News: Axios Markets: The big hedge

Tuesday, January 12, 2021

Axios Markets: The big hedge

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Axios Markets

By Dion Rabouin ·Jan 12, 2021

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Join me and Axios' Dan Primack tomorrow at 12:30pm ET for a virtual event on the pandemic's impact on minority-owned small businesses, featuring Rep. Ro Khanna (D-Calif.) and World Central Kitchen founder José Andrés.

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1 big thing: The big hedge

Illustration: Aïda Amer/Axios

Warnings that the U.S. equity market looks to be in a bubble are coming from a slew of Wall Street asset managers and strategists as stocks continue to reach new record highs and markets display abnormal behavior.

But data show that while investors are hedging their bets, there is hardly a mad dash to sell out of equity positions.

What's happening: As the 10-year Treasury yield rises solidly above 1% — its highest level in nearly a year — a growing contingent of investors fear that a crash is imminent without the ballast of rock-bottom interest rates.

Driving the news: A recent survey from E-Trade of 904 active investors found that 66% say the stock market is either fully or somewhat in a bubble.

Another 26% said the stock market is "approaching a market bubble."

The signs: In addition to the increase in long-dated U.S. Treasury yields, the dollar is gaining steam, having risen for four straight sessions after approaching a nearly three-year low.

Bitcoin's mythical journey above $42,000 a coin (and its fall from those heights) is also causing some worry among market participants, especially after Monday when cryptocurrencies overall lost almost $200 billion of value.
Market valuations are historically stretched, especially the tech-heavy Nasdaq, which is trading at nearly 47 times its year-ago earnings and 34 times its earnings looking ahead the next 12 months, per FactSet.
Bank of America points out that U.S. financial assets are now six times (!!!) the size of U.S. GDP.

What they're saying: "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble," Jeremy Grantham, co-founder and chief investment strategist at asset manager GMO, says in a note.

"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."

By the numbers: Despite the frenzied warnings from veteran investors like Grantham (the "G" in GMO), data from Bank of America show its wealthy private clients have increased equity holdings to an average of 61.7% of their portfolios, just below the record high level touched in 2015.

Deutsche Bank's asset allocation team noted that "the last two months of 2020 saw the largest flow into equity funds on record over such a period and the second largest as a [percentage] of AUM over the 10 year period they have data."

Yes, but: Investors also took cover last week, piling $29.1 billion into cash, $14.9 billion into bonds and $1.5 billion into gold. It marked the precious metal's largest inflow since August.

Bonus chart: Another sign of the bubble

Data; FactSet; Chart: Axios Visuals

The surge in Texas healthcare company Signal Advance continued on Monday as the stock rose by 438%, after previously gaining 1800% during one 24-hour period.

The catalyst: A Thursday tweet from Tesla CEO Elon Musk that said simply, "Use Signal."

Musk was recommending the encrypted messaging service (an independent 501c3) that competes with Facebook's WhatsApp, but a frenzy ensued in Signal Advance (SIGL) nonetheless that has continued for days.

By the numbers: The company's market cap has risen from around $7 million last week to more than $659 million as of Monday's close, according to FactSet.

The bottom line: Strategists think this may be another sign of the overall mania in stock prices. BofA's chief investment strategist Michael Hartnett notes cynically, extreme asset bubbles have been the "natural end to nihilistic bull markets of [the] past decade."

This one is unlikely to be different, GMO's Grantham writes. "The combination of timing uncertainty and rapidly accelerating regret on the part of clients means that the career and business risk of fighting the bubble is too great for large commercial enterprises."
"They can never put their full weight behind bearish advice even if the P/E goes to 65x as it did in Japan."

2. Catch up quick

President-elect Biden says he will call on Congress to forgive $10,000 in student loan debt and will unveil his economic plan on Thursday. (CNBC)

President Trump's executive order banning purchases of shares in 35 Chinese companies identified as having links to the Chinese military by U.S. investors took effect Monday. (Nikkei)

Dallas Fed President Kaplan said he expects broad vaccine distribution to unleash strong economic growth later this year that should warrant earnest discussions about the Fed tapering its QE program. (Reuters)

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3. Twitter's stock slump is about more than banning Trump

Data: FactSet; Chart: Axios Visuals

Twitter shares fell by as much as 12% on Monday after the company announced it had permanently banned President Trump's account.

Between the lines: While many were quick to say the decline was blowback for the company's decision, the performance of other social media companies' stock prices suggests there's more to the story.

On the other side: Snapchat banned the president's account on Wednesday and has seen its stock price jump since, gaining 5.3% on Thursday, 0.6% on Friday and another 3% on Monday.

Since banning Trump from its platform Snapchat shares are up 9.2%.
Twitter's shares have fallen 9.5% over the same time period, despite not announcing a ban on Trump until Friday after the market closed.
Facebook's stock price has declined by about 2.5% during that period, but gained 2.1% on the day it announced it was banning Trump for at least the remainder of his time in office.

The big picture: Twitter's shares have been in decline since hitting a record high of $55.87 on Dec. 18.

Still, over the last year Twitter stock has risen by 47%.
Facebook's stock has gained around 20%, trailing the overall market.
Snapchat is up by 212%, almost entirely since announcing spectacular and unexpected earnings growth last year.

4. For all the fuss, the dollar rally has been underwhelming so far

Data: FactSet; Chart: Axios Visuals

The dollar index rose for the fourth straight session on Monday worrying investors that the recent rally that has sent the dollar lower as stocks have risen higher could be coming undone.

What they're saying: "The appreciation of the dollar is coming at a time of not only rising yields but a risk-off period created by heightened uncertainty about political developments in the U.S.," Paresh Upadhyaya, director of currency strategy and portfolio manager for Amundi Pioneer Asset Management, told Reuters.

"I think that is exaggerating the strength in the dollar."

But, but, but: The dollar hasn't been that strong. The greenback is still about 7% lower than where it was at this time last year and has only risen by 0.7% year to date.

Further, Commodity Futures Trading Commission data released Friday showed speculators in the FX market remain extremely bearish on the dollar, taking net short positions to new highs.