Tech roars back as investors Martingale on Tesla, ITV shares down (after Morgan departure?)

Morning Note

Tech roars back: As I said last Friday, this is the kind of market that will trap bulls and bears alike. So yesterday was the classic Turnaround Tuesday as tech came roaring back following Monday’s sell-off. The Nasdaq 100 raced 4% higher and the Composite index rose 3.7%. We can put some of this down to short covering, but equally it seems the market cannot make up its mind in terms of rotation and bond yields. Today’s 10-year auction will be key – a sale of 3-year paper yesterday went off rather well and helped eased yield concerns, with the 10-year dropping 5 basis points to 1.54%. Asian shares failed to pick up the baton and European shares were mixed in early trade on Wednesday after eking our small gains on Tuesday, which followed Monday’s solid rally. The DAX trades near its record high, whilst the FTSE was down 0.5% in early trade under 6,700.

 

The risers among the tech space were among the big momentum stocks of last year: Tesla rose 20%, Peloton +14%, Baidu +14, DocuSign and Zoom both +10%. Beware these markets – they will take out both shorts and longs. Whilst the rally in tech lifted all boats, the Dow Jones only managed to rise 0.1%, slipping sharply in the last hour of trade after hitting another intra-day high at the top of the session. The S&P 500 advanced 1.4% to 3,875. This huge volatility in such a large stock as Tesla is going to be important. The sheer number of ETFs with exposure to Tesla and – by extension Bitcoin – is vast.

 

Martingale: a gambling system of continually doubling the stakes in the hope of an eventual win that must yield a net profit. Now yesterday we talked about Cathie Wood of ARK, who said she’s used the market pullback in tech stocks to dump some more liquid stocks, which also happen to make money, like Apple, in favour of her ‘highest conviction’ bets, which promise to do so some time in the future. Now this strategy of doubling down paid off handsomely yesterday as Tesla – the Innovation fund’s biggest holding – rebounded 20% and the ARKK Innovation ETF rose 10%. Timing matters a lot in investing, and I would argue that Cathie got a bit lucky with the bounce back being so strong, particularly as we are yet to see the impact of today’s 10-year bond auction across the pond, which could have serious reverberations around global markets if it goes off like the last 7-year sale. Moreover, I think yields will rise further – historically they are way below where they should be on an expected growth basis. This was one day, and momentum continues to trail value, and ARKK is still down over 20% from the peak set earlier this year. Continually Martingaling like this is surely not an advisable investment strategy, no matter how successful you have been before: past performance and all that…  

 

Anyway, tech soared yesterday, and volatility was crushed. The market wants to go up even as higher bond yields make people worry about tech valuations. Despite this, short positions on Tesla are estimated to have delivered $4.2bn in profit so far in 2021, according to estimates from Ortex. On the other hand, losses on GameStop short positions are estimated to have lost traders a total of $11bn YTD. Those losses rose again on Tuesday as GME surged another 27%. The put-call open interest ratio stands at a sturdy 3.37, with short interest at 23.6% still, according to Refinitiv data. GME was up another 5% in after-hours markets – at what time does the Street start to weigh in properly on the business’s fundamental case. I can see someone looking to grab a headline by supporting the fundamental case. Current consensus rating is at $16.80, implying a roughly 93% downside. YTD it’s up 1,200%.

 

Biden’s recovery plan will boost the global economy, according to the OECD. When you dump 10% of GDP on the world’s economy in stimulus, I’d be mighty surprised if that were not true. What’s more of an issue is just how much money is being printed vs the benefit to the economy. It’s not going to be a terribly efficient use of cash. No one is that bothered about this now – but it could become a problem once the economy is back to normal. Morgan Stanley raised its 2021 US GDP forecast by .5pp to 8.1% Q4 noting that reopening is progressing, vaccinations are ramping up and the labour market is gaining momentum. 

 

Amid and because are very different things. You can say shares are down ‘amid’ a regulatory investigation, or you can say shares are down ‘because of’ an investigation. The latter is more forceful, the former safer for writers and commentators if they are unsure why shares are doing what they are doing – sometimes shares go up or down for no reason at all. ITV shares are down over 4% this morning after the departure of Piers Morgan. Are they down because of this event or just amid his departure? Investors may be a little worried about the loss of ratings for GMB – it wasn’t exactly doing that well before he joined and its primetime slot will have repercussions for ads. Love or loathe, Morgan boosted ratings. It could also be that investors are worried about an investigation over comments made by Morgan on air. Shares were hit yesterday after it revealed the way in which lockdowns have hit ad revenues, but indicated things are picking up and Studios can drive new growth. DB today calls it a buy. You cannot be owning ITV and worry about one host, can you?

 

A clear pandemic winner, JustEat reported revenues rose 54% to €2.4bn, whilst adjusted EBITDA came in ahead of forecast at €256m, driven mainly by growth in Germany, Canada and the Netherlands. It still doesn’t make a profit on an IFRS basis. The company expects continued strong demand through 2021 as the momentum from lockdowns persists beyond the end of restrictions. New customers have been attracted to the platform and even if they don’t order as much, consumers are fairly sticky once they land. The company said it processed 588 million orders in 2020, representing a 42% increase compared with 2019 as it enjoyed three consecutive quarters of order growth acceleration last year. Investors will be pleased to see the improvement in Delivery efficiency as this lower-margin business makes up a much larger part of group earnings – the share of Delivery orders rose to 26% from 18% in 2019. The Brazilian business is picking up momentum but management reiterated that they remain willing to sell the 33% stake in iFood “if appropriate offer is made that reflects the size and superior growth of this asset”. JustEast says it has turned down several bids, the highest of which amounted to €2.3 billion. Shares advanced 0.7% in early trade.

 

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695 (61.8% of last year’s rally corresponding with the 38.2% retracement of the 2016-2020 rally – see chart below) area to reclaim the $1,714. Level. Next stop for bulls will be $1,724 but yields are key. A breakdown around $1,690 calls for a retest of $1,585 area.

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695.

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695

Copper prices are in consolidation following a 10-year peak that was driven by a speculative pile-on (supercycle bets) and as rising Chinese stocks are starting to reduce the backwardation in the futures curve. Rising yields and a stronger dollar are also a factor. I would see this more as consolidation that a reversal.

Copper prices are in consolidation