Market Musings 22/01/21: The Smell of Market Euphoria in the air

22nd Jan '21 by Edmund Shing

18 comments 3364 reads

The Smell of Market Euphoria in the air

Summary:

US investors are greedy at the moment, and sentiment seems to verge on euphoria;
Investment bubbles look to appear in cryptocurrency, SPACs, IPOs, mega-cap tech;
But so far, hard investment dollars have not yet followed this optimistic sentiment into massive buying of stocks;
Investment Trusts still offer niches of yield for the discerning income investor;
I agree with fund manager Gervais Williams - the UK stock market could be set for a huge catch-up phase after lagging for so long.

Is everyone just too optimistic right now?

A number of market indicators have me worried at present. Normally I'm optimistic, about stock markets, in particular. However sentiment seems rather frothy to me at the moment.

There is a lot of speculative behaviour evident, notably in areas such as:

Bitcoin and ethereum,
Hydrogen stocks,
Cannabis stocks,
SPACS (special purpose acquisition vehicles, listed in the US)

and a number of other speculative areas too.

Of course it is true that the global economy is expected to recover sharply in 2021, helped both by government spending and easy policy from Central Banks. But, this is all already very well known. The question then is: what can can drive market further upwards?

And, what are the risks that we are not taking account of today, which could send financial markets into a correction? Here are some of the market indicators that have me worried.

At an overall stock market level, investor sentiment seems to be very much on the bullish side, with the CNN Money Fear & Greed indicator pointing firmly at Greed.

US Investors are greedy at the moment

Wb6NqO1iMrYAiMf_8GZSgW7jY-aJFz6gcoN28emYfeP0dynOKRdnaXnm7eApj_46Qa2_QfGLy6x8GFVxBjO1lJRMKuVKHTRCMbBm_ezJ-djHV9HHqfHMhQetsPyXcbHH0pFUIJlc

Source: cnnmoney.com

Secondly, I see that a lot of retail investors have been buying speculative stocks. I talked about Bitcoin, but an even more speculative area than Bitcoin potentially has been the stock prices of Bitcoin miners. Yes, you can buy companies that mined Bitcoin. One such company is Argo Blockchain (LON:ARB). There are also other bitcoin mining companies such as MARA Marathon Patent listed on the Canadian and US stock exchanges.

Prior to December last year. Argo Blockchain’s share price had been trading around 4p to 6p. But as of earlier this month, it touched a peak of 120 pence, some 20 times higher, in just a…

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john2

22nd Jan '21

I agree with you about the prospects for UK stocks, Edmund. People now know what the Brexit situation is and can start to make firm plans. Today's announcement from Nissan about investing in UK battery production was a good example of this.

However, I'm not sure I agree that the FANG stocks echo the TMT bubble of 1999 to 2000. The vast majority of the stocks in that bubble were non-profit making but were promising great things for the future. I am personally invested in both Google and Microsoft, which are very far from non-profit making and both have large positions in cloud services, which is a fast-growing sector which isn't about to go away. The Microsoft offering in particular provides an environment which locks users in for the long term. I think that both of those companies have a lot further to go.

The Phoenix

Fantastic write up Edmund I love your weekly write up on sectors with examples of etf's and trusts that can be bought as a play on what you review.

Keep up the great work maybe a regular second mid week comment one day if where lucky :)

William K

23rd Jan '21

Exceptional insights. Thank you so much Edmund. For next week, any thoughts on where US homebuilders (XHB) are heading over the next 12 months?

Edmund Shing

That is a fair observation john2, interestingly the latest Moneyweek podcast makes similar observations.

I would partially agree, in that history never repeats exactly but rhymes, bur what I do observe is the beginnings of a rotation out of these mega-cap tech stocks into the rest of the US stock market, which I view as healthy.

Edmund

Interesting Wilkonz,

I remain pretty bullish for the prospects for US housebuilders, despite their strong performance to date. Ultimately, for me the combination of lower long-term mortgage rates in the US, higher than average cash savings currently and the millennial effect, a demographic bulge in the 30-something age band who are now entering their prime homebuying years, should fuel housing demand.

The continued strength of US lumber futures (driven by housing demand) is also a good sign for US housebuilders, as is the continued rise in US housing starts...

Thanks clarea for your kind comments,

let's see if I have time! i still work full-time, at least for now...

But funnily enough, I may write another short note this weekend, based on where I see the greatest potential in terms of risk v reward from a top-down point of view for 2021.

Best, Ed

Sachiv Mehta

Great insights, but does it matter if you're buying the business (for a 5-10 year horizons), and not the stock or valuation, and doing this consistently, over 20 years? probably not...

Phuntt

I’ve been a big believer as Edmund says that now Brexit has at least been nominally completed it should cause a slow rerating of uk shares and have posted bullishly on the subject here a few times.

