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China’s Economic Recovery, Stimulus Talks, SpaceX and Homebuilding Stocks

China’s economy expands, stimulus talks near Pelosi’s deadline and SpaceX puts another batch of its Starlink satellites in space.
(Sergey Dobrydnev)
(Sergey Dobrydnev)
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Good morning! Today’s word count is 1,934 words, or a 9-minute read. Let’s get to it:

Market Summary (10:45 A.M. ET): “Continuing talks among top Democrats and Trump administration officials, as well as evidence of China’s economic rebound, are boosting investors’ optimism,” WSJ writes.

  • S&P 500: $3,481.63 (-0.06%)
  • Nasdaq: $11,646.73 (-0.21%)
  • Bitcoin: $11.639.554 (+5.27%)
  • Gold: $1,912.70 (+0.33%)
  • U.S. 10-Year: 0.774%

Justin Oh’s Daily Read

Let’s look at homebuilder stocks. Homebuilding is an example of a heavily cyclical industry where revenues boom and wane based on the economic and housing markets. Homebuilder valuations are generally forward-looking through the ups and downs, and that an investor might invest in these stocks if he or she believes the peaks or troughs will be higher than what the market is pricing.

Here are valuations for some of the largest publicly traded homebuilders (EBITDA based on average three-year consensus estimates). 

  • LGI Homes ($LGIH) – 8.5x forward EBITDA
  • Lennar ($LEN) – 8.5x forward EBITDA
  • D.R. Horton ($DHI) – 8.5x forward EBITDA
  • Pulte Homes ($PHM) – 6.4x forward EBITDA (11.9% current free cash flow yield)
  • Toll Bros. ($TOL) – 8.5x forward EBITDA

Looking over the past 5-6 years, these companies have traded within a 5.0x to 8.5x range, and we can see there is optimism embedded in the stocks. The last time they were trading over 8.0x EBITDA was late-2017, and they didn’t perform so well afterward. So the question is: will home prices and new home demand be especially strong over the next one to two years? (…)

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China Economy Grows As Rest of World Struggles With Coronavirus

Chinese officials said its gross domestic product increased 4.9% in the third quarter compared to last year, WSJ reports.

China isn’t quite back to pre-coronavirus forecasts, but this puts it on track.

  • Projections from the beginning of 2020 put China’s growth between 5.5% and 6%.
  • After a historic 6.8% contraction in Q1, China added 3.2 percent in the second quarter and 4.9% in the most recent one.
  • The International Monetary Fund projects China will finish with a 1.9% expansion this year, the U.S. will shrink 4.3% and Europe will contract 8.3%.

China also has strong peripheral stats to back up its growth. Chinese unemployment fell 0.2% to 5.4% from August to September, remaining beneath Beijing’s target of roughly 6%.

How The Three-Stage Recovery Played Out:

  1. China shut down most economic activity in January, with the lockdown lasting until around the end of March.
  2. In April, factories revved-up production, and China increased its share of global exports on things like face masks, sterilizer and work from home equipment.
  3. Consumer recovery drove the third quarter, with authorities “encouraging consumers to begin venturing outside of their homes and opening up their wallets.”

The Chinese economy’s resurgence has been a boon to American companies with significant operations in China — Domino’s Pizza and McCormick & Co.

  • Domino’s said retail sales in China during Q3 “offered a lifeline” while around 300 of its locations were closed during Covid-19.

But, more importantly, China’s return to some form of normalcy incited recovery in hard-hit industries.

  • During China’s eight-day National Day holiday, 637 million people traveled within the country, spending roughly $69 billion, and domestic movie theaters pulled in $580 million.

Justin Oh:

China’s bounce back is a good example of why I’ve suggested investing in the Chinese tech giants for international exposure. In reality, winners tend to outperform in a dominant fashion, and the rest lag behind.

I still believe in the continued dominance of the U.S.-based economy despite recent pressures, but I also think China to be highly competitive and will always do what’s best for themselves.

It will be a U.S. vs. China showdown for the foreseeable future, and China is already bouncing back. Having exposure to parallel regimes through dominant growth monopolies (at reasonable prices) is a great way to diversify yourself.

Stimulus Deal Before Election Hangs on Pelosi’s Tuesday Cutoff

With House Speaker Nancy Pelosi’s Tuesday deadline looming, the prospect of House Democrats and the White House agreeing on a new stimulus package for the U.S. economy is dimming, Bloomberg reports.

President Donald Trump said he’s willing to match the Democrats $2.2 trillion spending demand, saying, “I want a bigger number than she wants.” However, the Republican-controlled Senate is likely to reject any figure that high.

  • With Trump trailing Democratic Nominee Joe Biden in polls, the President’s influence over the GOP may be diminished.

Price isn’t the only point of contention. The two sides still can’t find common ground on a national plan to control the virus, including aid to states and an employer liability shield.

Mitch: While Pelosi and Treasury Secretary Steve Mnuchin press on with talks, Senate Majority Leader Mitch McConnell is pushing forward with his own plan.

  • The $500 billion Republican-only plan would renew “a small business loan program and provide expanded unemployment benefits, school aid and money for virus testing, among other provisions.”
  • Democrats are “almost certain to block action.”

Standing Pat: “Despite the standoff, and recent data showing the economic recovery is slowing, markets so far mostly have shrugged off Washington’s inability to act.”

  • Last week was the S&P 500’s best since August.

Democrats could pass a more massive deal with a Biden Victory, even if it means taking a smaller deal during the lame-duck period up until the inauguration.

If Trump Wins: A win would give him more negotiating leverage, but “Anybody who would want to predict what President Trump will or won’t do is doing so at their own risk,” said former Republican House Speaker John Boehner.

