New Year, and I’m already Fed Up
What the Market? + The Curious Investor - Jan 10, 2022
A few style changes to the investor section and the return of The Curious Investor! Check out our update on Block (formerly known as Square below)
What the market?: Our regular update on the economic context
The Curious Investor: A peak into our research on specific equities or industries
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What the Market?
Mr. Market was feeling a little blue about all the ‘vid going round. Alas, he popped a cork and he indulged himself in the imbibing of his sparkly grapes. Mr. Market realized that it must now be January! Which means, it’s time to kick in the January Effect, the supposed time that we all decide to buy after a December of tax-loss harvesting, or some other mystical collective reasoning. Indices kicked the year off with new highs but dropped quickly after the Fed dropped the interest rate mic, and said like winter, it’s coming. Anyways, burp out the bubblies quickly because earnings season is kicking off. Big banks are at bat first (refresh on how to analyze banks with our guide), and we’ll also get a fresh set of inflation and consumer data to roll our eyes at.
What’s driving the market?
Fed’s gonna do, what the Fed’s gotta do: As the economic machine continues to speed up and support itself, it’s time to taper down all the stimulus supplements. As with any tapering of a feel good drug (not that we know the feeling or anything), markets are naturally feeling a bit of withdrawal. With the potential for interest rates to increase as early as March, (coinciding with the end of the Fed’s asset purchasing program) volatility is naturally increasing. With the cost of borrowing increasing, investors with an abundance of growth and speculative investments that rely on cash are going to be nervous until the playing field settles.
Is it really a market newsletter if there isn’t an inflation section? Yeah…we wish we could have left this topic in 2021 too. The diva that is inflation will take center stage yet again this week with an expected reading of 7.1% YoY. If I were allowed back in the casinos again, I may place a bet that the Fed is fed up with ole inflation and will throw the full weight of its monetary policy tools to hopefully end this sooner rather than later. In the meantime, pour yourself and inflation a cup of your favorite Joe and cuddle up - it’s here to stay for a bit longer. The good news is that economists expect this to be the peak with 2022 inflation estimates coming in at around 3% (which seems suspiciously low and borderline wishful thinking). As usual, the teenage drama queen that is Mr. Market (shoutout Lindsay!) will likely overreact before realizing it’s pretty chill. Anyways, if that all bored you, inflation sucks, and we’re all tired of talking about it but it’s here to stay…for now.
What’s an investor to do?
The tale of 2022 looks to be more conservative, focusing on the new normal rather than economic recovery. Expect volatility as the Fed adjusts monetary policy. In the short term, it may be worth shifting towards value stocks which should rock a little more steady than growth and speculative positions. In the long haul, if you can rock with the boat, make sure you really love your growth plays for the voyage to the new normal.
Keep an eye on the economy
Consumer Confidence and Retail Sales (released Friday): Both tend to have a lot of influence on inflation and are key drivers for major industries in the U.S., particularly in December
The Curious Investor
An update on Square, err..Block Inc. (disclosure: WTM is long SQ)
About the rebrand: The rebranding of Square to the parent company Block in our eyes was a genius move by Dorsey. The rebrand allows investors to easily discuss the different business units that fall under the entity.
Square: the seller-side ecosystem and company that has become synonymous with creating payment solutions for merchants
Cash-App: the buyer-side ecosystem focusing on enabling mobile peer-to-peer payments and purchasing options for consumers
Tidal: the music streaming platform
Spiral: formerly known as Square Crypto
TbDex: the blockchain liquidity protocol
Since the rebrand, Block has been taking a bigger beating than Marvis Frazier when he fought Tyson in ‘86. A recent sell-off of growth names and riskier assets amid concerns of a Fed rate hike have hit tech companies and fintech’s especially hard. However, Block slid even further than its comps due to two key drivers:
Changing focus: Dorsey has increasingly shifted Block’s focus to decentralized services and currencies. In addition to Spiral, and TbDex, Dorsey stated that Block will “develop a hardware wallet, bitcoin mining, a consumer device for consumers to mine bitcoin at home.” Since the announcement, Bitcoin, has dropped from 57K to 40K. Changes in strategy tend to scare investors, particularly when it’s towards something they don’t fully understand or like. Cue downward volatility.
A lofty valuation: Even for a growth company in the fintech space, Block has been trading at an aggressive multiple with a PE ratio of 86 vs. peers trading below 50 (which is already high). Furthermore, analysts covering Block adjusted their short-term targets which placed additional downward pressure on Block. The pullback was anticipated and seemed healthy.
The bad news is that a potentially more hawkish Fed will put pressure on growth stocks like Block as investors transition to value stocks this year.
The good news is Block is doing all right. The overarching positioning and company verticals are growing within expected values. Even the financials are healthier than they were a year ago. Crypto skeptics and the general volatility of the space may put pressure on the stock price but can also provide a significant boost to Block’s revenues and position in the changing landscape.
The ugly: Short positions are increasing over the past year reaching ~10% (significantly above what we consider healthy metrics). Something to keep an eye on as we wait for Q4 earnings.
Airlines: Delta Airlines
Financial Services: Blackrock, Wells Fargo, Citi, JP Morgan
Monday: Eurozone unemployment rate and investor confidence
Tuesday: UK retail sales, Fed chairman testifies, US GDP estimates,
Wednesday: Chinese CPI and PPI, US CPI, Eurozone industrial production, Fed beige book
Thursday: Eurozone economic bulletin, US jobless claims, PPI, Fed speech
Friday: US retail sales and consumer sentiment, Chinese trade balance, UK industrial and manufacturing production
What we’re vibing:
Maker vs. Manager Schedule by Paul Graham: A short but thought provoking blog by Graham on how managers (business side) and makers (programmers, engineers, data scientists, etc.) operate on different schedules. By recognizing both, we can create better working relationships and optimize the performance of both groups.
The Art of Learning by Joshua Waitzkin: Written as a memoir and packed with an abundance of lessons about how to master any skill, Waitkin brilliantly breaks down the humbling experiences that enabled him to become a child chess prodigy and renowned martial artist. A humbling read to immerse yourself back into the beginner’s mindset.
A content guide to investing (books, books, books!)
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