Tina vs Eve: thoughts on inequality ?4

00:46 07-Dec-20

The Nasdaq and S&P both closed at all time highs on Friday, as stimulus hopes overrode pandemic and vaccine news.  That is appropriate in my mind, even though Pfizer's troubles put more pressure on the better-looking Moderna candidate.  With index records happening on an almost daily basis, most will recall the term TiNA (There is No Alternative) market.  Nobel laureate Robert Shiller even recently provided justification for the idea by modifying his CAPE ratio to compare against bonds.  On a broader level, I and others have pointed out that rising stock markets don't indicate economic health, they measure how well the rich are doing.  This note is primarily a macro update to introduce some new ideas along with parameters in an analogy for thinking about that.  However, I think I've already been clear that government policies for starting to make predictions won't be spelled out until at least early next year.

So without further ado, I'd like to introduce you to Tina's quieter, more conservative roommate, who I call Eve (Everything's very expensive).  I like to think of the market as a relationship between the two, and when monitoring any relationship, it's best to know both participants.  Tina's the assertive, flashy one who gets all the attention, but it's Eve that keeps the place running, and it's hard to get to know her because she juggles so many things.  Here a few that I will be looking at in 2021:

The first is that the Nasdaq has outperformed the S&P by over 20% since the crash in February & March.  Note from the second chart that this divergence is neither recent nor consistent; it's been going on since the market started reflating back in 2009, increasing as it became more apparent that Dodd-Frank reforms weren't going to be effectively implemented, and then accelerated again in response to imperfect pandemic relief.  In the third chart I observe that the last time this happened was just before the market crash of 2000, which I've publicly and privately cited as being far more damaging to stock investors than the 2008 financial crisis.  Finally, note that I've used the S&P as a base line simply because it is easiest to analyze and for investors to track.  The broader Russell 2000 or 3000 indexes make for similar comparisons, to correspondingly greater degrees.

One explanation for the divergence in index values is industry composition, as the Nasdaq has more technology, which has performed better during the pandemic, but I think index weighting also plays a big role.  Excluding Tesla, which was recently added to the Nasdaq 100, the top 5 companies are about 40% of the index vs roughly half that for the S&P 500.  In any case, the actual gains in semiconductor sales and the latest economic data tell a different story.  Even if the Nasdaq Composite rises no further, it will have appreciated almost 39% in 2020, after a 35% gain the year before.  The gain from its March bottom is 88%.  The only other time in history that it had back to 30%+ YoY gains was in 1998 (39.6%) and 1999 (85.6%).

The point here, beyond that we are on dangerous ground, is that there are always alternatives and all sorts of inequalities matter.  So far, we've mostly seen inequality in analysis, but that's starting to fade.  FIT has virtually no premium left, though that may be news-induced and HIMX has exceeded expectations, but not without reason.  BGCP has already outperformed GOOG (over 60% vs 20% appreciation), as I predicted.  I think BGC's enhancement of its FX services will be important as the market is forced to look beyond its default choices.  Virtu also announced improved analytics for institutions looking to optimize their trading.  Both companies can benefit from volatility and international migration and will remain as core holdings for me.  On the other hand, though Covanta's next ex-date is December 30th, telecoms like Lumen are still the only utilities that I want to own; the dividend on VOD is coming up with €/$1.21.

In the wake of RCEP, I'll also be reconsidering my stance on Ebix, and looking at Lufax Holdings (LU) as it declines from its listing on NYSE at the end of October toward fairly reasonable valuation.  The parent company's (Jack Ma's Ping An) use of technology has been impressive and the shift toward Wealth Management with declining churn (8.4 -> 4.8%) is of great interest to me.  That said, I'm generally wary of Chinese stocks, as I don't trust the figures or my ability to predict the geopolitical risks embodied by the country.  Yet the past few years show that the latter has become tough all over.  To that end, any positioning in EBIX will still have to account for India's non-free market, as well as the debt risk, but Asia thriving in the face of India's domestic mismanagement could actually supercharge the EbixCash remittance business.  More importantly, it's pretty clear that conditions so far are still conducive to investment interest for the IPO.  Another heads up is that I will be tracking the Metromile (MLE) IPO, having had positive conversations with an actuary on the business model.  I will not, however, be buying the INAQ SPAC.  Feel free to ask questions.

Markets aren't the only choices either.  In the real world, the rich need the poor in order to maintain their lifestyles, and large companies need customers, which are often smaller companies, in order to maintain their earnings.  eMagin's expense ramp with DoD support is a relatively benign example of that, but when inequalities become too large, it necessitates a redistribution of wealth.  Markets hate that, but political parties and countries laying more and more landmines for each other makes disillusionment and black swans ever more likely.

So in addition to currencies and debt levels, I will be tracking American home sales.  Per the chart, volumes are at the highest levels since before the mortgage crisis, but prices are just now starting to rise slightly faster than real inflation rate I've cited while median price has flattened out over the past few years.  I interpret this as a sign that the wealthy are buying more properties overall.  I'll be watching for a fall in volume first, and then want to see what happens to prices.  I very much doubt that the next crisis will be mortgage-related, but housing is still an important consideration; real estate is the only asset class that has historically out-performed stocks over the long term and it's only when cash starts to look like the best alternative that the relationship with Eve blows up.  Tina's appeal still looks undeniable for the moment, and Mr. Schiller's analysis is sound but short-term.  Cherry-picking relative appeal doesn't keep you safe in life, sound principles like valuation do.  Eve wouldn't be afraid to tell even an impressive academic, "it's not you, it's me", and neither should long-term investors.