The Bad. The Weird. The Delightful.
2020: The year that took our breath away 😵
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The 100-year annual return on stocks is about +7%
But this year…
During the world’s worst pandemic in a century
Fastest fall in global markets in history
the stock market is set to end the year up +2x its average!
“Economists will study the unprecedented recession and recovery. The swift 34% bear market and dramatic 65% rally”
In my opinion, the only thing to study is the biggest PRINTING PRESS in history.
I don’t know how the FED keeps a straight face inventing this much money out of thin air.
But unfortunately, this level of stimulus looks to be necessary.
I love you like Kanye loves Kanye West.
The stock market is an addict.
It’s drug of choice = free money.
“Before the markets became hooked on QE, the S&P 500 used to actually outperform money printing rate by 6% a year.”
It now requires twice as much stimulus to get a worse result.
On an inflation adjusted basis the S&P 500 has actually lost -1% per year since 2008!
Reminds me of a great line from the movie Wall Street.
“Too much cheap money sloshing around the world. The worst mistake we ever made was letting Nixon get off the gold standard.”
The stock market skyrocketed in 1985 despite interest rates at +13%.
Today, interest rates are zero to negative.
Which could mean this bull has more legs to run!
Let’s take a quick & dirty look back on 2020:
The Bad. The Weird. The Delightful.
FOSSIL FUELS: A DEAD END.
I am not going to make friends in the oil patch stating the obvious.
Fossil fuels are dead.
I mean they are literally made up of dead matter.
But all jokes aside, 2020 will go down as the year we collectively decided there’s a healthier way to power the world.
-Energy sector was the WORST performer. Down over 30%.
-Oil price went negative for the first time in history
-Record inflows into ESG ETF’s
-Half a decade low institutional ownership in energy stocks
In 2010 Exxon’s Mobil’s market cap was 17x larger than leading (and also my favourite) renewables play, NextEra (NEE-US).
Today, their market caps are virtually identical.
Energy is now the smallest sector weight of the 11 S&P sectors.
In the 1980s, it was almost 30%.
In 2008, it was 17%.
Today, it’s 1.9%.
OFFICE SPACE: ‘#WFH Forever’
Brookfield Asset Management is known to be ‘smart money’ on the street.
Unfortunately, smarts don’t save you when the world changes and you are one of the largest commercial landlords on the planet.
And things look worse than 2008:
“An estimated $126B in commercial real estate will be forced to sell at distressed prices over the next 2 years. That will eclipse the amount of distressed commercial property sold during the first 2 years after the 2008 financial crisis.”
At some point, this sector will become a ‘value play'.
But for now, the ground is still shifting and there are too many varied opinions.
The CEO of CBRE says 80% will return to work.
Blackrock’s Larry Fink says only 50% should go back.
None of my friends want to ever go back
It would be a fruitless exercise to model valuation on such shaky inputs.
No one better to illustrate this then the FinTwit king of ‘Garbage In, Garbage Out’:
Movie Theatres: ‘Theatrical Releases Coming to a Couch Near You’
The government bails out airlines because it’s a necessary service.
Movie theatres not so much.
80% of U.S. households subscribe to Netflix or some streaming service.
Unfortunately, these awkwardly shaped buildings in non-prime areas desperately need a makeover.
AMC the largest movie theatre chain in the U.S is in big trouble.
The stock has crashed from, $32 share to <$3 and they need $750MM to stave off bankruptcy (almost 2x its current market cap)
The final nail in the coffin may have come this week when Warner Bros announced that all new theatrical releases for 2021 will stream simultaneously on HBO Max and in theatres.
There goes the entire industries MOAT!
GOLD: “A Mine Is a Hole in the Ground with a Liar at the Top” -Mark Twain
I feel bad for the gold bugs.
They aren’t lying when they scream ‘conditions have never been more perfect for an explosive move on gold’
Sure, gold is up 20% YTD and outperforming the stock market.
But given 30% of the world’s bonds have negative yields.
Gold should be up way more.
Problem is, there’s a new digital kid in town.
“JPMorgan Says Gold Will Suffer for Years Because of Bitcoin”
I personally think they can co-exist (I own both).
But I think there’s more upside on Bitcon.
The gold market is nearing $10 trillion, while the bitcoin market is only ~4% of this ($450B).
And the transferability aspect makes it superior.
In terms of volatility, I often get asked:
“How can Bitcoin be a currency if it’s so volatile”
Me: “First of all, I don’t know that it’s a currency, it might be something else altogether. But if you need to understand it’s volatility read this”:
“For Bitcoin’s market cap to grow from a $25 million to $250 million to $2.5 billion to $25 billion to today’s value of over $250 billion, it requires volatility, especially upward volatility (which, of course, comes with associated downside volatility)” -Lyn Alden
SPACS: A license to Print Money
In 2020, there was no faster or easier way to raise a billion dollars than a:
SPAC: Special Purpose Acquisition Company.
