Category: Investing

Pinduoduo Q4 Earnings Release

E-commerce company Pinduoduo released Q4 2022 results this morning. Revenue missed lofty analyst expectations, despite growing +46% year-over-year, while adjusted net income and adjusted earnings per share (EPS) beat analyst expectations. Pinduoduo’s stock has had a decent 2023 so far.

The company did not give a forecast, though noted “steady growth” of consumers during Q1 2023 while higher priced goods such as cell phones saw “decent growth”. Management noted that competition is “intense” as technology investment and expenses rose from RMB 13.8 billion to RMB 21.8 billion. “Temu,” the platform’s international brand, will expand to new markets including in Canada and Europe.

At the end of day, Pinduoduo’s revenue grew nearly ~50%, but net income grew only about ~30%, though cash saw a healthy increase. Management’s emphasis on investment is unlikely to instill confidence, as indicated by the -13% fall pre-US market open.

• Revenue increased +46% to RMB 39.8 B ($5.773B) versus analyst expectations of RMB 41.9 B and Q4 2022’s RMB 27.2 B
• Adjusted Net Income increased +43% to RMB 12.1 B ($1.8 B) versus analyst expectations of RMB 11.17 B and Q4 2022’s RMB 8.4 B
• Adjusted EPS was RMB 8.34 ($1.21) versus analyst expectations of RMB 7.54 and Q4 2022’s RMB 5.9.

Key News

Asian equities were all lower as financial contagion fears kept buyers on the sidelines despite the weekend announcement around Credit Suisse and UBS. Credit Suisse has a strong presence in Asia, great Asia and China research, and solid people who hopefully successfully navigate events outside of their control. The crisis of confidence, which seems to be benefiting Bitcoin in a bad look for central banks, includes wiping out $17 billion worth of Credit Suisse bonds held by regional Asian banks. It is worth noting that CNY posted a small gain versus the US dollar as maybe the Fed will pause their rate hikes.

Foreign investors were far more pessimistic as Hong Kong was off more than -2% while mainland markets were off, but not nearly as much. Mainland markets remembered Friday’s bank reserve requirement ratio cut was after the market’s close and followed by the 1 and 5-year loan prime rates being left unchanged over the weekend. Mainland investors bought a healthy $725 million worth of Hong Kong stocks via Southbound Connect overnight as Tencent was a large net buy. Hong Kong advancers/decliners was negative as short volume was 19% of total turnover, led by high short volumes in Hong Kong ETFs, though not individual stocks. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -1.36%, Alibaba, which fell -2.82%, China Mobile, which fell -3.56%, HSBC, which fell -6.23%, and Meituan, which fell -1.15%.

Baidu managed a small gain, up +0.91% following the positive ERNIE Bot reviews. Huarong Securities fell -7.22% after announcing a wider than expected loss for 2022 and news its auditor was fined.

Mainland markets were mixed after opening higher but slid lower over the trading day as Shanghai and Shenzhen posted small losses and the STAR Board posted a small gain. Foreign investors bought a net $232 million worth of Mainland stocks via Northbound Stock Connect.

President Xi is visiting Russia to push his Ukraine peace plan. Markets could use some good news as a resolution and/or progress toward a resolution would be the ultimate black swan.

The Hang Seng and Hang Seng Tech indexes fell -2.65% and -2.75%, respectively, on volume that declined -21.52% from Friday, which is 107% of the 1-year average. 49 stocks advanced, while 464 stocks declined. Main Board short turnover declined -7.53% from Friday, which is 1,221% of the 1-year average, as 19% of turnover was short. Value “outperformed” growth as large caps “outperformed” small caps. Materials was the only positive sector, up +1.31%, while healthcare fell -4.33%, technology fell -4.3%, and consumer staples fell -3.2%. Materials was the only industry group positive while healthcare equipment, pharmaceuticals/biotech, and consumer services were the worst. Southbound Stock Connect volumes were moderate/light as Mainland investors bought $725 million of Hong Kong stocks as Tencent was a moderate/strong net buy and Meituan was a small net buy.

Shanghai, Shenzhen, and the STAR Board were mixed to close -0.48%, -0.32%, and +0.94%, respectively, on volume that increased +8.73% from Friday, which is 118% of the 1-year average. 1,863 stocks advanced while 2,824 stocks declined. Growth factors outperformed value factors as small caps outpaced large caps. Technology and materials were the only positive sectors, up +0.92% and +0.06%, respectively, while healthcare fell -1.58%, utilities fell -1.37%, and consumer staples fell -1.12%. The top-performing industries were precious metals, semiconductors, and power generation equipment, while telecoms, office supplies, and diversified financials were the worst-performing industries. Northbound Stock Connect volumes were high as foreign investors bought $232 million worth of Mainland stocks. CNY gained +0.12% versus the US dollar, while the Asia dollar index was flat, Treasury bonds rallied, Shanghai copper gained, and steel was down slightly.

