The UnARKing of the Market?

Fred Imbert and Jesse Pound of CNBC report the Dow falls more than 150 points to close out a losing week:

Stocks fell on Friday to close out a tough week as traders weighed President-elect Joe Biden’s $1.9 trillion stimulus plan along with the latest earnings from some of the biggest U.S. banks.

The Dow Jones Industrial Average closed 177.26 points lower, or 0.6%, at 30,814.26. Earlier in the day, the Dow was down more than 300 points. The S&P 500 dipped 0.7% to 3,768.25, and the Nasdaq Composite slid 0.9% to end the day at 12,998.50.

Dow Inc. and Chevron both fell more than 3% led the 30-stock average lower. Energy dropped 4%, posting its worst one-day decline since late November, pressuring the S&P 500. 

The Dow and Nasdaq posted weekly declines of 0.9% and 1.5%, respectively, to snap four-week winning streaks. The S&P 500 also lost 1.5% over that time period.

Biden’s proposal, called the American Rescue Plan, includes increasing the additional federal unemployment payments to $400 per week and extending them through September, direct payments to many Americans of $1,400, and extending the federal moratoriums on evictions and foreclosures through September.

The plan also calls for $350 billion in aid to state and local governments, $70 billion for Covid testing and vaccination programs and raising the federal minimum wage to $15 per hour.

“There is real pain overwhelming the real economy — the one where people rely on paychecks, not investments, to pay for their bills and their meals and their children’s needs,” Biden said during a speech in Delaware Thursday night.

Tom Essaye, founder of The Sevens Report, said the proposal was “being met by a ‘sell the news’ reaction as markets already priced in most of what was included.”

“Plans for future historical stimulus, easy Fed policy and vaccines are now well known, and as such those catalysts simply don’t have the positive influence on stocks that they have over the past few months,” he added.

A third major relief bill has been widely expected in recent weeks, especially after the December labor market report saw the economy lose jobs and Democrats won two key Senate races in Georgia, giving Biden’s party narrow control of both houses of Congress.

“There was a fair amount of transparency as this deal came to fruition,” said Keith Buchanan, portfolio manager at GLOBALT. This made it easier for investors to price in the proposal’s potential impact on risk assets ahead of time, he said.

It remains unclear whether Biden’s proposal will be welcomed in a sharply divided Congress. Though Democrats hold both houses, they will need to sway moderate members of their own party, such as West Virginia Sen. Joe Manchin, and some Republicans to increase spending. Democrats originally pushed for another multi-trillion package last year before agreeing to a $900 billion bill in December.

Nonetheless, CNBC’s Jim Cramer noted that famed investor David Tepper’s outlook on stocks is still positive.

“I don’t want to say he’s wildly bullish. I would say he’s very constructive,” Cramer said Friday on “Squawk on the Street.” “He saw this coming. He knew to get out and now he feels there are pockets where you should be in, pockets of very reasonable valuations.”

On Friday, investors got fresh looks at major banks such as JPMorgan Chase, Citigroup and Wells Fargo. JPMorgan reported better-than-expected earnings, but the stock fell more than 1%. Wells Fargo and Citigroup also declined 7.8% and 6.9%, respectively, even after posting earnings that beat analyst expectations.

Meanwhile, the U.S. Commerce Department said retail sales fell 0.7% in December. Economists polled by Dow Jones expected sales to remain flat.

Alright, it's TGIF Friday and time to cover these markets again.

Before I begin, if you have not taken the time to read my Outlook 2021, please do so here, as it's more comprehensive and I'll be referring to it when making some points in this comment.

First, let me begin with rumblings of a big bond bear market. As I stated in my Outlook 2021, I don't see persistent inflation, maybe cyclical inflation because the US dollar got hit last year raising import prices, but not sustained inflation which only comes from sustained wage gains which are not there.

Anyway, whenever Treasuries sell off, markets get nervous, Jeff Gundlach appears on CNBC and warning of rising inflation as the Fed pledges to keep rates low and its monetary stimulus programs running and a bunch of bond bears show up warning of another major backup in bond yields.

I don't get too excited and will refer my readers to a recent comment Brian Romanchuk of the Bond Economics blog posted on why the Treasury sell-off is following past patterns

Suffice it to say, the backup in bond yields is very normal, nothing to worry about for now, and to be truthful, I don't see what all the fuss is about. 

Jerome Powell said this week the Fed won't raise rates unless they see troubling signs of inflation and for now, the yield on the 10-year Treasury note remains somewhat anchored around 1%:

Now, can it go higher to say 1.2%? Sure. What about 1.5%? Maybe but for that to happen, you need to see a major global economic recovery and we're far from that right now.

At 2%, every major pension fund in the world is going to be hitting the bid on long term Treasuries as part of their liability-driven investment program.

