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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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International

A-levels: A grades are up compared to pre-pandemic results

The pandemic has has a serious impact on school pupils – but a record number have applied to university.

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Fewer students are getting their first choice of university than in 2021. Monkey Business Images/Shutterstock

The 2022 A-level results are in, and the number of students receiving A or A* grades has fallen – down by 8.4% on 2021.

For the first time since 2019, A-level results are being decided by formal exams. Students were warned that grades were likely to be lower than in 2020 and 2021, when cancelled exams and teacher assessments in A-levels led to record high results. Nevertheless, the proportion of students receiving A grades is up from pre-pandemic levels in 2019.

A busy end to the admissions round is under way for universities and students, and the next steps for students still living with the impact of the pandemic are becoming clearer.

In 2021, some universities were over subscribed and had to offer significant incentives for students to defer their places. While the number of students in 2022 accepted on a UK university course – 425,830 – is higher than in 2019 and the second highest on record, it is 2% lower than in 2021. Just a few days before the results were out, thousands of students did not yet hold an offer of an university place.

Over the past two years, students studying qualifications, whether BTEC, T-level or A-level, have had to cope with the consequences of the pandemic for a significant proportion of their course. This has included school closures and remote lessons, social isolation, illness and increased levels of mental stress.

Highest number of applications

Nevertheless, 2022 has seen the highest ever numbers of applications to higher education, with 44% of 18 year olds applying. This number includes record numbers of students from areas of the country with historically low participation in higher education. It demonstrates that many young people believe higher education can make a difference to their future opportunities.

For the lucky ones who get the grades to gain a place at their first choice of university, planning for their degree course starts right away. A record number of Scottish students have already been accepted to their first choice of university.

The best advice for those students who don’t receive confirmation that they have been accepted by their first choice university is to ring the university, who will have staff on hand to explore their options.

For students who haven’t got a university place, it is still possible to explore options though clearing – which allows students without offers to find places on university courses that haven’t been fully subscribed. Students in this position should try to keep calm, write down their options and avoid quick decisions.

For those young people who do go to university, there will be challenges. With the cost of living for all rising rapidly, people on a lower income – as many students are – will feel the pinch of higher bills for food or rent.

Support from universities

The pandemic saw a serious and concerning rise in mental health issues affecting young people. Universities need to be ready to give holistic support to students as they transition into university and settle into undergraduate life. This means support for academic transition needs to be delivered in the context of good available support for mental health and wellbeing.

However, Universities UK, an advocacy groups for universities, has recently pointed out the wide range of benefits for those who study for a degree, including the £9,500 more per year on average graduates in England earn compared with non-graduates. It also draws attention to the value of degrees to improve the life chances of young people, to build skills and to contribute to society.

For many young people, getting a degree gives them access to a vocation such as teaching or working as a health professional. For others it is a path to travel and adventure. For many, the university journey is a place where young people find their tribe and begin to understand their identity.

For the class of 22, making it to university might mean life-changing opportunities. Given the challenges and restrictions of the last few years, this has never been more important.

Helena Gillespie receives funding from the European Union.

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Government

Pfizer Inc (NYSE: PFE) To Acquire Global Blood Therapeutics For $5 Billion

According to sources familiar with the matter, the Wall Street Journal reported that Pfizer Inc (NYSE: PFE) was in advanced discussions to acquire pharmaceutical…

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According to sources familiar with the matter, the Wall Street Journal reported that Pfizer Inc (NYSE: PFE) was in advanced discussions to acquire pharmaceutical company Global Blood Therapeutics (NASDAQ: GBT) for $5 billion.

Pfizer, too, acquired Global Blood Therapeutics 

Pfizer wants to close a deal soon, but there are still other interested parties, according to the article.

Global Blood Therapeutics, which manufactures Oxbryta, the blood disorder medication, saw its shares jump 44%  on Friday afternoon to a two-year high. As of Thursday’s closing, the company’s market cap was $3.12 billion.

A spokesman for Global Blood stated the company does not “comment on market rumors or speculation,” while Pfizer declined to respond on the matter.

With plenty of cash left over after selling its COVID-19 vaccine, New York-based Pfizer is searching for deals that may generate billions of dollars annual sales by 2030.

