Another Massive Rally
It didn’t seem like the market had the capability to have another massive rally since the NAAIM index is at a 2020 high as stocks were very overbought prior to Tuesday. We’ve already gotten the vaccines. There will be news in the next few weeks on their distribution. The first Moderna shipments will be delivered on December 22nd. The FDA has a meeting scheduled on December 10th to discuss Pfizer’s request for authorization.
However, this news probably isn’t enough to boost the whole market. At this point, it’s a catalyst for sector rotation to the banks & energy and away from tech. Speaking of rotation, Zoom stock fell 15.1% on Tuesday which put it 28.5% from its peak on October 19th.
The unexpected catalyst that boosted the whole market was the bipartisan stimulus proposal. Specifically, Senate majority leader Mitch McConnell was quoted as saying waiting until next year for fresh COVID-19 relief “is not the answer.” That’s a big deal because he has held up negotiations the most. If something actually passes, the cyclical stocks have more room to rise and yields will increase quickly.
Across The Board Rally
Surprisingly, the Nasdaq 100 and small cap value were up almost the same amount (1.28% and 1.48%). In fact, the Nasdaq 100 finally hit a record high (I was wrong). You would think value would have crushed growth since the stimulus is the most helpful to the banks and energy. Rising rates are bad for tech stocks, but that didn’t matter on Tuesday.
As you can see from the chart below, the 10 year yield rose to the highest level since mid-November. It rose from 84.5 basis points to 92.8 basis points. It has been in a modest uptrend since early August. The next step is getting above 1% this month. It’s currently at 91.5 basis points. The dollar has been crashing as the index is at 91.18. It’s down 6.8% in the past 6 months bring it to a 2.5 year low.
There is a lot of support at 89. Usually, American stocks stop outperforming when the dollar is weak. That would be another negative signal for large cap tech. The dollar doesn’t like the stimulus because it means greater deficits.
After hitting a record high on Tuesday morning, bitcoin has pulled back. It’s down from about $19,900 to $18,600. It’s tough to predict this asset because there have been a ton of booms and busts. You would think if the software stocks and SPACs crash, bitcoin would fall with them. These speculative stocks are somewhat related to the most shorted stocks.
As you can see from the chart below, they are up 166% from March. Generally, these firms have bad fundamentals, but obviously not every highly shorted stock is a loser. One that that is a loser is Carvana which is up 159% year to date. It’s expected to lose money in 2021 and 2022.
Copper has been on a major run. It hit a 7 year high on Tuesday. This rally signals emerging markets will continue their run. Some are bullish on emerging markets and commodities. This is all part of the rising rates short large cap U.S. tech trade. Even though the Nasdaq 100 and the small cap value index were up almost the same amount, regional banks and oil services had monster days as you’d expect.
The regional bank index was up 2.6%. The oil services index was up 4.4%. The biggest news this week in the energy sector was Exxon’s announcement of an impairment charge that will be between $17 billion to $20 billion. Exxon usually doesn’t take write-downs. This write-down has to do with its acquisition of XTO. Basically, every acquisition in the past 10 years has been bad for energy firms.
Salesforce Stock Falls After Earnings
Salesforce has been in the news this week as it bought Slack and reported earnings. The deal values Slack at $27.7 billion. Slack stock had a relatively weak run as a public company before this purchase announcement. It was up 28.5% year to date before the announcement. It sounds crazy to say that Slack has been weak with that sized gain but many ‘work from home’ stocks like Slack are up triple digits this year. Some are even up quadruple digits.
Investors were worried about Microsoft Teams beating Slack. Now that Salesforce bought Slack, it has a better chance of competing, but obviously, that doesn’t mean this will be a good deal. Salesforce is desperate for growth. It’s using its expensive stock (and cash) to get growth which is a great game plan for the current market, but the environment could shift, making it look bad in hindsight (just like how energy acquisitions now look bad).
Salesforce reported $1.15 in EPS which beat estimates for 75 cents. It reported $5.42 billion in sales which beat estimates for $5.25 billion and was 20% growth. The chart above shows sales growth in each of its 4 business lines. The stock fell 4.8% after hours on this report. This sounds a lot like Zoom’s reaction.
These ‘work from home’ stocks can’t win even when top and bottom line estimates are destroyed. That’s because investors know tough comps are coming next year. Plus, demand will fall as the economy reopens.
The firm gave disappointing guidance as it expects 73 to 74 cents of EPS in Q4 which missed estimates for 86 cents. It guided for $5.665 billion to $5.675 billion in sales. 2022 EPS estimates call for a 1.85% decline because of the tough comps and the reopening of the economy. The stock trades at 52.33 times 2023 earnings EPS estimates.
That’s quite expensive for a firm expected to have sales growth in the high teens in that year. It wouldn’t be surprising if that growth estimate is too high, which means the stock is even more expensive with lower growth. It should probably trade at less than 30 times those estimates. These software stocks will have a bad 2021.