What’s new
Administrative topics and an introduction
Well folks, welcome to 2021. I’m pleased that we can move into a new year, albeit a new year plagued to start doomed by the same old challenges we know all too well from 2020. As with every new year, we look forward to the opportunities ahead, leaving the past in the past, and attempt to straighten out in the year to come (i.e. become a better version of yourself in one way or another).
I don’t like calling Market Madness my ‘side thing,’ but that is what it is. As a result, I know there are many areas of improvement that can be tackled with more time, energy, and effort. My hope for 2021 is to incorporate more technical research and provide some additional, personal, commentary about the happenings in the market. I am hesitant to provide any concrete suggestions (see disclaimer), but I want to grow this journal into something more than just a rehashing of the news condensed into an easier read.
If you follow me on any social media, I was hype about Market Madness’ performance in 2020, given that I never would have imagined seeing 100+ subscribers. I feel the ambition; the sky is the limit now. I have a lot of big plans for 2021, and I hope you all stick around for the ride, and we make a lot of new friends along the way.
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: +1.35% | +9.72% for 2019
S&P 500: +1.45% | +18.40% for 2019
NASDAQ: +0.66% | +44.92% for 2019
Asia and Europe 5 Day Performance
Nikkei 225: +3.59% | +18.26% for 2019
Hang Seng: +3.20% | -0.29% for 2019
FTSE 100: -0.64% | -11.55% for 2019
DAX: +0.97% | +3.55% for 2019
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: +20.90% YTD 📈
US 10 YR: 0.919%
Crude OIL: $48.42
Spot Gold: $1,897.90
TEDRATE: 0.15
LIBOR (3 month): 0.23838%
U.S. Dollar Index: 89.931
EUR/USD: $1.22
Pound/USD: $1.37
USD/JPY: 103.16 JPY
USD/CNY: 6.53 CNY
Weekly update
An article by Christopher
Financial markets
Stocks performed well this week, continuing the 2020 record-setting rally. When looking at the year, there are clear index winners and losers. From Jan. 1 to Dec. 31, the U.S. indices added large gains, particularly with the S&P 500 and the NASDAQ. Overseas, the markets’ performance in 2020 were mixed with some up big, some down big, and others somewhere in the middle.
2020 broke fundamental analysis and investing in many aspects, with what was replaced by (at least for the retail trading universe) what is being dubbed YOLO trades. The retail trading space saw major influx of new capital thanks to stimulus as well as higher unemployment (with those unemployed folks seeking a way to generate potential profit/income). Zero-Commission trading has only boosted the opportunity for investors to get in the trading world on the cheap.
Some are starting to waive a caution flag as we see margin and leverage levels among [retail] investors continue to raise, signaling a blind-bullish attitude toward trades, neglecting the potential downside of being over-margined and over-levered when things begin turning south.
On the other side, we have the major run-on of IPOs, especially in the information/software tech-space. 2021 appears to be an anticipatory kind of year, at least in Q1 and Q2, as momentum for records and new heights continues, but we’re also seeing signs (and some research suggestions) signaling that the ‘music,’ so to speak, is slowing down in some ways (yes, I paid homage to Margin Call just there; it is a wonderful film). Similar to how 2020 started, 2021 will start also with a sense of market-overheating, as the tape continues to rip and money is being made in many areas of the market.
2020 was a fabled ‘unicorn’ in many aspects (the market turnaround, the news of major gains and trade winners), yet we need not forget that a lot of ‘red’ tends to come before, between, and after the highlighted ‘greens’; no one wants to post their losses online but will not think twice about posting a big win. The picture is misrepresented, and the market is not handing out alpha like it is candy on Halloween. Don’t get sucked into the glitz and glam of what is merely a YOLO trade that is likely to leave you battered and bruised.
Bonus: Two really good OpEds from the FT this week: “Why obituaries for the bull market in bonds might be premature” and “A theory of (almost) everything for financial markets”
Also, read more about the crazy year in financial markets here.
