The future ain’t what it used to be

December 24, 20202 Comments

Every once in a while I like to post a blog where I draw comments from people much smarter than myself. Below are a few exurbs from research pieces I subscribe to – the overwhelming theme of which seems to be that “The future ain’t what it used to be.”

Hopefully they help with our investment decisions going into the New Year. I’ve added my own two cents worth below each quote, in bold noted as “Keith’s take”:

From a research report by Beartraps…Inflation is the goal, not the fear.

Status quo = let the money flow.

“Let’s not pretend the Fed knows what they are doing, as the treatment is starting to be worse than the disease. Never allowing a mild recession only makes things worse in the future…”

“The Fed wants inflation, and will take it any way it can get it. The Fed is looking at two basic things. While the near term is confused between fiscal stimulus, vaccine rollout, second wave pandemic, more lockdowns and Brexit, the medium term is bright as the pandemic is cured and the economy reopens for real and for good……it will feel compelled to remove that barrier to inflation i.e. it will make sure financial conditions stay loose despite any pressures to the contrary. However, it just doesn’t foresee anything out there that will stop inflation once the pandemic is gone. Thus, the basic drive is to keep financial conditions super loose, and if for some unexpected reason they nonetheless tighten, the Fed will act and make financial conditions loose again.

Keith’s take: Hold an element of re-inflation assets in your portfolio. Gold & silver, base metals, materials, oil & gas, emerging markets.

From – SqueezeMetrics: How S&P inclusion bursts the Tesla bubble:

“Ever since June (at $200/share), Tesla stock has been driven by a perpetual motion machine of hype and call option flows — nothing more. And everyone knows it. Here’s what not everyone knows: When a stock joins the S&P 500, it becomes part of a massive volatility complex, which is a terrifying web of arbitrage and pseudo-arbitrage relationships. Tesla will join the index as a top-ten component of a cap-weighted index. It’s big. Its bigness will allow all manner of dispersion, relative value, and market-making traders to begin relying on Tesla’s newfound correlation to the index. This will invariably cause arbitrageurs to buy SPX options/vol and sell TSLA options/vol to “close the spread.” Since Tesla stock is driven by the returns on call options, it is a slave to “vanna”: the relationship between option prices (implied volatility) and delta (stock exposure). In other words, since June, TSLA goes up only when implied volatility (IV) goes up. When Tesla joins the index, these historic call option flows and the hype machine behind them will hit the big red fire truck that is the S&P, at 500mph. Implied volatility will be unable to rise. Call options will bleed value. New flows will be absorbed by real traders. With the call option hype trade hampered, the stock will have no possibility of further returns — a deliciously ironic end to the ugliest of Robinhood’s many ugly children. And an appropriately ironic fate for Tesla — a victim of its own ‘success.'”

The inmates are running the asylum. With commission-free trade and the growth of Robinhood and ‘day-traders’, the volume in the options market has exploded. This has been driving upside in equities such Tesla throughout the year, even before the pandemic in the early January rip higher in renewables.”

“The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values.” (Dow. WSJ. 2/25/1902)

Keith’s take: The future may not be what it used to be for the S&P 500. Stocks like Amazon, Tesla, Zoom, etc are overdone. The SPX may feel the sting of their influence per the analytics presented above. My focus remains on value stocks, inflation assets, and diversification outside of the US markets.

Canadian markets may catch a bid in 2021, having risen only 17% in total since 2008  (12 years!!). That’s about a 1.7% compound rate of return, not incl. dividends.  Given my view on commodity stocks and value – perhaps a better year in 2021 for the TSX?

From Sentimentrader: Record high PE/ PB levels by NYSE members

“When we focus on severe valuations, with a P/E above 30, there has never been anything like what we’re seeing now. Nearly 40% of companies are currently sporting a valuation that high, and that’s excluding the many companies that currently have negative earnings.”

“It’s not just earnings. The same goes for using price/book value, with 20% of stocks having a ratio above 10, well above the prior peak in 2000.”

Keith’s take: Before jumping into overly bearish prognostications, we must keep in mind that interest rates are much lower than during the period of high valuations in 2000. TINA (There Is NO Alternative to stocks) influences the markets just as much, if not more, than historic valuations. Having said that, John Templeton always told us that the words “This time is different” are the 4 most dangerous words for an investor to utter…

I continue to focus on value within the asylum that is todays market. 

POLL: What do you think is the consensus for risk assets on the Georgia election, sweep scenario?

Taken from a poll of over 450 buy-side institutional investors on our live Bloomberg Chat, with more than 50 contributors across nearly all asset classes. These comments taken from various large institutional money managers (aka “smart money”) offer thoughts on what happens if the Democrat’s take the Senate. Summary courtesy Larry McDonald, BearTraps:

“In our view, Dem sweep gets you a large commodity, reflation surge, curve steepening further, and a Nasdaq crash 25-35% over 3-4 months, colossal tech exit…
Dem sweep is problematic for risk assets from what I see…

GOP retain senate = good for stocks, OK or no new negatives for bonds and stay short USD;
Dem sweep = Negative for stocks; big negative for bonds AND negative for USD… So on a Dem sweep, stocks may rally for a couple days but then sell off…”

Keith’s take: Whether or not we see a NASDAQ crash, Biden is no friend of big-tech dominance. At the least, I’d expect a continuation of the sideways pattern that began in August of this year for the FAANGs etc. Further, a Democrat Senate will likely mean more stimulus and more spending – meaning that reflation stocks, as noted above, will be a place to be.  We’ll know the outcome to the Senate election in early January.

MS comment: Apple vs. Tesla

Keith’s take: I’d prefer to get through the Georgia Senate race in early January before jumping on any tech stock. But, all things being equal, AAPL might be one tech name to own in 2021 – especially upon a breakout from the current sideways consolidation. Note that the chart does suggest that breakout attempt may be happening:


    • We have about 12% non-NA exposure spread between some emerging market ETF’s (specific markets, plus one broad EM ETF), and a few individual company ADR’s in a couple of developed countries. We also have about 8% in a couple of multinational firms with high overseas exposure.


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