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Major Chinese City Mobility Tracker

Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.88 versus 6.88 Friday
• CNY per EUR 7.37 versus 7.36 Friday
• Yield on 1-Day Government Bond 1.81% versus 1.82% Friday
• Yield on 10-Year Government Bond 2.85% versus 2.86% Friday
• Yield on 10-Year China Development Bank Bond 3.01% versus 3.02% Friday
• Copper Price +0.48% overnight
• Steel Price -0.02% overnight

Gold prices are closing in on an all-time high above $2,000 an ounce. This pair of MoneyShow contributors weighs in on what’s behind the move – and how investors can profit!

Sean Brodrick, Weiss Ratings Daily

The banking problems started by Silicon Valley Bank are far from over. Depositors are still fleeing smaller banks, figuring they might be facing the same problems as the banks that failed. The ongoing crisis supports gold.

One reason is because gold is a safe haven. But it’s also due to another reason … it’s now harder for the Federal Reserve to raise rates!

In a week, there has been a huge shift in Wall Street’s bets on the Fed raising rates. Goldman Sachs (GS) expects there to be no rate hike at all. Global financial services group Nomura Holdings (NMR) boldly expects the Fed to CUT at its March 21-22 meeting — something that did not seem possible last week.

Even if the Fed hikes rates at this meeting, it’s losing incentive to keep hiking rates at future meetings. That’s because Fed rate hikes are part of what fueled the banking crisis in the first place.

Currently, the Fed’s benchmark is in a range of 4.5% to 4.75%, up from near zero a year ago. That is a huge move in a relatively short amount of time.

This hurt banks in two ways: It hammered the value of longer-dated Treasurys held by the banks, and it raised the borrowing costs of bank customers, including no-earnings tech companies that need cheap money to survive.

So, now we will have fewer rate hikes than previously expected. And since the market is an expectations game, this is chopping away at support for the U.S. dollar.

What is priced in dollars? Gold and silver. As the dollar slides lower, precious metals should find the next leg of their bull market.

The easiest path is higher, with a target of $2,931 sometime in the next year. This banking crisis is just adding fuel to the move higher in gold that was already taking place.

While you can profit from buying something like the SPDR Gold Shares (GLD
GLD
), it’s the gold miners that are really outperforming. That is because miners are leveraged to the price of gold. As its price climbs, their profit margins get bigger and bigger. An attractive ETF in this scenario is the VanEck Gold Miners ETF (GDX
GDX
).

So, while America works through this banking crisis, don’t hide under your desk. There are great investments out there for those brave enough to seize the day. Gold is a shining example, and the miners will shine even more so.

Brien Lundin, Gold Newsletter

In times of financial crisis, it’s important to remember this maxim: “There’s never just one cockroach.”

Think way back to another time. Like two weeks ago.

Back then, the futures markets indicated a 68% chance that the Fed would hike rates 0.50% at their meeting on March 22nd. By the next week, the winds had shifted enough that there was a 60% chance that the Fed would only raise by 0.25%.

Fast-forward to now, and the script has completely flipped: There may be no hike at all. That would be the pause that we’ve been predicting as an eventuality. But instead of months down the line, it’s going to happen either now or at their next meeting. Why?

Because things are breaking.

For months I’ve been warning that we were headed for a reckoning. The Fed and other central banks couldn’t force-feed the most severe interest rate hikes in over four decades without causing severe damage to a global financial system that had been built upon the shaky foundation of zeroed interest rates.

I couldn’t tell you what was going to be the first domino to fall, although I suspected it would be the bond market, overseas real estate or the derivatives house of cards that Alan Greenspan warned me about. There were only two things we could be confident in:

1) Something would break, and…

2) We would want to own gold and silver when it did.

The last few days have checked off both of these boxes. Importantly, gold and silver are leaping higher again as the collapse of Silicon Valley Bank has sparked a banking crisis not just in the U.S., but across the world.

So, what now?

First off, understand that, like the first shots fired at Fort Sumter, the coming conflagration will spread to many fronts. This isn’t just about a bank that was too exposed to the risk of rising rates, or even a banking system similarly exposed.

It’s about an entire financial system and global economy, from bonds to banks to businesses and more, all reliant on ultra-low interest rates and ever-easier monetary policy.

With sovereign debts now much larger than the economies that created them, the very idea of “normalizing” interest rates is passé. Higher rates can’t happen because they can’t be tolerated.

