Market Watch Ep.12: Coinbase debut & UK Housing Market Crash?

Welcome to the Market Watch podcast by Amplify Live, where you can access the latest market insights with me, Anthony Cheung, the Head of Market Analysis, and joined by our Head of Trading, Piers Curran, getting you up to speed on what mattered in markets this week.

Okay, it is Friday the 16th of April and it's the latest episode in the Market Watch series, episode 12, and we've decided to give Piers a day off. But fear not, I am joined by a familiar face if you follow the Amplify Trading YouTube channel, Eddie Donmez. How's it going, Eddie?

Hi, Anthony. How's it going? Glad to be stepping in for the boss that is Piers Curran, but he's slacking off on holiday, so happy to be here.

Great stuff. And I hear it's been a busy week for you, you and the team.

Yeah, definitely. So my role at Amplify is kind of the other side of the business, so the dark side, compared to Anthony's Amplify Live. So I'm the head of the Amplify Me division of Amplify, which is essentially the technology that drives all of the training behind investment banks. So some of the programs that we run and also training students in various different front office roles in finance. So this week Uh, we've been super busy, uh, running things like quantitative trading simulations, market making simulations, and, uh, IPO simulations with Citigroup. And last week we were also working with Credit Suisse on their, on their spring week. So we had a lot of fun doing that.

Okay, so I heard IPO simulation. So with that, we've got to talk about, of course, probably one of the biggest headline stories of the week, which is of course Coinbase One of the first things I wanted to just clear up, Eddie, and I hope you could explain it in a really concise way if possible, is this confusion about, is this an IPO or is this a private listing? What's the difference here?

Yeah. It was actually a direct listing, contrary to the financial media. This is essentially where employees and investors sell their existing stock to the public. Then in an IPO, they're essentially issuing shares for the first time. Another thing, another difference between an IPO and a direct listing is that there's no underwriters. None of the investment banks are involved in that underwriting process. That's most likely why we saw so much volatility on the first day of trading with Coinbase, because essentially the market makers set the price, and they let it trade and passed it on to the secondary market. So he saw a massive ramp up to a peak of, I think, $430, and then all the way back down to $320 for Coinbase.

Yeah, it was so interesting. I was reading some stories at the time because obviously there's a new type of market participant now, I think, in 2021 with these more— the younger demographic and the access to trade these types of things. And I saw a stat that day traders purchased and net $57 million on its debut. The total accounted for 7% of the $822 million individual investors spent on all US stocks and ETFs on that day. The stories were there's a lot of, I think, new entrants to the market, let's say, who just all piled in the first 10 minutes and obviously when it turned. But I guess this is investing. There's intraday move, but then there's the the overall investment horizon. With that, I did see that Cathie Wood's been very active over the last 2 days. What's going on there? Because I know she's also a trending topic of late.

Yeah. Cathie Wood's obviously famous, particularly last year, for just the outstanding performance of some of her innovation ETFs, new internet style, genomics, for example. But obviously a big determinant of that demand for the ETF and the performance was Tesla, of course, a big holding of hers. That's one name she actually sold over the last week in quite a sizable chunk to buy some Coinbase. Cathie Wood's top holdings, which are quite interesting as we've had bank earnings come out as well, are digital wallets. Really, she's a big investor of innovation and the secular trends just like the internet was for an outlook of 5, 10, 15 years. She actually bought some Coinbase, selling a bit of her Tesla, which was really interesting. She's a big believer of this technology and she's a big advocate of Bitcoin as well. I think she's got a price target of around— or an addition to the price of Bitcoin that is around $60,000 today, with another $500,000 incremental onto that price. Her thesis, in very basic terms, is really a story of institutional adoption. I can talk about what this means for Coinbase, but in terms of what we've seen, really with Tesla allocating a portion of their treasury assets to Bitcoin, Michael Saylor, of course, made that particularly famous as well over the last year, using that as a hedge against monetary debasement and inflation. In addition to that Treasury allocation of 5% would add $500,000 to that Bitcoin price, which of course is a big driver of Coinbase. That sounds pretty tasty, but let's not forget she was pretty much spot on with her Tesla price target, which again, drew lots of eyeballs and lots of criticism a few years ago when she set that out.

