Weekend Update #056

Jan 8

Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

On Wednesday, January 5 the major stock indices declined sharply with the NASDAQ falling over 3.3%, the S&P 500 retreating nearly 2% and the DJIA down 1.1%. The downward move followed the U.S. Federal Reserve’s meeting minutes that indicated that the central bank would continue to shave its asset purchasing program, and hike rates shortly thereafter. The Nasdaq experienced its biggest single-day contraction since February and the S&P had its largest decline since late November. Fundamentally speaking, the risk-free rate changes the value of an investment with an upward move increasing the total discount rate to which future cash flows are applied. As the discount rate increases, given that the market expected risk holds, the value of future cash flows will decrease and consequently decrease the value of a company’s equity.

The move was also not marked by simple anticipation of future rate changes. In the chart below we track the 10-year treasury yield by its intraday and YTD absolute bps moves:

In just one week the yield has moved upwards by 10bps, which can also help explain the downward pressure on U.S. stocks this week. (Most DCFs model cash flows out ten years, so we peg our discount rate to the risk-free rate associated with this investment horizon). The current expectation is two or three definitive rate hikes in 2022.

Some bullet points from the Fed minutes include:

Expectations for an earlier reduction in accommodative policy lifted short-term rates and supported the dollar
Expectations of COVID becoming endemic have contributed to lower growth outlook and a lower long-run neutral level of the federal funds rate
Median expectation for net asset purchases to end was for March 2022, but the distribution of expected federal funds rate hikes were variable
Higher inflation and a tighter labor market
Stronger economic outlook than last year, higher inflation and larger balance sheet could warrant a potentially faster pace of policy rate normalization

Thank you Blue Room Analyst Ian Carter

Dayton Korean United Methodist Church was a big part of my growing up. While I was in high

school, my brother and I went to church twice per week. Sunday morning of course, and also

Friday night for Youth Group, which was an evening gathering, starting around 6:00 PM

Reverend Andrew Park of United Theological Seminary served D.K.U.M.C. by providing English

language sermons to the youth congregation on Sunday mornings while also leading small

group bible study. Rev. Park often preached about social justice, and he warned about the

coming economic inequalities from trade globalization as the North American Free Trade

Agreement (1993) was being signed and as the General Agreement of Tariffs and Trade was

transforming into the World Trade Organization.

So much of what we saw this week has been foretold.

When it came to the specific topic of understanding, what Reverend Park said to break down the

constituent meaning of the words “under” and “stand.” Rather than look down and assess and

stand over to figure things out. Consider to be humble and proactive and take the step to make

the gesture of humility to stand under the person.

The Insurrection on Capitol Hill

Symptom

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Globalization / Corporatism

Institutionalism

*Beeple’s collage, Everydays: The First 5000 Days, sold at Christie’s. Image: Beeple*

Quantitative Easing is a type of monetary policy in which a Central Bank purchases assets to support the economy over which it presides. The Federal Reserve is the Central Bank of the United States. Central Banks have the authority to manage a country’s currency and money supply.

Following the bursting of the housing bubble and the ensuing financial crisis, the Federal Reserve slashed interest rates and began the first round of quantitative easing in 2008, which comprised purchases of government agency bonds and mortgage backed securities in effort to support financial markets. By doing so, the Fed’s Balance Sheet grew from a pre-financial crisis mark of $755 billion to over $2 trillion, an increase of nearly $1.5 trillion.

Subsequently in 2010 and 2012, the Fed announced additional rounds of quantitative easing to continue supporting the US economy. These measures resulted in the Fed Balance Sheet surpassing $2.5 trillion, and later $4.2 trillion, where it stayed for several years until September 2017, when the Federal Open Market Committee (FOMC) announced it would begin the “normalization” of their Balance Sheet. The Fed does this by selling its balance sheet securities and/or by ceasing to reinvest maturing securities.

And indeed, the Fed was able to reduce the Balance Sheet to about $3.5 trillion, a decrease of over $600 billion and raised rates from near zero to 2.5% in the span of about two years, up until the emergence of the COVID-19 pandemic.

During CES 2022, Dr. Femi Wang and several Ambarella, Inc. executives gave insightful updates on the future of the business. Much of the higher level information was shared in previous earnings calls and conferences in the back half of last year, but the company did officially introduce a new family of CVflow SoCs.

Ambarella announced a new CVflow Domain Controller SoC that can handle computer vision, radar, lidar, ultrasonic, and higher levels of autonomy than previous CVflow hardware. Cars running on CV3 architecture brings them closer to fully autonomous while minimizing energy consumption by using a single SoC. The ASP for CV3 family chips will be tiered starting around low to mid double digits and increasing all the way up to low triple digits. The current ASP for Ambarella CVflow SoCs is in the upper single digits due to the current volume of sales of non-CV, legacy chips. In the future the company will seek to decrease the percentage of sales of legacy chips and increase the sale of CVflow chips above the current 75/25 split.

Costco Wholesale Corporation (“Costco” or the “Company”) (Nasdaq: COST) today reported net sales of $22.24 billion for the retail month of December, the five weeks ended January 02, 2021, an increase of 16.2 percent from $19.14 billion last year.

For the 18 weeks ended January 2, the Company reported net sales of $76.34 billion, an increase of 16.6 percent from $65.47 billion last year.

December comparable sales were up 14.5 percent with e-commerce sales up 17.8 percent in the month.

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BLUE ROOM
Investment Team Bullpen
__________

Wednesday January 5, 2022

9:00 AM

Hanoi, Vietnam

Tuesday January 4, 2022 7 PM

Denver, Colorado

__________

+++

THIS WEEK’S

HIGHLIGHT

= WITH =

– DRY STORAGE –

A COLLABORATION

CHEF
MARC VETRI

CHEF
KELLY WHITAKER

MAKE AT HOME / GRILLED MOUNTAN PIZZA

Marc Vetri is the Chef and Founder of the critically acclaimed Vetri Cucina in Philadelphia. With a history of working in some of the finest Italian and American kitchen, Vetri Chef has been named named “Best Chef: Mid-Atlantic” by the James Beard Awards as well as one of the “Ten Best New Chefs” by Food & Wine Magazine.

INGREDIENTS

________________

500g Yecora Rojo Flour

375g warm water (80 ℉)

4g dry yeast

15g salt

Toppings as desired.

Instructions

Dissolve the yeast in 350 g of warm water
Add flour and mix into dough
Dissolve the salt in the remaining 25g of warm water
Wait a half-hour then add the salt slurry into dough
Wait a half-hour and fold dough
Repeat last step 3 times (1.5 - 2 hours)
Cold ferment in the fridge for 12 - 36 hrs before being shaped
Lay the dough over a grate covering a wood-burning fire. Flip at the desired time and add your choice of toppings
Kelly and Marc roasted mushrooms over the fire to add to their pie along with prosciutto, ricotta, gruyère, and garlic