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Punta Penna Lighthouse, Vasto, Italy
This lighthouse is one of the tallest in the world. It stands at 230 feet tall and is located on the northern coast of Italy. The current lighthouse was first lit in 1948 but the light station was first established in 1906.
Storozhenskiy Light, Leningrad Oblast, Russia
This lighthouse stands at 233 feet tall. It is the worlds 7th tallest traditional lighthouse. The lighthouse still has a keeper today and is accessible to visitors. The lighthouse is located just northeast of Saint Petersburg.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Loan winner on Monday
Stocks across the world sank on Monday due to numerous risk factors. Increased uncertainty, tariffs, and recession fears led investors to continue to pile out of equities on Monday. The Nasdaq was off more than 4% as of 2 pm on Monday. For now, it seems the euphoric returns that markets had over the last 2+ years have come to a halt. The Nasdaq is off 8.5% from its all-time high, a drawdown but nothing of significant magnitude yet. The S&P 500 erased 9 months of gains in just 12 trading days. On the opposite side, treasury yields moved lower on Monday as investors piled into bonds.
We warned our readers that 2024 returns will not be repeated this year. We think many investors are waking up to this realization and are rotating capital away from the riskiest assets to stable, recession-proof stocks or other asset classes. Investors have piled into consumer staples, and bonds in recent days. We expect this to continue and are not stressed due to our clients having little to no exposure to the most at-risk areas of the market which include many growth stocks. We warned our readers last week that there could be short-term pain in U.S. equity markets as Trump’s administration causes disruption, and uncertainty and are looking for lower interest rates.
The odds of a recession have surged in recent months with numerous economists claiming we have already entered a recession. According to betting site Kalshi, there is now a 40% probability of a recession this year, double the probability 6 weeks ago.
It was not just high-risk tech stocks that tanked on Monday, quality names across the world moved lower on these worries. We will warn our readers which include our investors that quality names will bounce back, many of the names that have seen pullbacks have no fundamental issues and remain attractive. The pullbacks are due to systematic risk factors that cannot be eliminated.
However, one familiar name was up over 60% on Monday on a day when markets were tanking. RedFin, the digital real estate brokerage that we all know and utilize jumped on Monday due to an announcement from Rocket Co. Rocket Co. will acquire RedFin in an all-stock deal that values Redfin at $1.75 billion. The deal is expected to close during the next two quarters. The deal will see Rocket Co. pay $12.50 a share to acquire RedFin. RedFin closed on Friday below $6/share and was down more than 65% over the last 5 years. Rocket Co. offered a 115% premium to the value of RedFin shares as of Friday’s close.
While RedFin shareholders were happy on Monday, Rocket shares sank as investors worry the company is paying way too much for RedFin. Rocket Co.’s management says RedFin is a strategic asset that will help grow its traditional mortgage business by connecting its mortgage products with RedFin’s 50 million monthly visitors. They claim this acquisition has numerous synergies and it will reduce costs for American homebuyers. Rocket has identified $200 million of synergies, including $60 million on the revenue side, and believes the deal will be accretive. Numerous analysts claimed this acquisition price is aggressive and relies on several factors including the cross sale of financial products to home buyers.
We expect this deal to surpass regulatory hurdles and believe the Trump presidency will see more deal activity on both the private and public side compared to deal activity during the Biden presidency. However, we will warn that deal-making could screech to a halt if uncertainty and worry continue to linger across equity markets.
We do not own either of these companies. We will follow RedFin to see if there is any arbitrage opportunity moving forward regarding the takeout price and will evaluate this deal for Rocket Co., as the pullback was quite steep on Monday for the mortgage giant (could be an overreaction on a really bad day for the markets).
Talk about bearish
We have talked about market sentiment deteriorating throughout the last few months in recent editions of this publication. The Fear and Greed Index is making multi-month lows, the market is closing in on a 10% pullback, and investors are seemingly hedging themselves. According to data, investors are buying the most puts they ever have over 5 days. Here is a chart that tracks the rolling average 5-day U.S. put volume:
Quite the spike over the last few days.
Obviously, puts can be used for more than hedging purposes but nonetheless, investors are betting against the market and loading up with bearish bets.
We know one fella who is probably quite calm right now.
Buffet doubled Berkshire’s cash exposure throughout 2024 to $334 billion. Buffet is going to be very active over the next few months, especially if things get choppy.
Another week, more tariffs
This week Trump announced a new round of tariffs against the great white North. After pausing tariffs against Canada and Mexico last week for another month, Trump announced 50% tariffs on Canadian steel, and aluminum on Tuesday morning. The new tariffs come in response to Canada’s (Ontario’s) response from last week. Numerous retaliatory tariffs were announced by Canada at its federal and provincial levels. The Ontario government is irritating Trump the most as they have taken U.S. products off the shelves of LCBOs and have claimed they will slap a 25% upcharge on electricity that is sold to three northern U.S. states. Although Trump delayed the tariffs, Ontario Premier Doug Ford has said his tariffs will remain in place until a long-term solution is agreed on and tariffs from Trump are ‘gone for good’.
The 50% aluminum and steel tariffs will take effect as of March 12th.
U.S. steel producers saw an immediate lift after this announcement while Canadian producers saw their stock prices pull back. We have exposure to two quality names in the sector, one on each side of the border. We think in the long term these companies will see large gains but in the short term could see large swings to the up and downside.
