Weekly TLDR - May Meltdown Edition
In this week’s TLDR, we talk about decreases in the market P/E ratio, poor Q1 earnings, tech tightening, and the spectacular collapse of USD stablecoin TerraUSD.
The TLDR
In this week’s TLDR, we talk about decreases in the market P/E ratio, poor Q1 earnings, tech tightening, and the spectacular collapse of USD stablecoin TerraUSD.
Also a small comment on the recent stock market rout. Our advise is to hold on and ignore the volatility, and if you have spare cash, definitely start going on a buying spree and prioritize growth companies with healthy cash flows that can survive a high capital cost environment. When we return to calmer waters, these companies will resume elevated earnings/sales multiples and greatly reward opportunistic bear market investors.
Chart of the Week
Price-to-earnings ratios are dropping across the board as companies report disappointing Q1 2022 results. The drop in P/E indicates that investors are either getting pessimistic around the overall economic situation or pessimistic around company earnings. Sentiment often shifts before earnings do, so keep an eye out on earnings reports, particularly companies that pull back their earnings projections due to the changing situation. While investors are getting more pessimistic, we saw a +428K change in payrolls in April and very low unemployment at 3.6% so the underlying employment situation in the US seems fairly healthy, despite the stock and bond market meltdown.
Stock Market TLDR
Poor Q1 Earnings
Speaking of negative earnings adjustments, Q1 has been a doozy for many companies and even major tech giants like Amazon and Netflix. The group of high-growth stocks that saw enormous gains during the pandemic like PLTR, COIN, RBLX, PTON etc continue to get crushed. Even companies that beat expectations did so only by the slimmest of margins (e.g. GOOGL 0.2% beat, MSFT 0.6% beat).
This is certainly feeling like the beginning of a major earnings expectations adjustment which will make stocks look more expensive again despite the recent decline in the overall market P/E ratio. Historically, when adjusting earnings downwards, companies tend to be ultra conservative so I would look to the Q2 earnings period as a reset of expectations and Q3 earnings as a starting point for positive earnings surprises again.
Tech is Tightening
The hot topic in Silicon Valley is around hiring freezes and layoffs. After decades of being “in demand”, tech is experiencing a real downturn. Outside of employment issues, expect cost controlling measures to be put in place as well as the shedding of underperforming features. VCs are already sending startups in their portfolio warnings around controlling cash burn as well as not counting on future rounds. Expect to see further layoff announcements in tech and potential acceleration out of high cost of living metros like San Francisco. Uncertainty for tech workers could mean less travel activity, less real estate investing, and less premium services.
Inflationary Signs Still Flashing
Despite increasing interest rates, signs of inflation are still coming in strong. The latest has been around increasing costs for fertilizer, which will factor into prices of grains and other produce. Diesel prices have also skyrocketed lately, which is a huge hit to interstate shipping, trucking, and distribution. Both of these will likely cause a “double whammy” to grocery prices, restaurants prices, and the prices of other consumer staples. When oil and gas prices started increasing earlier this year, the play was to buy oil and gas stocks (e.g. record quarter for Shell). Maybe the play now is to buy fertilizer companies like CF, who are seeing revenue growth of 170%+ Y/Y.
ARK Buys GM
Staunch Tesla bull and CEO of Ark Invest, Cathie Woods, recently sold Tesla in her ARK funds to buy GM for the first time. This marks a dramatic shift from her prior negative sentiment on GM’s ability to shift from Internal Combustion Engines to Electric. Just last November, Woods said that GM and Ford didn’t have the “EV genes” to succeed in the electric vehicle universe. Last night’s transaction disclosure from ARK showed that the funds collectively sold about $12 million in TSLA and bought $6 million in GM among other investments. FinanceTLDR has covered GM before and we believe GM is years ahead of Tesla in terms of self-driving car technology (Cruise) and on-par or slightly better than Tesla in terms of battery technology (Ultium). We’re happy to see a staunch Tesla bull like ARK see the same thesis.
Crypto TLDR
TerraUSD, Third Largest USD Stablecoin, Breaks Down
The third largest USD stablecoin TerraUSD (UST) broke off from its USD peg and was trading at $0.30 on the dollar at its absolute lowest in the past couple days. UST has recovered to about $0.70 but that’s still a far cry from $1. Along with the collapse of UST is the collapse of its sister asset, the free floating LUNA cryptocurrency that was trading above $85 only a week ago and is now trading at a measly $2. That’s almost a 98% plunge!
Crypto stablecoins that rely on an on-chain algorithm to maintain the USD peg can be leveraged ticking time bombs with an in-built positive feedback loop that can crash the asset in times of market stress. TerraUSD’s fall is reminiscent of the fall of Mark Cuban-backed Titan in June of last year. Titan was also an on-chain USD stablecoin system that had a flimsy algorithm. It lasted for only a few months before stressful market conditions also brought forth a spectacular deleveraging and crash of the system.
The moral of the story is to be wary of on-chain USD stablecoin systems. If the stablecoin isn’t backed by real world currency, or hasn’t consistently weathered volatile bear markets, it’s probably not a safe asset.
Big Banks Invest in Crypto Private Equity
Citigroup and Wells Fargo were among the investors in the recent Series B fundraising round of Talos, a crypto trading infrastructure firm that provides tooling for institutional investors across the trade lifecycle. This recent raise brought in $105 million for the startup and elevated it to unicorn status with a $1.25 billion valuation. The participation of large banks like Citigroup and Wells Fargo in Talos’s fundraising round is very positive for crypto, signaling a significant increase in institutional interest and acceptance of the burgeoning asset class. In addition, this latest raise continues to show that, despite the absolute mess in public markets, crypto private equity seems to be holding up with companies still raising a significant amount of money.
El Salvador Buys the Dip
El Salvador’s president Nayib Bukele posted on Twitter the purchase of 500 BTC on Monday at an average price of $30,744. The South American country adopted Bitcoin as legal tender in June of last year and has been slowly building a national reserve of Bitcoin since. The recent fall of Bitcoin’s price from around $40k to $30k has prompted the small nation to opportunistically expand its Bitcoin reserves. The sudden increase in national and institutional buyers of crypto over the last two years could signal the start of significant volatility reduction for the asset class. This can act as a positive flywheel that draws in even more national and institutional investment.