According to a recent E*Trade survey of retail investors, 75 per cent of respondents fully or somewhat agreed that the stock market is in a bubble - in financial speak an investment so pumped up that it must burst. Yet 61 per cent still felt great about the future prospects of shares. In other words, the majority of DIY punters know that what they are buying is terribly overpriced but still think it wise to put more money into it. Such sentiment is not simply crazy. It reflects the recent experience of the shortest stock market crash on record. In the last 12 months everybody who played the stock market could make money, seasoned investors and novices alike. What we are experiencing is the mother of all bull markets, born, one could argue, in 2009.
It is not possible anymore to ignore the attitudes of retail investors, as they have grown during the pandemic to a formidable force. They are estimated to chip in 25 per cent of all money invested and are capable to wrong foot hardened buffs, as the Gamestop story has proven. Gamestop, an almost bankrupt, hapless videogame retailer was carried by a loyal fan base to stock market gains of comical dimensions: its shares rose 12,712 per cent within a few days. A few crashes later the stock is still worth 2,900 per cent more, despite the retailer’s inveterate loss-making.
Armoured with unexpected transfer payments from the government, DIY investors gamble with their windfall money and celebrate the pain they inflict on some unsuspecting hedge funds, which would still profit once they understand the direction of the trip. According to FAZ, retail investors invested in the last five months more money into stock funds than in the previous 12 years put together. Their voice is imperative, even when they talk nonsense. Professionals fear to miss out.
Crypto-currency Bitcoin rose tenfold within the last year. It is difficult to call it a bubble as it bursts so regularly that it can’t be a bubble. The same is true for the seemingly unstoppable rise of Tesla. Its recent billion-dollar-investment in Bitcoin brought more paper profits than its car sales will fetch in the foreseeable future. Is this still a car company, or just an investment idea? These bubbles are not only re-growing very quickly after each pop, they seem to be interdependent.
Take the bible-reading, investment-demigod Cathie Wood. Her ETFs (!) invest in ‘disruptive innovation’, which means rather concentrated bets on Tesla, Zoom, Bitcoin, or Spotify – not to forget large cross-investments between her funds. It is difficult to fathom the mess when these ETFs start to unravel in tandem.
Retail investors’ voice is imperative, even when they talk nonsense. Professionals fear to miss out
And then there are the SPECs, listed money bags which do not quite reveal what their business purpose will be once their investors’ pennies are brought to use.
When the dotcom bubble burst so spectacularly 20 years ago, the wise men on Wall Street quipped that “when the tide goes out we will see who was swimming naked”. Internet start-ups were vying for the largest ‘cash burn rate’, funded by gullible investors and their wild, uncalculated bets on an unknowable future. Enron, a rather pedestrian gas pipeline company, grew into a 100 billion dollar energy trader based largely on fictitious income. The Italian dairy company Parmalat created income by Xeroxing non-existent bank deposits. Fraudster Bernie Madoff’s investment fund was caught out a few years later. His ‘fund’ was the equivalent of a chain letter, inflicting losses of 64 billion dollars. The crash of 2009 was triggered by collapse of a real estate bubble. It toppled banks, manufacturers and insurance companies.
What we see happening around us now is the same trickery and fraud which was until now only revealed by a crash. In June last year we learned that Germany’s most revered electronic payment provider Wirecard, grown into the darling of the stock market by inventing income from partners which either did not exist, or swore to never have heard of Wirecard. The Greensill saga which unfolded a few months ago had the same, familiar ingredients. Meant to provide low-risk supply chain finance, whereby outstanding invoices are bought at a discount, it soon ventured into unsecured lending, loosely based on ‘future’ invoices. The bank’s single largest client was the pop-up steel empire of Sanjeev Gupta, who embellished his accounts with invented trades and fictitious, ‘expected’ invoices. Greensill used to securitise these shaky loans, to insure them and then to sell them on to Credit Suisse and its unsuspecting retail investors. When insurance cover was suddenly withdrawn, Credit Suisse pulled the brakes, with ten billion US dollars of investors’ money on the hook.
