Date: 11/15/2021
Author: Kent Moors, Ph.D.
Rivian Automotive (RIVN), the latest in the line of fledging electric vehicle (EV) manufacturers, began trading on Wednesday of last week. By close on Friday, it had gained almost 30 percent and was sporting a market cap of $127.2 billion.
Let that sink in for a moment. From $0 to over $127 billion in three sessions for a company with a few advance orders but which has yet to produce any actual vehicles and has no revenue stream. Look at this another way. Rivian is now the second largest EV manufacturer in the US after Tesla (TSLA) but is also the largest US-listed company with no sales. Both were reached before RIVN had completed its second day of trading.
The company’s IPO was much anticipated, as much for the smoke as for the sizzle. This was one of the more hyped placements in recent memory. By Friday, Tesla (TSLA) scion Elon Musk was already throwing some shade.
But the current price of $129.95 a share (at close Friday) seems all out of proportion to the nonexistent balance sheet.
Make no mistake, the EV sector has been on fire and the presumption that we are all moving from gas guzzling relics to modern streamlined electric beauties is (apparently) widely shared. This, despite rising indications that the sector remains overcrowded and tilted toward a non-Western (read Chinese here) expansion.
Rivian may well have an initial market niche. It emphasizes pickup trucks and a smart looking SUV. These are on the higher end of the pricing chart (coming in at an initial stripped down $67,500 and $70,000 respectively). But the fact that these are US-based production (the company is based in Irvine, CA) also helps the Wall Street build up.
The market cap mayhem is reminiscent of that surrounding Coinbase Global (COIN) in its initial trading. COIN reached an intra-day high of $429.54 billion during its first day of trading on April 14. But, whereas, COIN has now settled into a meaningful position in the crypto sector (and a market cap of “only” $89.8 billion at close on Friday), RIVN will remain an image in the eye of the investor for some time.
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Rivian is the latest example of a hyped stock that generates investor interest without any accompanying justification from the bottom line. And it will not provide any such solace for some time to come. The company faces support, distribution, and infrastructure problems it has not yet even begun to address. It also faces an uncertain reception on the demand side.
What the mania does signal is a market that is becoming overvalued across the board, providing less prospect for what investors have expected in the way of significant return. Traditionally, this is the environment in which such hype will resonate.
This has been a victory of IPO form over substance. The only beneficiaries at this point have been the underwriters. The likes of Morgan Stanley, Goldman Sachs, and JP Morgan Chase, along with almost 20 other smaller bank players, pocketed over $173 million in fees for the largest US exchange placement since 2014.
Meanwhile, the average American investor is looking at a stock that will not have any sort of sustainable value for some time. Even then, that assumes all goes as the company hopes.
When there are fewer genuine avenues for a better than aggregate market average return, one that can withstand more pervasive downward pressures, the “new kid” gets the attention. There is little prospect for Rivian to maintain its lofty market cap in the face of no critical mass on the sales side.
Reaction to such hype is also another indicator of a pending market contraction. As subscribers to my Sigma Trader and PRISM Profits services well know, the signals have been rising for a while.
I regularly track interest rates, crude oil prices, bitcoin/crypto currency reserves, and exchange traded fund/exchange traded note (ETF/ETN) flow rates. I have called these my “four horsemen,” indicators of an impending market slide and have also noted that these yardsticks assess underling market currents, rather than the performance of any particular market segment or sector. The current climate is one in which intensifying inflationary pressures are dovetailing into prospects for a market contraction.
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In the Sigma and PRISM weekly portfolio reviews released on Friday, I reported the following:
The broader market performances this week effectively put to rest any suggestion that inflationary pressures are not surging. They are now the chief concern in addressing where the markets are likely to move. Despite a nice pop today, all three main indices will be ending the week down. As I write this a bit more than an hour before close, the Dow, S&P, and Nasdaq will post losses in the current rolling week daily average (adding the most recent closing value, deleting the earliest) of 1.04, 0.55. and 0.93 percent, respectively.
As the week progressed, more angst was expressed on the inflation front, contributing to other factors weighing on the markets. Curiously, however, earlier worries about stagflation – where economic growth rates remain subdued while both unemployment and inflation increase – seem less pronounced.
