There must be balance in the force
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There must be balance in the force
The Curious Investor - Mar 01, 2021
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What the Market?
Mr. Market doesn’t rest for long. After months of unwavering rallies creating illogical equity valuations, bond yields creeped upwards on mounting fears of inflation and potential interest rate hikes. Mr. Market decided it was time to reduce his risk and start taking profits, particularly from growth stocks.
How come?
Finally, the big package arrives: Early Saturday the House approved Biden’s revised $1.9T package. Now it’s up to the Senate to vote on the revised bill (removing the $15 federal minimum wage) before unemployment aid programs expire March 14.
Scared of a bit of inflation, Mr. Bond? Bond yields have risen to a high of 1.6% over the last couple of months! If that doesn’t sound like much, well, that’s because it really isn’t. Given that the target inflation is 2% and the 10Y bond yield hit 1.6%, real rates are still negative. The rising bond yields do suggest that we may be heading towards economic growth as another stimulus passes, a 3rd vaccine is approved for emergency use, and commodities prices continue to rise. While we suspect this increase is largely driven by inflation fears following the Fed Chairman’s speech last week, bond yields are still low compared to growth expectations for the coming years.
What’s an investor to do?
Investor mindset:
This is your moment. The market correction will provide favorable entry points to open and build positions from. Now is the time to put your plan into action and stick to your guns.
Portfolio management:
By now, the aid bill is all but priced into the markets, but bond yields are expected to continue rising on stimulus and vaccine news as well as inflation and interest rate hike fears. Speculative and growth stocks will be hit the hardest as higher bond yields represent a rising borrowing cost for companies and potentially higher inflationary pressures. Investors may look to cash-in on riskier positions and settle for value-based investments such as commodities and cyclical positions that will benefit from the short-term burst in economic activity driven by the stimulus, vaccine, and warmer weather.
Keep an eye on the economy:
February Jobs Report! After reports in December and January left us feeling kind of blue, the February report will provide much needed insight into the state of the labor market. Analysts expect 150k jobs to be added to the economy (compared to the 49k from January). The unemployment rate is likely to go up this month, but don't fret, as it is likely due to a rise in the labor force participation as the unemployed start looking for jobs again as the economy begins to reopen. Play close attention to leisure and hospitality employment to gauge the strength of reopening activity. Released on Friday.
The Curious Investor:
Coinbase Direct listing: The company announced last week it plans to go public via direct listing. While a direct listing doesn’t provide the benefit of pitching major institutional investors, high profile companies like Coinbase are best suited for direct listings. What you need to know:
Coinbase provides an exchange marketplace for buying and selling crypto and commerce solutions to enable crypto payment acceptance (further boosted by the upcoming Visa / Coinbase debit card) and offers its own USD pegged cryptocurrency, USDC, to allow users easy trading within crypto while being able to sit in a “crypto cash” position.
Coinbase has 43M verified users on the platform, 2.8M MAUs, 7k institutional investors, and 115k+ merchant partners. On top of that their crypto trading volume more than doubled between 2018-2020!
As more details come out regarding valuation and timing, this is a company to keep on your radar. To learn more about Coinbase’s business click here!
What the SPAC is going on? SPACs accounted for over half of all IPOs in 2020 and144 SPACs have gone public in 2021; that’s ~5 per day raising roughly $44B! That’s $44B in shell companies looking to buy a real company in overcrowded industries. How far down the barrel will these SPACs go to close a deal? Similar to the IPO and ICO bubbles, when obscure non-financial celebrities start getting involved (e.g., A-Rod, Shaq, Ciara, Colin Kaepernick) it’s time for retail investors to raise the red flag. The hype generated by big names behind a SPAC, and their lofty visions, tend to fall short of acquisition expectations. If you think IPOs are overhyped, this is pre-overhyping the overhyped upcoming IPOs. That’s not to say there are not great SPAC acquisition IPOs out there, but it’s getting harder to filter through the noise. If you’re considering a SPAC investment, read the offering memorandums carefully, and evaluate the real-world limitations of these media-driven companies.
Square’s Earnings (Disclosure: WTM is long SQ): On Tuesday, Square presented Q4 2020 earnings results that were met with some disappointment from investors, despite beating analyst expectations. Square has two ecosystems: seller-side (merchant services, POS systems) and buyer-side (Cash App).
The Seller-side ecosystem has generally been the core of Square’s business but has been hit heavily by the pandemic as Square focuses on small businesses. Square’s core (non-bitcoin) growth lagged competitors at 26% for the quarter (65% YoY). Gross payment and in-person retail volumes were lower than expected, and Square revised its expectations down for the year. The good news is that as the economy recovers so will Square’s in-person retail volume.
The Buyer-side ecosystem, Cash App, is quickly becoming the core of Square’s business as the pandemic limits seller-side activity. Cash App added 12m MAUs and increased the gross profit per MAU by 70% YoY. Activity and profits (+168% YoY) continue to increase as Cash App rolls out new banking and crypto features.
Bitcoin: Square announced that the company had bought up an additional $170M of Bitcoin on top of the $50M it bought in September last year. Bitcoin now accounts for about 5% of the company’s current cash-equivalents. Announcing $170M investment during a sell-off probably didn’t help Square...
Earnings Calendar:
Economic Calendar:
Monday: Chinese PMI, Eurozone, U.K. and U.S. Manufacturing PMI, ECB President Speech, Fed members speeches
Tuesday: Eurozone CPI, U.S. Redbook Index, Bank of Australia interest rate decision, ECB speech, Fed Speech
Wednesday: Eurozone and U.S. Services PMI, Fed Beige Book, Australian GDP, U.S. employment change
Thursday: Eurozone retail sales, U.S. jobless claims, Fed chairman speech,
Friday: U.S. February jobs report
If you didn’t know, now you know
Recent data revealed that over 6,500 migrant workers have died in Qatar since it was announced as the host of the 2022 World Cup in 2010. Qatar has even arrested reporters covering the appalling living and working conditions. Since Qatar has always had a high migrant worker death rate, it is hard to argue that the World Cup is the driver behind the unusually high death toll. However, it is harder not to question why FIFA gave the tournament to a country where so many migrant workers die in the first place?
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
Want a Free McDonalds Sandwich? By lifehacker.com. For those of you into awesome and useful life hacks, this site is a must-know. From free chicken sandwiches to finding images with similar vibes, it has it all.
As a Man Thinketh by James Allen. This 42 page classic originally penned in 1902 is a powerful reminder of how our thoughts shape our realities and impact our health, appearance, and environment. As we all continue to adjust and push through a new normal, As a Man Thinketh is a great reminder to check in on our mental health and thoughts.
Looking for more?
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.