The Three I’s (Innovators, Imitators, & Idiots): In a 2008 appearance on Charlie Rose, the host asked Warren Buffett: “During the financial crisis, should wise people have known better?” Buffett responded: “People always should know better. People don’t get smarter about things as basic as fear and greed. You can’t stand to see your neighbor getting rich. You know you’re smarter than they are. They’re doing these certain things and they’re getting rich. Then your spouse is unhappy with you because you aren’t doing those things. Pretty soon, you get the natural progression of the three I’s: Innovators – that trigger more Imitators – that make room for even more Idiots.”
It’s a similar deal with SPACs. I know how SPACs work and why they exist, and have no issue with either. In fact, I like how they work, and that they exist. My only issue is with the ending valuation of the company. Usually in the world of finance, prices are pretty accurate. Normally your potential reward has a direct relationship with the risk you’re taking. So, here’s what I don’t understand:
1. SPACs, by design, are very dilutive. Therefore, the value of the SPAC’d enterprise should be below that of a non-SPAC’d company – but it’s not.
2. SPACs come to the market quickly and without much conventional vetting. This should lower the value of the enterprise – but it does not. [In fact, most companies that opt for a SPAC do so because their corporate valuations can be 2 or 4 TIMES higher than traditional IPO valuations.]
3. There is a massive push towards the buying of call options in deal-less blank check SPACs. That means people are betting on firms with money – buying the right company that they’re intentionally overpaying for. That makes no sense.
So, who wins in a SPAC deal? Factually, the average return for the original SPAC holders (the money people – the group doing the buying) is over 980%. That scares the be-jesus out of me. This is yet another case of: Innovators – triggering more Imitators – making room for even more Idiots.”
The Market:
The signs are all over the tape. Interest rates continue to spike. Soft and hard commodities haven’t been this strong in more than 15 years. The U.S. Dollar is in a downtrend. It could be in response to the new fiscal stimulus, or the expectation that the FED will remain accommodative for the foreseeable future, or even that vaccinations will end the virus sooner than anticipated. In any case, back-to-normal stocks are on fire: airlines, hotels, travel agencies, leisure stocks, oil & gas, financials, and industrial metals like copper, nickel, steel, and lithium. However, many of the mega-cap names that used to be ‘sure things’: (AMZN, AAPL, MSFT, FB, NFLX, GOOGL), are showing weakness. The narrative has shifted. It’s not unusual for the stock market to act counter-intuitively. After all, who would consider buying airlines that are still operating at half capacity and are dependent on governmental help, and selling Apple and Amazon which are reporting record numbers? Analysts are looking 12 months down-the-road, and trying to discount a different story. The problem is that the market is often wrong. But between the process of discounting the future and the prediction of reality – many stocks will go up 2 to 10 TIMES. That is why price action matters (right now) over fundamentals. The patterns and behaviors remain the same, and the only thing that changes are the names on the Leader Board.
InfoBits:
- Walmart is raising wages for 425K workers… bumping its average to ~$15/hour, but keeping it’s starting wage at $11/hr.
- Lucid Motors, an EV outfit… will go public via SPAC at an $11.8B valuation.
- Oscar, the health insurer, set IPO terms… giving them an initial market cap of $6.5B.
- Roblox, the user-generated games platform… will go public via direct listing.
- Toast, the restaurant payment-processor… is IPO’ing at a $20B valuation.
- WeWork cofounder Adam Neumann… is in talks to settle his lawsuit against SoftBank. Terms would have SoftBank buying Newmann’s piece for $500m.
- China formalized financial rules… that will force the Ant Group and others to have more skin in the game with their loans – which will stunt their growth.
- Spotify plans to roll out a high-end subscription service… Spotify HiFi – will allow subscribers to listen to music in “CD-quality – loss-less audio format.”
- LinkedIn is launching "Marketplaces"… targeting white-collar gig workers: app developers, marketers, and designers. Users will be able to book freelancers straight through LinkedIn.
