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3M: What to do now

Aug 30, 2023

Good morning! 👋

The markets are up in early going as Wall Street tries to extend a 3-day winning streak.

Naturally, the headlines would make you think traders have bottled lightning or something equally brilliant, but that’s really moot.

The real driver is the ADP report, which shows slowing job growth. Predictably, the thinking is that the Fed won’t need to raise rates if things are slowing, which is why traders are trying to get ahead of that (again).

We know that’s a bunch of bull-oney.

Money continues to run to the best companies making “must have” products and services the world cannot live without, which is why you want to focus on ‘em to the exclusion of dang near everything else.

Here’s my playbook.

ADP says job growth just 177k, below expectations

Job creation slowed more than expected, according to ADP, which released a report showing that just 177k jobs were created in August. 200k were expected. Perhaps more importantly, the report also showed that pay growth slowed for workers changing jobs AND those who stayed in current positions. (Read)

What catches my attention is that this is “consistent” with pre-pandemic numbers, according to Nela Richardson, ADP’s chief economist.

A few things…

The ADP report is typically viewed as a precursor to the DOL jobs number, but that may no longer be true, so take it with a grain of salt. ADP changed its methodology last year, so the linkage may not be as clear nor as predictive as it once was.
The markets will be gone like a rocket the moment there’s even a hint that the Fed’s done, but reports like this continue to make the case for that eventuality. Tech stocks in particular.

Be in to win or you won’t… win!

Regional banks get new rules (too little, too late)

US regulators have dished out a slew of new rules for regional banks with at least $100 billion in assets. The goal is to protect the public from more crashes after the SVB blowup this past spring that roiled global markets. (Read)

According to the plans, lenders will need to maintain long-term debt levels equal to 3.5% of average total assets or 6% of risk-weighted assets.

I’ve got a better solution.

Any bank engaged in risky asset trading or loans does NOT get public backing. And while they’re at it, hold regulators accountable for culpable negligence.

Meanwhile, there’s only one bank I want to own. Upgrade to Paid

I’ll be back: First non-human financial advisor registered with the SEC

It’s official.

The SEC has registered the first-ever non-human financial advisor.

Created by San Francisco-based Global Predictions, the tool is called Portfolio Pilot, and it became the world’s first non-human financial advisor 2 weeks ago. SEC rules are not designed for non-human applicants, so the CEO and chief compliance officers also had to pass the Series 65 exam, but, says the firm, “Portfolio Pilot is doing all the work.” (Read)

There are apparently already 13,000 users and some $6B on the platform.

I’m super excited.

Knowing what I know about the science of complexity and how big data works, this is an amazing opportunity for people not using it.

Why?

That many users on a common platform will create a massive herding effect, which, in turn, means there’s a predictable element to what they buy or sell, when, and why.

I’m already tuning our analytics. 😊

Drooling is optional, but I am.

Mullen is doing the SEC’s job

EV maker Mullen is suing Charles Schwab, TD Ameritrade, and other brokers, alleging that they engaged in illegal and manipulative stock trading practices resulting in large shareholder losses. (Read)

Good!

Allegations of abusive short-selling have been around a long time, and I think there’s a very clear case to be made that Wall Street has manipulated the system for years in its own interest at the expense of individual investors. PFOF is but one part of a bigger, more nefarious scheme.

The SEC is supposed to enforce this nonsense but—true to form and as is the case with many regulators lately—hasn’t stepped up, for whatever reason. So Mullen is taking matters into its own hands via the court system.

My guess is that there are more than a few lawyers on speed dial this morning.

Meanwhile, I’m thinking some long-term putskies could be a great speculative play here if the case gathers steam and there isn’t a quick settlement or reform. Maybe even a pairs trade… Long Mullen while simultaneously long puts or short stockbrokers.

3M might have met its match

Big corporate lawsuits are tough under normal circumstances, but thousands of lawsuits levied against 3M could torch any prospect of a future. Talk about what could be a tough end. (Read)

The company has launched thousands of products over the past 109 years, including everything from Scotch tape to sticky notes and water-resistant sandpaper. Chances are you’ve probably got several 3M products in your house right now; I know we do.

Reports suggest the company will file bankruptcy preemptively to shed potential legal claims while also trying to spin off its lucrative medical division to preserve value.

I’m not sure that’ll work considering a federal judge disallowed a similar strategy earlier this year when 3M tried to resolve the situation by using Chapter 11 to resolve the largest tort case in history by taking its subsidiary, Aearo Technologies, bankrupt. (Read)

Definitely putskies.

I think there’s a good case to be made that all the shenanigans will result in a dividend cut and that additional legal headaches will torch earnings. I can easily envision MMM plowing through new lows later this year.