Rudi's View | Jul 09 2020
This story features ETHERSTACK PLC, and other companies. For more info SHARE ANALYSIS: ESK
Dear time-poor investor: the bull market of 2020 has created a whole new generation of enthusiastic share market participants
–Class of 2020
-Bitcoin, The Share Market Omen?
Class of 2020
By Rudi Filapek-Vandyck, Editor FNArena
There are two key characteristics embedded in the share market and human investors are not well-suited to deal with either of the two; randomness and irrationality.
Most investors look at daily price moves and try to make sense of it through the framework of an intelligent, well-considered, structured, long-term investment strategy.
This then leads to oft used expressions such as “the market is telling us” but such approach belies the fact not every participant in the share market fits in that same mould.
As a matter of fact, it is very well plausible there are times when, and specific places in the market where, rational decisions with a focus beyond the immediate are not at all front of mind among those buying and selling stocks.
Most of you, I assume, have by now heard about the recent inexplicable rise in popularity of US listed companies that are but one step away from corporate failure, with failing car rental company Hertz Global Holdings the poster boy for this new market craze.
Under US legislation, companies in deep trouble (usually burdened by too much debt) can seek court-approved Chapter 11 protection, which allows business operations to continue while trying to find a solution to the financial problems.
Such a solution regularly involves wiping out shareholders and starting anew. A scenario investors in Australia can relate to as this is how Virgin Australia is being saved from the corporate graveyard.
One would think, logically, that anyone with a sense for risk would draw a long bow around such companies, but that’s not what happened recently.
After shares in Hertz staged an eye-catching rally despite the company being all but broke and in deep debt, money started pouring into stocks of similarly hard hit, bankrupt companies including JC Penney, Whiting Petroleum, Pier 1 Imports, Chesapeake Energy and GNC Holdings.
All the while, corporate debt linked to these companies continues to trade at a discount, indicating bondholders, who rank above equity owners, don’t expect they will receive all the money they are due.
Australia had its own eye-catchers last week with shares in Etherstack PLC ((ESK)) and Alterity Therapeutics ((ATH)), stocks virtually nobody had ever heard about up until that point, rising by more than 1000% in one day.
Yes, that’s right. Up 1000% between the open and close of June 30th.
Etherstack is not going bankrupt, at least not here and now. The company develops radio technologies for wireless equipment manufacturers and network operators.
The share price surge occurred after it announced having teamed up with Samsung to jointly develop and market Samsung’s advanced network solutions, with Etherstack’s digital land mobile radio (LMR) softswitching technologies embedded.
In summary: Etherstack will receive some income from Samsung’s marketing efforts, at some point, but we don’t know how much or when, and neither do we know any other details that might impact on the company’s future growth or viability.
But the share price went up by 1000%-plus. And there are times when that is all market participants need/want to know.
Etherstack, from its part, is using the unexpected opportunity by exercising conversion options for the convertible bonds it issued in August last year.
Gotta make hay while the sun shines.
Shares in Alterity Therapeutics jumped on the announcement the company had met with the US FDA to agree upon requirements for a phase II trial of its ATH434 product, a potential treatment of a specific Parkinsonian disorder.
Had anyone of last week’s buyers considered that phase II has yet to be organised, and there will still be a phase III if proven successful?
The Alterity Therapeutics share price is almost back to where it was pre-June 30th.
For good measure, nothing of what you just read is new or unusual for the share market locally or elsewhere.
Most investors like to think of the share market as a public forum where intelligence and insights meet experience, in-depth research, sophisticated tools and a bit of luck, but some participants are not the slightest interested in any of that.
They simply want to make money. End of discussion. And through as many short cuts as possible (We’re all human, n’est-ce pas?).
The share market has always been a hodgepodge of different strategies and time horizons, not to mention the differences in experience and skills, but anecdotal evidence suggests this year in particular has seen two identifiable groups join the market:
-older investors who had become wary amidst a lot of talk about inflated share prices are preferring to sit on large amounts in cash instead of risking it in the market;
-a younger generation of enthusiastic stock market newbies who have now quickly discovered a lot of money can be made, and quickly too, when markets are “cheap” and on the rise.
The latter has already been dubbed the “Robinhood traders”, after a popular, rapidly growing, commission-free trading platform in the US and the UK, “on a mission to democratize finance for all”.
According to media reports, some 160,000 Robinhood accounts have been trading shares in bankrupt Hertz, pumping up the share price by more than 1000%.
Probably the most telling quote I came across was: “While the New York Stock Exchange has already moved to de-list Hertz to better protect investors, Robinhood continues to support trade for the company’s shares.”
