☀️☕Unicorn sighting! Soft landing ahead… but where? What’s priced in?

24 January 2023

🧧🐇💦Happy Tuesday and Happy Chinese New Year!🍊🍊

新年快乐 Xin Nian Kuai Le, everyone!

恭喜发财 Gong Xi Fa Cai!


US large-cap S&P 500 closed 1.89% UP ▲ Tech-heavy Nasdaq Composite closed 2.66% UP ▲▲Pan European STOXX Europe 600 closed 0.37% UP ▲ HK’s Hang Seng Index closed 1.82% UP ▲ Japan’s Nikkei 225 closed 0.56% UP ▲


US large-cap S&P 500 closed 1.19% UP ▲ Tech-heavy Nasdaq Composite closed 2.01% UP ▲▲Pan European STOXX Europe 600 closed 0.56% UP ▲ HK’s Hang Seng Index closed till ThursdayJapan’s Nikkei 225 closed 1.33% UP ▲

📊 In the Markets

Melt up! Probability goes up to 99%… from, ermm, 97%?Unicorn sighting! Soft landing ahead… but where? What’s priced in?Spotify cuts 6%. Tech people lose jobs. Wall Street is happyPeople shouldn’t believe Tweets… says Twitter’s owner?Crypto lender Genesis in Chapter 11 bankruptcy, at last

📝 Focus

Generative AI and Microsoft’s (quite) big bet

📖   MoneyFitt Explains

🎓 What is In The Price? 

📊 In the Markets

Melt up! Probability goes up to 99%… from, ermm, 97%?

Wall Street is melting UP!

If you read the business sites, you’ll see that US stocks rose on Friday and Monday because of bullishness (i.e. expecting prices to go up) from an expected slowdown in inflation-fighting, economy-slowing interest rate hikes from the Federal Reserve, the US central bank.

You’ll hear that the market is seeing a 99% probability that the next rate hike in 8 days will be only 0.25% (25 “basis points”)… basically a dead certainty. This is a major slowing of the pace of interest rate hikes after the last cut of 50bps, which followed a stunning run of four consecutive 75bp hikes last year.

In two days, the tech-heavy Nasdaq Index has risen 4.7%, while the broader S&P500 has rallied 3.1%. In the same two days, the CME FedWatch Tool has seen the probability implied by futures prices (not economist forecasts) of a 25bp hike has gone from 96.8% to 99.1%.

First point is that interest rate futures traders are totally different individuals from stock market investors, though from the outside many people think they’re basically the same… or at least that they talk to one another to arrive at their views. They aren’t and they don’t, for the most part, and generally watch “each other” as though the other knows exactly what they’re doing. So it’s not like stock market investors as a whole actually arrived at a 99.1% chance of a 25bp hike on Feb 1st. and that the move from a 96.8% chance is what drove stock prices higher.

Second point is that among all the drivers of stock market prices, the interest rate outlook is just one (though an important one, especially of late.)

At least as important would be “positioning” – in other words, what investors are expecting and, as a result, where they have already placed their bets. If markets start to go in a way they weren’t expecting or haven’t “priced in” 🎓, (a) they can choose to have the courage of their convictions and stick doggedly with what they have, or (b) they can cave in and follow the markets, neutralising or reversing some of their positions because…

“Markets can stay irrational longer than you can stay solvent.”

As different investors have different approaches to those choices, as markets continue to move against a large enough proportion of investors, more and more of them will, reluctantly trade in the direction of the market (whether up or down) and continue to fuel the momentum in that direction.

An old Wall Street adage goes: “Bull markets climb a wall of worry; bear markets slide down a river of hope.” And even the greatest fundamental long-term investors realise that…

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

A glimpse into the minds and positioning of some of the smartest investors and strategists on the planet can be seen in their publicly available strategies for 2023, which have been compiled and analysed by The MoneyFitt Morning team in our “Investors Guide to What’s Priced-In for 2023” (get your copy below.) 

Unicorn sighting! Soft landing ahead… but where? What’s priced in?

Against most predictions for 2023 just a month ago, the US and other industrialized countries may actually be able to bring inflation down towards targets without triggering a huge jump in unemployment, according to new research from the Federal Reserve Bank of Chicago. Basically, that’s the fabled “soft landing” unicorn.

 “This scenario—can there be a soft landing—is one we would all want to see,”

In fact, Fed Chair Jay Powell had already said way back last November in a post-speech Q&A that there “is a path to a softish landing,” which suggested new confidence that inflation will ease without a recession and severe job losses. But after that day, when markets shot up 3%, the index softened, and the rally so far this year has only just brought us back to about that level again.

As we wrote in our “Investors guide to What’s Priced-In for 2023” (get your copy today), the “Eurozone and UK recessions in 2023 are universally expected, and most say they are already there. From an economic perspective, that region’s looking the worst of anywhere (not the same as being bearish stocks or bonds there)”.

But now, according to the widely-watched Consensus Economics survey in January, the Eurozone is expected to avoid a recession this year, a sharp about-turn from confident predictions a month ago that Europe would plunge into a recession and be among the hardest-hit areas in the world due to its economic exposure to the Russia – Ukraine war. Now, the surveyed analysts expect growth of 0.1% thanks to lower energy prices, continued government support and a boost to global demand from China’s earlier-than-expected reopening of its economy.

