De-Risking the US Exposure
The US market has experienced a sharp rally in November, with the Nasdaq up about almost 12%. Meanwhile economic indicators are showing further signs of deterioration. Median new home prices fell 17.6% in November from one year ago. This may indicate that the level of home prices in general may fail to hold up for much longer despite very high interest rates. I am thus taking short term gains in Opendoor, which has rallied 58% over the last week.
Delinquency rates are rising sharply, reaching levels not seen since more than 10 years ago.
Going forward, I believe that the market will become increasingly impatient with the Fed’s interest rate policy. November inflation will most likely not come down fast enough for the Fed to soften its language. I am convinced the Fed interest rate decision for December 13 will keep emphasizing that “inflation remains too high.”
I expect a first interest rate cut no earlier than March 20, 2024. Until then we will most likely see a continued deterioration in the economy. Moreover, we will have most Q4 2023 earnings results by then, as well as the Q1 outlooks. I don’t think it will be pretty relative to the rosy earnings growth expectation that are currently penciled in.
In sum, I believe the US markets may be challenging for the next several months and I would not be surprised to see a significant correction.
I am thus exiting my most risky US growth stock positions: Opendoor, Carvana, and Lemonade. The most recent google trends data look all very unconstructive, which is why I anticipate Q4 earnings may disappoint. Importantly, the recent share price performance also allows me to take some nice short term gains in Opendoor (+30%) and Lemonade (+15%). Carvana was about flat since I bought it again.
Adding to European Cheapness
While the European economy is arguably in a worse state than the US, Europe is making even faster progress on the inflation front. Eurozone inflation fell astonishingly fast to now just 2.4% in November. Combined with the recessionary environment in large parts of the continents, the ECB is now coming under strong pressure to cut rates. Market are already pricing a pivot. German 10y government bonds have fallen from 3% to 2.4%.
It strikes me that European “fallen Angels” such as Hellofresh and Auto1 Group are trading at all time lows. Hellofresh is now trading at 5.6x 2023 EBITDA. Auto1 has achieved its goal of adjusted EBITDA break even already in Q3 this year and will return to growth in 2024. In contrast to Carvana, Auto1 has no net debt. Nevertheless, Carvana is up 560% this year and Auto1 group is down 27%. I am thus adding to both companies to make them full 5% positions.
The remaining proceeds are used to re-enter the German residential real estate stocks Vonovia and Grand City Properties. Both are at about the same level since when I exited them. Given the faster than anticipated decline in Eurozone inflation, I believe that both stocks are short term very promising. The momentum in the share price is very strong and I think they should directly benefit from any further fall in inflation and interest rates.
Disclaimer: This is not investment advice, do your own research
Can you tell me your IWG thesis please?