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Speculative Mania – Was 2021 The Peak?

"Speculative" is a word that aptly sums up the year 2021. The question that remains, however, is whether we have seen the peak in that speculative behavior, or will 2022 continue the trend?

From the mainstream media’s view, expectations are high that…

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“Speculative” is a word that aptly sums up the year 2021. The question that remains, however, is whether we have seen the peak in that speculative behavior, or will 2022 continue the trend?

From the mainstream media’s view, expectations are high that 2022 will be a continuation of 2021. Maybe such will be the case. However, as we laid out just recently, many of the headwinds that supported the ramp in speculative behaviors have, or will, reverse in the months ahead. To wit:

  • Tighter monetary policy, and high valuations.
  • Less liquidity globally as Central Banks slow accommodation.
  • Less liquidity in the economy the previous monetary injections fade.
  • Higher inflation reduces consumption
  • Weaker economic growth
  • Weak consumer confidence due to inflation
  • Flattening yield curve
  • Weaker earnings growth
  • Profit margin compression
  • Weaker year-over-year comparisons of most economic data.

I am sure I have forgotten a couple of things.

As is always the case, the event that changes the “bullish psychology” is always unknown. However, the eventual market reversion is almost always a function of changes in liquidity or a contraction in earnings.

Heading into 2022, a review of 2021 can undoubtedly provide some clues as to what potentially happens next. Notably, “record levels” of anything are records for a reason as it denotes the last period before the eventual reversion.

Peak Buybacks

While not a direct measure of speculative activity, share buybacks hit a record last year as companies rushed to improve bottom-line EPS reports. As we noted previously, more than 40% of the index’s total return since 2011 came from share buybacks. Over the last few years, in particular, they have accounted for nearly 100% of the net buying in the market.

So, the question for 2022 is this:

“If buybacks accounted for a large portion of the net purchases in the equity market, what happens if those buybacks reverse?”

While it may seem like an unlikely event now, there are many reasons companies could rethink using cash for uneconomic benefits. For example, higher interest rates, slower economic growth, or declining share values could cause companies to hoard cash rather than spend it.

There is also the risk of legislative action due to the problem of “wealth inequality” “n America. Over the last couple of years, CECEO’save gotten pushed into the spotlight for their excess wealth. While Congress may not lift taxes on the wealthy, an easy fix is making share buybacks illegal once again. Via Vox:

“Buybacks were illegal throughout most of the 20th century because they were considered a form of stock market manipulation. But in 1982, the Securities and Exchange Commission passed rule 10b-18, which created a legal process for buybacks and opened the floodgates for companies to start repurchasing their stock en masse.”

Everyone Is In The Pool

Another sign of excess speculation has been a record flood of liquidity into global equity funds over the last 18-months. Since the 2020 pandemic-driven economic shutdown, roughly $1.3 trillion in capital flowed into equity funds globally.

global equity fund flows

The massive floods of Central Bank liquidity and fiscal policy interventions by global governments swamped the financial system. So naturally, those funds found their way into equity funds to chase surging asset prices.

As we head into 2022, as noted above, the global government and central bank liquidity spigots are getting turned down. Interest rates are rising, and inflation is starting to affect policy decision-making. The result may well be a reversal of those flows into equity funds as witnessed in 2015-2016 and 2018-2019 as the Fed tightened monetary policy and tapered their balance sheet.

However, for now, everyone is still in the pool. When it comes to a speculative market, you don’t want to be the last one out.

IPO’s & SPAC’s

The actual image of speculation came in the form of Wall Street rushing to dump their private equity investments onto the unsuspecting public. It is always worth remembering that Wall Street is a huge business. Their job is to fill investor demand with supply.

In 2021, demand for products was exceedingly strong, from ESG funds to electric vehicles, disruptive technologies, and cryptocurrencies. So if Wall Street could not get the company to market using a traditional IPO (initial public offering) process, a SPAC (Special Purpose Acquisition Company) was a quick way to get it done.

IPO's brought to market by year.

As shown below, investors were eager to buy the IPO’s of companies even though most of them generated no profits. But in a “speculative market,” such is not surprising.

Non-profitable technology index

There was also a record number of private companies to reach $1 billion in market capitalization. In total, with private equity funds flush with capital, there were more than 800 “Unicorns” in 2021 alone.

Global unicorns in 2021

If Unicorns are supposed to be a rare and magical sighting, 2021 was truly unique in that it generated 30 companies that reached $10 billion in market capitalization.

Global decacorn count by year.

