Can this carry on? I am getting skittish because this just feels too good to be true. It’s simply too easy to make money in stocks at the moment just by being long the indices or the right names, especially nearly anything and everything tech-related. And yes, tech is suddenly very much back in fashion!
The Mag 7 stocks (ex-NVDA) have gapped up so sharply since the election of President Trump that saying “valuations are stretched” is the mother of all understatements. To this old-timer, stocks seem increasingly detached from fundamentals as well as geopolitical and market risks that are visible but largely ignored at the moment. Market risks are simply “trumped” (no pun intended) by momentum, with investors piling in recklessly. It seems too easy to me but hats off to investors that jumped on the “Trump trade” because it has proven – at least so far – to be a very smart move. Perhaps two of the biggest beneficiaries have been MicroStrategy (MSTR, Bitcoin depositary) and Tesla (TLSA), the latter of which has outshone its Mag 7 brethren since early November because President-elect Trump is largely in Elon Musk’s pocket….or is it the other way round? TSLA’s appreciation puts its Mag 7 peers to shame, and – at least to me – seems to be the mother of all shorts, except…..TSLA supporters don’t give a toss about fundamentals, so playing the short side would likely prove to be a losing trade.
The price action you see in the table above over the last six weeks or so, and the way we have arrived there, make me increasingly uncomfortable. Placing your bets in line with what Mr Trump likes and doesn’t like has clearly been the right trade, no matter how distasteful and – in some respects – sketchy it feels.
As an aside, for those of you playing MicroStrategy (MSTR) on the long side, you’ve done well but I stick to my view that the returns of MSTR and BTC should not be diverging the way they are. Should you want to compare MSTR to the Mag 7, it’s impossible because MSTR losses money quarter after quarter. If you would prefer to view the company as a “Bitcoin bank”, good luck with that too – the company trades at nearly 26x book value, and it’s market value is at least three times the value of its Bitcoin stash. Stocks like MSTR, TSLA and some similar ones that are also clearly over-valued are screaming “short”. However, messing about with stocks that have meme-like price-action characteristics is a fool’s game, so avoid what appear to be obvious trades involving over-valued stocks like MSTR, TSLA and – of course – DJT, the mother-of-all Trump proxy trades.
The economic news worth mentioning this past week includes:
US CPI for November came in spot on expectations, but nonetheless headline CPI increased slightly MoM (from 0.2% to 0.3%), while core CPI remained flat for the fourth month running (0.3%). With headline / core CPI YoY at 2.7% / 3.3% per annum, this report was a stark reminder that the “last mile” for getting inflation back to 2.0%/annum will likely remain challenging, as you can clearly see in the graph below from the November inflation report.
The bond market reacted as expected to the CPI print, selling off across the curve. However, expectations that the Fed would lower the Fed Funds rate at next week’s meeting actually increased, standing currently at 97%. Looking out longer term though, investors have moderated their rate cut expectations for 2025, with only two reductions now expected. The Economic Projections to be released by the Fed in conjunction with next week’s FOMC meeting will shed more light as to what the Fed is expecting in 2025.
The ECB reduced its policy rates 25bps on Thursday, as expected, and signalled more cuts are ahead in the new year as Eurozone growth falters. In its press release (here), the ECB projects that inflation will meet the 2%/annum target in the coming years, but that economic growth remains lethargic. The central bank expects GDP growth this year to be 0.7%, and for 2025 1.1% in the common currency zone. The Euro weakened further on the news and has fallen below $1.05/€1.00.
GDP growth in the U.K. surprisingly fell 0.1% in October according to the ONS (release here), suggesting that the U.K. is also suffering from slowing and erratic economic growth. The decline in GDP in October was the same as in September. For the 3-months ended October, U.K. real GDP grew a scant 0.1%. This didn’t seem to change expectations as far as the upcoming decision by the Bank of England at its monetary policy meeting this week. Economists are expecting no change, reflecting the BoE’s deliberate approach to monetary policy easing. Investors need to also keep in mind that consumers and investors were probably more cautious in September and October ahead of the UK budget, which was not announced by Labour until the end of October.
MARKETS LAST WEEK
Global stocks were largely weaker, with Japanese stocks gaining and other major market indices losing ground. In the US, the performance (following earnings) of a few tech names – like Broadcom – and the continued ascendancy of TSLA for reasons that I cannot possibly explain, pushed the NASDAQ to a modest gain. Both the S&P 500 and the large cap, more concentrated DJIA lost ground. The Russell 2000 – which has been chalking up nice gains since Mr Trump’s election – was the worst performer among U.S. equity indices last week, down 2.6%
Yields in the US Treasury bond market rose across the curve last week. Yields moved higher early in the week but the increases gained momentum after the release of the U.S. CPI report for November. Expectations remain that the FOMC will lower the Fed Funds this week, but as mentioned already, expectations regarding the number of rate cuts in 2025 is quickly diminishing as inflation remains stuck above 2%/annum and the U.S. economy remains resilient.
Corporate credit spreads were steady last week, although yields on corporate bonds moved higher along with yields in the underlying UST market. Similar to the rich valuation in U.S. stocks, it is difficult not to have some concerns about corporate bonds backing up given how tight spreads are at the moment.
In other assets, gold and Bitcoin were up slightly (BTC now above $100,000). The US Dollar continued to strengthen, and the Yen continued to weaken. Currency movements suggest the BoJ will not change monetary policy at its meeting this week.
MY TRADES LAST WEEK
My readers must know me by now – I am a “buy-and-hold” investor. Having said that, the market feels so ahead of itself that I couldn’t resist lightening (scraps) last week on two Mag 7 names I own (both top 5 positions) that have been running like mad – GOOG and AMZN. GOOG is up 11.8% since the beginning of November, and AMZN is up 15.2% over the same timeframe. I consider this insane because there has been no particularly earth-shattering news that justifies the increase in prices. However, similar to the other Mag 7 names, these stocks have benefited from massive momentum as investors have piled into US stocks indiscriminentely, with tech stocks being the preferred “go to”. On a portion of the residual shares of GOOG and AMZN (against which I did not write covered calls) – and the other Mag 7 names I own (AAPL, MSFT and NVDA) – I wrote short-dated covered calls at the end of week before last, most of which expired worthless yesterday. I also had covered calls on LULU, BRK.B and V which expired, all of which resulted in a small amount of incremental income. I did not re-write these on Friday because the market was weak, and I am still sitting on open 195 calls for GOOG for next Friday. I consider these trades “non-intellectual” as they are simply around the edges of my portfolio and nothing more. I remain well long equities with “insurance” in the form of a series of SPY puts in case investors come to their senses in the new year.
WHAT’S AHEAD
Monetary policy meetings (and expectations):
FOMC: Dec 17/18 (97%+ probability the Fed Funds rate is reduced 25bps)
Bank of Japan: Dec 18/19 (unclear / limited signals so far, but I expect no movement)
Bank of England: Dec 19 (90%+ probability of no change in the base Bank Rate)
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