January 2021
A simple note on investing and the stuff that moves markets.
Market Maker
Hello, and welcome back, or welcome to, the Market Maker. Hope everyone had a nice holiday, feeling rested and ready to take on 2021. Appreciate all the questions and feedback from the last letter, and definitely keep it coming. Just click below to reach out! 

As 2021 kicks off with much of the turbulence we had hoped to rid ourselves of when the ball dropped, markets remain elevated near all-time highs. Investors continue to grapple with unprecedented political turmoil amidst a pandemic that rages on. Stubborn asset price appreciation all along the way has many beginning to use the 'B' word that rhymes with
trouble. Frankly, rumbles of a severe correction have been heard for years by permabears (who have been permawrong), but undoubtedly those calls have gotten louder as we emerge from the depths of the pandemic crisis. 

We have covered at length the presumed
disconnect between the stock market and real economy, but it was recently while answering some questions from people trying to make sense of it all, did I appreciate we have more firmly moved into "complete rationalization mode." Within my own market sentiment gauge, a cautionary sign. At some point a glass a quarter full is simply not half full...

Here is a sampling of those discussions:

You: Markets had seem pleased after the election with the prospect of divided government. Democrats just pulled off wins in both Georgia Senate run off elections, and therefor will officially take control of the White House, House, and Senate; the 'blue wave'. Wouldn't logic suggest the market is now displeased?
Me: Well, while Democrats did win, Republicans took more seats in the house than expected, and the Senate still remains largely split at 50/50 with important moderates on both sides of the aisle. Most meaningful legislation will require cooperation from Republicans in order to reach the necessary two thirds majority. The 'bull ripple'? 

You: Still, a democratically unified government is likely to mean higher corporate taxes and more regulation, negatively impacting earnings and market returns. 

Me: Well, that is definitely true based on the proposed Biden agenda, but the short term economic focus of the administration will undoubtedly be on pandemic relief. Good luck finding support to raise taxes with nearly 7% of the population unemployed, 12% in poverty, and millions of small businesses on the edge. More probable in the short term we are likely to see another round of massive stimulus, which Biden just outlined will put checks in people's pockets, provide billions to local government, extend unemployment insurance, and deliver small business aid. As always, it really comes down to timing, "the odds of additional stimulus rise, while it is also likely that Democrats will want to pay for this stimulus with higher taxes down the road." (Raymond James, thanks JD)

You: Policy aside, the US Capitol building was literally just invaded on the back of a conspiracy that the election was fraudulent. 
Me: Well, the market has always been kind of 'heartless' and a good portion of investing is now controlled by computers anyway, which intentionally do not translate horrifying images or emotion. Put bluntly, "There should be no mystery as to why the markets didn't care about what happened in the Capitol, however disturbing, disgraceful, and embarrassing it was. It's because it has no bearing on the direction of the economy, earnings, and interest rates. It's that simple." (Peter Boockvar)

You: Politics aside, the pandemic is killing over 4,000 people a day and the vaccine rollout has been rocky. 

Me: Well, the market has a pretty high frustration tolerance here by the mere fact that we even have two vaccines in the first place, ahead of expectations and exceeding effectiveness guidelines. Patience will eventually ware out as the government suggested 20 million people would be vaccinated by the end of 2020, and we just only crossed 10 million. That frustration is being counterbalanced by optimism of a new administration to help navigate this more adequately, and an effective JNJ vaccine that will ease distribution challenges with only one dose required. From a markets perspective, a supply chain challenge is much more solvable than a production challenge. 

You: The December Jobs report clearly showed the labor recovery stalling out as 
nonfarm payrolls fell by 140k when economists had been expecting a gain of 50k. 
Me: Well, while this was the first decline since April suggesting the recovery is faltering, permanent job losses have actually come down, and the overall unemployment rate has stabilized.
Average hourly earnings actually increased for the first time since April since most of the job losses were concentrated in lower wage industries like leisure and hospitality. The monthly jobs data reflects the past whereas the market is seeking to reflect the future. 

