WC-10/31: November 3rd Will Be Volatile, Being Real With Everyone, Government Bonds Have Been Making Our Market Rally For a While
On Wednesday, FOMC Meeting Minutes Released and the Federal Reserve will say something out interest rates. We apologize for the delay on portfolio updates and explain bonds and "interest rates".
Portfolio and Personal Updates: AMC, Being Real, and Apologizing
We’ve been slow on the portfolio updates — we apologize for this.
We plan to release a short-term and long-term portfolio to officially begin the YouTuber’s Vs. Weekly Catalysts portfolio experiment, as we’ll call it, within the next two weeks. Before, we didn’t have a clear timeline for this because we weren’t co. Now we do.
For context, the watchlist below is for our long-term portfolio, which HAS been started, but we haven’t finalized the list of stocks in it just yet and don’t want to show it to you until it’s complete. Again, for this we apologize. This isn’t an excuse, but a lot of our hesitancy stems from us waiting for the next dip in the market to do one big buy. Additionally, the market is in a weird place between deleveraging and
Another big reason for not finalizing our portfolios has been that we’re largely invested in two major squeeze plays.
Yes, we have conviction in these plays. When will they pan out? Technical Analysis (weird line-drawing astrology, strange statistics, and techniques that magically work a non-trivial amount of the time) keeps pointing to the near future.
Being even more (maybe too) real here — but also on the topic of catalysts — AMC has an earnings report this week which many might think will cause the squeeze. We can’t predict when AMC will squeeze, or what will cause it to squeeze, given the nuance of this situation. All we (mostly) know is that “shorts haven’t covered”, meaning that many investors who have been short-selling AMC, have not bought the shares they loaned out back.
When they do, AMC is expected to soar.
Watchlist
Update: We’re buying more Pinterest (PINS) for sure. We’re not buying Johnson Controls (JCI) anymore. There’s nothing wrong with it, but we’d just rather focus more capital on these other stocks of similar conviction:
T2 Biosystems (TTOO) - This is roughly $1.00/share for a company that makes blood tests which “provide actionable results in just 3 to 5 hours.”, along with a Covid test (T2SARS-CoV-2 Panel test), that can detect both the Mu (B.1.621) and Iota (B.1.526) variants of Covid. Big dip-buy for us.
Agile Therapeutics (AGRX) - They make Twirla®, a weekly hormonal birth control patch for women with a body mass index (BMI) less than 30 kg/m2 who can become pregnant). Insiders are still buying, they’re still at a local low, and YoY is trending upward. This is a big buy soon just based on technicals.
Affirm (AFRM) - They are a market-leader in the fast-growing ‘Buy Now, Pay Later’ space. Trading activity on AFRM is dying down and, if you google ‘AFRM stock’, you’ll see it’s price sort of peaking. This is really tricky timing given the state of the market, but our eye is definitely on it.
Tattooed Chef (TTCF) - This looks like it’s hitting a bottom so we might buy very soon, regardless of whether the market crashes.
Note: These are all stocks for our long-term Weekly Catalysts portfolio. We’re working on a short-term watchlist as well, and will release both in the next two weeks.
Catalyst Calendar
11/ 03 - FOMC Meeting Minutes Released + Federal Reserve Statement
(2pm) Expect BIG volatility in the market November 3rd as an interest rate decision and potential tapering signals will be delivered from the Fed via their press conference after a two-day FOMC meeting.
The FOMC meeting will take place from November 2-3 and will be followed by the press conference, where Federal Reserve Chairman Jerome Powell will answer questions, likely about interest rates and tapering timeline given fears of inflation and the Fed tapering too late.
Given the market’s likely temporary euphoria, it wouldn’t be surprising if we get bad news but it only causes a temporary dip before the market rallies even higher.
11/04 - Unit Labor Cost (QoQ) Report
If this isn’t increasing a lot (it’s hard to put a number to this), then investors might see this a bearish indicator of the economy as employers are not paying enough to workers such that they can catch up to inflation. Unit Labour Costs measure the yearly change in the price businesses pay for labour, excluding the farming industry, and is traditionally seen as a leading indicator of consumer inflation.
One view of this metric is that a higher Unit Labor Cost means that the labor market (i.e. employers) is catching up to demand for higher pay, and therefore supporting a growing economy. Another view is that if a reading that is stronger than forecast is generally supportive (bullish) for the USD, while a weaker than forecast reading is generally negative (bearish) for the USD.
11/05 - Unemployment Situation / Rate
(8:30am) The market will likely be volatile November 5th, unless the unemployment rate beats investors’ expectations which haven’t been reported yet. If this is much lower than expected, investors might begin to believe stagflation fears. You can find it reported here.
This may have been priced into market already, but we need to look at how the market has reacted to the past unemployment despite inflation fears. Then in this sentence and the following, we explain why this will have an impact on the market.
Bonds: Our stock market went crazy last year due to lower “interest rates” (What the Fed is talking about on 11/03) on government bonds
We’ll make this quick: a bond is basically a loan
A bond is just a loan that you can “sell” to someone.
The gist of it is the following:
You loan some amount, called the face value or principle, out to someone for some period of time. Let’s say 5 months for this example. After those 5 months, the face value must be paid back, at a date called the maturity date.
Every month, until the maturity date, you charge them an amount equal to the face value that you loaned multiplied by a rate called the interest rate or coupon rate.
So, every month for 5 months, you would get amount equal to the interest rate multiplied by the initial amount you loaned. This is like the “profit” on the bond you sold.
After the maturity date, you get your money, the principle, back.
Here’s an example:
You loan $1000 to a friend, at an interest/coupon rate of 1% per month, or 0.01/mo., for 5 months.
Your friend gets $1000 up front, but pays you $10 (interest rate x principle, or 0.01 x $1000) every month for those 5 months
After 5 months, your friend gives you the initial $1000 back. But, over the course of that 5 months, you’ve made $50. So you started with $1000, but now you have a total of $1050 after 5 months.
Last year, the Fed lowered the federal funds rate (aka “Overnight Rate(s)”), which is the interest rate charged on certain government bonds called Overnight Funds
Overnight funds are bonds/loans which need to be repaid after one day, or “overnight”.
The Fed made government bonds (loans, basically) extremely cheap, which gave a lot of (effectively) free money to banks and institutional investors. Banks either threw it into the stock market or used it as collateral for margin debt (more borrowed money) to invest in stock. This why our stock market went crazy last year and into this year; the lowest rate at which banks could issue bonds at was lowered even more, giving banks more room to profit off of bonds and loans. This is also why it’s very important to know about bonds.
Government bonds and their interest rates are arguably one of largest market forces.
The point is that government bonds and their interest rates have a direct impact on our money supply and economy.
Investopedia explains why government bonds are way too importan.t
Overnight rates were decreased significantly by the Fed as a part of their QE policy. If you didn’t understand all of that, don’t worry. The point is that government bonds have a LOT to do with our economy and investor activity.
So how do banks and investors make money off of bonds?
You just to sell bonds are higher interest/coupon rates than you buy them.
This is where we get into the weeds a little. In short, you just need to make sure the rate you pay for a bond (or any debt instrument) is less than the rate you charge for a bond (or any debt instrument) you administer. This is how many financial institutions make money.
Let’s say you buy a bond with an interest rate of 2%/month and sell one with an interest rate of 4%/month, and both have the same principal amount and time horizon, then you make 2%/month. That is 2% of that principal “loan” amount every month for the time horizon of the bond. You just need a higher net rate of return.
That’s honestly the way our economy works; run up debt, and sell it a higher price than you have to pay on it.
M&A, IPOs, and Deals
Nothing to report here.