The time is always right to do what is right

 

Before I start the normal format of the blog, I wanted to release this today, because I know there are a few Canadian readers out there who are working today, but mostly because it’s Martin Luther King Jr Day. Dr. King was an amazing leader and I wish we had someone of his standards to guide us today. I guess all that we can do is listen to his speeches and read his writings. Here are a couple of things I read on him and his impact today.

7 best Martin Luther King Jr. quotes you may not know

They Walk in MLK’s Footsteps

Most of the major news last week circled around the changes coming in Washington. Social Media platforms pulled access for President Donald Trump. Whether you agree with that or not, it’s the first time many have applied any sort of moderation. Many corporations have also decided to pull campaign donations. Some companies suspended donations to those Republicans who voted against the electoral votes, but many paused all political spending. That’s nice and all, but we’ll see if they hold said spending when another major election cycle comes. President Elect Biden has begun laying out more and more details of his economic agenda. Here’s a quick summary, it’s BIG!

While we have a shorter week of trading in the US, there are a few big economic numbers expected this week. Plus, we have the Presidential inauguration on Wednesday. As per my note last week, I’m interested in Housing Starts. Out today in Canada and Thursday for the US. Then Existing Home Sales are released on Friday. Many of the major central banks meet this week too. Bank of Canada, BoE, and BoJ all meet on Wednesday, and ECB on Thursday. On an individual stock basis, I’ve got an eye on a couple of lock-up expirations this week in the US once trading starts on Tuesday. It’s something I’m attempting to keep a closer eye on. Plug Power (PLUG.O) has lockup expiration on their $845M follow-on from November. Their last follow-on deal of $361M saw a drop of 4.2% on expiry date. Jamf Holding (JAMF.O) is another name with lockup expiry. Since its IPO, shares in this $4B software company have fallen 14.7%, so it might see some pressure when trading opens Tuesday.

Earnings Watch 

Last week

• Delta had sort of a nice pre-game to the “opening” of Earnings Season for Q4 reports. Predicted surprise was -5% and they missed on the bottom line by a little over 1%, but Revenues were a pleasant surprise and the look forward was a very pleasant outlook. The stock traded strong on Thursday only to turn and close down on Friday. Thursday and Friday saw six price target increases and two decreases.
• Wells Fargo had an interesting run last week. After my post on Monday, there were four estimate updates, two small to the downside, but two large increases. This moved the Predicted Surprise from -4% to positive 3.7%. The company still surprised to the upside, coming in 7% above the mean. That didn’t seem to matter much though as the stock sold off on heavy volumes Friday. The biggest negative I saw in the headlines was the flat to down expectations for FY ‘21 net interest income. Another highlight was that the bank is reportedly looking to sell its asset management unit, which manages more than $600B.
• JP Morgan had a smaller Predicted EPS surprise coming into the week @ 3%, but that slimmed a bit before its report on Friday to just 1.8%. They beat that by just a little, surprising by 44% to the upside. There has already been one price target increase on Friday. As I mentioned last week, Banks have so many moving parts. For JPM, Investment Banking revenue was up 37%, Trading revenue was up 20%, and they reduced the loan loss provisions by a net of $1.9B after those were huge in the 2nd and 3rd quarters. Evercore said that the majority of the earnings strength was on the back of these, which were expected. Maybe that’s why the stock traded lower?

This week

While it’s not huge in terms of amount of companies, there are a number of high profile names reporting this week. The rest of the major banks report along with about 50 others. With the reaction to JP Morgan, I hope for their sake that they come strong, or else. We hear from a few other big names like UnitedHealth, P&G, Intel, and Netflix. With Netflix’s latest commercials, I’m waiting on their expense forecasts.

