[Market Madness] Edition 0125
For Immediate Distribution
What’s new
Administrative topics and an introduction
Well folks, it was a bummer of a week from a market perspective. At the start of the week, it appeared as though we would continue the upward market trend, although we would run the risk of further widening the gap between the financial markets and the underlying economics. Instead, as the week carried on, we saw some sense of reality kick in, despite the onslaught of hyper-valued IPOs that hit the street this week. The economic condition appears to be worsening, and combined with the ongoing stimulus stumbles, investors continue to keep a wary eye on what is coming next.
Coming off a few days of new COVID 19 cases in the U.S. surpassing 200,000, I’d say that things are getting much, much worse. The investment world is feeling this, as investors appears to be dimming their optimism and bracing for the potential of new lockdown measures. The Pfizer vaccine was just approved yesterday by the FDA for immediate distribution, but that does not mean it will be an overnight success. Rather, the distribution process is going to be long and riot inducing, as many groups and industries are calling ‘dibs’ on the first round of vaccinations because they ‘need it the most.’ It truly always is one thing after another.
Let’s get into some stories.
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Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: -0.69%
S&P 500: -0.95%
NASDAQ: -0.69%
Asia and Europe 5 Day Performance
Nikkei 225: -0.37%
Hang Seng: -1.23%
FTSE 100: -0.03%
DAX: -1.39%
Rates, Spot Prices, and ‘Good to Knows’
U.S. Dollar Index: 90.976
US 10 YR: 0.897%
Crude OIL: $46.56
Spot Gold: $1,837.50
Market Madness Portfolio: +18.71% YTD
TEDRATE: 0.14
LIBOR (3 month): 0.2195%
Weekly update
An article by Christopher
Financial markets
The global financial markets retracted this week. The virus is still holding tight onto the markets and impacting the recovery efforts as we move further into the winter months. What started off as a good week, things turned for the worse as stimulus talks continue to drive bipartisan divide and a lack of any agreement on the horizon. Heck, the fine folks on the hill have to go back to the drawing board for the budget next week because they could only pass a one-week extension… but I digress.
All things being considered, it was a weird week. We will talk about it more in the next story, but there were a TON of IPOs this week, with many of them being in the tech / SaaS (Software as a Service) space. This week aside, the past several weeks have been trending upward in the markets, adding to records, and fueling the stock market recovery to new heights. We’re still seeing some divide across industries and sectors. As long as COVID 19 concerns are looming, tech appears to continue being the favorite child of the Street and manufacturing and travel appears to continue being stagnant or declining.
Bonus: Enjoy this excerpt from The Macro Tourist describing the ongoing ‘buying frenzy.’ Also, enjoy this week’s Felder Report titled ‘This is Insanity.’
Economic data and stimulus
On the economic front, the worries continue. Weekly jobless claims this past week rose back to September levels. Many are still concerned that the rising cases, looming restrictions, and the winter season will lead to a resurgence in employees losing work. Another measure of the labor market is new job openings, which also slipped in the first weeks of December. This data measures the availability of new jobs that people can apply to. A reduction in this figure also leads one to conclude that the labor market itself is retracting.
Overseas, lockdown measures have returned. This time, they’re targeting particular ‘hot spot’ areas where contracting the virus is more likely, something the U.S. seems unable to do. Rather, it appears as a strike at ‘freedom’ if someone is told they cannot go to their local bar for a drink with friends. (trigger warning) The biggest concern that I see in America’s fight against the virus as compared to other European nations is that, on the national level, we appear unable to give up anything in return for greater safety and lower virus numbers. My friends overseas have explained the lockdown procedures to me, and their willingness to accept them for the greater safety and good of everyone else. Here, that is simply not the case. Restrictions and lockdowns spark tensions that end up in civil unrest. For the greatest amount of good to be realized, we all must do our part and temporarily give up what might be valued to us, knowing we can have that back in the future under better conditions. (end trigger warning)
The ongoing gloomy economic conditions are leading more heads to anxiously turn in the direction of both the Fed and Congress. The Fed has signaled that some of their buying programs are to continue for a significant amount of time, and the same goes for the ECB (European Central Bank). These efforts come as one of the few cornerstones that are propping up global markets, with the Fed acting as Atlas, holding the U.S. economy together while Congress continues its collective inability to act.
