Kodak Moment: Smile and Say “Technology!”

Join Chris Perras for the 7/31/2020 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas, and welcome to our July 31st podcast, Keeping You Connected to Your Money. This podcast is entitled Millennials Kodak Moment: Smile and Say Technology. The S&P 500 sits this morning around 32, 35. This is almost exactly flat here today. The tech-heavy NASDAQ is up over 15% here today and the value bias Dow Industrials is down about 8% here today.

Listeners, it’s summer in the stock market in the economy. This week gave me one of the most interesting and unique weeks I’ve ever seen in 25 years of helping people invest their money. I would venture to guess that until this week, almost no one under the age of 50 knew what Eastman Kodak did, or had ever used one of their products. Kodak’s company and their stock once a titan in the film industry in US manufacturing had become irrelevant to both our economy and the stock market. I mean, how big is the current market for physical film nowadays?

Your iPhone can produce a higher-quality image instantaneously that lasts forever. It can do it for free, and you can edit your beautiful work immediately. The pictures you take never wash out with age. You can send dozens or hundreds or even millions of copies to friends, relatives into the world instantaneously for free. Physical film was one of the first losers in the transition from an analog to a digital world. I mean, have you used your Polaroid camera lately? When’s the last time you bought Fujifilm? I don’t know a professional money manager who even knew the ticker of Kodak until this week.

Then Peter Navarro in the Republican-led White House inked a $750 million loan with an otherwise dead company to convert their corporate campus and convert their underutilized and unused manufacturing facilities into a home for up to 25% of the United States domestic drug component supplies. This is brilliant and groundbreaking. These drug components supplies come almost exclusively from Asia. What happened to the stock? Well, the Kodak stock exploded from $2 a share to over $60 a share in two days. Listeners, that is the Robin Hood effect.

I don’t know if it will last for Kodak the stock, or if the day trading crowd will move on to the next headline. My instinct is to say it’s a flash in the pan. Moreover, I have no idea how a company that’s been near obsolete for 30 years got a $750 million loan out of nowhere. What I know from investing is as an American citizen, this is exactly the type of investment our federal government should be making in manufacturing and jobs. We should be incenting and reshoring our manufacturing jobs to re-employ unemployed US workers and diversify our supply chains away from our reliance on Asian markets, which we do not control.

Yes, over longer-term times it will be inflationary from a price perspective but is the necessary from an accessibility of resource perspective. Maybe you should think about doing a little bit of the same with the likes of Intel, which I will get back to in a few minutes. In the stock market this week, it was the biggest week for earnings reports for the second quarter. I mean, I might venture to guess it was the biggest week for S&P 500 earnings ever.

In the span of 30 minutes last night, Thursday night, almost 30% of the S&P 500 market cap reported earnings. Amazon reported earnings, the stock is up about 5% today. Facebook reported that stock is up about 8% and Apple reported that stock is up between 6% and 7%. Google reported and that stock’s down around 4% today, but they all reported in about a 30-minute time span. All reported blowout revenue in margins and earnings except for Google.

The COVID-19 epidemic has done more to accelerate ongoing consumer and technology trends in the last six months than anything investors have probably seen in decades. These companies have benefited from COVID. Additional companies like Electronic Arts, which owns numerous online video games, sports franchises like FIFA Soccer, also beat and raised guidance. No longer is it just millennial gamers and Gen X’s like myself enjoying the at-home entertainment of interactive gaming, but the ongoing shutdown of most of professional sports leagues coupled with continued closing of most movie chains has enticed millions of new older gamers to pick up this form of entertainment in the safety of their own homes.

In fact, as a whole, earnings reporting season has been much stronger than most analysts, and almost all economists thought it would be two to three months ago. Why? It’s a combination of pent-up demand for housing, autos, and technology products, coupled with strong pricing, demand trends, and consumer staples for consumption at home instead of at work or in restaurants. Which brings me back to the big wart in the earnings reporting season. That was Intel. Intel reported what was a stellar revenue in earnings quarter. However, it was not this quarter that I was worried about, it was next. I had expected them to give mediocre guidance for the third quarter and the stock to sell off some.

All these things looked spot on until management team came out and conceded that not only had they continued to have glitches in their current manufacturing process, but they would be late to the market with an even more complex technology, they would be late by 12 to 15 months. Their main rival in manufacturing is Taiwan Semi, who manufactures chips for the likes of Nvidia and AMD, and they have beaten Intel to the market consistently the past three years. Being late in technology cycle is tantamount to missing the boat entirely.

