What’s new
Administrative topics and an introduction
Well folks, it has truly been a week. We’ve learned that the markets do not even stop for a full-on insurrection on Capitol Hill. Regardless of the nightmare that occurred that day, the fine folks on the Hill certified the election results and declared Joey B. as the 46th POTUS as of 1/20/2021. There were very many news-worthy moments this week, ranging from the political to the markets, and even Bitcoin had its moment in the limelight. Is it really 2021, or just the sixth week of December?
In other news, I am pleased to introduce Ryan as our newest contributor to Market Madness. He’s going to talk shop on Small Caps this week.
P.S. check out the updated Behind the Madness via the button below! It is BEEFY, now with links to free video courses, institutional research sources, and learning/training resources as well as a discount code on paid courses from CFI if you’re looking to expand your knowledge. I also created a Discord Server for the community to collect and chat about markets, economics, and anything else. Follow this link to join.
Let’s get into some stories.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: +1.66%
S&P 500: +1.88%
NASDAQ: +2.45%
Asia and Europe 5 Day Performance
Nikkei 225: +2.53%
Hang Seng: +2.38%
FTSE 100: +6.40%
DAX: +2.41%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: +24.80% since inception (June 2020) 📈
US 10 YR: 1.12%
Crude OIL: $52.73
Spot Gold: $1,847.80
TEDRATE: 0.15
LIBOR (3 month): 0.22475%
U.S. Dollar Index: 90.098
EUR/USD: $1.22
Pound/USD: $1.356
USD/JPY: 103.949 JPY
USD/CNY: 6.475 CNY
Weekly update
An article by Christopher
Financial markets
The markets did not care one bit about the drama on Capitol Hill this week, posting gains and extending rally-records. The tech sector printed notable gains this week after many had imagined a selloff as the new admin is likely to be less favorable to tech giants.
We saw a big move in treasuries this week, with the 10YR US Treasury cresting over 1% for the first time since March, and the dollar experienced a sharp rise as well. Both actions have been attributed to the Dem sweep of Georgia and rising expectations on a more robust stimulus offering. That remains to be seen, as there is still some discourse on the Hill regarding the size of direct payments as well as who will be eligible for those payments.
In commodities, crude oil rose above $50/barrel for the first time since early 2020. This movement appears due to further cuts on production in the Middle East to stimulate positive price momentum. Rising oil prices appear to come as a surprise to the larger picture, since the incoming administration is much tighter on fossil fuels than the outgoing one.
If you’ve gained nothing else from this section, just know that the rally continues across the board, despite everything else going on in the world.
Bonus: “Under Siege” by The Heisenberg Report, “Sentiment Speaks…” via Seeking Alpha, and “‘Early Warning Signs…’” by The Heisenberg Report.
Economic data and stimulus
This past week was a big one for economic data. Non-Farm Payrolls (NFP) for December printed in stark contrast to the Street’s prediction (actual -140K versus +100K consensus), with the unemployment rate holding steady at 6.7%. The weekly jobless claims came in under expectation, but still remain at a very elevated level.
Other economic data appeared to show strength, with both the PMI and ISM manufacturing gauges printing higher than consensus (PMI actual 59.6 vs 56.5 consensus and ISM Manufacturing 60.7 vs 56.5 consensus). Interestingly enough, consumer demand rose for imported goods, further questioning the trajectory of the economic recovery as a whole.
“It’s been a very unequal pandemic economy,” Scott Brown, chief economist at Raymond James, said. “We had a lot of job losses in lower-paying service industries, but those workers aren’t typically big spenders.” He noted the top 20% of income earners account for more than half of consumer spending…
There have been other recent signs economic momentum is slowing. Household spending declined in November, marking its first retreat in seven months, and household income also fell, according to the Commerce Department. New- and existing-home sales declined in November from the previous month.
However, like imports, the manufacturing sector has been buoyed by consumers shifting purchases to goods from services. Data firm IHS Markit said its purchasing managers index for the U.S. manufacturing sector recorded in December its largest monthly improvement since September 2014. (excerpted from WSJ article)
On a global level, there are growing worries of the second strain of COVID 19 and how it will continue to reel the world. The World Bank is estimating a potential decade loss of economic activity from the pandemic.
Bonus: “Clear and Present Danger” by the NorthmanTrader.
Small cap edge
An article by Ryan
Invest with Conviction
Investing is all about believing in something. Once you have developed a strategy, will you trust it? How do you know if it will pay off? How much capital should you deploy in the process? In a world where these questions are impossible to answer, having conviction in your decisions is crucial. It has a lot to do with bet sizing (how much you invest) as well as your portfolio performance.
If too much is allocated into a losing position, your portfolio will suffer. This is something all investors will experience at one point or another and is an obvious mistake. Allocating too little capital to a winning position is just as painful and can harbor serious regret among even the savviest investors but may not appear as obvious to the eye.
I learned this lesson the hard way early on and only recently had my first successful bout with bet sizing. I was able to increase my conviction through exploring Small Cap stocks and developing an advantage over the market.
How to Get Started
Choose an industry you have an “edge” in (or are deeply interested in)
Take a dive into that segment of the small cap market using a stock screen (I like TD Ameritrade’s platform)
Reach out to company leadership (due diligence)
Make your own probability weighted price target
Decide whether to invest!