In the end, only Wall Street will benefit from the rush to supply speculative products to retail investors armed with a stimulus check and a trading app. But, as shown, by the end of 2021, most IPOs and SPACs failed to work as well as hoped.

IPOs profitable and non-profitable

Will 2022 see a recovery?

All Levered Up

Seth Klarman’s famous book, “A”Margin Of Safety,” discussed the 1980’s bond mania before it imploded. At that time, many companies issued bonds even though there was little ability to pay the interest expenses. Today, we call such companies “zombies.” Such is because they must feed on cheap debt to stay alive. Currently, the market capitalization of these zombie firms is at a record.

Number of companies with EBIT less than interest expense. Zombie firms.
Chart courtesy of Kailash Concepts

The obvious problem is what happens when they cannot refinance their debt. Unfortunately, as Kailash Concepts explains, debt itself is a significant risk.

Currently, the world is awash in financial alchemy. There are a record number of companies unable to cover their interest expense from profits.

Since 2007, a big part of America’s debt crisis has moved from the financial sector to non-financial stocks with too much debt. We believe the mix of record debt and equity valuations is likely a side effect of real rates approaching lows last seen in 1973. Whether we are right or wrong on the causality, the facts are intimidating in our view.

Our research has documented the world has never been less prepared or equipped to deal with a possible outbreak of inflation or pull-back in Federal largesse.

However, it isn’t just a corporate leverage bubble. There is also a bubble in investor leverage.

margin debt balances

Not only did retail investors take on margin debt to leverage their bets in the markets, but they also took on a record level of speculative single stock options. Such is the purest form of speculation in the market.

Ratio of single stock options trading volume

The problem with options and margin debt is that individuals have little control over the outcome. If asset prices fall, for any reason, investors speculating with leverage and options get wiped out from margin calls and contract expiration.

ItIt’sot a pretty thing.

Price To Sales Rocketship

The best measure of speculation in the market, in my opinion, is the number of people willing to pay more than 10x price-to-sales for an investment. But what about 20x? Kailash Capital recently showed an increase in the market capitalization of stocks with price-to-sales ratios greater than 20x.

“While we’ve seen an increase in the number of companies coming public via IPO’s / SPAC’s the number of investable companies hasn’t kept pace with the degree of inflows, resulting in re-ratings. Looking at the total market cap of stocks with P/S in excess of 20x we’ve surpassed the tech bubble high by nearly ~$1.0T.” – Kailash

Stocks with price to sales greater than 20x

If you don’t understand why this is so essential, let me remind you what Scott McNealy, then CEO of Sun Microsystems, told investors paying 10x Price-to-Sales for his company in a 1999 Bloomberg interview. 

“At 10-times revenues, to give you a 10-year payback, I must pay you 100% of revenues for 10-straight years in dividends. That assumes I can get that by my shareholders. It also assumes I have zero cost of goods sold, which is very hard for a computer company.

That assumes zero expenses, which is hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that expects you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10-years, I can maintain the current revenue run rate.

Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those underlying assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?”

Investors have forgotten the most crucial point of investing.

“The price you pay is the value you get.” – Warren Buffett

Speculation Always Ends Badly

The amount of speculation in the market currently is rampant. There have only been a couple of times in history when we saw similar investors’ actions, and both ended poorly.

The three most significant market risks heading into 2022 are a reversal of the things that supported the speculative attitude of investors over the last year: buybacks, liquidity, and earnings growth. Notably, the reversal of liquidity impacts every facet of the economy and markets, and earnings are the “bullish support” for overvaluation.

As Ray Dalio once quipped:

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

As an investor, it is simply your job to step away from your “emotions” and look objectively at the market around you. Is it currently dominated by “greed” or “fear?” Your long-term returns will depend greatly not only on how you answer that question but to manage the inherent risk.

“The investor’s chief problem – and even his worst enemy – is likely to be himself.” – Benjamin Graham

The post Speculative Mania – Was 2021 The Peak? appeared first on RIA.

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Easyjet share price down 3% as pandemic losses hit £2.2 billion

The EasyJet share price shed over 3% today to give up a chunk of…
The post Easyjet share price down 3% as pandemic losses hit £2.2 billion first appeared on Trading and Investment News.

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The EasyJet share price shed over 3% today to give up a chunk of the gains the budget airline had made earlier in the week. The new slide came after it announced a £213 loss for the last quarter of the year covering the Christmas period, taking losses for the Covid-19 pandemic period to £2.2 billion. The airline also told investors it is still burning through £150 million in cash every month as it struggles to build capacity back up.

