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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • Writer's picturetim@emorningcoffee.com

An Asset is Worth What the Market Pays for It

This past week has been more of the same, with U.S. equity futures indicating a positive start today (Friday Aug 21st) as we round out the week. In general, August continues to be rather predictable.  This disconnect between the real economy and financial markets is so severe that many “old-time” investors (include me in that camp) struggle to understand how this can be, but the reality is that prices of financial assets reflect supply and demand.  Traditionalists focus on tearing into companies and developing a valuation range based on companies’ fundamentals like revenues, cash flows, industry growth trends, competitive landscapes, etc.   Today, this valuation range is a data point and nothing more.  An asset is worth what someone is willing to pay for it, and all of the analysis that one might do is subordinated to market forces.  This is true regardless of the fundamentals or backdrop.  It is this investment environment we find ourselves in at the moment, like it or not.  As hard as it is for me to say, perhaps the best advice for investors is to sit back and enjoy the ride.  And if you own Tesla, congratulations for figuring this out early! 

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tim
Sep 16, 2020

I saw an article in #Bloomberg this morning, “Reddit’s Stock Threads Become a Must-Read on Wall Street” (link: https://www.bloomberg.com/news/articles/2020-09-15/big-investors-are-dying-to-know-what-the-little-guys-are-doing). It discusses the growing importance of hedge funds and other professional investors following the trends of a growing base of retail investors, trading - as the article calls it - in “one lots” in the options market. It goes on to discuss how these professional investors are trying to get information on retail flows via other means since Robinhood pulled its access to data that allowed Robintrack.net to provide retail flows by stock on its website. If you are dismissing this data as unimportant, you are wrong - retail flows are driving prices in many cases, and as I mention…

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tim
Aug 21, 2020

That’s a terrific response, Paul, thank you. Someone asked me a similar question on LinkedIn - what’s changed as far as my view? The simple answer is “not much really”, and I certainly didn’t mean to imply capitulation. Rather, the reality at the moment - and who knows how long this might persist - is that there are “forces” divorced from fundamentals / economics driving prices higher. Ignoring these is at an investor’s peril. You are very right in saying that, at least from the perspective of sector performance, markets seem to be sending the right message as far as under / over performers. Equally true, there are a select few large tech names mostly responsible for driving the …

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Paul McKenna
Paul McKenna
Aug 21, 2020

Tim, sounds like you have not had that morning coffee? I think I prefer you own previous commentary on the issue of the markets disconnect with the real economy: the amount of liquidity chasing yield/equities, as TINA, is underpinning an elevated ‘bottom‘ for valuations, and the runaway performance of the S&P in the face of what is likely to be one horrible global recession is due to the very significant weighting biases - tech/healthcare sectors; FAANG+M (alone perhaps accounting for as much as 25-30% of the S&P). Such sectors and stocks have rallied for arguably very credible reasons (stay/work at home, move to digital/virtual, focus on health trends). Stock valuations in recession impacted sectors (e.g. Financials, Energy, Materials, Retail) a…

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