Follow the Flows, Not the Fed

So much obsession with the Fed these days on Wall Street and in the press. We are all supposed to believe the narrative that the violent market sell-off (S&P 500 is down roughly 7.5% YTD) is due to the market speculating that the Fed will raise rates. As noted previously, this doesn't make any sense: no one adjusts their estimate of a business' intrinsic value because they think the Fed will raise rates from 0% to 1% over the next twelve months.

The more likely culprit for the market swoon is the fact that, through January 24, the US Treasury had run a budget surplus of roughly $18 billion. When the Treasury runs a surplus, everyone else runs a deficit. Budget surpluses reflect the Treasury removing dollars from the non-government sectors of the economy. This reality is shockingly omitted from mainstream narratives.

Additionally, retail investors are hurting, which shouldn't come as a surprise. Below is an estimate of retail P&L during the pandemic, courtesy of Morgan Stanley:

Here's something I wrote in an internal email yesterday:

Let’s say you’re a retail trader with a $10,000 account balance at the beginning of the pandemic. Per the below, in 2020 you made a killing, +40%. Most, if not all, of that came in the form of ST cap gains. Assuming marginal tax rate of 30%, you netted $2,800.

As a novice, you didn’t put the $1,200 aside to pay taxes on those gains in 2021, so as you prepare your 2020 taxes, you realize you have to sell some of your holdings. Notice average P&L inflects downward in Feb/Mar 2021, as retail traders who’ve crowded into the same stocks are forced to sell to raise cash and pay taxes.

So, your new principle is $12,800. The below estimate suggests retail on average lost 15% in 2021, bringing your account balance down to $10,880. +9% cumulative over two years, vs. +45% for the S&P 500. You probably also lost money on some stupid crypto scheme. So at this point, you are likely selling what you can to make sure you can pay your taxes later this year and locking in any gains from the pandemic (if any) before you lose anything further.

Below is a list of retail-favorite stocks, according to Goldman Sachs. Not investment advice, but I would urge caution to anyone who owns these, given their stretched valuations and potentially negative flow dynamics discussed above:

AMC Entertainment (AMC) - 15.4x EV/TTM Revenues

Doordash (DASH) - 8.7x EV/TTM Revenues

Blackberry LTD (BB) - 6.9x EV/TTM Revenues

Airbnb (ABNB) - 20.5x EV/TTM Revenues

Marathon Digital Holdings (MARA) - 39.3x EV/TTM Revenues

Fisker Inc (FSR) - 70,150x EV/TTM Revenues

Roblox (RBLX) - 39.4x EV/TTM Revenues

FuboTV (FUBO) - 4.9x EV/TTM Revenues

Draftkings Inc (DKNG) - 9.9x EV/TTM Revenues

Riot Blockchain (RIOT) - 22.5x EV/TTM Revenues

Microvision Inc (MVIS) - 395.7x EV/TTM Revenues

Workhorse Group Inc (WKHS) - 404.8x EV/TTM Revenues

Canoo Inc (GOEV) - $2.2bn market cap with $0 TTM Revenues

Be careful out there...