Spotify cuts 6%. Tech people lose jobs. Wall Street is happy

Spotify said on Monday it would cut 6% of its workforce, or 600 people-with-families-to-feed, ahead of an expected recession, slowing advertising growth and after already trimming other costs (partly to offset a huge surge in spending on podcasters like Joe Rogan.) On Friday, the much larger Alphabet moved to lay off 6.4% of staff (12,000 people) — which had been flagged, but came as a shock to some of the higher-performing, well-paid employees who were axed in a wide range of divisions across the firm, from Google Cloud and Android to Chrome and the core search groups. True to form, Wall Street rewarded the sackings with rallies in the shares. (Incidentally, GOOGLE shares have no voting rights in Alphabet, while GOOGLE shares do.) Some 100,000 people have lost their jobs so far in tech, though, to put things in perspective, this is less than the number that had been added since the start of the pandemic.

People shouldn’t believe Tweets… says Twitter’s owner?

“Just because I tweet something does not mean people believe it or will act accordingly… the causal relationship is clearly not there”

Elon Musk, on the second day of testimony in federal court, said he thought he had sufficient financial backing to take Tesla private, both from Saudi Arabia’s Public Investment Fund and from the value of his own holdings in SpaceX.

He emphasised that the tweet was him just “considering” taking Tesla private, not a definitive bid. But he then added “If you say that you’re considering taking a company private or acquiring a company . . . there is going to be some premium” which seems to run a little against the line from the first day, quoted above.

Crypto lender Genesis in Chapter 11 bankruptcy, at last

Crypto lender Genesis Global Capital filed for bankruptcy, two months after halting customer withdrawals, showing continuing contagion in the space. Genesis’ bankruptcy follows in the footsteps of big-time lending peers Voyager Digital, Celsius Network and BlockFi.

Genesis’ creditors include crypto exchange Gemini with US$766 million outstanding and a massive feud brewing between the founders. Gemini had partnered with Genesis on its defunct Earn program in which its customers could “deposit” crypto assets and receive what, in hindsight, were economically unsupportable “interest rates” for lending out crypto (all without regulators or deposit insurance involved.)

By offering a very attractive but not outlandish 8% annual return, “depositors” were lulled into thinking that crypto lending was not a get-rich-quick pyramid or Ponzi scheme that would inevitably collapse under its own weight. Which, of course, it did, with the help of the implosion of first hedge fund Three Arrows Capital (3AC) and then FTX, which led it to “pause” withdrawals as long ago (in crypto-time) as November.

Genesis now owes US$3.6 billion to creditors.

📝 Focus

Generative AI and Microsoft’s (quite) big bet

Generative AI definitely has the same “guys, guys, have you seen this??” buzz that Snapchat filters and facial recognition had so recently, before becoming just an accepted and expected way of life.

Microsoft confirmed the widely-leaked “multibillion-dollar investment” and an extended partnership with OpenAI, the maker of the tech sensations of 2022 (and 2023 and…) ChatGPT and DALL-E 2. Said to be US$10 billion at a pre-money valuation of US$29 billion, it’s big, but in perspective, actually less than a sixth of Microsoft’s free cash flow last year. (FCF is the amount of actual cash left over from revenues after a company pays for its operating expenses, and before any spending on capital expenditure.) And just on Monday, Microsoft’s market value measured by market capitalisation (number of shares X share price, which is not the same as cash available to spend) rose by US$17 billion. More important than the investment number is the commitment shown to developing products using AI.

But the long-term implications for how we lead our everyday lives are likely to be far greater (along with more than a few ethical issues), and that’s the play Microsoft is making with its stake in OpenAI as well as its other AI efforts.

One professor at the University of Pennsylvania’s prestigious, top-tier Wharton Business School, found that ChatGPT – even in its current form – outperformed some of his students in his operations management course, receiving a B to B- grade on the exam, a core MBA subject (think about how to harvest cranberries better.)

From commentator Victor Alexiev:

Three things struck me as important to keep in mind when thinking about its implications:

– 1. The ability to ask the right questions will be even more important;

– 2. We will soon be drowning in content and the ability to filter through and allocate attention to pieces that are genuinely original and matter will be critical for success in life;

– 3. AI will increasingly become our interface to the world, and this has far-reaching positive and negative implications.

📖 MoneyFitt Explains

🎓 Priced in 

It’s rarely obvious what happens when news affecting a company or a market comes out. The most confusing thing is when something good happens to a company and the stock doesn’t shoot up. Sometimes it does nothing or even goes down. What happened? 

We say in the market that the market has “priced it in” or that the news or results are “in the price” or “factored in”. This means that means the current value of the improved future prospects is already reflected in the price. (An old market saying that can apply here is “buy on rumour, sell on news.”)Inexperienced traders often see what IS positive news and buy. Thinking the fastest trigger finger will win, they often jump in without considering how much may have already been priced in. Sometimes you can’t tell if the news has been priced in until AFTER you see how it trades because the market is made up of so many players with different amounts of information and expectations. Experienced investors are often caught off guard and surprised by news or results, too, despite their enormous resources, access to expert analysis, teams of researchers and gigantic salaries! Professional investors spend their entire careers trying to be brilliant at picking winning stocks or timing the market, yet many many studies show that the vast majority of them do worse over the long term than “index-hugging” ETFs.

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