PoR - 12/19/2021
On avoiding Apple, Microsoft, Google, Amazon, Tesla and Meta; Cyber-risk and the Cream Cheese Supply Chain; Climate Risk Management; Two Short Additions to the Demographic Discussion
On avoiding Apple, Microsoft, Google, Amazon, Tesla and Meta
{I started writing this on Monday. Too slow. :-< Sorry}
Something you may not know. The five largest stocks (Apple, Google, Microsoft Amazon, Tesla) have come to dominate the stock market.
And only a few stocks are responsible for the majority of the gains in the S&P500
However, โof the 10 largest stocks, only 1 (NVIDIA) is in the top 10 for YTD performance, with only 1 other (Alphabet/Google) in the top 30โ (@LizAnnSonders Chief Investment Strategist, Charles Schwab)
Traditionally, owning the largest firms has led to under-performance (Fama-French et. al.). Rob Arnott, in The Winners Curse: Too Big to Succeed?, writes:
For investors, Top Dog status โ the #1 company, by market capitalization, in each sector or market โ is dismayingly unattractive. We find a statistically significant tendency for top companies in each sector to underperform both the overall sector and the stock market as a whole. In an earlier U.S.-only study, we found that 59% of these Top Dogs underperformed their own sector in the next year, and two-thirds lagged their sector over the next decade. We found a daunting magnitude of average underperformance, averaging between 300 and 400 bps per year, over the next 1 to 10 years.
Perhaps this is driven by index investing (as discussed in the last PoR) or perhaps it is an agency cost of your advisor not wanting to deviate too far from market returns.
Cyber-risk and the Cream Cheese Supply Chain
You may be aware that there is a cream cheese shortage. NYers are having difficulty getting their schmear, Juniors has had to pause production on their iconic cheesecake, and Kraft will pay you to not make cheesecake this holiday season.
Supply chain problems? Are there boats full of cream cheese off the coast of California?
Nope.
In October, there was a ransomware attack on Schreiber Foods, . This halted production for 5 days.
Andrew Tobisch, head of external communications at Schreiber Foods, said that this "cyber attack" began on October 22 (Friday) and lasted the entire weekend.
Tobisch explained, โOur factories and distribution centers cannot use the necessary operational support systems. The problem affects all of our operating areas. Fortunately, we have a dedicated response team who acted immediately and worked hard to solve the problem.โ
"As a result, we have made great progress and successfully brought the factory back online in the evening of October 25 (Monday)."
From the Wisconsin State Farmer:
Because of the cyberattack, Schreiber is unable to conduct normal ordering of inventories from its suppliers.
Computerized milk-handling systems are involved in raw milk intake at modern dairy plants and systems are responsible for testing raw milk, determining components of that milk as well as inventory, ordering and many other functions. โEverything is computer-controlled these days,โ Hardin added. โYou add up the numbers and there will be ripples statewide and nationwide that could affect retail and food service sectors as well as farmers and other milk plants.โ
Schreiber Foods is only the most recent firm in the food industry to be targeted by ransomware in recent months. The BlackMatter ransomware group was blamed by CISA last week for two cyberattacks on New Cooperative and Crystal Valley in September. CISA has issued an alert about the BlackMatter group.
Climate Risk Management
OK. Finally. Someone has thoughtfully approached ESG as a risk management issue, rather than as a โrisk management as complianceโ, with regard to climate risk.
And of course itโs Til and friends at Oliver Wyman.
Banks and Climate Change Risk isnโt perfect; it includes too much of the typical discursion that tries to convince us that climate change is a real problem (UN this, Glasgow that, blah, blah). But once you get past that, it has a lot of helpful thought.
Every institution is confronted with two challenges: what is the impact of climate change on my institution, and what contribution is my institution making to climate change? Our chapter focuses mostly on the first, and largely through the risk management lens.
The paper recognizes the differential time horizon issue. Most risk managers understand the risks, but the time horizon of the institutions activities are generally believed to be shorter that the effects of warming. (This of course is in part due to the fact that people tend to project linear change on exponential processes).
Physical risks manifest gradually, tipping points notwithstanding, but by the time they do arrive, unambiguously, only radical behavioral change coupled with significant technological advances are likely to have an impact. In that scenario, transition risk is very high since it will require sudden, large scale shifts โ which are quite costly.
It recognizes that clients cannot be simply classified in a binary fashion (green or brown). It goes further and discusses the risk architecture needed to properly consider the issues. It discusses the numerous sources of uncertainty that must be addressed.
And then it gets quite practical, citing specific โrepresentative concentration pathwaysโ and โshared socioeconomic pathwaysโ that most contribute to a disorderly economic transition. It then lays out representative examples taking deep dives into the credit risk implications in specific sectors, and the challenges of estimating th effects on the traditional PD, EAD, LGD framework.
Kudos to the OW folks for helping to move the ball forward.
Addendum:
A useful exercise is to try an mentally live in the world of 2050, approximately the time you would pay off a 30 year mortgage if you took it out today.
The IPCC Fifth Assessment Report (AR5) suggests that the average world temperatures will rise by as much as 2.3ยฐ Celsius (4.2ยฐ Fahrenheit) by mid-century. In fact, a โworst-case scenarioโ by the National Academies of Sciences projects a sea-level rise of as much as 20 inches by 2050.
Remember, a warming of the artic perma-frost equals death; the vast zone of frozen earth that covers about a quarter of the Northern Hemisphere is a sprawling storehouse for about 1.6 trillion metric tons of carbon โ twice the amount already in the atmosphere; there is already dramatic physical evidence of rapid change.
Two Short Additions to the Demographic Discussion
Iโm going to give this newsletter a rest for the rest of the year. Off to Florida (triple vaxxed and double masked).
I hope that all of you and your families are well, that you find some joy in whichever holiday season you celebrate, and that you remember the less fortunate among us in your thoughts and actions.
What Iโm Listening To: