May 21, 2020

Axios Capital

Summer unofficially begins this weekend, I hope you get outdoors to enjoy it.

  • I'll be doing just that next Thursday, taking the mental-health day that Axios has given all of its employees each month, so Edge will be back in two weeks.
  • In this week's 1,716 words — a 6-minute read — stock market speculation; drug-company billions; underperforming banks; possible euro bonds; virus-related income inequality; virus-related branding opportunities; a classic SoftBank PowerPoint slide; and much more.
1 big thing: The speculative frenzy

Illustration: Sarah Grillo/Axios

Never has the stock market seen so much gambling. Volume is at record highs, with individual stocks and the market as a whole feeling almost manic. More people than ever are betting more money than ever on which way stocks will move, in a frenzy that feels more like a casino than a safe place for long-term capital appreciation.

Why it matters: Legendary value investor Ben Graham said that in the short term, the market is a voting machine but that in the long term it's a weighing machine. Right now there is no shortage of votes, but few people believe that the weight readings are remotely reliable.

By the numbers: The stock market saw a record $14.6 trillion of volume in March, according to Cboe data. That's exactly double the $7.3 trillion of volume a year previously, in March 2019.

  • April's volume was $9.8 trillion, up 50% from the same month in 2019.

The big picture: There are a lot of drivers for the speculation.

  • Zero interest rates. Interest rates are the cost of money. When the Fed slashes rates to near zero, that means money is effectively free — and that expected profits years in the future are worth almost as much as real profits today. The result is that stocks have no real limit on how much they can rise.
  • Bearishess. Stocks famously "climb a wall of worry": They often rise more strongly when investors are bearish than when they're bullish. And investors are very bearish now: As Bloomberg's John Authers reports, a BofA Securities survey shows only 25% of them thinking that we're in a bull market, and a mere 10% of them believing that there will be a V-shaped recovery.
  • Value vs. momentum. There's a decades-long argument between value investors — the "buy low, sell high" crowd — and momentum investors, who prefer to just buy when stocks are going up and sell when they're going down. The gap between them is greater than ever, with every value investor convinced that the market is overvalued, and every momentum investor strapped in to the upside rocket ship. The result is ever-increasing wagers on both sides.

For individual investors, there are more reasons still:

  • Most retail investors now pay $0 for stock trades, and individuals tend to overconsume anything that's free and that provides a dopamine rush — especially when they're stuck at home with nothing better to do. As Axios' Dion Rabouin has reported, online brokerage accounts are being opened at a record rate.
  • Nobody knows anything. To oversimplify only a little, retail investors have been "buying the dip" and buying hot stocks during the rally while professional investors have been bearish. When the institutional "smart money" has a bearish bias and therefore has been underperforming small investors, that makes the stock market look like a more attractive place to try to make extra money.
  • They're playing with the house's money. If you have a $100,000 stock portfolio, then about $25,000 of your money has magically appeared during the rally of the past two months. It's even more than that, if, like many young investors, you're largely invested in tech stocks. Because that feels like a windfall gain, it's easier to gamble with.
  • There's no sports. For millions of people, betting on sports provides their gambling outlet, allowing them to be more sober and sensible in the market. But there aren't any sports on right now, so, as the FT's Richard Henderson reports, they're gambling on stocks instead.

The bottom line: The whole world feels a bit like a fever dream right now. In a dream world, all you need to do is name your electric-vehicle manufacturer after Nikola Tesla, allow retail investors to bet on it, and see it worth $12 billion. Lewis Carroll wouldn't blink an eye.

2. Moderna's busy Monday
Data: FactSet; Chart: Axios Visuals

The hot stock on Monday was biotech darling Moderna, which announced positive news about its potential coronavirus vaccine at 7:30am, before the market opened.

  • The stock immediately spiked up to $87 per share, from its Friday close of $66.69. It closed the session at $80.
  • After the market closed, at 4:18pm, Moderna announced that it was going to take advantage of its elevated share price to sell at least $1.25 billion in new stock.
  • Just six hours later at 10:32pm — Moderna announced that it would sell all the new stock at $76 per share, and would raise $1.34 billion in total.
  • The following day, with euphoria wearing off in large part thanks to a fantastic piece of skeptical journalism by STAT's Helen Branswell, the stock sank below the $76 offer price.

What they're saying: "The role of drug regulation seems to be shifting from the FDA to the SEC," deadpanned investor and philanthropist John Arnold on Twitter.

  • Arnold was referring specifically to another pharmaceutical company, Gilead, which has yet to release trial data to back up a coronavirus-related press release from May 1. But he might as well have been talking about Moderna.

Our thought bubble, from Axios' Bob Herman: "Moderna's stock price makes absolutely zero sense, considering it still doesn't have a single successful product to date."

  • The company hopes to make medicines using mRNA technology. So far, neither Moderna nor any other company has managed to do that for any disease at all.
3. Whither the banks?
Expand chart
Data: FactSet; Chart: Axios Visuals

The S&P 500 hit a curious milestone earlier this month: Less than 10% of its market capitalization was made up of financial services companies. That ratio was as high as 22% in 2007, before the 2008 financial crisis.

  • The financial companies in the S&P 500 include all the major banks, as well as other giant companies like Berkshire Hathaway, BlackRock, and American Express.
  • Together, they're worth some $2.4 trillion — but that's only 10% of the $24 trillion market cap of the S&P 500 as a whole.