The decline in stagflation worries is the result of a nice bounce in new employment (with a corresponding noticeable reduction in first time unemployment applications) and what may be an historically high rebound in consumer sales. With both economic growth and unemployment signaling more positive news, inflation is (at least for the moment) the sole obstacle.
It is important to note that the two main indicators of inflation are both moving up. On the other hand, these do not have the same policy implications. One is the broadly used (and reported upon) Consumer Price Index (CPI). The other is the Personal Consumption Expenditures price index (PCE), the Fed’s preferred measure of inflation. The CPI is released by the Bureau of Labor Statistics, while the PCE is provided by the Bureau of Economic Analysis.
The CPI gets more press since it is used to adjust social security payments and also is the reference rate for some financial contracts. The Fed, however, states its goal for inflation in terms of the PCE. And that means the PCE has the greater impact on determining Fed interest rate moves.
These track similar trends but are not identical. The CPI measures the weighted pricing average of a basket of consumer goods and services, including transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. CPI takes prices from household surveys but covers only urban households and then only out-of-pocket expenditures.
The PCE, on the other hand, uses data from the Gross Domestic Product report and from suppliers. In addition, the PCE measures goods and services bought by all U.S. households and nonprofits. That means it includes households not covered by the CPI and also considers third party payments (for example, employee medical insurance, Medicare, Medicaid), also not included in CPI calculations.
In addition, the core PCE figures (a primary focus of Fed interest) does not include the volatile energy and food categories. The PCE further allows a revision in how the underlying basket is weighted. It can revise the base for measurement to reflect as consumers exchange some goods for others in attempts to offset price increases and to do so in more near-time ways. The CPI cannot and is limited to a base five-years in length.
Therefore, while similar, the two standards for measurement are not identical. In general, the CPI tends to report somewhat higher inflation. Since 2000, prices as measured by the CPI have risen by 39 percent, while those measured by the PCE have risen by 31 percent, leading to differing average annual inflation rates of 2.4 and 1.9 percent. In this century, then, CPI inflation has run about half a percentage point higher than PCE inflation. When calculated from 1960 the difference is almost the same, 3.9 percent for the CPI and 3.4 percent for the PCE. Since 2008, however, the difference has been smaller, 1.7 percent and 1.4 percent.
Nonetheless, the bottom line these days, using either CPI or PCE, is the same. The rate of inflation is now higher than at any point in the last three decades (since May 1991). Much consternation is seen in reported analyst readings that attempt to identify changes over short periods of time. Month-to-month changes in inflation figures comprise the fodder for headlines.
Yet such month-on-month figures need to be viewed carefully. Because they can moderate significantly, those making policy prefer to use an average view over a longer period of time. The PCE can be revised in more ways than CPI, which is one of the main reasons it is preferred by the Fed.
And here, three of my four horsemen point toward a convergence of inflation and a market correction that may initially reflect these same inflationary pressures.
First, interest rates, the main barometer of inflationary sentiment continue to rise. The bellwether 10 year note yield ends today at 1.577 percent, a result accelerating 14.5 basis points (bps) over the past three trading sessions. That translates into a hefty 10.13 percent rise over the three-session period in the current rolling week daily average.
Second, crude oil prices are following suit. While the two main benchmarks have come in at a weekly loss, both West Teas Intermediate (WTI) and Brent remain above $80 a barrel in territory that is already showing some signs of beginning to effect energy-dependent sectors of the market in ways parallel to the impact of inflationary pressures.
Third, bitcoin/crypto currency reserves are on a tear. Despite posting declines for the day and week, all four of the indices I follow are strongly up for the month and up by double digits for the quarter. I must wait a bit for more formal figures but estimates now suggest almost three-quarters of the crypto rise is a result of using the coins as reserves against market fluctuations. This is both a hedge against market contraction and against inflation.
The final horseman – ETF/ETN flow rates – shows a continued accretion. The rate of accumulation in exchange/traded funds and exchange traded notes is an anecdotal move to “beat the market” by playing a range of stocks (or financial notes based on those stocks) with one investment. That may also signal parallel moves to offset both inflation and a pending market contraction, but it remains too early to make that conclusion from current data.
In such an environment, hype like that surrounding Rivian is simply adding another piece of kindling to the fire.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
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