It Takes Ever Smaller Flows To Cause Outsized Impacts On Stock Prices
By Peter Tchir of Academy Securities
Wall Street's Trillion Dollar Mistake(s)
NVDA has added almost $1 trillion of equity market cap since the start of the year (at 2pm or so yesterday, when the idea for this report struck, it was over $1 trillion).
How did Wall Street get this performance so wrong? There have been a lot of bulls on this stock, rightfully so. But I can’t remember many (any) predicting a greater than 70% return in barely two months! This is already a large company, so it should be well followed and well known. I don’t track single stocks closely, so maybe I missed people foaming at the mouth screaming to buy this stock for this type of return at the start of the year, but I thought even the bulls were more moderate. I keep thinking “what in the news flow did I miss?” AI has been the story of the year (it is AI and AI “deputization” driving markets this year, not the MAG 7 – see It’s Friday, I’m in Love and Time to Retire the Magnificent 7 Moniker). But the news flow on the AI and even chip front didn’t seem that extraordinary to me. We’ve all seen company after company announce plans to incorporate AI. Sure, the AI story and data have been better than expected, but has it really surprised by that much?
One thing I can say is that if you told me on January 1 that NVDA would rise this much, I’d have predicted a much higher year-to-date return for the Nasdaq 100. The Nasdaq 100 is still up around 7% this year, a great return by most metrics, but with one of the biggest components of the index doing so incredibly well, that strikes me as light.
I have no good answer as to why this was missed by so many (not by everyone, but many or even most). While not having a good answer seems unhelpful, it just means that we have more to think about. One thing that I think we have been seeing of late is that anecdotally it looks like relatively small net flows are having a larger than normal price impact on the markets. I’m not sure what caused the Nasdaq 100 to spike from 2:30pm until 2:45pm yesterday, only to see two heavy selling “pencils” (a line that goes straight down on the chart) into the close. Across the board I wonder if the “faux liquidity” we have created with so much electronic and algorithmic trading is obscuring an unnervingly low level of true liquidity – in both directions.
While I suspect that “this time is different,” I can’t help but drag out When Price Becomes “Just” a Number. My experience is that there are times when price “becomes just a number.” And whatever that number is supposed to mean gets lost in the shuffle of short squeezes, chart watchers, gamma squeezes, and the like. I’m not sure we are seeing that in this market, but it is in the back of my mind and certainly seems relevant to the next “trillion dollar” mistake!
Bitcoin. As Bitcoin trades above $67,000 and seems poised to break all-time highs, we are left wondering how much impact the launch of the Bitcoin ETFs has had on the market. Bitcoin had a market cap of about $530 billion back in October and is above $1.3 trillion now. So not quite a “trillion dollar mistake” but close enough. I am sure that there are many reasons for the rise. Chinese citizens who are nervous about their economy may well be a big driver. The success of FTX claims (which went from a low in the 20s to the 90s gives some comfort, though my understanding is that some investments into AI companies drove a lot of that recovery). But clearly the story of the ETFs has been a big part of the move. We saw Bitcoin ramp higher into the approval. While it fell for a bit post the launch, it has gone “parabolic” since then. Every company is heavily advertising bitcoin ETFs, which should generate exposure. Every RIA may consider adding Bitcoin to their allocation mix. The halving (when the mining rate slows) is apparently another catalyst. Scarcity, scarcity, scarcity, so the argument goes.
Well, if I’m the Fed, I’m watching this move quite nervously. What does it say about liquidity? Financial conditions? What does it say about faith in currencies and central banks? I cannot think of anything good this move is saying, but back to ETFs.
I’ve been using this page to track Bitcoin ETF fund flows. At the end of day 1, there was about $29 billion of AUM in the Bitcoin ETFs (GBTC converted from a trust structure into an ETF, giving a running start to the Bitcoin ETFs). There is currently about $52 billion in the ETFs. A seemingly impressive fund flow. But in early January, the price of Bitcoin was just above $46k, turning that initial $29 billion into about $38 billion. While it gets a bit tricky given daily flows and price action, it looks like in almost 2 months since the Bitcoin ETFs were launched, they’ve taken in net inflows of less than $14 billion ($52b-$38b). All the other stories aside, I cannot think of how it is possible for $14 billion of net inflows to drive $800 billion of market cap gains. That appreciation ignores the rally that we’ve seen in things like Ethereum (which I find most intriguing) to Dogecoin (which I thought was a joke), but it has doubled in just over a week and is up over 200% since October.
I would not want to step in front of this freight train, but even scarcity can get ahead of itself.
Finally, we come to Made by China. As far as I can tell we are still one of the few places pushing the theory that China will attempt to resurrect its economy by trying to sell their own brands, rather than just by making “our” brands. What is difficult to tell from the data that I’ve seen is how much of the slowing sales into China has to do with its consumers struggling versus traction gained by China’s brands in China. For the moment, I suspect that the bulk of any China sales issues is related to the weakness of their consumer. But, if some of it has to do with a more aggressive effort to sell its own brands (domestically and internationally), we may only be seeing the tip of the iceberg of a “new form” of competition with China.
Missing China’s strategy shift, if they are truly doing it, may make $1 trillion seem like small potatoes.
Mistakes happen, but mistakes of this magnitude shouldn’t. Yet they did, and we might see more of them.
I remain in bear mode on domestic equities.