WC - 10/03: Watch the 10Y Treasury, Inflation-spiced Lattes, Sony Buys Game Remaker
The 10Y Treasury and the Fed are the new controllers of the market. We're done with the days of the market seeing higher all-time highs despite bad economic reports.
Catalyst Calendar
*All times are in EST
Friday, October 8th - Jobs Reports
8:30 a.m. Fears of Stagflation (inflation mixed with dismal economic growth) are now circulating the media, and probably investors’ heads. This sentiment makes the September jobs report a little more important than usual, especially after the preliminary (unrevised) August tally of 235K added jobs. Bank of America forecasts an unchanged unemployment rate at 5.2%. You’ll be able to find it here.
Watchlist
T2 Biosystems (TTOO) - Imagine Theranos, but not fake. T2 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. T2 is technically a “biotech” stock, and will likely be hypersensitive to a market correction, making it a big dip-buy for us.
Affirm (AFRM) - ‘Buy Now, Pay Later’ market leader and almost-first-mover. We might
Johnson Controls (JCI) - We repeat: old but innovative industrial controls technology company (think intelligent HVAC systems) with multiple growing university collaborations for R&D. We like R&D spending.
Tattooed Chef (TTCF) - Nothing new to report with them. Just a big dip buy.
Pinterest (PINS) - We still repeat: good balance sheet, great management, and overall innovative platform in the attention (read: ad-space) economy.
A Real Market Catalysts - Inflation Is A Good Excuse For Fear in the Market
Now that we’re exiting the euphoria of free money from the Fed, investors seem to be concerned about things that will actually effect the economy. Namely, inflation.
Inflation is an important thing to keep an eye, and in particular the 10Y Treasury yield as an investor. Any sudden spikes in 10Y Treasury yield might cause a flight from the market, which could cascade into margin calls, and then a correction.
Relevant Definitions
Inflation - the general rise in prices of goods and services
10-year Treasury (bond) - a government debt instrument (a bond or “loan” you can sell) issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. It has an expiration/maturity date of 10 years later. So after 10 years, one party needs to repay the initial amount they were “loaned”.
Yield - the (theoretical) internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond (e.g. the 10Y Treasury) today at the market price, assuming that the bond is held until maturity, and that all coupon and principal payments are made on schedule.
Inflation Directly Impacts Stock Price
Inflation, by definition, directly changes the price of the Liabilities and Assets in this equation. Therefore, the value of the company’s stock price ought to change with inflation or inflation expectations.
“Liabilities” are essentially debt or costs to your business. These are the goods and services a company relies on in order to operate. Inflation will change the price or cost of these things.
“Assets” are things of value, like revenue as well as all the things a business literally owns, like buildings, equipment, uniforms, and other businesses. The value of these things is determined by how much someone else would pay for it, aka it’s price, which inflation directly effects.
For a publicly listed company, “Owner’s Equity” refers to the total value of the company’s outstanding shares. If liabilities and assets change in value, and owner’s equity (i.e. stock price) is dependent on assets and liabilities, then the stock price of the company will change as well.
Inflation Right Now - 10Y Yield and Inflation are Still Inversely Related, and Inflation is Still Slowing
Last week we mentioned that we wouldn’t be surprised if the 10Y Treasury Yield became a concern for the market as it spiked 17.72% between September 20th and the 29th.
Mainstream economics holds that 10Y Treasury yield moves inversely to inflation or inflation expectations. We think this relationship still holds true even though recent CPI-U data shows inflation’s increase beginning to slow. Now 10Y Treasury inflecting downward, likely reflecting investors’ expectations that inflation will increase, as it won’t be as “transitory” as the Fed is trying to portray.
The problem is controlling inflation, not inflation will running too high
CPI-U, or the consumer price index for urban consumers, measures change in prices. So when CPI-U is positive, but decreasing, it means that prices are increasing as a slower rate. This doesn’t mean we don’t have inflation, we do. But it could foreshadow sudden deflation (decrease in prices) in the somewhat near future. The Fed’s job is to control this by ensuring “stable prices”. If they don’t, businesses won’t know how to price things, which directly impacts how much money they make and, consequently, stock prices.
The market wants to know (or at least be fooled) that the Fed has inflationary dynamics under control — if they don’t, investors get scared because pricing good and services becomes difficult and unpredictable.
In general, the Fed / Jerome Powell wants to instill serenity in the market and businesses regarding the economy; they need to make it seem like they’ve got everything under control. This is for three main reasons:
If they don’t, the market and corporations could overreact (as they tend to) and cause adverse economic effects (e.g. accidentally underpricing goods and services)
They’re a branch of the federal government and the value of our dollar is largely correlated with trust in our government
If nobody trusts the Fed then, when their advice is actually needed, nobody will use it
Just follow the 10Y Treasury yield. You can google, “10Y Treasury Yield”, and it will show up. This and the Fed are basically controlling the market via inflation concerns.
M&A, IPOs, and Deals
Vertical Integration: Sony Acquired BluePoint Games last Friday
Last Friday (October 1st, 2021) Sony Group (NYSE:SONY) acquired Austin, Texas-based video game developer Bluepoint Games.
Terms of the deal were not disclosed, but Bluepoint Games is known for some pretty sweet video game remasters and remakes including the following:
Remake "Demon's Souls" remake for the PS5
Remake of "Shadow of the Colossus" for the PS4
Remaster of "Uncharted: The Nathan Drake Collection,"
Remaster of "Metal Gear Solid HD Collection"
"God of War Collection."
Legally and financially, Bluepoint Games will become part of Sony's PlayStation Studios. Earlier this week, Sony attracted bull rating from Cowen on a call tied to valuation
Would we buy SONY?
Maybe.
They’re a solid “backbone” stock to have in a riskier, more growth-oriented portfolio since they’re not as risky as what people seem to calling “growth” stocks nowadays. The fact that they’re acquiring a gaming company that does very good remakes (at least we think so) tells us they’re at least trying to keep up with the times and innovate outside of PlayStations and sound equipment.
We’d need to look at their balance sheet to say more, but vertical integration is always hot in the stock market dating scene.