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Friday Musings: The Carrot & The Stick

  • Top takeaway: how well US Growth & Thematic equity held up amidst the week's Crypto Carnage.
  • I see the private markets - VC, PE as late cycle and the public equity & Commodity markets as early cycle.
  • I note StoneX just updated its ETF country rankings and Brazil, Mexico and Latin America came in 1,2,3.

Everyone is familiar with the story of the carrot and the stick – the carrot is the reward or the lure to do something and the stick is the threat of what might happen if one doesn’t.

 

In the financial space the IPO has usually been the carrot for the hardworking entrepreneur  operating under the VC’s watchful eye, threatened with the stick of no more funding if the plan isn’t executed on.

 

Today it seems as if things have reversed – the private equity space is awash with money and every startup is rewarded with oodles of cash and then various funding rounds at ever higher valuations – at least till they come public.

 

To me the public markets are now the stick – the IPO does offer a route to cash out but it also means facing the public market investor armed with comps and a much greater sense of the ins and outs than an opaque private round where investors are often in bc they have to be not because they want to be.

 

Look at the Coinbase IPO as a recent illustration (down close to 50% from high) or the launch of DAPP, the digital pick & shovel ETF (down close to 40%) or the SPAC splat or this week’s Crypto Carnage – it’s been some ride – somebody should get naming rights for the Coney Island rollercoaster. Most recently Squarespace IPOd and closed its 1st day roughly 40% below its last private round in March – down 40% from a private round less than 3 months ago – talk about ouch!

 

Yet all the bubble talk is about the public markets – I just don’t get it. I have written about how masterful the public markets have been at pricking all the little bubbles – the FANG names, Robinhood bros, Thematic trend plays, USTs & now the Crypto Killers. We even have the first blush of a healthy pullback in Commodity land – its welcome – trees don’t grow to the sky and neither does the price of oil, copper, lithium, lumber, carbon etc.

 

JPM just updated its SPY EPS projections to $200 in 2021, $225 in 2022 and $245 in 2023. That puts the SPY at under 19X 2022 EPS– that’s a bubble? Bitcoin down well over 50% - that’s a bubble, ARKK down well over 30% - a bubble? Really? I just don’t get it.

 

I see a public equity market that runs on twin engines – Value and Growth – when rates rise Value does well, when rates ease Growth does well. I found it super impressive that Wednesday’s Crypto Carnage didn’t spill over into the growth or thematic names at all. 

 

The key takeaway this week is from Mr. Market - regulars know I like to let the market tell me – and Mr. Market is telling me there is no more selling pressure in those names.

 

Meanwhile back in private equity land two things struck me this week: one was reading how every big hedge fund now wants to get into the private space – to be the next Tiger Global. At the same time and this is pretty wild Vanguard, the epitome of slow roller, is about to allow its individual clients to invest in the private space.

 

Whose left? I see the private space as late cycle and the public equity market & Commodities as early cycle. Call me crazy but that’s how I see it. GS reporting that authorized stock buybacks at over $500B ytd are a record & 25% above next closest yr. should provide a little support for that POV.

 

So maybe its time for some contrarian thinking – maybe it’s worth reading Gavin Baker’s excellent piece on why US growth stocks are now looking attractive or my buddy from up North, Kevin Muir, on inflation – his insights on the correlation between the US 10 yr. inflation swap rate and stocks was the single best thing I read on inflation last week.

 

BofA notes that its Tech stock z score allocation just hit an ATL (18 year history) while MS reports its unprofitable tech stock basket (think thematic) just had its worst relative perf vs SPY of any basket (over 100) at any time period over last decade – oh yeah – we are definitely in a bubble. Sizing/model portfolio construction is something I spend a lot of time on – and that’s why.

 

Here’s a few more contrarian examples:

 

From USD strength to EMFX with DXY under 90 & MXN at best level since January.

 

From US to Latin America equity as StoneX’s latest ETF country rankings put Brazil, Mexico & LA itself #s 1,2,3.

 

From UST rates straight shot higher to China 10 yr. Govt bond at lowest yield since Sept. Recall the Covid lineup: Asia 1st in, 1st out – follow the leader.

 

From too fast US growth to peak growth to slower growth ahead with PMIs peaking and housing starting its descent as mortgage apps roll over.

 

From EU disaster to European recovery as EU May PMIs surge, led by Services at 55.1 and Composite at 56.9. Note German 10 yr. BUND touching -.10% this week – BBG consensus is that it doesn’t cross zero till Q3 2022 – crazy wrong – I see it above zero before YE. Great for EU Banks – MS sees 15% upside. EU equity buybacks at 3 yr. high.

 

Form Crypto to Gold – gold up 3 weeks in row, 6 of last 7 – real rates negative…

 

From Commodities to Digital – Comm finally take a break while O/S digital thematic pick up the baton…

 

Speaking of thematic here’s a little heads up for my besties – I am close to launching a 100% Global Thematic Equity Model Portfolio to complement my existing global multi asset model. Pretty psyched as timing seems great post big correction. Reach out for more.

 

TGIF!


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