FVAC Feedback

While investors are generally frustrated by the current equity market, we have to play the FOMO, retail-oriented, lax oversight, easy money fueled game in front of us.  FVAC bridges that divide, by being both sensational – rare earths are inputs for electric cars, wind turbines, advanced sensors, robotics, and most everything else sci-fi – while also meeting reasonable investment process criteria.  A few FVAC bullets:

• profitable ‘specialty chemical’ producer that is expected to serve very rapid demand growth
• facing only one mediocre ex-China competitor
• run by management of unusually high quality for sector
• backed by western government national defense interests
• trading at a discount to replacement cost, when above interests need domestic supply

Concerns focused on substitution of other materials – a real risk but one we see as low in the near-term.  New materials would require a long development cycle to be placed into service – permanent magnet electric motors are the substitute.  Materials scientists have already looked for decades, and alternatives would likely include rare earths because of their f-orbital configuration.  Concerns about competitive entry seem misplaced, in part because Mountain Pass is a well characterized deposit with tolerable byproducts and also because of the decade or so it would take to launch a new integrated production facility.  More importantly, it is already largely built with a capital cost to market size ratio that would dissuade most evenhanded analyses.  We think FVAC is worth a look – replay & slides available here:  CLICK HERE

UBER | AB5, Prop 22, App Data Not Supportive

While many freedom-loving investors might believe that Uber “should” be allowed to structure whatever employment arrangements it wants, the law says something different. While we’ve covered the decline of white collar law enforcement in our FCN long thesis (CLICK HERE ) Uber has been found in violation of California labor law.  Uber plans to pull out of California ridesharing – not food delivery, which wasn’t covered by the court – and push hard to pass Prop 22, which would exclude ‘app-based drivers’ from AB5.  Found to violate the law? Change the law! The pull-out is designed to inconvenience Californians, emphasizing the need for ridesharing and driving support for Prop 22.  Uber and other platforms like DoorDash are spending over $100 million to get Prop 22 passed.  They face some daunting hurdles, however.  SEIU and transportation unions oppose the measure.  Some progressives have claimed that it will create a ‘permanent underclass’ of workers.  The share price is clearly assuming that Prop 22 passes, and polling suggests passage is likely as of mid-August. 

Does cessation of service increase the odds of voters supporting the initiative? Our guess is that usage is already down and shutting service may facilitate new customer habits and transport adaptations.  It should also emphasize that the model loses money without, what some might view (or at least a court did), as aggressive labor practices.  Is Uber a taxi company selling a dollar of service for 0.95 cents even with the cost advantage of flouting labor laws that alternatives transport modes obey?  Or is it a protected interest, wielding lobbying dollars and political spending to embed itself as an ‘exception’ because of some tech halo? For investors, it probably doesn’t matter – the risk looks unusually asymmetric. Perhaps Uber should have abandoned global plans and adjacent markets, focusing like FedEx Ground on shoring up the legal foundations of its labor arrangements.

 
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Eats still operating at a sizeable loss…

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Airline Data, UAL, AAL, LUV | No Capacity Discipline, Bailout Bets

Such different capacity strategies as the legacy carriers ‘rage, rage against the dying of the light.’  We’d love to get constructive on a SAVE or LUV if there seemed a sensible way forward, and a failure of AAL or UAL to file may, in fact, improve the relative competitiveness of the lower cost competitors.

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Biz Jets flight are largely back

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If not to Europe given travel restrictions

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2 Sigma Screen

We’ve updated parts of the 2 sigma screen, adding some tickers and removing some dead wood.  Overwhelmingly the commercial aerospace industry is the most down, but so are payroll processors (PAYX, ADP) perhaps in part because of float interest declines.  Unfortunately, FDX is the single most overbought name – with UPS and Deutsche Post also up.  DE is also overbought into what should be its most difficult quarter in several years – could be one to watch.  Defense contractors have lagged, presumably because the street isn’t reading the 100 Year Marathon, or perhaps because they are reading Kill Chain.  Both are worth a review given current geopolitical tensions.  Hedgeye is hosting a call on China with Derrick Scissors from AEI this Friday at 12:30PM.

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