What Snowflake's Big IPO Tells Us
The Fed 'juice' just keeps coming... A new uptrend? It looks that way... A self-fulfilling prophecy that works... Mergers aplenty... What Snowflake's big IPO tells us...
We start today with a brief note about more 'Fed juice'...
It just keeps coming...
As we expected heading into the Federal Reserve's latest meeting of the minds this week, Chair Jerome Powell said today during a post-meeting press conference that the central bank plans to keep its low-rate, "easy money" policies in place for the foreseeable future.
The Fed left its rock-bottom benchmark rate range near zero... and Powell said that would be the case until inflation rises consistently and maximum employment is reached. Also of note, the individual projections of Fed governors showed that most expect rates to stay down near zero through 2023.
Check out our free Stansberry NewsWire service for more analysis on the Fed's latest commentary in the coming days. But in short...
As we've said before, artificially low interest rates and a big Fed balance sheet are essentially huge logs of firewood for a "Melt Up" in stocks and the start of a new bull market...
And that's exactly what we're seeing today...
During the sell-off in tech stocks that sandwiched Labor Day, we urged level-headedness and noted the key technical "support" levels that our editors were tracking in key indexes... like the benchmark S&P 500 Index.
Well, those have held up... and we're seeing "rotation" among different sectors of the market. That's a hallmark of an uptrend.
Stansberry NewsWire analyst Mark Putrino noted this in updates on the S&P 500, as well as the communications services and health care sectors yesterday. Based on his indicators, Mark said...
Today could be the first day of a new uptrend...
If anything, as DailyWealth Trader editors Ben Morris and Drew McConnell wrote yesterday, today might mark a great buying opportunity before stocks really take off again. As Ben and Drew began yesterday's issue...
If you believe that the world is going to implode before the end of the year, today's issue is not for you...
If like us, however, you believe that central banks pumping trillions of dollars, euros, yen, and other currencies into the economy will lead to higher asset prices, then you'll want to read on...
Then, they talked about one of the best ways to see price trends – moving averages...
During bull markets, assets tend to spend most of their time above their moving averages. And during bear markets, they spend most of their time below them.
The second thing is the direction of the moving averages themselves. The moving averages are the trends. When they are moving higher or lower, assets often continue to move in the same direction.
The 50-day moving average (50-DMA) is the average of an asset's closing prices for the prior 50 trading days. We use it to gauge the intermediate-term trend.
A brief, but related aside... I (Corey McLaughlin) recently heard a golf analyst say that legendary golfers Jack Nicklaus and Tiger Woods both like to pick out an "intermediate" target between them and the hole where they're trying to hit the ball several hundred yards away.
So if you're a golfer, you can think of the 50-DMA as an intermediate target out on the course. It will get you headed in the right direction when thinking about stocks (and maybe save you some strokes, too).
Ben and Drew then went on to note that several different assets are trading near major "support" levels of their 50-DMAs. And as we've mentioned before, these are price points where people tend to start buying and stop selling... so the prices rise in turn.
As Ben and Drew said...
'It's something of a self-fulfilling prophecy, but it works'...
They showed charts of the S&P 500, Nasdaq Composite Index, Dow Jones Industrial Average, Russell 2000, emerging markets, gold, and bitcoin that all pretty much illustrate the same thing...
Nothing is 100% certain, but signs point to stocks heading higher in the short term. More from the issue...
The benchmark S&P 500 Index recently pulled back 7% from its highs. And now it's bouncing almost exactly at its 50-DMA...
The tech-heavy Nasdaq Composite fell 10% from its highs. It's also bouncing right at its 50-DMA...
As Ben and Drew shared...
When an asset that's in a bull market pulls back to its 50-DMA, it's often a great buying opportunity...
In a bull market, assets will push far above their moving averages. At that point, though, they are at greater risk of a sharp pullback. But after they pull back, a lot of that risk is gone. So these "tests" of the moving averages provide lower-risk entry points.
Plus, a lot of traders watch the 50-DMA... And they use these tests as entry points, too.
We've never said this stock market perfectly reflects reality or that easy-money policy is good for the economy's long-term health. In fact, it's much the opposite...
If those things were true, it would be really easy for anyone with a whiff of any analysis to make a lot of money all the time. But in reality, we have to work with what we see...
And today – despite "the world is ending" images, like red skies at night and in the morning, and temperatures on the East Coast a degree or two lower than they would be had West Coast wildfire smoke not caught the jet stream – we see stocks are going higher.
As Ben and Drew put it...
The central banks of the world are pumping incredible sums of money into the economy and financial system. And that has led to huge rallies in all kinds of assets.
We don't know when these rallies will end. But we don't think they've ended just yet.
Instead, we've witnessed some volatility, which we expected. And now that all of these assets have pulled back to major support levels, you can buy them with less risk than you could have just a few weeks ago.
As traders, this is exactly what we look for.
We're also seeing more 'frothy' behavior in other ways...
Namely, we're talking about a new round of merger announcements. These usually happen during "good" economic times and signal a more positive economic outlook from the buyers involved in the deals. As Stansberry NewsWire editor C. Scott Garliss wrote on Monday...
