Crazy Train

 

"Crazy, but that's how it goes. Millions of people living as foes." Last week, we yet again saw another microbubble as a result of the WallStBets crowd. I was prepared for it though with my anti-bubble suit I purchased. While I was looking for a picture for this post, I found an image from a research paper on actual air bubbles. I thought there was a neat correlation to what we find in markets. The larger macro bubbles make it to the surface and explode violently, while the microbubbles decrease in size and dissipate under the surface. Think about it, the larger a bubble is, like the entire Japanese stock market, NASDAQ stocks, the housing market, the more violent the explosion. The recent activity we’ve seen from the microbubbles, like Work from Home, MEME, or Cannabis stocks have kind not really done too much overall damage. Yes, many people got left holding the proverbial bag, but it wasn’t catastrophic. The 2021 bubbles do seem to be faster and more violent than previous bubbles.

Let’s take a look at some of the 2021 bubbles. I looked at some of the Meme stocks (GME, BBBY, AMC, KOSS, and BB), Tilray, which was a big mover from larger cannabis stocks, MicroStrategy, which is trading at an obscene premium to its Bitcoin holding, Tesla, which is a company run by the greatest promoter since PT Barnum, and Silver. Silver looks like a blip comparatively, but I included it because some of the r/WSB crowd thought they could move a global commodities market. This first chart is only YTD performance and there are multiple hundred percentage moves.

2020 saw the Work from Home stocks go bananas. A market cap weighted index is up just over 150% since the March lows. Now, some of the names are up quite a bit, but it’s been a slower more methodical move. The same is true of the FAANG names, but they’re all megacaps now, so that's a little more impactful move. The final chart is the Dotcom bubble from the Oct 98 start of the parabolic move before the crash.

The IPO market is a bubble in and of itself. Just last week, according to the IFR US ECM briefing, there were 12 regular IPOs worth $4.2B and 26 SPACs worth $8B listed. The total for the week was over $22B in proceeds. Bumble’s IPO was the largest event of the week. It was quite the success raising more than $2B and jumping 75% in the first week of trading. The 25 SPACs is just an average week for 2021, because there have been 142 total in the first 6 weeks. Next week should see a slow down with the markets closed on Monday and the SECs staleness deadline for IPOs on Tuesday.

I don't know what we'll do without 30+ ECM events to watch this week. Oh wait tomorrow, Tuesday, is Mardi Gras. It's usually a time to get out and party. I heard this year it's being called "Yardi Gras". The big event  for this week will be held a little late for that party. The House is holding a hearing around the GME events on Thursday. Joining that party will be Robinhood CEO Vlad Tenev, Keith Gill (aka “Roaring Kitty” on YouTube), Citadel founder Ken Griffin, and Melvin Capital Management CEO Gabe Plotkin. 

Earnings Watch

Last week was a big week for reporting for North American equities. About 10% of the S&P 500 and Russell 1000 reported, along with 14% of the Russell 2000 and TSX Composite. There were a few names that stood out when looking back.

• Under Armour had a huge beat, 340%. Reporting $0.12 vs. -$0.05 posting 20% growth YoY
• Zillow beat by 50%. Reporting $0.41 vs $0.27 or 260% growth YoY. The stock gapped up to new all-time highs. This stock might be our Pets.com type example from this era.
• Twitter beat by 24% Reporting $0.38 vs. $0.31 or 52% growth YoY, imagine if they had a full time CEO. The stock rocketed to new all-time highs.

Let's take a look at some of the names I highlighted coming into the week.

• Fox Corp reported much better than expected numbers on both the top and bottom line. Looks like the biggest factor was record political ad spending. The lackadaisical response from the stock leads me to believe that some of the effects of COVID on sports and the lack of a polarizing President could lead to less growth in the near term.
• Tenet Healthcare also crushed expectations and traders bid the stock up after hours. The enthusiasm faded before the stock opened the next day and by the time the conference call was over it was down 6%. The company announced it was retiring some debt and upped guidance. I don’t see much negative here, but with the stock up 66% since the last report, maybe a 169% beat just wasn’t enough. 😲
• On Red Rock, I thought a beat would send the stock up much more, but 3% is still okay, I guess. It wasn’t on much volume though, but it was still a new 52 week high. The report was mostly positive, but the top line numbers were down 25% YoY.

