Consistent Confusion

“It’s supposed to be hard. If it wasn’t hard, everyone would do it.” – Tom Hanks, A League of  Their Own  

Earnings season has concluded, and it is time for a quick summary of what transpired. Seeing as  the guidance and Q2 results will weigh heavily on sentiment and more importantly positioning  for the rest of 2022. With that being said… 95% of the S&P 500 has now reported, 77% of  companies beat estimates and 73% beat sales targets. Earnings for the quarter grew 9.1%  year/year and revenue growth was on average 13.6%.  

Earnings are currently expected to grow at 10.1% for the remainder of 2022 but based on some  awful numbers from the lower-end retailers along with a warning from Snap, we would be highly  skeptical if those targets are met.  

Currently, the S&P 500 trades at 16.4x 12-month forward looking earnings, well below the 5- year average of 18.6. So, the market is “cheaper”, but we feel that the current multiple will be  even lower by the time we are unwrapping gifts at Christmas.  

There is much consternation lately on just how far some stocks, particularly tech stocks, have  fallen and if they are indeed worth getting involved in at these levels. The answer, at least in the  short term is likely not yet. Using Netflix as the perfect example: the stock is down 72% from its  all-time highs and 67% YTD. A stunning move lower for a well-known brand and one would  think is more resilient to poor economic trends ($18 a month for hours and hours of content).  There are many examples like this (Square and PayPal come to mind), and it is the reason almost  all investors feel much worse about their own portfolios than the 20% drawdown in the  NASDAQ index this year represents.  

This dynamic is exemplified by the ARK ETF. The trading community has made a sport of  hating on Cathie Wood and her ARK funds this year. Twitter is full of daily commentary  highlighting her struggles and predicting her funds eminent demise. Part of that is due to the fact  that she is a woman in a prominent role on Wall Street – but that’s a much bigger topic in which  we will abstain from for now.  

Our point, and is there is one, is that we are all focusing too much on the ARKK names and  technology companies that will change the future and attempt to disrupt just about “everything.”  That all may be well and good someday, and we are fairly certain some of these companies will  be leaders of the future. But we need worry about today first, and what we need today is “stuff”  (not a technical term). 


Covid, supply chains, labor demand, climate change, and a war have all led to disruptions in  production and difficulties shipping goods across the globe. What was once thought as just a  temporary problem caused by Covid has morphed into a permeant issue the world faces. This  conundrum was highlighted on the 24th when Snap warned of Q2 earnings and revenues to be  “below the low end of their guidance” while Albemarle, a lithium mining company, reported a  great quarter and raised their 2023 EPS guidance to $12.30-15 from $9.25-$12.25.  

The world doesn’t need “Snaps” to keep spinning on its axis. But it does need lithium to power  Tesla’s and keep our iPhones charged. We also need oil, wheat, roiled steel, copper, cement,  diesel fuel, and a host of other “stuff.” 

We aren’t here to dance on ARKK’s grave, nor do we root against Cathie Wood. In fact, we  give her credit for the gumption she has sticking with her beliefs, as misguided as they have been  recently. And we like her devotion to Bitcoin, which is also (very) misguided lately too (she has  a $500K price target).  

But the real story is to focus on areas that produce and transport goods. It’s not as sexy as an app,  or software that lowers a firm’s expenses or aids in search for clothing. But it is where the  profits are being harvested and without a doubt where the growth is and will be for the  immediate future. There will be a time when ARK stocks will be back in vogue and disruption  talk will be back all over Twitter – again, there is some real merit there for creating change.  However, in 2022 one would be better served becoming more familiar with the likes of Mosaic,  Cleveland Cliffs, Southern Company, Nucor, Haliburton, and Safe Bulkers – to name a few.  And if you don’t agree just consider the fact that Snap is now trading $4 below its $17.60 IPO  debut on March 2nd, 2017.  

After being confirmed by the Senate on May 12th, Chairman Powell said, “With perfect  hindsight, it would have been better for us to have raised rates sooner.” 

Well, it’s interesting he said that right after he was officially confirmed. Also, interesting that he  essentially admitted the Fed was trapped and now far away from their “flexible 2%” inflation  target (CPI reading was 8.1% as of May)  

He further admitted that “”The process of getting inflation down to 2% will also include some  pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation  were to get entrenched in the economy at a high level.” Powell went on: “The question whether  we can execute a soft landing or not, it may actually depend on factors that we don’t control, but  we should control the controllable… there’s a job to do on demand.” 

