Market in Pictures – December 2020
— Rafael Resendes (@rresendes) December 9, 2020
Looking for Value
We venture that few investors would have foreseen stocks at these levels had they known 2020’s timeline of events in advance. We have little if any idea on irrational exuberance or market tops but have some thoughts on where to, and where not to, look for value.
Option activity, measured in terms of call options, a bet on higher prices, is currently setting records:
‘The greatest call-buying frenzy since the dot-com bubble’ –
— jeroen blokland (@jsblokland) December 8, 2020
Measured with virtually any known fundamental metric, P/E ratios, cash flow, the Q ratio, market cap to GDP, and many others, the market appears richly valued. Nobel Laureate Robert Shiller, a rather sane and sober observer of long-term trends, does note that his long-term CAPE ratio, a measure of long-term P/E ratio, less 10-year yields, suggests some value remains in purchasing equities at current levels.
Here it is.
15 valuation factors for US equities.
11 of them are undisputedly at record levels.
— Otavio (Tavi) Costa (@TaviCosta) November 22, 2020
Outside of the US, opportunities for earning any yield at all, even with credit risk involved, look increasingly grim; headlines today note 10-year bonds in Portugal now yield 0.00%. So, even a zero percent target return now entails credit risk. In China, a recent auction for 5-year bonds at negative rates was oversubscribed.
In the US, equity market investors appear to embrace risk in places we would not be comfortable. Among stocks most exposed and damaged this year, several leisure, gaming, and food stocks have stock prices well higher on the year, some with enterprise values even yet higher.
Honestly, it’s pretty shocking how many hotels and cruise stocks have basically recovered entirely from COVID when you add the debt and share dilution
Royal Caribbean, Norwegian, and Carnival are all trading at 94-101% of their pre-COVID enterprise values… pic.twitter.com/yqDwkVLeN2
— Corry Wang (@corry_wang) December 8, 2020
We suggest investors not try and complicate their analysis in a year that has challenged, if not destroyed many investing strategies. Opportunities exist in a multitude of companies with sustainable and repeating revenues, with cash flows and often dividends in excess of bond yields, and investors could do far worse with greater effort focusing elsewhere.
The past month has seen a record month for small stock returns and a bounce in previously lagging sectors.
Smalls are soaring once again today.
The Russell 2000 is up 18.4% for the month.
This would be the best month EVER for small caps. Wow. pic.twitter.com/0viYyMK5xW
— Ryan Detrick, CMT (@RyanDetrick) November 23, 2020
The rotation has been real… pic.twitter.com/ZkCd0I7dhs
— Jake (@EconomPic) November 18, 2020
During a month where we *may* have seen the beginning of a resurrection in value, here is the move in context.
Orange line is the performance of growth minus value since late 2018.
Blue line is 1998-2001 pic.twitter.com/v4C6U7hpVP
— Drew Dickson (@AlbertBridgeCap) November 26, 2020
Some market observers assert we are witnessing a market rotation to small value stocks, which could have a substantial amount to run higher. While there is much debate about what is actually a value stock, we prefer our own framework. We believe a strategy for investing that consistently buys cheap cash flows will be rewarded.
“Modeling financial markets is hard – markets are complex, almost chaotic systems with very low signal-to-noise ratios. Any attempt to properly characterize market dynamics – as a requirement for constructing alphas, is brave, counterintuitive, and inefficient.”
enjoy the wkend
— MultifractelFarol (@Mephisto731) September 5, 2020
— Institutional Investor (@iimag) November 10, 2020
— Institutional Investor (@iimag) November 24, 2020
— Institutional Investor (@iimag) November 13, 2020
Quant fund shrinks 92% from 2018 peak in factor-investing crisis https://t.co/aQCgNSr7aV
— Bloomberg (@business) November 19, 2020
— Institutional Investor (@iimag) November 18, 2020
Quant Carnage Hammers Iconic Hedge Funds Renaissance, Two Sigma https://t.co/Oikw2yEzls
— zerohedge (@zerohedge) November 17, 2020
Grantham’s Short Call Cost His Hedge Fund Over $2 Billion https://t.co/xAd0Q9bliF
— zerohedge (@zerohedge) November 24, 2020
— jeroen blokland (@jsblokland) November 18, 2020
‘Bitcoin is seizing the spotlight from gold as a hedge against risks such as further dollar weakness or a pick-up in inflation, after widening its performance lead over the yellow metal.’ https://t.co/m7Vv1QJ9Us pic.twitter.com/dWJWzQWnUg
— Jesse Felder (@jessefelder) November 18, 2020
Peru issues 100-year bond https://t.co/bpIojUpKnQ
— MarketWatch (@MarketWatch) November 25, 2020
MAD world! #China issued 5y notes this week at a yield of -0.152%, 1st time it has managed to borrow at negative interest rates. Investors placed total orders of about €18bn as investors seems to want more exposure to China. https://t.co/v87CirEOb7 pic.twitter.com/LEYzA3o6mY
— Holger Zschaepitz (@Schuldensuehner) November 19, 2020
Totally crazy! Global stock mktcap on course to historic $100tn mark. Gained another $2.1tn this week as string of pos vaccine news continues to overwhelm the here-and-now or rising virus cases & suppressed econ activity. All stocks now worth $98.7tn, equal to 112% of global GDP. pic.twitter.com/mIwwFf6hIS
— Holger Zschaepitz (@Schuldensuehner) November 29, 2020
Meanwhile in China…..
Banking assets just made fresh new highs.
Now at 330% of its GDP!
We have never seen an economy of this size being so levered.
Matter of fact…
The world has never been so levered.
It all points back to gold. pic.twitter.com/4s1kx0K5Se
— Otavio (Tavi) Costa (@TaviCosta) November 29, 2020
Wow. Last week, just before the Thanksgiving holiday, more than 35 million call options traded — a record
— Sarah Ponczek (@SarahPonczek) November 30, 2020
. @Crescat_Capital “speculative long call option positioning today relative to puts is the highest it has been since the peak of the tech bubble.” https://t.co/zAfXLPCnp4 @crescatkevin @TaviCosta $GOLD $GLD $IAU $SLV
— ValueWalk – Q3 hedge fund letter screener (@valuewalk) November 25, 2020
Femsa is the 2nd-largest retailer in Mexico. 20k stores to use for eComm/financial services
If you believe that Biden is more friendly to Mexico, its cheap. pic.twitter.com/62L4z6zU6N
— Post M. (@Post_Market) November 11, 2020
Apple revenue was up 1% over the past year. Its stock is up 92% in the past year. $AAPL
— Charlie Bilello (@charliebilello) October 29, 2020
Nike Sales are down 6% over the last year.
Nike Stock is up 37% over the last year.
Result: Price to Sales ratio at a new high.$NKE
— Charlie Bilello (@charliebilello) September 29, 2020