Stupid is as stupid does

 

Last Monday’s media coverage was divided between Elon’s SNL appearance and a major pipeline shutdown causing people to freak out. Elon slowly yielded to the gas shortage on the East coast due to the Colonial Pipeline shutdown. As some of the pictures hit social media, the lines and people at gas stations along the east coast became a circus. Here are some of the best/worst I saw. One thing to note, the picture of bags is apparently from 2018, but the fact that a government agency had to send this out tells you all you need to know.

This whole pipeline disruption intrigued me and I read a lot of articles on it over the week. These four are some of the better ones I read that highlight the whole problem and it’s possible knock-on effects. As you’ve seen from the pictures above, we cannot seem to control ourselves as Americans.

US fuel pipeline hackers 'didn't mean to create problems'

Gasoline demand spikes in several states after pipeline hack

Colonial Pipeline reportedly paid the hackers nearly $5 million, despite suggestions to contrary

The gas shortage is another recent example of Americans making things worse for one another

As we moved into the week, inflation started to make its way into the news. On Wednesday the UK GDP numbers started the day with a small positive surprise. Then the big surprise came from the US CPI numbers. The core CPI rose the most since 1982, and the media was all over this for the remainder of the week. I’ll cover my thoughts on it more below, but it really moved markets. US treasuries sold off on the report sending the 10 year to more than 1.7%. All major global equities markets sold off Wednesday into Thursday. Things did rebound for equities to end the week, but they mostly ended lower for the week.

Just after the stage lights moved off Elon and his crypto fascination, he struck again tweeting that Tesla would no longer accept Bitcoin for purchases. This sent crypto markets running for cover. BTC and ETH each had a big drop Wednesday afternoon, BTC about 20% from its highs and ETH just under 18%. BTC ended the week down about 14% and ETH was just up 1.5% from Sunday night’s prices. I also have some points on crypto below.

Earnings Watch

Last Week

Coming into the week, I was interested in Disney. Their parks are starting to open, so I wanted to see what the last quarter without them was doing. Streaming added another 9M users, but growth was slower than previous so traders sold the stock. For Simon Property group, I was keen to hear the commentary. They beat estimates and raised guidance. One thing of note was they collected over 95% of net billed rents for Q1. Pre-COVID was in the 98% range. Another name that stood out was TradeDesk. They crushed top and bottom line numbers and announced a 10 for 1 stock split. All that good news and the stock traded down 25% and I couldn’t figure out any reason.

This Week

We’re slowing a bit in terms of market cap percentage reporting, but there are still a few big names yet to report. The S&P 500 has only 4% names and market cap reporting. For the Russell 2000, it’s only 2%. In Canada, the TSX index has only 2% as well. Upcoming this week on the earnings front are big retail names in the US. Mega-retail rivals Wal-Mart & Target and Home Depot & Lowes, which are both personal favorites of my wallet. There’s also some tech in Cisco and Applied Materials.

Equity Capital Markets

We’ve got a few direct listings on the probable schedule for this week in SquareSpace and ZIP Recruiter. There are also a couple decent sized traditional IPOs in Oatly Group at an expected $1.3B+ and Procore Tech ~$590M. The big one expected this week is out of China. JD Logistics, spinoff of JD.com, could raise as much as $4B.

Looking back a bit in ECM. Here are a few articles that touch on IPO failing and maybe why three of the eight IPOs were postponed last week.

2020's Biggest IPOs Are Getting Smacked in the Markets

Hear.com, Zenvia Postpone IPOs Because of Choppy Stock Market

Best of the Week:

Pat Hennessy puts out some excellent content on Twitter. This post came late after Tuesday’s SPX down day. Pat’s point being made with the chart is that the VIX move was much larger than expected based on the S&P move. He has some additional info on these “beta responses” in the thread. He also brings up a point about positioning of VIX contracts being short, which you can see in the second chart below. While short positions are nowhere near the records seen in late 2019, there’s still a decent amount of traders short vol. This thread goes pretty deep into vol trading, but something to follow as these markets seem to have an itchy trigger finger.

VX30 vs the SPX 1 day move

Best of the Rest:

CPI reports this past week were robust. There’s no denying that. This chart from the first link below shows some of the subcategories of the CPI. Prices are rising in a whole bunch of different places. Everyone seems to be locked in on the car market. Used cars and trucks are up 10% and rentals up 16%. Let’s think about why that might be. The wait for a new car can be like six months, because of the chip shortage. People that need a car now are going to the used car market. Don’t want to fly from NY to Boston? Rent a car. In the second article, The Capital Spectator highlights quotes from Eric Winograd, senior economist at Alliance Bernstein in a note to clients: “The more persistent categories of inflation (services, and rent specifically) were relatively tame last month, but goods prices surged, as did transportation and travel. None of those moves are likely to be persistent. Over time, that means that the most likely course of events is still for inflation to settle down as the supply side of the economy catches up to the demand side.” If you zoom out and look at a long term chart of CPI, you can see the dip in early 2020 and now that we’re turning the spigot back on things are closing the gap. Plus we’re still seeing dislocation of resources in some areas that have and will cause some price spikes. I might not be in the disinflation camp, but I’m not on the hyperinflation team either. I liked this quick analysis from Russell Investments. I think they hit it spot on.

Inflation is Here. But is it Here to Stay?

