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Welcome to Firstlinks Edition 376

  •   24 September 2020
  • 2

Weekend market update: The S&P500 in the US rose strongly on Friday, up 1.6%, while NASDAQ recovered some lost ground, rising 2.3%. However, this was at the end of a losing week where the US gave up 0.6% and Europe was down even more on COVID-19 worries. France and the UK are struggling. Friday in Australia produced the amazing result that Westpac, fined $1.3 billion the day before, rose 7.4% on the Government's intention to loosen credit laws. Banks pushed the S&P/200 index to a gain of 1.7% over the week.  


The US tech index, the NASDAQ, peaked on 2 September 2020 at 12,058 and closed three weeks later at 10,632. On the same days, Apple hit US$137.98 and then fell to US$107.12. These falls of over 10% and 20% seem high but both were simply returning to their early August levels. It's hardly a rout when a month's gains are given back, although Morgan Stanley analysts warned the sell off was only half way done.

The bigger question is whether such a stock correction will scare off the 'Robinhood' traders. Much of the demand for tech has come from new retail investors living the 'markets only rise' dream, buying US$500 billion notional value of stock options in August alone, or five times the previous monthly high. The options sellers who take the other side of the trade cover their exposures by buying the same shares, adding to demand. For the first time ever, options trades exceeded normal share trades on US stock markets in August.

What happens when these new players realise markets do indeed fall and their options are well out-of-the-money and likely to expire worthless? Perhaps they hang on for a rise. As we discussed in this article on retail investors, it is their impact on the actions of professionals that has the most impact on the stock market. The chart below shows the incredible growth (blue line, almost vertical) in 'small trader call buys', that is, stock options bought by retail punters hoping the market will rise. Apple's fall will test the mettle of many of them.

And yet amid the tech 'correction', an eight-year-old cloud-data software company floated with a value of US$70 billion. Snowflake's shares rose from its issue price of US$120 to reach a high on the first day of US$319. At its closing price, it was worth six times more than its last funding round as a private company as recently as February 2020.

In case you are wondering who gets a piece of the action when first day trading leaves US$4.3 billion on the table, the answer is, those closest to the investment banks handling the deal. It's impossible to receive an allocation unless you know someone or are a big client, with Warren Buffett making a billion on the day. As David Dechman, once Head of Private Wealth Management at Goldman Sachs, confirmed in an internal memo written many years ago, the system allows the rich and connected to become even wealthier (sourced from Bill Gurley's Twitter feed via AFR):

"The hot deals are obviously a currency, which can be used to please institutions, please high net worth individuals, acquire new customers ..."

Does the same thing happen in Australia now? Of course it does. Winning the hot deals is not just about the fees the investment bankers earn. Having said that, the first day of trading on the ASX on Wednesday for the P2P lender Plenti (ASX:PLT, previously RateSetter) closed at $1.30 versus its $1.66 issue price. It hit a low of $1.16 on Thursday suggesting some buyers were there for the stag which never turned up.

This week, a focus on tech and innovation

We continue our Interview Series with Thomas Rice, who manages the innovation fund that delivered 43% in the last year by finding the best new ideas around the world. He describes his biggest positions and what he likes and does not like in global tech. How could you not love a job like that with a world of new tech to pick from?

Then in the high-profile Battery Week, a comprehensive review of Tesla looks at whether the current price can be justified. The market did not like Elon Musk saying major cost improvements could take three years, and Vikram Mansharamani takes a deep dive into the bubble of Tesla's share price.

Adrian Fyffe describes the impact of currency movements on a global portfolio, and ways that Australian investors can access the big US names like Facebook, Apple and Google while minimising costs in FX transactions.

Moving on from tech, Christine Benz takes an unusual look at retirees who have enough money and would rather protect what they have than push for more, while Wade Matterson shows how, even for relatively wealthy retirees, the current age pension provides a safety net if the market falls. It's a reassurance but financial independence is still the best outcome.

Are we facing a W-, V- or U-shaped recovery? Kristiaan Rehder thinks it's more likely a K, with some companies doing very well as the expense of others.

In the final three articles by Leisa on our Survey, she covers your views on the increase in Super Guarantee and fall in JobKeeper, how you have changed your investment portfolio and your economic outlook, and how COVID-19 has affected you including long-term consequences. There's a fascinating collection of hundreds of comments on how you think the world will change ... or not.

In a footnote to last week's article on how LICs and LITs are facing challenges, another conflict appeared in the media this week with high-profile bankers Rob Ferguson and Malcolm McComas running the following advertisement in The Australian Financial Review


Graham Hand, Managing Editor

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Weekly Editorial

Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020
  • 6

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?


Tech continues to run on rising prices not profits

The global tech run paused in September but the boom is driven by rising prices rather than actual profits. It will end when global confidence in the prospect of endless monetary and fiscal stimulus runs out.

Investment strategies

When defensive assets become indefensible, turn to tech

During COVID-19 and the economic recession, we are seeing a surprising new entrant to the defensive sector grouping. Technology shares have been behaving a lot like defensive shares such as food and utilities.

Interest rates

10 reasons low interest rates may limit growth

Ultra low interest rates could be counterproductive for economic growth. Policymakers need to rely less on monetary stimulus and be mindful of the side effects they are creating, especially for retirees and savers.

Financial planning

What the RC, Budget and Keating mean for aged care

Although the Aged Care Royal Commission (with Paul Keating) and Budget announcements gave the aged care sector high profile, the welcome 'granny flat' changes came with inadequate extra Home Care Packages.

Investment strategies

Is currency exposure an unwanted risk or source of returns?

As more Australians invest overseas, currency exposure represents a new risk. 50% hedged, 50% unhedged was once a popular ‘least regret’ approach, but there's a move to currency as a return source.


High growth and low rates incompatible with current share prices

The unrealistic value creation through lowering discount rates while assuming high growth shows a sensible link is critical. Interest rate assumptions need as much valuation focus as the cash flows of the business.



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