So, the crisis that began with Silicon Valley Bank will spread to other sectors…and will force central banks to stop their rate hikes.

A pause alone will be a shot of monetary adrenaline for every asset class, but none as much as with gold and silver. That’s why smart money is flocking to precious metals at this moment, sending prices climbing. Follow the money.

Regional bank stocks spent last week trying and largely failing to recoup any losses from the contagion fears surrounding the failures of Silicon Valley Bank and Signature Bank, and the crisis appears to be far from over.

The SPDR S&P Regional Banking ETF (KRE) fell 6% Friday and is down 27% in the last month as investors worried about carrying too much risk into the weekend. The next domino fell on Sunday when UBS agreed to buy troubled Credit Suisse for about $3.25 billion in a fire sale, 60% lower than where its stock closed on Friday.

It would be easy for investors to steer clear of the riskiest corner of the current market, but heightened fear can create outsized opportunities, and billionaire Bill Ackman tweeted last week that regional banks are an “incredible bargain.” Analysts emphasize that investors need to be able to stomach some risk but still see signs of hope for some of these stocks.

“The market is in many ways doing a ‘shoot first, figure it out later’ mentality,” says Chris McGratty, head of U.S. bank research at KBW. “Most banks that we’ve talked to had some really unsettling deposit trends last Monday, but each day that’s gone by it’s gotten better.”

McGratty’s favorite stock among the hardest-hit names recently is Phoenix-based Western Alliance Bancorp. (WAL), a bank with $68 billion in assets and 36 locations concentrated in the western United States. Its stock is down 57% in the last two weeks, though it has recovered 25% since its low point last Monday. It’s currently trading below its tangible book value and has a more diversified customer base than SVB did, McGratty says. The bank issued a press release on Friday to reassure investors, saying it had more than $20 billion in immediately available liquidity, 55% of its deposits are insured and net deposit outflows had stabilized quickly.

McGratty also recommends Evansville, Indiana, based Old National Bancorp. (ONB), which has a more conservative risk profile, consistent earnings and a 3.7% dividend yield. Its decline in the last month is just 14%.

Analysts are more wary of First Republic Bank, the San Francisco-based bank that caters to a wealthy clientele and has suffered the most collateral damage from the SVB collapse. Its stock is down 84% in the last two weeks and fell 33% on Friday, a day after 11 banks including JPMorgan, Citigroup, Bank of America and Wells Fargo committed $30 billion in deposits to prompt a 70% intraday gain Thursday.

“The reason they’re taking $30 billion is because the deposit outflow situation had become pretty hard,” says McGratty. “The initial read was that it was a really great piece of information, but if you look through it a little bit more, the reason they’re doing this is not because of a position of strength.”

First Republic is in talks to sell a piece of itself, the New York Times reported Friday. Its high net worth customers would be an appealing feature for a competitor to acquire at the right price, but it has steered itself into trouble in part due to low fixed-rate mortgages it offered to these clients which have lost value in the last year of rising interest rates. Its credit rating was cut multiple times by S&P Global over the weekend into junk territory, and it’s down another 13% Monday morning.

“If you come to the conclusion that the bank will stay in business, then your decision concerning the stock is related to, ‘What is the earnings outlook?’ And the earnings outlook is very stressed,” says Dick Bove, a banking analyst at Odeon Capital Group. “In many cases they have fixed rates below the market because the rates were set to attract big depositors into the bank or big investors into their investment company, so the portfolio is not yielding a lot.”

Even before the chaos of the last two weeks, regional bank stocks have lagged the market for a long time. The KRE ETF is now down 23% in the last five years, compared with a 52% gain for the S&P 500 Index.

Bove thinks the acute fears of widespread failures for banks is “pretty much over,” creating an opportunity for a rebound, but he’d still rather be in bank preferred stocks than in common stock. Many preferreds are now offering a yield of 6% to 7%. Among 20 recommended preferred stocks, Bove highlights a 6.2% PNC issue now yielding 7%, a 5.6% Wells Fargo yielding 6.2%, a 5.3% preferred from U.S. Bancorp yielding 5.7% and a safe 4.55% JPMorgan preferred that currently offers 5.7%.

“These banks are definitely not going to miss the preferred payment, particularly if they have to sell common equity,” he says. “I don’t want to deal with all this crap about what they’re going to earn or the amount of money they have to raise. With the bank preferreds, I’m in my view totally protected, I get a high yield and I think that’s the way to go.”

Like a race-car driver slicing in front of the competition, the Nasdaq Stock Market has resumed market leadership in 2023.

This year through March 17, the Nasdaq Composite Index has returned 11.1%. The New York Stock Exchange Composite Index has fallen 3.8%.

