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March 8, 2021 – Friday’s reversal may be a temporary end to the NASDAQ selloff if there is strong follow-through today. But if rates continue to rise, the speculative end of the market will continue to face headwinds.

//  by Tower Bridge Advisors

Stocks went for a wild ride Friday. At the start, they fell after interest rates edged higher following a stronger than expected employment report. But a good jobs number is almost never a reason to sell. More jobs is always a good economic sign. Investors soon recognized this. Stocks turned around quickly and finished higher. Even the beleaguered NASDAQ followed suit and rallied, although it finished down for the week.

In technical parlance, what we witnessed Friday had all the markings of what technicians call a low-high reversal, a rapid move lower, usually following several down days, and then a quick recovery ending near session highs. By late Friday morning, clearly, again from a technical standpoint, the selling in many NASDAQ names reached a short-term crescendo. Many were now below longer-term trend lines. Friday morning’s selling offered some signs of capitulation. Weaker hands, who jumped in late, ran for the exits. When the selling exhausted itself, buyers stepped in.

But what looked like a selling climax may not be what it seemed. To be real, robust buying must continue today. Corrections often have sharp one-day or intraday counter rallies. Many of the biggest high flyers of recent months never made it into positive territory on Friday. Tesla, for instance, broke below $600 and stayed there all session long. It was $900 not very long ago. While some will say Tesla is now a bargain at one-third off, even at $600 its shares sell at a huge valuation at multiples of its 52-week low. Many other recent cult favorites also failed to finish higher.

A stock isn’t cheap at one-third off if the previous high was an absurd valuation.

I would characterize today’s stock market as two distinctive parts. One I will label the S&P 500 and related real businesses. Real means that the companies have a stream of revenues and earnings that are predictable within a reasonable range. Valuations today are high because interest rates are so low, and excess money (thanks to the Fed and Treasury) pushes prices higher. But then there is the silly side, an unintended consequence of too much money, too much momentum, and what Robert Schiller and Alan Greenspan labeled irrational exuberance.

Irrational exuberance shows up in SPACs, special purpose companies that raise money to buy a future, not yet named, company that the SPAC creator chooses. It could be a company that promises to send paying guests to the moon. Or one that will make the next electric car, far better than anything Tesla has created to date. Lately, anytime a SPAC announces the purchase of anything, its stock goes up 50-200%. SPAC creators make a killing. SPACs usually are accompanied by a PIPE. That stands for a private investment in a public equity (the SPAC) at a discounted price. Guess what? More money for the SPAC creators and friends. So far, SPACs have given momentum investors a free ride. We will see where they end down the road. My guess is they won’t end well.

Then there is Bitcoin, cryptocurrency built on something called blockchain technology. Every Bitcoin has its own special identifier, a digital code somewhat akin to the serial number you find on a dollar bill. Every Bitcoin is both unique and instantly identifiable. In theory, blockchain technology can allow us to track flows of data and, yes, Bitcoins. In theory, it can speed up the pace of transactions. In theory. Try today to buy something with Bitcoin and see whether you can complete the transaction faster than you can with a credit card. No way! For one, the infrastructure to verify the identity of the Bitcoin is primitive within a retail setting. Second, the value of a Bitcoin can change by hundreds or thousands of dollars in a second. Bitcoin isn’t money. It isn’t a gold substitute. Its value is totally dependent on what the next guy is willing to pay for it.

But let’s take this one step further. There is a new acronym that is today’s rage called NFT. That stands for non-fungible token. Attach an NFT to anything and it becomes unique. The token is a blockchain derivative, a relative of Bitcoin. Right now, Christie’s is holding an online art sale of a work by the artist Beeples, unknown to most of us but one with a cult following on Instagram. He has allegedly posted a new Instagram image every day for 5000 days and amalgamated them into one work merger with an NFT that makes it unique. It is sort of like a classic work of art versus an edition of the same piece. One is unique and one is a multiple. The current bid for the Beeples work is up to $3.4 million with three days to go. An NFT of a Lebron James dunk sold for over $200,000.

Is this world going nuts?

Again, there is the crazy world of SPACs, Bitcoins, and NFTs. Add in some of the short-selling silliness related to GameStop and friends. And then there is the world of stocks based on real values. The two do overlap a bit. There are companies that have real revenues and earnings selling at 30-50x revenues that won’t stay in that kind of stratosphere forever.

The problem will come when all those nutty bubbles start bursting. When that happens, panic will cause those getting walloped to sell real assets. But the real pain will be felt by those playing in the epicenter. Those invested around the edges may endure some modest short-term pain.

For those of us who call ourselves investors, the focus will remain how the clash between rising earnings and higher interest rates works itself out. Lately, the accelerated pace of rising rates has been winning out. Next month it will be earnings season, but it will also be a moment when the next round of stimulus checks goes out in the mail. This clash will take months to work itself out. It is tempting to try and play at the outer fringes of silliness, especially when it is working so well. It’s a speculation, a gamble. I know how it will end, but I don’t know when the end is. In the meantime, who knows?

Friday’s reversal may give the speculators a reprieve, especially if there is strong follow through today. But the silliness isn’t going away yet. When it does, the damage will be far worse than a 10% NASDAQ correction. Most SPACs will ultimately sell below their $10 offering price. Some will go to zero. So far, the real uses of Bitcoin are no different than they were when Bitcoin traded at $1,000. Don’t get me wrong. Digital currency is inevitable. But a digital dollar makes a lot more sense than Bitcoin as a transactional form of money.

Thus, enjoy the strong economy, hope the Fed is right and inflation stays within reasonable bounds, and if you are going to speculate beyond the fringes, think a bit and don’t let yourself get caught up in the silliness.

Today, NBC news anchor Lester Holt is 62. Former Monkees drummer Micky Dolenz turns 76.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « February 2021 Economic Update – “2021 – Growth vs. Inflation”
Next Post: March 10, 2021 – The speculative end of the market staged a big rally yesterday after several down weeks. Today we will see if there is any follow-through. Although the speculative fringes have begun to correct, they can hardly be characterized as cheap. »

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  • April 12, 2021 – Headline inflation data may look scary, but it isn’t indicative of a change in the core rate. Amid surging earnings, stock prices keep moving up. But inflationary pressures are increasing, suggesting the fairy tale ride for stocks won’t last forever.
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  • April 5, 2021 – A wonderful employment report on Friday will be a nice Easter present this morning. Surging employment without surging wages is the perfect combination for stock market investors.
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  • March 29, 2021 -Stocks rose to record highs on Friday amid economic optimism. While bond yields rose, they stayed below recent highs.
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  • March 22, 2021 – While 10-year Treasury yields have been rising about 30 basis points per month YTD, that pace is not likely to continue. While some shortages lead to price increases, there are also excesses that will drag prices lower. The pandemic accelerated change. It takes some time for the economy to adjust completely.
  • March 19, 2021 – A spiking 10-Year Treasury continues to impact markets. Technology and high P/E stocks collapsed again yesterday. The rotation pushed many Industrial, Financial and Consumer Discretionary names to new highs. Dovish Federal Reserve commentary is a double-edged sword now as free money is leading investors to fear inflation.

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