Making sense of the markets this week: May 10, 2021

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Wealthsimple taps celebrities and nets a $5-billion valuation

In October of 2020, we reported on a previous round of financing for Wealthsimple. At that time, valuation estimates for the Canadian online investment company were in the $1-billion range. 

The actual valuation turned out to be closer to $1.5 billion. 

Fast forward to this week: Wealthsimple announced another round of financing that raises the price tag to $5-billion. And celebs are in on the act as well, with musician Drake, actors Ryan Reynolds and Michael J. Fox, and a few high-profile professional athletes stepping forward with cash to invest in the fintech giant. 

Wealthsimple originally launched as one of Canada’s robo-advisors, and has moved on to add more financial services, including a discount brokerage. Many say that they “own” the millennial market in Canada. That offers incredible long term potential, and the appeal for investors. 

It’s certainly not soaring on the basis of profits that are yet to arrive—and might be many, many years away. 

In this week’s round of fundraising, led by venture capitalists Meritech and Greylock, and also includes Inovia, Sagard and Redpoint, Two Sigma Ventures, TCV, as well as the celebrities and athletes mentioned above, Wealthsimple has raised $750 million CAD. 

The company has experienced significant growth during the pandemic, which is likely one big reason why its valuation has increased so dramatically. 

Wealthsimple’s commission-free retail trading platform has grown rapidly, and clients are investing in bitcoin by way of their crypto trading platform. Late last year, Wealthsimple also launched its money transfer app, Wealthsimple Cash, and in March 2021 it made it available to all Canadians. 

From TechCrunch… 

“The app is very similar in terms of features to Venmo or Square’s Cash app, but neither of those offerings have been available to Canadians thus far. Wealthsimple’s app, which is free to use and distinct from its stock trading and crypto platforms, has thus tapped significant pent-up demand in the market and seen rapid uptake thus far.” 

The fintech also offers Wealthsimple Tax, and plans to expand (and perhaps evolve) their original robo-advisor offering. Combined, Wealthsimple has more than 1.5 million users, with over $10 billion in assets under management as of the last publicly available numbers. 

Also from that TechCrunch post… 

“With this funding, Wealthsimple plans to ‘expand its market position, build out its product suite, and grow its team.’ The company also offers automated savings and investing products (the robo-adviser tools it was originally founded around), as well as tax filing tools, and it has demonstrated a clear appetite and ability to expand its offerings to encompass even more of its customers financial lives when committed with fresh resources to do so.”

But more important than the celebs is the all-star list of venture capitalists that have lined up. They collectively have a track record of investing in some of the biggest tech hits that we know by name. Meritech has also invested in Salesforce, Nextdoor, Zulily and Lime, while Greylock has backed Airbnb, LinkedIn, Coinbase and Discord. 

This perspective from one of the investors was offered in this Globe and Mail article (paywall)… 

“‘We invest in companies with the potential to revolutionize industries and become enduring market leaders,’ said [Meritech’s general partner Max] Motschwiller, in a statement.

“‘Wealthsimple has been able to capture a generation of financial consumers in Canada with financial products that are markedly different than anything offered by the incumbents—simpler, more human, and built with the kind of technology that delivers an experience consumers want’.”

I am a big fan of the suite of disruption and the brilliant advertising from Wealthsimple that shines a light on lower-fee options such as the robo platform. But I have publicly questioned that $5-billion valuation for a company that does not yet turn a profit. 

And having worked in the disruption area as an investment advisor at Tangerine Investments (another robo option and the first Canadian robo, in my opinion), I know Canadians are creatures of habit. It’s a challenge to get them to even adopt online banking and robo investing. 

Furthermore, us Boomers have all of the money, ha. “OK, Boomer!” Ya, I hear ya on that. 

So what’s the deal on valuation? Perhaps it’s not a big deal. 

This from the OPM Wire blog (anonymous Bay Street insider), via Twitter personal messaging… 

“Wealthsimple is a gamble, it’s a big risk…but I don’t think valuation makes or breaks the decision…. They’ll either succeed big or fail. You have to think of everything they can cross-sell and the fact that Wealthsimple clients will constantly become richer over time.”

That is a fair and sensible assessment. This is a very long term play on trends already in motion. Millennials and other younger generations (and perhaps Wealthsimple clients) will certainly have most of the money…one day. 

Rental car companies are buying used cars

Now here’s an inflation hotspot: rental car companies. In early April, we reported it can now cost $300 per day to rent a Kia Rio. 

There is a car production shortage, thanks to chip shortages. Yes, it appears that even cars run on advanced technology. No chips, no cars. And the shortage is expected to continue well into 2022. 

Global vehicle production fell 4.6% in the first quarter, and that’s compared to 2020 when factories had already lost weeks of work due to COVID shutdowns, according to LMC Automotive. 

Ford’s production was down 17% in the first quarter of 2021 and production could fall by as much as 50% in the second quarter, the company offered on a recent earnings call. Other automakers face similar production declines.

Now, rental car companies are buying up used cars to fill their fleets. And they expect things to get worse. 

From that driving.ca post…

“‘The global microchip shortage has impacted the entire car-rental industry’s ability to receive new vehicle orders as quickly as we would like,’ Luster said. “Hertz is supplementing our fleet by purchasing low-mileage, pre-owned vehicles from a variety of channels including auctions, online auctions, dealerships and cars coming off lease programs’.”

One kink in the supply chain can set off a whole host of reactions and chaos. This is a surprising example, ending with outrageous rental car costs. And it will not be an isolated event. 

