Private Wealth

Weekly Research Briefing: Some Missing Information

November 30, 2021

Without knowing all the new Omicron COVID data on Friday, the thin, post-U.S. holiday trading markets elected to sell first and ask questions later. Seventy-two hours later and we still have many questions about the new variant, but very early information might let us tilt toward some informed ideas:

  • Is Omicron more transmissible? It appears so.
  • Is Omicron less severe? We have only seen mild to no symptoms so far.
  • Could Omicron be slowed by the current three vaccine regimen? Likely since it shares some of the same characteristics.
  • Could a less severe Omicron replace the more severe Delta variant (as evidenced in South Africa)? In this age of COVID, anything is possible.
  • If Omicron is worse than Delta, wouldn't the South African Rand enter a freefall? Yes, but it hasn't.

If the hospitals were filling up with the new Omicron COVID variant, then I would view Friday's selloff as fully justified. But given the lack of severity, I view Friday's markets more as a Black Friday sale for your most favorite risk assets. You should also use the Omicron event as a reminder to buy more N-95 masks and BinaxNow self-test kits when you see them on the grocery, drug, or mass merchant store shelves. The U.S. is still very unvaccinated, and I had a friend and a relative both come down with COVID in the last week. You still don't want to get this virus, especially over the holidays.

I can't imagine the Omicron variant will alter any central bank plans toward tightening and raising interest rates, but again, in the age of COVID, anything is possible. Maybe OPEC+ and the U.S. strategic petroleum reserve will back off plans to increase oil flows now that prices have fallen almost 10%. Last week, the U.S. Fed's board members were out talking up an acceleration of the tapering process. I can't imagine that they would shift gears on that now, especially with another likely hot jobs number hitting the domestic tape on Friday. After Monday's close, it appears that tech/growth stocks came out on top of the 1.5-day trading while cyclicals/energy suffered the most. High yield and high-grade credits did surprisingly well, which also suggests to me that Omicron is not an unknown black hole.

Usually, our attention this week is on the holiday shopping figures. And while Omicron may have been front and center to the markets on Friday, the weekend belonged to the many who hit the brick-and-mortar stores. For the first time ever, online sales declined year over year as shoppers felt better to venture out for gifts this year versus last year. With t-shirt weather continuing in Colorado this month, I had no excuse but to mask up and venture out to check the parking lots which looked quite full. So hopefully those full wallets are being put to use. Nice to see the Santas back in action.

Now that was a memorable spike in the VIX...

@charliebilello: The $VIX spiked 54% higher on Friday, the 4th largest 1-day % increase in history (note: $VIX data goes back to 1990).

If Omicron < Delta, then this bounce should continue given the short-term oversold condition...

@mark_ungewitter: Friday's downside volume is likely to generate at least a bounce, barring a 2020-style crash.

S&P 500 Volume Advance-Decline Percent

Before Omicron, the Fed was clearly lining up to accelerate the tapering process...

Since the November meeting, several participants have signaled openness to discussing a faster taper at the December meeting. Last week, Vice Chair Clarida stated that it “may well be appropriate at [the December FOMC] meeting to have a discussion about increasing the pace at which we’re reducing our balance sheet,” while this morning San Francisco Fed President Mary Daly—a dovish FOMC participant—noted that if labor market conditions continue to improve and inflation remains strong that she “would completely support an accelerated pace of tapering.” Other participants, including Atlanta Fed President Bostic, St. Louis Fed President Bullard, and Governor Waller, have also argued for an acceleration of the taper pace over the last few weeks. Taken together with our forecasts for continued high inflation through the winter, we believe that there is significant risk that the taper timeline is accelerated, which would increase the odds that liftoff comes earlier than our July 2022 forecast.

Goldman Sachs

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Regarding inflation, the stage was clearly being set for a lower wage lift-off back in 2017...

Just no way to replace two million workers who often enter the U.S. looking to work in the lower paying industries. This gap will only grow in 2021.

Contribution of international migration to population growth


Also, regarding inflation, how will you feel about oil prices of $125 to $150 per barrel?

Given the current shortage of spare capacity of OPEC+ and the significant underinvestment in energy capex by the rest of the world, J.P. Morgan sees these prices as doable in 2022/2023. You can only guess what the first question of every U.S. Presidential debate will be in 18 months.

Global Oil Capex


Thirty-plus year lows in the relative price action of Latin American equites...

Of course, if J.P. Morgan is correct and oil moves toward $150 per barrel, I know a few Latin American energy stocks that will breakout and help change this underperformance.

LatAm stocks at lowest level


A great article on how one company's stock price has had such a major impact on the world of investing...

“We don’t really have the language to describe Tesla any more,” says Michael Green, chief strategist at Simplify Asset Management. “It’s like explaining to a person in a two-dimensional world the concept of ‘up’.”

The Tesla-financial complex is a phenomenon that many investors — whether passive index funds, traditional mutual funds, hedge funds or ordinary retail investors — have no choice but to contend with, given the idiosyncratic force it now exerts over the stock market.

