Today's Markets: Is it over for Cathie Wood and what is Musk up to?

Is there any way back for Cathie Wood and ARK? The ARK Innovation ETF (ARKK), the flagship fund, is down 60 per cent in the last 12 months and has now underperformed the S&P 500 with dividends since its inception in 2014. Teladoc (0LDR) is the latest to crumble, sliding 40 per cent yesterday on some very weak numbers. It’s now off by 65 per cent this year. Tesla (TSLA), the number one holding, also down big, off 20 per cent in the last month since Elon Musk announced plans to buy Twitter (TWTR)... turns out he has been selling stock amounting to $4bn. More on that below. 

Roku (ROKU) – another roughly 7 per cent holding in ARKK – rallied 8 per cent going into earnings and a further 4 per cent after hours despite soft guidance as revenues beat expectations. Shares, like much of the ARKK holdings, are down 60 per cent this year. Worth noting that out of 36 holdings in the ARKK ETF, Tesla is the only stock with a positive return.

Back in March 2021 I commented on her strategy - “At these moments she (Wood) looks to 'concentrate' portfolios to the 'highest conviction names', so this means selling more liquid stocks (eg Apple) which are participating in innovation but are not ‘pure play’ innovators.” 

Her entire fund has been a case study in correlation and concentration risk and the unwind was obvious for anyone who would care to notice that the party wasn’t going to go on forever. The top seven holdings which account for about half the ARKK fund are totally correlated speculative technology stocks.

I also noted that: “Continually Martingaling like this is surely not an advisable investment strategy, no matter how successful you have been before: past performance and all that…”. (Martingale: a gambling system of continually doubling the stakes in the hope of an eventual win that must yield a net profit). 

I also commented over a year ago on the research relied upon by Wood: “ARK says Tesla will reach $3000 by 2025. That is not even the bull cash ($4,000), whilst the ‘bear’ case implies a mere doubling or more to $1,500. ARK uses a Monte Carlo simulation to get there, which is aptly named since it is basically a case of spinning the wheel and see what number you land on. Actually it’s more like keep spinning until you get the number you want. Investing should not be a game of roulette... If you like this I have a bridge to sell you.” 

Sometimes it’s better to keep quiet. A classic of the genre right here. Oh, and I love this setup… How much wealth has been destroyed in the last 12 months? The crazy bit is that investors don’t seem to mind and ARK Innovation continues to attract capital. Investors have added a net $933.9 million to the ETF this year, including about $224 million in the last month? Why would you do that? Why pay 75bps for exposure to a bunch of stocks you can own yourself 

Musk things... he has been selling, as we thought he might be. Musk sold 3,680,000 shares on Tuesday and 735,000 Wednesday. About $4bn, which is nowhere near enough to get to the $21bn he needs to finance the Twitter deal. And he says there will be no more sales for now. Ok three things. First what he says and what he does are two different things. Two, if he’s not selling more, where’s the cash for Twitter coming from? Three, how can 4.5m shares move a stock as big as Tesla as much as it did? No way does a margin desk feel good about that. What happens if he has to dump 30m to repay the margin loan when it hits $400? Problems for another day maybe... lots think the Twitter deal is a smokescreen to offload a tonne of Tesla stock without a backlash, finding some other reason down the line to walk away. It would not come as a surprise to me if he were more focused on rockets than cars and wanted to get out of Tesla – lots of lawsuits, the tech is just not working and it’s a potential bubble trap of a stock. Last year he faked a Twitter poll to offload lots… fits the pattern of behaviour. Meanwhile Twitter results were rubbish as they always are, though users rose. 

Anyway, back to earnings and some whoppers from Amazon (AMZN) and Apple (APPL). First Apple, which is down 2 per cent in pre-market trading after warning of an $8bn hit from supply chain woes. That’s despite a very positive quarter as revenues rose 9 per cent to $97.3bn. Net profits of $14.4bn driven by the gains in Services where revenues rose 17 per cent to $19.8bn with margins at this division at 72.6 per cent. Revenues for iPhones, iPads Macs and Other Products all rose but profits relied on Services. Some $14.26bn of the $14.4bn profit came from Services... no wonder the earnings call was downbeat. 

Amazon – yikes. The tell was in the UPS numbers a couple of days ago. It is “no longer chasing physical or staffing capacity”. Sounds like a big deal. Shares down 10 per cent in the after-market – incredible move for a stock this large and liquid. Lots of warning signs in the report – operating cash flow down 41 per cent, an almost $20bn outflow in free cash... $10bn in new shares and just 7 per cent revenue growth – not even in line with inflation. AWS growth less than Microsoft (MSFT) and Alphabet (GOOGL) clouds... blame Russia. This is a business no longer able to grow while costs are only rising.

As a certain wise cat explained on Twitter, just because the market’s ‘generals’ get hit it doesn’t mean the market will fall... buybacks matter as earnings get out of the way. Moreover the dollar rampage seems to have finished which will be a good shot in the arm for risk and could mark the start of the next bear market rally. Vix has already led the way – as noted a few days ago, watch the turn in the Vix to lead and then watch the dollar.

Meanwhile, stagflation is here for real. US GDP shrank by 1.4 per cent (annualised), GDP inflation (deflator) is at 8 per cent... so as we have been warning for some time now, it’s clear stagflation.  

Neil Wilson is the Chief Market Analyst at markets.com