There may be many inflation hotspots this summer (and beyond) as supply and demand get bent out of shape. And one hotspot might even be the kitchen table; I have read so many reports of rising food prices. 

Food commodities prices up 21% year-to-date and 75% YoY!

With oil, steel, copper and even lumber all up 50%+ YoY, wait for it: #inflation.

A higher than expected peak inflation in the pocket imo, the question is if/how transitory it'll be and in which markets. pic.twitter.com/V87fLRJOix

— Emre Akcakmak (@akcakmak) May 5, 2021

The inflation watch continues. 

U.S. stocks like pessimism—not good numbers and optimism

I have previously offered that stock markets like to climb that wall of worry. Stock prices can reach and climb higher as they conquer the challenges that are in the way. Stock markets like a good fight. 

Here’s a more than interesting post from Liz Ann Sonders of Charles Schwab, which suggests (and offers some great charts to back it up) that when the going gets easy, the stock markets get going the other way—they fall in price. 

Key points from Sonders… 

“But the stock market tends to sniff out inflection points in economic data; so keep a close eye on growth rates, and the possibility of a peak in this year’s second quarter.”

And on those forward-looking markets… 

“In addition, as I’ve always said, when it comes to the stock market’s perspective on economic data, better or worse matters more than good or bad. It’s human nature for us to think about economic data in good vs. bad or strong vs. weak terms; but stocks are generally more tuned into economic data’s trend and rate of change vs. level. 

Translation (from me): We might think of that as beware of “peak good news.” The market just wants more and more good news. It might not matter if more good news is coming, if the best news is behind us. 

In that post, you’ll see negative one-year returns for the S&P 500 when the GDP growth, year over year, is most favourable. When consumer confidence is highest, one-year returns are the lowest. When the unemployment rate is highest, we see the higher stock returns. When the S&P earnings change (year over year) was in the range of  -10% to -25%, we see the greatest next-year stock gains. 

And, of course, past performance does not guarantee future returns. 

All fascinating statistical events. And they make sense. Warren Buffett would tell us to be “fearful when others are greedy, and greedy when others are fearful.” We might substitute: be greedy when everyone is reading the bad news. 

Funny enough, the above theme was a suggestion in my first post of 2021—that when we start to get to the other side of the pandemic the markets might turn up their collective nose. From that post and my commentary… 

“The pandemic will dominate again in 2021; the deployment of vaccines will be the wild card.

“Personally, I hold a contrarian hunch or guess as to what might happen when we start to get to the other side of the pandemic. The markets have been riding a wave based on optimism. Once we have that pandemic under control, market makers might turn their attention to actual earnings and earnings prospects. And they might not like what they see.” 

The stock market is a “sniffer outer”

From Liz Ann Sonders… 

“Optimism is extremely elevated—certainly justified by stock market behavior over the past year, as well as recent economic releases. But some curbing of enthusiasm may be warranted given the history of the stock market as an uncanny ‘sniffer-outer’ of economic inflection points. This is not a time for FOMO-driven investment decision-making; but instead of adherence to the tried-and-true disciplines of diversification (across and within asset classes), periodic rebalancing and fundamentals-based stock picking (for those investors who do that directly).” 

Yes, indeed: stay the course, stick to your investment plan. And be ready for anything. 

Hedge funds are selling their tech stocks to retail investors

And perhaps hedge funds are in the “already priced-in” camp. Hedge fund managers are sellers of the big US tech winners. It’s the real investor who is buying. 

From this MarketWatch post, headlined “Hedge funds had become ‘extreme’ sellers of stocks even before Yellen’s interest-rate remarks”… 

“The hedge fund selling was most concentrated in the communications services and information technology sectors, according to the BofA data—i.e. the big tech winners that have thrived during the COVID-19 pandemic. Who’s buying? Retail clients were the only group to buy U.S. equities for the third week in a row and have been net buyers for 10 straight weeks, says Bank of America.” 

And from this Axios post on the same subject… 

“U.S. households increased their exposure to stocks to 41% of their total financial assets in April, the highest level on record, WSJ reported, and stock funds have seen net inflows for seven straight weeks.”

The stock markets are priced on supply and demand. Over the past several days, the retail investor hasn’t been able to keep up with the “smart-money selling.” The market has shrugged off incredible earnings reports from many of the big tech names. The U.S. tech sector (XLK) is down almost 5% since those wonderful earnings reports started rolling in over the last two weeks. 

The good news is all of the good news with respect to earnings growth and the economic recovery. But that might not be enough for the high flying tech giants and perhaps the total U.S. market. 

Time will tell if retail investors have deep enough wallets to keep up with this institutional selling. It’s the pros vs. the retail Jos and Joes. 

Tweet and news of the week

It was certainly a shocker to read the announcement from Bill and Melinda Gates that they have decided to end their marriage. Gates took to Twitter to make the announcement:

pic.twitter.com/padmHSgWGc

— Bill Gates (@BillGates) May 3, 2021

Together, they run the Gates Foundation, which gives away $5 billion each year. And much of Bill Gates’ wealth has still not been donated to the foundation. The couple’s split leaves a lot of money and projects “up in the air.” 

Ryan Ken of the Let Me Back Up Podcast feels the announcement was worded and created to calm markets. But did it do more to rile them up? 

That divorce announcement was not for us. It was to calm global markets. And that is absolutely wild to me.

— Ryan Ken (they/them) (@Ryan_Ken_Acts) May 4, 2021

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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