- LVMH is buying 50% of Jay-Z's luxury champagne brand… as a bet on the post-pandemic ultra-luxury market.
- Pfizer’s vaccine is 85% effective after the first shot.
- Workhorse (WKHS) was taken to the woodshed… as they failed to secure a contract with the USPS – that instead went to Oshkosh Defense.
- The SPAC boom is spreading to China. Hony Capital is preparing to list a SPAC in the U.S. – making an early Chinese PE giant to jump on the global SPAC bandwagon.
- Charlie Munger is concerned about… Tesla at $1T and Bitcoin at $50,000.
- Macy’s had its first profitable quarter in a year… thanks to strong holiday sales and inventory cutbacks.
- Ardagh, the company that makes White Claw and LaCroix cans… will go public via SPAC-quistion.
- SWIFT – the FED’s system that allows inter-bank transfers and settlements… went down for several hours last week. Take that Treasury Sec. Janet Yellen!
Crypto-Bytes:
This time it’s different: Per HL: It was 2017 when trading volume in Bitcoin (BTC) first surpassed that of the S&P (SPY). That was the signal that Bitcoin was not a ‘fraud’. BTC would go on to hit $19,000, head into a bear market, and now be near $50,000. Since November of 2020, weekend messages on Stocktwits have increased 400% and all of the trending tickers have turned to crypto. This is not a bubble – it’s a sea change. There’s enough capital and profitability in the crypto world that the pace of development and spend will only continue to accelerate.
- Former Bank of England Governor Mark Carney has joined the BOD of Stripe… and has advocated crypto replacing the U.S. Dollar for years.
- Chinese institutions MYbank and WeBank… are set to join the ongoing trial of the digital yuan.
- The North American Bitcoin ETF launched last week… with two products gaining approval and quickly surpassing expectations.
- Treasury Secretary Janet Yellen warned… that Bitcoin is an “extremely inefficient”way to conduct monetary transactions. Always talking her own book.
- If you would like to understand NFT’s = ‘Non-Fungible Tokens’… try Peter Yang’s ‘Step by Step Guide to NFTs for Creators‘.
- Bitcoin traded within an $11,000 range on Monday… marking the leading cryptocurrency’s first 5-figure daily price range.
- MoneyGram is stepping back from its partnership with Ripple Labs… citing the legal uncertainty around the blockchain startup’s XRP token.
- The New York Attorney General’s multi-year investigation… into the exchange and stablecoin issuer Bitfinex and Tether’s internal finances – has concluded with the regulators bringing NO formal charges.
- Non Fungible Tokens (NFT’s)… could become the killer app for crypto. This is likely to be the greatest unlock of artist opportunity in 100+ years.
- MicroStrategy purchased another $1.026B in Bitcoin… bringing its total to $4.78B. Making itself, in some sense, a de facto Bitcoin ETF.
- Square also bought $170m more Bitcoin.
- Crypto-exchange Coinbase… will go public via a direct listing for $100B.
- In case you missed it… Barstool Sports founder Dave Portnoy went after Robinhood CEO Vlad Tenev – accusing Robinhood of leaving amateur investors high and dry amid the GameStop saga. "You’re really the Sheriff of Nottingham." https://www.youtube.com/watch?v=LqoJApzkaPU&feature=emb_logo
Last Week:
Monday: Boeing grounded 100+ planes because on a flight from Denver to Hawaii one of its engines disintegrated in flight. BA is a big part of the DOW, so that's one reason the DOW is indicated down 180. But there's also rising interest rates. Nothing stops a love fest faster than rising interest rates. Investors are beginning to worry about the inflation that J. Powell says doesn't exist. I guess it doesn’t matter that: copper’s hitting a 10-year high, lumber broke $1,000 / 1,000 board feet – for the 1st time ever, and nickel’s hitting a 6-year high? BTU looks interesting. China's building 180 coal fired plants, and I’m thinking that someone in Texas will begin to pick coal and natural gas over windmills going forward. I’ll take some BTU over $4.20.
