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Good morning, Bull Sheeters. Tech stocks are leading the way this morning, sending U.S. futures mostly higher, and lifting global stocks, too.
It’s a big earnings week for Big Tech with one half of the FAANGM sextet reporting in the coming days.
In today’s essay, I look at the bubbly trade in penny and loss-making stocks, including the crazy surge in GameStop.
But first, let’s see where investors are putting their money.
Markets update
Asia
The major Asia indexes are mostly higher in afternoon trading with Hong Kong’s Hang Seng up 2.4%, continuing an impressive monthlong rally.
The big gainer is Tencent, which at one point was up more than 10% on Monday as bulls poured into call options at a staggering clip.
China is the new global leader for business investment. The much watched figures on direct foreign investment came out this weekend, showing the U.S. lost the No. 1 position in the past year, thanks to COVID-19.
Europe
The European bourses were mostly higher out of the gates with the Stoxx Europe 600 up 0.5% at the open, before slipping.
President Biden phoned a slew of world leaders this weekend, including Britain’s Boris Johnson. Downing Street was quick to highlight that the topic of a trade deal came up on the call. The White House had a different recollection of the conversation.
The one-two punch of Brexit and COVID is jangling nerves in the U.K.’s financial and business capital. Roughly 40% of Londoners say they’d consider a move across the Channel to Europe.
U.S.
U.S. futures point to a positive open. That’s after all three exchanges closed out last week in the green.
Goldman Sachs equity strategists see signs of “froth” and “unsustainable excess” in the U.S. stock market. It’s not just with SPACs, they warn, but also the “bubble-like” enthusiasm for stocks with negative earnings. There’s more on this below in today’s essay.
Big tech dominates the earnings calendar this week. The big names include: Microsoft (Tuesday), Apple and Facebook (Wednesday).
Elsewhere
Gold is flat, trading around $1,850/ounce.
The dollar is down.
Crude is up, with Brent trading above $55/barrel.
As of 9 a.m. Rome time, Bitcoin was up around 1%, at $33,300.
***
Game on
The B-word comes up a lot on Wall Street these days.
As Goldman Sachs equity analysts wrote in a note this weekend, “among the questions we receive most frequently from clients is whether U.S. stocks trade at unsustainably high levels (read: “Bubble”).”
The answer to that question is: yes, bubbles abound. But you have to know where to look for them.
For example, equities pros struggle to find an adjective for the craze in blank-check SPACs. There have been 56 SPAC IPOs so far in 2021, raising $16 billion. (If SPACs still puzzle you, check out Fortune‘s Jeff John Roberts analysis of what a “lousy” investment the SPAC is for anybody looking to make a quick and decent return.)
There are other alarm bells Goldman sees in the markets—namely, the robust trade in penny stocks, in companies hemorrhaging losses and in overvalued stocks (as represented by EV/sales multiples hitting or exceeding 20X). It almost goes without saying that such risky bets usually don’t end well. And yet volumes in these YOLO (you only live once) trades are reaching historic highs.
EV/sales is a much watched metric. It gives investors a good idea of whether the market value of a company (factoring in its level of equity and debt) is in line with revenues. A stock with a relatively low EV/sales—say, under 1X—may be a company that’s undervalued despite decent top-line growth. A high EV/sales ratio, meanwhile, indicates investor exuberance is running hot for a business whose stock price is growing faster than sales—or so it often seems.
They tend to be highly risky.
“Since 1985,” Goldman writes, “the median stock trading at an EV/sales multiple above 20x has generated a subsequent 12-month return of -1%, compared with +6% for the median US stock.”
In the past month, nearly one-quarter (23%) of shares that have changed hands are companies with out-of-whack inflated EV/sales, as the table above shows. Meanwhile, there’s been a similar surge in the volume of trading in firms with negative earnings.
One such beloved loser is GameStop; it’s soaring again this morning in pre-market trading. The loss-making video game retailer is up nearly six-fold since Jan. 12 as retail investors go all in to punish the many shorts that are betting on its crash. It’s being called the mother of all short squeezes, and it’s triggering a whole slew of vicious take-downs on Twitter. The big scalp for the WallStreetBets crowd is the veteran activist short Andrew Left of Citron Research, who it appears is losing huge sums on his bearish position at the moment.
At one point on Friday, GameStop was the most actively traded U.S.-listed company, Bloomberg reported. Never mind that it had a rough Christmas sales period, and recently delivered a sobering outlook that involves further belt-tightening to weather its COVID-battered market.
GameStop bulls—I can’t believe I just typed those words—are going all in on the stock as if it were an e-commerce juggernaut.
If you were a bubble hunter, stocks like this one would be worth examining.
***
Have a nice day, everyone. I’ll see you here tomorrow… Until then, there’s more news below.
Coinbase is well positioned to successfully navigate this crypto winter and take market share, Bank of America said in a research report Tuesday. It maintained its buy recommendation following the exchange’s second-quarter results.
The results warrant “a muted stock reaction,” the report said. Net revenue of $803 million was below the bank’s and consensus estimates, while its adjusted $151 million loss before interest, tax, depreciation and amortization was better than the street expected. Importantly, the company remains “cautiously optimistic” it can reach its goal of no more than $500 million of adjusted EBITDA loss for the full year, the report added.
Coinbase shares fell almost 8% in premarket trading to $80.74.
Bank of America notes that Coinbase had no counterparty exposure to the crypto insolvencies witnessed in the second quarter. The company also has a “history of no credit losses from financing activities, holds customer assets 1:1, and any lending activity of customer crypto is at the discretion of the customer, with 100%+ collateral required.” These rigorous risk-management practices will be a “positive long-term differentiator” for the stock, the bank said.