“It stands out like a sore thumb,” says Dean Curnutt, the chief executive of Macro Risk Advisors. “It’s something you’ve got to pay a lot of attention to.”

One of Tesla’s oddest quirks is the fuel that has helped power its rocketing stock market value. Although its stock is wildly popular with many ordinary retail investors, the swelling size and hyperactivity of Tesla “options” — popular derivatives contracts that allow investors to bet both on and against a stock and magnify any gains and losses — has also flabbergasted many market veterans.

The nominal trading value of Tesla options has averaged $241bn a day in recent weeks, according to Goldman Sachs. That compares with $138bn a day for Amazon, the second most active single-stock option market, and $112bn a day for the rest of the S&P 500 index combined. This makes Tesla’s stock more prone to whipsaw movements, because of the “leverage” inherent in using options to trade...

The Tesla options market — more than 60 times as active as the entire FTSE 100 options market, and almost seven times greater than Euro Stoxx 50 options — has helped push US option trading volumes above actual stock trading volumes this year.

Tesla accounts for a big chunk of that aberration. In November options trading was 50 per cent higher than stock trading in nominal terms, and without Tesla and Amazon it would have been 20 per cent lower, according to Goldman Sachs. “The combination of a high market cap and extraordinary option activity make Tesla a critical driver,” the investment bank said in a note.


Tesla dominates US options market

Meanwhile, a much smaller market capitalization auto company is going to write a $17.6b check to try and retake the lead in EV...

TOKYO— Nissan Motor Co. said Monday it plans to spend $17.6 billion over the next five years as it adds 20 new battery-powered vehicles to its lineup.

The company hopes to recapture a degree of the prominence it held in the electric-vehicle race after its pioneering introduction of the Leaf EV more than a decade ago. Investors have boosted the share prices of car makers that are betting big on EVs, including relative newcomers such as Tesla Inc. and industry stalwarts like Ford Motor Co. and Volkswagen AG.

“We have a 10-year head start over our competitors in electrification,” said Nissan CEO Makoto Uchida. The amount the company plans to invest in the next five years is twice what it has spent on electric vehicles since 2010...

Nissan said nine of the 20 new vehicles to be introduced by 2026 would be purely battery-powered EVs. The others would include Nissan’s version of gasoline-electric hybrids, vehicles powered by electric motors but equipped with a small gasoline engine to recharge the battery while driving.


Buy Now, Pay Later is the latest thing in financial opioids...

While kids have been smart to avoid credit cards, some are getting addicted to this new financial gimmick. If they use BNPL, send them Scott's piece below, then sit down with them and have your own intervention.

Smoking wasn’t popular among women until Edward Bernays, the father of public relations, rebranded it. In 1929 he capitalized on the feminist movement and repositioned cigarettes with a “torches of freedom” campaign. Bernays hired women to march down Fifth Avenue smoking as a public display of emancipation and rebellion. Within six years, women were purchasing 1 in 5 cigarettes, up from 1 in 20 in 1923.

The strategy is simple: If people associate something negative with your product (e.g., cancer), change the conversation — “You’ve come a long way, baby.”...

A low-calorie version of this is unfolding in the payments space. The stale product formerly known as a loan has been rebranded as “Buy Now Pay Later,” or BNPL. The premise is simple: Buy a product for a fraction of its cost at checkout and pay the rest of it off over a few weeks or months. The good news: Debt is not as bad as cancer. Though it can trigger depression and even revolution. But that’s another post.

BNPL is one of the hottest trends in finance: 1 in 5 Americans used one of these services in the past year, with U.S. spending on BNPL increasing 230% since 2020. By 2025 global BNPL spending is projected to double to $680 billion. In August, Square acquired BNPL pioneer Afterpay for $29 billion in the largest-ever acquisition of an Australian firm. Swedish BNPL giant Klarna is getting ready for a $50-billion-plus IPO, with a current valuation on par with ING or Lloyds Banking Group.

The target market is young people. Klarna’s frontman is rapper A$AP Rocky (who was paid in equity, not debt) — many BNPL brands rely on social media influencer campaigns. In the U.S., three-quarters of users are Gen Zers or millennials; it’s projected that nearly half of Gen Z will be using BNPL services by 2022. Their attraction to BNPL coincides with an aversion to banks and the credit they offer. This is a generation that came of age just before or in the wake of the Great Recession, a global economic crisis precipitated by … way too much credit. Young people love BNPL because, according to the former director of Afterpay, the vast majority of them “don’t want to be on credit.”...

There’s one problem: Buy Now Pay Later is (wait for it) credit.


If it looks, smells, and acts like credit, then just call it credit. And be prepared to meet your federal regulators...

In complaints to the Consumer Financial Protection Bureau, consumers have said that they've had problems with purchases, either because they couldn't make a return or get a refund, or got charged with fees they didn't understand.

Consumers also do not always understand the risks of these products, said Rachel Gittleman, financial services outreach manager at Consumer Federation of America.

"These products are credit and carry the same consequences for defaulting as other types of loans," she wrote in a letter to the House Financial Services Committee.