The most widely watched market gauge, the Standard & Poor’s 500 Total Return Index, has inched up 2.4%. The Dow Jones Industrial Average has lost 3.5%. All figures are total returns, including dividends.

Nasdaq is known as the home of most large technology companies, and of a variety of smaller stocks. The NYSE, or Big Board, is home to most large companies except for technology and biotech firms.

Will the Nasdaq continue its comeback, after a dismal 2022, when it lost fully 33.1% of its value? I think so, but it will probably be a bumpy ride.

Strengths, Weaknesses

The technology sector, the heart of the Nadaq, has one huge advantage and two disadvantages. The advantage is that many of the world’s most innovative companies are U.S. tech firms.

A disadvantage is that the tech sector has lost the temporary boost it got from the Covid-19 pandemic. Another headwind is rising interest rates, which are harsh on relatively expensive stocks.

The reason is simple. Say you expect Microsoft
MSFT
to earn $25 a share in fiscal 2028. If interest rates are 2% that’s worth about $22 now. If they’re 6%, it’s worth less than $18.

I don’t believe that the Federal Reserve is finished raising interest rates, but I think it’s nearly done. I am starting to beef up technology holdings in client portfolios, after cutting them in the past year.

Stock Picks

Here are four Nasdaq stocks that look like good values to me now.

Amkor Technology
AMKR
, a mid-sized company based in Tempe, Arizona, does packaging and testing for semiconductor companies. About one-third of its business is in the U.S. The rest is in China, Ireland, Japan, Malaysia, Taiwan, Singapore and other countries.

Since I believe the risk of a recession is fairly high in the U.S. this year, I like Amkor’s international diversification. The company has shown impressive growth for the past decade, yet its stock sells for a modest valuation, eight times earnings.

I recommended Encore Wire
WIRE
last year and will do so again this year. It’s a mid-sized company based in McKinney, Texas, that manufactures electric building wire and cable.

Prosaic business? Sure. But Encore has grown its revenue at a 9% annual clip for the past decade, and faster lately. The stock sells for a mere five times earnings.

With trepidation, I also recommend Taylor Morrison Home
TMHC
, a homebuilder based in Scottsdale, Arizona. There are good reasons to be scared of homebuilders, notably the recent rise in mortgage rates. But there are positives, too.

Home prices are high, reflecting a backlog of demand. And with the stock selling at only four times recent earnings, I think the potential headaches are already pretty well reflected in the stock price.

I also like Cirrus Logic
CRUS
, a chip maker specializing in voice chips. I discussed Cirrus in a February column on stocks with powerhouse balance sheets. The Austin, Texas, company has debt equal to only 9 percent of the company’s net worth–a very strong ratio.

Cirrus sells for 18 times earnings, a little more than I am usually willing to fork up. This time I am willing, as the company has grown both sales and earnings at about a 12% annual pace for the past decade.

Track Record

Every year around this time, I recommend a few Nasdaq stocks. In 16 tries, my picks have averaged a one-year total return of 18.9%. That compares well with the 16.0% average return for the Nasdaq Composite Index over the same periods, and the 11.9% average return for the Standard & Poor’s 500 Total Return Index.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

A year ago I offered five recommendations. The best performers were Encore Wire, up 32%, and Olympic Steel
ZEUS
, up 29%. The worst was Alphabet
GOOGL
, down 25%. I had moderate losses in Diamondback Energy
FANG
and Apple
AAPL
.

Overall, my picks from last year were up 5.1% while the S&P 500 was down 10.7%.

Disclosure: I own Alphabet, Cirrus Logic and Diamondback Energy personally and for most of my clients. I own Amkor Technology and Encore Wire personally and for some clients.

Topline

Ahead of a pivotal interest rate decision on Wednesday, the Federal Reserve faces a novel dilemma: stubbornly high inflation amid massive uncertainty over a banking crisis that could force a preemptive hiking pause—a prospect some analysts fear could make a potential recession worse than previously feared.

Key Facts

What We Don’t Know

It’s still unclear how Fed officials will react to the banking sector’s struggles, but some clarity will come on Wednesday, when the Fed concludes its next policy meeting and announces how high it will raise interest rates—or whether it will do so at all. Before the crisis of the past week, many experts predicted the Fed may accelerate the pace of rate hikes—authorizing a half-point increase after a quarter-point hike last month. After SVB’s collapse, analysts at Goldman Sachs said they “no longer expect” the Fed to hike rates this month. Others, including investment bank Nomura, followed suit, calling for no increase. But Bank of America still expects a quarter-point hike.