JPMorgan said Coinbase had endured another challenging quarter, while noting some positives.
Trading volume and revenue were down materially. Subscription revenue was also lower, but would have been much worse were it not for higher interest rates, it said in a research report Wednesday.
The company is taking steps on expense management, and in addition to the June headcount reductions, is scaling back marketing and pausing some product investments, the note said.
The bank says the company’s near-term outlook is “still grim,” noting that the exchange expects a continued decline in 3Q 2022 monthly transacting users (MTUs) and trading volumes, but says Coinbase could take more “cost actions” if crypto prices fall further.
JPMorgan is less optimistic than Bank of America about the company in the near term, saying pressure on revenue from falling crypto markets will have a negative impact on the stock price. Still, it sees positives including higher interest rates, from which the firm will generate revenue. It also sees opportunities for the exchange to grow its user base, leveraging almost $6 billion of cash. The surge in crypto prices in July, and the forthcoming Ethereum Merge are also seen as positive catalysts, it added.
The bank maintained its neutral rating on the stock and raised its price target to $64 from $61.
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Elon Musk sold $6.9 billion of his shares in Tesla Inc., the billionaire’s biggest sale on record, saying he needed cash in case he is forced to go ahead with his aborted deal to buy Twitter Inc.
“In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock,” Musk tweeted late Tuesday after the sales were disclosed in a series of regulatory filings.
Asked by followers if he was done selling and would buy Tesla stock again if the $44 billion deal doesn’t close, Musk responded: “Yes.”
Yes.
In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock.
Tesla’s chief executive officer offloaded about 7.92 million shares on Aug. 5, according to the new filings. The sale comes just four months after the world’s richest person said he had no further plans to sell Tesla shares after disposing of $8.5 billion of stock in the wake of his initial offer to buy Twitter.
Musk last month said he was terminating the agreement to buy the social network where he has more than 102 million followers and take it private, claiming the company has made “misleading representations” over the number of spam bots on the service. Twitter has since sued to force Musk to consummate the deal, and a trial in the Delaware Chancery Court has been set for October.
In May, Musk dropped plans to partially fund the purchase with a margin loan tied to his Tesla stake and increased the size of the equity component of the deal to $33.5 billion. He had previously announced that he secured $7.1 billion of equity commitments from investors including billionaire Larry Ellison, Sequoia Capital, and Binance.
“I’ll put the odds at 75% that he’s buying Twitter. I’m shocked,” said Gene Munster, a former technology analyst who’s now a managing partner at venture-capital firm Loup Ventures. “This is going to be a headwind for Tesla in the near term. In the long term, all that matters is deliveries and gross margin.”
At the weekend, Musk tweeted that if Twitter provided its method of sampling accounts to determine the number of bots and how they are confirmed to be real, “the deal should proceed on original terms.”
Good summary of the problem.
If Twitter simply provides their method of sampling 100 accounts and how they’re confirmed to be real, the deal should proceed on original terms.
However, if it turns out that their SEC filings are materially false, then it should not.
Musk, 51, has now sold around $32 billion worth of stock in Tesla over the past 10 months. The disposals started in November after Musk, a prolific Twitter user, polled users of the platform on whether he should trim his stake. The purpose of the latest sales wasn’t immediately clear.
Tesla shares have risen about 35% from recent lows reached in May, though are still down about 20% this year.
With a $250.2 billion fortune, Musk is the world’s richest person, according to the Bloomberg Billionaires Index, but his wealth has fallen around $20 billion this year as Tesla shares declined.
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Most of Gen Z is too young to remember the 2010 New York gubernatorial candidate Jimmy McMillan.
But over a decade later, they would probably agree with his signature issue (and catchphrase): the rent is too damn high.
This July, median rent payments were 7.4% higher than during the same period last year, according to a Bank of America report released Tuesday.
The national median price for a one-bedroom apartment has been hitting new highs nearly every month this summer. It was $1,450 for July, according to rental platform Zumper. In the country’s largest city, New York, average rent exceeded a shocking $5,000 a month for the first time ever in June.
But inflation in the rental market hasn’t hit each generation equally, and no one is getting squeezed harder by the higher monthly payments as Gen Z. Those born after 1996 have seen their median rent payment go up 16% since last July, compared to just a 3% increase for Baby Boomers, BofA internal data shows. “Younger consumers are getting squeezed the most by higher rent inflation,” BofA wrote.
The great rent comeback
Early in the pandemic, landlords slashed rents and gave significant COVID discounts to entice tenants to stay instead of leaving urban areas. Once those deals started expiring in 2021, many landlords suddenly raised payments once again, sometimes asking for over double their pandemic value.
Young people across the board have been hit hard, and rent burdens compared to age can be seen even within a single generation. Younger millennials had their median rent payment grow 11% from last year, while the median payment for older millennials rose 7%. Gen X experienced a 5% median rent increase, according to BofA.
It’s not a surprise, then, that Gen Z feels so strapped for cash. The majority of young people, 61%, said they want to receive their wages daily instead of twice a week, a practice typically reserved for workers living paycheck to paycheck, according to a report from the Center for Generational Kinetics, which specializes in research across the generations. Rising rent inflation has even priced nearly a third of Gen Zers out of the apartment search altogether. Around 29% of them have resorted to living at home as a “long-term housing solution,” according to a June survey from personal finance company Credit Karma.
It’s no wonder—the rent really is too high.
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