Valuation Crisis … (TWTW – Jan 17-21, 2022)

Valuation Crisis – Well, quite the week. Mega acquisition from Microsoft (Gaming Company Activision); bike (stationary at that …) falling off a cliff, or bridge, or whatever image visually can capture Peloton’s latest tumble (-25% after market Wednesday) on news company was halting production (even if temporarily), and finally, Netflix (-20% again after market hours, this time Thursday), on account of – apparently, seeing slowing subs growth in its future (knock on effect –  Disney notably weak on Friday). Apparently … COVID-19 pulled sales forward for Netflix … (who’d have thought …)

Like I said … quite the week! Which is why I was kind of struggling with coming up with a title for this week’s commentary. Not because I couldn’t come up with one, but rather, because I could think of several, amongst them:

  • disrupted disruption (see thematics space performance below)
  • generals falling (that concept that market leadership has been increasingly narrow, and now, well, the generals – the leaders – are joining the soldiers (who were already in the muck of a nasty correction) in the trenches …presaging the end (?) of the “correction”
  • correction, what correction (as 2021 at an index headline level produced impressive results, but under the hood, a lot of names were already undergoing a harsh correction).

So here we go, as far as trying to capture some of the notable and important developments and market action of this past week:

Disrupted Disruption – never EVER, do I recall so much “Schadenfreude” (cheering on someone’s misery or misfortune) than when I see everything being written recently about Cathie Wood and ARKInvest. For that matter, I certainly don’t recall there being a “short” Peter Lynch (of Fidelity Magellan fame) fund or ETF, nor a “short” Warren Buffet fund… As pertains to Cathie’s $ARK, well, that obviously exists. And the intensity of the scrutiny and volume of criticism her earlier success has now unleashed, is, well, like I said, a high volume Schadenfreude. Not constructive for anyone, imo, but it is what it is. Certainly what can be said, is that the market is repricing in a significant way – on account of these rate hikes on the horizons, penciled in, whether they ultimately materialize or not. Hence, I went with the title Valuation Crisis. Why? well, because we for obviously quite some time, on account of the easiest monetary and now fiscal accomodation ever known to mankind, had – or so it seems – blissfully ignored the reality of financial metrics. Belief, if you will, in a world in disruption with boundless opportunities (which it still is, by the way), was at all times highs, and valuations parameters “suspended”. Well, THAT, at the risk of stating the obvious, is, if not entirely over, certainly being stress tested rather harshly of late.

Couple of visuals you likely have seen in relation to all of this:

ARK versus S&P and versus Nasdaq

ARK versus SARK (Short ARK …)

Bottom line – Prospect of FED hikes has turned into quite the headwind for Innovation and Disruption, which in the case of ARK, peaked in February 2021. Incidentally, February 2021 pre-dates the very negative Inflation prints that ultimately “are forcing” the FED’s hand in turn of pushing them into (finally?) a more aggressive bias for rates in 2022, with 4 hikes in the cards, and JPM’s Jaimie Dimon apparently seeing as many as 7 …

Weekly performance “Thematic”:

  • Evolve e-Gaming ETF the lone thematic in positive territory this past week – likely boosted by Activision purchase by Microsoft
  • Only Blockchain faring worse than ARK’s disruption and innovation ETF (Bitcoin … incidentally, also undergoing a rather painful downward ride or late – notwithstanding I watched a Youtube Video of Jordan Belfort (of Wolf of Wallstreet fame) making the case of why he is now bullish the Crypto currency, having previously been bearish …).
  • Pain last week broadly distributed across thematics – in all cases faring materially worse than the broader market

Weekly performance “Sectors”:

  • While weakness hitting the tech space disproportionately so (rather bad day for Shopify Friday, to wrap up the week …), ALL Sectors joined to the downside, save for Utilities. THIS … it is to be hoped, marks us getting nearer the end of this “correction” as opposed to its beginning. No matter, it has been painful.

In terms of “market leadership” this YTD sectors review perhaps speaks for itself: Financials; Energy (notwithstanding again negative action on Friday in particular), and Materials…

Finally, for those thinking we are at the beginning of the “sell-off” (and I am not arguing we couldn’t see more of that happening near term) … STILL … worth considering, going back to the “generals” comment, that many have already observed that for some time the “soldiers” aka the non-FAANG, for FANGMA, or whatever other Tech mega cap … have already sustained significant losses from their recent highs… Now, it is the “generals” turn aka the megacaps that were keeping the headline indices afloat (or where the performance of 2021 was concentrated). Cue in – shed a tear for the gazillionnaires, who apparently this past week saw billions shaved from their wealth – the poor darlings …

Anyways, What does that look like?

Sorted by losses from high (greatest to lowers), here is what the thematics and sector picture looks like:

Bottom line: has the prospect of FED hikes already caused most of the damage? OR, will there be more on account of still a lot of potential unwinding of positions to take place as “stimulus” effect removed from markets and participants reassessing both risk and opportunity?

Overall thought: painful though this may be (past 3 weeks), it likely is beneficial down the line in terms of helping revalue the entire market, and having said value not be subject to meaningful further downside as a result of rate hikes – absent FEDs ending up forced to be more aggressive than currently contemplated.

Oh – of course some commentators didn’t exactly “help” – aka for instance Jeremy Grantham, forecasting pretty much financial Armageddon … (fingers crossed it doesn’t come to that) BUT – to these headlines of 50% drops being in the cards, one could respond – yeah, check that, already happened / happening (see Shopify for instance, and effect on XIT – Canadian Tech). If anything … it might be time to consider – maybe … just maybe? Getting into Canadian tech before going back for more NASDAQ?) We will see

oh – to conclude – a video I watch earlier which I thought frames 2022 well:

Financials and energy to power Canadian equity markets

Enjoy the week-end!

be careful out there … tricky times …