Monday, 24 May 2021 / Published in Analysis

I don’t claim to be an expert on the crypto space and don’t really understand it. Yes, blockchain might prove useful, but I fail to understand why a crypto asset should be worth billions because of the usefulness of blockchain. Second, I disagree that cryptos are a hedge against inflation. I also disagree with the notion that cryptos will replace currencies, or that they are an alternative to Central Banks. 

However irrespective of what one believes, what is important for investors at the moment is that the regulatory cloud we have mentioned in the past is just beginning. And the regulatory assault on the crypto space is coming from multiple sides.  

SEC chairman Garry Gensler in a recent House committee hearing, made it clear that there is no investor protection regime for the crypto space at the moment, implying the need for regulation. He also mentioned regulating exchanges and that he was concerned about price manipulation. Coinbase, for example, is registered in most states as a money transmitter, not as an exchange.  

Meanwhile in China, where banks have been banned from getting involved in crypto for several years now, is also preparing more regulatory scrutiny. As a result, two miners said they will cease operations in China citing “regulatory risks”. 

Finally, the Biden administration’s tax enforcement plan released Thursday calls for transactions of more than $10,000 to be reported to the IRS. This might lead to many investors liquidating their holdings before any such plan becomes law.  

We don’t really have a crypto strategy and as a general rule of thumb don’t get involved in the space. However irrespective of the different opinions about cryptos, investors who venture in the space need to be aware of the regulatory risks. These might include, but not limited to, tax liability risks, regulatory scrutiny of exchanges, clarity in the ownership structure of many cryptos, and investor protection regulations.  

Please note that the appeal of the crypto space has been that it was a non-regulated and decentralized investment. However, if regulators enforce the same regulatory scrutiny on the crypto space as in other investments, that could alter the appeal of the space, and the value of cryptos as perceived by participants in the space.   

Tuesday, 30 March 2021 / Published in Analysis

As we have said many times over the past several months, while the market as a whole is not in bubble territory, many parts of the market are. In particular, the technology sector is as expensive as I have ever seen.

In fact, one of my worries has been that when the technology sector did correct, it might bring down the entire market. The good news is that this has not happened, and the market overall is holding up.

This in my mind means two things. The first is that the bull market is still intact. The second is that the rotation we have been seeing over the past several months seems to be enough (at least for now) to prevent a general market correction, even as many of the high-flying technology names correct or do nothing.

Also, the fact that the high PE and High Price/Sales stocks are correcting , should also bring down the market multiple over the next few quarters, which is a good thing.

This in turn should be good for active managed portfolios and less for passive portfolios or passive investment instruments.

Finally, this also means the liquidity wave we have been riding since the beginning of the pandemic is alive and well, but investors have to change strategy and find new winners.

Like the old wall street saying goes, never fight the Fed or never fight the central bank as I say. And with the Fed still purchasing 120 billion in assets every month, this liquidity wave is still alive and well.

Thursday, 11 March 2021 / Published in Analysis

A short while ago I questioned if 2021 might be a sell the COVID 19 vaccine news trade. I said it probably won’t, because central banks will keep pumping liquidity. However, a new twist is now unfolding, and that is higher bond yields.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.  

For example, 10-year US government bonds yields have risen to 1.5%, and the 30-year yield is now at around 2.20%, with most yields in other major markets also increasing.  

In my mind, irrespective if inflation comes back, as most think it will, I find it hard to believe that the long end of sovereign debt can increase by a lot without central banks intervening. This because the interest cost to governments will rise substantially, something that will make an already bad fiscal situation much worse.  

So, the question is, can central banks bring down long dated bonds if they want to? The answer is yes, and I think they will do just that at some point. But the even more important question is, how might markets react to such a development? The answer is we don’t really know, because on the one hand we will have inflation and higher growth because of a COVID vaccine, but yields will not be reflecting such a reality, as they have in the past. 

My guess is that if markets start correcting, central banks will communicate that they will start buying longer dated bonds to keep yields down to avoid markets correcting by much. But the truth is we don’t know how markets will react to such a reality, irrespective of what central banks say and do. But until we see price action to the contrary, we have to keep trusting an old Wall Street saying that says never fight the Fed, or generally speaking, never fight Central Banks.  

