Month: January 2022

Submitted by QTR’s Fringe Finance

“Stocks take the stairs up, and the elevator down.”

Bear with me today. I know tomorrow is New Year’s Eve, 2021 and I know I’ve written extensively over the last two months about the fact that Tesla (TSLA) is the only string that Cathie Wood’s flagship ARK Innovation Fund (ARKK) is hanging on by. And while I definitely don’t want to spend every day harping about the unmatched investing prowess of Ms. Wood, I do think today marks a great time to reiterate and examine this sentiment, and I’ll explain why.

First, I think it’s worth noting: for all of the CNBC appearances, all of the ass-kissing by podcasters and financial media hosts, all of the touting of Cathie Wood as a “visionary”, all the magazine covers and writeups (Forbes called her “Wall Street’s Wizard” on their 50 over 50 cover), all of the conference appearances and the rest of the endless bluster we have had to endure for the last 3 years, ARKK has now officially given up all of its historical outperformance versus its benchmark as a result of the absolutely atrocious year it had in 2021.

(Note: All figures used in this article were accurate to the best of my ability as of December 30, 2021 and do not include market performance for ARKK for the last trading day of the year.)

This is seven or eight years worth of “work” (or at least making it look like you’re doing some work) down the drain as a result of underperforming the NASDAQ by more than 46% this year, as of 12/29/2021’s close.

All of the comparisons and arguments over the last 2 years about how ARKK is such a better vehicle than the NASDAQ due to Wood’s investing acumen are officially moot and heading into 2022, Cathie Wood is going to have to put up or shut up.

She may get a fresh YTD P/L figure to cling to, but “Wall Street’s Wizard” won’t just be fighting to outperform her benchmark this year, she’ll be fighting for ARKK’s performance versus its benchmark since inception and a lot of the firepower Wood needs is going to have to come from this guy:

If I were an ARKK investor, this would frighten me.

Meanwhile, almost every headline on Wednesday this week was about how the S&P made its 70th new all-time high day and how the year stood out as such a blockbuster one for the stock market. ARKK finished Wednesday down 1%.

In fact, over the last 5 trading days, Tesla has been up 15%, the NASDAQ has been up 2.77% and ARKK is lower by -5.27%.

Are you starting to understand why, exactly, it’s going to be a problem for Cathie Wood if Tesla starts to pull back?

Over the last month, all of the Top 10 holdings in ARKK are lower between -2.8% and -20.9%, including Tesla. The NASDAQ is only down -0.11% over the same period.

While the NASDAQ is only 1.8% off its 1 year high, ARKK’s well known/top components have fallen between 11.6% and 69.4% from their 1 year highs (Full disclosure: using % off highs is an ugly way to make a chart, no matter what you’re looking at).

And for those thinking the pain could be over and there’s nowhere to go but up, here’s a gentle reminder that out of ARKK’s well known/top holdings, the lowest price to sales ratio is 4.1x and the highest is still 39.6x sales.

The exercise becomes even funnier when you attempt to use a price to earnings ratio. According to YCharts, six of these 11 companies turn up a null response when asked for a forward PE, while the forward PE’s of the remaining five names, Zoom, Roku, Tesla, Twitter and Twilio, return figures of 37x, 144x, 175x, 189x and (drumroll please) 2,802x.

But hey, maybe ARKK has bottomed, right?

I know I’ve mentioned this before, but the portfolio of companies Wood continues to keep in her “flagship” fund are all still wildly overvalued and, in my opinion, have plenty of room to fall in a situation where high flying stocks re-rate lower.

2022 is going to be such a crucial year to watch ARKK, not only to track its performance against its benchmarks, but to see if Wood’s narrative about her “innovation” stocks (whatever that means) being in “deep value” territory (read: routinely over 100x sales) still holds water with the financial media (it will) and investors (it may not).

My guess is the narrative will not hold up, and that we won’t even need a market crash to prove it – we’ll just need either a slight rotation from growth to value or a 30% drawdown in Tesla at some point.

Ergo, Wood has two options as I see it at this point:

1. Rebalance her portfolio to remove Tesla as a top weighting, which would contradict all the claims she’s made about the company over the last two years and would subject her portfolio to more exposure to the names that dragged her down in 2021 to begin with.