Why it matters: This is not a financial crisis. America's banks are well capitalized, the Fed has restored liquidity to the markets, and trust in the financial sector is hitting new highs. Still, banks are severely underperforming the stock-market recovery.

  • By the numbers: An update to Edelman's trust barometer shows 65% of Americans saying that they trust their country's banks. That's up from 54% at the end of last year and 42% at the end of 2012.
4. Europe crafts a fiscal lifeline

Illustration: Aïda Amer/Axios

Europe came one step closer to the long-held dream of fiscal union this week, as both France and Germany signed on to the idea of the EU itself — rather than member states — raising money on the bond market that could then be spent on crisis relief.

Flashback: In April, I praised a Spanish proposal that the EU issue €1.5 trillion in perpetual bonds and then give the proceeds to the member states most hurt by the pandemic. The problem was that while Spain would be a net winner from the scheme, none of the net losers seemed inclined to sign on.

Driving the news: The proposal from France and Germany is similar, if smaller, at €500 billion ($550 billion). Still, it would constitute an unprecedented transfer from Europe's richest countries to those most in need.

  • Reality check: All 27 EU member states, including fiscally hawkish nations like the Netherlands and Austria, would need to agree in order for this to become a reality. But up until now, Angela Merkel's Germany would also have been considered to be in that group.

What they're saying: "Ms. Merkel, in the twilight of her long political career, has put the interests of the 27-nation union" before her domestic concerns, writes Steven Erlanger of the New York Times.

The bottom line: The U.S. monetary union only works because it allows and accepts massive one-way fiscal flows from the rich states to the poorer ones. (New York Gov. Andrew Cuomo has had some choice words on that subject of late.) If the European monetary union is to succeed, similar flows between states are likely to be necessary.

5. Who's losing income
Data: Census Household Pulse Survey; Chart: Axios Visuals

Axios' Stef Kight writes: The richest Americans are the least likely to say they've had income loss during the coronavirus outbreak, according to the latest results from the U.S. Census Bureau's new weekly survey.

  • Half of those making less than $100,000 said they have seen employment income fall since March 13. Just 29% of those making $200,000 or more said the same.

Between the lines: Many of the highest paid jobs in the U.S. aren't impacted by shutdowns and can be more conducive to remote work.

6. Crisis #branding

Photo rendering via Hilton

The travel and tourism sector has been one of the hardest hit by the pandemic, and is desperate to reassure potential customers that they will be safe from the novel coronavirus when and if they start traveling again.

  • The formula for doing so is simple: Find a well-known brand of household cleaner, add a well-known medical brand, and combine.
  • United Airlines has announced that it is "teaming up with Clorox" and "working closely with the experts at Cleveland Clinic."
  • Hilton Hotels says that it "will collaborate with RB, maker of Lysol and Dettol, and consult with Mayo Clinic."

The bottom line: The only two things that will always thrive in a crisis are cockroaches and co-branding opportunities.

7. PowerPoint slide of the week

Slide 51 from the deck accompanying SoftBank's latest annual earnings report

8. Coming up: China's biggest political event

Illustration: Sarah Grillo/Axios

Axios' Courtenay Brown writes: China's biggest annual political gathering, the National People's Congress, starts tomorrow. It was delayed from March because of the coronavirus outbreak.

Why it matters: The ceremonial spectacle symbolizes the country trying to return to normal after being the first hotspot of the global pandemic.

  • Important news has come out of the gathering in the past, like President Xi Jinping scrapping term limits in 2018.
  • This year, a law that would effectively end the "one country, two systems framework" with Hong Kong will be debated at the Congress, per the BBC.
  • Officials usually unveil that year's GDP target. Per Bloomberg, that may not happen this time. If it is released — and if it's optimistic — it could signal a possible stimulus plan to revive the economy. (The IMF predicts China will grow 1.2% this year — the slowest since 1977.)

It's unclear whether all of the 3,000 delegates will be in Beijing for the meeting.

  • The Associated Press reports there's focus on getting attendees tested beforehand, while some parts could be held virtually. And while the event typically last two weeks, it might be shorter this year.
9. Building of the week: 1111 Lincoln Road, Miami
Photo: Jeffrey Greenberg/Universal Images Group via Getty Images

The most famous parking garage in the world, 1111 Lincoln Road was designed by Swiss starchitects Herzog & de Meuron in 2010.

  • Built with a budget of $65 million, the building was sold for $283 million in 2017. The rooftop apartment (7 bedrooms; 11 bathrooms; 18,000 square feet of outdoor space) was then listed for $34 million.
  • "It's not a place that is obviously a good place to live," the building's designer, Christine Binswanger, told Vanity Fair's Matt Tyrnauer. "There is noise, dirt, cars, and public foot traffic."
  • The building also hosts many, many fashion shows, which take advantage of its dramatic wall-free buttresses and cantilevers.

Finally: There are very, very few individuals who can say that they have been blogging for 20 years. Two of them announced the end of their blogs this week: Bruce Sterling at Wired, and Walter Olson at Overlawyered.

  • Blogging for even 10 years is a magnificent feat that almost nobody manages. To get to 20 years is astonishing, and I shall be toasting both Bruce and Walter this weekend.