Crucial Quote

“The risk of not raising rates… is that everyone knows the Fed was planning a rate hike,” says Donabedian. “Foregoing a rate hike [could indicate] the Fed is confirming that a crisis is at hand.”

What To Watch For

If the banking industry’s troubles get worse, the Fed has options: After the 1987 stock market crash and the collapse of a highly leveraged hedge fund in 1998, the central bank pivoted from fighting inflation to stabilizing the financial system—cutting rates to help markets recover before ultimately returning to its aggressive hiking agenda.

Tangent

Donabedian believes a likely recession will be the “market-clearing event” that helps start a new bull market. “This is normally the case,” he says. “In the last ten recessions, the stock market bottomed on average four months before the recession ended. Nine of those ten examples proved to be the beginning of a new, durable bull market.”

Further Reading

Bank Stock Crash Deepens: Dow Sinks 460 Points As Top Banks Shed Another $57 Billion (Forbes)

Key Takeways

• Elon Musk believes that there are a lot of current similarities to the 1929 stock market crash which lead to the Great Depression
• The ‘Roaring Twenties’ experienced soaring economic growth and social advancement, ending in a 90% fall in markets and an unemployment rate of 25%
• While there are some similarities between now and then, the world is obviously a very different place.
• Even so, investors can take lessons from the 1929 crash, and help put in place protections for their portfolio

The last few weeks have been a rocky one for investors. The volatility really kicked off when rumors began to spread about Silicon Valley Bank (SVB), and within the space of a few short days the company had gone from supposedly stable and safe to shut down by the regulators.

But SVB shareholders haven’t been the only bank investors to lose their shirt since then. Crypto-focused Signature Bank was also shut down the same weekend as SVB, and now it’s Credit Suisse who have received an emergency buyout.

The challenges for Credit Suisse have been around for many years. Over the past 5 years, the stock price is down 88.23%. But the price was up and down like a yoyo last week as their biggest investor, the Saudi National Bank, announced they wouldn’t be providing any additional funding.

A lifeline was offered by the Swiss National Bank and now a fire sale buyout has been negotiated with UBS.

Worried about the current volatility and want some extra insurance for your portfolio? Q.ai’s Portfolio Protection allows investors in our Foundation Kits to add sophisticated, tailored AI hedging strategies to their holdings. Every week our AI analyzes your portfolio’s sensitivity to a range of different risks, and then automatically alters the protection strategy for you.

With all of this happening in the background, Elon Musk has given his 2 cents on Twitter (as you’d expect), commenting that there are a “Lot of current year similarities to 1929” on a thread from high profile fund manager Cathie Wood.

So how did the 1929 crash that led to the Great Depression play out, and are there really similarities for investors between then and now?

Want Portfolio Protection? Download Q.ai today for access to AI-powered investment strategies.

Elon Musk’s Twitter warning

The tweet from Elon Musk was a comment on a Twitter thread from chief investment officer at ARK, Cathie Wood. Interestingly, this thread was providing a comparison between the turmoil undergoing the mainstream banking system, and the crypto system.

Wood noted that while all the chaos was unfolding with SVB, Signature Bank, Credit Suisse and all the rest, the bitcoin, ethereum and other crypto networks continued without fuss.

The thread wasn’t necessarily stating that crypto is the future, but Wood was making the point that we’re now seeing some impacts of points of failure of a highly centralized system.

She comments that regulators should have focused more on this, rather than spending time aiming to block decentralized systems that aren’t going through these same issues.

The final tweet in her thread states that the biggest issue that was ‘hiding in plain sight’ was the asset and liability duration mismatch that caused the downfall of SVB. She finished this comment by saying that bank deposits have fallen year on year for the first time since the 1920’s.

To this last point, Elon Musk tweeted “Lot of current year similarities to 1929.”

What happened in 1929?

Because it wasn’t just a hiccup in deposits in 1929, but a major stock market crash that led to the Great Depression. And Musk isn’t necessarily wrong. While the world is very different now than it was almost 100 years ago, there are definite similarities.

The years leading up to the 1929 stock market crash were known as the ‘Roaring Twenties’. Economic growth was high and there was rapid social change, particularly around women’s rights.

Despite the fact that prohibition was in force, it seemed as if the 20’s were one big party. Until the music stopped.

The Dow Jones went up over 600% between 1921 until late 1929. But by late October, the tide turned and the market experienced some of its worst declines in history.

The Dow fell 29% on October 24th, 1929, before falling a further 13% on October 28th and another 12% on October 29th. But it didn’t end there. Markets continued to bleed for years, until 1932, at which point the market had fallen by almost 90%.

This crash kicked off the Great Depression, over which time US GDP fell by over 36%, the unemployment rate hit 25% and many banks failed.