It should not be the last wound inflicted on the Swiss premier bank. Shortly later it would suffer a loss of 4.7 billion US dollars from Archego. This unassuming, small ‘family office’, consisting of the bets and trades of stock market operator Bill Hwang, made exorbitant, 50 billion US dollar wagers on a handful of US and Chinese companies, entirely funded by such illustrious banks as Morgan Stanley, Goldman Sachs, Wells Fargo, UBS, Deutsche Bank, Mitsubishi UFJ, Mizuho, Nomura and Credit Suisse.
The banks seemed oblivious to the aggregate outstanding risk, each of them safe in the belief that in emergencies, when Hwang would not provide for appropriate margin payments, they could always sell the underlying shares. It proved difficult once it dawned on them what a fire sale worth 50 billion US dollars would do to the share price. An attempt by the banks to syndicate their problem failed. While they were still talking, Goldman Sachs and Morgan Stanley had already sold 20 billion US dollars’ worth of shares en block. A few others were equally swift; the rest was bitten by the dogs.
After the shock of the flash crash in March 2020 there seems to be only one route for stocks now: up to ever new heights. This is all brought upon us by menacing walls of money, crystallised in vast savings and seemingly unlimited, cheap credit. If things get wobbly, everyone pins their hopes in the Fed as an investor of last resort. We perceive crazy volatility, bubbles bursting and again reflating as a temporary phenomenon.
A New York-based fund manager, a friend of my daughter, called her up recently to quiz her boyfriend, an art evaluator for one of the big auction houses. What she needed was a crash-course in fine art, as she wanted to set up an art-themed investment fund. She didn’t want to be bothered with details. She only wanted a plausible growth story, oblivious to the fact that a fire sale of a few Rembrandts would make the liquidation of Archego’s mainstream shares a child’s play.
Investors’ excitement and abandon build up pressure in a bubble. Their enthusiasm feeds recklessness, which in turn overrides all inbuilt safety valves. After the bubble burst we learn how it all happened. To see both recklessness and exuberance with such clarity already before the accident is unsettling. What to do then? It would be wise to stop investing until it’s all over. Yet we keep dancing until the music stops.
“The project is set to benefit from increasing demand and falling supply of its critical minerals following years of under-investment in new projects.”
(IEA: 2010)
Oops.
As a former Federal Reserve chair herself, now Treasury Secretary Janet Yellen should have known that her comments about the possibility of a need for an interest-rate hike would send markets into a tizzy, and by the end of the day she had walked back her remarks. No matter, as they’d brought about a classic rotation — the technology-heavy Nasdaq Composite COMP, +0.10% dived 1.9%, while the Dow Jones Industrial Average DJIA, +0.49% actually rose slightly.
What was interesting was that the bond market didn’t follow suit. The 10-year yield on Treasury inflation-protected securities actually fell, to negative 0.81% — nearly a three-month low. It is noteworthy that the market for interest rates didn’t see anything terribly new or interesting in Yellen’s remarks about interest rates. The currency market wasn’t volatile. So maybe the stock market was vulnerable to selling.
Bank of America reports that, of its clients, hedge funds have been “extreme” sellers of stocks. The rolling four-week average flows for hedge funds were the lowest in the history of this series, which dates back to 2008 — and were three standard deviations below the average.
The hedge-fund selling was most concentrated in the communications-services and information-technology sectors, according to the BofA data — i.e., the tech winners that have thrived during the COVID-19 pandemic. Who’s buying? Retail clients were the only group to buy U.S. equities for the third week in a row and have been net buyers for 10 straight weeks, per Bank of America.
Why would hedge funds be getting nervous? Well, the April payrolls report on Friday is expected to be a seven-digit affair, after nearly topping a million in March. Even with Federal Reserve policy makers at pains to dismiss signs of surging inflation, they can’t ignore a rapidly healing labor market, so official data showing a surge in jobs creation will inevitably cause market discussion of when the central bank will pull back on its bond buying.
“As usual, it looks like the connection between legacy ‘duration proxy’ tech sector/’secular growth’ is the risk into the next two months of ‘peak’ U.S. economic data base-effect, with this week’s heavy U.S. data slate culminating in the CRITICAL Friday NFP, which is expected to be a WHOPPING +++ print and is set to dictate the timing of Fed ‘tapering’ socialization,” said Nomura Securities strategist Charlie McElligott.
How whopping? Steve Englander, head of global G-10 currency strategy at Standard Chartered, said a payrolls number in excess of 2 million would scare investors, and anything above 1.5 million would cause “uncertainty.” In other words, the risk is that by Friday, traders might be talking like Yellen did on Tuesday.
