4/11/21
S&P 500: 4129
Nasdaq: 13900
10 Year Treasury: 1.6%
David R. Snyder, CFA
For the last few months I have been ranting about all of the excesses in the financial markets and forecasting the bubbles would burst soon. Many have already burst such as the stocks of hypergrowth companies and speculative SPAC’s. There are more to come.
The unjustified run up on hope and prayers for the alternative energy and marijuana stocks last year has reversed with many stocks more than 50% off their 52 week highs. I follow JinkoSolar (JKS 38) closely and wrote about their poor earnings last Fall after their stock increased from $22 to $90 in two months on no news other than the prospect of a Biden Presidency. They just reported another awful quarter and the stock is now 58% lower than its peak. Also in one of my recent writings I recommended shorting Blackberry (BB 9) after the Reddit/Robinhood traders pushed the stock above $20. They also just reported a poor quarter and the stock has now declined more than 50% from its 52 week high.
Seems as though reality can get in the way of speculation and schemes to keep stocks at unrealistic valuations. Who would’ve thunk it? But at least they still have Gamestop (GME 158) as their only bragging rights left to show the world how they are great investors. Anybody that buys GME’s proposed three million share secondary offering is just glutton for more punishment. There are plenty of Reddit postings now of investors losing lots of money. There will be little sympathy for them after their arrogant “we know more than you old investors” postings. They actually know very little about the financial markets. I heard the CEO of webull, another new trading platform, state that it will be a good experience for his clients when they lose a lot of money during the next downturn! A good experience??!! Does he know it took many years to get individual investors back in the stock market after the tech bubble burst in 2000 and the financial crisis of 2008?
One speculative asset that has not declined yet is cryptocurrencies. It seems as though every day there is a new institution that is offering bitcoin. But that doesn’t necessarily mean these investment firms believe in cryptocurrencies long term value. They just don’t want to give up an opportunity to make money from trading crypto. I wrote back in 2008 when Calpers (largest state pension fund) decided to increase their commodity exposure by $10 billion that it would mark the top in commodities (it was the top). Thus institutions newly committing to cryptocurrencies is not necessarily a bullish sign.
The initial public offering for Coinbase will likely mark the top for cryptocurrencies. It is estimated to be valued at over $100 billion dollars and has a virtual monopoly as the largest crypto exchange in the world. However the irony is that Coinbase charges on average a 1.5% fee for exchanges. I thought this new world was about decentralizing, getting rid of the middleman and lowering fees. It seems as though there is a lot of room to chip away at that 1.5% fee as new competition enters the market. Coinbase’s revenue growth rate is off the charts but that is likely peaking. Often times in the past when a hot industry’s top player goes public, it marks the top for that sector and sometimes the entire stock market. Remember when Blackstone (BX 77), the premier private equity firm went public right at the top of the stock market in 2007?
I will never invest in cryptocurrencies. First of all I don’t invest in any asset that doesn’t have intrinsic value. Have never invested in gold, art or collectables so certainly not going to invest in crypto. The demand for gold is 50% for jewelry and about 7% for industrial and tech use. The rest is investor demand. That is just whimsical demand. Trying to guess what others think of gold which is basically required to forecast gold prices is a loser’s game. There is no correlation with gold other than high inflation rates and the dollar. It is a myth that gold is negatively correlated with real rates.
Have yet to see a good valuation measure for crypto. If you can’t value an asset why would anyone buy it? To just take gold’s valuation of $10 trillion and say that crypto can reach that valuation as a store of value is a weak argument. First of all there are plenty of investors that will still own gold as a store of value so the two assets probably split the store of value. And 57% of gold demand is real demand from jewelry and industrial products. That cuts the potential for bitcoin store of value down to under $3 trillion.
A spokesman for Coinbase cited the stock to flow method as a valuation tool. However that method is riddled with holes. And she also cited George Gilder’s esoteric valuation method. George is a brilliant technologist but anyone remember in 2000 when he had targets on tech stocks multiples higher than their peaks with some crazy valuation methods. He is not a financial guy. Bottomline there is no credible valuation method for crypto. With stocks, bonds and real estate there is a simple discounted cash flow or dividend model that uses real money being returned to the investor as its methodology. Tried and true. There will always be demand for real money being returned to investors.
I love the argument that we need crypto or gold to protect our purchasing power. Heard an investor on a financial news network last week say that the dollar’s purchasing power has eroded over the last 30 years. He cited gold and the S&P 500 both being priced at $365 in 1991. Well guess what happened. The price of gold increased about 400% while the S&P 500 with dividends reinvested increased over 1600%. And inflation increased about 130%. Stocks didn’t protect investors against inflation? This investor also forgot to count reinvested dividends which is a big part of the return on stocks. And the dollar is actually 10% higher today than it was in 1991.
The biggest risk for crypto is that the US will issue a digital currency. China has already announced a digital yuan in the making. The Fed is not going to let the control of money be taken over by private sources. This will present a real challenge to private cryptos.
The hope that private corporations will invest their trillions of dollars in cash in crypto is another pipe dream. Corporations in the past have had the option to invest their cash in stocks that provide on average 10% annual returns instead of the measly returns on short term Treasuries but they rarely choose the stock option. Why? Because they want liquidity at a stable price. Why would they now invest in cryptos that have even more volatility and little return history? Bitcoin actually declined 13% in a few hours two weeks ago!
To artificially limit supply of a product such as Bitcoin just proves that it is not a free market. No gold is not limited in supply. There is over 10 times the amount of the current supply of gold within one or two miles of the earth’s crust. Artificially limiting the supply of Bitcoin is just pure price manipulation.
If an investor is worried about the dollar, then invest in foreign currencies. If worried about inflation then invest in stocks, real estate, and commodities that are not controlled by investor demand. In my 34 years in the investment industry I have heard every year investors worry about the US dollar maintaining its status as the world’s reserve currency. I never believed a word of it and still don’t. It is not going to change in the near future.
The S&P 500 has reached the top of the upper limits of my forecast. However small and mid-cap stocks are still below their March 15th highs and breadth has been weakening. The AAII investment survey revealed over 57% bulls, a multiyear high while Investor’s Intelligence showed 60% bulls and only 17% bears in its survey. These are contrarian indicators. I have not called for a correction yet, but we are getting very close.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.