Semiconductor designer Nvidia (NVDA) announced it would be acquiring chip-design firm Arm Holdings for $40 billion. Biotechnology company Gilead Sciences (GILD) said it was buying competitor Immunomedics (IMMU) for $20 billion. Telecom carrier Verizon (VZ) disclosed plans to snap up prepaid wireless services provider TracFone for up to $7 billion. And Oracle (ORCL) announced it would partner with TikTok to ease the White House's security concerns.
Typically, companies seek out acquisitions to fuel growth. CEOs are looking for opportunities to snap up other companies when they believe the market is mispricing an opportunity.
Nvidia, in particular, is banking on continued demand for its data-center chips. Arm Holdings designs microprocessors that power roughly 90% of the world's smartphones. As Scott continued...
Given Nvidia's insight into demand for remote-connectivity semiconductor chips, it sees an opportunity. In the last six months, its free cash flow has grown by $2.1 billion. And now, it's potentially adding another $2 billion in revenue to the $11 billion in sales it had last year.
Not to mention, the deal costs $40 billion with the potential for an added $5 billion in performance fees. You're not making that type of commitment unless you feel pretty certain about the growth outlook and potential going forward.
Whether you can muster regulatory approval is a different story altogether. But that's no reflection on economic optimism.
Initial public offerings ('IPOs') are back in the news, too...
Today, shares of cloud-software and data-warehousing company Snowflake (SNOW) doubled upon its IPO, making it the most lucrative software stock debut in New York Stock Exchange history.
Notably, Warren Buffett and Charlie Munger's Berkshire Hathaway (BRK-B), an early investor in the company, made about $1 billion today alone as the stock closed up 123%.
Longtime observers of Buffett know he has been averse to IPOs (just like gold)... So in addition to being more evidence of the bull case for cloud stocks, this shows that an early changing of the guard at Berkshire is continuing...
Empire Financial Research founder and Buffett expert Whitney Tilson recently wrote in his free daily e-letter of Berkshire's Snowflake deal that "[Buffett] almost certainly didn't make this investment." More from Whitney...
Rather, it was likely initiated by executives Todd Combs or Ted Weschler (I'd guess Combs), who will eventually replace Buffett in managing Berkshire's enormous investment portfolio.
Both are more comfortable investing in the tech sector – and Buffett certainly isn't going to second guess them, especially for such a small investment ($600 million is a drop in the ocean of Berkshire's stock holdings, which were valued at $207 billion at the end of the second quarter).
It doesn't surprise us that investors with a lot of money and a pulse on tech stocks decided to take a stake in this new public company that works entirely in the cloud and in data.
Data is the 'new oil'...
As we've written repeatedly this year, cloud-based companies – including Software as a Service ("SaaS") stocks – have tremendous tailwinds behind them in today's market. The big catalysts are surging demand and the ridiculously "capital efficient" and scalable business models that these companies have.
Silicon Valley veteran and tech writer Om Malik gave a nice analysis of Snowflake's model in a recent post. The company has essentially taken the SaaS model to another S – servers...
Snowflake is a good template for fully-managed cloud services. Its rivals, such as Databricks, sell software and customers get their servers. Snowflake does everything, including managing the servers. As consumers, we are used to this "server-less model" when we buy our cloud services. Snowflake has done that for companies big and small.
And of Berkshire's investment, Malik said what we've long known...
Berkshire Hathaway might have a propensity for more traditional businesses – after all, people still want to buy insurance, fast food, and homes – but they are being transformed by technology and data.
From storing it (data warehousing), making sense of it (analytics), and building applications and services with it, data is a core part of the future of industry and business.
Our editors have shared several actionable ideas in the software space over the past few months and years. In our flagship Stansberry's Investment Advisory newsletter, we've recommended a trio of SaaS stocks...
The first one, e-signature software company DocuSign (DOCU), is up more than 200% since our research team's initial recommendation in October 2019... and the latest pick in the August issue is already up a healthy 6%.
Elsewhere, Stansberry Venture Value editor Bryan Beach has recently recommended three "hidden" SaaS stocks with up to 3,000% potential – from a group of about 150 "pure" plays in the space. As Bryan said...
There's no question this group will continue to offer some of the best investment opportunities in the world.
As Bryan wrote in the Digest last week, these are flashy stocks – as Snowflake's IPO performance indicates – but it's critical that you take valuation into consideration.
A lot of these stocks are expensive today, especially in this Fed-inflated market. But Bryan has done the work and research for you... And he believes the three companies he has recently recommended are priced well and set for "hypergrowth."
Click right here to learn more about these exciting stocks right now.
Why a Weak Dollar Is Good for Stocks
Your dollar may buy less at the grocery store today... But Stansberry NewsWire editor C. Scott Garliss shares why a weaker dollar is making the stock market soar.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 9/15/20): Almaden Minerals (AAU), American Homes 4 Rent (AMH), New Oriental Education & Technology (EDU), Expeditors International of Washington (EXPD), Fortuna Silver Mines (FSM), Gravity (GRVY), McDonald's (MCD), Osisko Gold Royalties (OR), and Sabina Gold & Silver (SGSVF).
A quiet mailbag today... What's on your mind? As always, we welcome your thoughts and comments at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 16, 2020