BentinPartner Weekly
Dear Reader,
Last week’s most noteworthy developments were the launch of a series of IPO’s that soared on their listing day. First DoorDash and then Airbnb in a 24-hour period, went public and then saw their valuations...double. Valuing the same travel company at USD18bn at the beginning of the year before the pandemic, USD47bn at the IPO on Wednesday and USD100bn the following day when all people can do is stay at home, reflects a market that is red hot and hyper confident about “revenge traveling”.
Next to these two well-advertised successes similar exuberance was noted last week for AbCell which soared more than 200% above its IPO price on Friday, while 4D Molecular therapeutics climbed 84%, Vivos 71% and Certara 51%, translating into an exploding US IPO index. The trajectory seems the same as for bitcoin and tesla... just a bit quicker... What was interesting was hearing more people wondering why banks are “leaving so much money on the table” (with people ready to pony up double the IPO price the next day) than people scratching their heads at yet more evidence of markets walking on their head.
There is a new concept taking hold...called ‘solid’ bubbles; a by-product of FOMO, TINA and of a record USD18trn worth of bonds carrying negative interest rates amidst unparalleled system credit growth, government debt expansion and record money supply inflation.
Not so rosy news…
- While record flows going into equity ETF’s to the tune of USD121bn in November (bringing the total for the year to USD659.3bn, a 14% increase from the previous record) should not per se be a matter of concern, they compounded the confirmation that retail investors have been largely behind the shift in how options are now being used, from a way for professional managers to hedge pair trades or reduce exposure to a way for retail investors to multiply their “long only” leverage.
- Last week did not bring positive news on the US fiscal stimulus deal (as no consensus could be reached for the USD916bn needed fiscal support).
- The US jobless claims number deteriorated for third week as US covid deaths and cases broke new records. At least 3,300 deaths from the virus were recorded on Friday and more than 231,000 new cases were reported, stretching the U.S. health-care system to the brink.
- China’s rally which has been a leading bull force so far this year sputtered last week as China buck a trend towards greater economic stimulus as policy makers allow for tighter liquidity to stabilize the debt level. This has pushed up government bond yields and interbank borrowing costs higher. Some state backed firms have missed payments, casting doubt on the reliability of government support for (all) state owned enterprises.
A widely bullish consensus...
JPMorgan analysts noted last week that the consensus is strong and bullish, suggesting investors’ need to position to hedge against crowded trades. JPMorgan recalled late 2017 and early 2018 as a reminder that the consensus view “rarely plays in its entirety”. Coming from respected analysts that have been advising bitcoins to institutional investors lately, I will take their words of contrarian cation with a pinch of salt…
The CIO’s of the two largest Swiss banks are comfortable for next year as well. The first one ran a short video where he ran up the stairs prior to outline his bullish case. The other more cerebral one gratified his readers with lessons on how to stay calm, never panic, sit with your winners (all good advices if any), and gratified his readers with classical music recommendations for a good half of his weekly review. So yes, the consensus is bullish and assertively so and it made me feel good, and it did not wake up the contrarian investor always hibernating in me.
Also, there is a marked difference now vs. the two previous episodes of overwhelming consensus that preceded the two aforementioned corrections which leaves room for more optimism in the reasonably priced segment of equity markets (value, EM for the most part in our view), going into next year. Those are of course “0” interest rates for as long as the eye can see (Fed Chair J. Powell said last week that the FOMC was not even thinking about thinking to start raising interest rates), promised further central bank asset buying and analysts’ expectations for a 35% rebound in earnings next year which could help stocks without causing excessive multiples’ expansion. The ECB last week committed to increased its PEP program by EUR500bn. So did Japan which announced a fresh USD 708bn economic stimulus package.
Risks to the rosy outlook...
- the risk of higher inflation ( the Economist cited higher inflation as a low probability risk but a risk nonetheless). This would guide bond yields higher with snowball deficit building effects, not even considering the need for the more massive sustained fiscal stimulus. In our view the rise in inflation is more than a tail risk (inflation expectations are on the rise already, as are commodities and the structural deflationary forces that led to a prolonged period of deflation are just not going to be there anymore and will likely work in reverse).
- risks related to covid vaccination that could either be less effective than planned or advertised (with possible complications for those suffering from existing allergies) or an insufficiently large population vaccine acceptance (Trump’s threat on the FDA to sack its leader without a speedy approval which came on Saturday may deliver as much as shaking people’s confidence due to the perception of a rushed process).
- Geopolitical risks still exist (Iran, Taiwan) but are likely to fade somewhat with the Trump’s Presidency.
In either or both scenarios above, investors’ confidence would be shaken, which in our view is a good reason to continue to seek diversification and safe haven (such as precious metals) either for their industrial potential use (silver and platinum) or their safe haven status (gold).
Over The Past Week…
Over the past week, the S&P500 dropped -1,0% (13,8% YTD) while the Nasdaq100 dropped -1,2% (42,0% YTD). The US small cap index gained 1,1% (14,9% YTD).
Cboe Volatility Index climbed 12,1% (69,2% YTD) to 23,31.
The Eurostoxx50 dropped -1,4% (-4,5%), underperforming the S&P500 by-0,5%.
Diversified EM equities (VWO) dropped -0,2% (10,7%), underperforming the S&P500 by0,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,3% (-5,5%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,1% (2,9%).
10Y US Treasuries rallied -7bps (-102bps) to 0,90%. 10Y Bunds dropped -9bps (-45bps, Z-score -2,3) to -0,64%. 10Y Italian BTPs rallied -7bps (-85bps) to 0,56%, underperforming Bunds by 3bps.
US High Yield (HY) Average Spread over Treasuries climbed 7bps (48bps) to 3,84%. US Investment Grade Average OAS climbed 7bps (11bps) to 1,12%.
In European credit markets, EUR 5Y Senior Financial Spread climbed 8bps (11bps) to 0,63%.
Gold gained 0,1% (21,3%) while Silver dropped -1,0% (34,2%). Major Gold Mines (GDX) dropped -0,7% (19,8%).
Goldman Sachs Commodity Index gained 1,7% (-21,8%). WTI Crude gained 0,7% (-23,7%).
Have a nice week ahead and stay safe.
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Marc Bentin, BentinPartner GmbH
Founder, Chief Investment Officer
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