It has no operations. It’s strictly formed to raise money through an IPO and then find a company to buy.
In a nutshell, raise now, ask questions later.
“SPAC initial public offerings accounted for 52% of the $124 billion raised via 356 US public offerings in 2020”
It’s not a new way to raise money. But one that attracted billionaires, celebrities and captured the greed of investors.
Oh and Chamath Palihaptitiya, he’s involved in 6 SPACs!
I don’t blame them, look at the fees you can make.
But here’s the problem, things are about to get weird.
With $72B raised (add a 5x leverage multiple) and you’ve got $360B chasing deals with a gun to their head.
If you think the deals being announced now are “interesting” - just wait 20 months for when the stock clock is flashing red - @Post_Market
Blow-ups have already happened.
Like Nikola. It went from HERO to ZERO in a nano-second. Losing 80% of its value.
But it hasn’t all been bad. There’s been some gems.
Like Draftkings, up ~500%. It’s success stems from being in the:
Right industry: sports betting.
Right time: legalization gaining momentum in the U.S.
Right company: one of 2 leaders in the sector.
To keep tabs on the SPACtacular deal flow to come, check out: https://spactrack.net/
TECH: “Build Once, Sell Twice”-Jack Butcher
Technology stocks were the clear winner this year, up +40% YTD.
The #WFH boom fuelled the S&P to unprecedented levels. With an unprecedented level of “non-real” assets.
As of 2020, 90% of all assets in the S&P are intangibles (the bulk of this is because of tech).
Let that sink in.
It may seem like a ‘frothy top’ for tech.
But, if you look at the earnings power of the FAAANM stocks – Facebook, Amazon, Alphabet, Apple, Netflix & Microsoft – they have far exceeded those of the S&P.
As for new hipster stocks like Peloton, I feel the easy money may have been made.
ESG. The Electrification of Everything
Tesla will one day be the greatest short of all time.
I just don’t know when that day will be or if it’s actually going to happen.
It’s cult-like nature should be a Harvard Business Case study in itself.
I love the company but not the stock.
It’s valuation is unjustifiable on any traditional metric. It’s now bigger than:
-ALL car companies combined.
-The Entire Energy Sector
Having said that, “those crazy enough to think that they can change the world, are the ones who do”.
Elon is crazy and so are his fans, shareholders & supporters. So, it might just work.
But more importantly, Tesla’s success has had the positive spill-over effect of making saving the planet hip again.
Bringing much needed eyeballs and a fundamental re-allocation of capital to the green sector.
For more on this theme read my article from a couple weeks back.
Copper and Uranium also had big years up 30% and 20% respectively.
IPOs. “Party Like It’s 1999”
I thought this chart said it all.
Until my portfolio manager friend sent me this:
“We discussed your post in our morning meeting. There might be more room to run here”
Every time a company goes public it feels like a kick-off at the Superbowl.
The VC investors are charging to get out and the Robinhood investors are charging to get in.
Given the insane performance of these IPOs, it has to make you wonder what the bankers are smoking. They are literally paid to understand market conditions and price IPOs accordingly.
They have not done a good job.
As such, companies like Roblox and Affirm have decided to wait until next year to IPO- and not risk leaving billions of money on the table.
PSYCHEDELIC: What a TRIP!
No doubt, there’s a boom in psychedelics.
In my 15 year career in finance, I have never seen a company close a bought deal and launch another one the same week at +130% the valuation with +$200M in demand.
This confirms to me big institutions are getting involved.
There are now +15 public companies with a combined market cap of +$5B. Compared to cannabis with +100 companies and +$70B market capitalization.
It’s a polarizing sector though.
Some say it will never be a recreational play like Cannabis. But others say it could be much bigger displacing a portion of the opioid market and could be worth $100B.
BEER, WINE & LIQUOR
Other sectors that outperformed this year: Small Caps (outperforming the broader index by ~30%), U.S Cannabis, Lumber & Plant-Based Foods (more here).
Oh and Beer, Wine & Liquor have had their best year on record!
How is Grit Playing It?
Stock picks and the newsletter will be returning January 3rd.
Kicking off 2021 with a VERY GRITTY edition that is sure to dazzle. Stay tuned!
Don’t forget to follow me on Twitter. Where I give daily insights on stocks.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Bitcoin hit a new all-time high. Old resistance becomes new support. Remember, Bitcoin isn’t for everyone, some people don’t want to make money ; )
What else we Grittin’ On:
‘Blow-Off Top’. No bull market is complete without merger mania. Looks like 2H20 has a decent chance to be the strongest M&A period in over 10 years.
Crypto. Largest exchange in the U.S files to go public via +$30B Goldman Sachs-led IPO.
Robinhood. Settles one lawsuit for $65MM and SEC slaps them with another. They forgot to tell their customers their entire revenue model is based on selling their data. Oops.
$AirBnB. The banks wish they could come up with technical analysis this bang-on.
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