Tuesday, 23 February 2021 / Published in Analysis

When 100% of outstanding shares are shorted in any stock, you get a sort of a black hole short interest phenomenon. In other words, even if someone covers his shorts, someone comes on top and shorts even more shares. Very soon more than 100% of all outstanding shares are sold short and covering becomes impossible, because there are no available shares to be covered. More or less, that is what happened in the case of Gamestop.

But Gamestop is not the only heavy shorted stock. There are many more than meets the eye. And it’s not just stocks that are heavily shorted, EFTs are shorted also. For example, according to an article from the Motley Fool site (link here) the SPDR S&P Biotech EFT (XBI) has a short interest of 103%%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is shorted to the tune of 91% and the SPDR S&P Retail ETF (XRT) has a short-interest ratio of 465% recently. Yes you heard right, 465%. The ETF has 2.6 million shares outstanding with more than 12 million shares short. In comparison, the short interest of Gamestop as f Feb 5 was 89%.

The question is, are seasoned professionals right in shorting these securities so much? The answer is yes and no. Professional investors and managers know all too well that any mania can’t last forever, however a speculative mania can last longer than anyone imagines, and stocks can rise for no reason, or much more than thought possible. In other words, as Keynes correctly said, markets can remain irrational longer than you can remain solvent.

The bottom line is that we are witnessing a market like no other in history. A speculative frenzy I have never seen before, and a market that behaves irrational in every respect.

I am not sure how this ends or how long it will last, but I am sure that in the end, irrationality will be punished, and prudence rewarded.

Wednesday, 03 February 2021 / Published in Analysis

I have never subscribed to the theory that interest rate differentials are what determine the value of currencies. Yes, differentials do play a role, but in my opinion a lot less than most people think.

While the yield spread between 10-year US treasuries and 10-year Bunds has increased, this has not stopped the dollar falling almost 10% vs the Euro. Obviously if yield was the main driver of currencies, this should not have happened.

When looking at the current valuation of the dollar, many other factors are in play at the moment, that overshadow yield differentials.

The greatest factor is Inflation tolerance: The Fed has repeated many times that it will tolerate higher inflation for a considerable amount of time, even after the pandemic ends. At the same time, it has also said it will continue to purchase assets for at least the same amount of time.

And contrary to what happened in 2018-2019, when the Fed tried to raise interest rates in order to offset the US government’s increased spending, this time around the Fed will do nothing of the sort, instead opting for continued bond purchases and thus preventing yields from rising.

This will probably create a dilemma for holders of US treasuries. And the dilemma is, will the interest earned compensate for the dollar inflation they will incur. The answer is probably not, which might an additional reason for the correction of the dollar.

Finally, because the fed’s balance sheet is poised to rise for the foreseeable future, in a way this dilutes the value of the dollar a bit. However insofar as the rise of the Euro vs the dollar, please also remember that the US has a twin deficit while the Euro zone a current account surplus.

Friday, 22 January 2021 / Published in Analysis

Cryptocurrency market has witnessed a massive selling pressure in the past few days, with Bitcoin price falling below $29.000 for the first time since Jan. 05, 2021, on growing concerns over regulation attention and a widespread profit-taking after the extraordinary rally.


Regulation attention from US Treasury and ECB:

The recent price rally and enthusiasm in the crypto market have lost some steam after Janet Yellen’s comments, President Joe Biden’s pick to head the US Treasury, during a US Senate hearing on January 19, 2021.

Yellen expressed concerns that cryptocurrencies could be used to finance malign and illegal activities, adding that she is intended to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for Cryptocurrencies and other fintech innovations. That followed a call last week from European Central Bank President Christine Lagarde for global regulation of Cryptocurrencies.


Bitcoin and Ethereum sell-off:

The price of the world’s most popular cryptocurrency initially lost as much as 17% to $28.800 on Thursday night, before bouncing back between $30.000-$32.000 on Friday. Bitcoin is trading 30% below its record high of $42.000 posted at Jan.08, 2021.