But most importantly he assured the market that the next two meetings (June and July) they  would raise by 50bps each – which at least gives the markets some clarity.  

After picking through the carnage that once was a stock market there is one name that we are  starting to actually like for the long term. That is Airbnb. The travel company posted one of the  better quarters thus far in 2022 and is trying to become more of a “hotel” company as they  expand into transportation, payments, and possibly a cryptocurrency aspect. 


On May 3rd, they reported a blowout quarter. Beating estimates by $0.27 and seeing revenues  rise 70.1% year/year to $1.51 billion. Also, they raised Q2 revenues to $2.03-2.13 billion versus  the $1.96 estimate.  

Valuation wise…it’s still not “cheap” and in this current environment you are guilty until proven  cheap and that is admittedly a way away. But, in times like this it is imperative to have a list of  companies that will be the leaders as we emerge from these doldrums and enter a new bullish  phase for both stocks and the economy (yes it will happen at some point).  

Airbnb has a market cap of $75 billion, compared to $85 billion for Booking Holdings and $20  billion for Expedia. It trades at a forward of P/E of 63 (not cheap), 11x sales, 15.5x book and  maintains $13.13 of cash per share.  

Airbnb is one of the early “disruptors” that has taken on the hotel and time-share industry with  much success, they had $47 billion worth of bookings in 2021 and will likely surpass that  number in 2022 as travel demand continues to surge despite higher fuel prices and a wonky  economy. Bookings growth forecast is for 17% average annual growth during 2022-31. Within  this forecast, we expect Airbnb’s 2022 bookings to reach 174% of 2019 levels versus 173% prior  

But the real story for Airbnb is the fact that they are trying to become a “super app” -which is the  new buzzword in Silicon Valley. Meaning, they are attempting to become a one-stop shopping  site. It’s likely they will add transportation (Buy Lyft?), payments (buy Square/Pay Pal?) and  maybe even throw in an insurance component for those who like to have security for  cancellations. Granted, these possible acquisitions would have been a lot easier when their  currency (stock price) was near all-time highs and not hoovering near the all-time lows where it  resides now.  

We aren’t in any rush to buy this name despite the rosy write-up. The fact is that we feel there is  likely another purge coming for stocks and those that are still trading at high valuations and see  their stock prices 60-70% off their all-time highs, still likely have another 15-20% downside.  And there will also be a basket of once high-fliers that simply won’t survive – especially in the  light of higher financing costs.  

It’s not inconceivable to see Airbnb lose another 25% of its market cap, especially if the  economy peters out or fuel prices really start to surge. It’s also possible that at $119 shares are a  screaming buy and will jump 10-fold from here. We don’t pretend to have the answers. Again,  the goal here is to identify the future IBM’s and Exxon Mobile’s, make a list, monitor the news  and charts, and try and find an optimal entry point and then manage it.  

Lot easier said than done obviously, but that is the plan.  

Just when the markets began to look like they were putting together a meaningful bounce off the  20% drawdown official bear market lows, they were smacked across the face with some  disconcerting earnings reports and tepid commentary from Walmart, Target, Lowe’s, and Home  Depot. 


These above mentioned stocks were absolutely demolished to the tune of 20%+ and are now all  trading at or near 52-week lows. Target recorded its worst one-day drop since the 1987 crash.  The commentary from management went something like this “inflation is squeezing margins and  is likely to hurt demand going forward. Revenue isn’t bad because inflation is driving up prices,  but retailers can’t raise prices fast enough to protect margins” 

So once again the big problem is inflation and once again that is the number enemy of the Fed  now. So, in essence, the Fed is tightening and also withdrawing liquidity into a possible  recessionary environment. That obviously is not a benign scenario for equity prices or any risk  asset for that matter.  

This quote from Chairman Powell this month reinforces his mantra:  

“What we need to see is inflation coming down in a clear and convincing way, and we are going  to keep pushing until we see that” – May 17th, WSJ conference  

Many are beginning to speculate where the “Fed put” is now that general indices have dropped  20%+ and are officially in bear market territory. Some estimates (or guesses) going around the  street are in the 3500 range for the SP-500, currently over 4,100.  

