The bubbles are making a comeback
Your Daily KnowHow
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In today’s KnowHow…
The bubbles are making a comeback
Airbus in a hurry to secure supply
Nvidia tries to breakout crypto exposure
Painful week for Big Oil
What happened overnight…
It’s been a pretty dull week in the equity market. Volumes continue to wind down and this morning has been no different. In early European trading, travel stocks are buoyed by the Airbus news (more below), while the miners are also trading well with healthcare stocks offsetting these gains. Oil declined on concerns there will be a glut of Iranian supply hitting the market soon. Bitcoin retreated further below $40,000 even though activist investor, Carl Icahn, turned on his Musk attitude and said he may get into cryptocurrencies in a ‘Big Way’. Finally, the US dollar and treasuries were steady after the US and China trade chiefs had a ‘candid’ first conversation as they try to resolve differences.
Chart of the Day
Why is Amazon wasting its time on a small deal like MGM? Well, if you look at Amazon’s share of US streaming over the past year, it has reason to be concerned, as does Netflix for that matter. We’ve said a few times before that this a market that will likely only support 3, max 4, players. But, competition is ramping up and we’re not far from this market hitting maturity in the US at least. If you want to win, now is the time to step up.
Analysis
The bubbles are making a comeback
Defining a bubble is hard. Mainstream media will often pick out any short-term rapid increase in prices and refer to it as a bubble, suggesting that it is now susceptible to a sharp sell-off. If you took that definition, you would have looked at various asset classes or stocks through history and concluded they were bubbles when in fact, they were not. We like the Robert Schiller definition below though clearly that last point on “real value” is a source of much debate.
a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors … despite doubts about the real value of an investment.
Where are the bubbles today?
In the Fed’s May-21 Financial Stability Report, they argued that despite some concerns around equity market valuations, the current equity risk premium, the return of stocks relative to bonds, suggested that the overall equity market wasn’t particularly expensive. We’ve argued this before… if you think about equity market valuation in the context of other asset classes, particularly bonds, the relative yield remains attractive. That is why we expect to continue seeing equity inflows over the coming months.
However, they did go on to highlight pockets of the market that were demonstrating bubble symptoms.
indicators pointing to elevated risk appetite in equity markets in early 2021 include the episodes of high trading volumes and price volatility for so-called meme stocks—stocks that increased in trading volume after going viral on social media. Elevated equity issuance through SPACs also suggests a higher-than-typical appetite for risk among equity investors
In a nutshell, the market overall looks fine but there are clearly concerning pockets in SPACs, meme stocks and we would throw in hyper-growth stocks also where valuations have run well ahead of the wider market.
Unwind or reset?
This chart from Jurrien Timmer, Fidelity’s Head of Global Macro, shows how since late March, a lot of those bubbles have started to unwind as the market has toyed with higher rates expectations and the effects of stimulus cheques starting to fade.
Just in the last few days however, there is a bit of a meme-ish feel returning to this market.
What we’re reading
Airbus in a hurry to secure supply
Airbus this morning has announced plans to step-up production of its popular single-aisle passenger jets. The European aerospace group confirmed plans to increase production of its A320 family of aircraft to 45 jets a month in the fourth quarter and told suppliers to prepare to ramp up to a target of 64 a month by the second quarter of 2023. Airbus said in a statement that it was also exploring rates as high as 70 by early 2024 and 75 by 2025. So what does this renewed confidence from Airbus tell us? We would suggest a couple of things: i) the company is still highlighting a recovery in commercial aviation to 2019 levels by 2023-25. That doesn’t necessarily paint a particularly optimistic picture and is in line with what they have suggested in the past. Travel return is a long slog recovery, ii) Airbus wants to turn the screw on Boeing on the single-aisle jet and is eager to secure supply early. Have a look at the chart below… that is even before the 737 grounding in Mar-19.
Nvidia tries to breakout crypto exposure
We have written on Nvidia a few times in the past (see here) and have generally highlighted three concerns: i) near-term crypto risks to earnings, ii) the longer dated timeline for the Grace CPU and iii) potential near-term risks to the ARM deal. Put all that together with a 50x earnings multiple and instinctively, as much as we love Nvidia, we’re reluctant to go piling in here. Yesterday, management tried to address the first point on crypto-mining and its bearing on total gaming revenues. They see a $400 million chunk of second-quarter revenue from special chips Nvidia has created for use by cryptocurrency miners. That is 6% of total Q2 sales but bear in mind the overall indirect number is likely to be higher. Plus, as ethereum looks to rapidly go eco-friendly, there is a risk that the unwind happens quicker. We love Nvidia, but we’ll sit back and watch for now.
Painful week for Big Oil…
We have written extensively on the shift to clean energy from all sorts of players but this week, big oil took the brunt of the pain. International oil companies have laid out detailed plans to drive down carbon emissions. But stunning boardroom and courtroom defeats this week showed how powerful forces in society want faster change. Shareholders at ExxonMobil, backed a long-shot activist campaign to overhaul the company’s board, handing the new directors a mandate to push a more aggressive strategy to drive down emissions. The vote on Wednesday came after a Dutch court ordered Royal Dutch Shell to accelerate and deepen its emissions cuts. Meanwhile, investors in Chevron defied management on a major climate vote, approving a measure for the company to set stringent targets on the emissions from the products it sells for the first time. BP earlier this month also fended off shareholder calls to strengthen its climate targets, but it too saw support for the measure surge. On Friday France’s Total is likely to see a backlash at its annual investor meeting. With pressure from shareholders, governments and the courts, the pressure on big oil is unlikely to abate in the near-term.