How Long Will ‘Transitory’ Inflation Last?

U.S. inflation surges. Are transitory issues to blame? - Listening time: 8 minutes

There's inflation, and then there's hyperinflation. Professor Jeremy Siegel was on CNBC Friday predicting the possibility of 20% inflation. He also crushed Jerome Powell for his dovish actions. 

Inflation could spike to 20% in the next few years as the US money supply explodes, says Wharton professor Jeremy Siegel

Guest Lyn Alden speaks to the inflation topic well in this episode. You can get a real sense of what she speaks about from her chart book. She reviews some historical data around debt, CPI, and spending, but the reason I added this here is her comparison of today to some historical periods. We’ve mentioned transitory inflation, but Lyn takes it to another level here. If you listen to just one thing, go to the 40:30 mark and listen to the next three and half minutes. Basically, she thinks inflation is partially transitory. She snuck in one of the best comments near the end of her presentation. The chart below about not really stopping using an energy source as we find new ones.

Lessons of History (guest: Lyn Alden) - Watch time: 138 minutes (Lyn first 65 minutes)

Lyn's Charts

Cullen Roche always does a fantastic job of explaining some of the recent Economic topics into digestible bits. This week he covers some of the comments of Stan Druckenmiller. He’s actually disagreeing with the investing legend too. It’s a quick read and helps with some of the arguments around the Fed’s actions of late.

Three Things I Think I Think – Losing Reserve Currency Status

This is a little bit old being released about two weeks ago now, but I saw this one last week for the first time. It’s not all that surprising to be honest. The government is supporting many businesses through this pandemic, so some businesses that would normally be going out of business are being temporarily supported. What I’m wondering is if, like we saw with the CPI, there will be a catchup process.

New Bankruptcy Filings Plummet 38.1 Percent

There have been more than half a trillion dollars in share repurchases authorized by U.S. companies this year, according to Goldman Sachs data. U.S. companies are so flush with case that they not only authorizing buybacks, they're also upping dividend payments. This WSJ article is behind a paywall, but you can get the idea from the two charts below. Let me share a few other details from the article that really add to the story. Apple recently authorized a $90B buyback. $90B! That's larger than all but a couple of hundred companies in the world. An RBC note quoted in the article says they buybacks and dividends were quoted "roughly three times more than capital investments." So short term, when regular buyers are not there, the company will be there to support the stock. I couldn't find it in time for this post, but I know I've seen something that companies are horrible at market timing and tend to buy at market highs. I guess we'll see. 

Companies Are Flush With Cash—and Ready to Pad Shareholder Pockets

Almost anyone you talk to about volatility thinks about the VIX. Well, the NASDAQ is about to launch options to track the VOLQ, which measures the 30-day implied volatility of the Nasdaq 100 index. The VOLQ is usually a little higher than the VIX. We did see an exception during the peak worry period of 2020.

Nasdaq gets green light from SEC for volatility index options 

Michael writes about the extremely high ranking of the Shiller PE, or CAPE ratio. Traditionally, this has meant lower returns for the next 5 years, as I’ve done below, or 10 years, as Michael notes in the article. This important highlight here from Michael is that the market hasn’t given much a thought about this for a long time. The ratio has traded above its long term average 97% of the time since 1990.

The CAPE Ratio is Very High

Like anything else in business, once big money starts being made, Washington starts to take notice. When Washington takes notice, the businesses know the need to hire lobbyists to make their case to help them understand what Washington is planning and do what they can to make it the most friendly it can be to their business and/or industry. This NY Times articles give some highlights of crypto and the sort of activity that’s going on in the Capitol.

As Scrutiny of Cryptocurrency Grows, the Industry Turns to K Street

I swear this guy just cannot help himself. Elon Musk is out tweeting about crypto again. This week he both sent the two majors down pretty quickly. Why? I don’t know. Next, he's Tweeting about working with Doge developers. Seriously? The guy that created it said he worked for like 2-3 hours on it, that’s it. I finished Nikola Tesla’s biography over the weekend and can see a ton of similarities here. Hint, they’re not all good.

Elon Musk says Tesla will stop accepting bitcoin for car purchases, citing environmental concerns

This chart from Chartr is the third of three sections from the link, so don’t think I have the wrong one if you click and see a McDonald’s story. I thought the chart helped explain the story above.

The Crypto Energy Conumdrum

One for the road

Daniel Kahneman joined People I (Mostly) Admire to chat about his new book, ‘Noise: A Flaw in Human Judgment’, which focuses on the variability of errors in decision-making between individuals. I have loved anything I’ve ever read by or about Kahneman. In this session the Nobel laureate provides an example from an insurance company he consulted with, which thought there would be ~10% variability in judgements for claims payouts by different adjustors analyzing identical information, but it was actually 50%, costing them $2 billion per year. Kahneman talks about best practices for large judgement problems, how this problem manifests within both the criminal justice system and job interviews, and broad thoughts on the intersection of psychology and economics. I have to thank Colby Donovan for this easy and quick summary of the episode. I usually find a podcast or two I missed during the week from Colby’s weekly summary on Sunday.
Daniel Kahneman on Why Our Judgment is Flawed — and What to Do About It - Listening time: 44 minutes

Thanks for reading. I hope you have a good week, because you never know what you're gonna get.

Michael