However, I had a long conversation with a friend of mine who is an international sales manager for major UK soft drink manufacturer during the week and it has made me question those assumptions. He went into detail about the non- tariff barriers in Europe which is making things very difficult for them (most of which I was aware of but I was still shocked on the cost effects).
Aaah, I said but over time don’t you see other opportunities coming online? The answer as we went through region after region was not really. Or at least nothing with the scale and size of the business they are losing in Europe. I realise that this will vary to some degree across other industries but still it got me worried....

I understand your concerns about non-tariff barriers. I think the EU are as usual playing hardball, and doing everything that they can to make life difficult for us.

I hope that I am not being too optimistic about this, but the Nissan investment in battery production that I mentioned above was brought about in order to avoid the EU's rules on components that were not manufactured in either the UK or the EU. I really hope that other companies will relocate production to the UK in a similar manner.

JB87

Found myself nodding along in agreement to all of this, great article. I'm looking at J D Wetherspoon (LON:JDW) Young & Co's Brewery (LON:YNGN) Countryside Properties (LON:CSP) and Halfords (LON:HFD) to outpace the FTSE 100 + 250

transport_tycoon

and $FB ‘s PE is broadly in line with the market despite a huge amount more ad revenue that remains in traditional media.

Results are out next week. They tend to beat on revenue (and generally on profits) but future guidance and US usage could be a risk.

Ragusa

24th Jan '21

You are deluding yourself that the present impasse with EU exports will pass. The EU is a rules based organisation in regard to the Single Market and if you don’t follow the rules then you don’t get access. There will be as a result significant Customs clearance paperwork/costs and delays to logistics which have nothing to do with tariffs. The EU will become progressively tighter on those rules being observed. The UK left the EU not the other way around. The SM is sacrosanct to the EU which Thatcher was the instigator of when PM. UK companies that are progressive and prepared will do well. Some may have to set up operations in the EU particularly for Perishable and JIT material stocks.

Momoko Miyamoto

Halfords (LON:HFD) has had a good run, from a number of COVID tailwinds, staycations, cycling, rates relief and being allowed to stay open during lockdown. I don't think these trends will continue beyond 2021 and the SP has already recovered. It's not a great business in normal times, has lots of large shops under stocked with uninspiring products and there's normally very few customers present.

BitcoinKye

I have massive crypto profits, but I need to diversify some of these gains into UK stocks.

SCI20

I am not sure that it is time to ditch the FANG stocks just yet. Apple is set to report record earnings on Wednesday and according to Bloomberg hedge funds are adding to their holdings in Apple and Amazon. IMO, with $192B in cash Apple remains very attractive.

Silver Moon

I knew the EU would try and starve the UK out.

Thornabian

Amazon has a 40% 5yr price CAGR vs 67% EPS 3yr CAGR and Google has a 22% price CAGR vs 22% EPS 3yr CAGR.

When you compare earnings growth vs price you get a better idea of why there has been such a rally in US tech stocks. They find ways to beat consistently. There are periods where they become a little stretched but people generally can't go far wrong with them and that's why they buy them. Especially when 76% of bonds provide a negative yield, so people just continually go back to them.

Overall UK stocks are historically cheap but it is heavily exposed to banks and oil. Net interest income for banks has been cut massively although I do think they are a little cheap due to government stimulus for loans and volume.

Oil does seem too cheap because demand will pick up post-covid and even if renewables are the future, it is also needed to build a renewable future.

However, I do think the need for renewables is accelerating quicker than many people realise. Campaigns from people like Sir David Attenborough, Prince William, Musk, Bezos, Gates and many others, including institutional money, seem to be creating an exponential increase in pressure to find solutions and investors are not buying for today, they are buying at high valuations because they know the world cannot ignore this problem.

I am cynical and still think people will buy with their wallets and not ethics, on the whole, however, the costs of renewables (wind turbines and solar panels) and hydrogen fuels cells have both dropped around 50-60% in 5 years or so and it is becoming financially viable as well as ethical to invest and buy these products. Electrolysis from renewable to fuel cells is also starting to be used more widely. (FedEx delivery vans have started using hydrogen fuel cells in the US, Alstom runs trains on hydrogen fuel cells, Asda replaced all warehouse equipment with Plug Power hydrogen batteries and the UK is trialling hydrogen fuel cells in trains and buses.)

Diesel and diesel generators are used for trains, buses, cars, construction equipment, cranes, tractors, diggers, decentralised signalling systems, events equipment e.g Olympics, forklifts, boats and yachts and they can all be replaced by fuel cells. Especially as hydrogen energy in fuel cells doesn't degrade like lithium batteries. The limitation until now is that hydrogen has been created by natural gas rather than renewable electrolysis but this is changing.

The utility for hydrogen fuel cells and other renewable fuels cells is very broad and this is the story of why investors are buying at a big premium.

My overall point is, not everything with a high valuation is certain to fall and investors buy the future, and very rarely the current hard numbers.

Did Patel say she would do that to the Irish a while ago

Market Musings 22/01/21: The Smell of Market Euphoria in the air

The Smell of Market Euphoria in the air

Summary:

Is everyone just too optimistic right now?

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Edmund Shing

18 comments

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