David Fuller and Eoin Treacy's Comment of the Day
Category - Technology

    Email of the day on Dow Theory for the 21st century

    Hope you and the family are well Eoin, no doubt your children are pretty grown up now, although probably still on the payroll.

    I know David would have been fascinated with the ‘Capitulation Indicator’, that forms part of a ‘Dow Theory Buy Signal’, so I attach my 2-page note on that indicator also. It dovetails well with the ‘Dynamic’ move at the ned of a bear markets that he looked for. I was sorry to hear of his passing, way too early in life.

    Feel free to share both of the above attachments, if you deem them of interest to your own subscriber base.

    Read entire article

    Biggest Bitcoin Fund Sinks Toward 30% Discount in Crypto Selloff

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    One of the biggest casualties of the cryptocurrency selloff is the Grayscale Bitcoin Trust. 
    The $27 billion fund (ticker GBTC) has plunged nearly 17% so far in 2022, outpacing Bitcoin’s nearly 9% decline. As a result, GBTC’s price closed 26.5% below the value of the Bitcoin it holds on Tuesday, widening GBTC’s so-called discount to record levels, according to Bloomberg data.

    It’s a dynamic that’s plagued GBTC for months. The trust doesn’t allow for share redemptions in the same manner as an exchange-traded fund, meaning that the supply of shares can’t be created and destroyed with shifting demand. Grayscale Investment LLC applied to the Securities and Exchange Commission in October to convert GBTC into an ETF -- which is expected to quickly repair the discount -- but regulators have yet to approve a physically-backed Bitcoin fund.

    “GBTC keeps breaking hearts as the discount widens,” Brent Donnelly, president of Spectra Markets, wrote in a report. “GBTC is basically a binary bet on a physical ETF at this point. Tempting but tempting the way value traps can be tempting.”

    GBTC first fell into a discount last February as the number of shares outstanding skyrocketed, after years of trading at a premium to Bitcoin. However, the launch of Bitcoin ETFs in Canada and the first U.S. derivatives-backed Bitcoin ETFs eroded GBTC’s competitive advantage. Grayscale’s parent company,
    Digital Currency Group, has sought to repair the discount by buying back GBTC shares.

    GBTC’s price has dislocated from Bitcoin to an even greater degree than the ProShares Bitcoin Strategy ETF (BITO), which is vulnerable to tracking errors given that it holds futures contracts. While Bitcoin rallied 1.6% on Tuesday, BITO and GBTC fell 3.3% and 6.4%, respectively. 

    Read entire article

    Selling Out

    Thanks to a subscriber for this latest memo from Howard Marks which concentrates on selling. Here is a section:

    Many people have remarked on the wonders of compounding. For example, Albert Einstein reportedly called compound interest “the eighth wonder of the world.” If $1 could be invested today at the historic compound return of 10.5% per year, it would grow to $147 in 50 years. One might argue that economic growth will be slower in the years ahead than it was in the past, or that bargain stocks were easier to find in previous periods than they are today. Nevertheless, even if it compounds at just 7%, $1 invested today will grow to over $29 in 50 years. Thus, someone entering adulthood today is practically guaranteed to be well fixed by the time they retire if they merely start investing promptly and avoid tampering with the process by trading.

    I like the way Bill Miller, one of the great investors of our time, put it in his 3Q 2021 Market Letter:

    In the post-war period the US stock market has gone up in around 70% of the years . . . Odds much less favorable than that have made casino owners very rich, yet most investors try to guess the 30% of the time stocks decline, or even worse spend time trying to surf, to no avail, the quarterly up and down waves in the market. Most of the returns in stocks are concentrated in sharp bursts beginning in periods of great pessimism or fear, as we saw most recently in the 2020 pandemic decline. We believe time, not timing, is the key to building wealth in the stock market. (October 18, 2021. Emphasis added)

    What are the “sharp bursts” Miller talks about? On April 11, 2019, The Motley Fool cited data from JP Morgan Asset Management’s 2019 Retirement Guide showing that in the 20-year period between 1999 and 2018, the annual return on the S&P 500 was 5.6%, but your return would only have been 2.0% if you had sat out the 10 best days (or roughly 0.4% of the trading days), and you wouldn’t have made any money at all if you had missed the 20 best days. In the past, returns have often been similarly concentrated in a small number of days. Nevertheless, overactive investors continue to jump in and out of the market, incurring transactions costs and capital gains taxes and running the risk of missing those “sharp bursts.”

