Its Over

Originally posted by 1ronnie ↑

600 point rise a day and then an 800 point drop on the Dow. Volatility rules the day even a month after the correction began and you’d wonder when the markets can settle in. We had positive trading environment just before yesterday’s 799 point drop which led some to believe that the worst this time (note: I say this time, the worst is still ahead of us not far) may be over.

Jim Cramer of CNBC blames the large fall in US markets to algorithm programme trading – market professionals set the algorithm when US futures start pointing down.

We know that the relief rally (as I coined it yesterday) was fuelled by two factors – the announcement of a 90 day truce on the US-China trade war and the Fed’s less hawkish tone suggesting a more rate neutral stance. Both of which I had expressed scepticism and I said that this felt like a rally the market would likely sell into. And so precisely the market did.

We know that someone in high office is faker than fake news itself. China is balancing a tightrope and coming out as a loser is a ‘lose face’ position that the Chinese regime would never put itself in, but neither does it want to create a disastrous situation that a failed trade negotiation portends. They need more time to work it through- while that releases tension on the political front, the uncertainty of an unresolved trade dispute is toxic for the business environment especially in relation to international investments. So this aspect alone is impinging global growth and unfortunately the downturn cycle has already been set in motion – you won’t see it just yet – the markets represent a forward barometer.

So the next key decision is the Fed’s decision this December. Will they push ahead or will they hold back a rate rise in the face of such uncertainty? If I am not wrong the next FOMC meeting is a week before Christmas. And markets will likely be edgy and trade sideways for another couple of weeks leading up to the rate decision. And if the Fed pauses, we could be in for a rally to usher in 2019 in late December or January 2019.

I also think we may have to get used to more of such volatility in 2019. While volatility may be great for day trading, it is not so for short and long term investing. As I said yesterday, some people can make lots of money in the week, tweeting and backflips while the rest of us would be caught up in the hailstorm. You just don’t know which way or direction will be heading – so it could be up 5% in January, then down 3% in February as the 90 day truce approaches, then up 10% in March as the US-China trade dispute looked like having a silver lining after all, but then down again in April-May as the market focusses on other concerns, namely grappling with evidence of a more than expected slowing economy amidst a tightening credit environment. All in all, a Buy and Hold strategy in 2019 may well be a zero sum game and could well be even more adverse than a sit out sidelined position. And I wouldn’t wait for October 2019….as the Big Kahuna approaches.

Remember “Doing Nothing is Doing Something”

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Fastbrick Robotics (FBR) was a market darling from mid 2016 to mid 2017, rising from 2c to a high of 30c and recognised as a strong potential tech microcap about to disrupt the construction industry with its Hadrian X robotics home builder.

Notably FBR caught international interest with an MoU collaboration with Caterpillar US…that news sent FBR on fire! Caterpillar even took a modest 5% equity interest in FBR further augmenting its potential.

Today, FBR fell 15% to 14c after months of sideways consolidation around 15-20c zone. The news? An announcement of an end to the Caterpillar MoU with Caterpillar selling its equity interest and an announcement of a new commercial model for FBR namely WaaS , Wall as a Service, lol.

So what is the take from this?

Firstly, there is no surety that any MoU with an MNC with result in anything tangible even though the MNC had taken an equity interest. As I had expressed in YOJ forum, many of these MNCs are only doing these collaboration as part of their own fact finding mission- they’re big enough and will want to do it for themselves if they could. And it is cheaper for them to collaborate with domestic innovators (like FBR and YOJ) than to create a separate project for themselves to determine their prospective long term commercial value. I have dealt with MNCs myself to know their mindsets.

So meanwhile, we go all bananas with the idea that our local hero has got traction with the big boys and poised to become a future one as well. As the GSW shareholders did with Amazon (remember?) and Yojee shareholders with UPS.

But more importantly I think, the cessation of the Caterpillar relationship could also be interpreted as Caterpillar’s own verdict on the potential (or rather lack of) of FBR’s disruptive mechanised construction business model. Furthermore, FBR newly created ‘Wall as a Service’ business to build any wall or part of any construction to me is a downgrade of the market expectation that their business model would be able to substantially displace manual labour with their own robots. So if you can’t get anyone to agree to have your robots build houses why not offer to build some of the walls whenever you need if you suddenly run short of labour. But that does not give the same revenue potential upside the market clamoured for. It could be a sign that the wonderful disruptive construction technology that FBR offers may be ahead of its time…great technology but the market is not yet ready for it.

And what happened to the great Saudi MOU to build of a potential (note the word potential) project to build 50000 new houses in the Saudi Kingdom by 2022? Still on the cards? So far ahead and not contractually binding.

In short MOUs are a just a piece of paper to show preliminary engagement that in most cases would fall short of a contractual binding agreement. Even GSW’s announced Master Agreement with Amazon fell substantially short – it was an agreement but without binding clauses that would result in any substantial commercial value that shareholders would otherwise interpret as having.

So yesterday I said that a company may have a great innovative product, solution or service but it is the entrepreneurial capability of the company’s management and/or founder(s) to implement and execute successful which is actually the key ingredient for success. Secondly, this FBR example also showed us that sometimes we may have both the above ingredients for success but the market may not be ready just yet to embrace it. FBR’s brave new world for the construction industry may well be a few years ahead of itself…with an expected downturn in the world economy, labour is not about to get scarcer and dearer. But in the meantime, it needs the cashflows to continue as a going concern.

I believe if FBR breaches its 14c support, FBR is headed lower, much lower given its market cap of $200m! The large market cap was driven by capital raisings, so pretty much like YOJ, the price stagnation on the back of a higher capital base gives a loftier market cap.