You get the idea. Nobody likes the guy that has an answer for everything, but that seems be exactly what the market is doing. The 'all news is good news' mantra is only sustainable for so long. I do believe 'my' responses here are based in fact and logic, but when taken all together, I can't help but feel a healthy level of skepticism. Couple this with clusters of irrational buying and stock tips from the Spectrum guy, and a growing level of caution feels warranted. 

The market is also not monolithic. Certain pockets may be overvalued but others may just be getting started. We have already begun to see this with small cap stocks hitting
all time highs while the big tech names have cooled off. In other words if the market ends the year flat overall, there will still be some winners and some losers. Now go win. 

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Today’s market, in context

Before we dive in, let's take stock of where markets stand today. 

Snapshot (as of January 15, one month % change, one year % change):
S&P: 3768, +2%, +13%
Nasdaq: 12999, +2%, +39%
Dow: 30814, +2%, +6%
10Y Yield: 1.09, +16%, -40%
Gold: 1834, -3%, +18%
Oil: 52, +10%, -10%


The Election Market Maker
The November Market Maker
The December Market Maker

Correction Catalyst Watchlist

Operating with a level of caution and awareness, here are three interesting themes to monitor that may indicate the punch coming out of the punch bowl. 

1. An uncomfortable acceleration of interest rates
Investors are closely watching the fixed income market as treasury yields are reaching their highest levels since March. They remain historically low, but recent upward momentum is being driven by the $2T Biden stimulus proposal (more government spending, more debt, more bond issuance) and inflation expectations (higher prices are tamed by higher yields). While the Fed did just
recommit continued support for the economy, the 10 year yield crossing the psychological 1% level has people questioning will rates actually stay low forever. There is no agreed upon break point level that would begin to impact stocks, just agreement that low rates have been an essential underpinning for today's high valuations.
Rising Rates Have Traders Debating Trigger Point for Stock Upset (Bloomberg)
Rising Bond Yields Pose Threat to Pricey Stocks (Seeking Alpha

2. The hot IPO and SPAC market cool down
The expansion of new companies entering the public market is an exciting display of capitalism, and also indicative of the great demand for equity exposure. In just the first two weeks of 2021,
$15B has been raised - 2020 full year was $83B, but 2019 was the prior recent high at $13B (thanks CB)! Investors are looking for places to put their money that will drive returns in a low rate environment, and these new securities present big growth opportunities. However, the intense fervor may point to some speculative behavior as the average day one return of IPO's has been 38%, well above the 15-20% average (Affirm 99%, Poshmark 142%, Petco 83%, Motorsport 75% just to name a few). I am not here to evaluate these specific company's business models or appropriate valuations, just simply to acknowledge this type of immediate appreciation is worth monitoring within the IPO and SPAC pipeline. 
IPO Frenzy Drives $435 Billion in US Stock Sales (Bloomberg)
Dizzying Valuations, IPO Craze Tick Boxes on Bubble Checklist (
Will 2020 be Seen as the Year of the SPAC Bubble (

3. Cryptocurrency price deflation
Investing in bitcoin today comes with an expectation for hypervolatility, but a sustained drawdown could serve as a broader warning to the entire market. Replace crypto with any number of highly volatile buying sprees - see
Tesla, Signal, Plug, Zomedica - and a similar point can be made. The wild ride higher in these securities is worrisome. For crypto specifically, institutional participation, global debt, lack of faith in governments, and simple supply and demand have helped drive the recent gains for logical reason. But any significant pullback in any one of these could signal a warning for the market at large.  
Bitcoin is Unlike Any Other Bubble We Have Seen So Far (Bloomberg
Mark Cuban says Cryptos Trade is 'Exactly Like The Internet Stock Bubble' - But Thinks Bitcoin Can Survive (

There are of course other, more obvious risks that would deflate investor enthusiasm quickly such as a political upheaval that prevents the new stimulus package, an unforeseen risk to the vaccine rollout, or wildly disappointing Q1 guidance in Q4 earnings. In reality, if we are in some form of a bubble, it is typically just a slight adjustment in investor psyche that can massively snowball downward. So whether there is a big event or a minor shift in sentiment, a broad market move or just pockets of volatility, it feels prudent to stay on our toes. 

A thought on investing...they said it

A few passages from recent letters by legendary investors. 

