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@theMarket: Financial Froth Infects Markets
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One sure sign that stocks are getting overdone, is the actions of overconfident investors that bid up stocks in a euphoric frenzy, only to dump them at the first sign of trouble. These behavior patterns normally usher in a corrective stage in the stock market, but exactly when that will occur is anyone's guess.
Investopia's definition of froth "refers to a market condition where an asset's price begins to increase beyond its intrinsic value." Wall Street's "Reefer Madness" event this week is just such an example. Certain stocks in the Cannabis sector saw their share prices double and then triple in a matter of days. Penny pot stocks with little to no fundamentals skyrocketed higher as well, notching up 50 percent gains or more each day.
I, for one, was quite happy with those results; at least at first. After all, marijuana stocks were on my 2021 list of sectors investors might want to consider this year. My reasoning had more to do with expectations that Congress would finally legalize the substance. If so, it would allow companies to finally access capital from the banking sector, and possibly trigger a wave of mergers and acquisitions. I never counted on a Reddit Raid by traders.
Evidently some investors, emboldened by their success in pushing up (and then down) some stocks like GameStop and AMC, turned their sights on pot stocks. While traders couldn't get enough of these shares on Monday and Tuesday, by Wednesday those same stocks saw declines of 50 percent or more. But those stocks were not the only example of froth. Bitcoin had its own bout with buyers.
Cryptocurrencies were another area, which was on my recommendation list for this year. Bitcoin soared this week after Elon Musk announced that his company, Tesla, the electric vehicle manufacturer, had invested up to $1.5 billion in Bitcoin last month. Bitcoin gained 25 percent this week as a result. Several stocks that were leveraged to cryptocurrencies did far better than that.
Platinum, and platinum stocks (another of my recommendations), hit six-year highs as well this week. Let me go on. Special Purpose Acquisition Companies (SPACs) of all shapes, sizes, and colors are being snapped up faster than they can be created as well. No never mind that the majority of these investment vehicles in search of an asset have left investors holding the bag more times than not if you wait around too long to sell.
It has gotten to the point that traders are now monitoring the feed of Reddit, the internet App, as well as tweets from "Wallstreetbets," which is popular with the Robin Hood retail crowd looking for clues on the next stock or sector that could rise from the ashes.
And yet, if readers were to simply look at the major averages of the stock market, nothing much has happened this week. The S&P 500 Index made minor new highs, as did NADSAQ, but then fell back again. If anything, the indexes have simply consolidated this week.
One would think that a series of successive new highs, combined with a series of frothy escapades, would lead to a wildly bullish investor base. Not so. Instead, recent fund flows suggest investors are rather cautious on stocks. Fund flows have favored bonds, rather than stocks since the beginning of the year.
Bullish investment sentiment, as measured by the AAII Index, also fell in January and has still not recovered. Since the beginning of the year, money market cash has increased by $10 billion and roughly $50 billion has been pulled out of equity funds. One possible reason for the sour sentiment could be the froth I have been referring to.
Media coverage of some of these massive, short-squeezes and the rapid rise and fall of stocks (and even commodities such as silver) may have frightened off the more conservative investor — at least for now.
As readers are aware, I have been advising that you take some profits in investments in which you have out-sized gains. I have been taking my own advice this week. I sold some of those stocks that had run up to what I considered nose-bleed levels. I will continue to do so if the opportunity presents itself. I expect we may see one more surge higher (2-3 percent) before we encounter a more serious pullback, so enjoy the froth while it lasts.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Gambling, the Vice We Love
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The pandemic has altered the behavior patterns of many Americans. It has also forced states to re-examine their thinking in several areas, especially in taxation and spending. One of the biggest winners in this process appears to be gambling.
Clearly, with most of the nation's leisure activities shut down, more and more Americans are looking for something to occupy their time. At the same time, thanks to massive losses in tax revenues, states are scrambling for ways to make ends meet. Sports and other forms of online gambling are an easy answer to shoring up state budgets, while satisfying the consumer's demand for more action in this burgeoning leisure market.
