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Good morning. At 8:30 a.m. today, not long after this newsletter arrived, the December CPI release will arrive. At this point it likely becomes, in the words of Bill Murray on Ghostbusters, “Human sacrifice! Dogs and cats live together! Mass hysteria! “

Inflation is the most important variable in the market outlook right now, so the excitement is justified. However, we hope you have a few quiet moments reading the stock valuations and market making before the biblical scenes begin.

A word of clarification on yesterday’s inflation comments which received some interest. As we wrote earlier, we are not too concerned about inflation in the hull (which is likely to get hot today) and we are not convinced that the Fed is lagging far behind the curve.

But Ethan and I are not on Team Transitory. We’re hopeless fence-sitters on inflation, and we’re not going to win victory laps as things turn out. If we often take up the ephemeral side of the argument, it is only because it has been widely declared dead and we don’t understand why.

The arguments that inflation should subside quickly in the second half of this year and below 3 percent next year are perfectly reasonable, if not decisive (here is a representative one). When that happens, history will look back and say, “yes, temporarily”.

Anyway, email us: and

Are there any bargains on the stock exchange?

We have written quite a bit lately about the breadth or lack of it. Our conclusions were that while the market is getting thinner – it is being supported by the performance of fewer and fewer stocks – no, we are not entirely sure that this is the bad omen that it is widely considered to be.

An abstract consideration of the breadth (ie “X percent of the stocks in the index Y are Z percent away from their highs” or similar) might be less helpful than a concrete consideration. Which companies are hacked by how much in a certain index? Is there a pattern?

By looking at this, perhaps we can tell if the decreasing width was really a cause for concern. And as a bonus, it could show that the thin market is creating pockets of value. After a period of pervasive reviews, are bargains emerging?

The Nasdaq 100 is a good index to start with because it’s manageable in size, made up of well-known stocks, and is mostly tech stocks that have broken. It’s been going sideways since September.

Using an S&P CapitalIQ screening tool, I looked at how the 100 stocks in the index performed. Twelve of them have lost a fifth or more of their worth in the past 12 months. This is one change: a year ago, none of the stocks in the index saw such sharp falls. The list of the seriously injured includes wild growth games like Zoom and Peloton, but also more robust tech companies like PayPal and wireless operator T-Mobile.

A third of the index is unchanged or lower than a year ago, spread across sectors (technology, retail, pharmaceuticals) and from growth (Lululemon) to value (Amgen). Reviews are also starting to come. The index still looks expensive (the average price / earnings of the index is over 40), but 60 of the stocks saw their price / earnings ratio decline last year, twice as many as the year before.

The top third of the index looks very strong, or natural. All show annual increases of 25 percent or more. But this index is waving a large, diverse, poorly performing stock tail. It doesn’t tell of ubiquitous investor confidence like broad indices do.

However, look at the bright side. Cheaper stocks mean higher returns over the long term. And at first glance, it looks to me as if there are bargains to be found. I’ve looked at stocks that have fallen at least 20 percent below their 52-week highs and then checked for valuations, growth rates, and gross margin / financial ratios (a rough proxy for company quality and pricing power that will be important when inflation) persists). A collection of stocks emerged that, just numerically, look fascinating. Here are some of the names that came up on the screen:

The five columns, running from left to right, give an idea of ​​how badly the stock has been devastated; its evaluation: the quality / pricing power of the company; its growth; and how much you pay for that growth (the ratio of P / E to sales growth, or “PEG” ratio).

Like the output of any screen, these numbers need to be cleaned up and checked for anomalies, etc. And God knows, this is not investment advice. The point is just that the market is producing some battered names that look fascinating. There aren’t many really cheap stocks out there (the second column has some very high P / E ratios). But these high ratings are offset by high growth rates (see last column: Any PEG ratio below 1 is attractive). And these are quality companies (see middle column, where gross profit / assets above 30 percent should get your attention).

There is definitely more work to be done. The point is that the downside of a thin market are opportunities for bargain hunters. If the markets remain choppy, this could be a fun year for value investors.

Ken Griffin’s reasonable coverage

Ken Griffin, as you may have heard, has just received a handsome sum for a minority stake in his Citadel Securities, a dominant market marker in stocks, credit, and derivatives. Venture investor Sequoia Capital and crypto specialist Paradigm now own $ 1.2 billion in the market-making firm and are valued at $ 22 billion. There are rumors that Citadel is adding a crypto trading operation.

What kind of business are Sequoia and Paradigm doing for their money? Citadel Securities doesn’t disclose financial data, so we looked at a competitor that does: Virtu Financial, the other big kahuna in market making.

Two things count in the market making business: trading volume and market volatility. Virtu shares skyrocketed in early 2018 as volatility rocked the markets. During the pandemic, a spate of retail activity helped propel the stock 80 percent higher:

Citadel Securities isn’t exactly like Virtu. It’s bigger and traded in different markets. But it’s clear that Sequoia and Paradigm are betting that the rise in retail volume and volatility will continue when the pandemic is finally over.

To make matters worse, Hitesh Mittal from BestEx Research points out that volume and volatility fall apart more often these days. For example, how good is a high volume, low volatility environment for Citadel Securities? We can only speculate.

In any case, it’s a good time for Citadel Securities – and Griffin – to diversify. Adding crypto to the market-making mix creates a new source of income. And taking some wins at the top isn’t a bad idea either. (Ethan Wu)

Good read

One problem that is not given enough attention is that the monetary policy of the industrialized countries increases the inequality between the nations.

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