Ethereum, the second most valuable digital currency after Bitcoin, dropped even more yesterday, declining 22% toward $1.040, only three days after posting a fresh all-time high at $1.440.

The price of Ethereum, which was founded from the Russian-Canadian programmer Vitaly Buterin back in 2014, entered 2020 at near $120 per coin. The popularity of Bitcoin and the massive inflows from institutional investors have helped Ethereum to post a parabolic rise above $1.000 at the end of 2020.


Rocky start of 2021:

While the 2020 was a great year for Cryptos with lots of bullish developments, tremendous price rallies up to 300%, popularity, and media coverage even as they still have limited real-world usage, however in the first 3 weeks of 2021, the bears have taken control, bringing lots of pressure, huge price swings and volatility.

The recent two-day sell-off wiped out more than $100 billion from the crypto market capitalization, which it now stands at around $900 billion, while the Bitcoin’s dominance rate is 65%.

Wednesday, 13 January 2021 / Published in Analysis

The US dollar has been the top performing currency since last week, gaining support from a spike in US Treasury yields, the Biden’s stimulus agenda, hopes for US economic growth and expectations for higher inflation.

The greenback continues to recover from 3-year lows after the Democratic party won control of the US Senate last week, which propelled expectations for bigger fiscal stimulus packages to shore up the US economy. 

President-elect Joe Biden has promised further pandemic-relief fiscal spending following the disappointing non-farm payrolls for December, financed with more Treasury debt and taxes.

The 10-year Treasury bill crossed the 1.10% yield level for the first time since March, sparking speculation that a long period of interest rate compression could be reversing.

The dollar valuation has improved against major currencies since the US real yields are rising faster than global counterparts together with the shift by the Federal Reserve to allow higher inflation.

The surge in bond yields and market inflation expectations have been enough to pause the bearish bets against the greenback. The dollar index rose near the 91 level, after dropping as low as 89 last week, which was 12% lower from March highs. 

Thursday, 17 December 2020 / Published in Analysis

Bitcoin, which is the flagship cryptocurrency broke above the psychological level of $20.000 on Wednesday for the first time in history. The upside momentum continued also during Thursday’s European trading hours where the price hit a new record high of $23.700.

The pioneer digital currency price has surged by more than 100% since the September lows of $10.000 amid robust demand based on its unique crypto characteristics and the continuing devaluation of the world’s major fiat currencies (especially the US dollar).

Positive long-term fundamentals

The ballistic-style rally was supported by Bitcoin’s positive long-term fundamentals such as its scarcity (the total supply of bitcoins that will ever be “mined” is capped at 21 million) and the devaluation of the US dollar amid the massive monetary policies by the Federal Reserve and other Central banks around the world.

The portfolio managers have started using Bitcoins to diversify-hedge their investment portfolios against market risks and inflation, instead of Gold and inflation-linked Treasuries-Bonds. Bitcoin acts as a “store of value” asset and it is ideal for hedging some of the monetary and fiscal risks.

Hence, the crypto market has seen strong demand from institutional investors who invest billions into digital assets and blockchain technology. Many traditional banks and asset houses such as BBVA in Spain and Fidelity will start using bitcoins in their financial operations. Also, the S&P Dow Jones Indices recently announced plans to launch crypto indices in 2021, while Cboe has tapped New York-based trading software firm Coinroutes’ crypto market data capabilities.

The recent development in the digital markets provides further evidence that the crypto market is transforming from a retail place for speculation into a sophisticated and tech-savvy part of a global financial industry.

Wednesday, 09 December 2020 / Published in Analysis

The global pandemic and the economic shutdowns have been devastating to the travel sectors in 2020, but optimism surrounding vaccine developments has boosted confidence of a smooth economic reopening in 2021.

50% of the global population is expected to receive a vaccine until next May, allowing consumers to travel and gather safely in public spaces, reversing the investing outlook for the travel and tourism sectors.

