Apple and Amazon missed earnings last week due to supply chain and labor issues. The overwhelming response was to buy the dip because Wall Street believed the issues are temporary. We believe the supply chain issues are temporary too. But how long is considered temporary? It seems that no one cares because everyone is flush with money!
In our last blog we pointed out the notable divergences in the market. The divergence has been building since February 2021. The divergence can last longer than one’s imagination as long as the liquidity is ample in the system to support the high valuation. This really drives home the point that the stock market can be detached from reality as long as the liquidity is sloshing around.
All three indices have made an all-time high last week. This officially declares that the melt-up has begun. It is a blue sky until Q1 2022.
Last week Lucid Group, a pure EV play broke out its 8-month correction trading range because it delivered Lucid Air limited edition vehicles as promised earlier. The stock price at 36.99 is still well below its all-time high at 64.86. We checked out the company background and a lot of youtube videos on the line of Lucid Air EVs. We are very impressed with the company and the new cars. We will place an order to buy a Lucid Air car. Naturally we will also open a new position in LCID. We didn’t own TSLA in the last few years and only traded TSLA recently. Even though TSLA will go a lot higher in the future, but the law of large number ($1 trillion company) will keep the rate of change relatively contained. LCID is just at the beginning at roughly $60 billion market cap. It is relatively easier to go from $60 billion to $300 billion.
GWH is another climate change play. GWH makes flow battery that can be used at utility scale. There is an arms race in battery technology to achieve zero CO2. Renewable energy relies on battery technology to replace fossil fuel. Without battery technology, renewable energy is not helpful during the time when the sun is not out and the wind is not blowing.
GWH has major institutional support. SoftBank owns more than 23% of GWH and is the biggest share holder. SoftBank Energy is a major renewable energy player in the US and has signed agreement with GWH to produce Gigawatt hour systems. GWH finished the SPAC merger recently. The stock tripled on its first trading. Last Friday it achieved the highest ever weekly close at 18.00. That’s a lot of strength considering how it flashed up to 28.92 in a jiffy and dipped down to 14.12 in 8 trading days. Absent of a market crash, this 14.12 low should hold and it should grind slowly higher to re-take 28.92 pretty soon as the market is in another leg of melt up.
WEJO merger is happening on November 17th assuming the VOSO share holders vote for the merger on November 16th. We have talked about connected vehicle data company WEJO in the past and we are currently long VOSO shares. Most likely WEJO shares will jump because the SPAC negotiated a real good deal with WEJO when the SPAC market was crashing earlier this year.
We are going to trade more heavily on the long side with LCID and GWH tickers because the melt-up has begun.
We are still holding PLTR as one of our big long positions.
Back to our earlier question. How long is considered temporary in regards to the issues with supply chain and inflation? We believe that the major concern is labor shortage and wage inflation. Wage inflation is very stubborn. Once a worker gets a higher pay, it is almost impossible to take it back and expect the same productivity. Higher wages will put pressure on margins for a while until the companies figure out how to deal with it. The companies can either pass the higher wage cost to consumers or eat it. Once the consumers are maxed out on money, the companies will lose power to pass the higher wages to consumers, therefore a period of slow down will occur. The consumers are in good shape right now due to the unprecedented fiscal polices, but money will soon run dry and the Fed will start to reverse QE at the same time. That’s a not combo and it will cause slow down. That is one of the main reasons that we call a correction in Q1 2022.
Some in Wall Street say this higher wage is a structural problem that will lead to a major market correction. We disagree. We believe the labor shortage and higher wage will force companies to innovate. Those who can’t innovate will lose the race. Those who are in the right course of innovation will win BIG. There are five major innovation platforms (energy storage, Artificial Intelligence, Genomic Sequencing, Robotics, BlockChain) happening now. There has never been a time in history when we have so many innovations multiplying at the same time. Innovation by nature is deflationary. We will not face hyper inflation like what happened in the 1970’s.