Tuesday: Rising interest rates and an over extended market has everyone nervous. I find it interesting that we have a shortage of chips and yet the chip makers have been in a downtrend for weeks. That said, we should keep an eye on a small Japanese chip maker (RNECY) that splits its product between auto computers and the internet of things applications. I’d be a buyer of RNECY over $6.10.
Thursday: The market is more worried about rising rates, then it is happy about J. Powell’s QE forever speech. Inflation is popping up in all sorts of areas. Our FED will eventually lose control of inflation, and all heck will break loose. Inflation is forcing the bond market's hand, and our FED is going to have to either fight this with more QE, go out further on the curve, or just let it climb higher. If rates continue to climb, and we don't let the Dollar fall – the stock market is heading lower.
Friday: Yesterday got ugly. The 10-Year yield shot up like a rocket and that scared the heck out of traders. For the past 5 years we've had zero interest rates, and therefore all economic activity and discounting was based on a zero-interest rate environment. When rates pop, it's not just debt financing that becomes harder to service – it limits the number of people that can secure debt in the first place. We’re hanging around the 1.5% level, and if it stays here or drifts lower – you can expect some positive market movement. One name I’m liking is KIRK.
Marijuana:
- NJ made marijuana legalization official… as Gov. Phil Murphy signed the weed legalization bill. This made ‘The Garden State’ the 13th to legalize adult-use cannabis, and first in the Northeast / Mid-Atlantic. New Jersey is expected to be the largest cannabis market on the east coast for the foreseeable future, with the potential to reach $1B annually within only a few years.
- Cannabis company Parallel is going public via SPAC at a $1.9B valuation. Ceres Group Holdings (the acquirer) is led by cannabis investor Joe Crouthers and co-founded by Scott “Scooter” Braun (manager of Justin Bieber).
- Judge Merrick Garland, nominated to become U.S. attorney general… signaled that he would adopt a hands-off policy for most cannabis cases.
Next Week: A Pivotal Moment for Markets…
- Net Net: The S&Ps closed the week at 3,807 – which is very close to its all-time-high of 3,959. So, things are not exactly ‘collapsing’ before our eyes. The S&Ps experienced a couple days of volatility and one hideous day (Thursday) of downside action. The uniqueness about the current situation is that it originates within the Bonds, and is proliferating outward.
- The Bond Debacle
o Rising Rates… have been caused by the tremendous sell-off in bonds – culminating in last week’s horrific treasury auction. Rates peaked at 1.61% before landing around 1.5%. The financial and energy sectors got us to these levels, and both experienced wicked mid-week reversals.
o What if bonds rally? If the bonds rally, the financials and the energy sector will both be in trouble. The financials dropped 6% last week (still up 11% YTD), while the energy sector fell by 8% (still up 27% YTD). This compares to Apple (AAPL) being down 6% YTD. So, if you believe the bonds will rally, then: SHORT Financials (XLF), SHORT Energy (XLE), and BUY Tech (XLK).
o What if the bonds continue to selloff? That’s when panic & capitulation will set in. The financials and energy sectors have already reversed so there’s virtually nothing proping the S&Ps up at that point.
o Yield Curve Control (YCC)… will come into play if the bonds (/ZB) selloff and break thru the 155 level. YCC has already been implemented in Japan and Australia – where their respective FEDs have stepped in and rallied their own bonds higher. At that point, any ‘free market’ bond activity ceases to exist and things begin to get out-of-control in the overall marketplace.
o Bond Volatility… currently we are at the 2nd highest level in bond volatility over the past 3 years (second only to the COVID crash). If you follow the SRVIX, it is experiencing one the larger moves I’ve seen on the interest rate swap side of the fence. Until the SRVIX returns to normal, the rate environment is anything but calm.