The short-haul airline that makes most of its income shuttling holidaymakers and business travellers around Europe said it is still only operating at around half of its pre-pandemic capacity. However, it is hopeful that pent-up demand and an end to travel restrictions mean it will return to pre-pandemic levels by summer and enjoy much brisker trade than of late over the Easter and spring period.

easy jet plc

But before then the airline company will again have to absorb deep losses over the current quarter, which is traditionally its weakest of the year. Even a strong summer period, think most analysts, will be insufficient to see the company return to profit this year. EasyJet’s value is still less than half of what it was in February 2020 before the coronavirus-induced market sell-off that hit later that month and saw markets dive into March before starting to recover. The share prices of rival budget airlines Ryanair and WizzAir have recovered much more strongly in comparison to EasyJet’s and are now close to their pre-pandemic levels. There have been concerns around whether EasyJet could survive the pandemic but investors contributed £1.2 billion last autumn to bolster its balance sheet.

The EasyJet share price is closing the week at around £6.15 compared to over £15 before the pandemic. However, there is now hope the worst may be behind the airline and it can begin its, potentially long, journey back to health. Chief executive John Lundgren attempted to soften the announcement of another hefty loss with a bullish statement on where things go from here for his company:

“Booking volumes jumped in the UK following the welcome reduction of travel restrictions announced on January 5, which have been sustained and given a further boost from the UK government’s decision this week to remove all testing requirements.”

“We believe testing for travel across our network should soon become a thing of the past. We see a strong summer ahead, with pent-up demand that will see easyJet returning to near-2019 levels of capacity, with UK beach and leisure routes performing particularly well.”

For now, however, forward guidance for the immediate quarter remains cautious with the company admitting it has fallen short of its expectations to be at 80% capacity by this quarter, sitting at just 67%. However, with most analysts confident the company will eventually return to strength, and profit in the 2022-23 financial year, EasyJet shares could offer a good buying opportunity at current levels.

The post Easyjet share price down 3% as pandemic losses hit £2.2 billion first appeared on Trading and Investment News.

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Government

Xi Jinping Seeking “Global Domination”: Mike Pompeo

Xi Jinping Seeking "Global Domination": Mike Pompeo

Authored by Nathan Worcester via The Epoch Times,

Mike Pompeo said Chinese leader Xi Jinping wants “global domination—hegemony for the Chinese Communist Party,” warning that the…

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Xi Jinping Seeking "Global Domination": Mike Pompeo

Authored by Nathan Worcester via The Epoch Times,

Mike Pompeo said Chinese leader Xi Jinping wants “global domination—hegemony for the Chinese Communist Party,” warning that the rise of the Chinese Communist Party (CCP) could destroy the rules-based international order in place since the end of World War II.

“It’s not about putting a Chinese tank division in Taiwan. It’s about accreting political power and influence throughout the world,” Pompeo said.

Pompeo, who served first as CIA director and later as Secretary of State under President Donald Trump, made the statement in an appearance at the Argus Americas Crude Summit 2022.

He said his tenure as CIA director came at a time when U.S. attention had to shift from terrorism to other threats, foremost among them the CCP.

He added that a “global awakening” is taking place about what he sees as the ambitions of the CCP.

“Most of the credit goes to Xi Jinping. He foisted a virus on the world, for goodness’ sake, and refuses to let anybody go figure out where it came from,” Pompeo said.

The CCP has met with international criticism for blocking access to the Wuhan Institute of Virology (WIV) and related facilities in Wuhan by the United Nations. Many scientists and journalists suspect the CCP virus that causes COVID-19 originated at the WIV.

Pompeo also commented on ongoing trade-related conflict between the United States and China, raising questions about the United States’ initial decision to open up to China in the context of its primary Cold War conflict with China’s then-rival, the Soviet Union.

“The trade war began maybe in 1972,” he said, referring to Henry Kissinger and President Richard Nixon’s visit to the People’s Republic of China in the context of restoring diplomatic ties.

“Maybe it was the right thing to do in 1972—but the trade war long predates the Trump administration.”

“We encouraged business together. I don’t fault the businesses who went there. Notice the past tense of this. America’s policy encouraged connectivity with the Chinese Communist Party. Today, that is an enormous liability for the world, and Xi Jinping knows that,” Pompeo said.