This brings me full circle to today’s title of the podcast, Kodak Moment: Smile and Say Technology. I’ve mentioned this a number of times over the past year, the main thing that seems to really separate the four disparate generations here in the United States is technology, how it’s used, and what were the secular trends and technology which was driving society during the consumption ages of that generation when they were 20 to 50 years old.

Just like other areas of manufacturing, like autos, and big capital equipment, new technology and its ability to drive the use of cheap offshore labor has driven a trend over the past 40 years of just-in-time supply chains. Maybe we saw that this week, which has gotten hidden behind the scenes of technology, CEO testimony in Washington, blowout tech earnings last night, and more COVID virus news is what will become a game-changing attitude of investors and politicians over the next decade. Maybe the Kodak Moment we really saw this week was the first of many to come policies at the top of our federal government to reassure jobs and reclaim self-reliance on critical components of our economy.

Let’s think about repurposing underutilized or older assets in newer ways. No, I’m not talking about picking winners and losers at the government level, I’m talking about remaining self-reliant in areas of need. Maybe as a country, we should help Intel catch up with Taiwan Semi in technology, so we don’t fall woefully behind in semiconductor manufacturing. While we still currently lead the world in semiconductor design, but we’re lagging far behind now in reliance on others in Asia for manufacturing the actual chips that go into all of our products.

Maybe we shouldn’t send Tesla to us or convert older manufacturing plants within our domestic car companies like Ford or GM into modern manufacturing plants that make electric cars and batteries that roll out over the next 5 to 10 years here in the United States. Maybe we should help with that transition, as opposed to, let the older companies rot on the vine. Austin, Texas just gave Tesla a $1 billion incentive to build their next Gigafactory in Austin. Maybe at the federal level, we should incent companies, both domestic and foreign, to bring their capital here and build more in the United States. Whoever should win the upcoming election, they should take a cue of Donald Trump and his advisors and follow their example set in this week’s deal with Kodak and put in systems to reshore critical manufacturing back to the United States.

Currently, Troy and I just released a summer outlook video on the YouTube channel for Oak Harvests. We last did this on March 24th when we saw behind-the-scenes indicators telling us that there was a story that you were seeing. Listeners, feel free to subscribe to our YouTube channel for these updates. Go ahead to YouTube and search Oak Harvest Financial Group and sign up for free. Additionally, we’ve been slowly leaking our second-half outlook on the markets and the economy in prior podcasts. We haven’t really felt compelled to rush it to market because we don’t expect much net to happen in the markets over the next three months. We will release it shortly to clients and on our websites.

I want to leave our listeners with some data that few in the financial press have mentioned, but I think are very illustrator of how listening to economist’s pontificate about the stock market will rarely, if ever, make you money. Mid-week the alarmist headlines across most financial news networks were that second-quarter GDP in the United States fell at an annualized rate of 33% in the second quarter. That was a historic plunge; old news and virtually irrelevant to what will happen in the economy and the stock market in the future.

In fact, if you look back on stock market’s historic decline in March, what you will find is that the market dropped 34% peak to trough, closing high to closing low in one month. Reported annualized GDP dropped 33% in the second quarter and the stock market dropped 34% in March. That was at the end of the first quarter, not in the second quarter. Listeners, do you see a correlation? Stocks move in advance of the economy and they are a pretty good indicator of things to come in advance of the data that is reported by the government. We’ve talked about this for the past three months. The 10 V bottoms in the economy and the markets have followed almost the exact same paths over the last 100 years.

Here is a little more data for our listeners. After the strong pickup in housing, sales consumption spending, and investment in the late second quarter and early third quarter, where do economic estimates for each annual 2020 GDP fall? If you said they fell at -5%, but they’re being revised up slightly, you would have guessed right. Listeners, the S&P 500 is down almost exactly 5% from its late February highs.

Why do I emphasize this data and its timing? Listeners, if you have an advisor who calls himself a tactical asset allocator, who claims they have a system to get you out and get you back in, and that’s their system, whose sales pitch is, “You won’t lose money with us.” Whose systematic approach to investing in stocks is based on selling fear, which these so-called systems are, please run for the hills.

At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. If you’re retired or in the process of retiring, give us a call at 281-822-1350. We’re here to help you plan your financial future and help smooth the financial path you have into and through your retirement years with a customized retirement planning. Many blessings. This is Chris Perras at Oak Harvest. Have a great weekend and stay safe.

Speaker: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, statistics, and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax, or legal advice, or an offer, or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.