GM tops forecasts
ADP reported a 742,000 rise in private-sector payrolls for April, which was below economist expectations. The Institute for Supply Management’s services index edged lower to a still-strong 62.7% reading.
Lyft LYFT, -6.21% lost less than forecast in the first quarter on better-than-expected revenue. Activision Blizzard ATVI, +2.68% rose as the videogame maker’s “Call of Duty” franchise drove better-than-expected results. Real-estate services provider Zillow Z, -4.92% ZG, -5.55% also topped expectations.
General Motors GM, +4.13% easily topped first-quarter earnings expectations even as it reiterated a 2021 outlook that lags Wall Street expectations.
After the close on Wednesday, ride-hailing service Uber Technologies UBER, -2.81% , e-commerce site Etsy ETSY, -1.49% and payment provider PayPal PYPL, -0.27% report results.
Facebook’s FB, -0.71% oversight board upheld a suspension of former President Donald Trump on the social platform.
Worrying coronavirus news came from the island nation of Seychelles, where infections have surged despite 62% of its population having received two doses of a vaccine. India’s foreign minister left the Group of Seven gathering in London because of possible exposure to the virus that causes COVID-19.
The UK:
Updating:
Negative yields on debt.
Crypto worth more than the US coin in circulation.
Monday, 10 May 2021 14:52:29 (GMT+3) | Shanghai
The China Iron and Steel Association (CISA) has announced that in late April (April 21-30) this year the average aggregate daily crude steel output of large and medium-sized steel enterprises in China - all CISA members - totaled 2.3998 million mt, up 3.25 percent compared to mid-April (April 11-20).
In mid-April, the average aggregate daily crude steel output of CISA members totaled 2.3242 million mt, up 2.21 percent compared to early April (April 1-10).
Inventory levels in the Chinese steel market decreased in the given period. As of April 30, the finished steel inventories of large and medium-sized steel enterprises in China amounted to 13.4138 million mt, decreasing by 2.4957 million mt or 15.69 percent compared to April 20.
As of April 30, the average rebar price in the Chinese market was standing at RMB 5,247/mt ($814/mt) ex-warehouse, up by RMB 154/mt ($23.9/mt) or 3.02 percent from April 20, according to SteelOrbis’ data.
$1 = RMB 6.4425
For investors seeking momentum, Teucrium Soybean Fund is probably on radar. The fund just hit a 52-week high and is up 80% from its 52-week low price of $13.44 per share.
But are more gains in store for this ETF? Let’s take a quick look at the fund and the near-term outlook on it to get a better idea on where it might be headed:
This product provides investors an easy way to gain exposure to the price of soybean futures in a brokerage account. It uses three futures contracts for soybeans, all of which are traded on the CBOT Futures Exchange. The three contracts include the second-to-expire contract weighted 35%, the third-to-expire contract weighted 30%, and 35% weighted contract expiring in the December following the expiration month of the third-to-expire contract. It charges a fee of 2.50% per year (see: all the Agricultural ETFs here).
Soybean as a commodity has been an area to watch lately given its soaring prices. The soybean futures topped $16 per bushel for the first time since 2012 on supply crunch concerns. Surging demand in China and bad weather in key global-growing areas have sparked fears of grain shortages.
In South America’s copper-rich Andes, political risk is rising as high poverty and debt levels amid the covid-19 pandemic drive potentially sharp policy shifts and put mining wealth into the crosshairs of angry citizens and political leaders.
In No. 1 copper producer Chile, an overhaul of its market-orientated constitution is underway, and it is debating whether to hike royalties on miners. Peru, the No. 2 producer, is heading for a polarized June presidential election with a little-known socialist leading in the polls who wants to redistribute mining wealth.
“Some 42% of world copper mining production is under political uncertainty that could entail risks on future production,” said Juan Carlos Guajardo, head of the Chilean consulting firm Plusmining.
That uncertainty is helping support global copper prices that have hit record highs as post-pandemic Chinese demand bounces back, as well as rapid development of a green revolution of electrification seen as driving further appetite for the metal in years ahead.
But in Latin America itself a bounceback looks some way off. The covid-19 pandemic has driven a spike in poverty, propelling measures to unlock and redistribute wealth as many struggle to stay afloat amid lockdowns and high healthcare costs.
