Pulse of the Market - March 2021
JPOW and his Unlimited Money Glitch
The unsung hero (or villain based on your opinion) of the capital markets has been the man with the power to print unlimited money, Federal Reserve Chairman Jerome Powell. Known as JPOW on Reddit, Powell has printed over 30% of the total supply of money in one year. His strategy was pretty simple: have the Federal reserve print money to buy up Treasuries (quantitative easing) in order to stabilize the credit markets and keep yields low. Keeping yields to all time lows has allowed the stock market to roar, while also keeping debt cheap which in turn lets the economy recover much quicker as the cost of debt is minimal. Here is a gif of JPOW letting the money printer go into hyperdrive:
For all the older folks, BRRRR is slang to mean to do something very very quickly. In this case, I think we all know what JPOW is doing quickly (flooding the capital markets with liquidity).
Do I think spending Trillions on Stimulus and buying billions in bonds (treasuries and company debt) is a great long term solution? Absolutely not. But I do think Powell learned from the likes of Bernanke, Paulson and co during the 2008 Financial Crisis and realized if he didn't act fast, business and banks would see catastrophic impacts given the lack of spending/ saving by the American people to try to weather the pandemic. A good HBO documentary to learn about 2008 and the unprecedented policies enacted is Panic: The Untold Story of the 2008 Financial Crisis | Full VICESpecial Report | HBO:
Overall, in a recent Q/A, Powell noted the Fed plans to gradually let rates ease up to 2%, but does not plan to raise rates until the economy and labor market has fully recovered, which in his eyes won't happen til at least 2023. So until that point, I think the music plays on (or the stock market gradually goes up, with several correction phases) until the Fed finally cuts the music (i.e. stops QE/ aggressive buying of treasuries and other debts). I would be very weary of jumping into the market all at once given the 10 year treasury is already starting to creep up to 2% as I type this out....
The Tech Wreck
Starting in mid Feb, most highflying tech names (Zoom, Tesla, Peleton, etc) have taken a very nice haircut from their all time high valuations. Why?
Rise in risk free interest rates (treasuries): When the risk free rate rises, the WACC (or discount rate) used to derive a company's valuation via discounted cash flow analysis (DCF) becomes more "expensive" or debt isn't as cheap to borrow. As such, multiples compress to take into account the increased yields.
Rebalancing: It's been pretty obvious large hedge funds are rebalancing their holdings as the economy starts to come out of this great hibernation (aka COVID disaster). But moving your money into debt ridden, stagnant companies like Carnival cruise, Boeing, etc wont pay off in the long run, in my opinion, as all their cash flow will be used to just pay off their giant debt obligation instead of growing their businesses.
Lastly, markets were at all time highs. Naturally, those with massive gains have been taking some profits. The market has been in a correction phase (5-20%) for the last two months and to me, it's very healthy.
Final Thoughts/ Conclusion:
Overall, I think there are some great businesses (strong revenue growth, lots of free cash flow, very low/ minimal debt) that have been taken to the cleaners with this correction phase. Speculation was the craze and now people are looking to buy great companies during this fire sale. If your plan is to hold for 3-5-10 years then buying strong companies (that are in large total addressable markets), with healthy fundamentals and great management teams would be an ideal strategy during this correction. You might want to take a look at some companies that you really like right now. But I wouldn't "YOLO" and put all your money in at once. Slow and steady wins the race in the long run.....
In terms of JPOW, he is keeping the music going but when does it stop? Your guess is as good as mine!
Best,