2. Cling even tighter to Tesla and simply pray to god that despite volatility in the company’s most crucial market (China), the constant recalls, the amped up valuation, the psychotic CEO who has been charged with securities fraud and routinely taunts regulators in between selling $15 billion whacks of stock and massive emerging competition both domestically and abroad, shit just doesn’t go wrong.

Tesla is what made Cathie Wood – but it could also be what breaks her.

Things get tricky for ARKK’s balancing act heading into 2022. Look, many people have different explanations for Tesla’s historic run over the last two years. Personally, as my readers know, I still believe it was fueled by the options market. Regardless, it’s no longer about how it got here, it’s about where it is going. The stock simply can’t continue to go parabolic forever.

Tesla was up 53.9% this year and ARKK plunged -24.63%.

What kind of outperformance from Tesla will Wood need for ARKK to break even next year?

At some point, either the options market hysteria will end, Tesla will miss operational milestones, or the reality of its valuation will simply set in.

I’ll go further and say that even if Tesla winds up higher in the future, it’s may not get there fast enough to counterbalance the hand-selected portfolio of high flying names that Wood has stuffed ARKK with.

For me, it’s not a question of if ARKK will bear the consequences of what I see to be poor management, it’s a question of when. A friend of mine said it best yesterday about Wood: “A market that takes Tesla down 30% will wreck the rest of her holdings even more.”

And he’s right. After 6 or 7 tough years of taking the stairs up, Cathie Wood could be getting ready to take the Elon Musk elevator down.

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Disclaimer: Now or at the time of publishing I owned/own ARKK, QQQ, IWM, TSLA puts and am routinely short all of these names and sometimes other names that Cathie Wood has exposure to. Readers should assume I am short Cathie Wood at any given time. I may add any name mentioned in this article and sell any name mentioned in this piece at any time. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot. 

Ask any junior banker, and they will likely tell you that staffing levels are criminally low considering the intensity of deal flow over the past year. So it shouldn’t come as a surprise that 2021 was – just like last 2020 – a bumper year for deals, from SPACs to M&A.

According to data from Refinitiv, deals worth more than $5.8 trillion were signed worldwide this year, a 64% increase from last year and the fastest pace of growth since the mid-1990s.

2021 was an exceptionally busy year for an industry that has seen dealmaking activity steadily climb for much of the past decade.

Bankers and lawyers across Wall Street are thrilled: “In 2021 the stars aligned and virtually everything that could go right for [dealmaking] did,” said Frank Aquila, head of M&A at law firm Sullivan & Cromwell.

Of course, the boom led to record-breaking fees for investment banks in 2021. These fees totaled $157 billion, including $47 billion in fees for M&A advice, the most since people began keeping track more than 2 decades ago.

As one senior dealmaker told the FT, the flurry of deals shouldn’t be a surprise. After all, the Fed has “flooded the world with money.”

“One way of looking at this is that we have flooded the world with money, markets are up by about that amount and M&A is up the same,” said Andre Kelleners, head of M&A in Europe at Goldman Sachs.

Others opined that companies are taking advantage of the cheap money to reposition for the future.

“There is a mass reorganization of businesses going on out there,” said Alison Harding-Jones, head of M&A for Europe, the Middle East and Africa at Citigroup. Companies are “taking advantage of the interest rate environment and the relatively high share price environment” and attempting to “position for growth,” she said.

Private equity deals and SPACs drove most of the dealmaking boom. Dealmaking by buyout groups was a critical source of deal volume this year: For example, KKR’s €33 billion ($37.6 billion) offer for Telecom Italia, which was worth more than 2x as much in 2021 as the prior year.

It’s a testament to how far the private equity industry has come since “Barbarians at the Gate”: “I don’t think private equity can take over Apple tomorrow, but I think that short of that, they can do almost any company,” said Alvaro Membrillera, a partner at law firm Paul, Weiss in London.

What’s more, a total of 334 SPAC deals were announced in 2021, worth a combined $597 billion, equivalent to 10% of global deals by value. Whether the SPAC boom continues next year will partially determine whether the Street is celebrating another record next December, or whether the peak is already in the rear view as expectations for higher interest rates take their toll.