The trend toward legalizing gambling both on and off the internet has been around for the last several years, but the pandemic has added momentum to that process. Back in 2017, the U.S. Supreme Court ruled that states have the right to decide the status of sports betting for themselves. As a result, more than 24 states have legalized betting either online or at casinos or both.
Sports betting is only the latest offering in a field crowded with other gambling pastimes. Whatever your poison — poker, slots, sports betting, or live casino games — you can increasingly access it online. More and more Americans are doing just that.
For those veteran gamblers who enjoyed the excitement of the brick-and-mortar atmosphere of established gambling casinos, it took the pandemic to lure them onto the internet side of things. They found that online sites offered their own brand of adrenaline rush. Slot machines, for example, tend to be much more fun than the traditional, one-armed bandits of yesteryear. If that is not your cup of tea, you can access live studios where the game and dealers are in real-time and the light shows are often dazzling.
Another benefit of online sites is safety. Gamblers can feel safe because there are plenty of reliable websites that have been licensed by the state. They offer a transparent and fair game with high-security protocols. They are also open 24 hours a day, and you don't need to wear make-up or comb your hair to gamble. In addition, there are no lines, social requirements, expensive dinners, hotels, or worries about costly transportation to the casino.
The nation's attention was drawn to sports betting last weekend thanks to the Super Bowl. Wagers on the game were expected to break all records in legal sports betting. The American Gaming Association predicted that as many as 23.2 million people would be wagering bets on the outcome of the game. That would be a 62 percent increase from last year's wagers, totaling $4.3 million.
The nation's media featured a Texas businessman and owner of a furniture store, "Mattress Mack" Jim McIngvale, who placed a $3.46 million bet on the game and won $6.18 million. It was thought to be the largest bet made at the game.
Mattress Mack placed the bet on his smartphone through DraftKings (DKNG), a public company that is one of the top betting platforms in the nation. The publicity has been good both for the furniture store as well as for the price of DraftKings. The company's stock price has climbed substantially over the last few months as investors became aware of just how large the betting public has become.
Worldwide, the online gambling market is valued at $59 billon, according to Statista, a data research firm, and is expected to reach $92.9 billion by next year. That has investors excited. And like so many other areas affected by the pandemic, gambling could become even bigger in the future with online betting leading the way.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: Stocks Regain Momentum
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What a difference one week makes! Stocks recouped all their losses this week, and then went on to make new highs. The outcome of President Biden's proposed stimulus bill will determine the market's next move.
Let me set the record straight. Last week, I wrote that I expected stocks to stumble, and hopefully preparing readers for a possible decline of 10-15 percent. That was a mistake. Instead, traders bought last week's 3 percent dip and, at this point, we are now back to square one. Well, not quite.
The U.S. dollar, the 10-Year U.S. Treasury Bond, and the price of gold have all moved substantially since last Friday. The greenback, as represented by the U.S. Dollar Index (DXY), has gained 1.22 percent. That may not sound like much, but in the world of currencies that is a big move. If it continues to gain momentum from here, we could see some of the biggest natural resources gainers in the market hit a brick wall.
As for interest rates, the yield on the 10-Year Treasury Bond is now hovering in the 1.14 percent-1.15 percent range. The rise in rates is a reflection of the current negotiations underway in Washington over the timing and amount of the latest stimulus package. Here's why.
There is a whole breed of bond market investors out there (called Bond Vigilantes), who are quick to buy or sell bonds based on how they interpret the government's monetary or fiscal policy moves will impact inflation. In this case, additional stimulus by the Biden Administration would be considered inflationary, so the Vigilantes are selling bonds. Remember, there is an inverse relationship between the price of bonds (which are going down) and their yield or interest rate. Prices down, rates up.
Commodities, and to some extent, emerging markets, could experience a bout of profit-taking if interest rates and the dollar continue to climb higher. Which brings us to precious metals, specifically gold and silver. This week, gold fell below $1,800 an ounce, since a stronger dollar and higher interest rates are like kryptonite to gold.
Normally, silver would have declined as well with its bigger brother. And it has, but not nearly by the same percentage points. You can thank the Reddit/Robin Hood traders for that. After their initial success with Game Stop, some retail speculators believe they can push the heavily shorted silver price higher by large and concerted purchases of the silver Exchange Traded Fund (SLV).
