Mechelany Advisors' WEEKLY MARKET REVIEW highlights the salient feature of the past week, details specific issues of the moment and reviews the Mechelany Advisors' MODLE PORTFOLIO
Tech Meltdown
Rising bond yields and strong economic numbers rattled equity markets last week, but the main casualty was technology stocks. The Nasdaq ended the week -2.06 % lower while TESLA and Cathy Woods’ ARK fund investors lost respectively 34 % and 26 % of their investment in the past three weeks.
The US Tech Meltdown that we have been warning about is happening, and far from this being just a correction, this is the beginning of what will prove to be a devastating bear market in these highly bubbly stocks.
Investors in TESLA have just lots 250 Billion of their money while the much touted Cathy Wood’s fund investors almost 15 billion in three weeks. Her highly publicised decision to double-up on Tesla shares 2 weeks ago just proved to be a costly mistake and the only thing she has demonstrated is that, despite her stock picking skills, she does not seem to have any experience of investment bubbles.
The extremely violent fall in TESLA shares juts demonstrate what we have been saying all along :
Once the bubble bursts, there will be tons of sellers and very few buyers, leading the stock to fall in a vacuum….
And it is not over, because every attempt to recover will be met by investors who want to cash-out and protect their unrealised profits
.Whether Elon musk is genius or not, the psychology of markets and investment bubbles is always the same and 1000x earnings, only fools and new comers could think that they would ultimately make money by buying at these levels.
One of the most interesting part of what is happening today is that all the Redditt / Robinhood/Social Media investors that have been carrying the markets and these stocks to dizzying heights are starting to realise that they can lose real money and no simply end top with a game over on their favorite video games. They are also learning that oiling in to average down may actually not be the right strategy.
The other thing that is interesting is that besides the speculative extremes in TESLA, Twitter et al., solid businesses like Apple and Microsoft are joining the bear market scenario.
Apple shares have lost 17 % of their value since January 29th peak or 400 Billion of market capitalisation.
Long term investors are switching out of the COVID stay at hime beneficiaries to Financial stocks, consumers and cyclical stocks.
Economic growth is back…
and this is bad for the liquidity fuelled bubble…
The astounding performance of equities and Technology stocks in 2019 and 2020 was engineered by a careless FED that reversed monetary policy in December 2018 and went full blast in the 2020 COVID era.
But with vaccinations rolling out fast, businesses are re-openingm especially in the hospitality and travel industries explaining the strong data number that came out on Friday with the US economy adding 379’000 jobs and unemployment rate falling to 6.2 %.
Bond markets are bond markets and the FED cannot control the bond market if they have decided that rates are too low. And indeed they are considering the return of inflation stopping out in all the numbers.
US treasury yield made new highs last week, pulling the rug from under equity markets, making their valuations even more unsustainable than a few weeks ago.
30-year treasuries are now at 2.3 %, the levels they were at before COVID and 10-year bond yields have done the same at 1.57 %
To put things in perspective, the SP500 expected dividend yield is barely 1.5 % for 2021 and the Dow Jones Industrial will only achieve a paltry 1.93 %.
The US CPI is expected at 1.7 % and the PPI at 2.6 %, with earnings growing at 6 %.
All the above means that equity investors have no longer any yield advantage over bonds and are now yielding negative real returns at stretched valuations.
As for the Nasdaq, it trades at record high P/Es of 37x while its dividend yield is only 0.78 %.
Its doubling since March 2020 and 14x increase since March 2009 are now being questioned. Anyone believing that is can continue to push higher at the same paces with rising yields is living in cuckoo land.
Investors who followed our recommendation to bail out off US equities in January avoided a 9 % loss on their holdings.
China’s prudent management
The National congress of China’s Communist Party is happening this week-end and bears fundamental implications for the Middle Kingdom and the world economy.
Contrary to the US where the Biden Administration is passing through congress another 1.9 trillion stimulus plan, China’s Government is shifting from fire fighting to prudent management.
During the Friday’s session, China’s government set a conservative economic growth target for this year, shifting its focus from recovery mode to longer-term challenges like reining in debt and reducing technological dependence on the U.S.
The growth target was set at above 6%, well below economists forecasts, with the budget deficit expected to fall to 3.2% of gross domestic product.
Beijing outlined a plan to normalize policy now that the pandemic is under control domestically and the economy has bounced back.
It is also enacting new laws for Hong Kong, further integrating the Special Administrative Region politically into the Chinese system and ending 24 years of the system in place since the 1997 handover.
Chinese indexes have corrected significantly in the past three weeks and are now ready to focus again on the positives of the Chinese economy.
Moreover, we expect the NCCPC to enact measure to further integrate financially into the Chinese financial markets and this should be a boon for Hong Kong listed Chinese equities.