- The Rotation Game Continues
o Selling was not accompanied… by correlation coefficients that were high enough to warrant capitulation. We need a 92% correlation coefficient for that. Currently we’re only around 73%. Without any high degree of correlation, there is NO reason to step in front of this market.
o Tech, Financials, Energy and the Russell… are all doing their own things with no degree of correlation. They’re basically a sell-side activity slop-fest, and that is indeed unusual.
- Expansion of Volatility
o Volatility Futures are NORMAL. I’m surprised that the /VX is showing no signs of being inverted or any other unusual movement. There are currently a lot of retail traders out there buying volatility futures.
o VVIX > 110… the VVIX is trading at 125 which is ‘duck-n-cover’ land.
o Selling Gold and Oil? If you’re not used to these types of selloffs, what will happen is that big banks & institutions will sell a lot of their gold and oil in order to raise cash. Therefore, it’s not unusual to see commodities fall during a selloff like this.
- SPX Expected Move (EM)
o Last week’s EM was 74.11. We actually moved 95.56 – breaching the expected move. Fair warning: inefficient markets (as we’re seeing now) – can cause more inefficiency.
o Next week’s EM = 124.68 – Mr. Toad’s Wild Ride! There’s going to be a fire fight within the bond market this coming week. If bonds rally, then it’s “boom-boom out go the lights” for the financials. If bonds selloff, then it’s “nite-nite” for the entire market.
- Do NOT Step in front of this moving train! We all know that where we are – is NOT a bottom. Markets will either rally higher on the heels of bonds rising, or we will continue to sell off dramatically toward capitulation. In either case, do NOT try and catch a ‘potentially’ falling knife – because the expected move is too high. This is not a time to bottom-fish or sell Puts. This is a time to watch, sit on your hands, and let it unfold. If these markets break down, they will fall at least to the 3700 level in the SPX (the edge of the expected move).
Tips:
Looking at the 50-day moving averages: The NASDAQ closed below its 50 by 100 points. The S&P managed to close above its 50-day by 2 points, and the DOW above its 50-day by about 70 points. The NASDAQ is technically in trouble. Along with not getting over its 50-day, a trendline was violated, the Relative Strength Indicator (RSI) looks lousy, and if they don’t rescue it quickly – it will snowball. They rescued the S&P, and that was not by accident. There’s real market damage taking place. Yes, we could bounce from here, but make no mistake – a lot of traders are rattled.
HODL’s: (Hold On for Dear Life)
- Bitcoin (BTC = $46,500 / in at $4,310)
- Bitcoin Cash (BCH = $480 / in at $170)
- CLOV Healthcare (CLOV = $10.00)
o Sold $12.50 CCs for income
- CTI BioPharma (CTIC = $3.25)
o Sold Mar. $3 CCs for income
- Ethereum (ETH = $1,460 / in at $310)
- Grayscale Ethereum (ETHE = $15.09 / in @ $13.44)
- Grayscale Bitcoin Trust (GBTC = $43.16 / in @ $9.41)
- Hecla Mining (HL = $6.53)
o Sold Mar. $6 and $7 CCs for income
- Hyliion (HYLN = $15.13 / in @ $0.32)
- Infinity Pharma (INFI = $3.05)
o Sold Mar. $3, $4 & $5 CCs for Income
- Inovio Pharma (INO = $11.36)
o Sold Mar. $14 CCs for income
- Opko Health (OPK = $4.55)
o Sold Mar. $5 CCs for income
- Peabody Coal (BTU = $4.27)
o Sold Mar. $4 and $5 CCs for income
- SOS Limited (SOS = $4.97)
o Sold Mar. $5 and $7.50 CCs for income
- VisLink Tech (VISL = $3.24)
o Sold $5 CCs for income
- VivoPower (VVPR = $9.67)
o Sold $12.50 CCs for income
Follow me on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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