It took until 1954 for the Dow Jones to recover back to its pre-1929 crash.

So, it wasn’t awesome. Many investors were wiped out completely, and even those who could afford to hold their losing positions took years, sometimes decades, to get their money back.

Are there similarities between and and now?

Yes. But don’t panic, because the world is also very different than it was back then. The level of protection and globalization in the financial system is far, far different than it was back then.

We’ve experienced the level of government intervention that’s available to ensure that a widespread economic collapse like the Great Depression doesn’t happen again. While we have seen economic crises and bank failures, many steps have been taken by the Fed, the government and other regulators to avoid massive unemployment and widespread corporate bankruptcies.

Even so, we are experiencing some similarities from then to now. We’ve gone through a period of sustained economic growth, where tech companies in particular have seen huge gains in their stock prices.

Like the 20’s when stock market investing became a hobby for many of the general population, we’ve seen the explosion of trading apps like Robinhood making investing easier than ever.

Surprisingly, many stocks back in the 20’s were being bought on margin and with little thought given to the fundamentals of the companies.

Still, there were also a lot of differences too. To start with, the turnaround that caused the initial economic shock was an oversupply of goods with a lack of demand. We’ve been experiencing the opposite problem, with global supply chains grinding to a halt during Covid and not being able to keep up with consumer demand.

The bottom line

Should investors be worried?

The chance of an economic crisis as bad as the Great Depression is probably pretty unlikely, but at some point we will see another economic crash. It’s part of the deal when it comes to investing, and investors should understand that it’s not a matter of if, but when.

With this in mind, investors don’t need to be worried if they are structuring their portfolios in the right way. The number one way to do this is to ensure that they have sufficient diversification.

This doesn’t just mean diversification with a few different stocks, but diversification across asset classes, economic sectors and even geographic regions.

A great example of this diversification is the AI-powered Global Trends Kit from Q.ai. This Kit uses the power of AI to predict the performance of a range of different companies and asset types all across the world, automatically rebalancing this Kit every week based on those predictions.

As well as investing in mainstream assets like stocks and bonds, Global Trends also offers exposure to alternative assets like gold, oil, forex and the VIX.

Download Q.ai today for access to AI-powered investment strategies.

TL;DR

• The financial sector has had it’s rockiest week since 2008, with Silicon Valley Bank and Signature Bank being shut down by the regulators, and many other banks seeing double digits stock price losses
• Amongst all this commotion, new inflation figures were released showing the headline rate has reduced again, down to 6.0% on an annualized basis
• With all this uncertainty around, hedging strategies such as Q.ai’s Portfolio Protection could play an important role for investors
• Top weekly and monthly trades

Subscribe to the Forbes AI newsletter to stay in the loop and get our AI-backed investing insights, latest news and more delivered directly to your inbox every weekend. And download Q.ai today for access to AI-powered investment strategies.

Major events that could affect your portfolio

As last week’s newsletter went out, it was all kicking off in the banking sector. SVB had just gone under, and for many startups, their founders and employees, it was a tense weekend waiting to see what the financial implications would look like.

In the end it was as good of a result as could have been hoped for, with the regulators guaranteeing all deposits and ensuring companies had access to their cash practically immediately.

But, the financial sector wobbles didn’t end there. Crypto-focused Signature Bank was also closed down by the regulator on Sunday night, and many other regional banks saw their stocks plummet at Monday’s market open.

Since then, it’s been an incredibly volatile week, and it’s not just US banks that have been in the firing line.

Fresh concerns have been raised around Credit Suisse, as their biggest individual shareholder, the Saudi National Bank, announced that they wouldn’t be providing any further cash to the Swiss bank. The stock has seesawed all week, dropping substantially on this announcement, before gaining the next day on news of a $54 billion lifeline from the Swiss National Bank.

While all these bank problems aren’t directly related, many in the sector are facing similar challenges. Simply put, the Fed’s rapid interest rate hikes after a decade of record low rates is putting a strain on the underpinnings of the financial system, the bond markets.

It’s likely that these liquidity crunches and duration mismatch issues will continue to crop up over the coming months.

—

Not taking the top news billing for a change, the latest Consumer Price Index (CPI) inflation figures came out this week, showing another steady reduction in the annualized rate of price rises.

CPI rose by 0.4% in February, in line with analyst forecasts and bringing the annual rate down to 6.0% from 6.4% in January. Inflation continues to head in the right direction, having now fallen for eight consecutive months.

Even so, it’s not coming down as quickly as many would like. An inflation rate of 6% is still more than double the target rate of 2-3%, which Fed Chairman Jay Powell has said they will “use all tools at their disposal” to get it back down to.