That’s a nice round number to use and sounds smart. But if the above quote from the chairman  is even remotely genuine, then equites prices are not high on his worry list right now. We are  certain the first thing Mr. Powell does in each morning is check the various commodity prices  rather than the equity indices. Especially when gasoline prices have hit $4 in every state now as  reported last month in the Wall Street Journal.  

It’s a sad irony that inflation impacts the lesser off much more than others. Walmart and Target  confirmed as much this month. To further that point, higher-end retailers such as Macy’s,  Williams Sonoma, and Ulta Beauty reported stellar numbers this month and did not mention any lowering of sales forecasts. The Fed has (rightly) been accused of drafting monetary policy to  benefit the upper tier (i.e., asset inflation) while ignoring main street and the less well-to-do. We  would have to believe that now, especially with a Democratic White House in their ear (Powell  and Biden met on May 31st), they are uber conscious of switching policy to reverse that trend,  and hence tamping down inflation remains their number one objective – asset prices be damned.  

Keep in mind that roughly 70% of U.S. gross domestic product (GDP) is tied to consumer  spending so investors worried about a recession are closely watching for any signs of a  slowdown. This month left them with some mixed messages on that front for sure.  

The biggest positive arrow in the bull’s quiver is the hope that we have seen peak inflation and  that if China can reopen safely and supply issues finally start to unglue some, combine that with  some demand destruction that has occurred in the past few months and we can possibly start to  

see CPI and PPI prints along with PCE prices trend down and allow the Fed to ease off the  brakes a tad. But in reality, that is the only real bullish case to be made right now and its  admittedly a bit of a stretch. 


Again, no one said this year was going to be easy.  

Bitcoin Update:

May was without a doubt the worst month in years for Bitcoin and the  cryptocurrency community as a whole. While the price of Bitcoin held up reasonably well,  holding over $30,000, all things considered. The real damage was done in the altcoin world  (which we highlighted in our note sent out on May 13th). TerraUSD, an algorithmic stablecoin  was eviscerated by nearly 90% and “broke the buck” in a violent fashion – now trading at $.02.  It’s “partner” Luna saw its value drop a stunning 99.9% in just a matter of days – wiping out any  holders and sending shockwaves through the community that was intent on building algorithmic  stablecoins to fuel stability and was using LunaUSD and Tether as their opening projects. Tether  has held the buck for the most part but now has extra scrutiny surrounding it and it’s holding the  $1 level will be crucial for confidence going forward in this still burgeoning space.  

The good news is that the two bell weathers, Bitcoin and to a lesser extent Ethereum held up well  amongst the carnage and continue to establish themselves as stalwarts. There are currently 280  altcoins out there and its likely 90% won’t survive. This is very similar to the dot-com era in the  late 1990’s. Where a new industry got way overheated and led to some spectacular blow-ups  (Netscape, Nortel, Webvan) but also generated some legendary companies (Google, Amazon).  There are a lot of Netscape’s currently out there, but we view Bitcoin and Ethereum as the  Google’s and Amazon’s of the future. It should also be noted that as great as companies that  Google, and Amazon turned out to be – they did suffer through some nasty peak-to-trough  drawdowns of over 85%. Is history set to repeat itself in a completely new sector  

We read the Andressen Horowitz report on Blockchain’s future and came across a few.  interesting facts that help support the blockchain movement.  

Currently, 1.7 billion people don’t have bank accounts per the World Bank. Of those 1.7 billion,  over one billion do have mobile phones. Blockchain technology and Bitcoin are conceivable  solutions to this problem. Very likely more so than traditional banks and the massive regulations  that accompany them.  

Another interesting area that blockchain technology is going after is carbon credits, which is  becoming a very popular new product that companies are embracing as the ESG and focus on  climate change continues to grow.  

A third area is identity protection. These days your personal information is all over the internet  and every major player has access (Facebook, Apple, Google). As much uneasiness as there is  surrounding this breach, people are quick to donate their info.  

Blockchain technology is working to smooth out that awkwardness. We all want access to the  big media giants’ services but know that we must sacrifice privacy in order to partake. This new  technology just may find a way to circumvent this and that would obviously be a huge change. 

