Market Update: November 18, 2022

Welcome to the Weekly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this week.

 

We’ve had a lot of sideways trading this week with some volatile down days as well as some strong up days. But we are still stuck in a downward trend. Until the market breaks out of the downward trend, there is still a good possibility that any rally is simply a bear market rally.

In the news this week, mayhem grips Twitter as employees resign en masse following an ultimatum from Elon Musk. Holiday shoppers should be greeted this year with stocked shelves and low prices for the 2022 season. And the CEO in charge of the bankruptcy restructuring for crypto exchange FTX calls the mess “unprecedented” after reviewing the financials and balance sheet. This is not an overexaggerated statement considering CEO John Ray oversaw the Enron bankruptcy.

The more we find out about FTX, the crazier the story gets. It turns out that FTX had $8.9 billion in liabilities on their balance sheet including $1.4 billion in leveraged bitcoin, $5.1 billion in borrowed US dollars, and $796 million in Tether stable coin. If you compare this to the liquid assets on the balance sheet, there is a massive difference in value between the liabilities and the assets. According to the balance sheet documented by “visual capitalist,” FTX had liquid assets totaling only $900 million including $200 million dollars in a ledger account and $472 million of Robinhood stock. Not great.

The illiquid portion of the assets is even worse. It includes $500 million of locked Tether USD and $2.2 billion in Serum tokens which turns out is definitely not worth $2.2 billion because Serum only has a market value of $280 million. The rest of the illiquid balance sheet is made up of various other thinly traded cryptocurrencies. Altogether, it looks like this isn’t just a Lehman moment for cryptocurrency, but an Enron moment.

Elsewhere in the market, we’re starting to see green shoots of positive technical trading patterns including growing outperformance of higher risk discretionary stocks relative to low-risk staples. This follows a year of derisking from investors looking to hide from market volatility.

We are also seeing a ramp up in outperformance in small cap stocks which typically bear higher risk themselves, underperforming during volatile time periods and outperforming in bull markets. This follows a dramatic period of small cap selling pressure beginning in 2021.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved November 18, 2022, from FactSet Database.

2.Conte, Niccolo. Visual Capitalist. “Visualized: FTX’s leaked balance sheet.” Published November 15, 2022. Retrieved from https://www.visualcapitalist.com/ftx-leaked-balance-sheet-visualized/

3.FactSet Research Systems. (n.d.). Equal weight consumer discretionary relative to equal weight consumer staples (Interactive Charts). Retrieved November 18, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). S&P 600 relative to S&P 500(Interactive Charts). Retrieved November 18, 2022, from FactSet Database.

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