Closing thoughts for the week - 3
A fork in the road?
What a week. Growth stocks sold off massively allegedly due to the yield curve flattening. This correlation has been very loose in the past and as with any financial prediction presented as a truth it should be taken as a grain of salt, there are no absolute truths in the stock market. If rates go up enough so that certain parts of the economy grind to a halt, mainly the housing market, that’s another issue. But we are very far from that. Rates are still far below what they were even in 2019. Below is a chart of the 10 year treasure note, the benchmark that stocks are (according to theory) valued against. We are still well below pre-pandemic levels. And full employment will take a while to reach again, not to mention the fact that the global pandemic is far from being over.
-10 year treasury notes (TMUBMUSD10Y)
Bears
When being bearish you not only have to get the direction right, you also need to nail the timing, as you pay high fees to borrow stock. Furthermore as your position goes against you, your risk increases. It’s the opposite for long positions. This has led to a dynamic where bears get more and more outspoken as they need to convince longs to their bearish cause as fast as possible, as being bearish is at it’s core a short term game.
Ark invest
First of all this obsession with ark is too much, whatever happened to independent strategies. Everyone is either trying to frontrun ark’s buys or their sales. It’s crazy. I think they are happy to set the agenda and enjoy their position as the kingmakers in the market.
@stockjabber wrote a great article on “potential liquidity problems at ark invest” it outlines how Ark Invest has taken outsized positions in certain small / mid cap stocks and how this could be an issue if fund flows turn negative, as Ark Invest would be (according to the bears) a forced seller in illiquid securities.
4 Reasons I think trying to “fade ark” is a bad idea.
Ark decides which stocks Ark wants so sell. If Ark needs cash in a downturn, for whatever reason, they will sell more liquid names first. There really need to be very high outflows for Ark to be forced to sell something like $PACB at depressed prices. It’s probably not going to happen unless *** really hits the fan.
Ark Invests almost exclusively in some of the fastest growing companies in the world. These have a tendency to keep attracting buyers as they are at the forefront of technological innovation. You don’t want to be caught short in another “Tesla”.
These stocks are often already very crowded shorts! I think it’s just as likely that bears trying to play this game end up seeing it blow up in their own faces. How many bears have died on the hill of $TSLA already? What makes them so certain that the hill of $TDOC or $CDNA will be any different?
Inflows will only continue over the longer term. I find it difficult to believe that Ark wont continue to see inflows given the incredible performance, publicity and execution that they have had. Ark’s outperformance is not just because of Tesla, even before Tesla took off the main ETF was still performing very well.
SPAC crash - What a difference a week makes!
I mentioned last week that $CCIV and certain other SPACs were over heated. This week we saw $CCIV drop 40% in one day losing around 37B of market cap ending the day around 54B. Truly remarkable. Could be worth a speculative long play below 30, it will be difficult to rival Tesla starting more or less from scratch. But the CEO of lucid has some experience doing it before, so maybe it’s worth a bet. The car looks pretty cool too, if it works as described I see it selling very well.
Butterfly Networks (NASDAQ: $BFLY) - A name I owned also saw a spectacular dip from 28 to around 17.8. Shares were expensive and still are which left them vulnerable in a correction. 45m revenue in 2020 for a 3.6b market cap (at 19) equals 80x sales.
Overall Spac’s remain very volatile and should be approached with extreme caution. Especially pre-merger spac’s have much higher levels of risk than I think people realize.
What now?
As with any correction you will have people saying that “this was the top”. As long as growth stocks earnings reports keep showing stellar results and guidance, I’m going to stay long the sector, simple as that. Semiconductors and software are the backbone of every company no matter their business, and should thrive in any environment.