What You Need To Know This Week — August 29th, 2020
What You Need To Know This Week
A weekly recap to keep you informed on the most important events this week impacting markets, business, tech and the global economy.
APPLE AND TESLA ANNOUNCE STOCK SPLITS AND WATCH THEIR SHARES SOAR
Investors cheered as stock market darlings, Apple and Tesla, each announced stock splits. Apple is splitting its stock 4–1 and Tesla is splitting its shares 5–1. While having no effect on the underlying fundamental value of the shares, as each stock split increases the amount of shares an investor holds but reduces the share price by an equal magnitude, stock splits are indicative of the momentum anomaly. Price momentum is a classic factor that has predictive power regarding future share price performance, and a stock split typically follows robust recent share price performance. In addition, a stock split makes the shares more accessible to retail investors with less money to invest. However, new fractional ownership initiatives have reduced this benefit. Nonetheless, Apple and Tesla shares are up 30.7% and 55.1% since announcing their stock splits, respectively.
3D PRINTING STARTUP DESKTOP METAL ANNOUNCES COMBINATION WITH SPAC TRINE ACQUISITION
Private venture capital-backed 3D printing company Desktop Metal announced that it is going public through the special purpose acquisition company Trine Acquisition Corp. The merger values the metal 3D printing technology provider at $2.5 billion. Continuing with the trend of the “SPAC pop”, in which a blank check company’s stock would rally after announcing a business combination, Trine shares jumped approximately 10% this week on the news. Disclosure: The Accelerate Arbitrage Fund (TSX: ARB) is long Trine Acquisition shares.
PETER THIEL-BACKED TECH COMPANY PALANTIR FILES FOR IPO
The tech startup, whose named is derived from the movie “The Lord of the Rings,” filed its paperwork to go public. The data-analytics company, known for its controversial work for the U.S. Government, plans on hitting the public markets through a direct listing instead of a traditional IPO or the recent tech favourite, a SPAC. Despite being in business for 17 years, the company is still bleeding red ink. Last year, Palantir lost $576 million on $742 million in revenue. That being said, the current market seemingly rewards growth at any cost, such that the shares could trade well.
Notable Insights, Articles, Podcasts, and Tweets
Listen to John Arnold, the greatest natural gas trader of all-time, discuss how he made billions in profits trading and how he’s giving it all away through his foundation on Peter Attia’s Drive podcast.
Two-thirds of Canadian hedge funds are beating market benchmarks this year. The Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX) has outperformed the S&P/TSX 60 Index by 12.6% in 2020 with lower volatility.
It is a not a good time to be ignoring alternative investments: “While traditional 60/40 type portfolios could face significant risk as bond and equity correlations increase, this called for increased allocations to alternative strategies to improve risk adjusted outcomes”
Liquid alternative investments bring hedge fund strategies to the little investor: “Liquid alternatives are a great tool to help add more balance into the traditional 60% stocks / 40% bonds portfolio.”
Over the past three years, the investment portfolio with a 2% allocation to Bitcoin outperformed by 1.7% per annum with 70 bps of additional volatility, leading to a 22.1% improvement in risk-adjusted returns. Extending the comparison to five years showed that the Bitcoin-spiked balanced portfolio outperformed by 2.2% per annum with just 50 basis points of added volatility, equating to a 33.2% improvement in risk-adjusted returns.
According to analysts at Goldman Sachs, soon after a business combination was announced, the average SPAC outperformed the stock market. This share price performance lends credence to the SPAC arbitrage investment strategy.
With the S&P 500 index up more than 50% since its March lows, valuations have expanded such that the median stock in the S&P 500 has never been more expensive. The valuation of the median stock in the benchmark index is now in the 100th percentile of historical levels. The stock market is now the most expensive in history.
The Fed indicated it would hold rates at zero for the next five years or possibly longer. While it is difficult to predict the future, this policy most likely will not be friendly to those holding cash. It would be wise to be long a diversified portfolio of risk assets, including traditional investments along with alternatives.
The Canadian economy recorded its largest contraction on record, with real GDP plunging -11.5% in the second quarter (-38.7% on an annualized basis). The decline was worse than the -31.7% annualized Q2 plunge in GDP in the U.S. However, real GDP has bounced back 6.5% from May to June. Currently, estimates indicate that real GDP is still roughly 6% below its previous high.
With the tremendous speculative rally in the shares of Tesla, which have rallied over 400% year to date, its CEO Elon Musk’s net worth has ballooned to over $100 billion. Arguably, the current highly stimulative Federal Reserve monetary policy has seen no more significant beneficiary than Mr. Musk.
Former Bank of England governor Mark Carney has been recruited by global investment firm Brookfield Asset Management to head the firm’s ESG division. Born in the Northwest Territories, Mr. Carney has long been a proponent of environmental issues.
The index committee that manages the Dow Jones Industrial Average, a supposed “passive” index, announced that it would sell down its position in Apple (due to the upcoming stock split) and buy Salesforce, Amgen and Honeywell. That sounds pretty active to me.
Even though U.S. investors seemingly stopped caring about valuations long ago, given growth stocks have outperformed value stocks handily over the past decade, Canadian investors still appear to care about value. Canadian value stocks have tread water over the past 17 years, keeping up with the market, instead of massively underperforming as they have south of the border.
