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Thridrangaviti Lighthouse, South Constituency, Iceland
This lighthouse was originally constructed in 1942. The construction took over 4 years. The lighthouse is located 4.5 miles off the southwest coast of Iceland. It is one of the most isolated lighthouses in the world.
St Joseph North Pier Inner and Outer Lights, Michigan
This lighthouse is one of two located on a pier in St Joseph, Michigan. The lighthouse was first built in 1832, and the two lights were reconstructed in 1904. Both lighthouses are on the U.S. National Register of Historic Places.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Coffee makers continued turnaround
We have highlighted Starbucks in recent editions of this publication due to major events that we think have been catalysts for the company. The company is rapidly undergoing a strategic turnaround led by the former CEO of Chipotle, Brian Niccol. Niccol has taken Starbucks back to the basics and made some simple but effective moves that have already impressed investors (including ourselves). In the fall, Starbucks announced it would be moving towards a smaller menu with fewer offerings and their stores were no longer open to the public. Starbucks will eliminate approximately 30% of the items it offers by late this year. Starbucks locations are now only open to customers. Some analysts have blamed a policy that came into effect in 2018 for Starbucks’s poor performance in recent years. The policy allowed anybody to use the restrooms, get free water, and sit inside a Starbucks. Essentially, you did not have to be a paying customer. This led to issues for Starbucks across numerous locations which impacted revenue. Yet another win for Niccol is a very simple change.
Starbucks shares are up 24% this year and have been on fire since Niccol was named CEO last summer. Starbucks shares are trading at their highest level dating back to August 2021. This week, Niccol made another move that seeks to improve financial conditions for the coffee chain. On Monday, Starbucks announced it would be laying off 1,100 corporate employees. The company also canceled several hundred open positions. Niccol wrote in a statement that this simplifies Starbucks’s structure, removes layers of duplication, and creates smaller and more nimble corporate team.
The layoffs will not affect workers in Starbucks locations or its manufacturing, distribution, or warehouses.
Niccol has also made it a priority to make customer drinks faster in stores through increased efficiency driven by new workstations and more staff in Starbucks locations. Niccol also made changes to Starbucks’ mobile ordering system to allow customers to pick up orders at exact times.
Overall, Niccol’s strategy is simple yet effective. We think his success at Chipotle will roll over into this role at Starbucks. Sometimes simple changes are all that is needed to kick-start a stagnant business. We expect this turnaround to occur within the next few quarters. The recent performance of Starbucks’s share price is already reflecting this optimism from investors. All of Starbucks’s changes are aimed at boosting efficiency and margins.
Last quarter, Starbucks beat earnings-per-share and revenue estimates for the first time in over a year. Despite this earnings beat, both metrics were down year-over-year.
In other news regarding Starbucks, according to Reuters, Starbucks is exploring options to sell a stake in its China-based business.
We continue to remain bullish on Starbucks, especially after some of these recent announcements.
Disclaimer: MacNicol & Associates Asset Management holds Starbucks (SBUX) shares across various client accounts.
Tesla’s slide
Last week, we mentioned Tesla’s tough 6-8 weeks, this week we found a photo that illustrates this slide. Since December 18th, Tesla shares have lost 37.5% since reaching an all time high.
The 8-week loss equates to $600 billion in lost market capitalization. Quite staggering as the world’s largest electric vehicle producer struggles with potential trade sanctions, tariffs, and consumers turning their back on the company due to its CEO’s part-time job and political affiliation. We are certainly not agreeing with those boycotting Tesla over Elon Musk’s involvement in the Trump administration nor are we fully supporting his actions. We are simply pointing out a correlation that many investors across the world have noticed in recent weeks.
We will have to see if Musk and Tesla can stop this trend before shares completely crater.
On Tuesday, Tesla shares dropped by more than 8% bringing Tesla’s market cap to below $1 trillion for the first time since the U.S. election in November. Shares dropped due to sales plunging in Europe by 45% year over year in January. Tesla sales sank while electric vehicle sales in Europe increased by 37% over the same period. For the first time ever Tesla trails BYD in terms of EV sales in the United Kingdom.
