Time for another Brief. Today’s theme is fantasy vs. reality and how does one tell the difference when looking at market conditions.
It’s also a timely excuse for me to dispense fantasy football advice before people draft this weekend for those who want to skip ahead. 😉
Do Stock Splits Create Value?
Wait, do I really have to say more? OK, spare me the “signaling effect” story. I understand that well. Maybe that’s worth a few percent. It’s not worth 50% or more (80% for Tesla!). That’s stupidity. We are officially in the idiot stage of this market.
Does This Mean We’re Repeating 2000?
You want more again? Fine. Tech stocks are disconnected from all aspects of reality. Why? For starters, retail trading has doubled to 20% of trading vs. 10% ten years ago and 15% last year.
The more retail trading we get, the more disconnected stock prices get from reality. Why so much retail interest? The same reason it happened twenty years ago. Too much monetary stimulus. When the stimulus stops, the stocks will crash. Hard.
And no it wasn’t just Pets.com. Amazon fell 95% after the tech bubble. (I was talked out of buying it at $6 by the Fidelity tech analyst at the time because it “wasn’t going to survive”.) Be careful out there. It’s a dangerous world.
Is the Insuretech Hare Stretching Its Lead?
That depends how savvy it is. Recall, the advantage of the hare is its access to cheap capital. However, to win the race, it has to take advantage of that, umm, advantage.
For example, let’s look at Tesla. The bear case on Tesla the last few years was it would run out of cash. It smartly raised capital earlier in the year when the stock first took off. Post the split this week, it raised another $5B. Crisis averted.
The “confidence game” that created the free capital allowed Tesla to not just survive, but to thrive. Sorry to say to the purists, but there is more to running a business than having the best product or running the trains on time. If you can create a lower cost of capital, you have a powerful weapon. Don’t ignore it.
Verdict: Reality, for now, but highly correlated to bubble conditions remaining in place.
Is the Exxon Arbitrage Still a Safe Trade?
Last year, I wrote that buying Exxon stock and shorting its debt was the safest trade in the market. Since then, that trade would have lost roughly 40% (the stock has gone from $70 to $40 and the debt has risen from 118 to 122) and Exxon got kicked out of the Dow. So, was I living in a fantasy world?
No! Recall the original premise was that you could use the stock dividend to pay the bond coupon and still come out ahead, so you were getting the stock free for 30 years. Those conditions still hold. Just because the stock has gone down for one year, doesn’t mean it will for 30.
Also recall the important disclosure that this trade would only work with certainty in a fantasy world where you had no risk of your bond short being called away and no risk of a margin call for near term price volatility (good thing I brought that up!).
The other risk of course was that Exxon would cut its dividend. That hasn’t happened yet, though the risk has clearly gone up. That said, Exxon has made abundantly clear they will damn the torpedoes to keep paying the dividend.
Verdict: Reality (subject to the risks outlined above and in the original piece).
With kickoff less than a week away, this is probably my last chance to get these out there. Recall, on average, half of last year’s playoff teams don’t make it back.
Therefore, I don’t predict the most obvious teams to make it. I hold myself to the constraint of half the teams being new. Note, this is a little tougher this year with the two extra wild cards.
First, let’s look at over/under totals for the year and where I am out of consensus. The teams where I am most above consensus are the Steelers (13 wins vs. Vegas 9.5), Raiders (10 vs. 7.5), Falcons (11 vs. 7.5), and Seahawks (11 vs. 9). Seattle and Pitt have super easy schedules and I think Atlanta and Vegas will surprise on offense (though less confident in the Falcons).
Those where I am below are the Jets (2 vs. 7), Denver (5 vs. 8), Arizona (4 vs. 7.5), and Carolina (3 vs. 5.5). The one caveat to win total bets in general this year is it assumes a normal season.
A team might end up with several starters out for multiple weeks for Covid quarantine thus pushing them below expectations. You just don’t know which makes deploying real $ this year a very tenuous proposition so let’s put these in the “fantasy” bucket.
As for playoff teams, I have kicked out Houston, Tennessee, New England, Philly, and Minnesota. Note, I have both the Patriots and Bucs just outside the playoffs so Belichick and Brady both suffer from their divorce.
Side note: If you haven’t seen it yet, Belichick is doing Subway commercials!
The extra wild cards resulted in three teams each from the AFC North and NFC West. Those divisions have super easy schedules (the NFC West gets to play both the AFC and NFC East). It also helped the Steelers and Ravens to the two best predicted records in the league.
|1||Steelers 13-3||Saints 12-4|
|2||Chiefs 13-3||Cowboys 12-4|
|3||Colts 10-6||Seahawks 11-5|
|4||Bills 10-6||Packers 10-6|
|5||Ravens 13-3||Falcons 11-5|
|6||Raiders 10-6||Niners 10-6|
|7||Browns 9-7||Rams 10-6|
And, finally, what some of you have been waiting for. How should I handle my fantasy draft? Well, I’m not going to give you players to pick, but I will offer some strategies. If you want the long version from last year, you can find it here.
First, this year is going to be very different from other years because of the COVID uncertainty. It may be like baseball where whole teams have to skip a week or two (think of it like an extra bye week) or maybe only individual players will be out.
This makes depth more valuable than usual. Rather than taking a marginal veteran, get your star RB’s backup in case he gets quarantined. Of course, the risk with that is the backup is exposed to! So maybe what you want is the backup to someone else’s star RB! That also gives you potential trade leverage if they get nervous.
The point is high risk/high reward players in the later rounds have a better risk/reward than normal. Don’t play it safe in the later rounds. Remember the advice from last year…most later round picks end up on waivers anyway. This is the place to swing for the fences.
To that point, you will probably need to use waivers more often this year than normal. Don’t get wedded to your underperforming players. That doesn’t mean give up on everyone who has a bad start, but if a role has clearly changed, move on.
Leonard Fournette is not likely to be the #1 back in Tampa. If you had an early draft and took him, be ready to cut bait if he is only getting 5 carries/game.
Remember, it doesn’t matter if you have the best roster at year end if you don’t make the playoffs. If there are backup RBs who will start for three weeks because the starter has COVID, grab them even if you have to release a “better” player.
A Frank Gore or Lamar Miller type RB who you can start in a pinch but would rather keep on the bench is the equivalent of a 0 WAR baseball player.
If you can get someone who is a “+5 WAR” for three weeks and -5/week the rest of the way, you’ve added 15 points to your team and maybe won an extra week or two. There will always be a replacement level player on the waiver wire if you need one later.
Finally, this is not the year to stack. While there may be years where having Mahomes, Kelce, and Hill can win you a league, this is less likely to be that year. If they can only play 12 or 14 games because the defense has a COVID breakout while other teams play 16, you will not be happy.
So have a good draft, but the truth is the draft is less important this year. You need to be active throughout the year adding new players to manage to evolving circumstances. Keep this in mind when making waiver decisions. If you have a waiver budget, don’t use it all up early on the hot add. You’ll likely need it throughout the year.