Trail 18 — Free Fall
Jan 28 2022 (Editor — Sylvia Lo)
A few significant events this week.
Australia and NZ inflation figures are out, and both numbers were uncomfortably high. Headline inflation in Australia was 3.5 per cent in the last quarter of 2021, while underlying inflation — the RBA’s preferred measure — was 2.6 per cent versus the 2.3% consensus forecast. The inflation rate jumped to 5.9 per cent in NZ during the same period, putting the annual inflation figure at its highest since June 1990.
The Federal Reserve Chair Jerome Powell [SL1] signalled a March interest-rate lift-off and left the possibility of hikes open at each policy meeting.
These events have further reinforced the selloff in equities and bonds.
Value stock holds for now
While equities have been sold off, it has not been uniform, with money rotating out of tech stocks and partly back to value stocks. This was exemplified by Cathie Wood’s flagship ARKK fund, now on the cusp of being overtaken by Warren Buffett’s Berkshire Hathaway in a post-pandemic performance table.
Bitcoin equity correlation
While certain fortunes have shifted, others have become more aligned. Bitcoin’s movements are now mirroring U.S. stocks, and a 40-day correlation coefficient for the digital token and the Nasdaq 100 has reached almost 0.66, the highest since 2010. Bitcoin is also aligning to the S&P500, with the correlation also at an all-time high. While the world debates Bitcoin’s utility, it trades less as an inflation hedge and more as a simple equity risk proxy.
Editor’s Corner
Goodbye Afterpay
Afterpay, one of the few Australian unicorn companies, officially stopped trading last Wednesday, drawing its last breath at $66.47. At its peak, Afterpay sold at close to $160 and was the market leader in the Buy Now Pay Later (BNPL) sector. In just six years, the company went from $0 to a $39b valuation and was reborn on Thursday as Block (formerly Square).
Chip Domination
Intel has committed $20 billion to building a chip-making facility in Ohio, creating an additional ~3,000 permanent jobs. On Friday, Pat Gelsinger (Intel’s CEO) announced that they would build “the largest silicon manufacturing location on the planet”. While it won’t ease any supply chain issues in the immediate future, this investment might be what the company needed to revive its dying relevance. In 2021, chip shortages impacted our ability to purchase cars and laptops, this announcement could be viewed as a signal that they have plans to break into the auto industry.
Netflix Reaching Saturation
The streaming giant released its fourth-quarter earnings last Thursday but has forecasted a sharp decline in subscription growth. The company believes this will be driven mainly by inflation, consumer financial strain, the recent fallout with tech stocks and a relatively light content schedule to start the year.
Until next week.
Financial markets are fascinating, and I see them amalgamating the subjective and objective worlds. They are constantly evolving, follow no predetermined path and much like humans and society in general, their behaviour at most times is irrational. Yet, their day to day functioning is seemingly driven by facts and reasoning. They are filled with plenty of stories of triumph, tragedy and comedy. Every day they are thoroughly analysed and tried to make sense of. Yet, their future steps or directions cannot be predicted based on history. They follow a random walk. Therein lies their beauty.
If enjoying making sense of their randomness is as appealing to you as it is to me, each week, I briefly recap a few stories that captured my interest, with embedded source links available for those who wish to read more.