Tesla officially has some competition, and the competition offers consumers much lower prices for EVs. Is this soft month an outlier or is it a sign that Tesla’s dominant market share is eroding in front of our eyes? We are not sure, for now, it seems Europe is quite open to Chinese EVs continuing to increase their market share across the continent. We will have to see how long they let that happen.
Who buys these sh**ty coins?
Another day, another Ponzi. While not all cryptocurrencies are Ponzi schemes or rug pulls, we think it’s a good high-level term to describe what goes on in the meme coin area. Meme coins have no value and are usually named after a celebrity, internet meme, or humorous characteristic. These meme coins have been launched by retail investors, and celebrities over the last few years. Almost all these coins were rug pulls and many investors saw their capital disappear after buying the hype or launch.
Anybody who pays attention to crypto understands this pattern. This is why we think these types of coins are not suitable for any investors unless you are willing to lose all the money you put in. We question who buys these coins and consistently helps pump the price.
For example, a few weeks ago we highlighted Fartcoin in this publication. We highlighted that the meme coin had a market cap of $1 billion, it eventually peaked at $2.4 billion, since then the value of Fartcoin has collapsed by 90% leaving many who bought late “holding the bag”.
We know our readers and members of our network are not the ones buying these coins, but it still baffles us when ‘investors’ continue to fall for schemes like this. Remember, if there are no fundamentals and an ‘investment’ is based on a joke, you are not investing, you are gambling. Might as well hit the Bellagio at that rate.
Investors forecasting growth or a lack of
This past week, we noticed an interesting trend. A trend we wanted to highlight on a chart:
The chart above tracks Microsoft shares (MSFT) (blue) and the Consumer Staples Select Sector SPDR Fund (XLP) (red) price performance over the last year. The chart displays percentage performance and is an interesting piece of data when you synthesize the information.
Consumer staples are considered boring and conservative to many investors, yet they are outperforming one of the high-flying Magnificent 7 names during a period of rapid innovation and technological development (AI). This is a sign. The XLP ETF is up 11% over the last year while MSFT shares are down almost 3%. If you look even closer at the chart most of these gains and losses have come in the last 3 weeks.
So why has this happened? Inflation seems sticky and staples can hold their margins and innovation in AI seems further out than the market initially thought.
This divergence is worth noting and will be something we will be following closely. We have limited Magnificent 7 exposure at extremely low-cost basis and have recently increased our exposure to various North American consumer staples.
Dot com era
The S&P 500 just hit a level we have never seen, not even during the dot com bubble. No, we are not talking about price level, we are talking about a ratio, price to book. The S&P 500 is trading at 5.3x book. The S&P 500’s price-to-book ratio has doubled over the last five years.
Book value is simply a company’s total assets minus its liabilities. The higher the multiple, the more expensive the stock or in this case the index.
We are certainly not saying we are going to see market action like we did in 2000 or 2001, we are simply sharing warning signs that should have all investors both retail and institutional on alert of risk factors in the system. Investors are realizing these risk factors are real and markets do not always melt-up like they have in recent years. Investor sentiment hit a 7-month low this week according to the Fear & Greed Index. According to the index, investors are extremely fearful currently.
We think this level of sentiment is over the top as markets are still only percentage points off all-time highs. However, today’s investors are impatient and highly reactionary so the index reading reflects that. Investors are reacting to negative economic data, limited action from the FED, tariffs, geopolitical risks, and slowing sales all within a few weeks. We would warn our readers to not follow this extreme worry as remaining disciplined and focused during times of uncertainty and high volatility is extremely important. We believe our portfolios are constructed in a way that can mitigate these risks through diversification and downside protection without limiting portfolio returns by exiting the markets and sitting in cash on the sidelines. We will also say, some of the most famous investors in history buy when the street is selling and fearful (perhaps a contrarian opportunity in front of our eyes).
If you or your financial planner want to learn more about our portfolio structure or any of our funds, email us today to set up a meeting with a Portfolio Manager.