Its $11.6 billion acquisition of migraine medication manufacturer Biohaven Pharmaceutical Holding (NASDAQ: BHVN) in May was the most recent in a series of purchases that also included Trillium Therapeutics and Arena Pharmaceuticals in recent years.

Oxbryta received approval last year for sickle cell disease management 

In 2019, the US government approved Global Blood’s Oxbryta to manage sickle cell disease in individuals aged 12 and over. The oral medication was approved in December 2021 to treat the illness in younger children. The drug’s sales increased by almost 50% to $194.7 million in 2021.

After a gloomy start to the calendar year, when a lack of significant purchases and clinical-stage treatment failures lowered investor morale and restricted funding, the biotech dealmaking pace has recently picked up again.

Also, Amgen Inc (NASDAQ: AMGN) also decided to purchase ChemoCentryx Inc on Thursday for $3.7 billion to obtain access to a possible breakthrough medication for inflammatory illnesses. AstraZeneca’s $39 billion acquisition of Alexion Pharmaceuticals in 2020 has put the realm of immune diseases in the limelight. The deal, which was announced before trading opened, will also give the corporation control of at least two investigational immune disorders medicines.

Please make sure to read and completely understand our disclaimer at https://www.wallstreetpr.com/disclaimer. While reading this article one must assume that we may be compensated for posting this content on our website.

The post Pfizer Inc (NYSE: PFE) To Acquire Global Blood Therapeutics For $5 Billion appeared first on Wall Street PR.

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Spread & Containment

German Official Trashes Cost Of Living Protesters As “Enemies Of The State”

German Official Trashes Cost Of Living Protesters As "Enemies Of The State"

Authored by Paul Joseph Watson via Summit News,

A top German…

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German Official Trashes Cost Of Living Protesters As "Enemies Of The State"

Authored by Paul Joseph Watson via Summit News,

A top German official has trashed people who may be planning to protest against energy blackouts as “enemies of the state” and “extremists” who want to overthrow the government.

The interior minister of the German state of North Rhine-Westphalia (NRW), Herbert Reul (CDU), says that anti-mandatory vaxx and anti-lockdown demonstrators have found a new cause – the energy crisis.

In an interview with German news outlet NT, Reul revealed that German security services were keeping an eye on “extremists” who plan to infiltrate the protests and stage violence, with the unrest being planned via the Telegram messenger app, which German authorities have previously tried to ban.

“You can already tell from those who are out there,” said Reul. “The protesters no longer talk about coronavirus or vaccination. But they are now misusing people’s worries and fears in other fields. (…) It’s almost something like new enemies of the state that are establishing themselves.”

Despite the very real threat of potential blackouts, power grid failures and gas shortages, Reul claimed such issues were feeding “conspiracy theory narratives.”

However, it’s no “conspiracy theory” that Germans across the country have been panic buying stoves, firewood and electric heaters as the government tells them thermostats will be limited to 19C in public buildings and that sports arenas and exhibition halls will be used as ‘warm up spaces’ this winter to help freezing citizens who are unable to afford skyrocketing energy bills.

As Remix News reports, blaming right-wing conspiracy theorists for a crisis caused by Germany’s sanctions on Russia and is suicidal dependence on green energy is pretty rich.

“Reul, like the country’s federal interior minister, Nancy Faeser, is attempting to tie right-wing ideology and protests against Covid-19 policies to any potential protests in the winter.”

“While some on the right, such as the Alternative for Germany (AfD), have stressed that the government’s sanctions against Russia are the primary factor driving the current energy crisis, they have not advocated an “overthrow” of the government. Instead, they have stressed the need to restart the Nord Stream 2 pipeline, end energy sanctions against Russia, and push for a peaceful solution to end the war.”

Indeed, energy shortages and the cost of living crisis are issues that are of major concern to everyone, no matter where they are on the political spectrum.

To claim that people worried about heating their homes and putting food on the table this winter are all “enemies of the state” is an utter outrage.

As we highlighted last week, the president of the Thuringian Office for the Protection of the Constitution, Stephan Kramer, said energy crisis riots would make anti-lockdown unrest look like a “children’s birthday party.”

“Mass protests and riots are just as conceivable as concrete acts of violence against things and people, as well as classic terrorism to overthrow it,” Kramer told ZDF.

*  *  *

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Tyler Durden Thu, 08/18/2022 - 03:30

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