I doubt they will succeed, since silver is a huge global commodity that would require a heck of a lot of buying power to do more than move the silver price on a short-term basis. I would not recommend readers participate in this endeavor, although I do like silver for other reasons; but wait until the speculation subsides.
We are halfway through earnings season and investors have been pleasantly surprised by the results. Initially, Wall Street was bracing for an average 10 percent decline in the numbers, but at this point, the shortfall overall is less than 1 percent. Those results breed confidence in analysts' projections for this year, which are in the 20-25 percent-plus range right now.
Those expectations are based on the success of the U.S. vaccination program and the reopening of the economy. It is why I am bullish over the medium-term, even though I am still of the mind that somewhere ahead in this first quarter we will experience a pullback. On the upside, I could see the markets possibly approach the 3,950-4,000 level on the S&P 500 Index in a burst of irrational exuberance.
As the market climbs, I continue to advise investors to slowly-but-surely take some profits in those stocks where you have experienced outside gains. This is not market timing. This is common sense talking. You will be happy you did, if only because it will afford you an opportunity to buy the same, or different stocks at a cheaper price.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: The Business of Space
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Space! It holds the promise of riches beyond our wildest dreams -- solar systems bursting with precious resources ripe for the taking. Just the idea of such prizes has set off a frenzied rush by global business entrepreneurs to claim stakes in this new frontier.
The private sector has increasingly pushed aside governments and their contractors in a frenzied bid to develop commercial space exploration. At the same time, using all their cost-cutting prowess to reduce the cost of putting people and objects into orbit, and that is only the first step.
This year, for example, there are three separate missions to Mars, which are scheduled to arrive in February. The Emirates Mars Mission is due to arrive next week on Feb. 9. Its task is to study weather cycles and the Mars atmosphere overall. A Taiwanese spacecraft will touch down two days later. Its orders are to map the surface of the Red Planet, do atmospheric tests, and launch a rover that will search for signs of life. Finally, a week later, on Feb. 18, NASA will land another rover on Mars' Jezero Crater to collect soil samples, rocks, and hopefully return to earth with its treasures.
While all of this may send our blood racing and hearts pumping, the more mundane business of turning a profit in this fledgling industry is centered on the transportation side of commercial space. The budding business is built upon the bet that more and more companies will want to fill the skies with much-improved, (and cheaper) nanosatellites constellations, that will allow greatly expanded communications, imaging, and the use of scientific instruments to measure everything from temperature to energy consumption.
Over the next few years, an entirely new fleet of private sector rocket companies with names such as Virgin Galactic, SpaceX, Blue Origin, Alen, Astra, and Rocket Lab, are hoping to launch daily rockets laden with thousands of pounds of satellites into orbit for commercial and government use.
SpaceX, the company founded by electric vehicle pioneer, Elon Musk, is the front runner in this race for space. Last year, SpaceX launched astronauts to the International Space Station twice and is scheduled to do it again this year. If all goes as planned, expectations are that SpaceX will become the successor to the U.S. government's former space shuttle program.
The company also planned to fly a mission for a Texas-based company that has purchased a trip for a crew of four tourists to the space station. Could this be a forerunner of a sort of private sector cruise line into space?
Although none of these ventures have yet to make a profit, stock investors anxiously await their debut as public companies. Virgin Galactic, the only pure play in space, has seen a doubling of its stock price in the last six months, but it is not the only public company involved in the industry. Aerospace giants Boeing, Lockheed Martin, and Northrop Grumman are also major players in this arena. Additionally, there is also an exchange traded fund (ETF), the Procure Space ETF, (symbol UFO) that is widely traded, which has gained 33% in price during the last three months.
Another space rocket startup, Astra, is planning to go public using a blank check company, or Special Purpose Acquisition Corporation (SPAC), in the near future, worth a $2.1 billion valuation, according to the Wall Street Journal. Space tug company, Momentus, founded in 2017 by Russian-born, Mikhail Kokorich, is also planning to go public via a SPAC, Stable Road Acquisition Corp, in a $1.2 billion transaction this year.