But the landscape has changed substantially since he made those comments. Every increase in rates puts additional pressure on businesses, including banks. So far this has simply been considered a necessary adjustment in order to tackle inflation.

Now that the banking sector is looking on shaky ground, the Fed may be more reluctant to pile on additional pressure.

The next Federal Open Market Committee meeting happens next week, and a 0.25 percentage point rate hike had been widely expected, with the potential for a 0.5 percentage point increase not totally out of the question.

That higher figure is almost certainly off the cards now, and we could even see a surprise respite with no rate hike at all, to allow the financial some time to steady the ship.

This week’s top theme from Q.ai

The overarching theme right now is uncertainty.

Up until last week it’s been uncertainty in the tech sector, with widespread layoffs and cost cuts in what Mark Zuckerberg has labeled ‘The Year of Efficiency.” Now it’s the financial sector, with problems in banking having the potential to touch essentially every other market sector in existence.

In the middle of it all is the Fed’s battle with inflation, and their FOMC rate decisions which can wipe billions of dollars off markets in an instant.

But investors can’t afford to just dump their money in cash and wait it out. To begin with, this week has shown us that cash isn’t always as safe as it seems, and secondly, it loses value in real terms with inflation rates significantly higher than interest on cash deposits.

One of the most effective approaches to this issue is to implement hedging strategies against your investment portfolio. Traditionally this has been a real challenge for retail investors.

Q.ai’s Portfolio Protection uses AI to take the complexity out of the strategy, and allow anyone to add hedging downside protection to their portfolios. Every week our AI analyzes your portfolio’s sensitivity to a range of different types of risk, and then automatically implements hedging strategies to protect against them.

At the same time, it aims to do this while capturing most of the upside. In markets like the one we’re in now, it helps to have AI in your corner.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Anywhere Real Estate (HOUS) – The real estate services company is one of our Top Buys for next week with an A rating in our Technicals factor.

Madrigal Pharmaceuticals (MDGL) – The pharmaceutical company is our Top Short for next week with our AI rating them an F in Quality Value. Earnings per share were -$17.32 in 2022.

Cantaloupe (CTLP) – The digital payments and software company is our Top Buy for next month with an A rating in Growth. Revenue was up 20.6% in 2022.

Carvana (CVNA) – The online car dealer is our Top Short for next month with our AI rating them an F in Quality Value. Earnings per share were -$15.74 in 2022.

Our AI’s Top ETF trades for the next month are unchanged from last week. They are to invest in fintech, cutting edge tech and microchips, and to short bonds. Top Buys are the ARK Fintech Innovation ETF, the ARK Next Generation Internet ETF and the VanEck Semiconductor ETF, and Top Shorts are the iShares 7-10 Year Treasury Bond ETF and the iShares 20+ Year Treasury Bond ETF.

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Yat Siu, chairman of Asia’s largest blockchain investor Animoca Brands, thinks volatile cryptocurrencies are a relatively safe investment as the traditional financial world is rocked by the Credit Suisse turmoil and the failure of a string of U.S. banks.

“If you take a look what happened recently with the whole development with Silicon Valley Bank, which was obviously shocking, and with Credit Suisse being taken over by UBS…actually the narrative was played out quite differently for crypto,” Siu said via a video link on Monday at the Web3 Investment Summit in Hong Kong. “It started to actually bifurcate as some people had predicted, which is that sort of future, let’s say, safety net.”

To be sure, cryptocurrencies are risky investments. The largely unregulated market saw roughly 60% of its value evaporate from its peak in November 2021, according to CoinGecko as of Monday. It comes after a series of corporate disasters, including the bankruptcy of Sam Bankman-Fried’s FTX cryptocurrency exchange.

Siu said the “safety net” turned out to be bitcoin and ether, the two largest cryptocurrencies by market cap, rather than stablecoins, which was perceived safe due to their claims to peg with fiat currencies. Bitcoin reached a nine-month high of about $28,200 on Monday evening Hong Kong time, while ether rose to a seven-month high of almost $1,800, CoinGecko data shows. However, USDC, the second largest stablecoin, briefly lost its U.S. dollar peg in mid-March after its issuer Circle admitted that it had $3.3 billion banked with the now-failed Silicon Valley Bank.

Meanwhile, investors have been dumping Credit Suisse shares after rival UBS agreed to take over the 167-year-old bank for $3 billion on Sunday. The Swiss banking behemoth saw its stock price plummet nearly 60% on Monday. It comes hot on the heels of the collapse of crypto-friendly U.S. banks Silvergate Bank and Signature Bank, as well as Silicon Valley Bank, a major lender to startups and venture capital firms.