The bear market in “everything” continues to drag on and anyone who thought cryptocurrencies  would be immune were frankly delusional. This month there was some real damage down to not 


only prices, but the psyche as well. It is imperative that Tether holds its ground and proves that  stablecoins, in some capacity at least, can indeed work.  

But we are hard pressed to see how prices in this space can see much upside amongst the current  liquidity draining environment. That’s not to say the future for some of this technology isn’t  bright – it is. But patience will be a must for anyone bullish long term.  

We have not done much this month here aside from some successful Coinbase short plays and a  few quick long scalps using Bitcoin futures. We see a fair value floor on Bitcoin around $24,000  and have the 200-week moving average at approximately $22,000. So, we likely won’t do much  until/if we see those levels. Until then, it is practice what we are preaching – patience.  

Despite all the negative vibes currently surrounding cryptocurrency, there were five good items  reported this month we wanted to share them:  

Andressen Horowitz announced they have raised $4.5 billion for a dedicated crypto fund.  The industry’s largest raise to date. $3 billion will be dedicated to venture investments  and $1.5 billion to seed investments. This is the second crypto fund for Andressen. They  launched $2.2 billion fund last June.  

Blockchain startups StarkWare and Babel Finance also reached multi-billion valuations  after their latest funding rounds.  

Payments giant Stripe announced plans to give customers access to Bitcoin four years  after suspending support for the cryptocurrency. They will partner with Open Node, also  a startup.  

JP Morgan announced Bitcoin and crypto is now its preferred alternative asset class.  Coinbase made history this month when it became the first cryptocurrency company to  break into the Fortune 500. Coinbase’s 2021 revenue was $7.8 billion, just over the  minimum of $6.4 billion that companies needed to be considered for the Fortune 500.  

Looking Forward and Other Market Commentary:

With earning season over we  get to shift back to the macro side of the book at and digest a whopping eight central bank  meetings in June. The main event will be the FOMC on the 15th in which the market is pricing in  a 97% chance they raise rates by 50bps and then a 91% chance they repeat that in July.  However, futures are only allowing for a 29% chance of a fourth consecutive 50 bps rate hike for  the September meeting and are now beginning to price in 25bps hikes for November, December,  and February 2023. This may be more signaling that inflation is peaking as we touched on  above. Or is it the fact that the Fed is wary of going to hard, too fast, in an economy that is  beginning to appear a little fragile.  

Some feel that a large drawdown in equities will be the driving factor for a possible pause. We  don’t agree and remain steadfast that inflation is, and will be, the key driver for monetary policy  for at least for the rest of 2022. In fact, falling equity prices will temper new hiring and wage  growth, which in turn will help with inflation, as perverse as that sounds. These are the  consequences of expanding your balance sheet to the tune of almost $9 trillion. 


The second most important meeting of the month will be the ECB on the 9th. There have been  rumblings for months now that rates there are finally headed north while the euro has been  tumbling back to near parity with the dollar. We should finally see a small rate hike, likely  25bps, on the 9th as Europe tries to also fight rampant inflation that has been exacerbated by the  war in Ukraine.  

Other meetings if importance include: The BOJ on the 17th, Bank of England on the 16th, Swiss  National Bank on 16th, Bank of Canada on the 1st, and lastly the Riksbank (Norway) on the 29th.  

The CPI will come out on June 10th and the PPI on the 14th, conveniently right in front of the Fed  meeting on the 15th. PCE price data is set for the 29th. These are the 3 most important inflation  data inputs for the Fed along with weekly initial and continuing jobless claims (every Thursday  morning), and the monthly jobs report slated for June 3rd.  

Let’s also not forget that on June 1st, the Fed officially begins their quantitative tightening  program, meaning they begin to reduce their balance sheet and offload assets. It’s pretty clear  that the market has been anticipating this and started to price it in weeks ago. How much that is  priced in, or isn’t, and how much, if any, of a liquidity vacuum we will see in June will be  imperative for determining the next direction for assets.  

Also, we came across this fun fact regarding June and July: Since 2010, which is 12 years, the  S&P 500 has been positive in June 67% of the time for an average gain of 0.6%. This has been  followed by July’s that have been positive 83% of the time for an average gain of 2.5%  

It will be fascinating to see how that bullish statistic and the beginning quantitative tightening get  along this summer.  