This week isn’t quite as big in terms of the number of companies or the total index market cap. It has more of a mid and small cap feel to it this week. I mean there are still some mega-caps reporting like Walmart and Applied Materials. A few names I’ll have an eye on regardless of the expectations are Garmin, because I’m a huge customer, Southern Copper, interested to see how the run in Copper plays with their numbers, and north of the border, Shopify is reporting. Let’s have a look at a couple of names with data that stood out to me.

• Groupon has a number of data points that will have me following it’s report on Tuesday afternoon. The big one is the 86% Predicted Surprise to the down side. The estimates are all actually quite old, but being such a small company now, it doesn’t warrant intense coverage. Morgan Stanley has the freshest estimate at 31 days and after that most haven’t been updated since its last report in November. The stock has a volatile earnings past both in the surprise and the reaction. The last quarter was an EPS surprise of 115% with a first trade down 5.8% and that was the least reactionary of the last four reports. The 30 day Implied Vol is in the 68th percentile, so not insanely high, but it has jumped about 10% in the last week alone.

• Trade Desk caught my attention more so because of the option activity. Its implied volatility is in the 85th percentile and has jumped 10% in the last week. The calls are being bid up a little, but the implied move is still priced below the recent history. The company has developed quite the trend of besting the analysts expectations. The stock generally reacts well to that too. Last quarter a 20% beat on the top line and 196% beat on the bottom line led to the stock opening up 13% and closing up 27%. That day is not unusual for this name either. Even being a much larger company than Groupon, Trade Desk estimates are only slightly more updated. The two five-star analysts are both higher than the mean

Best of the week:

I haven’t touched on it much yet, but February is Black History month. It might be one of the most important months in quite some time. After all the events of 2020 and people like me opening their eyes to some of the historical events that were broken in the past and we have yet to fix today. Josh uses his platform to give us a look into some of the practices that have created the inequality we still see today. He opens with this for basically the first 30 minutes. Then you can listen to him and Dan discuss the options market.

The Options Market is a Circus (with Dan Nathan) + The History You’ve Never Been Taught - Listening time: 76 minutes

Best of the rest:

Jeremy Grantham is a legend in the investment space. The co-founder and Chief Investment Strategist for the asset management giant GMO is known for his thoughts on the bubbles in financial history. In this chat with Meb, he compares the current macro bubble we’re seeing to the other great bubbles in financial history. They also talk about interest rates, venture, his foundation and climate change.

Jeremy Grantham, GMO - What Day Is The Highest Level Of Optimism? It’s The Day The Market Hits The Peak - Listening time: 80 minutes

Excellent close to the week from the Real Vision team. I think they discuss every asset class this week.

Bumble’s IPO, The Yield Curve Migration, and a “Bubble” in Passive Investing? - Listening time: 44 minutes

Ben beat me to the punch with my intended title this week. I guess thems the breaks when you only post weekly. The use of Crocodile Dundee here is so perfect. This article is a nice quick view of some historical bubbles.

The Defining Trait of All Bubbles: The Willful Suspension of Disbelief

I loved this question from the author. Does it really even matter? This article looks at the current state of the marker from a wealth advisor's perspective. I wonder how much impact the work we've seen from Mike Green and company on the rise in passive will play out in this community. Advisors are trying to forewarn their client base that we could see this pop, but you need to stay the course. What if they panic? Then it will matter. 

Bubbles – Are We in One and Does It Even Matter?

Speaking of bubbles, let’s look at one of the latest Reddit stocks. Tilray went parabolic last week, along with the rest of the Cannabis industry.

Tilray shares soar 39% as Reddit message board sets sights on cannabis sector

US and Canadian marijuana companies are taking advantage of the high. They’ve got the munchies for more capital and, according to this story from our partners at Reuters, have raised record capital in the first weeks of 2021.

Once down in the weeds, cash-strapped pot producers raise billions in market rally

Another party that’s looking to take advantage of the recent euphoria around social media sentiment is Van Eck by releasing a Social Sentiment ETF. The article highlights how this is a rehash of something previously launched by Sprott that closed in 2019.

