Where's The Market Going From Here?
Where's The Market Going From Here?
In today’s edition of the newsletter, we cover the 3 areas:
Macro - Sentiment check: is SPX going to 4,300?
Stocks - Reopening stocks that are up big in April
Crypto - GBTC is converting to a low-fee Bitcoin ETF
Macro
Where’s the market going from here?
While no one can know for sure, there are plenty of reasons to be bullish. Last week’s jobs report, vaccination progress, and all states beginning to reopen their physical economies are helping the markets trend upwards.
One analyst on Seeking Alpha summarized the reasons why the market heading towards 4,300 soon.
In the compelling piece, Avi Gilburt says that many are still “stuck” on last year’s unexplainable rally. You’ve probably seen on Twitter the dozens of bears saying that a “correction is imminent” and there “needs to be a crash.”
But most of them are basing it off the fact that the market bottomed in March but inexplicably launched higher for months on end, even as the Covid situation (the cause of the original crash) got worse and worse. Covid mattered on the way down, but the market didn’t care at all on the way up.
Many bears believe the market needs to return to the March lows, fall further, and take years to recover (like in 2008).
But those people, according to Gilburt, are not embracing the new situation. The correction already happened. Covid wasn’t the prime reason it happened, it was more of an excuse for the correction that needed to happen.
Yes, some asset classes are in a bubble. Many tech names are definitely overvalued, but many have already entered a bear market of their own. For example, did you realize Zoom (ZM) is down 41% from its peak in October?
The new reality of the market is that growth is strong, consumers have money to spend, unemployment is declining, and there is no reason that a massive, system-wide crash is imminent.
Yes, we could see one in the next couple of years perhaps, but short-sighted traders always expect the next crash will be exactly like the last one, so bears keep expecting a devastating “flash crash” like we saw last March. The truth is, no two crashes are exactly the same, and the next one will likely be caused by something we aren’t even thinking about right now.
Stocks
If you’ve been following our newsletter for the past few weeks, you know that we’ve been watching the reopening trade very closely. At least once per week, I’ll pull up a 5-day scanner to see which stocks are up over the last few days.
The chart below shows the top 15 hotel, leisure, and restaurant stocks in terms of percent change over the last five days:
We break down stocks we like in our premium newsletter, so make sure to subscribe if you haven’t already. But for this edition of the free newsletter, I’ll go over a general framework we use for analyzing potential investments.
We want to invest in companies that have most or all of the following:
Extremely undervalued assets - We only want to invest in companies that are extremely undervalued. We focus mostly on micro and nanocap companies that are selling for an extremely steep discount to price/book, price/earnings, price/FCF and EV/EBITDA. This is one of the most alpha rich areas in the public markets — explained in this post.
Low or no debt - Unmanageable debt is usually what kills companies. Focusing on a strong balance sheet helps control for risk. If a company does have significant leverage, we size our position smaller to control for a complete capital loss.
Catalyst - We try to identify some business event or catalyst that will re-rate a security. This can include: asset sales, insider buying, potential growth, strategic alternatives, a new management team, etc.
Multi-decade lows - We love hated and unloved industries. Stocks no one is investing in. Beaten down industries that get no Wall Street coverage. “Melting Ice Cubes”. Some of the best multi-baggers are found in the most hated, unloved industries. 52 week low lists are gold mines.
If you want to learn more about our investment process or stock picking newsletter subscribe below for only $10/month and feel free to reach out to me on Twitter.
Large NFT Collector Sees “Huge Risks” for Traders
One of the largest NFT collectors, MetaKoven, is warning that traders shouldn’t expect to make money on NFTs. MetaKoven is the collector who Beeple’s piece “Everydays: the First 5,000 Days” for $69 million last month.
He says that he bought Beeple’s artwork to bring awareness to the marketplace and support the artist, but he warns that NFTs can be extremely risky. This article by Bloomberg explains more about MetaKoven’s warning.
So, how risky are NFTs?
According to the Bloomberg article mentioned above, the average price for NFTs on Nonfungible.com declined 70% between the February peak and early April. MetaKoven also described NFT trading as being riskier than trading crypto.
The problem with trying to flip NFTs is that the market is mostly unsure of how to price them. Unless with stocks or other securities, there are no multiples or metrics to value NFTs. Also, the utility of an NFT is ambiguous. At least with a cryptocurrency, we can read the whitepaper and look at use cases. There aren’t similar benchmarks for digital pieces of art.
Of course, art markets have done just fine over thousands of years despite the lack of utility. However, the traditional art market has thousands of years of price discovery behind it, while NFTs are just in the first inning.
I’m definitely not suggesting that NFTs have little value, but you can’t assume that a piece you buy today will be worth 10% in a week. The market for NFTs is unclear, and is much more speculative than just about any market in the world.
Like MetaKoven says, buy a piece because you like it and want to support the artist, and sell if the right opportunity comes along. But if you’re looking to make some quick money, there are much safer ways to do it.
GBTC Will Convert to an ETF, Saving Holders Large Annual Fee
Grayscale Bitcoin Trust (GBTC), an OTC security tracking the price of Bitcoin, will look to convert to an ETF as soon as regulators allow it.
GBTC was the first security on US stock exchanges that directly tracked the price of Bitcoin, but has traded at a discount to NAV (net asset value) since its inception because of its large expense ratio of 2% and a required six month lockup for buyers.
Up until now, the best way to mimic the price of Bitcoin on US stock exchanges was to hold shares of companies investing in Bitcoin and/or Bitcoin mining, like MicroStrategy (MSTR), Riot Blockchain (RIOT), and Marathon Digital Holdings (MARA).
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