So we shouldn't get particularly worried then about the coming out of Tesla. This is only what, a partial position switch to free up cash?

Yeah. So unlike any other portfolio manager, I think, she actually sells the boring companies, the Amazons, the Apples, She's very opportunistic, kind of dip buyer in some of those really interesting names that she has a big belief in the secular trend. Things like genomics and software as a service. She'll actually sell some of her biggest holdings that will basically grow about 8 to 10% a year, that boring return, and allocate some to those kind of companies and sectors. Secular trends that she thinks will 5x or 10x from here.

Just to wrap up this point, you mentioned briefly about some of the more traditional banks and how they've had their— well, we've seen corporate earnings obviously come out this week kicking off with some of the big banks. Just briefly, we had pretty spectacular numbers on one side, but then perhaps beneath the bonnet, there's a few signs of struggle elsewhere. Can you explain that a little bit about how these banks have performed so far?

Yeah. Last year in March, of course, the really dark days of March, banks really set aside something that's called credit provisions. This is basically a pot of money they put aside if things go bad, and things being loans. If loans go sour, individuals, so consumers, if commercial entities kind of default on those loans, that's a pot of money that they put aside to basically buffer for that. And this is really to do with expected losses, so kind of modeling of this is a percentage of the loan book that we think will go bad or, or be spoiled by COVID. And then there's obviously unexpected losses as well that can arise. But what we saw from the, the big banks really blowout figures. But I think if you look under the bonnet, there are some interesting things to just take note of. I think the big headline figures were that there was a release of credit provisions, particularly by those names like JPMorgan, that were basically overcapitalized. We had increased fiscal and monetary easing, things like the CARES Act and lots of relief on that side. And there's a lot of forbearance going on. So they were just releasing some of those credit reserves. But I think the key thing to take note of is that loan demand does remain challenged. Banks are competing for those loans. And if you actually take out that credit provision, JP Morgan, I think earnings would've been down actually year on year. Interesting to see the traditional banking activity suffering. Then this is interesting when you look at something like Cathie Wood really going all in on things like digital wallets, originating from Square and PayPal, and then making a big bet on cryptocurrency, obviously, but really that is a retail branch in your pocket. This is really what they're betting on. Definitely something to take note of on bank earnings. But on the other side, of course, you've got the investment bank performance, which has been amazing. But with Goldman, JP, for example, it's something you come to expect. They are investment banking powerhouses. Trading volatility has been there. I think JP Morgan's equity trading was up 47%, so they have smashed it out of the park. Of course, it's much of the same story we saw last year. We had the volatility, so trading was up and lots of clients wanting to get in and out of positions. After that uncertainty really in March and April, with deal activity really grinding to a halt because, of course, corporations were holding onto their cash, no one really wanted to do that blockbuster acquisition, the VIX was elevated, so market conditions were extremely bad, to put it lightly. No one wanted to IPO, for example. Then when that uncertainty subsided, there was lots of capital market activity. What that means is companies looking to raise liquidity, so funds through the equity capital markets and debt capital markets. Then there were some dislocations in pricing, so of course M&A activity came back, lots of deals were put on ice. That came soaring back. The investment banks, of course, killing it. Again, it's that traditional banking activity. We really saw that divergence between the JPMorgans and the traditional investment banks versus the retail-specific Wells, for example.

From a trading perspective, given that's where I'm spending a lot of my time with the guys, and certainly they're looking intraday, it's so interesting when you're when you see these bank earnings come out and you see these blowout numbers and the stock price falls. I always think that earnings are a tricky news catalyst to trade often, unless you have that underlying awareness of all the minute detail of how these different banks, these institutions differ slightly, and also context. I was looking at the beginning of the week, financials up 15% as a sector for Q1. This is already priced in, these numbers.

