Happy Fri’yay! We hope everyone is in a great place as we start the last month of the year. It is year-end which means we are working on all the fun little things we can do to maximize value in accounts. If you have anything that needs to be completed before the ball drops, let us know and we will get it done. With no clarity on the potential tax law changes, there shouldn’t be much to do but feel free to ask if you have any questions. Now on to the updates from the wild and wonderful world of global finance.
English majors are going to need to close their eyes for the run-on sentence coming up. Normally, we try to keep these notes within the grammatical limits of polite society, but given the current state of things, it’s best to let it fly. With that…
The November narrative seemed set that the delta variant was winding down and stocks were positive with interest rates set to move up on the confirmation that inflation was more “here” than “transitory” and the Fed taper was underway, while reports showed some easing to the global supply chain backup setting up for a mini end of the year rally, but then oh no new variant alert which Moderna and Pfizer CEOs said is most likely vaccine-resistant which caused a market sell-off and rates to fall and the Fed to pause taper as some uttered the words “potential lockdowns” until a few doctors speculated that the new variant could actually be less lethal and force out the more lethal previous variants, like the common cold, all while the first US omicron case was reported in California on Tuesday and the second in…Minnesota? We warned you it was long!
Hard to know exactly where that leaves things in December, but we do have the recent history of another surprise variant to study. When the Delta variant first revealed its ugly face, the market flopped and interest rates went down. It chopped sideways at lower levels for a bit before rallying up over 5% to new highs from June-August. Not that history repeats but it does give us an idea of a potential path.
The unknown this time is the transmissibility and lethality of the variant.
Assuming it isn’t worse than Delta, one could see a similar pattern unfolding this time around. That would mean stocks will move back up while interest rates dust themselves off and get off the floor. Long story short, the first part of the run-on sentence would still be in play.
The Omicron variant could also be worse leading to a hard six months which would be a bummer as the year 2020 continues well into 2022. One small point that indicates this won’t be the case is the price action in Moderna stock. Moderna would be a potential benefactor of a variant that requires a new or modified vaccine. The stock was trading around $275 before any news of Omicron. On the variant news breaking, it shot up to $352 for a couple of days before tumbling all the way back down to $295. So, some very big players made huge bets that there won’t be a need for a new vaccine. While this is a single data point, it coincides with some other “oh s%#* trades” that were placed and quickly taken off as the early doom and gloom subsided.
We are all sick of COVID-this and variant-that, but the market and Fed decisions do seem influenced by the happenings at this moment. Long term, there is plenty to be positive about and much of the issues of today will be a distant memory. So, consider this an interesting update and not something that truly factors in long-term planning. And if you want extra homework on COVID variant mutations (because who doesn’t!) this is a very straightforward read on how this happens.
Now on to the “hits.” All the best!
High Note Quick Hits
Up in Smoke
Tax-loss harvesting is a critical aspect of investment management at High Note. This has been the case with current capital gains rates and would only be more impactful if rates go up. What is tax-loss harvesting? Well, it’s a fancy way of saying that something gets sold for a loss. If we buy a position, we expect it to go up (duh), but sometimes that doesn’t happen (annoying). This recently was the case with ETF MSOS which tracks legalized American cannabis companies. So instead of raising our fists to the sky and yelling at the clouds, we dumped it and set the clock for 30 days which is the time we are required to wait until we can re-buy it. The long-term thesis has not changed that the American cannabis industry has incredible upside, but timing is everything and it hasn’t been right this fall. In the meantime, the loss-harvesting is too valuable to sit on while the markets catch up.
Happy Anniversary, Enron Bankruptcy
The story of Enron continues to stand out twenty years later as one of the most remarkable in Wall Street history. Books have been written, and movies have been made, but it’s still captivating as we hit the twentieth anniversary this week. Enron stock was beloved by Wall Street. There wasn’t a single analyst with a “sell” rating, and in fact, most price targets were almost double. Millionaires were made… and then unmade. It brought down the legendary accounting firm Arthur Anderson, put actual company executives in Federal prison, and led to market regulation changes.
Being the 20th anniversary, two key players in the story have been recently making the rounds. Bethany McLean, who wrote the first story that called Enron’s accounting practices into question and later co-authored “The Smartest Guys in the Room,” recently told her stories of Enron’s effort to kill her story and their tactics of threats and pressure. If not for her reporting, it might have been years before things unraveled.
The other character making the rounds is legendary hedge fund manager Jim Chanos, who famously shorted the stock. Because of Bethany’s reporting, Jim’s fund started shorting the stock in the fall of 2000, a full year before the bankruptcy. Ultimately, he made millions, and it helped vault him into prominence, attracting a ton of new money into his fund. It looks obvious in hindsight, but it was a long and difficult waiting game to be short the stock. He was asked if the law changes and regulations of today provide enough scrutiny to prevent such a thing from happening again, to which he responded, “probably not.” He’s been critical of how public companies report and present earnings based on accounting standards. While some of the laws have changed, there are always ways to work around it for those willing to deceive. It’s one of the many reasons that holding a concentrated position in a single company carries additional risk. What’s Jim Chanos up to today? He’s shorting Tesla.
