Ukraine On The Market’s Parade - Weekly TLDR

The TLDR

We hit 2000 subscribers last week! This is a big milestone for us and we are so excited about the support and interest that everyone has shown. The FinanceTLDR vision is to break down the ivory towers of financial research and provide quality research to retail investors. If you have been following us closely, you have probably realized that we have been increasing the amount and types of content we write in the past few weeks. Well, as our readership continues to grow, expect the trend of new content to continue. As for this issue of the Weekly TLDR, we have added a section dedicated to Crypto news. We may also have another surprise in two weeks ;). As for the rest, we will be talking about interest rates, geopolitical tensions in Ukraine and Taiwan, Lost Ark, NFTs, and Web 3 funding.

Chart of the Week

Bank of America has a great chart on equity fund flows throughout the years. With the dust settling from the trading frenzy in 2021 heralded by Gamestop’s unexpected meteoric short squeeze, we can see just how crazy 2021 was for stocks relative to other years. This is the best example of what happens when you give people money but tell them they can’t do anything or go anywhere. So… they bought stuff and stocks were top of the shopping list.

Market TLDR

1. Higher inflation and higher interest rates. Inflation numbers surprised the market at 7.5% for January, the highest it's been for almost 40 years. The market got sent into a tailspin as the 30 year mortgage rate immediately shot up and is nearing 4% currently. The stock markets, and particularly tech stocks, are particularly sensitive to interest rate moves so expect a lot of volatility in the upcoming weeks as economists continue to debate whether the Fed will increase interest rates 5 times or 7 times this year and if each increase will be a 0.25% increase or a 0.5% increase. In real terms, higher mortgage rates and lower purchasing power should result in dips in home prices right? But not according to economists at Zillow who upped their prediction of home price increase in 2022 from 11% to 16%! All of this doesn’t make a ton of sense from a classic economic systems perspective but we suspect increasing input costs, supply chain delays, and labor shortages are impacting new construction supply as well as increasing interest rates causing a “pull forward” of home buying activity as potential home buyers “get in before it's too late”.

2. Inflation doesn’t affect the rich. Chanel’s Classic Flap bag, which cost $5,200 in 2019, now fetches for a whopping $8,200. The company made three price hikes of these bags in 2021 alone. Surprisingly, or not surprisingly, the company is saying these rapid price hikes have not affected sales. This is certainly one indication that the top 1% has fared very well from COVID’s loose money policies and are willing to dish out more money than ever for luxury goods. The money printing during COVID might have saved the economy in the short term, but it has also exacerbated rising wealth inequality. This adds more impetus for the Fed to quell this rampant inflation and reduce damage being done to less affluent people that are much more price sensitive.

3. Inflation is not all bad. Salaries rising for many key job sectors. Even though inflation is eating into everyone's budgets, and unfortunately into the budgets of many that can’t afford it, it’s not all doom and gloom. Inflation has also been very beneficial to job sectors that traditionally didn’t see much salary growth. Check out this chart on salary growth for a select group of job sectors.

4. Ukraine might be on its own. Threat of war in Ukraine has certainly contributed to the choppy markets of late. European fund managers have likely been derisking throughout the past few months to be able to weather any potential disastrous consequence from a Russian invasion of Ukraine. Massive sanctions (which also hurt the EU) and natural gas supply disruptions (leading to more inflation) are top of mind. Russia seems more poised than ever to attack Ukraine with massive military build ups in strategic positions on the border and unfortunately for the good and innocent Ukrainians caught in the crossfire of two great powers, it seems more and more likely that Ukraine is on its own. The EU has no interest in significantly opposing Russia, since doing so would greatly damage the EU’s economy and even risk nuclear war. The US, without EU’s support, and weak domestic support, also has its hands tied and can probably only covertly supply Ukrainian resistance with weapons and ammo. Let’s all hope that the situation does not escalate to kinetic conflict and a diplomatic solution is found, for the sake of all the innocent people in the region.