• After last week’s reaction to JPM, I’d be a little worried about banks. That said Morgan Stanley (MS) is showing some data that makes me curious. A smaller Predicted Surprise at 2.9%, but two bold estimates, JMP and UBS, on the high side are of interest. The options skew is low, which tells me that the puts are only slightly more expensive than the calls. Looking at the Volatility Surface the deep out of the money calls are bid up quite a bit. Looks like someone has purchased a few lotto tickets on MS crushing this report.
• Stepping away from financials for a second, Alcoa (AA) reports Thursday afternoon. The Predicted Surprise here isn’t all that impressive because the $0.10 mean is a low basis. However, we do have a bold estimate from BMO all the way up at $0.32/share. There is also another estimate to note. Credit Suisse’s 5-star analyst, Curt Woodworth, has an older estimate out there way down at -$0.12. I’m looking for a possible update there before they report. The options on this name are elevated compared to norms. Alcoa, once the unofficial kickoff for Earnings Season, now only has nine analysts following it.
• Ally Financial (ALLY.K) reports Friday morning. They also have lower Predicted surprise like Morgan Stanley, but some of the other data is what makes this worth watching this week. They’ve had some shorter term momentum in this period’s EPS estimates, last week saw this quarter up by 6.6% and 11.4% over thirty days. Starmine’s ARM model, which measures more estimates, fiscal periods, and time periods, shows strong momentum too. Implied volatility is elevated on this name as well compared to both historical and implied numbers. Ally has already moved almost 10% in the last week, so those positioning in calls might be keen on selling winning trades before earnings.

If you’re interested in following the banks a little closer, my colleague Tim wrote up a nice piece on them. - U.S. Banks Set to Kick Off Earnings Season

For those readers that are Eikon users, I recommend checking out our Event tearsheet, which is available from the Earnings release on our events page. It shows a nice view of the estimates data moving into the event.

Best of the Week:

Tyrone Ross has made quite a few impactful appearances of late. This one with Bill really makes you think, Am I doing enough? This is the ‘Best of’ post for two reasons, Bitcoin will be a focus below and MLK Day. Historical prejudices just happen to make black Americans more likely to live in poverty, but Ty fights for all those affected by this. Tyrone speaks with passion about this topic. The most impactful story I heard him tell, it wasn't in this appearance, was how little money someone actually gets when you send it to some third world countries. Between the fees and the predatory individuals waiting at the physical locations, it can be as little as 60-70 cents on the dollar. He is a huge proponent of assets like Bitcoin helping to solve this issue. Follow Tyrone on Twitter @TR401

Tyrone V Ross Jr. - A Powerful Advocate - Listening time: 101 minutes

Best of the Rest:

Julius de Kempenaer is the creator of Relative Rotation Graphs™. Julius talks about the benefits RRGs offer investors, both individual and institutional. The conversation finishes with Julius applying his methods to taking a look at the impact of seasonality on equity sector performance. I love using the RRG app in my Eikon workspace because it shows where sectors are in the trend. I also use the industry score in the Starmine Momentum model for a sort of confirmation. Energy is on fire over the last few weeks.

Read the article discussed here: https://stockcharts.com/articles/rrg/2021/01/seasonality-is-nice-but-realit-326.html

Julius de Kempenaer - RRGs: The Secret Weapon in an Investor’s Armoury - Listening time: 55 minutes

Bitcoin

If you wondered what spooked Bitcoin last week, this article might be the original culprit. Well, the topic of this article. The FCA, which is the regulatory agency in the UK, issued a risk warning for consumers investing in digital currencies.

Bitcoin: be prepared to lose all your money, FCA warns consumers

Narratives are driving the moves in Bitcoin in the last year or so. This article from Research Affiliates sort of lights those on fire. Inflation hedge? No. Unseizable? I don’t think so. Digital cash system? Ha, not any more. Alex wants to make sure you actually know what you’re buying and don’t let the stories and charts have you invest in a bubble and likely manipulated asset.

Bitcoin: Magic Internet Money

Another limitation of Bitcoin and other crypto currencies has been its volatility. While great for traders and hedge funds, the big bucks from traditional asset managers and asset owners continue to stay on the sidelines because of it. The price moves we saw last week and over its life have been remarkable. The trailing 30 day volatility has averaged north of 75% over the last 10 years. The current trailing 30 day vol of 84% is more than 4x the that of the Russell Microcap index and 3x NASDAQ Biotech index. As I did last week, I find myself going back to Tesla to reference a highly volatile well followed equity. It comes in about 50%, still 60% less volatile than Bitcoin.

Bitcoin’s wild ride leaves traditional money managers queasy

This is a link to a post I made on LinkedIn. I created this drawdown chart for a client years ago, and was interested to see what Bitcoin might look like. After seeing all the red, I created a table to show the amount of trading days it's spent in each level of drawdown.

