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