Shares in Etherstack are by now responding to gravity, having given up more than -50% of that tremendous one-day rally.
As is standard practice, specific data and insights are always easiest to obtain for US markets, but recent insights shared by Nabtrade support the FNArena experience.
Average retail trading at Nabtrade doubled to $3.3bn as at the end of April from $1.6bn pre-pandemic, with Nabtrade observing many accounts that had been dormant are now active again.
To add more colour to those numbers: Nabtrade also reported a 500% uplift in new account applicants in March, followed by a 300% increase in April (off usual levels).
These are not all rampant gamblers only interested in speculating on Hertz & Co, although there would be a fair number included. Nabtrade data suggest blue chip stocks such as CSL proved equally popular.
Probably the most intriguing characteristic, according to Nabtrade, is that most of the money inflows concentrated on playing the rebound in falling prices, including for the local banks.
Gemma Dale, Director SMSF and Investor Behaviour at Nabtrade, cites the example of that particular day when the “impossible” happened in WTI crude oil futures with the quoted futures price actually falling deep in the negative.
Traditionally, this would have been followed by retail investors en masse selling in panic, but this time around, recalls Dale, “We had investors buying so enthusiastically that night, it was extraordinary”.
One thing that stands out from the crowd that freshly joined or re-joined equity markets in recent months is they have concluded from past experiences/observations that heavy sell-offs are most likely a buying opportunity.
The obvious irony here is, of course, that when investors who were already in the share market were selling stocks out of risk management or kept their powder dry in anticipation of further weakness, these fresh money flows showed everyone there are always two sides to any event in the share market.
It’s much more profitable to start from the bottom than it is to navigate when heavy turbulence hits near the top.
Have no doubt, the worst recession in a decade followed by the largest stimulus response ever seen in history have created a whole new generation of share market traders whose very first experience is one of the strongest and fastest bull market upswings ever witnessed.
In Australia, the Robinhood experience from overseas is being reflected in the sudden success that has befallen “Australia’s cheapest brokerage”, SelfWealth ((SWF)), also identifiable by its stellar share price performance post April.
And while Nabtrade emphasises that blue chip stocks and ETFs have been just as popular as the high risk, highly speculative options, another platform eToro has confirmed Tesla, Boeing, Hertz, American Airlines, Disney and China’s Nio Inc (considered the equivalent of Tesla) are all inside the top ten of most traded stocks among its clientele.
While not necessarily being of the same risk profile as Etherstack or Alterity Therapeutics, all the stocks mentioned have one crucial characteristic in common: trying to ascertain the value for those stocks through using fundamental analysis is near impossible, at least at this point in time.
This suggests to me that “fundamentals” are not top of mind for the majority who has recently (re-)entered the share market as a trader.
This has been more of a broad momentum play, possibly assisted by some charting and various market direction indicators.
I can even see a good case for buying #stonks because, well, #stonks are going up!
While everyone is making money, and the past few months have been extremely accommodating for anyone stepping out the comfort zone and taking on board more risk, no hard questions are being asked.
These hard questions will be asked at some point, of course. We’ll have to wait and see how much enthusiasm remains when trends become muddier and the inevitable losses start appearing in account statements.
Until then, be aware this year’s pandemic has created a whole new fan base for putting one’s money to work in equities.
This is yet another sharp contrast with 2008/2009 which left many scarred for life, never to return.
For now, risk-taking with gusto is back. Who’d have thunk it?
Bitcoin, The Share Market Omen?
A number of share market strategists have been advising investors it’s probably a good time to take a more conservative approach after a stellar run and with reporting season approaching both in the USA and locally in August.
This week strategists at Macquarie came out with the most remarkable share market weather vane by referring to cryptocurrency bitcoin as a warning signal to pay attention to.
On Macquarie’s observation, the price of bitcoin has thus far in 2020 led turning points for the S&P500 by one week.
Bitcoin futures have been sliding lower since June 2nd. In line with a greater participation of younger investors and traders in equities, Macquarie notes many of these youngsters would equally be actively trading bitcoin and other cryptocurrencies.
Macquarie already had been of the mindset that a share market correction might be on the cards. The fact that bitcoin is weakening, and might be leading equities, is simply yet another indicator pointing into that same direction.
Macquarie also points out the balance sheet of the Federal Reserve has now declined for three straight weeks.
Audio interview about my experience and observations from 5.5 years of running the FNArena-Vested Equities All-Weather Model Portfolio:
For those interested to read some background on the All-Weather Portfolio (from last week):
(This story was written on Monday 6th July, 2020. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part Two will be published on Friday).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: firstname.lastname@example.org or via the direct messaging system on the website).
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