That has put mineral resources in focus, given the outsized role they play in the region’s economic engine.
Peruvian presidential front-runner Pedro Castillo has pledged to keep 70% of mining profits in the country and stop foreign firms’ “plundering”, and has warned he could nationalize some resources. He leads in opinion polls ahead of the June 6 vote, though right-wing Keiko Fujimori is gaining ground.
Chile is in the midst of a longer process to rewrite its Augusto Pinochet-era constitution, which underpinned decades of growth but has also been blamed for stoking inequality that led to violent protests that rocked the country in 2019.
Chile’s lower house also approved this month a bill that would sharply hike taxes on copper mining to pay for social programs, which some industry insiders warned could bring mining to a halt.
Pablo de la Flor, executive director of Peru’s main mining chamber, said there were issues of resource allocation that needed to be addressed. But the solution lay in reforming inefficient local governments rather than the tax regime, he said.
“Sadly the funds haven’t been used properly to close social gaps, leaving productive regions lagging behind,” he said.
The convergence of risks is creating the most uncertain backdrop in years, although the region has long been volatile, with frequent political changes, protests and strikes.
Mining executives said that some of the risk may be tempered as those seeking the boldest changes came up against political opposition and were forced to water down their plans.
Diego Hernandez, head of Chile’s mining industry group Sonami, said the opposition-led mining royalties bill would likely get amended in the upper house before being given the green light.
“I do not think the project will be approved as it is today in the Senate because it would be very irresponsible and reckless,” he told Reuters. He warned earlier in May the bill would be a vote in favor of “no more mining”.
“In a period where we all have to worry about the economic recovery, dispensing with or strangling mining does neither of these countries any good. In the end, one hopes that common sense will prevail.”
Chilean state miner Codelco is the world’s largest producer of copper, while the Andean country is home to BHP’s huge Escondida mine and Collahuasi, a joint venture by Glencore and Anglo American .
In Peru, Diego Macera, director of the Peruvian Institute of Economics, said redistribution of mineral wealth was an obvious way to raise public funds for the post-pandemic recovery, though a fragmented congress would likely limit the power of whoever becomes president.
But, he added, the uncertainty could put off investors, fearful the state will seize assets.
https://www.reuters.com/article/copper-latam-risks-idCNL1N2MZ2F1
Soaring metal prices in China are hampering the country’s effort to recover from the coronavirus pandemic and throwing its plans off course.
The cost of everything needed for the Asian country’s post-pandemic infrastructure boom, from steel and coal to glass and cement, is increasing markedly.
The price of rebar, a type of steel used to reinforce concrete, has recently gone up to 6,200 yuan ($965) per metric ton in Shanghai, up 40% this year, and a new record high.
Iron ore, which is used to make steel, has hit 1,240 yuan per metric ton ($194) on the Dalian Futures Exchange, a 25% rise since the start of 2021.
Thermal coal, glass and aluminum are hitting all-time highs there with the price of plasterboard going up too.
The situation with steel has become so severe that officials in Beijing are warning of damage to the economy.
The increase in metal prices has led to the more frequent use of a popular idiom for defenseless - "without an inch of steel in hand" - on social media to describe desperate buyers.
"Global commodity prices are rising because stimulus by major economies are pushing up the demand," said Zhou Hao, a senior emerging markets economist for Commerzbank. He added, "the United States and China are both the drivers."
Expensive construction projects are already causing some Chinese firms to suspend work, according to recent survey data and analysts are warning that as smaller businesses weigh whether to cut costs or scale down, they could begin shedding workers.
"Small businesses are facing even tighter cash flows, because they have less negotiation power when prices increase in their upstream sector," wrote Luo Zhiheng, chief macro analyst for Guangzhou-based Yuekai Securities. "They either have to accept higher production costs, or cut their production and sit on the sidelines."
Meanwhile, the country’s main industrial commodities tumbled on Thursday after the government announced measures to keep a lid on increasing raw material prices.
On Wednesday, China's cabinet announced it will strengthen management of commodity supply and demand to curb "unreasonable" prices. It also said it will launch an investigation into behavior that bids up commodity costs, spooking China's hoards of metal traders.
Analysts at ANZ said steel and iron ore prices remain supported by strong seasonal demand, record high steel production, attractive steel margins and subdued supply.