U.S. Treasuries
Bond yields in the U.S. hit their lowest level since December on Wednesday reaching below 4.3%.
Treasury Secretary Scott Bessent has made it clear that he wants to see rates lower without the Federal Reserve’s assistance. Bessent understands the bond market is more powerful than the FED. We published this photo in an edition of this publication earlier this year:
Many have said the Trump administration is solely focused on the performance of the S&P 500 like during Trump 1.0, but it seems Trump 2.0 is more focused on the bond market and treasury yields.
For now, we expect yields to move lower as uncertainty looms, tariffs worry Wall Street, and investors ponder what comes next.
However, do not expect this to last the entire Trump presidency. Bessent has long been critical of his predecessor Janet Yellen who famously issued lots of short-term debt to artificially prop up the economy. Bessent has been a critic of this decision by Yellen to increase the proportion of short-term debt issuance, citing that it was a strategy to boost the economy, markets, and Biden re-election probabilities in the short term.
The rationale is that by issuing debt that provides a quick windfall to investors—the principal and interest are rapidly paid out—the Treasury has delivered a stimulus to the economy and thwarted the Federal Reserve as it sought to fight inflation.
Bessent will take a different strategy while he leads the Treasury and will look to increase the duration of U.S. debt. So far, he has yet to alter Yellen’s strategy, but he has remained highly critical of the previous regime. Bessent understands the economy is weak and it could not handle his policy move in the short term.
However, in the long run, Bessent will increase duration and lock in long-term debt at 4.2-4.6%. Bessent seems worried rates could move even higher which will cost the government even more in interest payments. An increase in long-term debt issuance will likely push down bond prices and increase yields in the short term. So, if Bessent gets his way, do not be surprised to see yields spike a few quarters down the line. However, do not pour all your eggs into this basket and believe what they say, after all, they could continue the short-term train that artificially inflates markets and the economy through boosted short-term debt issuance.
Huge earnings
One of the last big tech companies to report earnings this quarter was Nvidia. The company reported after hours on Wednesday. To say that investors, institutions, and Wall Street were paying close attention to these earnings would be putting it lightly. It seems every quarter now that Nvidia earnings are labeled the most important earnings report ever online.
We are on quite a streak of the most important earnings ever, we joke.
Nonetheless, investor sentiment points to markets relying on Nvidia earnings to continue increasing and if they miss, markets could collapse. Quite the irrational behavior of investors.
Nvidia reported numerous metrics that beat Wall Street consensus estimates including earnings per share and revenue. However, the days of massive beats for Nvidia seem to be over. Nvidia beat EPS estimates by 6% and revenue estimates by 4%. That is the lowest beats in 10 quarters. Year-over-year revenue jumped by 78% and EPS jumped by 73%.
The markets’ original reaction to these earnings was flat as were Nvidia shares. However, its earnings call came at 5 pm which many investors were focused on. During Nvidia’s earnings call shares fluctuated up and down by only a few percentage points. A few hours later shares were down 0.5% after hours trading. A whole lot of nothing, something we were not predicting, and something equity markets probably need right now.
Bullish call buyers and bearish put buyers were the real losers after this earning call (as of writing this). According to trading data, Nvidia options accounted for 15% of all single stock option volume over the last month.
Overall management highlighted robust Blackwell AI Chip demand fueled by generative artificial intelligence. Nvidia’s CEO talked about the surge in demand for Blackwell chips calling it extraordinary and unlike any ramp-up for a product they have ever seen.
The company launched new products which it highlighted on its earnings call. The company’s 2026 Q1 forecast for revenue came in line with investor expectations. The company’s CFO said (gross) margins will improve this year and return to the mid-70% range by the end of 2025.
Overall, a pretty strong quarter for Nvidia. For now, it seems like the decreased demand potential from DeepSeek is not impacting their order book. We will share any other data from Nvidia’s earnings release and call-in next week’s publication when we fully digest it.
MacNicol & Associates Asset Management
February 28, 2025
The Weekly Beacon February 28 2025 US