If you remember on the YouTube channel, and if you haven't watched that video, go and check it out, I was very bullish on the banks. But I think it's been such a great ride over the last 6 months. I think JP is up 68%. Really, it was since the November election where that uncertainty subsided. Of course, we had that inflationary fears, and of course, that's a steepening of the yield curve. Positive generally for net interest margins and things like that. And of course, the big driver, of course, vaccines, right? So, um, that's where we saw that bump. But I think it is a bit of profit taking, uh, from there, um, running into earnings.

Okay, cool. Well, look, let's, uh, let's talk about another subject. So it's a little bit off markets, but it's something that obviously strikes a chord with you and I, Eddie, because We are two of those people that people generally read about in the news at the moment that have made an exodus away from a major city. And we've decided, we've opted to move out of London. And yeah, we're going to talk about the UK housing market because I think people generally have always had a great interest in this. And I think that's probably born out of the fact that it's one of the biggest commitments that someone makes in their life. Therefore, of course, it's going to resonate from an emotional perspective, given the risks that are surrounding with it. This week we've had UK house prices hit record highs again. The average price of a UK home has jumped to a record £254,000. London, it's now north of £505,000. But as ever, the media love to call a crash. And that is still at play a little bit because people talking about, well, are we going to have a housing market wake up with a bit of a hangover when the extension on the stamp holiday ends? But what's your take on the situation as it stands at the moment, Eddie?

Yeah. Let's flash back all the way to March 2020 again when COVID hit and the world was looking so dark and uncertain, you would've, pardon the pun, bet your house that property prices would've been lower a year on from that. But flash forward to today and the UK housing market is hot. Why have they increased so much during this pandemic? Surely it's harder to buy houses and there's a lot of uncertainty, people being laid off, and there's a number of different factors at work here. I think the biggest driver for me is low rates. We've had global central banks as a result of COVID but really a trend really since the financial crisis, running to slash rates. This keeps financial conditions easy. Mortgage rates have really hit all-time lows. I think you can get a 30-year mortgage as low as 3%, I've seen. If you flash back, obviously, to the 2000s, that's 9%. If you flash back even further to the 90s, that goes into the double-digit teens. It's extremely cheap to borrow. That's, of course, going to be a big driver. Of course, we've also seen government policy as well have a big impact on this. In early March 2021, but of course earlier than that as well, the Chancellor, of course, Rishi, extended the stamp duty holiday. And of course, we've got tons of buyers rushing to complete their transactions before that deadline. And it's not a small saving. It can be up to £15,000 on a single transaction to get that saving. So of course, that's going to really kick people into action to get that completed. There's been huge demand, of course. Number of prospective buyers increased 17% in wanted by, uh, 2021. That's via Hamptons, uh, and 67% of houses on the market in the UK are currently sold, uh, subject to, uh, conditions, and that's via Rightmove. So huge demand and limited supply, really. Um, but I think another really kind of controversial trend— obviously we were based in London, uh, right by the Bank of England— it's been pretty much dead. We've seen a bit more activity kind of liven up more recently. Of course, I miss you. I miss meetings in person. But I think lots of city workers have really rushed to the suburbs. Running trainings and just working 8, 10, sometimes 12 hours a day in a single box room in a central London apartment that you're renting for £2,000 a month doesn't really sound that attractive. And a spare bedroom that you can have a home office, home gym, a nice garden, you know, just outside of London. You can make it in 30 minutes to an hour. That sounds pretty good to most city workers right now, especially if you only have to be in, let's say, once a week, twice a week. Will that change as we see kind of London open up? You know, of course we're big lovers of London. I think most people are. It hasn't been the same since the kind of COVID period. But as kind of the vaccines roll out and lots of people are vaccinated, do businesses go back to kind of working, you know, in the office? Is that— is this kind of trend going to be reversed? I don't think so. I think we're going to settle at a happy medium of kind of hybrid work, where we're kind of in the office for, you know, team building and meetings and strategy, which I think is super effective. But for those kind of head down, get on with your work, I think you can't get much better than being at home, no commute, and just cracking on with it. We're definitely going to be in a period of transition, and it's definitely going to be interesting to follow. But just one more point, will we see a crash after this kind of stamp duty holiday? Will people that are rushing to complete these transactions and buy these suburban houses with gardens, will they have overpaid? Right. With so much competition for those listings, you know, in 6 months' time when the world is a little bit more normal than we are right now, you know, will you be looking back thinking, did I overpay for that house? You know, we'll see. But I think there will be a cooling off of the housing market, of course, after that stamp duty. But I think the demand will persist at least at a baseline level for the next kind of 12 months, I would say.