Authored by Mike Shedlock via MishTalk.com,

With energy costs soaring and citizens complaining, the EU shifts to a more pragmatic energy policy…

EU’s New Green Definition 

The EU Drafts a New Definition of Green that includes nuclear and natural gas.

The European Union has drawn up plans to label some natural gas and nuclear energy projects as “green” investments after a year-long battle between governments over which investments are truly climate-friendly.

The European Commission is expected to propose rules in January deciding whether gas and nuclear projects will be included in the EU “sustainable finance taxonomy”.

Gas and nuclear power generation would be labelled green on the grounds that they are “transitional” activities – defined as those that are not fully sustainable, but which have emissions below industry average and do not lock in polluting assets.

Two Nuclear Green Requirements

1. The project has a plan, funds and a site to safely dispose of radioactive waste.

2.  New nuclear plants must receive construction permits before 2045.

Natural Gas Green Requirements

1. Investments in natural gas power plants would also be deemed green if they emissions below 270g of CO2 equivalent per kilowatt hour (kWh)

2. Replace a more polluting fossil fuel plant

3. Receive a construction permit by Dec. 31 2030 

4. Plan to switch to low-carbon gases by the end of 2035 

Point number 4 is interesting. To be classified as green, they only have to “plan” not “do” switch to low-carbon gasses. 

Low carbon gasses are defined as biogas, bio methane, or hydrogen produced via electrolysis by using renewable-generated electricity. 

Since methane is methane, a plan to switch to low-bio methane costs nothing (no plant retooling needed). Doing is another matter. But maybe it’s a lot easier in 2035. 

Do Something!

Previously, the EU proposed a 100g CO2e/kWh emissions limit, based on climate fearmongering and steps needed to avoid disastrous climate change.

That went out the window when citizens stated moaning about the cost of electricity and heating.

French president Macron did not want another “Yellow Vest Movement” energy protest on his hands ahead of French elections in April. 

France derives about 70% of its electricity from nuclear energy, due to a long-standing policy based on energy security. France aims reduce this to 50% by 2035.

Any bets on that?

Practical and Environmental Sense

The new policy makes for both practical and environmental sense in contrast to the ridiculous path Angela Merkel took Germany.

Merkel gave into the Greens and agreed to phase out nuclear. As a result, Germany became more dependent on coal. That makes no environmental sense whatsoever. 

Solar and wind are not exactly reliable as Spain found out, and its citizens are bitching the loudest. 

Mothballing plants that have decades more useful life also makes no practical sense. 

A cold winter and soaring prices knocked some sense into the EU. Inflation trumped green ideology.

In the US, Biden hasn’t learned his lesson yet. Elizabeth Warren and AOC still set green policy.

*  *  *

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Amid the Omicron Covid variant spread, and despite an emerging consensus that this latest variant is not very severe in terms of individual impact and hospitalizations, lockdowns are returning to much of Europe, but so are fierce protests.

Remember, all of this is for your “safety”…

NOW – People mauled by police dogs, beaten with batons at unauthorized protest against Covid restrictions in #Amsterdam.pic.twitter.com/BR5pUBqHuc

— Disclose.tv (@disclosetv) January 2, 2022

Chaotic and disturbing scenes are coming out of Sunday’s large anti-restriction protests near the National Museum in Amsterdam. The protest had been declared illegal by authorities, but a huge crowd showed up anyway, and that’s when police in riot gear attempted to disperse thousands. 

Among many scenes of people being beaten with police batons, dogs were also unleashed on the demonstrators, including in the above video which shows a man being mauled by a police dog who wouldn’t let go of his arm – even as he was prone on the ground at one point. It’s unclear if the officers were wanting the dog to release after clearly injuring the man, or if they wanted the animal to continue biting him.

Just before the police unleashed violent tactics on the crowd, the anti-lockdown protesters surrounded the anti-riot force and their vans, presumably there to make mass arrests.

Politiehonden en waterkanon bij demonstrantenhttps://t.co/UHgZuzQGkt pic.twitter.com/I5xHtAQHHD

— AT5 (@AT5) January 2, 2022

“The Netherlands went into a sudden lockdown on December 19, with the government ordering the closure of all but essential stores, as well as restaurants, hairdressers, gyms, museums and other public places until at least January 14,” CNN writes of the new controversial lockdown. “Public gatherings of more than two people are prohibited under the current set of restrictions.”

