Correlation Not Causation | The Daily Peel | 1/14/22

Market Snapshot

Markets had a tough day. Stocks basically got punched in the face repeatedly from December's PPI report, Lael Brainard put rate hikes in center stage, and much more. The Nasdaq ate it, losing 2.51% while the S&P fared slightly better seeing a 1.42% fall and the Dow dropped 0.49%.

Let's get into it.


Macro Monkey Says

PPI - The U.S. economy just cannot stop breaking records, both good…and bad. Yesterday, the BLS dropped the December PPI report showing the lowest monthly increase since November 2020, but, the highest annual increase ever since this data began being recorded back in 2010.

2021 closed the year with a 9.7% increase in producer price levels, with December seeing a jump of just 0.2%. Surprisingly, this record-breaking price jump was actually below expectations, as experts had predicted a year over year rise of 9.8%. Sure it's a small miss, but it's still another reason to throw shade at economists. 

Still this is at least one positive, that prices - at the wholesale level, at least - could be starting to see a downtrend. This could be a result of easing supply chain struggles seen in the last few weeks of 2021 before Omicron got its big break. But now as we know, Omicron looks to be taking its toll on global supply chains as well, particularly in China as flareups in cases just weeks before the 2022 Beijing Winter Olympics have been met with factory shut downs and other production slowdowns. 

Stocks had a bit of a mixed reaction to the data. Investors seemed unsure at the market open if the slowest monthly increase in 14 months or the fastest annual increase ever should take precedent. Either way, I'm just glad I'm not the only one who's confused.

Party Animal - This is exactly why the 13 Colonies ditched those losers across the pond almost 250 years ago. U.K. Prime Minister Boris Johnson finds himself in the hot seat again recently after reports emerged that the PM attended an "outdoor garden gathering" back in May of 2020. Sounds like a rager to me.

You remember May 2020, right? Yeah, it wasn't a good time, especially considering that in the U.K. citizens were only allowed to meet with one other person at a time outdoors while standing 2 meters (basically 6.5ft) apart. Meanwhile, a Senior official for Johnson was busy organizing a BYOB garden party for the PM's staffers that sought to break every rule in the book. Boris now claims that he, allegedly, only showed up for about a half hour to thank staff, considering the event more work and less play.

Now, Brits are pissed. Calls for resignation ring from 10 Downing Street to the Shelby Parlour. But good ol' BJ has a knack for getting out of sticky situations, and with the U.K. parliament holding the largest conservative majority since Thatcher, he could escape unscathed yet again.



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What's Ripe

KB Home ($KBH) - Like many celebrities after 50 years of aging, the housing market is still hot. This become clear upon KB Home dropping their Q4 earnings report, which showed a 40% jump in revenue and earnings of $1.91 vs $1.77 expected. Both number of deliveries and selling prices of these homes rose substantially, leading to these positive results. Shares popped 16.5% on the day following the report.

Taiwan Semiconductor Manufacturing ($TSM) - Speaking of earnings beats, let's keep the party going. Taiwan Semi, the world's largest chip maker, reported a revenue increase of 24.1% for the fourth quarter and an earnings jump of 16.4% compared to the same quarter last year. Even more exciting, the company plans to invest up to $44bn in new capacity as part of the $100bn planned investment announced last year in growing capacity and R&D. Investors were pumped and sent shares up 5.3%


What's Rotten

Microsoft ($MSFT) - The original gangster of Big Tech found its shares in the dumpster yesterday, losing 4.2% on the day. 2022 has not been kind to Microsoft, dropping 9.0% since we turned our back on 2021. With large tech companies replacing some of the yield that's been missing from investor's portfolios over the last few years, it's no surprise that giants like Microsoft fell alongside bond yields amid a treasury auction yesterday. It's tough being worth $2.3tn. 

Tesla ($TSLA) - The other of the two tech giants routinely (and wrongly) excluded from the elusive FAANG classification also found their shares in the dumpster yesterday. Sure yields could have to do with, but Tesla is seen as having much more risk and far less quality than Microsoft, so let's see what led to the 6.8% loss. 

Thought Banana:

I Now Pronounce You Correlated Assets - Despite what diehard cryptoheads would have you believe, BTC and other digital currencies look to be married to risk appetite just like other asset classes. According to the IMF, the idea that cryptocurrencies can serve as an uncorrelated hedge to assets like stocks, is hot garbage. 

In a blog post released on Tuesday, the IMF makes the claim that "there's a growing interconnectedness between virtual assets and financial markets." Although the correlation is still far from perfect, the recent trend toward moving more together can't be ignored. For instance, from 2017-2019, BTC and the S&P 500 had a correlation of 0.01. From 2020-2021, however, that correlation exploded to 0.36. And it's not just U.S. markets either as the IMF reports correlation between BTC and MSCI EM index increased 17x to 0.34 throughout the same time period.

Okay, so what? Assets being correlated isn't necessarily a bad thing. As digital currencies saw widespread adoption and ~5x increased in total market cap, it looks like investors are treating their digital holdings like any other risk-on asset. But, with the explosion in value, growing correlation, and importance of digital currencies in some emerging markets, the IMF reports "their increased co-movement could soon pose risks to financial stability." Way to go, BTC you lived too long to stay a hero, now the only way to die is as a villain. 



Wise Investor Says

"In bear markets, stocks return to their rightful owners." - Old Proverb


Happy Investing,

Patrick & The Daily Peel Team

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