| Nov 30, 2021 Powell-Omicron Double Whammy Sinks Stocks Hi Savio, It was a bloodbath on Wall Street today, as stocks dropped sharply thanks to both renewed Omicron variant concerns and surprisingly hawkish commentary from Fed Chair Jerome Powell. Overnight, stock market futures were trending higher until a Financial Times article was released that included an exclusive and bearish interview with the CEO of Moderna (MRNA). He basically said that due to the number of spike protein mutations (32), there is no world wherein current vaccines work super effectively against the Omicron variant. Because he is the CEO of a company at the epicenter of creating Covid-19 vaccines – and a person who likely knows more about this stuff than nearly anyone else on the planet – stock market futures immediately tanked after the report hit the tape. This morning, stocks opened sharply lower, but trading action was bifurcated. Cyclical and value stocks – those with the most to lose if the Omicron situation gets much worse – dropped big. But technology and growth stocks – those that are relatively immune to Omicron spread – actually rose in early trading. Also helping those stocks in early trading was a big plunge in the 10-year Treasury yield, which dropped to 1.42% around 10:30am EST. Then the next big headwind arrived: Jerome Powell. Powell took the stage in a Senate hearing this morning, and in his opening remarks, the Fed Chair sounded as hawkish as he has ever sounded. He said that: 1) It is appropriate to consider ending the taper of asset purchases a few months sooner than originally planned; 2) It is time to retire the word “transitory” when talking about inflation; 3) Inflation has spread more broadly across the economy recently; 4) The risk of higher and persistent inflation has increased; 5) Recent data suggests that the economy is very strong; and 6) The Fed will use the tools at its disposal to stop high inflation from being entrenched into the economy. It was a surprisingly hawkish statement from a normally dovish Fed Chair. As Powell was delivering those remarks, Treasury yields soared and stocks sank. What was a moderate sell-off in the Dow and S&P 500, turned into a steep sell-off, and what was positive early trading in the Nasdaq turned into a huge drop. By midday trading, everything was deep in the red. Technology. Semiconductors. Consumer cyclicals. Discretionary. Financials. Insurance. Utilities. Energy. Industrials. Real Estate. Large-cap. Small-cap. Value. Growth. Every sector and every type of stock traded down. The big fear here is that the Fed will shoot behind the duck. Yes, the economy is very strong right now with elevated prices. But consumer confidence is slipping, multiple CEOs have commented on easing supply chain bottlenecks, and the Omicron variant will likely slow economic activity some in the coming months. Therefore, the U.S. economy will likely weaken moderately over the next few months, while inflation pressures will subdue. But if Powell and company hike rates or tighten monetary policy ahead of that – in response to the current temporary environment – then the economy will be hit doubly hard in early 2022 by a natural slowdown and tighter monetary conditions. You’ll have slower earnings growth, which will result in lower earnings, and you’ll have higher yields, which will result in lower multiples. Lower earnings plus lower multiples equal lower stock prices. That would be a worst-case outcome here, and with Powell’s comments this morning, the likelihood of that worst-cast outcome increased. But only slightly… The reality is that Powell’s remarks are just that: remarks. They aren’t action. Actions speak louder than words, and this is a Fed Chair whose three-year history includes a multitude of actions that paint a picture of the most predictably dovish Fed Chair arguably ever. They also paint a picture of a Fed Chair who follows the data above all else. We remain confident that if that data starts to slow – i.e., consumer spending starts to stall thanks to the Omicron variant and inflation pressures start to subside – Powell will stay on the sidelines with an ultra-accommodative monetary policy. We believe that is exactly what will happen. Therefore, our “base case” outlook is as follows: Omicron will spread rapidly over the next few months amid the busiest travel time of the year, causing a spat of sporadic social distancing and travel restriction measures, the sum of which will cause global economic activity to slow somewhat and consumer spending to wane. In the face of slowing economic activity and with bottlenecks improving, the global supply-demand picture will rebalance. Inflation pressures will subside. Inflation rates will return to the Fed’s 2% target levels by mid-2022. Amid all this, the Fed will taper its asset purchasing program. Upon conclusion of that, they’ll reassess economic conditions, see slowing growth and falling inflation, and will decide to do nothing. The result will be zero rate hikes in 2022. Yields will stay for lower for longer. If things do play out like that, then secular growth stocks – the stocks that we’re invested in that are particularly rate-sensitive and can leverage secular growth drivers to power healthy revenue and earnings growth even in a slow economy – will be the big winners on Wall Street. That’s why we’re confident in buying today’s weakness in our stocks, because we believe they’ll be the biggest winners in 2022. And, even if reality diverges from our “base case” outlook, we take confidence in knowing that our target companies are in the early stages of creating novel technologies, services, and business models that will change the world in the 2020s – and ultimately score us shareholders huge returns. During times of turbulence, you have to see the forest through the trees. Regardless of what happens with Covid-19 or Powell in 2022, electric vehicles will continue to takeover the auto market, clean energies will continue to transform our energy grid, self-driving cars will continue to make progress towards becoming a ubiquity, space companies will continue to colonize and commercialize the final frontier, the metaverse will continue to morph into the next evolution of the internet, and the blockchain will continue to rewrite the rules of finance. Keep your eyes on the big picture. Don’t fret. You’re invested in the future, and nothing about that future changed today. On that note, let’s dive into today’s Daily Notes on our portfolio: - Matterport (MTTR) gains a new bullish rating and launches a new tool that will benefit the Architecture, Engineering, and Construction (AEC) industry. Wedbush just boosted its price target for Matterport to $38 from $30. The firm believes the company is in its very early stages, despite its rapid recent growth. It expects Matterport to make waves and continue to effectively convert customers into the future, building out a massive customer base. The new tools drastically improve workflows for AEC companies by enabling Matterport digital twins to be exported to an easy-to-use BIM file. Matterport also announced a new plugin for popular AEC software platform Autodesk that will further enhance these companies' digitization processes. By enhancing their current workflow with Matterport, companies are reducing costs by up to 70%. It is this combination of cost-saving benefits and metaverse potential that gets us so excited about Matterport stock. We’re very bullish here, and would be buyers on any big dips.
- Desktop Metal (DM) wins a preliminary injunction in a patent infringement suit. SprintRay Europe will be banned in Germany from interacting in any way (selling, using, or keeping) any products deemed to infringe on Desktop Metal's patent. This is nice news for Desktop Metal and its IP, and it broadly underscores just how far-reaching and powerful Desktop Metal’s intellectual property (IP) is at the current moment. Recall: Desktop Metal’s growth strategy is built on the back of developing and securing strong IP, and then monetizing that IP indefinitely into the future as the additive manufacturing revolution gets underway. This is a winning strategy, and near-term weakness in Desktop Metal stock will turn into long-term strength.
- Zai Lab (ZLAB) reports positive results for its late-stage ovarian cancer treatment. Data from the company's Phase 3 Zeluja trial showed that the treatment had a solid safety profile and effectiveness.
- EHang's (EH) demonstration flight in Indonesia was a success. The company flew its EHang 216 aerial vehicle in Indonesia's capital, Bali, in a five-minute autonomous flight. The unmanned flight demo went over smoothly and showcased EHang's future potential for local Indonesian partners and global partners alike. This is a very positive development for a company that has been stuck in neutral for months now.
Have a good evening. I will talk to you again tomorrow. Sincerely, 
Luke Lango
Editor, Early Stage Investor
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