What am I thinking?

The virtual marketplace is abuzz.

Variety of folks. Young, old, men, women, local, tourists. Dressed in an assortment of colours and textures. Each with different needs, different wants.

A plethora of shops. Games. Music. Food. Several shopkeepers, rotating several times a day. And of course, constant haggling or put politely, constantly changing prices.

I wish I were describing fun fairs and carnivals since Christmas is just a few weeks away but as you know by now, am talking about the global capital markets.

Gravity is powerful.

Life generally comes full circle. What goes up must come down.

Over the last few weeks and months, prices of several lofty names have started their descent from the moon to the earth. This journey from the moon to the earth should not come as a surprise.

Mash penned three articles during 2Q21, each indicating froth and frenzy engulfing the markets:

• SPACulation!

• The Mash Quarterly, 1Q21. Valuation matters. EV/Sales. TAM. Sun and Yahoo. ARKK. And more.

• What were you thinking? My thoughts, actually ramblings, on the froth and frenzy in today's global (US) markets. High growth stocks. Hot IPOs. SPACs. Crypto. And more.

I encourage you, especially the new owner-investors that have joined over the last two quarters, to please read these at mashcap.com/blog. If you have time for only one article, please read What were you thinking?

Back to our journey. From the moon to the earth. This journey has primarily been a direct outcome of shifting gravitational forces.

Some will be surprised to hear that the moon’s gravity has remained fairly constant, despite Elon’s Dogecoins and Starships routinely landing there.

The earth’s gravity (g) however, has been going through a transitory decline. This decline was fully orchestrated by NASA scientists, I mean Central Bankers. They ensured we went to (g)/5 and 5G simultaneously.

What gravity-defying measures!

Kudos to the innovative scientists that enabled all the disruption.

This disruption created some turbulence in the earth’s atmosphere. And this turbulence caused some bugs – both natural and artificial. The lingering effects of these have been less transitory than anticipated.

That said, after being in denial for a while, these scientists seem to have accepted the reality of some permanent forces impacting life. They are now attempting to course correct back to (g), at least theoretically.

Hypothesis.

In theory, rising (g) will impact the atmosphere on our planet. As we stand today, every 1% increase in interest rates should result in a 10 to 15% decline in the S&P 500.

Unfortunately, there is no perfect science here. Life is messy, and so is calculating the duration of the S&P 500 index. So bear with my limitations and remember that precision is not important here, the direction is.

Speaking of directions, there are two ways for effective interest rates to increase: (1) stop decreasing them (duh!) and (2) start increasing them (yes Mash, we get it). While the second scenario is obvious, the first one seems less so – even though it’s happening in front of our eyes!

Humankind calls it tapering.

Tapering essentially reduces the monetary stimulus that the scientists of this grand experiment have injected. At $120 billion per month, this tapering itself is equivalent to a 2% rate increase. You can do the math on the expected S&P 500 index decline if this working hypothesis plays out.

I believe the decline has already started playing out. The mere signaling of moving closer to the earth's gravitational pull has started to impact our virtual planet.

One (1) in every two (2) companies over a $1B market capitalization has negative returns over the past 3 months.

One (1) in every three (3) companies over a $1B market capitalization has negative returns over the past 1 week and 3 weeks and 1 month and 3 months – please note that there is a big difference between ‘AND’ and ‘OR’.

Let's move from the general to the specific. To put it mildly, several Hype and Halo names have been butchered. An illustrative sample of 10 names in each category has been provided below.

1. Hype.

Names, Decline from 2021 peak

Virgin Galactic, -76%

Plug Power, -54%

Fastly, -70%

Skillz, -82%

Lemonade, -76%

Opendoor, -61%

DraftKings, -61%

C3.ai, -82%

Stratasys, -55%

Robinhood, -69%

For those trying to connect these with my ‘What were you thinking?’ pockets, think of (a) Hype as Hot IPOs, SPACs, buzzing names and (b) Halo as slightly more established High Growth, New Tech but overstretched names.

2. Halo.

Names, Decline from 1-month peak

Cloudflare, -26%

Crowdstrike, -33%

Asana, -53%

Upstart, -48%

Roku, -26%

Unity, -27%

DoorDash, -36%

Teladoc, -37%

Elastic, -40%

Riskified, -59%

In the middle of this Hype and Halo correction or carnage, however you prefer to label this, the Heavyweights have held up well.

3. Heavyweights.

Over the last month, Apple is up over 5% while Microsoft, Alphabet, and Amazon have declined between 3 to 5% each.

The weaker heavyweights have had larger corrections. Meta declined over 10% while Tesla roughly 17%.

So what?

Putting these three categories together, my best guess is that the Hype names departed the moon first. They are on a high-burn rocket and are approaching planet earth slowly.

The Halo names have just departed the moon and have some fuel to burn before approaching the earth.

And the Heavyweights may start their journey soon.

Whether this working hypothesis plays out or not is unknown. Odds seem to be very good.

Whether scientists flip-flop again is unknown. Hard to call. But this time around, the inflation bug is powerful. Unless of course, a real bug causes a reversal (i.e. delay in the timing or amount of effective interest rate increase).

And since we can’t predict the next economic season, it's best we prepare.

In preparing for economic scenarios, I find no comfort in sitting through stark drawdowns in a global portfolio constrained by the limitations of the Liberalized Remittance Scheme just because we identify as long term investors.

One of the best growth investors of our time, Peter Lynch, famously stated that “everybody in the world is a long-term investor until the market goes down”.

I view the current setup as one with limited upside and significant downside. And your portfolios reflect the same (please check your latest monthly statement). Defense (has been and) remains the keyword at the moment.

That said, please note that defensive doesn’t mean pessimistic. In fact, I am excited about the possible dislocations in the capital markets and our shopping list is ready.

Assuming the working hypothesis plays out as expected, valuations will better reflect the earth’s gravitational forces (rather than the moon's). And those will be good times for prudent owner-investors.

Thank you for your patience and attention. Have a good Sunday.