Tuesday, 11 May 2021 / Published in Analysis

The chart below from Goldman Sachs research shows that short interest for the S&P 500 Index are at all-time lows. In other words, those that are betting on the index falling, are a very rare breed. 

Many years ago, this chart would have been interpreted as a contrarian indicator. The logic being that, with record bullishness everywhere, it’s probably time to sell. However, this time around I think we have to take this data at face value. And that is none other than a bullish indication.  



The reason why short interest is probably so low, is not for a lack of institutional investors who think that markets cannot go down, but probably because they have been squeezed out of their positions in attempting to do so.  

With liquidity continuously coming into the market from all sides (Central banks and physical spending), it is no wonder equities keep going up. 

Also keep in mind that bonds, especially sovereign debt, is not an option for most institutional investors. If institutions want yield, they will not find it in debt, unless they want to take on a lot of risk. And when searching for yield, equities are probably the route at the current time.  

The bottom line is that all roads continue to lead to equities. The record low short interest is probably a testimony to this. And contrary to the past, a record short interest currently cannot be interpreted as a contrary indicator, but has to be interpreted at face value, that being that is still a very bullish market. 

Tuesday, 11 May 2021 / Published in Analysis

While major indices don’t show it, and most investors don’t see it, many parts of the technology sector are crashing. And by that, I mean that many stocks have been falling for months now, even if this internal technology correction has not affected the major indices (yet). 

Almost all EV stocks are way off their highs, perhaps with TESLA having corrected the least. Even highly covered and talked about stocks like Quantum Scape, that is developing a next generation battery for EV cars has gone from about $130 to $28. AMD had its best quarter ever and has fallen about 15% from its last report. Even Apple has not been able to rally, even if its quarter blew the consensus away. ZM has fallen over 50% from its highs, and DOCU which reached almost $300 a share last year, is trading at around $190.  

In fact, perhaps a better illustration of what has been happening is the ARKK EFT, that has many of the high flying names mentioned above.   

The ARKK ETF has lost about 1/3 of its value from its high, and down about 20% year to date. 

The question is, is this technology correction over and might many of these stocks be a buy? 

My answer is no. Even after a huge correction, most of these names are still not investable. The reason being valuation concerns. In my book, stocks like AMD and ZM would have to fall by an additional 60% or so, before valuations make any sense.  

The next question is, will the correction in technology bring the entire market down? The answer is we don’t know, but so far, the major indices are not showing signs of stress (yet).   

However, if stocks like Apple make a serious correction, then all bets are off. The market will probably correct by a lot. But in order for that to happen, we would have to see a lot of money exiting this market, especially from passive funds.  

And what might be the reason for a rush to the exists from investors? Two things come to mind these days, inflation and an increase in capital gain taxes in the US.  

However, don’t blame the correction on neither of these issues. At its core, the correction we are seeing in the technology space has everything to do with valuations and investors getting carried away than anything else.  

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.