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Tesla Hits A Glass Ceiling

Updated: Sep 25, 2020

BentinPartner Weekly

Dear Reader,

July tech rally was driven by the fear of missing out tech and most recently, by Robin Hood day traders piling on Apple and Tesla shares after both companies pulled a 2000 styled stock split from their hat ...triggering another melt up in those shares. Tesla received further (weeks long) support from firming expectations that it would enter the S&P500 as early as the close of last week. The S&P500 tracks 11trn of passive investors money...

This was the dynamic prevailing until Tesla hit a glass ceiling on Tuesday after the second largest investor (after E. Musk) halved his investment and the company announced a stock sale ‘at market’ of USD5bn (to cash in some of the “monopoly money” created by the stock surge.)

In the second half of the week, the logic started to work in reverse, exacerbated by dealers who had sold large call positions in July-August to investors, preferring to underwrite the tech bubble with (downside protected) call options rather than outright share purchases. These dealers then had to buy more Tesla shares early last week (to hedge the rallying calls they had sold) only to find themselves obliged to get rid of this hedge in a hurry as Tesla share prices headed lower.... exacerbating global tech volatility.

It became clear over the week end that the purchase of Tesla calls was part of a larger multibillion trade from Softbank (FT article) that started in July and that was likely mimicked by many more investors (a logical move for anyone wishing to participate in a bubble with limited downside).

Late last week, B. Vamholt, the CIO of Credit Suisse Switzerland, wrote in his latest strategic review, that investors, in response to the biggest economic “doping” in history, and in particular pension funds, will have no other choice than to increase their allocation to equity markets in the future. Not only because stocks are going higher and bonds/cash yield have no current or expected return but because, as a result of the 2008 financial crisis, many of them pulled out as much as 11% of their total assets from equity markets and have not revised this decision since then, resulting into significant opportunity losses.

In Switzerland and for the first time since 1950, pension funds (which collectively control CHF100’000 billions in assets) envisage to again increase their share of money invested in stocks. The European and Swiss average pension only owns 30% in equities (vs. 47% in the US).

This could easily serve as the “excuse du jour” of a perma-bull but there is certainly a point in the argument that will limit the extent of the ongoing correction, at least for the “non bubbling” segment of the equity market. This is a caveat because there is no doubt, in our view, that tech valuation and the psychology of investors (all categories taken together, not only Robin Hooders) has more to do with Bubble dynamics than anything else we can recall from 30 years of investment experience.

If we are not mistaken, this could mean that investors will have to be more selective in the future than they have been in the recent past under the influence of a convenient, dangerous but irresistible group-think that 5 tech companies will rule the world and the way the economy will run in the future (from home, conversing with AI, before going shopping and paying contactless). This probably means that some form of rotation away from tech back to value and away from tech dependent US markets is not only possible but likely, if as a result of central banks “not even thinking about thinking to raise interest rates”, there is no other alternative indeed than to be invested in stocks.

There is another partial solution and another asset class for pension and social security funds to consider with precious metals and gold in particular. Talking about the latter, not only did Gold deliver the best performance of all asset classes over the past 20 years (something that few people know or are willing to concede) but gold exhibits unique diversification benefits with equities, that are the asset class that everybody agrees there is no other way we’ll need to buy more of…

On this topic, we would like to reflect on a discussion from a meeting with a large number of Swiss pension fund managers where we heard that some investors are not invested in gold for no other reason than "exclusion". When informed about the possibility of buying green gold (the word “exclusion” has become very trendy in the world of sustainable investments), one participant retorted that the non-investment in Gold was based on “exclusion” because gold brings no yield. We could not argue further, considering that the same fund manager was likely sitting on hundreds of millions of bonds and cash, yielding a negative return.

Many pension fund managers around the world face the same sort of inexplicable constraints. If not granted sufficient flexibility, gaping holes will build in pension funds accounts that will have to be filled one way or another.

Over the past week, the S&P500 sold off by -2,3% (6,4% YTD) while the Nasdaq100 shed -3,1% (33,4% YTD), a tally that was capped by the Nasdaq managing to reduce strong intraday losses on Friday. The US small cap index sold off by -2,7% (-7,8% YTD, Z-score -2,6).

Cboe Volatility Index rallied 33,9% (123,1% YTD, Z-score 2,1) to 30,75.

The Eurostoxx50 dropped -1,7% (-11,0%), outperforming the S&P500 by 0,6%.

Diversified EM equities (VWO) sold off by -2,3% (-0,9%), underperforming the S&P500 by0,0%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,6% (-3,4%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,3% (-2,1%). The dollar gained slightly as deleveraging also affected FX markets and large tactical shorts on the USD. The ECB meets on Thursday and will get a chance to talk down the euro but nobody could do this better than former ECB President M. Draghi and the USD is in a very different spot indeed. We retreated from some positions but we do not expect the dollar to stage either strong or a lasting recovery as the euro remains undervalued and the dynamics for the USD mostly negative.

Despite a 9bps spike higher in yield on Friday, 10Y US Treasuries ended the week unchanged (-120bps) at 0,72%. 10Y Bunds dropped -6bps (-29bps) to -0,47%. 10Y Italian BTPs dropped -3bps (-40bps) to 1,02%, underperforming Bunds by 2bps.

US High Yield (HY) Average Spread over Treasuries climbed 13bps (152bps) to 4,88% but US Investment Grade Average OAS dropped -2bps (36bps) to 1,37%.

In European credit markets, EUR 5Y Senior Financial Spread dropped -1bps (8bps) to 0,60%.

Gold offered little shelter last week dropping by -1,6% (27,5%) while Silver sold off by -2,2% (50,7%). Major Gold Mines (GDX) dropped -2,6% (39,5%).

The broad risk off week also affected commodities as economic data also came out, suggesting a weakening economic recovery. Goldman Sachs Commodity Index shed -3,6% (-28,6%). WTI Crude suffered a heavier selloff shedding -7,4% (-34,9%, Z-score -3,2).

Over the week end…

Ø After the close on Friday, the news struck that Tesla would ‘not’ join S&P (at least not for now). This will drill another hole in Tesla’s still positive narrative. Tesla dropped 8% in extended hours (after recouping 2% during Friday’s session).

Ø US markets will be closed today and the overnight session was volatile (but well “contained”).

Ø About 290 people were arrested on Sunday at protests against the government’s decision to postpone elections for Hong Kong’s legislature, police said. It was not clear what piece of legislature was invoked (the new national law or the old sedition law).

Ø UK PM B. Johnson set a new October 15th deadline for Brexit trade talks with Brussels.

Have a nice week ahead.

Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer


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