    As mentioned earlier, investors often engage in selling because they believe a decline is imminent and they have the ability to avoid it. The truth, however, is that buying or holding – even at elevated prices – and experiencing a decline is in itself far from fatal. Usually, every market high is followed by a higher one and, after all, only the long-term return matters. Reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing. That’s even more true of selling without reason things that have fallen, turning negative fluctuations into permanent losses and missing out on the miracle of long-term compounding.

    Read entire article

    Bitcoin Trades Add to El Salvador Sovereign Risk, Moody's Says

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    El Salvador’s Bitcoin trades are adding risk to a sovereign credit outlook that was already weak and reflecting a growing chance of default, according to Moody’s Investors Service. 

    The government’s Bitcoin holdings “certainly add to the risk portfolio”, Moody’s analyst Jaime Reusche said Wednesday in a phone interview.  

    Trading Bitcoin “is quite risky, particularly for a government that has been struggling with liquidity pressures in the past,” he said.

    President Nayib Bukele has said he buys the cryptocurrency using his phone, though the government doesn’t publish data on its holdings. Bukele bought some coins ahead of El Salvador’s adoption of Bitcoin as legal tender in September, and sometimes took advantage of price drops to buy more in the following months, based on what he has said in posts on Twitter.  

    El Salvador’s current ownership of an estimated 1,391 Bitcoins isn’t large enough to pose a major threat to the government’s ability to meet its obligations, but the risk will increase if the government buys more of the cryptocurrency, Reusche said.  

    “If it gets much higher, then that represents an even greater risk to repayment capacity and the fiscal profile of the issuer.” 

     

    Read entire article

    PMIs and Earnings Will Ultimately Determine the End of the Correction

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

    U.S. Five-Year Yield Highest Since February 2020 in Bond Selloff

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Treasury yields rose a second day, with five-year rates hitting the highest since before the pandemic took hold in the U.S., amid increasing conviction that the Federal Reserve will raise rates at least three times beginning in May.

    The five-year Treasury note’s yield climbed as much as 3.8 basis points to 1.392%, the highest since Feb. 20, 2020, while 30-year yields bumped up toward their 200-day moving average.

    Yields across the curve are rising for a second straight day, after Monday’s selloff lifted the 10-year note’s yield by nearly 12 basis points in its worst start to a year since 2009. The two-year yield topped 0.80% for the first time since March 2020.

    That move rippled through markets from Australia to the U.K., where bond trading resumed after a holiday on Monday. Australian 10-year yields jumped as much as 15 basis points to 1.82%, the highest since Nov. 26. Yields on the same U.K. tenor surged as much as 10 basis points to 1.07%, the highest since Nov. 3.

    Read entire article

    Chipmakers See Rare Sustained Growth in Bid to End Boom-Bust Era

    Semiconductor revenue is poised to top half a trillion dollars in 2022 for the first time ever. 

    But chipmakers are pursuing another milestone that may be even more ambitious given their famously boom-and-bust past: sustained growth. If estimates hold, 2022 could be the first time in decades that the industry posts a third straight year of sales increases. 

    Sales are jumping as computer chips spread to every part of consumers’ lives, becoming essential components of products from cars to smart devices to clothing. Surging demand during the pandemic also resulted in a shortage that is only now beginning to ebb; customers are still snapping up semiconductors as fast as the chipmakers can roll them off production lines.

    The continued growth would mark a turning point for a chip market locked in a vicious cycle for nearly its entire history. Demand surges; chips fill up warehouses and supply chains, creating a glut; then sales crash. It has happened again and again, to the point that investors take the situation for granted.

    Now, chipmakers like Intel Corp. and Micron Technology Inc. argue it’s different this time around. And they may be right. Chips are used in so many products these days, rather than being concentrated in computers and mobile devices, that the risk of a glut is lower. 

