Not So Shiny Objects
Doug Walters
We have been warning in recent months about pockets of exuberance to avoid in these frothy markets. While stocks traded sideways this week, we started to see some shiny objects lose their luster elsewhere.
Contributed by Doug Walters , Max Berkovich , ,
Equity investors this week found it difficult to find conviction, as stocks ended the day Friday close to flat. US Stimulus and reopening provided a tailwind, while concerns about rising Covid cases globally raised some red flags. Despite the improvements we are feeling domestically, Covid new cases hit an all-time high this past week, with India proving to be a particularly hard-hit area. While this past week was a non-event for stocks, some segments of “exuberance” are losing their froth.
We have spoken ad nauseam about “shiny objects,” like cryptocurrency, SPACs, retail squeeze stocks, and NFT art, distracting investors these days. We have warned not to view these as investments, and recently we have seen some of them lose some of their luster. The first to go was SPACs (see our February Insights, The Search for SPAC). Since their peak in mid-February, an index of the top 50 SPACs has underperformed the broader market by about 25%. This week cryptocurrencies stumbled, with the bellwether Bitcoin falling around 20% and the joke of a coin (literally), Dogecoin, falling over 40%.
Despite the decline, Bitcoin is up 572% over the past year prompting many to ask if this is an asset they should own in their investment portfolio. In our view, it is not an investible asset. Rather it is a volatile, largely unregulated, illiquid currency that is not backed by any tangible intrinsic value other than scarcity. Should demand drop and scarcity disappear, there is no reason why the price could not plummet. As with all of the other shiny objects out there, if you are up for a speculative gamble or interested in a purchase as a hobby, go for it. But, do no confuse these gambles with investments, and do not expect them to be worth anything in a few years when the exuberance subsides.
Headlines This Week
Tax Hike
- President Biden revealed a strategy that would help cover the cost of the infrastructure plan.
- The White House is expected to propose a nearly doubling of the capital gains rate for those earning over $1M in investment income, taking the rate to about 39.6%. This is his opening negotiation position and likely to come down.
- Higher taxes on corporations and closing loopholes might also be on the table.
- According to Bloomberg, any selling related to potential capital gains tax increase is generally short-lived, followed by a quick reversal.
Kept in Check
- The number of new special purpose acquisition companies (SPACs) declined significantly in April after the Securities and Exchange Commission issued new accounting guidance that would place an additional burden on SPAC issuers to account for and value their assets.
- SPACs are shell companies funded by investors, giving the SPAC issuers discretion to purchase any private company or companies on their behalf.
- The trading of SPACs also declined while selling intensified, with many losing their previous gains.
- These investment vehicles were set up with economics that heavily favored the issuers and should generally be avoided in investment portfolios.
Earnings Report
- Over 24% of the companies held in the S&P 500 index have reported their first-quarter earnings results.
- Of those reported, over 80% beat their sales and earnings estimates.
- Banks are leading the earnings growth this quarter after dramatically reducing the loan loss provisions set last year due to economic lockdowns caused by COVID-19.
- As economic conditions continue to improve, banks will continue to reduce their loan loss provisions, which will help them grow their earnings in the next two quarters.
The Week Ahead
Fed and Friends
Next week will see a deluge of economic data from around the world with highlights from here at home as well as a meeting of the Federal Reserve.
- Durable goods orders (Monday), the consumer confidence index (Tuesday), pending home sales (Thursday), and the personal income and personal consumption expenditure (Friday) will all be watched closely as US growth continues to accelerate.
- The Fed will meet Tuesday and Wednesday and is expected to keep its policies unchanged as the central bank has been steadfast in its assertion that any tapering of its quantitative easing program is a long way off.
- Preliminary Q1 US GDP is out next Thursday with expectations that annualized growth has accelerated to 6.5% from 4.3% as the economy has benefited from the large stimulus bills and reopening.
Double Dip Territory
The Eurozone’s first-quarter GDP estimate is out next Friday, with estimates suggesting that the economy has shrunk 0.8% compared to the previous quarter.
- If the estimate materializes, this will confirm predictions that the Eurozone entered a double-dip recession.
- With most of Europe under strict lockdowns during the period, the contraction was to be expected.
- With the region now loosening lockdown restrictions as its vaccination program picks up pace, there is optimism for a solid rebound in Q2.
FAANG Week
Earnings season is in full swing as Facebook (FB), Apple (AAPL), Amazon (AMZN), and Alphabet (GOOG) are all set to report next week.
- After the massive growth of these companies last year, benefiting from most of the world being stuck inside, investors will be keen to see if this tech bloc can keep up the momentum.
- Tesla (TSLA) will also be joining in after becoming the most valued automaker in the world last year.
- Questions are being asked if Tesla’s valuation is sustainable as competitors such as General Motors (GM) and Ford (F) are ramping up their electric vehicle offerings with the ability to scale much quicker.
- Other notable reporters next week are Microsoft (MSFT), Visa (V), Mastercard (MA), Chevron (CVX), Exxon (XOM), Starbucks (SBUX), and AstraZeneca (AZN).
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