Yeah. And just to wrap that point, I must say, I know Rishi's a big fan, listener of the podcast, and I've just got to just send my thanks to him and the rest of the team because I remember I actually pulled the trigger early. It's one of my bigger trades, I'd say, because I actually put my house on the market in March 2020. After the pandemic, right when the market hit its low on the 23rd. I'd already committed, I think, mentally to moving anyway. So I was already kind of like, right, I'm just going to commute in. That's fine. I'll come in 5 days a week and commute. But then obviously that news came out. I was already down the path of going through contracts and stuff like that when that news came out. So yeah, thanks, Rishi.

So you almost timed the market better than Jay Powell. On that.

Well, yeah, I didn't get the S&P, or even better, the Russell, but I did get the housing market. But let's not count our chickens yet, as you say. But yeah, I do think the point's very interesting though, in terms of—

I agree.

I definitely think that— I think we were discussing this earlier in the week, that if this was like an isolated incident that only affected England, I don't think you'd get that commitment from a corporate level for— to force change in the way of which employees and their working routines and the way that they function in the structure. So I think the fact that this is global and it's, and it's persisted— if you remember when we were back at the beginning, do you remember people in April, May were talking about— and then we got to the summer and things did feel normal, if you remember last summer, and it was like, oh, that wasn't, it wasn't so bad. And then actually to get to where we were, do you remember in Christmas and the new year? I mean, you never could have foreseen that in the summer. Um, it seems ridiculous now to think that, you know, of course that was going to happen. But, and so I do think the prolonged nature of this has created— it's been long enough to create that change, I think, in the way in which people, from a behavioral pattern, and employers will have to, um, now react to— it's almost like the power shift in a way to the employee, to a certain respect, where they want— I saw in a post that you made about living in this small box studio apartment when you can get value proposition so much better and have a better work-life balance in that respect.

And I think the key point is if the productivity is there and the numbers are there and the performance is there from the worker, you know, who, who are employers to say any different? If we do get a bit of kind of Zoom fatigue and general work-from-home fatigue and, uh, kind of productivity does drop off, then by all means I think employers are going to really kind of crack down on that, and rightly so, right? If you're not producing at home, you should be in the office to kind of to be there and to, to be helped. And I do think, you know, it's such a double-edged sword because I think we know each other, we've known each other for years, you know, we know Willem Peers and the rest of the team. But if you're a new employee being, you know, really joining the workforce then, I think you've really suffered because there's so many things you pick up and those kind of quick questions and quick chit-chat about the job or just general life and that social element as well, I think, is definitely lacking. So if you have been onboarded in that kind of COVID period, I bet you're dying to get back and I think you've probably missed out. But for the kind of seasoned employees that have been with the company for more than 6 months, a year, I think it's been fine.

Cool, all right, well look, let's wrap it up there and thank you, Eddie, for taking some time out to talk to me today. And yeah, if there's any questions at all, feel free to reach out to us. You can email us at info@amphitrading.com. Don't forget out— forget to check out the YouTube channel. Both Eddie and I put out content on a regular basis every day and every week. Um, but yeah, that wraps it up. Episode 12 in the bank, and have a great weekend everyone.

Thanks, um, thanks guys.