5. Taiwan is the next Ukraine? Potential war looms in Ukraine as Russian forces continue to be active along the border. US residents and military have been asked to evacuate as the world prepares for armed conflict. Although Russia called for a partial pullback today, tensions remain high. The effects of a war in Ukraine is hard to predict but energy prices have already shot up in response. Geopolitical ripples have also been made as China looks to Ukraine as a teaser of what response they would get if they prepare for forcefully invading Taiwan. As we look forward to getting ahead of future conflicts, potential tension around Taiwan would have major implications to the semiconductor manufacturing chain. TSMC, the world's largest manufacturer of semiconductor chips is located in Taiwan and would be disrupted by any major attempt or success from China around occupying Taiwan. There are even calls for Taiwan to destroy TSMC facilities if China should invade. The biggest winners in such a scenario would be Intel (INTC), GlobalFoundries (GFS) and Samsung (KRX: 005930), the remaining non-Chinese semiconductor manufacturers, with Intel and Samsung being the only ones at “leading edge”. Another potential winner is AMD as NVIDIA produces the vast majority of their chips at TSMC while AMD produces at GlobalFoundries. It would take multiple quarters for NVIDIA to get qualified and yield up at a different chip foundry. I imagine even Intel CPU chips would benefit if NVIDIA sees production disruptions for its GPUs.

6. YouTube >>> Netflix. In Q4 2021, YouTube’s total ad revenue alone again surpassed Netflix’s total company revenue ($8.6B vs $7.7B. YouTube is just in another league in the video live streaming business. Whereas Netflix has to pay tremendous amounts of money for existing and original content, YouTube’s content is organic, crowd sourced, and comes for free. While Netflix only gets a fixed fee from each user no matter how much they watch, YouTube’s ad–driven revenue scales the more people watch. Finally, YouTube, with its organic content, doesn’t experience the same cut throat competition that Netflix faces from other premium entertainment video streaming services.

7. Signs of life from Amazon games. After years of being maligned as a money wasting failure, Amazon game studios finally has a major success in Lost Ark, which hit 1.3 million concurrent players on the gaming platform Steam. Lost Ark is a game developed by a Korean company and operated by Amazon in the US, EU, and Latin America. While this can’t count as an Amazon developed hit, it will give Amazon more experience running a popular game, something it struggled with for its own New World IP. The New World player base has seen a 90% decline as players were plagued by in-game issues with exploits, bad economy, and unexpected developer changes. Also important is that game operating has been shown to be lucrative as Tencent used the operating -> investing -> owning / developing clones model to become the largest gaming company in the world. Amazon may have an opportunity to replicate that in the US markets and create a high potential third pillar of value alongside AWS and Amazon retail.  

Crypto TLDR

1. More corporate heavyweights launch NFTS. Samsung announced on Valentine’s Day that they were launching NFTs on the Theta Network blockchain, currently the 40th blockchain by marketcap. This comes after YouTube announced about a week ago that they were dipping their toes in NFTs and teasing a new feature allowing creators to sell NFTs of their videos. Samsung and YouTube are just the latest of a string of major corporations launching NFTs, including Adidas, McDonald’s, Taco Bell, Gucci, Louis Vuitton, Burberry, and Ray-Ban. Only time will tell whether companies are fickle hype train riders or will embrace NFTs for the long term.

2. VC money continues to pour into Web 3. Right now it seems like anyone building a Web 3 startup will get millions of dollars in funding. The VC enthusiasm for Web 3 is best seen with the recent valuations fetched by top companies in the space. Alchemy, a start up that likens itself to be the AWS of Web 3, recently completed a $200 million funding round, valuing the company at over $10 billion. This is almost 3 times as much as its prior $3.5 billion valuation from a funding round in October 2021. Alchemy’s latest funding round is hot on the heels of another monster fundraising round by fellow Web 3 incumbent OpenSea, which raised $300 million for a $13.3 billion valuation. In comparison, Robinhood, a company with more than 20 million funded customer accounts, has a valuation of $11.5 billion in the public market. Do public market investors lack vision, or is the Web 3 private equity market in a bubble?

3. The NFT bubble has not popped. Many people expected the NFT market to calm down with the frenzy seen in 2021. However, NFTs seem to have more staying power than many people believe, at least for the most expensive NFTs. On February 12th, the highest ever CryptoPunk (punk #5822) sale occured for $24 million, or 8000 ETH. The punk was sold to Deepal Thapliyal, CEO of Web 3 start up Chain. We’re starting to see NFTs become less of a speculative asset and more as a way for the ultra wealthy to flaunt their wealth, like expensive cars, hand bags, or watches, except without the physical allure. In some ways, this makes them an even better way to flaunt wealth. Nothing says you’re stupid rich like being able to drop millions of dollars on jpegs.

Bonus Chart of the Week

Source: Factset, Axios

This is what the market is trying to fight every time inflation numbers come out; a sharp and immediate reaction to the underlying interest rates.