"China’s measures to curb steel production and exports were not much help in containing the price rise. Falling iron ore inventories reflect strong underlying fundamentals," ANZ said.
China, the only major economy to dodge a recession last year when the pandemic began, launched a $500 billion infrastructure-led plan to support its recovery from the slowest rate of growth in decades.
Speculative bubbles that were intensifying at the start of year are now starting to pop.
John Bennett, director of European equities at Janus Henderson, has an eye for spotting bubbly behavior.
Bennett refused to invest in German payments company Wirecard for a decade after one meeting with their executive team. He eventually managed to take out a short position against the company after several attempts to find anyone who would lend him Wirecard stock.
"I said, 'No way do we put money into that,'" Bennett said. "And I was just amazed at the stock market. I felt so stupid for 10 years that it was allegedly a star because you only had to have one meeting with the people and you knew what you were dealing with."
Wirecard imploded in June, 2020, after Financial Times investigations and audits found the firm to be significantly overestimating or making up payments received by third-party companies.
Brewing bubbles
Looking ahead, most bubbles are starting to deflate, but Bennett remains worried about two that could be in the market for some time. Both center on the topic of ESG.
1) Food delivery companies
The food delivery space could be the next Wirecard, Bennett said, not for any crimes committed by companies, but in the sense that they may be a spoof.
"I think the whole food delivery space could astound people by saying, 'oh my goodness, oh, that was built on nothing," Bennett said.
European companies are making acquisitions in the Middle East, such as Iraq and Istanbul.
"What possible value is a European company going to add in Baghdad for delivery?" Bennett said. "That is where your own instinct comes in."
The industry is sucking in a lot of capital to not get a high value-add based on the value chain and margin structure, Bennett said. While stay-at-home mandates boosted food delivery revenues for companies like Uber, the industry has historically struggled to churn profits.
Bennett sees a space race focused on getting bigger market share than its competitors.
"I think an awful lot of money is going to be smoked in that sector," Bennett said. And that is before the companies address the many ESG challenges they are faced with, he added.
2) ESG funds
The investment industry as a whole isn't doing much better in addressing ESG, according to Bennett.
"I don't mean that the E or the S or the G is a fad, I really don't mean that," Bennett said. "ESG investing is a fad."
Inflows to ESG investment funds have been surging over the last year. A report from Bank of America on May 4 showed that there have been $95 billion of net new global ESG equity fund inflows year-to-date, which is up 200% year-over-year.
Chart of global ESG equity fund flows from Bank of America May 4 research note Bank of America
"Now, that's going on, and I think it'll be a gigantic misallocation of capital."
Instead, investors should be more active and engaged in shaping businesses they have invested in with an ESG lens, Bennett said.
"Let's deliver it to the market in the most sustainable possible way rather than exclude it," Bennett said. "A lot of these funds are going for ESG by exclusion."
ESG plays
Despite managing a traditional set of funds, two of Bennett's favorite stock picks across the portfolios are both strong ESG plays.
The French-Swiss cement company Holcim is one of Bennett's biggest investments.
Although cement companies are incredibly carbon intensive, Bennett sees Holcim becoming the world leader in the decarbonization of cement.
"Basically [Holcim] is an undervalued stream of cash flow that is on the way to being the world leader in the decarbonisation of a much, much needed commodity called cement," Bennett said.
Signify is a smart lighting-focused company based in the Netherlands.
The stock has already done well for Bennett's team but he thinks it still has at least another 50% upside to go.
Signify also has a hidden ESG angle to it, Bennett said. Smart lighting will be essential for achieving environmentally friendly lighting systems from smart office spaces to horticulture and vertical farming projects.
"We think Signify is a very undervalued growing business, growing stream of cash flow," Bennett said.
Inflation & ESG
As the economy starts to re-open, inflation is expected to rise temporarily. As part of the interview with Insider, Bennett highlighted that higher inflation could bring a major regime shift from growth to value.
In this case technology stocks and high growth stocks will take a hit.
"If you look at ESG funds, they are full of tech stocks, overpriced tech stocks," Bennett said. "Investors are going to be disappointed."
Many of the value stocks that will benefit from the economy reopening might not tick all the ESG boxes immediately, but it doesn't mean they should be excluded.
"If they do have a credible plan and programme to decarbonize, then allocate capital to them," Bennett said.
