'Dash for Trash' – The Carvana Edition; China's Lost Decade for Investors Has Already Happened; Warren Buffett's Florida Bet Bodes Well for Troubled Insurance Market; Biking, kayaking, and hiking in Oregon; Meeting an Empire subscriber
1) On Friday, my colleague Herb Greenberg penned an especially insightful Empire Financial Daily essay on the foolishness that's taking place in pockets of the market: 'Dash for Trash' – The Carvana Edition. Excerpt:
I have one question to ask...
Has everybody lost their minds?
I may have been a few weeks early with my "Welcome to Fantasyland" essay last month, but this is a market you could see coming.
We were clearly entering the "silly season," as a broker I met early in my career used to call periods like this during the 1990s.
The signs were all there... but perhaps nothing signaled its arrival (to me, at least) more than online used-car retailer Carvana (CVNA)...
My bottom line: It's great that Carvana pulled off such a stock-goosing magic trick, but lost in all of the mania of the market is that the viability of company's business remains a question mark... and until proven otherwise, investing in Carvana continues to be a dash for trash.
When there are so many other higher-quality companies to choose from, why so many people gravitate to those with the lowest quality continues to confound. Personally, I think casinos are more fun.
The foolishness Herb writes about is certainly a warning flag I keep an eye on that can indicate an overheated market on the verge of collapse, but I don't think we're anywhere close to that point yet.
It reminds me of one of Ronald Reagan's favorite jokes:
Two Russians are walking down the street, and one says, "Comrade, have we reached the highest state of Communism?" "Oh, no," the other replies. "I think things are going to get a lot worse."
2) Also on Friday was this insightful article in the Wall Street Journal, which does a good job of laying out China's challenges: China's Lost Decade for Investors Has Already Happened. Excerpt:
Deflation looms. The workforce is shrinking and aging. The property boom has turned to bust, leaving a legacy of heavy debt. Cash-rich consumers won't spend. There are plenty of comparisons between China's stuttering economy today and Japan at the start of its lost decade.
Investors in China have had a lost decade or more already. Domestic share prices are lower than they were in 2007, and earnings per share are the same as in 2013. No wonder Chinese stocks are among the cheapest in the world.
The question is whether the gloom – emphasized by a recent stretch of weak economic data – is overdone. Is China stuck in a middle-income trap, made worse by getting old before it got rich? Or can it grow out of its housing gloom, with a well-educated and innovative population able to put the troubles behind it once the postpandemic confusion abates?
... But productivity is everywhere except in the statistics, where it has been falling for more than a decade after an extraordinary period of growth that followed China's entry into the World Trade Organization in 2001. Weak earnings and low share prices are the natural corollary of weak productivity, and the government is standing in the way of improvement.
So will China follow in Japan's footsteps and suffer a lost decade? I think not.
When Charlie Munger was asked this question long ago at a Wesco annual meeting, he replied (this is from my memory):
The Chinese are gamblers. They're more entrepreneurial and willing to take risk than the Japanese, so I don't think they're likely to suffer the same stagnation.
A friend of mine, who runs a venture-backed medical device start-up in Silicon Valley and works with both Chinese and Japanese companies to produce the innovative new devices he develops, told me something similar:
The difference between the Chinese and Japanese is night and day. The Chinese are always pushing the envelope, contributing new ideas and wanting to do things faster.
The Japanese, by contrast, while they do extremely high-quality work, are slow and don't want to do anything until every "I" is dotted and every "T" is crossed with regulators.
3) In this latest post, former hedge fund manager Eric Rosen, who now lives in Florida, had this interesting tidbit:
I have written extensively about the problems with homeowner's insurance in Florida, given that many insurance companies refuse to underwrite new policies. The result is premiums are skyrocketing as much as 500%.
However, superman might be coming to the rescue based on this article, "Warren Buffett's Florida Bet Bodes Well for Troubled Insurance Market." In it, my friend, Ajit Jain said the firm increased its property-catastrophe exposure by nearly 50% this year including up to $15 billion of new risk in Florida. Leave it up to the smartest insurance minds in the world to come in when pricing gets stupid. Jain said:
We had a lot of powder dry and we were lucky that we kept the powder dry, because April 1 suddenly prices zoomed up again a lot higher than what they were on January 1, and starting to look attractive to us...
Net-net, I'm very happy with the portfolio. It's been a lot better – it is a lot better than what it's been in the past. I don't know how long it will last, and of course, if the hurricane happens in Florida, we could lose across all the units, we could lose as much as $15 billion. And if there isn't a loss, we will make several billion dollars as profit.
4) On Friday Susan and I biked 23 miles along the Columbia River (in our matching Backroads cycling jerseys!), on Saturday we kayaked up the Wind River and went for a swim (25-second video here) in the morning and went for a hike in the afternoon, and yesterday we went for another long hike.
Every day we've seen tons of beautiful waterfalls – this area is supposed to have the highest concentration of them in the world...
And to cap the weekend, Susan and I had dinner with Empire subscribers Dave and Karen, who were delightful. They live in nearby Hood River, but don't spend much time there as they're retired and travel about as much as we do!
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.