So...What's the Catch?
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So...What's the Catch?
The Curious Investor - May 03, 2021
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What the Market?
Mr. Market is getting anxious, and with anxiety sometimes comes erratic behavior. The US economy seems to be firing on all cylinders, and leading indices continue flirting with all-time highs, quietly readjusting drivers from growth to value.
What’s driving the market?
Do you fear inflation? Despite the Fed’s commitment to defining the current inflationary push as transitory, many analysts and media outlets believe that the Fed may be downplaying the actual impact. The Fed has a number of tools to mitigate inflation should it uptick outside its comfort zone and there has not been a clear reason for concern as of yet. At the moment, it looks a lot like the media is simply starved for attention but keep an eye on economic data and the upcoming PMI report.
So, what’s it going to be? While the economy continues to show faster than expected recovery, the Fed has doubled down on its commitment to an overly-dovish policy. Powell left interest rates on hold and indicated that the Fed will continue its asset-purchasing strategy until “substantial further progress” towards full employment and 2% inflation is achieved. With the labor market still roughly 8 million jobs shy from where it stood in Feb. 2020, the Fed will need to see continued progress in the coming months. Several analysts expect the Fed will begin considering policy changes mid-summer.
What’s an investor to do?
Investor mindset
Celebrate your victories (and the economic recovery) while tempering your greed. As the economic machine continues catching speed be wary of it going too fast. Although the bull market continues raging, consider diversifying and re-evaluating your portfolio and strategy heading forward.
Portfolio management
As the US economy continues showing strength, it may be a good time to start considering exiting some overheated positions. With the summer months approaching and the economy reopening, it may be a good time to start collecting profits from pandemic winners and focusing a bit more on reopening and real economy plays.
Keep an eye on the economy
April Jobs Report: After a strong March report, analysts will be looking at the April report to confirm the degree of strengthening of the US economy. Consensus is the labor market will have added 978k on-farm jobs, and unemployment to have fallen to 5.7%. Some economists have indicated they expected even higher figures driven by better weather, vaccine deployment and reopening activity driven by the hospitality segment. The Fed will also be watching this report closely as it will be a relevant clue towards what substantial progress may entail prior to discussing pivoting its dovish policy.
The Curious Investor:
Democratizing IPO access: FinTech’s continue to challenge the status quo of the investment world. Betterment and Wealthfront brought financial advisory services to the masses, and Robinhood forced the industry to abolish explicit trade commissions. Now, SoFi and Robinhood aim to democratize another aspect of the financial investment system, initial public offerings.
Currently: Accredited and institutional investors are majorly involved in the placement process of an IPO. This is why you’ll see a company say it’s listing for $20 bucks a share, but at the moment the market opens its trading at $40 (often referred to as the “pop”). While those privileged to have had early access more than double their investment instantly, the retail investor is left out to pick up on the IPO after the pop and dive into the ensuing volatility of the secondary market.
Why do some get early access and others don’t? To ensure that an issuer will receive at least a certain amount of capital for their shares, underwriters typically make a purchase agreement with the issuer. The parties agree upon a buying price for a number of shares from the issuer. Underwriters then turn around and offer those shares to initial investors. To limit volatility, underwriters typically avoid speculatory investors and highly leveraged opportunistic hedge funds, and offer the shares to institutional or accredited investors with genuine long-term interest in the company. Unfortunately for issuers, some companies are hard for banks to properly value, particularly those in novel industries (such as tech) or those overhyped by the media and they will air on the side of caution - often causing an issuer to lose out on potential fundraising.
What about me? While issuers struggle to raise funds at a fair market value, retail investors are entirely left out of the process and scramble for shares in the secondary market. Guess who’s almost sure to win? The banks. Duh. Sound unfair? Well, yes, it is. SoFi and Robinhood have recently announced that they will soon be offering their investors access to IPOs at listing prices. Although surely disruptive, regulators will undoubtedly have something to say, as initial offerings have inherently more risk for inexperienced investors. Offering these services is another way to reward customers and “the little guy”.
What it means for the market and investors? For now, while it’s only a couple of firms making such offers, there won’t be much of a change for market dynamics. Retail investors may be able to cash in on some big bucks (or losses) getting in on the latest IPO. However, if this trend goes the way of commission trading and becomes the norm - we may see the end of the “pop.” To participate in the early IPO, investors must indicate their interest in the offering. As underwriters gauge interest they will continue to evaluate the price and test interest to arrive at a “fair market value”. Since they can wait until practically the last minute to make a go/no go decision on the price, underwriters can more accurately price the IPO based on interest levels. This means that the pop may cease to become a thing, the issuers will be able to raise more money on their offering, and the speculative investors may actually lose their hold over the “pop” profits.
Checking in on Thermo-Fisher (Disclosure: WTM is long TMO): Despite beating on top and bottom lines, TMO’s shares dropped after earnings, potentially driven by the lower-than-expected guidance. The Company increased revenues by 59% ($9.9bn vs. $6.23bn), more than doubled Q1 earnings ($7.21 vs. $2.94) and generated a free cash flow margin of roughly 21% (read that again, slowly). It’s operating margins grew significantly across its four business segments, and its acquisition of PDD, a leading clinical research company, will position TMO as a growing force in the pharma services space. Much like Smaug, the company is sitting on a substantial cash position (about half of its current assets) and enjoys strong cash flow generation. Once its COVID driven business begins to slow down, TMO will most likely maneuver onto natural extensions through vertical and horizontal acquisitions to continue growing. At current multiples, the company looks fairly cheap.
Notable earnings this week:
Reopening: Hilton, Wynn Resorts, SeaWorld, Norwegian Cruise, Under Armour, CVS Health, Caesars Entertainment, Planet Fitness, TripAdvisor, Expedia
Tech: Uber, Lyft, Match, Coursera, Zillow, Activision Blizzard, Twilio, Etsy, Roku, Wayfair, Dropbox
Others: Beyond Meat, Square, Peloton, Nikola, Plug Power, Kellogg, Virgin Galactic, T-Mobile, General Motors
Economic Calendar:
Monday: Eurozone and US manufacturing PMI, Federal Reserve speeches
Tuesday: UK manufacturing PMI, US trade balance and factory orders
Wednesday: US Employment report, Eurozone producer price index, Eurozone and US Services PMI and Composite, Bank of Japan monetary policy minutes
Thursday: Eurozone Retail Sales and economic bulletin, UK Monetary Policy report, interest rate decision and press conference, US Jobless claims, Federal Reserve speech
Friday: Chinese Trade Balance, US unemployment rate and non-farm payrolls
If you didn’t know, now you know
Daily new COVID cases have been rising in India for the past couple of weeks. The Indian government has been struggling to keep up and is relying on other countries around the world for aid. Prime Minister Modi launched a number of emergency measures to relieve the burden but many believe he acted too slow.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
A Random Walk Down Wall Street by Burton Malkiel. A must read for all investors. Malkiel walks through the history of markets, jargon and theory in a rational manner that will give you the tools to build and enhance your portfolio. A deep dive into investing strategies and common mistakes.
The Mindful Athlete by George Mumford. With a foreword by Phil Jackson, this incredible blend between sports psychology and mindfulness is a must read for any high-performer wanting to improve. This a book to re-read multiple times when you’re feeling the pressure getting to you.
Resources
WTM Mentions Performance Tracker
A content guide to investing (books, books, books!)
Disclaimer
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.