Justin Oh:

From Morning Cents (Oct. 9, 2020):

“I had talked about how we should expect a volatile, but relatively sideways market, which has been playing out as expected. Markets don’t like uncertainty, so it has liked new stimulus package negotiations and Biden’s increased lead in the polls. But for the market to make another meaningful move higher, we will need to see another stimulus package to support consumer spending and a weak job market.”

SpaceX Successfully Launches 60 More StarLink Satellites, Bringing Total To More Than 800

Elon Musk, you continue to amaze us. At Florida’s Kennedy Space Center on Sunday, SpaceX successfully launched a batch of 60 of its “internet-beaming Starlink satellites, growing its constellation even further,” TechCrunch reports.

So, what is Starlink? Musk wants to replace “traditional satellite internet” to give the world high-speed broadband internet in places previously “unreliable, expensive or completely unavailable.”

  • The plan is to target the Northern U.S. and Canada in 2020 and expand out to global coverage by 2021.

It’s an impressive feat, as SpaceX has put around 835 Starlink satellites into space (some were test satellites).

The launch wasn’t perfect. While it did include “a successful controlled landing and recovery of the first stage booster,” pulling in the fairing halves that protect cargo during the launch was only “semi-successful.”

  • The halves parachute down to the Atlantic Ocean after use, where a recovery barge awaits. A net on one of the barges gave out, and the recovery crew was fine, but SpaceX said it wasn’t an “ideal outcome.”

But SpaceX’s ability to “maintain a very fast and frequent pace of launches” could be the defining feat. This year, Musk’s company has mostly focused on sending its own satellites to orbit, with nearly 300 new ones launched since June.

  • SpaceX wants to launch two more batches next month and has a tentative launch on the calendar for Wednesday.

A Win’s A Win: The launch was successful, and the necessary components were recovered, eventually, garnering a win for SpaceX and the Falcon 9 launch vehicle’s ongoing reusability.

Justin Oh:

You have to give it to Elon Musk, who I’ve looked up to for about 8-10 years at this point. If you’ve read his biography, you’ll realize he’s a wildly ambitious dreamer like many founders, but also has a rare intellect and perseverance that results in him willing companies into existence. I do not hero-worship and don’t think he’s infallible, but he is definitely among the business leaders I respect the most. 

He is hard-working and drives goals to completion, even if they’re a little late. He creates value for shareholders and society by innovating new technologies, not just cutting costs or financially engineering capital structures. Love him or hate him, we all can learn a lot from his accomplishments from Zip2, Paypal, SpaceX, Tesla, SolarCity, and beyond.

What’s Going On

Big Box Moves: “Chinese e-commerce giant Alibaba Group Holding Ltd. said it would pay $3.6 billion to take control of China’s largest big-box retailer and a major rival to Walmart Inc. in the world’s most populous nation. Hangzhou-based Alibaba, currently China’s most valuable company with a market capitalization in excess of $800 billion, said Monday it plans to double its stake in Sun Art Retail Group Ltd., which operates more than 480 large supermarket-department stores in China.”

Explosive Industry: “Automakers are confronting a new challenge in their race to sell more electric cars: battery-related fires leading to vehicle recalls and safety probes. U.S. safety regulators this month opened a probe into more than 77,000 electric Chevy Bolts made by General Motors Co. after two owners complained of fires that appeared to have begun under the back seat, where the battery is located. Ford Motor Co. said last week it is delaying the U.S. introduction of its Escape plug-in hybrid after fire concerns surfaced this summer in similar vehicles sold in Europe.”

Tensions Tighten: “The U.S. government is embarking on a push to persuade developing countries to shun Chinese telecommunications equipment, offering financial assistance to use alternatives that Washington says are safer and have fewer strings attached. The U.S. is ready to offer loans and other financing, potentially worth billions of dollars in total, to countries to buy hardware from suppliers in democratic countries rather than from China, said Bonnie Glick, the deputy administrator at the U.S. Agency for International Development, which is spearheading the effort.”

Raise Rackup: A Nigerian plans to raise $1.2 billion over the next three years to meter electricity consumption in Africa’s most populous nation, San Diego-startup Lawmatics collected $2.5 million to help lawyers market themselves, Pimloc netted $1.8 million for its AI-based visual search and redaction tool and tech-based real estate agency Propseller grabbed $1.2 million.

One Step Closer: “China’s securities regulator cleared the way for Ant Group Co. to proceed with its Hong Kong listing, one of several regulatory nods the financial technology giant needs before it can go public.”

Will You Be My Neighbor: “Nextdoor Inc., a social network for neighbors sharing information or trading goods and services, is considering options to go public, including an initial public offering” in the range of $4 billion to $5 billion.

Drilling Down: “ConocoPhillips is buying Concho Resources Inc. in an all-stock transaction valued at $9.7 billion, as the American shale-drilling industry is facing a downturn after a historic crash in oil prices amid the Covid-19 pandemic.”

Holding Up: “Major hotel chains, from Marriott International to Radisson Hotel Group and Paris-based Accor, Europe’s largest hotel company, say their African businesses are not only holding up, they are determined to stay on track with, if not grow, their footprints.”

Back To Business: “Pakistan Telecommunication Authority said on Monday it has lifted the ban on TikTok, 11 days after the South Asian nation’s telecom authority blocked the popular short video app in the country over problematic videos on the platform.”

Restricting Ties: “A new law will allow China to ban exports to protect national security, adding a versatile weapon to Beijing’s arsenal as it fights a war over trade and technology with the U.S.”

A Couple Cents Featured

Is Apple the worst tech stock to own right now? Justin Oh discusses.
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