Momentum Red... But Are Banks Waking Up?

[Midday Momentum] Monday, May 23, 2022 Momentum Red... But Are Banks Waking Up? By Garrett {NAME} Improving Sectors: Oil Production, Refining, Marine Shipping, Infrastructure Software Weakening Sectors: Retail, Asset Managers, Biotech, Advertising, Application Software Watch List: MRK, SIGA, MPC, XOM, CVE, PBR, CRT Dear Reader, You'll see trends on [Midday Momentum]( a few weeks before they arrive in The Wall Street Journal and Barron's. This week, for example, Barron's entire focus centered on investments in a bear market. According to its flagship article "Up & Down Wall Street," the potential drop for the S&P 500 is now at 3,000. As the author notes, we've seen $8 trillion in wealth wiped out in bond markets and equity markets this year. There now appears to be a race among editors and analysts to call a bottom much lower than where we are today. If they used momentum readings like we do, I'm sure they wouldn't have to guess the bottom. I suppose they're giving themselves far more leeway after failing to get it right several times this year. That didn't surprise me. What did surprise me was the sudden attachment to valuations. The issue had another article - "6 Cheap Stocks That Aren't Bargains." Barron's said that Crowdstrike Holdings Inc. (CRWD), Snowflake Inc. (SNOW), Shopify Inc. (SHOP), ZScaler Inc. (ZS), Lyft Inc. (LYFT), and PayPal Holdings Inc. (PYPL) all look cheap after their massive downturn since last year. But, the writer recognized that fundamentals matter. And explained that all six of these companies still had stretched valuations and could fall further. That's good insight. Of course, just when I had hope for Barron's, they failed me again. Another article looked for opportunities in the broken IPO market. Barron's notes five potential turnarounds in Allbirds Inc. (BIRD), Poshmark Inc. (POSH), Rivian Automotive Inc. (RIVN), Robinhood Markets Inc. (HOOD), and Warby Parker Inc. (WRBY). All these stocks are off big this year. But what exactly makes any of them suitable investments? What are these companies actually worth, compared to what they're trading at today? Remember, Rivian has terrible margins, just saw its biggest automotive investors ditch the stock, and trades at 165x revenue. Its tangible book value is $20.25 (trading near $30). Allbirds was a broken IPO with a horrible balance sheet. This stock was once trading at 15x revenue. That's now down to 2x. Its net asset value is $2.00. Any insider buying? Yes, back when the stock was in free fall at $5.39. It's under $5.00 now. Poshmark also has a terrible balance sheet. It trades at $11. Its NAV is $5. The stock's insider signal is negative. Warby Parker trades around $16. The margins are terrible. The valuation isn't good. It has negative EV/EBIT. This stock could reasonably trade for under 50 cents one day. The insider signal is negative. Robinhood has negative insider sales and is just a takeover target. It's off 90% this year. The balance sheet is so bad, and the NAV is $7.65. No, thank you. Barron's essentially had an article explaining the importance of fundamentals on one page and then completely ignored fundamentals on the other page! Today, on [Midday Momentum]( let's go back to basics and explore what metrics matter most in this market. I'm going to give you five to look at, so that the next time you read an article saying something is a buy, you'll be armed with the information you need to protect your money. I'll see you [today at 12:30 pm right here](. MOMENTUM INDICATOR RED ALERT Recap: We're seeing higher trading volumes today for the first time in a while on the back of Friday's options expiration. Money appears to be coming off the sideline in the banking space, where stocks have been oversold for a while. But we still have negative momentum in the broader market and the S&P 500. The more important thing to consider today is a steep drop in the amount of selling, but we have to witness multiple days of accelerating price and volume to dive back with confidence. THREE THINGS I'M WATCHING - GRID WOES: Our electrical grids will likely experience massive rolling blackouts this year. It's not a new story. Most energy economists I know have worried about this problem for at least a decade. It's not just the transmission lines or the Byzantine process of trying to "modernize" the grid. Out west, a lack of water in some of the critical rivers has threatened hydroelectric generation. A new report from the North American Electric Reliability Corp. (NERC) says at least 14 states will face blackouts this year. It also doesn't help that we are shutting coal and nuclear power plants and failing to install new ones. The grid is hitting full capacity. When demand outstrips supply, the