Industries such as airlines, hotels, leisure, entertainment, tour operators, casino, cruise lines, and restaurants which underperformed during the pandemic, are expected to have a sustainable recovery next year as the virus will be under control. With vaccines on the horizon, investors have already started positioning into travel stocks, with some of them posting their best monthly performance in November since the start of the pandemic.

Monday, 19 October 2020 / Published in Analysis

The unpresented hard landing in the global aviation industry demonstrates the significant impact and magnitude of the COVID-19 pandemic in the entire airline space. According to official travel data, more than 40 commercial airlines have already bankrupted or suspended their operations in 2020 so far, failing to survive the worst financial crisis in aviation history.

The next few months will be rocky for the airlines as coronavirus cases have risen in the U.S. and Europe at their highest level since summer. Many countries have already reinstated tougher social distancing rules and rolled back previews re-opening measures to curb the spread of the virus, creating a negative dynamic for the aviation industry once again.


Stock performance:

The shares of some major US carriers such as Delta Air Lines (DAL), United Airlines (UAL), and American Airlines (AAL) have lost more than 50% of their market value this year so far, contrasting with gains of 50% for the tech-related Nasdaq 100 Composite and 10% for the S&P 500 index.

Delta Air Lines and United Airlines delivered misses on third quarter-Q3 revenues that dropped at least 75% year-over-year, which was largely reliable with the drop in airport traffic observed during summer, low passenger revenues, and large operating costs.


Government support:

Governments around the world have minimized the damage in the aviation industry by supporting the carriers from going bankrupt during the first months of the pandemic. The industry’s revenues had been hit so hard from the pandemic-related lockdowns and the travel restrictions, that governments had no option but to support the carriers with billions of dollars to avoid layoffs.

The official authorities together have provided more than $150 billion in support, including direct aid, wage subsidies, corporate tax relief, and specific industry tax relief including fuel taxes. Thankfully for airlines, the financial aid does not add more debt to their balance sheets.

The US administration is planning to provide a new $25 billion bailout for U.S. passenger airlines to keep tens of thousands of workers on the job for another six months. The new financial aid will extend the prior $25 billion airline payroll support program of mostly cash grants approved by Congress in March, which it expired on Sept. 30.

American Airlines and United Airlines began laying off 32,000 workers at the end of September but had said they would change course if Congress reaches a deal on a new government program to fund payroll costs.

Furthermore, carriers have applied cost-cutting measures by parking thousands of aircrafts, canceling non-profitable routes, and laying off thousands of employees. Worth mentioning that many airlines were already struggling before the pandemic hit, but they now being in a better position because of government help.


Relaunch Boeing 737 Max flights in December:

Airlines are planning to return Boeing 737 MAX passenger jets back to service at the end of the year, provided they are certified by the U.S. Federal Aviation Administration.

At the beginning of October, the European regulators cleared 737 MAX’s return back to the skies, saying, safety changes Boeing made were satisfactory.

This is a very important development for the aviation industry after the two deadly 737 MAX crashes killing 346 people in a span of two years in Indonesia and Ethiopia. A congressional report pinned the blame for the fatalities on both Boeing and the FAA.


Outlook for next quarters:

Many analysts have downgraded the outlook for the airline’s stocks to negative as the short-term risk has increased due to the resurgence of covid-19 cases around the world together with the application of fresh lockdown measures and travel restrictions.

With demand recovery in most regions stalled and airlines still struggling with revenue generation and high cash burn rates, the market analysts expect to see more pressure in the final quarter of 2020 and the first quarter of 2021 at least. Carriers are expected to have Q4 2020 revenues only at 1/3 compared to Q4 2019, in response to the strict cleaning protocols, middle-seat blocking policy, and weak air travel demand.

The International Air Transport Association (IATA) expects that the passenger traffic is likely to return to pre-pandemic levels only in 2024, a year later than previously projected and some capacity may be lost for longer.

The year 2020 was a “lost year” for the airlines, and their focus is to minimize their operational costs, to apply budget-constraint measures which will improve their cash flow metrics until rebound will be reflected in air traffic following the distribution of an effective vaccine within 2021.