Ramp Report #3 - Below My Line

🔻 Below My Line: The "SPAC King" has been dethroned. Chamath Palihapitiya, founder and CEO of Social Capital, has been taking it on the chin for the past year--and possibly losing his billionaire status along the way (no one cares). To add even more fuel on the fire, on Friday, Chamath stepped down as chairman of the space-tourism company Virgin Galactic Holdings Inc.

Before we set the stage, let's remember how this all started. A simple and brutally honest tweet that manifested itself (albeit we have no idea what he was actually referencing):

While the SPAC fever started building in the 2nd half of 2020, the infamous Chamath tweet nailed the peak of the SPAC market to the day (the tweet was on a Sunday and the SPAC market peaked the Friday before).

Two of the three most popular SPAC ETFs are down about 50% since the tweet.

Let's take a look at how the individual stocks tied to Chamath have performed. Brutal.

Out of the 12 SPACs and PIPEs he was involved in during the past year, he's only in the green on one of them--MP Materials Corp (MP). Meanwhile, the S&P 500 has returned 3.72% over the same period.

Even Bloomberg reported that a basket of 10 of Chamath's stocks has dropped 40% since last summer. A tough run indeed. But at least was true to his word--he definitely f*cked some sh*t up.

Takeaway: Don't blindly follow famous investors without fully understanding the real rationale behind the investor’s investments. The hot hand eventually turns cold.

💸 Earnings Drive Everything:  The market has been rewarding positive EPS surprises less than average for S&P 500 companies in Q4. This isn't really surprising as it probably feels like navigating a minefield for most people who own individual stocks. Personally, I've had multiple stocks (tech and SAAS) drop more than 20% the day after reporting earnings even after reporting EPS and revenue that were in line with estimates.

Factset backs up my anecdotal data with hard data: To date, 84% of the companies in the S&P 500 have reported earnings for the fourth quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is slightly above the 5-year average of 76%. In aggregate, earnings have exceeded estimates by 8.5%, which is slightly below the 5-year average of 8.6%.

Given this average performance relative to analyst expectations, how has the market responded to positive EPS surprises and negative EPS surprises reported by S&P 500 companies during the Q4 earnings season?

To date, the market is rewarding positive earnings surprises less than average and punishing negative earnings surprises more than average.

Companies that have reported positive earnings surprises for Q4 2021 have seen an average price increase of 0.2% two days before the earnings release through two days after the earnings release. This percentage increase is smaller than the 5-year average price increase of 0.8% during this same window for companies reporting positive earnings surprises. In fact, this is the smallest average price increase for S&P 500 companies reporting positive EPS surprises since Q4 2020 (+0.04%).

Companies that have reported negative earnings surprises for Q4 2021 have seen an average price decrease of 2.8% two days before the earnings release through two days after the earnings. This percentage decrease is larger than the5-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

In addition, companies and analysts have been more negative in their outlooks and estimate revisions for Q1 2022 relative to recent quarters. In terms of earnings guidance from corporations, 71% of the S&P 500 companies (55 out of 77) that have issued EPS guidance for Q1 2022 have issued negative guidance. This is the highest percentage of S&P 500 companies issuing negative guidance since Q3 2019 (73%).

🦠 Waiting On The Next Wave: According to New York Times data, the U.S. reported a seven-day average of 108,000 new Covid cases per day as of Saturday; down 40% from a week ago.

Total deaths in the United States are now above 933,000. Covid deaths continue to remain elevated from the base of the delta wave bottom with a 7-day average over 2,000 per day. The U.S. will most likely pass 1 million Covid deaths within the next 2 months.

Shares of major Covid vaccine makers fell again this week as Covid cases continue to drop precipitously off of the Omicron peak. The most popular of the group--Moderna and Pfizer--are off 70% and 20.8% respectively.

The questions circling in my mind: Are we nearing the end of the pandemic and do these bloated stocks have further to fall? Or should we expect another variant wave to appear in the next few months and cause these stocks to rise again?

More bothersome than the health of vaccine makers is the chart below. It wasn't Covid that caused the biggest poverty reversal in three decades, it was our (governments') response to Covid that caused this. Monetary and fiscal stimulus as well as lockdowns and other Draconian measures all had a hand in this.

Data from the World Bank Group shows the economic recovery from Covid is not being experienced equally. Poorer countries are contending with a deeper, longer-lasting crisis that has increased global poverty and is reversing recent trends of shrinking inequality.

The extreme poverty rate was trending in the right direction before the pandemic hit. The chart below shows the disruption from Covid, however the projections are now pointing lower again. Economists are only beginning to wrestle with the implications of the aggressive responses by fiscal and monetary policy makers around the world.

🌶 Spicy PPI: January Producer Price Index (PPI) came in hotter than expected at +1% m/m vs. +0.5% est. and +0.2% in December. The y/y figure was unchanged at +9.7% vs. +9.1% est. Core PPI +0.8% m/m vs. +0.5% est./prior month; +8.3% y/y vs. +7.9% est. & +8.3% in prior month. Just look at the chart.

As noted by Liz Ann Sonders, the spread between CPI and PPI (both y/y) is no longer at lowest levels since 1970s, but remains in negative territory.

That's all for this week. Thanks for subscribing and sharing.