Spot steel and aluminum prices jumped as well after this announcement. Both metals have seen their price increase since Trump’s first announcement regarding steel and aluminum trade tariffs in early February.
Trump also threatened to substantially raise tariffs on cars coming into the U.S. from Canada on April 2 if Canada doesn’t drop its retaliatory tariffs.
Trump also posted on social media claiming he would be announcing a National Emergency on Electricity in the region and that Ontario would be increasing electricity prices for U.S. consumers. This surcharge will affect 1.5 million homes and businesses in Michigan, Minnesota, and New York, costing up to $400,000 every day the surcharge remains in place. Trump’s press secretary went further at a press conference on Tuesday where she warned Ontario politicians regarding the flow of electricity warning that bad things will happen to Canada if they turn the power off to Americans.
The warnings from Trump appeared to work as Doug Ford announced that he would be suspending the electricity tax on Americans effective immediately. After that announcement, markets moved higher as investors saw some progress between the U.S. and Canada regarding trade.
Quite the whirlwind of a week when it comes to tariffs.
Bank of Canada slash
Tiff Macklem slashed Canadian interest rates by another 25 basis points on Wednesday. The benchmark interest rate now sits at 2.75%. Wednesday’s cut was the 7th straight cut by the Bank of Canada. The Bank of Canada has now cut its benchmark interest rate by 2.25% over the last 10 months. These rapid cuts come as the Federal Reserve has been a bit stubborn regarding cutting rates.
The new cut sent the loonie lower relative to the U.S. dollar. The Bank of Canada has been forced to slash rates as economic growth has slowed across the country causing many to believe a recession is looming. Fast forward to the last month, and more worry is present in Canada. A trade war with the U.S. could spin the Canadian economy into recession. Tiff Macklem knows how devastating this trade war could be for Canada and is front running the pain with some interest rate cuts. Macklem labeled the trade war as a “new crisis” and said the Bank of Canada cannot offset the impact of a trade war.
Macklem said the trade war will weigh on economic activity in Canada and will lead to higher prices and inflation. We think a second wave of inflation is looming, especially in Canada. The Canadian government will not be slashing spending and decreasing its number of employees like the U.S. government.
Inflation in Canada is in the Bank of Canada’s target range, however, do not expect that to last long when tariffs come into effect.
Lessons from failed investments
The electric vehicle bubble of 2020 and 2021 was built on hopeful investors, false promises, and eager management. EV start-ups popped up all over, at the end of the 2010s; they all hoped to one day scale and rival Tesla. These companies chose 2020 and 2021 to go public or raise capital, this was a smart move as the cost of capital was low and markets were very liquid due to stimulus. Investors also had an appetite for high-risk, growth stocks as they traded at home. Many of these EV companies chose to go public through a SPAC. We have mentioned the SPAC bubble in previous editions of this publication so we will avoid details but from a high level, a complete and utter disaster that hurt numerous groups of people.
Back to the EV front. Beyond Tesla and a few Chinese producers, most of these EV producers have yet to produce a large volume of vehicles. Many of the names have even gone bankrupt in recent years. Rivian shares are down 92% since going public, Lucid Motors down 78%, Nio 90% since 2021, and Polestar 81% over the last 5 years. Fisker went bankrupt in June 2024, and Nikola Corporation filed late last month (we almost missed it). These names erased investor capital. We understand it happened and warned our readers when it was happening, but what can be done to avoid these mistakes?
Investors as people are susceptible to all kinds of biases. Limiting the impact of these biases is important. For example, many optimistic and clean energy supporters saw 2020 as a generational opportunity to get in on the growth of EVs that could rival Tesla at a lower multiple where more upside was possible. These investors used confirmation, and representativeness to support their thought process. Confirmation and representatives are two types of investor biases.
At one point many of these EV names had almost no sales and were worth roughly twice the value of traditional automakers, GM and Ford. At this time, we warned our investors to not buy the hype and follow the numbers. The numbers told us that Tesla would continue to be a dominant player in the space, a few new EV names would grab some market share, and the rest of this new market would be acquired by existing traditional auto producers. Fast forward, a few years, and that has happened in North America (the global market has a few Chinese producers that are low-cost options and have gained market share).
We think looking at everything from both sides assists investors in making the best decisions possible. This market bubble was like that of the Internet Bubble (the EV bubble was much smaller), investors believed a new technology would rapidly grow and overtake all incumbents and all that is needed is more capital. Many technology and internet names that raised a lot of capital late in the 90s eventually failed or were acquired at a steep discount. Perhaps these two bubbles are a slight foreshadowing for the artificial intelligence industry. The technology will be groundbreaking but many of the platforms will fail, and companies will arguably overspend on research and development.
The other thing that investors could utilize to avoid making a mistake like many did in the EV bubble is to analyze fundamentals. These companies had almost no sales and were burning cash when they went public (heck some of them are still burning capital on low sales). Forecasts are great and help investors with decision-making, however, some of the forecasts from these EV producers were too good to be true. The auto industry is capital intensive and takes time to scale (look at Tesla), it was very evident that these companies would run out of capital and would have to raise again. If you think a company will be forced to raise new capital out of necessity, avoid the investment and circle back so you do not face dilution. The numbers these EV producers were forecasting in 2020 and 2021 were laughable when you look back. They were promising a complete turnaround in a matter of 2-3 years in a highly capitally intensive industry. The warning signs were there for all of us, many investors just needed to listen.
MacNicol & Associates Asset Management
March 14, 2025