Tyler Durden Fri, 01/28/2022 - 23:00

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Authoritarian Madness: The Slippery Slope From Lockdowns To Concentration Camps

Authoritarian Madness: The Slippery Slope From Lockdowns To Concentration Camps

Authored by John W. Whitehead & Nisha Whitehead via The Rutherford Institute,

“All the Dachaus must remain standing. The Dachaus, the Belsens, the Buchenwal

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Authoritarian Madness: The Slippery Slope From Lockdowns To Concentration Camps

Authored by John W. Whitehead & Nisha Whitehead via The Rutherford Institute,

“All the Dachaus must remain standing. The Dachaus, the Belsens, the Buchenwald, the Auschwitzes—all of them. They must remain standing because they are a monument to a moment in time when some men decided to turn the Earth into a graveyard. Into it they shoveled all of their reason, their logic, their knowledge, but worst of all, their conscience. And the moment we forget this, the moment we cease to be haunted by its remembrance, then we become the gravediggers.”

- Rod Serling, Deaths-Head Revisited

In the politically charged, polarizing tug-of-war that is the debate over COVID-19, we find ourselves buffeted by fear over a viral pandemic that continues to wreak havoc with lives and the economy, threats of vaccine mandates and financial penalties for noncompliance, and discord over how to legislate the public good without sacrificing individual liberty.

The discord is getting more discordant by the day.

Just recently, for instance, the Salt Lake Tribune Editorial Board suggested that government officials should mandate mass vaccinations and deploy the National Guard “to ensure that people without proof of vaccination would not be allowed, well, anywhere.”

In other words, lock up the unvaccinated and use the military to determine who gets to be “free.”

These tactics have been used before.

This is why significant numbers of people are worried: because this is the slippery slope that starts with well-meaning intentions for the greater good and ends with tyrannical abuses no one should tolerate.

For a glimpse at what the future might look like if such a policy were to be enforced, look beyond America’s borders.

In Italy, the unvaccinated are banned from restaurants, bars and public transportation, and could face suspensions from work and monthly fines. Similarly, France will ban the unvaccinated from most public venues.

In Austria, anyone who has not complied with the vaccine mandate could face fines up to $4100. Police will be authorized to carry out routine checks and demand proof of vaccination, with penalties of as much as $685 for failure to do so.

In China, which has adopted a zero tolerance, “zero COVID” strategy, whole cities—some with populations in the tens of millions—are being forced into home lockdowns for weeks on end, resulting in mass shortages of food and household supplies. Reports have surfaced of residents “trading cigarettes for cabbage, dishwashing liquid for apples and sanitary pads for a small pile of vegetables. One resident traded a Nintendo Switch console for a packet of instant noodles and two steamed buns.”

For those unfortunate enough to contract COVID-19, China has constructed “quarantine camps” throughout the country: massive complexes boasting thousands of small, metal boxes containing little more than a bed and a toilet. Detainees—including children, pregnant women and the elderly— were reportedly ordered to leave their homes in the middle of the night, transported to the quarantine camps in buses and held in isolation.

If this last scenario sounds chillingly familiar, it should.

Eighty years ago, another authoritarian regime established more than 44,000 quarantine camps for those perceived as “enemies of the state”: racially inferior, politically unacceptable or simply noncompliant.

While the majority of those imprisoned in the Nazi concentration camps, forced labor camps, incarceration sites and ghettos were Jews, there were also Polish nationals, gypsies, Russians, political dissidents, resistance fighters, Jehovah’s Witnesses, and homosexuals.

Culturally, we have become so fixated on the mass murders of Jewish prisoners by the Nazis that we overlook the fact that the purpose of these concentration camps were initially intended to “incarcerate and intimidate the leaders of political, social, and cultural movements that the Nazis perceived to be a threat to the survival of the regime.”

As the U.S. Holocaust Memorial Museum explains:

“Most prisoners in the early concentration camps were political prisoners—German Communists, Socialists, Social Democrats—as well as Roma (Gypsies), Jehovah's Witnesses, homosexuals, and persons accused of ‘asocial’ or socially deviant behavior. Many of these sites were called concentration camps. The term concentration camp refers to a camp in which people are detained or confined, usually under harsh conditions and without regard to legal norms of arrest and imprisonment that are acceptable in a constitutional democracy.”

How do you get from there to here, from Auschwitz concentration camps to COVID quarantine centers?

Connect the dots.

You don’t have to be unvaccinated or a conspiracy theorist or even anti-government to be worried about what lies ahead. You just have to recognize the truth in the warning: power corrupts, and absolute power corrupts absolutely.

This is not about COVID-19. Nor is it about politics, populist movements, or any particular country.