Bonus: Enjoy an interesting read from The Heisenberg Report on America’s (unsustainable) economic model.
IPO mania
An article by Christopher
One thing, however, that is completely out of order with the overall market story of 2020 is the ‘IPO mania’ twist. Many comparisons draw these valuations and IPOs on a similar trajectory that was seen in 1999 during the dot-com bubble.
In a time where many have considered the trade between “value” and “growth” investing, it appears that growth, from a valuation standpoint (and, thus a price standpoint) is expensive, nearly surpassing that of the 1999 era.
The most recent case studies being DoorDash and Airbnb, who both crushed their day one market performance, which is a common trend for IPOs in general. However, their market performance on day one was remarkable, with Airbnb ending the day up 112% and DoorDash ending their first day up 86%.
There was a crucial lesson here (yet again), which has been true of other shares in the past; people and bots get tickers wrong. During Airbnb’s rise to super-status, a robotics company, ticker ABB, also took a major rise as both traders and algorithms made an error. The same was true when Zoom (ticker ZM, which people thought was Zoom Technologies, ticker ZOOM) took off earlier on in the pandemic.
A common trend that lends itself to the IPO universe is the idea of aiming too below the bar. When IPOs are so oversubscribed that everyone and their grandma wants to own a share and grab some of the day-one profit, market participants sometimes wonder why they set their expectation so low. If they had expected demand to be so large from the beginning, why not increase the allocation of shares, thereby dropping the price a bit. A greater supply of shares would ease some of the frenzy-demand, but still leading to a spectacular debut. (I am no expert on IPOs and the roadshow/subscription process, but I imagine there is some demand anticipation that goes into the allotment of shares pre-IPO.)
Either way, one thing strikes me very clearly after several IPOs of this size and grandeur: investors are willing to keep fueling the fire of the stock market. We continue to hear the common story of the Fed being the main fueler to the market, but we are seeing that investors and traders are still believing in risk-on investments being the best option for expanded returns. It will be interesting as we continue to see a divergence between financial markets and the underlying economics when the risk-on switch turns to risk-off and investors and asset managers feel that they’ve taken as much profit as they can from the market before the next correction.
(If you’ve spotted the inherent contradiction between this story’s market sentiment and the overall sentiment listed above stories regarding COVID 19, then good for you — this is something that is rattling my brain too. Overall, the sentiment is waivered, yet in some pockets, the optimism runs deep, especially when new offerings hit the Street)
Read more here, here, here, here, here, here, and down in the Quick Takes too!
Quick Takes
To fill in the gaps
Chinese government tightens control over private sector. (via WSJ)
C3.ai IPO news. (via CNBC)
Government shutdown deadline extended one week. (via CNBC)
Jabs thrown at Silicon Valley, companies moving to Austin, Texas. (via WSJ and CNBC)
Stripe aims to disrupt banking to fit the internet era. (via Stripe newsroom)
China generates record trade surplus. (via WSJ)
Bloom Energy’s blunder. (via WSJ)
Facebook clashes with the FTC. (via WSJ)
Follow up on Oil’s wild ride this year. (via WSJ)
Nigerian economy on brink of ‘unraveling’ warns World Bank. (via FT)
AT&T looks to sell DirecTV, receives offers over $15 billion. (via WSJ)
General Banter
What’s on the minds of our editors and writers
Check out the new “Behind the Madness” button that is a little further down the page. I’ve updated that page with some new newsletter signups and look to continue building that out and updating each week!
Reader’s Corner
A place for suggestions for readers like you
The reader might be interested in this WSJ article entitled “What Should Americans Eat?”
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
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GENERAL DISCLAIMER: All rights reserved to respective sources where I pull my information. I do not own or have vested interests in the websites where I get my news and information. Links are provided as credit and to provide additional context where readers might want more information outside of what is printed here on these sheets.
