CWS Market Review – November 30, 2021

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Omicron Rattles Wall Street

I find it interesting that on Wall Street, a market drop of more than 10% is called a “correction.” But if you take a long-term perspective, then, properly speaking, every market drop has truly been the error while the rally has been the correction.

It’s odd to think that way, but it’s true. The S&P 500 last hit an all-time high less than two weeks ago. Thanks to fears of the Omicron strain, the stock market got shaken up on Friday. It was the worst day for the S&P 500 in nine months, and for the Dow, it was the worst day in more than a year.

It was also a calm market. Before last Friday, the S&P 500 had gone 29 days in a row without closing up or down by more than 1%. In fact, that understates how relaxed the market had been. Of those 29 days, 22 had market daily moves that were less than 0.5%. Now we’ve had three 1% days in a row.

Here’s the minute-by-minute chart for the last two weeks:

As a general rule, volatility tends to feed on itself in the markets. In other words, high volatility often produces higher volatility, while low volatility produces even lower volatility. Consider that this year, the stock market has fallen more than 1% 17 times. In eight of those times, it rebounded by more than 1% the next day.

Today, the S&P 500 lost 1.90% and the index closed at its lowest level in over a month. All 11 sectors were down. For November, the index lost 0.83%. This was the second monthly loss in the last three months. Prior to that, the S&P 500 had rattled off seven straight monthly gains.

The stock market’s drop on Friday was very reminiscent of the kinds of days we saw in March 2020. The worst-performing stocks were travel and leisure companies while many of the top performers were defensive stocks. For example, Clorox had a very good day.

The trouble with the Omicron strain is that we don’t have a lot of information yet. Whenever this happens, Wall Street is more than happy to fill in the gap with fear. On Monday, the market made back some of those gains as we heard that Omicron may not be that bad, but on Tuesday, Wall Street reverted to fear.

My guess is that we’re going to witness Wall Street wrestle with the “lockdown trade.” That means that on most days, cruise stocks will be either the best- or worst-performing stocks, and there won’t be much left over in the middle. Today was a good day for the cruise stocks. Apple and Tesla also did well. In other words, investors are willing to take on more risk. Only seven stocks in the entire S&P 500 closed higher today.

By the way, our Buy List as whole skews towards being a classic defensive portfolio. That’s not a macro prediction on my part. It’s simply how our stock-picking worked out. In plain English, when folks get scared, they flee toward our stocks.

A good example is Hershey (HSY), a Buy List favorite. Shares of Hershey fell about 1.69% on Friday. That’s bad, but it was better than the overall market’s drop of 2.27%. Today, the S&P 500 fell 1.9% while shares of Hershey only fell 0.93%. Whatever Omicron may do or not do, I doubt it will impact chocolate sales.

By the way, investors shouldn’t overlook “downside Alpha.” That’s a fancy word for not falling as much as everyone else. I’ve found that most of the long-term outperformance comes during rough markets. Everyone can look brilliant in a rally but emerging from a harsh bear market mostly unscathed is an impressive feat.

Powell Said It’s Time to Retire “Transitory”

Besides Omicron, probably the main reason for today’s selloff was hawkish comments from Federal Reserve Chairman Jay Powell. At a Senate hearing, Powell said that it may be appropriate to speed up the tapering of bond purchases and that inflation will “linger well into next year.”

No, duh.

Jay, look around. Just recently, General Mills said that it will increase prices next year. That means you’ll be paying more for Cheerios or Lucky Charms. Even Dollar Tree is raising prices to $1.25.

Here’s a look at gasoline prices over the last 18 months:

Until now, the Fed has often described inflation as being “transitory.” Today, Powell conceded that it’s “probably a good time to retire” that word. Still, he’s pinning most of the blame on supply/demand imbalances.

The Fed’s original plan was to pare back bond purchases until they reached zero by June. After that, the Fed would start to hike interest rates.

Now that timeline is uncertain. According to the futures market, traders are placing a 45% chance of the Fed hiking by early May. That’s up 10% from yesterday. Traders narrowly see a second hike coming by September.

The bond market is reacting as well. I like to look at the spread between the 10- and 2-year Treasury yields. The spread got down to just 91 basis points today. That’s the narrowest since January. In March, the spread was 159 basis points.

For being such a simple metric, the 2/10 Spread has an eerily good track record. Whenever it turns negative, you know bad times aren’t far behind. The last time the 2/10 turned negative was in August 2019, only a few months before Covid rocked the world.

Jack Quits Twitter

On Monday, Jack Dorsey announced that he’s stepping down as Twitter’s CEO. The stock responded by vaulting 11% higher. That’s got to sting when news of your departure causes investors to celebrate. At its peak, Jack’s leaving added $4 billion to Twitter’s market value. Ouch!

Parag Agrawal will take over as CEO. He’ll be the youngest CEO in the S&P 500. At 91, Warren Buffett is the oldest. Agrawal is a little younger than Mark Zuckerberg. The Bloomberg story contained this curious sentence, “Citing security concerns, Twitter wouldn’t disclose Agrawal’s date of birth, but confirmed he was born later in 1984 than Zuckerberg’s May 14 birthday.”

Despite Wall Street celebrating Jack Dorsey’s departure, shares of Twitter closed lower yesterday and they were down 4% today. This brings up a good point that often isn’t discussed, namely that Twitter isn’t that profitable as a business enterprise.

You’ll have to excuse me for relying on antiquated notions, such as return-on-equity, a balance sheet, or “profits,” but Twitter really doesn’t look that good.

Jack Dorsey is also the CEO of Square. I’ve found that shareholders are willing to overlook a lot, as long as the stock is going up. Just look at Elon Musk. Yes, he says silly things, but the stock has done well over the years. That’s not the case with Twitter, so that added additional pressure on Dorsey to choose one of his companies to lead.

Twitter went public seven years ago and the shares are now below where they were after the first day of trading. The IPO was priced at $26 per share. On the first day of trading, it zoomed over $50 and eventually closed at $44.90. Today, Twitter closed 96 cents below that. In seven years, Twitter has basically gone nowhere.

At the end of this year, Twitter will have brought in about $5 billion in revenue. Their gross profit will be around $3 billion while the operating profit will probably be about $300 million, give or take. That’s probably around 35 to 40 cents per share, and we still haven’t gotten down to taxes and other non-operating expenses.

Are investors willing to pay at least 100 times earnings for a company that seems to have little direction? Clearly, Agrawal has his work cut out for him.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.
– Eddy

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Posted by on November 30th, 2021 at 7:46 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.