    A global chip shortage and supply-chain snags also make it less likely that semiconductor companies are facing a crash anytime soon. Most industry executives have cautioned that the shortage won’t ease until the second half of this year, with some products continuing to be delayed by the scarcity of parts into 2023. While the industry may never be able to escape its roller-coaster nature, the current demand boom may last until 2025. 

    Even though the chip industry is now less reliant on computers and smartphones for sales, those remain its biggest growth drivers. The much-touted automotive sector is a relatively small market -- but climbing -- on course to provide about 10% of industry sales.

    If there are years of growth ahead, the chip industry will need to expand capacity. That could be a slog. Factories cost billions of dollars and take years to bring online. On the plus side, the tight supply will make it all the easier for chips to avoid another crash.

    Read entire article

    Bitcoin: All the Volatility But Less Upside Than Ether

    This note from Bloomberg’s macro blog may be of interest to subscribers. Here is a section:

    Yesterday, Apple became the first $3 trillion company after rising some 40% in the past year. Meanwhile Bitcoin rose just 38% in that same time frame, but with a lot more volatility. That puts Bitcoin -- the granddaddy of the crypto market -- in an uncomfortable position. It offers all the volatility downside risks of cryptocurrencies but smaller returns than its peers.

    Gains in this latest Bitcoin halving cycle have been much reduced. The pace of Bitcoin issuance declines by half every four years in what is known as a “halving”. And that increased scarcity is a large part of the cryptocurrency’s appeal. But, as my colleague Joe Weisenthal just pointed out, Bitcoin has appreciated about 250% in this past cycle, whereas in the 2013 to 2017 halving the gains were 1600% and a gargantuan 2,000,000% in the first halving cycle from 2009 to 2003. And in 2021, the rise in Ether, the second most-valuable cryptocurrency, far outpaced Bitcoin, buoyed by its use in decentralized finance and the NFT market.

    So Bitcoin is a very volatile asset, with two drawdowns over 30% in 2021 alone, while still underperforming even Apple, the world’s largest company and one of the most liquid equity securities.

    On the other hand, if you’re looking for big returns, you’re not looking at Bitcoin either. Not only did Ether outperform Bitcoin by a large margin but the ‘altcoin’ Binance Coin, the next largest cryptocurrency, outperformed both with a 1300% gain.

    And now Ether is worth $455 million to Bitcoin’s market cap just shy of $900 million. Maybe 2022 will be the year Bitcoin loses its crown as the largest cryptocurrency.

    Read entire article

    Our Market and Economic Observations Heading into 2022

    Thanks to a subscriber for this report from Bridgewater which may be of interest. Here is a section:

    Equity team co-heads Atul Narayan and Erin Miles on other equity markets catching up with the US: Looking ahead, it feels that things are primed for the equity markets that have lagged the US (China, Japan, the UK, Europe, etc.) to catch up. There are several factors at play. First, COVID has been a material relative support to US equities from all channels—favorable sector tilt, less virus economic impact, more support from falling rates (versus, say, Japan, where yields are pegged), and compressing risk premiums, given safe-haven appeal for US equities, especially the FAANMGs. We would expect the COVID impact to gradually fade in the coming year and this to be a relative support for the markets outside the US.

    Second, China is showing early signs of moving toward easing after a year when the structural goals (deleveraging, rebalancing, common prosperity, etc.) were prioritized. This again will be a bigger relative support for economies like Japan, Europe, and EMs that are a lot more exposed to China. Finally, if you look back over the last 100 years, it’s almost always been the case that the winners of a given decade end up being laggards in the next one because of the degree of exuberance (and pessimism) that gets priced in following the winning (and losing) stretch. Given how stretched the relative positioning and pricing is today (for logical reasons), we expect the US versus rest of world diff to finally start to revert after a decade-long off-the-charts performance. The main things we are watching closely are the evolution of COVID globally, China’s policy stance, and the retail flows in the US, which were the biggest support for US equities over the past year and a half.  

    Read entire article