What’s new
Administrative topics and an introduction
Well folks, another week, another set of new antics in the ongoing WSB/Reddit/Retail trading saga. This time, they’re not only taking their money to the moon. They’re taking the cannabis industry with them. I guess one kind of green was not enough.
Outside of that small universe, the markets continued as normal, setting new ATHs (all-time highs) as earnings season continues. Finally, Ryan joins us this week to talk shop on his investing strategy in the small cap world.
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: +1.11%
S&P 500: +1.28%
NASDAQ: +1.74%
Asia and Europe 5 Day Performance
Nikkei 225: +2.58%
Hang Seng: +3.64%
FTSE 100: +1.55%
DAX: -0.05%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: +2.33%
CBOE Volatility Index (VIX): 19.97 (lowest since Feb 2020)
US 10 YR: 1.210%
Crude OIL: $59.61 (highest since Jan 2020)
Spot Gold: $1,823.13
TEDRATE: 0.16
LIBOR (3 month): 0.19763%
U.S. Dollar Index: 90.48
EUR/USD: $1.212
Pound/USD: $1.3847
USD/JPY: 104.913 JPY
USD/CNY: 6.454 CNY
Weekly update
An article by Christopher
Financial markets
U.S. markets managed to squeeze out additional gains to close the week in the green. Overall, the week was mixed, with both winning and losing days across the indices. While bond yields fell after the CPI report (see economic data and stimulus section below), investors were optimistic to continue buying stocks. This week was relatively calm, as the retail trader brigade has mostly settled, despite piling into weed stocks this week.
Elsewhere, we got dominated by news surrounding Bitcoin as Elon added $1.5 billion in BTC to the Tesla balance sheet and BNY Mellon was also going to dabble in the crypto space. A couple of my friends are more adept in understanding that market than me, so I will continue to ask them dumb questions until my brain can understand the purpose of crypto. As companies seek to diversify cash holdings (as Tesla did), the Fed has their eye on what might come next out of that space, as is the market at large as everyone tries to understand what a world would look like with mass adoption of BTC as a payment method. I’m still waiting for Target to make good on that promise they said a long while ago about adding BTC as a payment method.
The other highlight I wanted to share this week was a nice visual article by the WSJ which showcased the rise in use of SPACs as compared to traditional IPOs.
“SPACs are raising more money and outnumbering traditional IPOs, a review of Dealogic data shows. These “special-purpose acquisition companies” have raised $38.3 billion since the start of 2021, compared with $19.8 billion by traditional IPOs.” (excerpted from WSJ article)
SPACs are also something that I need to read more on to get a better understanding of them. I know they are all the rage currently in the go-to-market (GTM) space as a promising alternative to the traditional IPO process. I will add some remarks in a future edition outlining my findings and thoughts on the role of SPACs in the GTM space.
Bonus: “JPMorgan’s Wall Street chief gives his call for the Stock Market, SPACs, fintech and CEO succession” via CNBC.
Economic data and stimulus
The big items this week were CPI and stimulus updates. The Consumer Price Index (CPI) is a core measure of inflation measured in the U.S. and gauges overall inflation through pricing a traditional ‘basket’ of home goods. The release for January was unchanged from the month before, signaling that investors are going to have to continue waiting for the expected ‘big increase’ in consumer prices (i.e. inflation). Yields fell after this announcement which is an expected action after a ‘bad’ CPI report.
“Overall, the data indicates that ‘there’s just no real significant underlying inflationary pressure,’ said Thomas Simons, senior vice president and money-market economist in the fixed-income group at Jefferies LLC.” (excerpted from WSJ article)
Inflation is not a bad thing in general but is something that needs to be monitored to avoid being too high nor too low. Many have been fearing (and some still fear) that all of the stimulus and Fed liquidity actions are going to produce a huge boost to inflation but that seems still not yet to be the case.
That will be a problem for later, as the Fed Chair Jerome Powell spoke this week about low rates and a bleak jobs outlook. He predicts that the Fed will continue their actions long into the future and rates will continue to stay low in part due to that action. Fed Funds rate, the prime lever the Fed uses to influence all other rates is still hanging out on the floor. We have seen the unemployment rate creep back down (it now sits at 6.3%), Powell sees the bigger picture recovery still a long way out in the distance. On the back of this came another ‘improvement’ of a weekly jobless claim, falling for the fourth straight week (although last week’s data was revised higher than the original print). Jerome is right, the ideal position for the economy is still far off on the horizon.
Finally, a quick note on stimulus. The House this past week advanced the part of the stimulus bill that will include $1,400 direct payments to Americans. The question around more targeted delivery of those payments remains unanswered.
