The end of the analog world

This blog entry is based on an article from Josef Ajram published in EL MUNDO on September 7th, 2020. I have rarely read an article which explains so much and so clearly about stock market dynamics, Covid impact, expectations and digitalization. Here it comes in a relatively free-style translation from the Spanish into English.

August has graphically captured one of the most relevant stock market principles: never go against the trend. That is what the Nasdaq has shown, reaching 12,000 points, which is all-time highs. Nothing less than a 40% revaluation since in April. How can it be explained that a stock index reaches those heights when the GDP shows negative rates greater than 30%? There are basically two reasons.

First one, the value of money has been greatly reduced by the “mega printing” of banknotes by central banks; anticipating very low interest rates for years, investors with funds are forced to seek alternatives to diversify their savings in securities that they consider safe. Among these, the well-known FAANGs (Facebook, Apple, Amazon, Netflix, Google) have stood out; moreover, given their strong weighting in the Nasdaq they have pushed this indicator to levels impossible to imagine months ago.

The second driving force of this incredible bullish run is not tangible. It is just an expectation. The market considers that we are witnessing a change in the cycle. The entry into the technological era, which we expected in a few years, has been advanced. Investors believe that nothing will ever be the same. They discount something wild: The neighborhood and department stores are over, in favor of Amazon; advertising business is over in favor of Facebook; leisure time is reorganized, with a more “homely” life in favor of Apple and Netflix. The non-digital time is over. We entered the exclusively digital age, in favor of Google. The world as we knew it in February is over, at least according to the Nasdaq. Whether it is so or not, will be seen in time. I think that most of us wish (at least to a certain extend) that the hypothesis is wrong, but the anticipation of scenarios on the equities market has turned out so seldom to be wrong, that it certainly gives us food for thoughts.

Furthermore, the stock markets have a very good memory. They constantly remember past events and have in mind patterns that occur over and over again. That is why may people can earn a living with it.
Another of the developments that has been repeated over time has been the Apple and Tesla splits announced a week ago. This operation consists of dividing the price of a company's share and multiplying the number of titles in the same proportion. In the case of Tesla, on Friday, August 28th it closed at 2,213.4 dollars. Given the 1x5 split, someone who had 50 Tesla shares that day would own 250 shares on Monday (August 31st), the price of which had also been reduced to a fifth, that is, to $ 442.68.

Why would anyone do something like that? Basically, to attract small investors for whom it is unaffordable to pay $2,213 for a share. Although it may seem incredible, the statistics reveal that this maneuver has a very positive impact on the behavior of the price, leaving aside the real valuation of the company. In the case of Tesla there are two published data that are really surprising. The first is that its value in terms of market capitalization exceeds the sum of the following companies: GM + Ford + Fiat Chrysler + Honda + Hyundai + Daimler + Ferrari + BMW + Volkswagen. The other fact is that its capitalization (415,000 million dollars as of September 7th, 2020) is equivalent to the GDP of Portugal.

Does this valuation make sense? Only time will tell, but John Maynard Keynes’ phrase remains valid: "Markets can maintain irrationality longer than you can maintain your solvency." In any case, one should remember that it is not about going against the market trend, but about looking for the optimal moment to take advantage of the said trend.