This is about what happens when good, generally decent people—distracted by manufactured crises, polarizing politics, and fighting that divides the populace into warring “us vs. them” camps—fail to take note of the looming danger that threatens to wipe freedom from the map and place us all in chains.

It’s about what happens when any government is empowered to adopt a comply-or-suffer-the-consequences mindset that is enforced through mandates, lockdowns, penalties, detention centers, martial law, and a disregard for the rights of the individual.

The slippery slope begins in just this way, with propaganda campaigns about the public good being more important than individual liberty, and it ends with lockdowns and concentration camps.

The danger signs are everywhere.

Claudio Ronco, a 66-year-old Orthodox Jew and a specialist in 18th-century music, recognizes the signs. Because of his decision to remain unvaccinated, Ronco is trapped inside his house, unable to move about in public without a digital vaccination card. He can no longer board a plane, check into a hotel, eat at a restaurant or get a coffee at a bar. He has been ostracized by friends, shut out of public life, and will soon face monthly fines for insisting on his right to bodily integrity and individual freedom.

For all intents and purposes, Ronco has become an undesirable in the eyes of the government, forced into isolation so he doesn’t risk contaminating the rest of the populace.

This is the slippery slope: a government empowered to restrict movements, limit individual liberty, and isolate “undesirables” to prevent the spread of a disease is a government that has the power to lockdown a country, label whole segments of the population a danger to national security, and force those undesirables—a.k.a. extremists, dissidents, troublemakers, etc.—into isolation so they don’t contaminate the rest of the populace.

The world has been down this road before, too.

Others have ignored the warning signs. We cannot afford to do so.

As historian Milton Mayer recounts in his seminal book on Hitler’s rise to power, They Thought They Were Free:

“Most of us did not want to think about fundamental things and never had. There was no need to. Nazism gave us some dreadful, fundamental things to think about—we were decent people‑—and kept us so busy with continuous changes and 'crises' and so fascinated, yes, fascinated, by the machinations of the 'national enemies', without and within, that we had no time to think about these dreadful things that were growing, little by little, all around us.”

The German people chose to ignore the truth and believe the lie.

They were not oblivious to the horrors taking place around them. As historian Robert Gellately points out, “[A]nyone in Nazi Germany who wanted to find out about the Gestapo, the concentration camps, and the campaigns of discrimination and persecutions need only read the newspapers.”

The warning signs were there, blinking incessantly like large neon signs.

“Still,” Gellately writes, “the vast majority voted in favor of Nazism, and in spite of what they could read in the press and hear by word of mouth about the secret police, the concentration camps, official anti-Semitism, and so on. . . . [T]here is no getting away from the fact that at that moment, ‘the vast majority of the German people backed him.’”

Half a century later, the wife of a prominent German historian, neither of whom were members of the Nazi party, opined: “[O]n the whole, everyone felt well. . . . And there were certainly eighty percent who lived productively and positively throughout the time. . . . We also had good years. We had wonderful years.”

In other words, as long as their creature comforts remained undiminished, as long as their bank accounts remained flush, as long as they weren’t being locked up, locked down, discriminated against, persecuted, starved, beaten, shot, stripped, jailed or killed, life was good.

Life is good in America, too, as long as you’re able to keep cocooning yourself in political fantasies that depict a world in which your party is always right and everyone else is wrong, while distracting yourself with bread-and-circus entertainment that bears no resemblance to reality.

Indeed, life in America may be good for the privileged few who aren’t being locked up, locked down, discriminated against, persecuted, starved, beaten, shot, stripped, jailed or killed, but it’s getting worse by the day for the rest of us.

Which brings me back to the present crisis: COVID-19 is not the Holocaust, and those who advocate vaccine mandates, lockdowns and quarantine camps are not Hitler, but this still has the makings of a slippery slope.

The means do not justify the ends: we must find other ways of fighting a pandemic without resorting to mandates and lockdowns and concentration camps. To do otherwise is to lay the groundwork for another authoritarian monster to rise up and wreak havoc.

If we do not want to repeat the past, then we must learn from past mistakes.

January 27 marks Remembrance Day, the anniversary of the liberation of Auschwitz-Birkenau, a day for remembering those who died at the hands of Hitler’s henchmen and those who survived the horrors of the Nazi concentration camps.

Yet remembering is not enough. We can do better. We must do better.

As I make clear in my book Battlefield America: The War on the American People and in its fictional counterpart The Erik Blair Diaries, the world is teetering on the edge of authoritarian madness.

All it will take is one solid push for tyranny to prevail.

Tyler Durden Fri, 01/28/2022 - 23:40

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