Trust your strategy
An article by Ryan
Make a Plan
This past summer, I decided to completely revamp my investment strategy. It was a daunting task at first, especially in today’s world where there seems to be an “investment guru” or “guaranteed yolo play” around every corner. It is more important than ever to tune out the noise and find what works for you.
My first step was to figure out what I wanted to achieve, and how I would get there. I became disinterested with ETFs after I realized my returns were falling short of expectations. I grew fascinated with small cap companies and settled on investing in that segment of the market. As an individual, you must consider the level of risk you are willing to take, and then choose the approach that makes the most sense. The smaller the company, the greater the potential risk, but also the greater the potential reward. I was comfortable with this risk and felt that I could gain an edge over the inefficient small cap market.
Personally, I try to find overlooked companies that have either great future potential to be realized (growth) or have been severely oversold and deserve a more favorable valuation (value). I have an outline of the specific metrics I use to screen for stocks that fit each category down below for your convenience.
After much research, I took the plunge and invested my hard earned money into a handful of stocks that aligned with my strategy. This is probably the scariest part of testing out a new investment method, because at the end of the day you could be wrong. However, learning to live with that feeling and trust my independent research helped me grow so much as an investor over this past year.
For those of you who are new to investing, or simply want to change up your current strategy, do not be afraid to trust your instincts and due diligence. Blocking out all of the noise, paired with staying true to my own investment thesis, led to an outperforming year for my portfolio and many lessons learned along the way.
Growth Investing
Younger Companies (Proving Themselves in Market)
Accelerating Revenues (100% over last 5Y)
Accelerating Earnings Per Share (25% YoY or Greater)
Innovative Business Model (Competitive Advantage)
Value Investing
Mature Companies (Established in Market)
Price / Book Value < 1 (Currently Undervalued)
Less Price Sensitive (Outperform in Downturns)
Hurt by Recent Temporary Setback (Opportunity to Buy)
Stock Screening
Using these metrics above, I was able to discover a broad list of interesting small companies spanning every industry imaginable and fit the characteristics I wanted. Stock screening is a great way to put your ideas into action, and begin the search for solid investments. I use TD Ameritrade for my screens, but I have heard good things about other brokerages as well such as Fidelity and E*Trade (these are also free to trade just like on Robinhood! - but they will not sell your data in return).
Once you have that list compiled, start delving into each stock to better understand the company beyond its financials; Is it under solid leadership? Are there any exciting new products in the pipeline? etc.
As I mentioned before, the small cap market is extremely inefficient and the companies in this market carry higher risks than larger companies would, however this presents an opportunity to develop your “edge” and outperform.
Quick Takes
To fill in the gaps
Everyone is taking their road rage digital during the pandemic, as GTA V sells over 20 million copies in 2020. (via CNBC)
A couple developments in the crypto space. (via WSJ (1), WSJ (2), and WSJ (3))
A few articles on the continuing Reddit saga. (via Barron’s, WSJ (1), and WSJ (2))
Green energy in the Saudi desert? (via WSJ)
Concerns over oil’s quick rise. (via CNBC)
“Nasdaq, NYSE Sue SEC to Block Market Data Overhaul.” (via WSJ)
SoftBank reports $11 billion profit after tech funds lay “golden eggs.” (via WSJ)
General Banter
What’s on the minds of our editors and writers
“I just remembered, today's my birthday.” - F. Scott Fitzgerald
Reader’s Corner
A place for suggestions for readers like you
The reader might enjoy this paper I found on SSRN via a post on the Heisenberg Report. The post was really good and highlighted that we’re all missing the democratization of financial markets era, which happened a handful of years ago. What we’re seeing now in the markets is simply a byproduct of more available technology, forums, and that past progression of democratic financial markets.
You can read the post here: “The ‘Revolution’ Robinhood And Reddit Are Looking For Happened Years Ago”
Here is a notable section of that article:
“Bottom line: The democratization of markets happened years ago. You can track any number of benchmarks and/or simple, safe strategies using exchange-traded products that cost basically nothing. That’s the democratization of markets. And you can reliably leverage it to outperform the “pros” over long periods, with the obligatory caveat that past performance is no guarantee of future results.
By contrast, what you’ve seen recently is just the expansion of the casino for those inclined to treat markets as an avenue for gambling. Now, the casino is open to everyone at no cost to trade, unless of course you count the value of your order flow which, if you’re a retail investor, you probably didn’t even know had any value, which is why you didn’t ask any questions when brokers started telling you that you could trade for free.”
You can also read the paper here: “Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality”
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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