Last Week It was a tale of two worlds last week. In the rates markets, more and more participants have begun to accept as fact that the inflationary pressures being experienced in all corners of the e...
The past two weeks have tested the edifice of what the super-popular Cathie Woods ARK ETF (AARK) describes as, “Companies relevant to the theme of disruptive innovation.” Not too surprisingly to us, the disrupters have failed miserably, so far.
Over the last two weeks, as of late Friday morning, while the S&P 500 has dropped 4% and the Nasdaq 100 fell 11%, ARKK is down 28%. Additionally, the SPAC craze, which went into overdrive this year with approximately $65 billion of deals coming to market in the year’s first two months (in 2020, which was a record-smashing year, approximately $80 billion were underwritten) has been caught out in the open.
The SPAC Index is down 22% for the last two weeks. The culprit? The 10-year Treasury going up about 25 basis points to 1.60%. Overall, one would think a 1.60% 10-year Treasury wouldn’t be something to destroy valuations, in even a “frothy market.” It makes us wonder what would happen if something really bad took place. Actually, something really bad did happen last March, and these “disrupters” became moonshots!
The past couple of weeks have been darkly comical. Last week, we had the revenge of the Reddit club as GameStop (GME), after falling 81% during the first 3 weeks of February, blasted up 103% toward the end of the trading day last Wednesday, only stopped from going higher by a trading halt. The next day, GME rose as high as $170 before “falling” back to the low 100’s.
Multiple Fed officials have been on the speechmaking and talk-show circuit, more or less denying that bubbles exist. On February 16, the Federal Reserve Bank of St. Louis stated on CNBC,
“The biggest thing in equities is really these tech firms and how high are you going to value these guys. They’ve got great technology; they’ve got great revenues, business models [where] the sky is the limit. So, where investors want to value those is really driving a big chunk of the market. I’m not really sure you want to call that part a bubble. That’s just normal investing, trying to get your head around what those companies are really worth.”
We tend to disagree, when a stock named Club House Media (CMGR) is mistakenly purchased because it is confused with a popular app touted by Elon Musk and goes into 2021 with a share price of $2.43 and shoots up to $27.40 mid-Feb (Clubhouse Media Group Inc. offers management, production and deal-making services to its influencers, a management division for individual influencer clients, and an investment arm for joint ventures and acquisitions for companies in the social media influencer space), because nobody bothers to see that this company has zero to do with Elon Musk, and then retreats only to $16 after everyone supposedly finds out, that seems to be a sign of a bubble.
However, maybe Club House Media is on to something. This Wednesday, probably the number one social media influencer for stock picking, Barstool Sports founder Dave Portnoy, helped and backed the launch of a new ETF called BUZZ. BUZZ tracks a Vaneck “NextGen AI US Sentiment Leaders Index,” which scours content from “on-line sources” to discover what popular social media forums (such as Reddit) are thinking about specific stocks. The peculiar thing is that Barstool Sports—specifically the daily “Davy Day Trader” podcast hosted by “El Presidente” Dave Portnoy himself—probably has equal influence on Reddit. So “El Presidente” has an ETF that will overweight stocks showing positive sentiment on the internet, where he is perhaps the biggest “influencer” when it comes to stock picking. What could possibly go wrong?
So, are we finally at the end of perhaps the most improbable equity bull-runs, especially the meteoric rise of “technology disrupters”? In our last piece, Are We Reflating Yet?, we made the call for higher long-term risk-free rates. We believed then that the equity market was exposed to a sharp jump in these risk-free rates and we were correct. We think the main reason rates are rising is the ever-increasing supply of debt coming to market.
Last week the Treasury auctioned off in a successive three-day period approximately $180 billion in two-year, five-year and seven-year debt. By the time the seven-year auction came, the market clearly had enough. The seven-year auction was nothing short of a disaster. The blown auction changed what was a rather orderly sell-off in Treasuries into a panic, and thus a 10-year Treasury yield of greater than 1.50%.
However, while we think that the move-in rates are really a supply problem, a rather strong inflation narrative is taking hold in the market. Fed Chairman Powell spoke Thursday and he played down the threat of inflation and essentially signaled to the market that he isn’t worried about the latest move in rates. The Chairman does not see a tightening of financial conditions that would constrict economic growth yet, which means rates can go another 25 basis points or so before he even thinks about getting concerned.
About the inflation outlook, we agree with him. When the pandemic finally comes to an end, we agree that we will see a sharp few quarters of growth. However, we just don’t see a return to 1970’s inflation. What we do see is that the Fed isn’t ready to intervene with more quantitative easing to solve the growing Treasury supply problem. Therefore, we see the Treasury yield curve steepening further with longer term rates going higher in the coming weeks. For the risk markets, the strong will get a correction while the highflying “disrupter” stocks are in for a further beating.
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