“In light of that, crypto and specifically bitcoin and ether become attractive alternative ways to store value without those particular traditional banking risks,” said Siu in a written response to Forbes. “These cryptocurrencies have made notable gains just as the banking crisis rose to prominence. It’s not a coincidence. I think what we’re seeing now is a flight of regular money to some cryptocurrencies.”

Even though Hong Kong-based Animoca was not “directly impacted” by the banking crisis, some of the more than 380 companies in its investment portfolio “would be affected,” said Siu. The Animoca cofounder said the deposits of those companies are safe and that “the problem is not critical.” The company has previously informed its investors that it hasn’t banked with Silvergate or Silicon Valley Bank.

Animoca, which counts Singaporean sovereign wealth fund Temasek, Sequoia Capital and others as its investors, has been hit by the ongoing crypto winter. Most of the crypto tokens of its blockchain games, including flagship title the Sandbox, have nosedived more than 90% from its peak during the crypto boom in 2021.

On March 22 the Federal Reserve will announce it update Fed Funds target. Markets suspect a 0.25 percentage point rise as most likely, with a slightly smaller chance of holding rates steady. However, this Fed meeting is relatively uncertain when compared to most in recent years.

The inflation picture has deteriorated since the Fed’s last meeting, but banking issues may dominate. There is still concern that inflation is well above the Fed’s target and not falling fast enough. However, the banking crisis adds complexity to the Fed’s analysis. It doesn’t allow the Fed to deal with inflation in isolation any longer.

Markets believe that if a hike does come in March it could be the last, as recession fears may then force the Fed’s hand in cutting rates. That’s a new perspective. Previously, markets saw a few more hikes into the summer. However, it’s less probable the Fed will forecast a recession so directly, and may remain more focused on the inflation fight until economic evidence of a recession emerges. It recent discrepancies between the Fed and markets in forecasting rates, the Fed has normally prevailed. However, a recession might change that.

Banking Crisis

The banking crisis complicates the picture further. Silicon Valley Bank, Signature Bank and Silvergate Bank have all failed, and First Republic and Credit Suisse required support. Market confidence in the banking sector remains relatively low and on March 19 the Fed announced coordinated international liquidity, which acknowledged “strains” in global funding markets. That complements domestic support for banks announced a week previously on March 12. Global banking issues will likely evolve even over the remaining hours until the Fed meets.

On the one hand, the Fed’s provision of liquidity to ease risks to banks domestically and internationally has offset some of the Fed’s recent work in shrinking its balance sheet via quantitative tightening. So regardless of where rates move, arguably monetary policy, when considered holistically, is now materially looser than it was at the last meeting.

Also, the Fed’s March rate move may signal the wealth of private information it has on the banking sector. Raising rates would normally interpreted negatively, all else equal. Yet, it may also signal some degree of confidence from the Fed that the banking crisis may not worsen from here. If it signals that the Fed is perhaps less concerned about the banking crisis, then a rate hike may, ironically, be considered good news.

Holding rates steady would be welcomed by markets, but also begs the question of what additional banking data the Fed is seeing that necessitates such a change in policy from Fed Chair Powell hinting at a large 0.5 percentage point hike in rates not even two weeks ago, before major banking issues surfaced. As such looser policy may be viewed more as a signal that the risks to the banking sector are not over.

Economic Projections

With the March rate announcement, the Fed will also release rate projections for 2023 and beyond. These will be examined to see how the Fed’s assessment has changed from the most recent release of these forecasts last December. Again earlier this month, further hikes seemed likely, and the Fed may maintain this position, but markets now see a clear chance of rate cuts in 2023. That’s something prior comments from Fed officials was suggested was off the table.

The Fed under Chair Jerome Powell has always sought to emphasize the data dependence of its policy decisions. That’s perhaps no more true than this week, as inflation remains elevated, but risks to the banking sector present clear risks that could change the trajectory of the broader economy. That means the upcoming Fed decision is more uncertain than most recent meetings and markets could move more on the Fed announcement than is typical. Markets may also look past the actual decision on rates to what it signals regarding the Fed’s confidence in U.S. and international banks.

Gold has risen in March, despite the month being the seasonally weakest of the year. Price is likely to run to $2050 in April. The monthly gold price cycle below points to higher prices into June, at least. June then begins a period of seasonal strength that runs through September.

Gold Monthly Cycle

Newmont Mining is poised to outperform into mid-April. Seasonally, this is a favorable time of the year for the stock. Note that the monthly cycle which has been accurate on all four buy signals over the last year is in a positive mode. The share price is likely to rise back to the $55 area in April and higher into September.

Newmont Mining-Daily

Newmont Monthly Cycle