Anyway, every time we get yields creeping up, some Wall Street strategist comes on air and warns that this could be it, a "regime change" in inflation, and I'm here to tell you it's absolute and total nonsense.

The only inflation I see is in the markets where some industries and sectors are in total mania mode.

That brings me to today's topic, the unARKing of the market.

I laugh whenever I see neophytes posting stuff on StockTwits about how Cathie Wood's ARK Invest is buying this or that stock.

It literally creates a feeding frenzy. To wit, check out shares of Bionano Genomics (BNGO) which recently went vertical all because the ARK Genomics Revolution ETF (ARKG) is looking to buy it:

Of course, none of this is true, if you look at detailed holdings of ARKG here, you won't find this stock, but the feeding frenzy has now taken a life of its own and millenials are convinced this small genomics play is the next CRISPR Therapeutics (CRSP), a top holding of ARK ETFs.

This whole "Cathie Wood effect" is a bit silly but it's very real. She's by far the hotttest portfolio manager in the world, has been making outstanding bullish calls not only on Tesla (TSLA) but many other stocks like Roku (ROKU), Zillow (Z), Square (SQ), Teledoc (TLDC) and  a bunch more hyper growth stocks that ripped higher last year (see detailed holdings of ARK Innovation ETF here, it's the flagship ETF millennials love).

But there's an old saying, what goes up in the market too fast, typically comes down even faster.

Of course, in these markets, where central banks backstop madness, and short sellers are nowhere to be found as they've been inflicted with monetary coronavirus, you see a lot of funny stuff and mini manias that remind me of 1999 but on a much more outrageous level.

And it's not Robinhoodies driving this nonsense, it's the typical Wall Street funds (Vanguard, BlackRock, Fidelity, etc.) and elite hedge funds (D.E. Shaw, Renaissance Technologies, etc.) who are playing parabolic moves like never before, with an ESG tilt, of course.

Anything related to electric vehicles (EV), solar, wind, fuel cell, genomics, cloud computing, fintech, weed, is a buy and everything else is for dying dinosaurs "who don't get it" the world is changing and "disruptive technologies and pot stocks are the ONLY place to invest."

God forbid I tell these young millennials on StockTwits to diversify out of Tesla, Nio, CRISPR, or whatever hot stock Cathie Wood's ARK Invest invests in, I'm immediately met with a chorus of "OK BOOMER!" on StockTwits (I'm not a boomer, lol).

And who can blame them? In the make belief world the Fed and other central banks have created, hyper growth stocks only go up, you always buy the dip, even on vertical charts like this:

It's absolutely insane but again, I don't blame Robinhoodies, they're clueless, they think THEY are driving these stocks higher, not realizing they're going along for the ride and will get clobbered when Wall Street pulls the plug (pun intended).

Earlier today, Martin Roberge of Canaccord Genuity sent me his weekly market wrap-up,  All Eyes on ARKK!, where he observes:

Equity indices have taken a little breather this week, but given the overbought nature of the market this feels like a moral victory and a reminder that the market continues to be governed by a bullish bias. That said, as discussed in Wednesday’s incubator, the real test for stocks could begin next week. So far, further rotation from growth to value, large caps to small caps, and defensives to cyclicals has kept markets afloat. Should this internal rotation persist, the likely outcome could be more churning or a time correction. Conversely, disappointing company guidance spooking elevated 2021 EPS growth expectations could lead to a price correction. Higher bond yields might also, since the equity risk premium on US growth stocks is flirting with the January 2018 cyclical trough already. Fortunately, value stocks enjoy fatter equity risk premiums, hence our decision to stay put equities for now.

Since November, FAANG and/or mega-cap growth stocks are lagging the market. Many investors think this underperformance marks an important erosion in risk appetite, putting the overall market at risk. Well, something noteworthy has occurred since November which goes against this thinking: the craze in hyper-growth stocks. We are not talking about TSLA here, but more the likes of ROKU, ETSY, MELI, FUBO, LMND, JMIA, etc. Many early growth stocks can be found in the ARK Innovation ETF managed by the very popular Catherine Wood and her team. Taken from ARK’s website, the managers look for disruptive innovators whose technology enables new products or services that potentially change the way the world works. Unsurprisingly, among ARK’s top-10 holdings, the cheapest stock trades at 60x EPS. In ARK’s defense, history shows that valuation should not be much of an issue when you are looking for the next Amazon or Shopify. After all, most investors in my dad’s generation and mine missed these two stocks because they could not get their heads around 10x, 20x, 30x sales multiples. Well, not my two sons and their generation, and this is our point today.

Our Chart of the Week shows that ARKK’s price performance is mimicking the mania seen through the dot-com bubble, while the depressed put/call ratio suggests a similar market frenzy. The outcome for ARKK does not have to be that of the post-2000 tech bubble but when it comes to gauging risk appetite, we believe the focus should be on ARKK, a proxy for hyper-growth stocks and speculative hunger.