Mechelany Advisors’ MODEL PORTFOLIO
Our MODEL PORTFOLIO was up + 1.96 % last week for a +25.73 % increase Year-to Date, way outperforming the world indexes, the US markets and the Nasdaq
Since inception on January 1st 2014, 87 months ago, the MODEL PORTFOLIO has delivered 283 % cumulative performance, more than 4 times the MSCI World Equity index, 2.8x the performance of the US SP500 and 74 % more than the US Nasdaq despite its spectacular back-to-back performances in 2019 and 2020.
Perfomance Contribution
Last week, our MODEL PORTFOLIO was negatively impacted by our US treasury positions representing now 40 % of our asset allocation, the sharp fall in Silver, our short position on oil and by our Quantumscape position in the USA. Another negative contributor was our early entry into the Chinese domestic ETF.
On the positive side, our short tech portfolio, our European stocks and our Chinese H-shares have all contributed positively. BT and Telefonica both rose by double digit figures and Echostar in the US added 17 %.
In our Chinese portfolio, as we expected, the financial sector – banks and insurance are making a major breakout and our deep value stocks have done well.
Looking Ahead
We expect more turbulences in the US next week before a temporary bottom and a mild rally into April. The wider indexes may challenge new highs, but the technology sector will definitely not make new highs.
We see bond yields peaking and that will make a turning point in Bonds, Gold and the US dollar.
We expect the Chinese markets to resume their uptrends and Gold and Silver to bottom out with bonds. We also expect European stocks to be the major beneficiaries of the April rally.
However, we expect a major correction to take place in the second quarter of 2021 and will be positioned for that.
Transaction List
Last week we have been very active on the portfolio with a lot of volatility.
We started the week by de-hedging our Chinese portfolio and going long the Chinese domestic index, we shorted Oil and Copper and added back a lot of our Deep value Chinese stocks.
We de-hedged our European portfolio, took profits on our Apple Tesla and AMD shorts while taking away our Russell 2000 short for now. We added some Silver and Gold Miners.
On Friday, when the employment numbers came out, we re-instated our shorts on Tesla, AMD and Apple.
Next week, we will increase our exposure to European stocks
Portfolio Details
Mechelany Advisors’ CHINA DEEP VALUE PORTFOLIO
Mechelany Advisors'CHINA DEEP VALUE PORTFOLIO was launched on Jan 1, 2021 to capitalise on what Mechelany Advisors' sees as a MAJOR SECULAR ENTRY POINT in some of China's corporate giants. The portfolio is structured to generate 8 % gross dividend yield per annum and benefit from a unique potential for long term capital appreciation due to the exceptional value these stocks offer at the moment.
Despite the fall in the global Chinese Indexes, Our CHINA DEEP VALU PORTFOLIO rose by + 3.25 % last week for a +13.55 % performance since launch on January 1st 2021.
Investors have been offloading Chinese Technology, Electric Vehicle, Solar and Real Estate stocks, but our deep value portfolio was lifted by strong performance in bank and telecom shares.
EXANE Index Certificates on the MA CHINA DEEP VALUE PORTFOLIO
The certificates were launched respectively on February 9 and February 16th and are benefitting form their leverage factors of respectively 2X and 1.4 X. They are now up +10.45 % and +7.42 % respectively in less than a month and despite the correction in Chinese equities.
It is definitely not too late for investors to invest in them using the following ISIN CODE
Mechelany Advisors US TECH SHORT PORTFOLIO
Mechelany Advisors US TECH SHORT PORTFOLIO was launched on February 23rd 2021 to capitalise on the major bear market that we see unfolding in the US technology mega-caps in the next two years. It consistes of 8 stocks that are equal-weighted in the portfolio.
Last week’s breakdown in Tesla, AMD and Netflix pushed our portfolio up +4.26 % despite the rise in Alphabet and Facebook Inc.
On Friday, EXANE launched a Leveraged index tracker enabling investors to position themselves conveniently either to capture the alpha of the upcoming bear market in technology stocks, or to hedge their existing equity portfolio trough one single instrument traded daily and benefitting from a 2x leverage on the short side.
Click on the image below to Download the Term sheet
Mechelany Advisors BOND PORTFOLIO
Mechelany Advisors' BOND PORTFOLIO Mechelany Advisors’ BOND PORTFOLIO was structured in 2020 for clients wanting to benefit from a EURO-based high yielding portfolio using a leverage of one to one and generating 14 % income per annum.
Our Mechelany Advisors BOND PORTFOLIO is up 33.39 % since inception on April 6th 2020, less than year ago but gave back some performance since its peak at + 39 % in January.
We were clearly too early in entering the US Government bond market but are string on 50 % of the portfolio in cash, something that will enable us next week to increase our exposure there while taking even more profits on corporate bonds.
We see Treasury bond yields peaking next week while high yield corporate bonds start falling
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