Banks Are Very Hated
Bank stocks received a lot of hate over the weekend because of their bad performance last week. Price determines sentiment. There hasn’t been anything more grueling than owning European or Japanese banks in the past 14 years. In the past 2 years, U.S. banks have also done poorly. As you can see from the chart below, the Euro STOCC bank index just hit a record low.
Some suggest American banks will be like European and Japanese banks. They are missing the fact that the Fed will never cut rates below zero. Plus, American banks have higher capital ratios and better governance. American banks have also done a better job of closing physical locations. There is also more government meddling in Europe and Japan.
It’s interesting that just after banks were criticized so heavily, they had a great day on Monday. KRE regional bank index was up 3.56% and the XLF financial index was up 2.38%. This was a snap back rally. Banks were helped by optimism on a potential stimulus. Yields definitely didn’t help them as the 10 year yield barely moved. It’s still at just 65.7 basis points, well within its 6 month range.
Stimulus & Rapid COVID-19 Tests
Nancy Pelosi, the house speaker, said she had a brief conversation with Mnuchin yesterday. She said she thinks they can find common ground. We’re just waiting to see what the GOP thinks of the Dems new plan. If the GOP gives an inch, it means there is a chance. If they just deny it or propose the same plan they did before, there won’t be a deal. We will know if something gets done within about a week.
Other news of the day, which broke after the market closed, was President Trump’s announcement of the distribution plan for Abbott’s rapid tests. This is important because when the tests were first announced in late August, there wasn’t a specific plan on how they would be distributed. Some tests have been trickling out, but the millions that were promised haven’t been used.
President Trump stated, “I’m pleased to report we’re announcing our plan to distribute 150 million Abbott point of care tests in the coming weeks. About 100 million tests, will be given to states and territories to support efforts to reopen their economies and schools immediately. And 50 million tests will go to nursing homes, assisted living facilities, hospice care, historically black colleges and tribal nation colleges.”
We can expect a huge push towards testing more people in the coming weeks. It would help Donald Trump’s re-election efforts if this goes well. On Monday, there were 1.034 million tests which was the 2nd most ever. 7 day average is 947,000. Let’s see how much that increases in the next 2 weeks. Obviously, we will need to detail which states are counting the antigen tests in their overall results. Hopefully, this rapid testing allows the economy to re-open.
Monday’s Nice Rally
Overall stock market had a strong day as it wasn’t just the banks that did well. S&P 500 was up 1.6%, the Nasdaq was up 1.9%, and the Russell 2000 was up 2.4%. It was a good day for tech as the Nasdaq 100 was up 2.1%. CLOU cloud index was up 1.1%. That underperformance signals there was optimism on the economy and reopening after COVID-19 is fully under control. And the all-important Zoom Video stock was down 1.8%.
Tech Sentiment Weakens
Penn Gaming was up 4.4% following its decline related to its stock offering. Draftkings was up 7% as it reached another new record. Its stock is up 61% in the past month. That’s very scary. This will blow up soon. Finally, Tesla was up 3.4%. It's unlikely that it will surpass its August 31st record.
Investors have either turned against the Nasdaq or are hedging their position. As you can see from the chart above, the net short position in Nasdaq futures is the largest since 2006. Investors don’t necessarily want to buy the Nasdaq because a lot of people are short. Some are still very negative on tech.
As you can see from the chart below, growth stocks carry the highest implied duration, while value stocks carry the lowest duration. That means if yields rise, growth will get crushed and value will outperform. Defensives have a high duration because their dividend yields compete with treasury yields.
Extreme Speculation Is Still Here
Some investors might think the froth in the market is gone because the Nasdaq had a correction. That’s incorrect. You can see with the rally in Penn National Gaming and Draftkings, that speculation is alive and well. There is still a massive amount of froth left to get rid of. Unity Software gained 44% on the first day of its IPO. Since its first close, the stock is up another 40.2%.
Some of the craziest speculative news of the year is that there will be a fund that invests in SPACs. It’s a SPAC made to invest in SPACs. The company is trying to raise $100 million to invest in 10 to 15 SPACs. This is a terrible idea that won’t work in the long run. There has been $41 billion raised in SPACs this year as this has been a mania unlike anything we’ve seen since the late 1990s/2000.
One of the most famous SPACs of the year, Nikola, has been a total dud. That stock is down 61.4% since its pop on its deal with GM. Nikola is paying GM in stock. As the stock crashes, GM becomes more likely to exit the deal. If that occurs, the stock will crash even further. It’s still worth $7.3 billion which means it has further to fall. SPAC investors are obviously ignoring this blow up. They should use it as a warning sign not to invest in these mania stocks.