Bitcoin spends the majority of its life in Bearish territory

If you only listen to the first two minutes, you’ll see why there are a bunch of coins out there that will not ever be sold. Michal just reviews his thoughts on Trend following and crypto.

The Brad Rotter Crypto Call with Michael Covel - Listening time: 14 minutes

As I mentioned last week, investors that can not access crypto currencies directly are finding other ways of getting exposure to these assets. One company servicing that need is Grayscale. The firm offers investment trusts for many different coin assets, plus a diversified fund. Their assets saw quite a surge in 2020, ending the year north of $20B. Over 80% of their assets are in the highly publicized GBTC that invests in Bitcoin. The GBTC fund has been a popular trade for hedge funds too because of the large premium over NAV for which it trades.

Bitcoin frenzy drives 900% surge in assets for crypto investment firm Grayscale

https://www.visualcapitalist.com/bitcoin-market-cap-compared-to-crypto/

SPACs

I liked this particular episode because Goldman Sachs’ Olympia McNerney highlights the recent Equity Capital market and how SPACs factor in. Increase in high quality sponsors has increased the quality of the investor profile too. I liked Olympia’s point on the flexibility of the SPAC process for owners/investors. She also talks about how the overload seen in Q3/Q4 has leveled off and more assets are coming into this market. On the global front, she also sees the evolution of these vehicles in Europe, Asia, and even LATAM. There’s a lot of trends covered in this short episode. With 200+ SPACs with $500B of AUM, this will surely be interesting over the next year or two.

Companies Continue to Turn to SPACs for Greater Flexibility - Listening time: 19 minutes

Larry Wieseneck, co-President of Cowen, joined the Odd Lots podcast to discuss the momentum SPACs created in 2020 and why it might continue. Larry says the turn in SPACs came about because the private market dried up in Q2 to focus on their current investments. Like Olympia mentioned above, Larry thinks it gives companies more options for investment. It also removes some risk from the company because the investment is not dependent on market conditions as much. When companies get to choose a SPAC to merge with, aka a SPACoff, this allows them to choose a partner with expertise in their area that can help with development. It’s sort of like ‘Shark Tank’ for larger companies.

Cowen’s Co-President on Why SPACs Are Having Such a Moment - Listening time: 50 minutes

I told you last week that I could probably share this every week. I really try not to do so, but Julian Klymochko joins the guys to have a conversation around SPACs as well as GBTC, which is super relevant to this week’s post. Julian is the first guest lasting about 50 minutes. I’d also recommend sticking around to listen to Morris Sachs, but Julian’s chat is really my recommendation here. Julian gives some stats around the SPAC market like the average business combination takes about 10 months. He also reviews some of the risks of trading in SPACs.

Democratizing Alternatives (guests: Julian Klymochko, Morris Sachs) - Listening time: 50 minutes for Julian, 162 for full episode

If you’re not a WSJ subscriber, this article is well summarized with this single chart. From the article, they note that Q4 deals were up 5.4% on average the day they announced their target and up 16% month later. SPACs are performing well for the original investors, and it’s low risk because they can always get their money returned plus interest up until the deal becomes final. According to the article, there are eight investors with more than $1B invested at the end of Q3 last year.

SPAC Mania Gives Early Investors Steady Returns With Little Risk

As we heard in the conversation with Julian, it’s not all sunshine and rainbows with SPACs. According to McKinsey, from 2015 on over 90% of SPACs have found and completed a merger, but before that it was below 80%. I’m with the author here that as the number of SPACs continues to be high, we might see the completion percentage come down a bit. That’s not necessarily terrible news, because as mentioned above, you get your money back. The bigger risk is second rate companies that do get invested in. The lower rate of completion also brings more assets with a return closer to the risk free rate, which is like having extra cash.

SPACs and their consequences

Miscellaneous

I’ve shared these types of moves before, whether it was ZOOM instead of ZM or Tweeter when Twitter announced their IPO. They’re not really all that informative or educational, but they are fun to point and laugh. They do show some of the froth in these markets and how many “traders” are looking to make a quick buck. These types of stock moves are the same reason why we get quick parabolic moves in Tesla and some crypto currencies.

A Clear Signal of Insanity

Thanks for reading.

Michael