Economic data and stimulus
I will keep this section a little briefer, as much of the same from last week continues into this week. U.S. unemployment claims (new claims) remain elevated but have relaxed when compared to the week before. We will be continuing coverage on this area week to week as we still see an elevated level of unemployment and new claims continuing at an elevated level as well. As of the past week, continued unemployment sits above 5 million, which has been declining over the months (down from the worst level we saw in the pandemic: 24.915 million). The U.S. FRED economic database has the closing 2020 unemployment at 6.7%, and a gradual decline over the next 3 years to realign back into long-run target of 4.1% (FOMC notes, p. 2).
There is going to be a lot of challenge in predicting employment (and unemployment) moving forward just due to the way 2020 impacted and reshaped the labor market. This is not something new, per se, but is new to see at such an accelerated pace. Many industries did not get to choose which side of the fence they were on with regard to how the pandemic shuffled up the world. Media companies and tech firms are booming because of the virus, while transit companies (planes, trains, etc.) and food/entertainment (cruises, casinos, restaurants, bars, etc.) are getting the short end of what is becoming an incredibly short stick.
These issues and many more within the economic realm are likely to continue as hot-button topics as we move further into 2021 and beyond.
Bonus: "Too much stimulus?" from the Wall Street Journal.
What I am watching in 2021
An article by Christopher
Often, I am hesitant to provide firm recommendations on anything through this platform. I do not have any licenses, and I do not owe you a fiduciary responsibility in any capacity. But I consider myself having a duty of care to my readers: providing factual and informative financial and economic information, data, and commentary.
That being said, I want to include more of commentary as it relates to what I am focusing on as I read financial news and watch the markets in 2021. And what better way to start than with the first edition of a new year!
At a high level, here are some topics that I am watching at least through Q1:
The U.S. Dollar Currency Index ($DXY)
Values of the Pound Sterling and the Euro
Ark Invesment Management and their funds (ARKK, ARKQ, ARKW, ARKG, ARKF, PRNT, IZRL)
The plan for the Market Madness Portfolio in 2021.
The USD Currency Index
The U.S. Dollar, the reserve currency of the world, has been in a slump during 2020, particularly on the back half of the year. There are many explanations for this kind of movement: the trade war with China (and many of our other trade allies), the flight to risk assets and away from safety (something we saw earlier on in the pandemic at that above $100 portion of the below graph). As the world was effectively collapsing, the FED opened swap lines, allowing more countries easier access to flock into USD, raising the strength of the dollar compared to all the rest. Since then, and as the rally ensued (among other things as well), investors fled safety and ran to risk, leaving the dollar into a decline.
An ongoing concern is the global macro picture, especially as we move into a new administration and try to recoup some damaged trade relationships and diplomatic ties. Others are worried about the currency with respect to stimulus spending as a catalyst for future inflation, which has not yet materialized. This is something that the Fed has pushed to the curb to focus on the employment situation as they are not modeling such inflation to occur in the next several years.
Values of Pound Sterling and Euro
With the bill on Brexit finally behind us, we now look to the implementation of all the added complexities with the U.K. leaving, such as trade and investment treaties. Since Brexit has been important for a long time, I will be interested to watch the interplay between the Pound Sterling, the Euro, and the US Dollar. The Euro and Pound both saw new peaks against the Dollar following Brexit, benefitted by the low rates in the U.S. and signaling for no rate increases soon by the Fed.
I am also generally interested in the dynamics of the FX market, not for trading purposes, but more on the macro side of the analysis. To understand the flows in the FX world, you can unlock a whole new perspective on equity and fixed income investing that I am not yet privy to.
The relationship of the Pound and the Euro and the Dollar are also interesting to me as some are predicting an expatriation from London by the big banking and finance community for somewhere more beneficial to the industry within the Eurozone. That remains to be seen, but it will be an interesting thought to hold on to in the meantime.
ARK Invest
Ever since I met Catherine Wood (CEO @ ARK) at an investor conference in 2017, I’ve admired her thought process and how she runs her investment firm, ARK. If you’ve not checked them out, please, they are cool (TLDR; their bread and butter is disruptive innovation)! I’ll talk next about the market madness portfolio, but their innovation fund, $ARKK, has been a hold for me for a while now, providing substantial returns in the year 2020.