The protest looked to be at least in the tens of thousands, and possibly bigger:

⚠️🇳🇱 Massive protest against restrictions in #Amsterdam, #Netherlands.

Dutch protesters break throught the police line. 👇🏻 pic.twitter.com/8nnwlKTXUs

— Other Europe 🇪🇺 (@other_europe) January 2, 2022

Clearly citizens in the Netherlands and elsewhere in Europe are furious over this climate of the ‘never-ending pandemic’ and corresponding lockdowns which governments seem to now impose with ease.

Angry crowds go after riot control police in The Netherlands this weekend:

2022-01-02 +++ Amsterdam +++ #2januariamsterdam #klaarmetrutte #wef #eindelockdownnu #Museumplein #StopQR #HoldTheLine #NoThankYou #NoVaccinePassport #coronaprotest #COVID19 pic.twitter.com/AVbsSxI0Zm

— Guerrilla Reporters (@GuerrillaRepor1) January 2, 2022

But many are saying “enough!” and it’s becoming harder and harder to remove the liberties of the populace in the name of “protecting” people from the virus – a virus which we were told would dissipate once the vaccine is available.

Het gaat mis in #Amsterdam nabij het #Museumplein. pic.twitter.com/m3rpOtRcDt

— Owen O’Brien (@_owenobrien_) January 2, 2022

🇳🇱 De politie slaat er op los in #Amsterdam!!🙈 De politie probeert tevergeefs de demonstranten tegen te houden!👊#Museumplein
pic.twitter.com/TsWIJ51JKa

— Kees71 (@Kees71234) January 2, 2022

But instead we still have these scenes of police cracking skulls as people simply stand up for their rights amid authorities’ attempts to control all aspects of life in the name of “safety” amid the persisting pandemic. 

Authored by Alexander Zhang via The Epoch Times,

The UK government has asked secondary school students in England to wear masks in classrooms in a bid to limit the spread of the Omicron variant of the CCP (Chinese Communist Party) virus.

Face coverings are already recommended in outdoor communal areas and corridors for pupils in year 7 and above, who are usually aged 11 and above. But in its latest guidance (pdf) issued on Jan. 2, the Department for Education (DfE) recommended that masks should also be worn inside classrooms when the new terms begins after the Christmas break.

An additional 7,000 air cleaning units will also be provided to schools, colleges, and early years settings to improve ventilation in teaching spaces, the DfE said.

The recommendation will be temporary, remaining in place until Jan. 26, when the government’s “Plan B” regulations on COVID-19 are scheduled to expire.

Education Secretary Nadhim Zahawi said that he looks forward to seeing pupils back to school next week to continue their face-to-face learning, as “being in the classroom is undoubtedly the very best place for children.”

He said “there is no doubt that the Omicron variant presents challenges,” but lauded the education sector for its “Herculean” response.

Zahawi said that both he and Prime Minister Boris Johnson see education as the “number one priority,” and said the new measures will help “minimise disruption.”

The move has been welcomed by the main opposition Labour Party. Wes Streeting, Labour’s shadow health secretary, said he would rather have masks worn in classrooms than children out of school.

“If the choice is between having masks at schools or children missing schools in huge numbers, of course we want to keep pupils learning. That’s got to be the priority,” he told Sky News.

But senior Conservative lawmaker Robert Halfon said that he fears mask-wearing in schools could damage children’s mental health.

Halfon, who chairs the education select committee in the House of Commons, said the risks from COVID-19 need to be balanced against the risks to children’s wellbeing.

“There is a lot of evidence out there from Belgium, to Canada, to the United States, suggesting that masks on children have a damaging effect, or can have a negative effect on their mental health, their wellbeing, their ability to communicate, their emotional awareness,” he said.

He added:

“There is no requirement to wear masks in offices for adults. So why is there a requirement for children in schools, in classrooms, when children are at least risk from COVID? I don’t get it.”

