednesday

CEO Scott Kirby points to higher labor costs, delayed aircraft deliveries, & air traffic controller shortages as contributing factors to rising costs

American Airlines (AAL) Q3 2023 Results:

Beats Earnings by 52% & Slightly Misses Revenue expectations by ~0.3%

$13.4 Bn in total revenue, up ~0.1% YoY & down ~4% QoQ

Stock Up ~2.07% on the day, down 34% QoQ & down -15% YoY

>> The consumer continues to spend on travel & leisure. Like Warren Buffett, avoid buying airline stocks.

Freeport-McMoRan Inc (FCX) Q3 2023 Results:

• Beats Earnings by ~15% & Beats Revenue expectations by ~6%

• $5.8 Bn in total revenue,~16% YoY and up ~1% QoQ

>> We like commodities and commodity miners. It’s a natural inflation hedge, and diversifier for traditional equities.

Real Estate Earnings

• Prologis

Prologis (PLD) Q3 2023 Results:

• Beats Earnings by ~33% & Beats Revenue expectations by ~11%

• $1.9 Bn in total revenue, up ~9.7% YoY

• Occupancy rate: 97.1%, in line with estimates

• Operating income for Q3: ~$882 MM

• Net operating income for Q3: $1.3 Bn

>> Prologis is ‘commercial real estate’. They offer data center services to companies in Big Tech and firms like CoreWeave. Not all CRE is created equal.

Healthcare Earnings

• Johnson & Johnson

Johnson & Johnson (JNJ) Q3 2023 Results:

• Beats Earnings by ~6% & Beats Revenue expectations by ~1%

• $21.3 Bn in total revenue, up ~7% YoY down ~16% QoQ

• Net earnings: $4.3 Bn, flat YoY

Key Takeaways:

• Pharmaceutical sales: ~$14 Bn, up 5% YoY

• Medical devices business sales: ~$7 Bn, up 10% YoY

AI

Broadcom unveiled a new chip.

It’s the most advanced router in the world.

We like Broadcom because Big Tech firms like Google are spending on Broadcom to build their own GPU Tech stack. Broadcom is a hedge against Nvidia.

It’s consistent with our approach to AI of investing in the Silicon layer, and avoiding the sky high valuations in the application layer.

We were offered an investment at OpenAI at an $86 Bn valuation on $1 Bn in revenue. Easy pass.

OpenAI will probably fetch a $300 Bn valuation in a year or two. That doesn’t mean it’s not the right decision to pass anyway. Focus on making consistent good decisions rather than chasing.

We’ll share a private pre-IPO investment we are doing now in the Silicon Layer when it closes in a few weeks…

Digital Assets

DCG is a modern day Enron.

There, I said it.

Recoveries for Gemini Earn are looking bright (any may be completely made whole) due to focus on Restitution.

It will turn on the strength of the balance sheet. Here is our analysis.

Larry Fink calls crypto a flight to quality.

Pretty incredible to hear that coming from one of the world’s largest asset managers with $8 trillions in AUM.

The institutions are here folks. In fact, they never left.

A Bitcoin ETF approval could come later this year or early as next year (or sooner)

We expect the approval of a Bitcoin ETF first, followed shortly by an Ethereum ETF.

SBF is going away for a long, long time.

SBF's 'word salad' defense - hiding behind complexity - won't stand up to scrutiny.

It's a straightforward fraud case. Did he take the money? (Yes.)

Did he lie about it? (Yes.) Did he know he was lying about it? (Yes.) Done.

Remember the George Stephanopoulos interview?

Work with us: we are are looking for a client associate to provide sales and client service support. Send referrals here.

Meme of the Week

Quote of the Week

"In investing, what is comfortable is rarely profitable." - Robert Arnott

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