On the year, this fund has done well. Part of the secret sauce behind the scenes at ARK is their approach to active investing, which is evident by the expense ratio on the fund. Another part of their secret sauce is that Catherine looks for analysts who are not finance experts, but industry experts in fields where they are planning to invest underneath that “disruptive innovation” umbrella. Take a look at the top 10 holdings:
Some news came out a few weeks back about a planned shareholder takeover of ARK by Resolute Invesment Managers (and thank goodness that did not happen). That means Catherine is bringing more of her active investing energy into 2021 and their funds are on my radar in 2021.
Market Madness Portfolio in 2021
On the side, I’ve been managing a long hold investment for the duration that I have been writing Market Madness and I was going to provide that as a supplement to the weekly editions.
I talked about it at its introduction, but the portfolio is run on Alpaca Markets, using their paper trading platform. Yes, I am not using real money on this account; I wanted to simulate an investment thesis and strategy using a sufficient level of capital (which I definitely do not have in reality). So instead of trying to build an asset allocation around a small base of capital, I was able to use the paper platform and use $1,000,000 in paper funds to allocate across the funds that I chose.
Here is the breakdown:
You can read the full piece here where the fund was introduced. The allocation and underlying investments have changed slightly, but the thesis is still the same: a target beta approach to buy and hold investing. Since inception, the ‘fund’ has generated a strong level of return, way above what I was expecting.
This fund benefitted from the market bounce back and in a big way. The returns would have been much more subtle in a more ‘normal’ year (~7.5 - 8.0% based on the model).
Yet, as we talked above, the market is showing some signs of overheating, and the fun show needs to take a pause from time to time. Over the next several weeks, I plan to readjust the allocation and take a more conservative approach (potentially targeting a 0.6 Beta instead of the current 0.8), but I have not fully decided. When I make the adjustments, I will devote space in the following edition of Market Madness to walk through those changes and my outlook.
Q1: Bull or Bear?
As you all might know, I am a huge fan of the Fear & Greed Index as a proxy for what the ‘temperature’ of the market is in the near term. This obviously changes week to week but can be a good short-term proxy in cooperation with the VIX. The indicators underlying the fear/greed output show mixed messages; market momentum and stock price strength are sending greed signals, but safe haven demand and junk bond demand are sending fear signals.
Where I stand right now, the bull run has a little more gas in the tank but will potentially struggle to maintain throughout all of Q1.
Quick Takes
To fill in the gaps
Wells Fargo looks to 2021. (via CNBC)
Streaming was red hot in 2020. (via WSJ)
EU and China agree on new investment treaty. (via FT)
A theory of (almost) everything for financial markets. (via FT - Opinion)
Banks dive deep on government debt. (via WSJ)
An oil outlook for 2021. (via FT)
Global banks rake in the fees in 2020. (via FT)
Boeing 737 MAX returns to the air. (via WSJ)
Intel urged to explore strategic alternatives. (via CNBC)
JPMorgan doubles down on traveling in the new year. (via CNBC)
A piece on Bitcoin, of course. (via The Heisenberg Report)
20 Lessons from 2020. (via Macrodesiac on TradingView)
General Banter
What’s on the minds of our editors and writers
I am pleased to share another great resource of quality finance content aimed at career development in the financial world. Enter Afzal Hussein. Before entering the world of entrepreneurship, he worked in Investment Banking at Goldman Sachs in London. He has a strong presence on YouTube as well as a course on CV building for banking on Skillshare. When you go, let him know Christopher from Market Madness sent you.
Macro-Ops is offering an “Advanced Liquidity Training” video series, and it is the bee’s knees. Their content is ultra-premium macro-strategy work, and a majority comes at a steep cost. When I see them offer something for free, I jump on that. Occasionally, in addition to their “Dirty Dozen” chart mailing each Monday, they send out really informative articles which are always worth saving. Some months back, they did a two-parter on Cash Flow and I go back to that one often.
Finally, the fine folks at Macrodesiac published a piece on Saturday walking through volatility. Enjoy “Your Volatility Handbook.”
Reader’s Corner
A place for suggestions for readers like you
The reader should enjoy HBO/BBC’s new show “Industry”, which is a new drama following a graduate class entering the wild world of prestigious investment banking in London. Watch the first episode for FREE here!
It is not finance documentary, but an enjoyable and addictive drama, nonetheless. I binged all 8 episodes in one day (thank goodness a season 2 is in the works). It made me feel nostalgic to be back in the trading room at my university, absorbing the sights and sounds.
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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