Markets have been acting strangely recently, as we’ve seen some pretty strong volatility, hinting at a “value rotation.”
A value rotation “refers to switching from one set of stocks to the other. The thinking in the stock market is that usually a particular set of stocks move together.” In this case, the rotation is happening from growth stocks to value stocks. Growth stocks are considered stocks that have potential to outperform in the future because of their potential as a company. Value stocks are considered companies that are currently trading below what they are worth. Value is always a great investment, but there are times when you may want to allocate more money to value or growth. We are currently in an environment in which we should allocate more to value, due to interest rates as well as current macroeconomic conditions.
Our overall thesis stays the same. We strongly believe that hard assets and value will outperform during the Biden presidency. As we enter inflation territory, these assets and equities will generally outperform. We also believe that we will see a hard correction or recession in the coming months or 1-2 years. This is based on the idea U.S. fiscal policy isn’t conservative enough to not go into inflationairy territory. We’ve also seen extreme levels of hyperspeculation similar to that of the 1990s tech bubble. People are day trading technically on their Robinhood stock portfolios, trading in and out of options and other derivatives that they don’t quite understand. They try to ride fundamentally poor stocks “to the moon.” SPAC speculation is insane, and when all is said and done, it will likely only be the: Banks, Hedge Funds, Private Equity/Venture Capital Firms, and the guys issuing SPACs who make it out alive.
Let’s talk about SPACs. “A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as ‘blank check companies,’ SPACs have been around for decades. In recent years, they've become more popular, attracting big-name underwriters and investors raising a record amount of IPO money in 2019. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.” For those of you engaged in financial markets, you may have noticed that the SPAC business is booming. SPACs such as $CCIV have exploded 500%, and have been fielded by the retail frenzy rooted on the idea that the company that will merge with the black check company. While this may seem like a great market to be in, the SPAC market—like our financial markets—can behave like a giant poker table, and when you can’t seem to identify who the fool is, chances are that it’s you. Hedge Fund manager Patrick Boyle dove deep into the modern financial scheme going on in this market in his most recent video. In the SPAC market, Hedge Funds, institutional investors, traders. and the issuers of black check companies are the winners at the poker table. The issuer plays the role of the casino, and the hedge fund is given advantages over the retail investor. Given early shares as well as warrants, Hedge Funds have a zero sum game to make a good 20-40% return on their investment. Issuers are given a 20% stake of the merged company, through which they also make a near guaranteed sum of money. If you aren’t a hedge fund or a SPAC issuer, SPACs may not be a great add to your portfolio.
The Biden administration seems to be off to a good start, rejoining the fight against climate change. The Biden administration just passed a 1.9 trillion dollar stimulus package, acting as a double edged sword. Morally speaking, it's the right thing to do to set up strong safety nets to help those in need during hard times. Fiscally speaking, this is going to put us into strong inflationary territory. Printing money will have drastic impacts on our economy in the long run. We will try to dive deeper into the package next week.
Let’s run through a potential game plan. We are currently seeing reflexivity like never before. Here is a little sketch we created of what we think is happening.
We are currently in the rotation area, who knows what will happen, but when we see the blow up in growth, it will be a heck of a great time to buy distressed value and growth.
Watch These Sectors as Stock Market Rotation Creates New Opportunities in 2021 Market Realist https://market realist.com/p/what-is-stock-market-rotation/