As nat gas prices surge in Europe, Germany is kicking off the new year by moving ahead with plans to shutter three of its six remaining nuclear power plants, making good on a commitment made in the aftermath of Japan’s disastrous meltdown at the Fukushima Daiichi plant.

The decision was championed especially vigorously by the Greens, who are now helping to rule as part of Germany’s new “stop sign” ruling coalition. But soaring natural gas prices across Europe mean this concession to the environmental lobby couldn’t come at a worse time.

It’s a decision that could have consequences for the US. As we have complained before, the AOC-backed “Green New Deal” mostly excluded nuclear, by far the most efficient and useful alternative to fossil fuels, instead choosing to rely solely on inadequate “renewables”. And as Reuters adds in its report, Germany’s decision to pull the plug represent an “irreversible” pivot away from an energy source deemed “clean and cheap by some.”

Here’s more from Reuters:

Germany has pulled the plug on three of its last six nuclear power stations as it moves towards completing its withdrawal from nuclear power as it turns its focus to renewables.

The government decided to speed up the phasing out of nuclear power following Japan’s Fukushima reactor meltdown in 2011 when an earthquake and tsunami destroyed the coastal plant in the world’s worst nuclear disaster since Chernobyl in 1986.

The reactors of Brokdorf, Grohnde and Gundremmingen C, run by utilities E.ON and RWE shut down late on Friday after three and half decades in operation.

The campaign to shut down nuclear power in Europe’s biggest economy isn’t finished yet: Germany’s last three nuclear power plants – Isar 2, Emsland and Neckarwestheim II – are set to be turned off by the end of 2022.

Preussen Elektra, the company that runs the Brokdorf and Grohnde plants, said in a statement on Saturday that its two plants had been shut down shortly before midnight on Friday. Meanwhile, RWE said the Gundremmingen C plant had also stopped generating power on Friday evening. PreussenElektra CEO Guido Knott thanked his staff for their commitment to safety: “We have made a decisive contribution to the secure, climate-friendly and reliable supply of electricity in Germany for decades.” They certainly avoided any major meltdowns during the plant’s lifetime of active use.

Just last week, Julianne Geiger from OilPrice.com wrote that Germany’s latest push to “greenify” its grid at the expense of nuclear power  couldn’t be happening at a worse time. And instead of changing its energy policy to adapt to the times, Germany is stubbornly refusing to yield, and making decision it can’t easily undo.

Now, the country is losing a reliable power source just as the German baseload power for 2022 delivery – a European benchmark – hit a brand new contract high of €278.50. This is an increase of 10% as gas flowing through a pipeline connecting Russia to Germany switched direction to flow Eastward instead.

And in an editorial published on New Year’s Day, no less an authority than the Washington Post editorial board opined that Germany was making a tremendous mistake, something that would place its people further in hoc to the Russians.

As WaPo noted, France is going in the opposite direction, choosing to build more nuclear power plants. And there’s a reason for that: trying to wean an economy off coal and fossil fuels wouldn’t just be impossible, it could be “perilous” without a contribution from the ever-reliable nuclear sector.

Absent nuclear, Germany also depends more on Russian natural gas, a deep geopolitical vulnerability that gives leverage to Russia’s authoritarian government.

True, the German government has committed to phasing out coal — but not until 2038. Even on this long time frame, eliminating coal without help from nuclear power plants will be perilous for Europe’s largest economy. Analysts warn that Germany’s supply margin — how much electrical generation capacity the country has in reserve — could plummet in the next couple of years, risking blackouts in times of grid stress.

Next door, French President Emmanuel Macron is moving in the opposite direction, announcing plans for new nuclear reactors. France relies more on nuclear power than any other nation, a major reason the country has about half the per capita greenhouse emissions Germany does. Mr. Macron rightly sees expanding the nation’s nuclear capacity as a better alternative than attempting to rely on renewables alone. Solar and wind power will be essential pieces of a cleaner energy mix, but the grid will still require reliable, always-on sources of electricity to back up intermittent renewables. Better it be nuclear than coal, oil or gas.

It appears, following The Netherlands’ recent surprise flip-flop decision, that nuclear power might be Europe’s only answer to the looming dependence on Russian gas. The question is, is it too late – or too politically untenable – for Germany to un-flick the switch?