Know Your Worth

Stop me if you’ve heard this one before: US equities hit fresh all-time highs with tech leading the charge.

Wednesday was the fourth straight session during which US benchmarks celebrated new records. Once again, the Nasdaq 100 outpaced both the S&P and small-caps, with the latter lagging big-cap tech by some 280bps.

The FAAMG cohort surged on Wednesday. That, despite good news from Moderna on the company’s vaccine candidate and a strong beat on durable goods. Typically, days defined by (cautious) optimism on the public health front and upside data surprises are also sessions characterized by outperformance from cyclicals and a retreat in the so-called “stay at home” trade. Now, every day is a good day for tech, apparently.

The defensive character of the action (and, yes, there is still something a bit bizarre about a market in which piling into overvalued mega-cap tech shares counts as “defensive”) comes ahead of Jerome Powell’s hotly-anticipated Jackson Hole speech and also as Hurricane Laura makes landfall as a potentially catastrophic Cat 4 storm.

As alluded to above, secular growth’s outperformance (and, relatedly, momentum over value for the second straight day), seems somewhat at odds with the rates space. Tuesday’s tech rally, you’ll recall, came despite bear steepening in the curve, and on Wednesday, a solid auction helped five-year yields outperform, steepening the 5s30s.

“The bearish tone in Treasuries was extended by strength in durable goods orders [and] the equity market certainly used the data to press further into record territory”, BMO’s Ian Lyngen, Jon Hill, and Benjamin Jeffery wrote Wednesday afternoon, adding that “positive news regarding the Moderna vaccine trials… served to reinforce the assumption that herd immunity is more than simply a bovine fantasy”.

Again, you’d expect that to manifest in underperformance from tech and momentum. Instead, we got Netflix up 12%, among other indications that the move in pandemic beneficiaries has now reached escape velocity.

The perpetual motion machine is alive and well. If the “rich get richer”, what do the trillionaires get? Richest, I suppose.

Jeff Bezos’s net worth exceeded $200 billion on Wednesday. “As Americans devastated by the coronavirus pandemic sit in their homes–jobless, cooking in bulk, praying for a single $1,200 check to arrive by mail–Bezos quietly became the world’s first-ever $200 billionaire”, Fast Company wrote.

I’m not sure “quietly” is the right adjective. Those who keep apprised of such matters have been anything but “quiet” about the money made by the world’s billionaires during the pandemic.

If you’re keeping score at home (while “cooking in bulk and praying” for a check from Steve Mnuchin), the world’s 10 richest people made nearly a quarter-trillion in 2020’s first eight months alone.

Some of this is, of course, attributable to the Fed’s support for markets. They’ve received all manner of criticism for that, but Fed officials have been among the most vocal proponents of fiscal stimulus. Only Congress can offer long-term, sustainable solutions to alleviate a situation (spiraling inequality) that the Fed was effectively forced to exacerbate starting in the wake of the financial crisis, and continuing to this very day. In the absence of redistributive, pro-growth, demand-side fiscal policy, what you see in the chart above will continue.

The Richmond Fed’s Tom Barkin on Tuesday said zero “is the right place to be right now” for rates. “We ought to be pulling out the stops”, he added, noting that “uncertainty is quite high and [that] matters a lot for players in the economy”.

Indeed it does. One thing market “players” seem fairly “certain” about, though, is that it isn’t a good idea to short the trillion-dollar club or otherwise bet against the hundred-billionaires whose companies are members (or on the verge of becoming members). Short interest on the Nasdaq 100 ETF is the lowest since 2019 (h/t Sarah Ponczek).

Barkin spoke again on Wednesday at a webinar hosted by the Morgantown Area Partnership, in West Virginia.

“Consumer sentiment has taken a step back”, he said. “Uncertainty is quite high. That is the main point I want to make”.

Speaking of uncertainty, around 1,000 Salesforce employees are facing an indeterminate future. Sources said Wednesday the company plans to cut at least that many jobs in a bid to streamline operations. A spokeswoman confirmed some changes are being made to “position the company for continued growth”.

After reporting record quarterly revenue, the shares rose 26% on the session. Twenty. Six. Percent.


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13 thoughts on “Know Your Worth

  1. A company “worth” in the thousands of billion dollars? Still hard to wrap my brain around that concept. Especially in the case of Alphabet and Facebook, which basically exist to sell advertising…And if you own a big chunk of one, and it keeps going up, what will you do with a million million dollars?

    1. Yeah, where to put it.

      I’d like to have the problem.

      The gain will evaporate. Great opportunity to take the gains and plow it into technological innovation in small companies developign big ideas in AI, biotech, nano-tech, clean energy, etc, etc. …the generation of companies in 20 years, or more, that will replace at least the advertisers.

  2. Blows me away that more “investors” (whoever these people are) are not taking profits in the S&P5. What, maybe another 10% upside? Compared to, what 20%, 30%, 50%, downside risk?

    1. In regards to TSLA…. why would I want to buy the betamax? I want to buy the vcr. Valuations are ridiculous. We have massive inflation in food and housing combined with record unemployment going into flu season. We have morons in charge and are going to be raising corporate taxes in 5 months. The algorithms just keep leading us onward.

  3. What about the $60 billion in leveraged funds that are short QQQ reported in these pages as of last week. Does not a substantial portion of this action need to close prior to the market going down? Today should have been a good short covering day. Also those who think we are on the verge of a new bull market in FAANG do not they need to buy in?

  4. It’s almost like the coyote learned that if he looks up instead of down that cliffs don’t exist and in fact he could fly this whole time. Waiting for the meep meep.

  5. Feels so “blow offy”. Who knows when and from what level but a violent (most likely short term) reversal seems to be coming. The growth embedded in the prices is aggressive while the belief discount rates will stay low forever seems naive.

    Normal, rational people don’t usually trade so “grabby”. It can last longer than one can remain solvent but it is important to stay rational when you don’t have to play the relative performance game.

    Be smart everyone and look for good risk rewards opportunities. Maybe the earnings leverage is higher than I believe but one needs a lot of growth, op leverage and low discount rates to justify a lot of this in my opinion.

    In the “old days” a $2Tn mkt cap required about $200bn of FCF per yr into perpetuity. Maybe today it is $75Bn (lower future returns) but that is a lot of recurring business. I am just not sure a lot of the world will look the same 10 years from now.

    This is not 2000 per se as the businesses are better but the GEs of the 2000 world thought they would forever be on top.

    We shall see. Be smart.

  6. Perhaps we’re witnessing end-stage capitalism. Even Adam Smith understood that capitalism unchecked leads to monopoly. Google, Microsoft, Facebook, Apple, and Amazon together control the information we get, what we buy, what we want to buy, and who gets elected. Not completely, not yet, but that’s where we’re headed. So if you think it will continue unchecked, then the value of these companies is infinite. I think the election could be an inflection point. If Trump wins and the Republicans keep the senate, then who knows what happens–probably more chaos and bluster but no real antitrust reform. If the Democrats win the presidency and take over the senate, then it gets interesting. Joe is part of the system, but there are many scenarios in which anti-monopoly voices could become powerful again.

  7. In my mind, Trump narrowing the gap to Biden in an unequivocal negative. Can you imagine the the large American cities the day after another surprise victory from Trump? So it has not surprised me that there has been a buoyant stock market while the Biden lead was substantial and Trump and GOP control of the Senate was written off. I also find something else weird. Gold is up a lot. NDX is up a lot. Why is the first one accepted and the second one engender such broad skepticism?

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