Overlooked Small Cap Stocks
Small cap stocks provide an opportunity for investors of all experience levels to gain an “edge” over the rest of the market. These small companies can have great potential and are often overlooked by popular news outlets and the broader investment community.
Here, you’ll find companies from every industry, operating in every market segment imaginable. Some are stagnant and declining businesses, left to die in an illiquid market. But others hold incredible potential underneath their unassuming shell. They have been overlooked by large investors who have flocked to large and mega cap stocks.
These end up in the inefficient small cap market, where even the newest investors can develop an “edge” and become experts in their field. For example, you may see a market opportunity in your own life, such as a new service that is emerging. Take that opportunity to research any small cap stocks that have to do with this change you are seeing.
Become an expert on those companies by doing everything you can to learn more, about their model, outlook, and structure. Then, reach out to leadership at the company and ask as many questions as you can. Not easy questions that can be found in a 10K, but meaningful questions that can help you build an opinion of the company’s potential. The executives and IR (investor relation) teams at small cap companies are incredibly easy to talk to (you’d be surprised how many CEO’s I’ve chatted with by doing this).
While thousands of analysts attend an Apple investor conference, a small cap stock may only see a dozen or so in attendance. This affords you the luxury of accessibility to leadership, and thus an ability to develop your own “edge” (your secret sauce) over the rest of the market. This ultimately can give you a better chance to find investment opportunities before the broader market does.
Using experiences and insights from your own life, you can develop an edge over other investors, allowing you to see great investments before they do. The stock market as a whole performer exceptionally well over 2020, but by finding my own edge in small cap investments, I was able to significantly outperform the major U.S indexes.
Bitcoin: the house view
An opinion piece by Christopher
Let me get my take right front and center: Bitcoin is the tulip of the 21st Century. There, I said it. I own up to it from here on out regardless of where it goes. I read an interesting piece on the markets this week, and it had a quote that resonated with me:
“Speaking of ‘market cap’ (and the scare quotes are there for a reason), the market value of cryptocurrencies managed to climb above $1 trillion Thursday. Try to wrap your head around that — one trillion dollars worth of nothing.” (excerpted from “The Insurrection Rally” by The Heisenberg Report)
According to 2019 data from Statista, a little over 25% of all Americans could not even afford one single unit of this “currency.” I am struggling to understand the identity that Bitcoin wants to have. I understand the value and potential in the underlying blockchain technology, but if you want a traceless payment system, why not just use paper cash? If your worry is the acting ability of the central banking system, you have to remember there is a lot of responsibility on their shoulders since the US Dollar is the world’s reserve currency.
So what then (and pardon my ignorance) is the point? The first big wave of Bitcoin was in the retail investor space, but now I’m getting wind that fund managers and other “Wall Street whales” are taking stakes in the ‘never say die’ rally.
But going back to the above quote, I’d enjoy understanding truly what the underlying value proposition or underlying anything behind what makes up the price of bitcoin, or any other cyrpto for that matter.
For firms, their stock price can be backed by their management of their balance sheet coupled with expectations about future performance metrics. Standard currencies are valued based on faith in the issuer (usually a government or coalition of governments). But from how I have come to understand it, the ownership of the currency comes down to those who actively hold it, but there is no backing of faith of issuance or anything of the like. And if you lose access to your coin wallet, those are gone forever, further cutting the limited supply and increasing the value of each coin still in existence. I do not think that all the crypto currencies will live forever, but it seems foolish to think that if you don’t like Bitcoin, you can just make a new one.
I am interested to see where the future of this arena goes, and I am happy to stick to my take, either way the proverbial digital coin falls. What’re your thoughts?
Read more here from Bloomberg and more here from the Economist.
Quick Takes
To fill in the gaps
US 10 Year Treasury crosses above 1% on Jan. 6; first time since March.
A warning on corporate borrowing. (via FT)
Runoff Results. (via WSJ)
Is Jack Ma okay? (via WSJ)
New COVID 19 variant’s impact on the global economy. (via FT Opinion)
Outlook on Emerging Markets in 2021. (via CNBC)
Donnie playing ‘I Spy’ for new votes in Georgia ahead of electoral college certification. (via WSJ)
Bonds move after Dems Georgia flip in runoff election. (via WSJ)
Of course, Bitcoin had itself a week. (via WSJ and The Heisenberg Report)
Credit Suisse books $850m charge over Mortgage-Backed Securities. (via WSJ)
Commentary on a perma-bear’s perspective on stock mania. (via The Heisenberg Report)
Boeing reaches $2.5b settlement in 737MAX probe. (via WSJ)
Twitter permanently bans Donnie’s personal Twitter account.
In The Know with Cathie Wood. (via YouTube)
General Banter
What’s on the minds of our editors and writers
There was enough banter surrounding the insurrection this week, that I’m going to let you enjoy what you will from that lens.
Shoutout Substack for adding new theme options, so now I am printing this on the figurative greenback.
Reader’s Corner
A place for suggestions for readers like you
The reader might enjoy this video reflecting on the most searched questions on Google in 2020.
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.
Do you like what you have read? Consider subscribing so that Market Madness is hand-delivered to your inbox each day! If you know of anyone missing Market Madness, save them the trouble, and share it with them!
Check out Behind the Madness for all the cool links and sign ups I used to have at the bottom of the weekly edition. To bring the best content each week, I dedicated a new page to them that will be continuously updated so I am not taking up space here each week.