This kind of confusion can lead to consumers falling behind on payments. In a recent study by Credit Karma, one-third of consumers who used "buy now, pay later" products had fallen behind on one or more payments, and 72% of them said their credit score dropped...

"Even when people do pay the installments, there's likely a higher number of people who are also at the same time racking up credit card debt," said Melody Brue, principal analyst at Moor Insights & Strategy. "It's sort of ironic that some of these 'buy now, pay later' options are meant to be for people not tapping into credit, but they actually are."

If consumers rack up debt or complaints rise, the companies could lose customers — or money, if the loans don't get paid back. This could undermine one of the big claims for "buy now, pay later": that it's cheaper, easier and better for consumers' credit than a credit card.


BNPL is big in Australia. The industry's market cap is now less big since their customers have seen behind the curtain...

The sales event of the year is upon us! 7am on Friday an assault was unleashed on my inbox as every retail company I'd ever given my details to flooded by emails with Black Friday discounts. No cash? No problem. BNPL is available at the checkout. Afterpay-style services are coming up with creative ways to entice us to take on more debt, and the retailers love it. Global fintech Klarna claims retailers who offer BNPL see an increase in average order value of around 45%. We may have cut up the credit cards but we haven't kicked the habit, with Australian's collectively owing more than $900 million to buy now, pay later (BNPL) services.

But public opinion is wavering. BNPL players including Afterpay, Fupay and Zip Co got a shellacking on the ABC's Gruen panel last week. Host Wil Anderson said F*-U to BNPL, panellist Kirtsy Muddle has a "real ethical problem with it" calling on the advertising regulators to step in, and Todd Sampson thinks it’s a "twisted, dark form of debt" targeting the most financially vulnerable. On social media, love has turned to hate as influencers who once spruiked BNPL to their followers now condemn the service as a modern debt trap. Groups like Financial Counselling Australia have been talking about the dangers of unregulated credit for some time. Now, their concerns are going mainstream.

Investors are heading for the exit. Once market darlings, shares in all the major players are down between 16% and 40% over the last three months. The sector has massively underperformed the S&P/ASX 200 as investors baulk at huge marketing spends, mounting credit losses and lower than expected customer growth.

From peak to trough


Movie theaters are better businesses than BNPL ones...

But in revisiting an old punching bag, AMC still looks five to twenty times more expensive than it should even if COVID never happened. But yes, I know that I am forgetting about the crypto-paid and drone-delivered bags of popcorn. Even the insiders know the score. Just check the insider trading filings.

Tweet from @RandolphDuke7


My theater is running only 10-15% full on opening weekends...

We have been conditioned to watch most movies in our home. The majority of viewers are not going back.

Attendance at AMC Theatres


A great list of the top firms investing in private companies that become decacorns...

This year has seen the number of new companies valued as decacorns double already, compared to 2020, marking the highest year on record for new startups valued at $10 billion or more.

Since the first decacorn was born in 2007—when Facebook, now Meta, was valued at $15 billion in a funding round as a private company—there have been 84 of these companies in total, per Crunchbase data. Of those, 33 have exited, 31 via a public market debut.

So, who are the most active investors in these highly valued private companies, of which 30 new ones have been minted as decacorns year to date?

Most Active Investors In Decacorns By Investment Counts


Type 1 diabetes patients are getting another big reason to celebrate this holiday season...

Early this year, she spotted a call for people with Type 1 diabetes to participate in a clinical trial by Vertex Pharmaceuticals. The company was testing a treatment developed over decades by a scientist who vowed to find a cure after his baby son and then his teenage daughter got the devastating disease.

Mr. Shelton was the first patient. On June 29, he got an infusion of cells, grown from stem cells but just like the insulin-producing pancreas cells his body lacked.

Now his body automatically controls its insulin and blood sugar levels.

Mr. Shelton, now 64, may be the first person cured of the disease with a new treatment that has experts daring to hope that help may be coming for many of the 1.5 million Americans suffering from Type 1 diabetes.

“It’s a whole new life,” Mr. Shelton said. “It’s like a miracle.”...

“We’ve been looking for something like this to happen literally for decades,” said Dr. Irl Hirsch, a diabetes expert at the University of Washington who was not involved in the research. He wants to see the result, not yet published in a peer-reviewed journal, replicated in many more people. He also wants to know if there will be unanticipated adverse effects and if the cells will last for a lifetime or if the treatment would have to be repeated.

But, he said, “bottom line, it is an amazing result.”


Raindrops on roses and whiskers on kittens, no...

But bright copper kettles filled with Dungeness crab and now you are talking about one of my favorite things. After six dry years, the holiday dinner table will finally be complete. Welcome back Mr. Crab.

Oregon’s commercial Dungeness crab season will open Dec. 1.

It’s the first time in seven years that the season has not been delayed by low meat yields, high levels of domoic acid, or both.

Commercial Dungeness crab is one of Oregon’s most iconic and valuable fisheries, contributing millions to coastal communities. It has traditionally been featured on many Oregonians’ holiday menus.

But the scheduled opening has been delayed in recent years. In some years, parts of the coast have remained closed into late January.

Dungeness crab


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