In addition, Ark Investment funds CEO, Cathie Wood, is also planning to launch a new space-focused ETF to join her stable of seven successful disruptive technologies ETFs.
Critics of the space boom point to the fact that all these companies are losing money. The likelihood of profits, they say, could be years away (if ever). Space bulls argue that early investments in electric vehicles was derided with the same arguments, and look what happened to those with the courage and vision to risk their capital.
For the people attracted to investing in some version of tomorrow's Starfleet, be forewarned that it will require an enormous amount of patience, an extended time horizon, and possibly as much volatility as the Millennium Falcon's frequent jumps into Hyperspace.
As for me, color me Buzz Lightyear, since I am already convinced that "infinity and beyond" could be the future of space investment.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: A Roller Coaster Market
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Investors learned a number of lessons this week. First among them was that stocks, on occasion, can go down as suddenly as they can go up. They also began to realize that it may take longer than expected before this pandemic is put to rest.
Over the last two weeks, I have been warning investors to shuck those rose-tinted glasses and take a more realistic view of exactly where we are in this pandemic relief world. That advise is starting to sink in. This week, the Biden administration, Senate Majority Leader Chuck Schumer and even Dr. Anthony Fauci, the nation's top infectious-disease expert, gave investors a more sobering look at the future.
The distribution and delivery of vaccinations, according to President Biden, was going to take longer than he expected. How much longer is still anyone's guess. At the same time, Senator Chuck Schumer admitted that the Democrats $1.9 billion relief package might not see the light of day if he waits around for Republicans to get onboard. And finally, Dr. Fauci said he was concerned about the impact of some new coronavirus mutations on the existing efficacy of the present vaccines. None of the above should have surprised investors, but in a bull market hope springs eternal, so the bulls were buffeted by the news.
For some reason, investors assumed that the relief package was a done deal and would be passed in a blink of the eye with bipartisan support. Schumer's comments that he sees something passed in "4-6 weeks" was definitely not part of the bull's agenda.
Whats more, it now appears that in order to accomplish at least half of what President Biden wants in his package, the Democrats will have to resort to passing relief measures through a special Senate process called budget reconciliation, which would not require any Republican votes for the legislation to pass.
That news, combined with fresh doubts and concerns over the pace of vaccinations and new coronavirus strains, created a selling frenzy on Wednesday that saw the averages lose more than 2 percent by the close of trading. Thursday, markets sprung back to recoup most of those losses, but then fell again Friday. This kind of volatility is usually a sign of a topping pattern, although not always. I believe a 3,250 on the S&P 500 Index bears watching. A meaningful close below that level would usher in another cascade of selling that could result in a 10-15 percent correction.
The good news is that this week's sharp sell-off did reduce some of the frothiness that has been building up among many small-cap stocks. An interesting sideshow to that trend, which has also caught media attention, was the meteoric rise in GameStop and other heavily shorted stocks.
This video game vendor was the subject of what is called a "short squeeze." That's when a number of sophisticated investors (usually hedge funds) borrow and then sell stock of a company (the short) betting the stock will fall in price. Usually, the pros will keep that position, and when they judge the stock has fallen far enough, will buy back their short and bank the difference.
However, there is a new breed of retail investor populating the stock market. This week, they decided to turn the tables on these short sellers. They discovered the power of the little guy through several social media services like Reddit, that small investors could join together and combine purchases of options that could run up the stock price of down and out companies. They targeted GameStop and successfully forced those who shorted the stock to cover at much higher prices. It worked so well that now the latest trend among these traders is to identify additional shorts that can be exploited. The hunt is on and one of today's pick happens to be silver, a much-shorted precious metal.
Last week, I advised investors to begin raising cash in some high-flying stocks. Many of the stocks that saw the worse declines on Wednesday were in that category. Those kinds of washouts are usually a warning sign of further weakness in the overall market.
Hopefully, some readers did take my advice and are happier for it today, so continue to take more profits as we enter February. There is definitely a 10-15 percent decline in the cards somewhere up ahead, in my opinion. Whether that happens at this level, or somewhat higher, is immaterial. When it happens, in a week, two weeks or three, I will be buying that dip with the cash I am slowly raising now.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
