6th Mar '21 by Edmund Shing

37 comments 3756 reads

Wade in on Weakness?

Summary

This week’s Podcast: Blowing Bubbles
Bond breakdown hits go-go growth
Historically, stocks have not feared rising yields
Cyclical currents boost Construction, Mining, Industrials, Insurance, Banks
Focus on the relative leaders
Not giving up on precious metals

New podcast out this week

This week’s podcast deals with the subject of potential bubbles in financial markets.

Blowing Bubbles

The equity bull market is the longest in history. Valuations are high and even extreme.

Why has this bull market lasted so long, over 10 years? Are we now in bubble territory?
What are the warning signs that we are reaching the top of the market cycle?
What lessons can we learn from previous bubbles?
Households in aggregate have more cash than usual. Is this having an effect on financial markets?
Are investors “greedy” at the moment?
How can investors safeguard their investments and how can they take on more risk?

Navigating choppy waters

The sharp rise in US bond yields (long-term interest rates) has sent shudders through all financial markets over the last week. At the beginning of 2021, the 10-year US bond yield stood at 0.9%, not far from a historic low. As of last Friday, this yield had risen to 1.55%, reflecting increased market fears over higher future inflation.

Since peak in August 2020, the 20-year US Treasury bond ETF (TLT) has dropped 18%, with other government bond markets also falling in sympathy, albeit by less.

US long-term bond ETF sells off

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Source: tradingview.com

This rise in long-term interest rates has rippled across financial markets, causing a leap in volatility particularly in stocks and commodities sensitive to long-term interest rates, namely growth stocks and gold.

The US mega-cap growth ETF (MGK) dominated by Big Tech names has fallen 7% so far from recent peak, while the growth-oriented ARK Innovation ETF (ARKK) has fallen over 30% from recent highs.

Mega cap tech sells off

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Source: tradingview.com

Should we interpret this setback for growth stocks and bonds as a typical market correction, or potentially the end of the long-running bull market in stocks and bonds?

For now at least, I maintain my view that this is more likely a correction than anything worse. Remember: in previous long-running bull markets such as in the late 1990s, there were numerous 10%+ market corrections which…

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Momoko Miyamoto

7th Mar '21

Take a look at Ip (LON:IPO) (my largest holding) if you’re interested in unquoted UK tech firms, includes biotech, AI, genomics and other fashionable goodies. Ip (LON:IPO) has a 15% stake in Oxford Nanopore technologies which is tipped to go public soon. I believe that the Nanopore stake alone is worth far more than the current enterprise value of Ip (LON:IPO) .

timarr

when did they open it up? I wrote to them complaining about lack of availability and they said it was institutional only

I bought last October - I just went on AJ Bell and traded as normal. I think it's open to professional investors, which for the likes of me is a combination of portfolio size and what amounts to overtrading (10 significant size transactions per quarter for a year). I did a lot of trading last year mainly because of the pandemic, so that was probably an unintended consequence.

They've had the Airbnb IPO since then and although Grail has pulled theirs it sounds like a deal is in the offering with Illumina. It's higher risk, no question, but it's a tiny bit of my portfolio and I'm happy to leave it indefinitely.

FederalReverse

I regularly buy investment trusts and Manchester And London Investment Trust (LON:MNL) is one that I've watched for a while without pulling the trigger. They may well be correct on their maximalist tech growth stock thesis, I agree there is a lot of evidence to support it. I also like their attitude recognising the difference between real (cashflow) growth companies, and the much more speculative variety (that which consitutes much of the Ark funds, for example).

One thing that has put me off buying here is the type of commentary often given in the monthly fact sheets, there are a number of examples. I present an example of a quote from their March 2020 factsheet:

"The only positive thing about the Virus is its most celebrated casualty is the Value thesis"

I've done a little comparison of Value factor vs. the Manchester And London Investment Trust (LON:MNL) portfolio and I fear that Global Value Factor has indeed outperformed Manchester And London Investment Trust (LON:MNL) share price since March 2020, beginning precisely when they published the above. In my opinion, other than being an opportunity for a manager to look rather silly, statements such as the above reflect an unfortunate level of hubris, which I would like to try and avoid in my investment trust managers. It simply doesn't reflect a healthy attitude towards market nuances and issues of predictability. I have to admit I read a lot of invesment trust documentation / commentary and I rarely see this type of language used.

NeilS

I tried ii, HL and Barclays before writing to complain to Baillie Gifford.

the manager of Manchester And London Investment Trust (LON:MNL) sounds like a tool. Also the fact that he inherited his job from his daddy is a red flag too.

Mike888

Hi Edmund, could you provide the podcast link please - thanks :-)

Edmund Shing

8th Mar '21

Here you go Mike

https://wealthmanagement.bnppa...