June is the first official month of summer and with that the summer driving/flying season kicks  into full gear. Also, the demand for cooling obviously coincides with the summer as well. This  summer will serve as a good barometer to gauge the amount of demand destruction, if any, and  how healthy the economy is showcased by how much Americans are willing to travel with broad  

elevated prices. Our guess is that it will be pretty busy on the roads, airports, hotels, and theme  parks this summer.  

The price of oil stubbornly resides over $115, natural gas just a shade under $9, and gasoline hit  $4 in every state this month. Oh, and the forecast for hurricane activity this “season” is extremely  high. We really do not need any supply disruptions from hurricanes this year – to state the  obvious.  

It isn’t mentioned much in mainstream financial news, or on retail platforms, but corporate credit  spreads are akin to the heart of the equity markets and determine its health. The chart below  shows that while spreads have widened (as shown by the rise of the curve below) but they are  nowhere near such capitulatory moments in 2020 during the depths of the pandemic or in 2016  when the Fed attempted to raise rates.  

The sell-off in credit has been swift, but also orderly, which has helped equities remain  somewhat stable despite consistent selling, as noted by the fact that the VIX has not traded over  40 all year and is currently hoovering around in a manageable 25-32 range. 

Why is that? Well, if you look back to the two major crisis we have incurred in the past 15  years, the financial crisis in 2008 and the pandemic in 2020, they both created excessive levels of  uncertainty. In 2008 we weren’t sure if America’s financial institutions would survive. In 2020  we were all hunkering down in our homes and wondering if/when/how society and commerce  would ever function again normally.  

But in 2021, we know the enemy. It is the Fed’s reversal of their easy monetary policy and  inflation, which is exacerbating the problem and the speed on which it needs to be dealt with.  That certainly is not an easy problem to overcome, but it’s also not an unknown. We know if  China ends their Covid lockdowns and ports become unglued a bit, this problem could at least be  alleviated to an extent. Which again is why the fed funds futures have stopped pricing in 50bps  hikes past July.  

It’s tough out there no doubt. But it is a reset of valuations, which isn’t fun, particularly for  technology, but this isn’t 2008 or 2020. And that’s a good thing.

Corporate yields are up.  

But nowhere near previous

worrisome levels.

Finally, below are headlines and Tweets that we came across in May and had to double-check to  make sure they were indeed real:  

“The Biden administration canceled all three remaining offshore oil and gas lease sales late  Wednesday as gasoline prices hit an all-time high.” 

US House Speaker Nancy Pelosi says Democrats will next week present a bill on gasoline price  gouging. The bill will enable the president to issue emergency declaration making it illegal to  increase the price of gasoline. “Price gouging needs to be stopped.” 

California Governor Newsom Proposes $18 Billion Relief Package to Offset Inflation  


You want to bring down inflation? Let’s make sure the wealthiest corporations pay their fair  share. – President Biden Tweet, 5/13  

This isn’t meant as an anti-democrat rant, although it certainly appears that way, but it’s more to  just point out the basic economic mistakes being made in this case by some Democrat leaders.  Simple, basic economic theories that are taught in any introductory high school economics class.  

It’s beyond baffling that these principles are being violated on such a large scale at such an  important juncture for our country. But instead of just complaining we decided to try and list  some plausible ideas that would help fight inflation instead of the ludicrous suggestions above:  

1) Stop spending – another $40B spent this month for Ukraine aid  

2) Promote domestic oil & gas production – creates more jobs too  

3) Open ports and ease some labor restrictions for long shoremen  

4) Repeal tariffs  

5) Repeal Buy America rules  

6) Repeal new Ethanol rules  

7) Resume student loan payments  

8) Suspend the Jones Act – restricts the number of vessels that can legally deliver goods that was  passed in 1920.  

There are obviously some negative side effects for these suggestions, primarily climate change.  But continuing down this path we are on is going to lead to inflation being a permanent problem  for years to come. This month gasoline futures hit all-time highs and oil nearly pierced $120 per  

barrel. That is one of, if not the biggest inflation inputs. This simply cannot continue and  sprinkling $18 billion all over California only prolongs the condition.  

Econ 101.