21/02 Feb Market Commentary

Mar 5, 2021 | Blog Cats | 0 comments

We must be getting into late stages of a cycle given the fervor and frenzy of certain topics in the market.

Bitcoin

The price of Bitcoin (vs USD) started February around 32,600, reached a high of 58,350, fell to as low as 43,060, and began a new rally to close out the month. A lot of things happened within this month. Some argue Bitcoin is now set up for a spectacular collapse while others will argue the foundation is set for a surge. It is a highly speculative situation.

Starting with the collapse perspective, the New York Attorney General’s office announced a settlement reached with Bitfinex, the group that created Tether, a stablecoin that is used by cryptocurrency investors that cannot find conventional access to the market. Amongst many astonishing findings was that its dollar-for-dollar reserves policy was a lie to the tune of billions. The NYAG settlement stipulated that Bitfinex could no longer conduct business in New York, something that is generally viewed as the kiss of death since New York is often considered center of the financial universe.

On to the surge perspective, it is argued that the Tether saga is now behind Bitcoin, no collapse has occurred, and institutional investors continue to enter the water – BNY Mellon and BlackRock to name a few. Tesla also jumped in by announcing the company had acquired $1.5 billion of Bitcoin and may accept Bitcoin for car sales. Notably, most of this “institutional” participation is simply productizing or enabling retail investors to invest in the market – they are not putting their dollars at risk, they just want fees from crypto craze.

MircoStrategy, an operating company with dotcom-era origins, appears to have completely pivoted strategy to being at the center of the crypto craze. Under the leadership of an audacious CEO, MicroStrategy made the bold move of investing the company’s “reserve” assets in cryptocurrencies – namely Bitcoin. The company has now issued debt to buy more Bitcoin – not only did it seek to issue $600 million, but the debt deal was upsized to $900 million on high demand. The CEO is now considering another debt raise…

All these activities contributed to Bitcoin achieving a milestone $1 trillion market cap. Interestingly, the narrative around Bitcoin has slowly shifted from a new, disruptive currency to now Bitcoin should just be viewed as a smarter and better gold – a digital gold. That is probably a more accurate description, but we still think most buyers of the cryptocurrency are speculators, not long-haul owners – buying something to sell it higher. If that is true, then it seems to us that Bitcoin is a bubble – people buying for no other reason and with no other basis then “price goes up”. But if the activities of this month keep pace in months to come then this bubble could blow larger before it pops.

Bitcoin:

Tesla

Tesla and Tesla-adjacent stories during February:

GameStop

Last month we highlighted the frenzied trading of stocks like GameStop. This activity subsided as the stock prices slowly declined. There was a congressional hearing that included Robinhood’s CEO, Citadel’s CEO, Melvin Capital’s CEO, and a retail investor, Keith Gill, who went by several online names. We did not watch the hearings, but we understand there was little to be gleaned from the grilling by representatives with little understanding of markets. What is fascinating is that by the end of February stocks like GameStop were rallying again – after falling back to $38.50, it surged to more than $180. What else is fascinating is that for all the narrative around retail investors “sticking it to the suits” (hedge funds, Wall Street, et cetera) there are now stories of several hedge funds making large sums of profit during the run up. All we can say is that something appears to be deeply broken with this market and we wish for it to be fixed. In the meantime, prepare for things to get crazier.

Silver

Following the GameStop gambit, Reddit users turned their attention to the silver market. The price of silver was driven higher but given the depth of the precious metals market the price of silver did not rise like GameStop and the others. Instead, curiously, gold has broken through technical support levels to the downside while silver remains somewhat buoyed. We continue to watch precious metals with interest in select investments.

Silver:

Gold:

Rates

The long end of the treasury curve has been on the rise – the treasury curve is steepening. The central prognostication is that inflationary pressures are driving investors out of bonds. Just look at commodity prices, for example: lumber, copper, iron, oil, corn, etc are all up big year-over-year. But then there is the curious case of gold trading lower and treasury TIPS breakeven trading inverted – this is generally interpreted to mean that expectations are for transitory inflation, rising near-term and settling lower long-term. Some from this camp are calling it a “head fake”. Perhaps more plausible still is something quite technical: 1) Bank SLR (supplementary leverage ratio) was temporarily excluded as part of Federal Reserve COVID policy and is set to expire March 31, 2021. Among other reasons, the SLR exclusion has allowed banks to soak up increased treasury issuance since the pandemic began. The Fed does not yet know what it will do with the exclusion despite the deadline looming, but, in the meantime, banks are shedding assets in anticipation of compliance should the SLR exclusion not be renewed. This means treasury bonds are being sold. 2) The Treasury has inexplicably decided to shift the mix of new issue treasuries – on net, shifting from shorter to longer. This is causing reduced supply of T-bills (and shortages in the repo markets as seen by rates literally at 0.0%) and increased supply of bonds, driving rates higher and the curve steeper. Adding fuel to the fire, convexity hedging (mortgage investors), and risk parity unwind must sell into the market in response to the recent move in rates.

Curve steepening:

Breakevens:

Bloomberg commodity index:

Brazuela

Brazil president Bolsonaro ousted the CEO of the country’s stated owned petroleum company, Petrobras. The CEO was replaced by a Bolsonaro loyalist general. As you could imagine, the general does not have petroleum or mining experience. We wonder if Brazil’s oil production has taken a step in the direction of Venezuela, an oil rich neighbor to the north with diminished technical ability to extract the oil after years of malinvestment under communist mismanagement. We will see, but we think Petrobras has little investment appeal now.

Boeing

After two long years scrambling to get its 737 birds back in the air Boeing grounds another bird. This time, the 777s are having engine problems. Luckily, there were no deaths, but if you watch the video it must have felt terrifying to be on these flights. The culprit appears to be a particular breed of Pratt Whitney engines exclusive to the 777s. And, in the case of Boeing, these are fortunately very old aircraft – it will not shutdown production of newly airworthy aircraft.

Junk

Junk bonds have achieved record low borrowing costs according to FT (note, this site requires subscription). In the piece FT notes that Centene Corporation borrowed $2.2 billion for 10-years with a 2.5% coupon, matching the low set by homebuilder MDC Holdings in January. T-Mobile now holds the record for lowest coupon ever for a junk issuer with its 5-year note that pays 2.25%. Ford borrowed seven years with 2.9% coupon. The list is growing…

Warren Buffet said in his latest letter to Berkshire Hathaway investors:

Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim.

We could not agree more. Investors currently appear desperate for yield as risk premiums across the investment universe have been driven lower by central bank largesse.

Now is the time to be paying attention to fundamentals. Know what you own.