Rusty2

I can buy Schiehallion Fund (LON:MNTN) on IG.

The Phoenix

Love your weekend blogs Edmund your normally on the money re sectors and 2-3 weeks ahead of major market moves.

Re bond yields any thoughts on the Fed not yet stepping in last week to try and crush them back down with Powell's latest announcement to the markets ?, re the cost of the debt burden you mentioned do you think they are to bothered by this given couldn't some of the maturing debt be rolled over on to lower or even negative rates ?

They also have the QE hose on full blast would it make any difference issuing another say fifty billion of bonds for the Fed to buy to pay for the interest costs over the next twelve months ?

Thanks Andy

Zarathustra

Where in the world is there a 10 year bull market?

I agree Andy, I think the US Federal Reserve is monitoring financial conditions very closely. If these look like they are tightening a lot, then the Fed will have to act.

There are quite a lot of things the Fed can still do without necessarily buying even more bonds every month - they could sell down their existing Mortgage-Backed Security portfolio faster and reinvest those proceeds into longer-term bonds, to force long rates lower. Or they could buy more TIPs (inflation-linked bonds) to force the real yield lower (bond yield less expected inflation).

Either way, I see it as unlikely that they will allow the US Government's borrowing costs to rise too far...

Edmund

Caduceus

9th Mar '21

is there a way to subscribe to these podcasts? Im not on fb or any social media. Are they avail on Spotify?

Surrey Steve

10th Mar '21

My belief is that the previous bull market ended in 2020, we then entered a very short bear market (probably the shortest on record) and are now in a new bull market. I feel that given the rapid rise since the bear market bottom that what we are currently seeing is a necessary correction (although this is quite savage in the US tech space) and will be followed by generally higher markets.

Like Edmund, my portfolio is hopefully positioned to benefit from this trend with heavy exposure to Miners, Financials, and Cyclicals where their balance sheets are strong enough to facilitate rapid growth. I am pretty much fully invested with minimal cash holdings.

MarkER

Hi Edmund, I realise that this is not relevant to this weeks topic, but I have a question regarding your Stock Slam pitch of Atalaya Mining (LON:ATYM), which i am considering buying into. When questioned about the legal issues, you seemed to imply that these are no longer an issue. I have read the most recent update and it states:

Astor update

· The Company continues to go through a court process to determine the mechanism and timing for the payment of the deferred consideration to Astor. Following the hearing on 30 October 2020, the following stages have been fixed by the Court: (i) Atalaya's application for permission to amend its statement of case will be heard in February 2021; (ii) a summary judgment hearing will be heard in June 2021; and (iii) if Astor's application is unsuccessful, a trial will take place in February 2022 for six days.

This doesn't sound like the legal issues have gone away or that it's all sorted out now. I was wondering if you, or anyone else had any information that could ease my mind on this matter? It would be much appreciated. Thank you

soupercomputer

11th Mar '21

That naive view of the markets and Bitcoin (he should listen to Saylor) explains why MNL is on an almost perpetually substantial discount. Why is it so many fund managers become so overly self-assured and arrogant (Woodford et al!). The best a far more humble and introspective (Dalio, Tudor Jones et al).

15th Mar '21

Hello MarkER,

sorry to be so long to get back to you on this question. I have spoke to Atalaya's IR about this question, so I have an answer for you! IThis should not be an outstanding issue for long, i.e. I think the EUR53m Atalaya owe to Astor will be paid soon as they now have the means to o so, resolving this liability. The only outstanding issue is then Astor who also now want interest on this amount! So the potenital litigation applies just to that element...

Hope that helps,

gus 1065

Just so happens there was an RNS this afternoon saying Atalaya have paid the €53m to Astor but confirming that there is a residual claim for interest still outstanding (which Atalaya dispute).

https://www.investegate.co.uk/...

Market seems pleased as the shares picked up about 7% today (I hold).

Gus.

16th Mar '21

What a coincidence! Thanks very much gus 1065

The Boon Fund

28th Mar '21

Indeed - I have the same view, that any "dips" in the US equity markets caused by rising Treasury yields, at least the next 2 or 3 times - will be safe to buy as the Feds will come out with their bazooka one way or another. Relatively safe 2-4% gains by trading in and out of NASDAQ or S&P500 ETFs over a short a few days.

However, whether the Fed's bazooka is sustainable.... lets see.

chillyhill1

Excellent article as usual, I think the sector makes up something like 50% of the performance of a stock. So very useful.

Market Musings 06/03/21: Wade in on Weakness?

Wade in on Weakness?

Summary

New podcast out this week

Blowing Bubbles

Navigating choppy waters

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

37 comments

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