Social media sentiment ETF to launch in wake of Reddit rebellion

Energy

Zerohedge has a trove of great content. The problem is you have to get through a ton of other content to find it. This article shares some of the recent work from JPM quant Marko Kolaovic. If you’re not familiar with his work, I highly recommend it. I’m a data geek and Marko forms a lot of his opinions mostly off data rather than stories. I loved this post around Energy. Energy has been the most beaten down sector of late. Marko notes that this latest up trend in oil is just the beginning. This would also confirm some of the data and opinions I’ve shared from Art Berman.

Kolanovic: A New Commodity Supercycle Has Begun

A former colleague of mine at SocGen, Dylan Grice also gives three reasons why oil prices will rise. A shortage of capital around reduced spending, a focus around EVs, and flat global production outside of shale oil. The thing that drew my attention here was the fact that Tesla alone has a larger market cap than not only all the auto companies, but now it’s going back and forth with all the Energy companies in the S&P 500 and sits just below the entire Russell 1000 Energy index. This ratio was near 40:1 less than two years ago.

The Stage is Set for a Bull Market in Oil

Bitcoin

Elon loves trolling his critics. Well, last week he announced that Tesla would start accepting crypto payments and that they’ve purchased Bitcoin for their balance sheet. The $1.5B purchase has already risen about 20-30% just using a trailing 50 day average, so this means that S&P 500 passive index investors now have a 0.006% allocation to Bitcoin. This is just another barrier broken for the asset class.

Tesla Invests $1.5B in Bitcoin, Plans to Accept Crypto Payments

There was another huge breakthrough for Bitcoin last week. Canada’s main securities regulator, Ontario Securities Commission, is said to have approved the first Bitcoin ETF. This ETF would invest directly in BTC not derivatives.

Canadian regulator clears launch of world's first bitcoin ETF - investment manager

This CIO article highlights many of the asset owners looking into Bitcoin as an asset class. Many seem to be doing so via firms like Mark Yusko’s Morgan Creek Digital. Many are also using some of the funds that Blackrock said would start allocating to the asset. There’s also an option of direct investment and storage via Fidelity Digital Assets. Some large college endowment have also used the same method you and I might use, Coinbase. Finally, there has been growing open interest in the CME futures contracts.

Growing Number of Pension Funds, Endowments, Foundations Adding Bitcoin to Portfolios

Not all Bitcoin news was positive last week. The Indian government freaked quite a few people out with this announcement. For clarity, the bill being fast-tracked would ban crypto.

Indian parliament reportedly considering fast-tracking crypto bill

Jason Zweig brought up one of the big negatives around Bitcoin. It uses a ton of electricity. There are some good arguments in the responses, particularly that the miners tend to go where electricity is cheap and use mainly renewables. I’m not sure I have a firm opinion on either side, but the discussion should be had.

Bitcoin mining is on track to consume almost as much electricity in 2021 as all the world's transportation systems combined did in 2018

And on that front, Tesla is one of the largest holdings in the largest ESG ETF, iShares ESG Aware with about $14B in assets. It doesn’t really get a great score in the Refinitiv ESG model, but I’m trying to find out how his allocation to a dirty technology might affect the company’s B+ Environment score.

Is Tesla an ESG investment or not?

I saw this come across my Twitter feed. It seems that bubbles aren’t only relegated to the financial markets. RobinHood has seen a lot of issues since their cutting off trading. News reporters have also set up shop outside their HQ as upset customers are going directly to the office to compliance. You see when you don’t have a customer service team, this is what happens.

Robinhood is getting wrecked in the App Store

My colleague, Michael Ehrlich, shared some data around changes in issuance for Conventional and GNMA since 2013 that he found using the Refinitiv Advanced Mortgage analytics.

Changes in Bank vs Non-Bank issuance landscape since 2013

Another colleague, who is much more well versed in the fixed income markets, was just showing me some of these charts around rates. The spreads are rising between TIPS and nominal Treasury yields. I have the 10 year below, but Jim looks at the 5-year rates. While nominal rates are very low, real rates are closing in on negative 2% for the 5-year. This is a 2.5+ sigma event for this market. Now, I know markets are really normally distributed, but this is large for this market. Jim thinks this relationship is broken, but cannot tell if it’s temporary or permanent. This is definitely something to watch for both equity and bond investors.

The Great Divergence: Nominal vs. Real Treasury Yields

Thanks for reading. Have an amazing week.

Michael