The Best Of All Possible Worlds

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The market is so optimistic right now it’s surreal. The S&P closed at an all time high Friday while 10 year treasury yields backed up 97 basis points last week despite May CPI running at 5% (see Ben Levisohn, “The Inflation Scare Is Over. How to Prepare for the Next Inflation Scare” [SUBSCRIPTION REQUIRED], Barron’s, The Trader, June 12). The VIX, known as the fear gauge, closed below 16, its lowest level since February 2020. The put to call ratio is far below anything we’ve seen in recent history as investors feel absolutely no need to hedge. It doesn’t get better than this.

I think the narrative goes something like this: Economic reopening is upon us and the boom will be unlike anything we’ve see since at least the early 1980s. Inflation will be transitory as the Fed insists. Therefore, there is absolutely nothing to stand in stocks way.

Even if this is true, however, the question arises: How much of the good news is already priced in? If it’s not true, the stock market is in for even bigger trouble.

Barron’s ran a feature story today on the world’s largest semiconductor company, Taiwan Semiconductor (TSM)(“Taiwan Semiconductor Is The World’s Most Important Chip Maker. How To Play The Stock” [SUBSCRIPTION REQUIRED], Reshma Kapadia, Barron’s, June 12). I am having difficulty finding the appropriate share count number on their website to use in calculating market capitalization. Barron’s lists it as $553 billion.

Even Wall Street’s lone bear, Mehdi Hosseini, senior equity analyst at Susquehanna Financial, says: “This is an A+ company with solid management”. Nevertheless, all the investors quoted in the article are bearish the stock because the valuation is full and not reflecting near term challenges even though it has already corrected 16% from its February highs (TSM closed Friday at $118.24 and analysts are estimating $4.06 EPS in 2021 for a 29x forward multiple. 29x is high for a semiconductor stock because the industry is notoriously cyclical).

Yesterday morning, the technician Andrew Thrasher tweeted a fascinating chart. The S&P closed at an all time high Thursday but 17.23% of stocks in the index (about 86) closed at 20 day lows. That is the first time since at least 1996 that the S&P has closed at an all time high while greater than 15% of its components closed at 20 day lows. Again and again I am seeing data points like this: We haven’t seen this in 10, 15, 20, 25 years. It’s a testament to the uniqueness of the current market environment. It’s a unicorn.