electricity company HAS TO initiate rolling blackouts. It will cripple the grid and knock it out of months if they don't. It is stunning how little people in government know about the impact of electricity and diesel fuels in this nation. There's no mass electricity storage, and you can't ship it on boats from Asia or Europe. Keep an eye on NRG Energy (NRG), which regularly hits new 52-week highs. - ​​MORE CANS: Due to Europe's bone-crushingly high energy costs, glass manufacturers are struggling to keep up with demand ahead of "Oktoberfest" - a famous German drinking festival that helps keep everyone in that nation sane. Well, there's a problem. Small- and mid-sized brewers will reportedly face bottle shortages, and it's yet another victim in this ongoing global supply chain crisis. As an avid and proud drinker of Corona Light (it's the only thing that doesn't leave me with a hangover), I'm very worried about the bottle situation. I dislike Corona Light cans because they put one ounce less of beer than in the bottles. Thanks, Shrinkflation. It's a reminder to pay close attention to packaging stocks. - RETAIL WORRIES: Retail problems aren't over. I don't believe that inflation is at a 40-year high. I think that it's at an all-time high because we don't calculate the CPI with the same formula that we did back in 1980. Best Buy Co. Inc. (BBY) will report this week, and the numbers should be terrible. I'm not focused on shorting the stock, as it's already at a 52-week low. Instead, I'd look at shorting some of their "top-selling" products like GoPro (GPRO) and other camera companies. HOT LONG SHOT What happens in the event of a serious market crisis? The Japanese Yen has historically rallied. And the reversals are VERY sudden. So, how about we take a shot at it? I'm going to talk about a possible trade on this with my [World's Biggest Trade]( members today at 1PM. But if you want something that's a long shot... The Invesco CurrencyShares Japanese Yen Trust (FXY) January 20, 2023 $83 calls have a 9.98% probability of profit and trade for $0.50. Any correction in the yen over the next two months would drive this fund back above $76 to $77 and has enough time to deliver a nice profit. The odds are 1 in 10. That's what makes it a long shot. WHAT YOU MISSED I explained last week that Venture Capital investors are freaking out after capital dried up in the first quarter. It's not just the fact that there was a big drop in capital deployment last quarter; it's that a lot of private investors are stuck in investments that are extremely overvalued. If you've ever watched "Silicon Valley," there's a reason why the main character asks for "less money" at a lower valuation at the end of Season One and the start of Season Two. He wants to avoid what's known as a "Down Round," - where the next round of capital-raising is done at a lower valuation than the first round of capital-raising. There's a "Market Teardown" underway where investors like Softbank are facing massive losses because they invested in companies at extremely high valuations in the hope that they could make more money in the next round if/when the startup valuations increased. What's simply amazing is that after the huge problems we've had with startups in the last decade - headline names like Snap Inc. (SNAP), WeWork Inc. (WE), and Theranos, we ended up with bigger valuations, more money chasing bad deals, and a SPAC market full of bad companies at outrageous valuations. Quarterly and monthly letters from VCs are incredibly apologetic for chasing valuations higher. Well, that's what the herd does, and the strategy works until it doesn't. We're fortunate because we invest in a public, liquid market. The public tech market is only down 30% compared to some venture funds that are losing 50% or more on their money so far. Valuation compression in the VC and private markets do spill over into the public ones. So don't be surprised to see lots of big tech names continue to drop. See you soon for Midday Momentum at 12:30pm ET - [join right here](. Stay liquid, Garrett {NAME} You are receiving this e-mail at {EMAIL}, as part of your subscription to Midday Momentum. To remove your email from this list: [unsubscribe here](. To cancel, or for any other questions or requests, please contact our Customer Service team: [Online]( Phone: 888-384-8339 (North America) 443-353-4519 (International) Mail: Midday Momentum | Attn: Member Services | 1125 N Charles Street | Baltimore, MD 21201 Fax: 410-622-3050 Our Customer Service team is available Monday ‑ Friday between 9:00 AM and 5:00 PM ET. © 2022 Money Map Press. All Rights Reserved. Nothing in this email should be considered personalized financial advice. 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