Regarding economic data, in the US, President-elect Joe Biden proposed a $1.9T rescue package for the economy. Meanwhile, Fed Governor Powell reassured markets, saying that now was not the time to talk about tapering the bond-buying program. In all, the government wants to increase public spending and the Fed appears ready to mop up, at least partially, Treasury issues. Otherwise, we learned that headline and core inflation for December came in at 1.4% (from 1.2%) and 1.6% (from 1.6%) respectively, still below target. A low comparison base in Q2/20 could juice YoY numbers later this Spring. For now, the spike in Covid-19 infections appears to be negatively impacting the economy. The NFIB index declined to 95.9 (from 101.4) and retail sales fell -0.7% MoM in December. Manufacturing production improved a notch (+0.9%) but remains 2.8% below year-ago levels. In Europe, industrial production improved markedly in November (+2.5% MoM). However, we fear new lockdown measures will weigh on these numbers going forward. Elsewhere, in China, trade statistics show that exports increased 18.1% YoY in December while imports advanced a more modest 6.5% over the same period. Interestingly, China bought record volumes of crude oil, copper, iron ore and coal in 2020.

Now, I'm not saying it's time to go short ARK's mighty ETFs, that would be suicidal in these markets, but people reading this comment need to prepare for the unARKing of this market, and it could be very painful for a younger generation which only invests in ARK ETFs, or only invests in solar (TAN) or biotech (XBI) ETFs.

As I stated in my Outlook 2021, I'm a big believer in solar, biotech and other disruptive technologies, but you really need to pick your stocks carefully or risk getting slaughtered.

Even Cathie Wood gets dinged once in while, she's definitely hot but these momentum markets can flip on a dime and she can get clobbered too, now more than ever since everyone is following her every move.

As I stated in my Outlook 2021, be careful, stay humble, pick your spots carefully, always manage your risk accordingly or risk getting your head handed to you. 

Last year was an anomaly. Many stocks went up 500%, 700%, 1000% or more, that's not reality, that's typically a telltale sign of a bubble and look what has happened to some of the hot stocks, like Cardiff Oncology (CRDF) which got clobbered today after running up all of last year:

Buy this biotech dip? Maybe, just like some bought the huge dip in Sarepta Therapeutics (SRPT) last Friday (a holding of ARK ETFs), but be careful in these markets, buying the dip can easily turn into a disaster, especially if you don't know what you're doing (and truth be told, too many people don't have a clue!).

I will end with the stock of the week, for me, at least. It's BlackBerry (BB) and I think it's a stock to watch going forward and judging by the volume today, I think many other institutions are looking closely at it:

Ontario Teachers' Pension Plan and Prem Watsa's Fairfax Financial have been invested in it for a very long time, but I noticed two leading hedge funds -- D.E. Shaw and Two Sigma -- also own it as of the end of Q3 20202:

What else? When you see a big bank like Wells Fargo (WFC) get hit after reporting decent earnings, it's typically "sell the news traders" and you need to keep an eye on it:

Can it go lower? Absolutely, big banks (KBE) tend to trade with rates and if long bond yields tumble, it can spell trouble for banks. Also, a big market correction, especially in high growth stocks, can spill over and impact value stocks like Financials (XLF), Energy (XLE) and Industrials (XLI). 

That's called the beta effect and it can impact all stocks. 

From that perspective, the unARKing of the market makes me nervous, depending on how bad it gets.

Just remember, if you made a killing buying Tesla, Nio, Plug Power, solar and biotech stocks last year, sweep the table, take a huge chunk of profits and diversify (don't be stupid, especially if you're up huge and are very concentrated in a few stocks).

Alright let me wrap it up with the top performing large cap stocks of the year so far (full list available here): 

A lot of these are going to reverse course and get whacked hard, just showing you how manias die hard in markets where central banks promote madness.

Below, Cathie Wood posted some of the best numbers in the history of money management in 2020. In this interview, the Ark Investment Management founder and chief executive officer discusses her expectations for future returns, confidence in Tesla Inc., Bitcoin and gene-editing technology, and the woulda-could-shoulda moments in her career. Wood spoke exclusively to Erik Schatzker on Bloomberg's "Front Row" in December.

Also, the interview of the week. CNBC’s “Halftime Report” is joined by Doubleline CEO Jeffrey Gundlach to discuss how markets are trading amid the pandemic, what he expects from the Biden administration, why the U.S. isn’t out of a recession and more.

Take a lot of what Gundlach says with a grain of salt, he's not always right on bond yields and especially not on inflation and the stock market, but I always enjoy listening to his views.

Lastly, I embedded another interview worth watching. Henry McVey, head of global macro and asset allocation at KKR, discusses the outlook for the U.S. economy, the Federal Reserve's bond-purchasing program, and market risks. He speaks with Bloomberg's Erik Schatzker on "Bloomberg The Open."