Bill Gross: taken from his first investment outlook piece of 2021 which discusses his favorite sector (natural gas), some pockets of overvaluation (Tesla, new tech), general skepticism around government support for a weak economy, and of course Gilligan's Island
"This market is driven – yes – by intense speculation, but also by fiscally pumped, central bank-primed corporate earnings, which when discounted to present value by near zero nominal and in many cases negative real interest rates, produce record stock prices."

Howard Marks: taken from his latest memo (one of the best I have read), discussing his evolution of thinking on the meaning of growth and value, motivated by conversations with his son during lockdown. 
"I worry that value investing can lead to the rote application of formulas and that, in times of great change, applying formulas that are based on past experience and models of the prior world can lead to massive error."

"Some of today's lofty valuations are probably more than justified by future prospects, while others are laughable - just as certain companies that carry low valuations can be facing imminent demise, while other are just momentarily impaired. The key, as always, is to understand how today's market price relates to the company's broadly defined intrinsic value, including its prospects."

Bill Miller: taken from his Q4 market letter which highlights the caution in forecasting, and lays out the potential case for historic laggards to become leaders. 
"As Sir John Templeton said, 'Bull markets are born in pessimism, grow on skepticism, mature on optimism, and die in euphoria.' I would characterize the current state of the market as one of optimism that a solid recovery is underway, that corporate profits will be higher in the next year, that inflation will stay low, that the Federal Reserve will continue to provide significant liquidity to the economy and will keep short-term rates at zero, that long-term rates may rise but not sufficiently to derail the recovery, that no adverse Fed policy changes will occur until the economy has achieved full employment which is not likely to happen for at least a few more years, that stock market valuations, as the saying goes, look high and are high, but are not as high as they look given the aforementioned economic conditions."

Bill Nygren: taken from Oakmark's Q4 market commentary letter which gives details on their top holdings (Alphabet, Charter, Facebook, Citi to name a few), and their argument for a fast return to normalcy. 
"So what will the 'new normal' look like? Some of the pandemic changes have led to real improvements—think of the transition to 'touchless' everything, from doors to faucets to toilets to elevators. Why would we want to turn back from these changes? But apart from improvements like these, we think the new normal will be a lot like the old normal."

Jeremy Grantham: taken from his latest piece, aptly titled, "Waiting for the Last Dance", doubling down on his call for a significant market correction. 
"The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000."
Want to discuss further? Email me here.

Picturing the Market

An interesting JPM chart reminding investors that just because the market hits all time highs, does not mean you need to park your cash on the sidelines waiting for a pullback.  

Despite a wild ride in 2020, traditional "risk-on" and "risk-off" global assets actually had similar performances. Bloomberg examines the data from ASR further in showing cumulatively for the past decade, safe haven assets actually outperformed. 

Silver was the best performing asset of 2020. This chart from VC also effectively illustrates the volatility from the March collapse. Gold, corporates, and treasuries served a steady hand. 

Love a good asset quilt (thanks Ben Carlson). A pandemic and election could not derail the powerful consistency of large cap US equities. 

The pandemic's impact on the market has some correlation to economic shutdowns, graphically depicted here by Goldman (thanks PD). While we are well off the April highs with vaccination underway, the January uptick is concerning.

Whoa. Perspective. (Thanks CS)

Very cool Bespoke chart that shows the number of companies with 500mm+ in market cap, have doubled in the last three months, and trade at multiples of 10x last years sales. Silly high, but well below the dot com bubble! (thanks JA)

An updated look at the Buffet Indicator which continues to scream caution. 
Updating another fan favorite - the Citi Panic/Euphoria model. Same story.
Inflation is a driving force behind interest rate expectations (which are a driver for markets). This is a pretty succinct explanation of drivers pulling inflation both directions, currently well below 2%. 
We have all seen plenty of charts that depict the current political divide, but this one from Axios was particularly striking. Most notably is the latest divergence after the Capitol attack, which convinced most dissenters Trump was done, and therefore their economic confidence went down. 
Individual investors opened more than 10 million new brokerage accounts in 2020, exemplifying the fantastic growth in retail trading (/investing?).
High volume in tiny stocks is another indicator of increased retail participation, and performance has been solid!

Thank you for reading.

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