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Sell Side Handbook Predicts… Stonks in 2021

2020 was an interesting year in finance. The overall return in my PA was around 40% (simply taking the total gain on monies invested since January 1, 2020), which means if you went all in on the NASDAQ, Green Thumb Industries or Tesla/NIO congratulations you have trounced in great measure please send a link to your blog in the comment section below.

For the rest of you, gather round gather round and hear ye. My one-year sample space qualifies me as the superior stock picker (Also, it is likely my PA is much larger than your AUM of 1 bitcoin or a fractional share of Tesla).

A Look Back at Stonks in 2020

To summarize the last year in markets, market participants started in January bullish, mitigated by the growth engine of the world, China, suffering from a small virus that would only be contained to China.

That narrative ended up being spectacularly wrong and Covid-19 ended up being the event of a generation.

Post acceleration of Covid, most prominently in New York, stocks tanked, with previously high flying tech stocks taking the biggest hit. Corporates with large amounts of debt started going under rapidly, necessitating a number of bankruptcies and subsequent restructurings with very little clarity on what valuation should be.

This ended up being short sighted as tech firms were in theory the most insulated from a major disruption owing to disease as business is conducted remotely via the cloud. Tech stocks stormed back from their March lows and have been breaking records weekly.

To combat a massive systemic shock, the Federal Reserve and U.S. Government (as well as other governments around the globe) entered into massive monetary and fiscal stimulus propping up financial assets and in theory the working man.

What ends up happening is a total bifurcation between what is happening on Main Street and what is happening on Wall Street as well as stocks and the general economy. It also resulted in massive dispersion in stock returns, delineating clear haves and have nots, as well as blowing up a bunch of quant fund returns.

If you look outside the window, the world is objectively terrible (unless you are in China). People are dying daily in the thousands, ICUs are filled up and job security is not great. No one is outside, which is why I am serving as a stock muse on this website instead of trying to find someone suitable to marry on Friday night (actually people are outside, hence the aforementioned).

However, your Robinhood account populated with Tesla, NIO, various pharmaceuticals and cloud companies, is positively flying. Your crypto wallet is also possibly flying. Planes are not flying.

Old economy stocks especially involving retail or real estate have been crushed. Industries that are getting disrupted have been crushed.

2021 Vaccine and Stocks

The new prevailing narrative is that once the vaccine is out en masse things will get back to normal. This is possible, but should be treated with some skepticism because assuming perfect execution in rollout and deployment would be inconsistent with how we got into this situation to begin with – low adherence to authority and a polarized society in addition to various other unknowns.

As with most other markets in history – someone is wrong, although we won’t be sticking our necks out and prognosticating on who that may be. Retail, leisure and lodging stocks are priced as if things will get back to the old normal. Technology (SaaS) companies are priced as if things will not and people will be using Zoom forever while adoption continues to grow exponentially. Maybe both narratives are correct, but maybe not.

I’ll admit, I didn’t buy Tesla nor did any of the funds I purchased. My investment philosophy is sticking with companies that have decent growth, robust free cash flow and a valuation I can sort of understand. I don’t understand Tesla and I never really tried – however, I can sort of see where the Teslanaires are coming from.

Low Interest Rates in 2021 and Everything is a DCF

If Elon Musk executes on his long-term vision, and admittedly he has done a marvellous job with execution given the battery factories, ubiquitous charging stations, free autonomous driving data (sort of, through Autopilot) and rapidly increasing deliveries (especially in China), Tesla will generate massive amounts of free cash flow in the future if his competition is kept in check. Now assuming this scenario bears fruit, Tesla may well be undervalued.

When is this vision going to be realized? 2025? 2030? 2035? However, given a very low interest rate environment, the discount rate is in theory lower using a DCF. At a low enough discount rate, many stocks with very far out business plans end up being viable – hence why all of these tech companies are trading at multiples that are nonsensical. The earnings multiples are meaningless. The sales multiples are meaningless. But what happens when interest rates rise? These stocks will then in theory get crushed.

Now interest rates are not going up. This is not politically feasible in any developed western economy with anaemic growth and unchecked personal debt buildup. What we may be looking at is a Japan circa 1980’s scenario where there is a balance sheet recession where a lot of otherwise reinvestable capital gets ploughed back into debt service resulting in a lost decade or two or three.

However, Japan has only receded from the lens of a U.S. dollar investor. As long as the dollar retains its status as the vehicle currency of the world and has widespread acceptance, there is no problem. The dollar’s hegemony would only be challenged if there was a competing stable currency, which brings us to…

Bitcoin $400,000 and RMB as an Alternative to Bitcoin

No one even cares about gold any more. What a cliffhanger. Tune in on the next episode of Dragon Ball Z…

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Matt
ex investment banking associate
https://www.linkedin.com/in/matt-walker-ssh/

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