Crypto Ready For Mainstream

Good Afternoon. All significant indices returned positive returns for the week as markets moved on from the DeepSeek worries. Earnings continue to be strong with mixed macro data. Below are the key highlights of the week:

• Inflation: The CPI number came in hotter than expected on Wednesday. The CPI rose 0.5% in January, following a 0.4% increase in December. Year-over-year, it climbed 3.0%, up from December’s 2.9% gain. Again, CPI is not the Fed’s preferred measure, and what matters is the PCE, which is expected to come at the end of the month. The key components that feed into the PCE, i.e., healthcare or transportation, have reported slowed growth. Hence, the PCE is expected to be ~2.5%, and the core PCE to be ~2.8% in two weeks. Any print hotter than this may cause volatility in the market. The inflation is sticky as expected, diminishing any chances of the rate cut in the next Fed meeting.

• Retail Sale: US retail sales decreased 0.9% after increasing 0.7% in December. This is the most significant decline in nearly two years. Cold weather and the Los Angeles fires contributed to the weak start for consumer spending and manufacturing, but uncertainty over tariff timing may also be a factor.

• Powell Testimony:
  Fed chair Powell testified this week before the House committee. Below are the key takeaways:

  • Supplemental Leverage Ratio: Powell agreed that the current SLR framework is too stringent and needs to be reviewed. He conceded that lowering the SLR requirements would allow banks to create more capacity to provide liquidity in the US Treasury Market and improve the structure.

  • Basel III Endgame: Powell agreed that the initial Basel III proposal in July 2023 was too punitive or gold-plated the bank capital. As per Powell, Basel gives a global floor so everybody is at the same level.

  • Crypto: The Fed doesn’t want to get in the way of banks serving crypto customers. Fed-supervised banks are currently involved in substantial crypto activities but are doing so in a set framework.

  • CFPB: Powell confirmed that prior to Dodd-Frank, consumer protection laws were implemented by financial institutions’ primary prudential Regulators. Hence, if Congress had decided to repeal the CFPB, we could have returned the consumer protection law enforcement function to other financial regulators.

  • Vice Chair: Powell preferred not to have a Vice Chair of Supervision. Having responsibility for one person increases the volatility in bank regulation decisions, and it will be better to have this as a shared responsibility by the board as before the creation of this position under the Dodd-Frank Act in 2010.

  • Average Inflation Targeting: A member blamed the Fed’s average inflation target, leading to higher inflation. Powell confirmed that the ongoing monetary policy framework review process will consider potential changes or moving back to the prior 2% inflation target but can not guarantee the review outcome.

  • Higher Long-Term Rates: On the criticism of higher inflation expectations leading to higher long-term rates and mortgage rates, Powell again mentioned that the root cause of this is not higher inflation expectations but policy uncertainty. He mentioned this during the FOMC press conference. I don’t think he is perfectly correct on this. One key factor for increasing term premiums is higher inflation expectations due to policy uncertainty or tariffs. Powell stood firm in that higher long-term rates are not due to higher inflation expectations.

  • Luxury to Wait: Powell mentioned that, as the economy is doing well, we have the luxury of waiting for further rate cuts.

• Coinbase Earnings: Coinbase's earnings were the most impressive for the week, confirming that crypto is finally coming mainstream. 

  • Coinbase revenue doubled YoY.

  • On the call, the company mentioned that we have the most pro-crypto congress, leading the charge on stablecoin and market structure legislation.

  • International revenue share reached almost 20%. The company is focused on continuing to grow internationally.

  • The company aims to make USDC the world's number-one stablecoin. Last year, the volume of stablecoins was $30 trillion, three times the year ago.

  • The CEO mentioned that up to 10% of the global GDP may run on crypto by the end of this decade, and Coinbase is well-positioned to be the preferred partner. Like the Internet in the early 2000s, every company will have to figure out how to adapt to crypto.
    

For the week:

• The S&P 500 is up 1.47%, the Nasdaq is up 2.58%, and the Dow 30 is up 0.55%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 44 (Fear) out of 100, up 5 points from last week. Details here

The top five trending stocks on Reddit are SPY, Nvidia, MGO Global, Reddit, and Tesla. Read More

Here is a summary of this week’s key economic releases:

Target Rate Probabilities for the March 19th FOMC Meeting:

Source: CME FedWatch

OpenAI Rejects Musk’s Offer: OpenAI has formally dismissed Elon Musk’s $97.4 billion offer to acquire its nonprofit parent. In a brief response to Musk’s lawyer on Friday, OpenAI’s attorney, William Savitt, stated that the board reviewed the proposal and concluded it was not a legitimate bid. Read

Eggflation: The latest U.S. Bureau of Labor Statistics data reveals that large Grade A egg prices have reached their highest level in 45 years. This surge traces back to the impact of H5N1 avian influenza, which hardened poultry producers this winter. A mutated strain of the virus surfaced in migratory birds last September before spreading to domestic flocks, disrupting supply and driving costs higher. Read

ARM’s New Chip: Arm Holdings is set to unveil its chip this year, marking a significant shift from its traditional licensing model. Meta has been secured as one of its initial customers. Read

Crypto Rush: U.S. foundations and university endowments are increasing their crypto investments, driven by President Trump's pledge to establish the nation as a "bitcoin superpower." Read

CFPB Update: A judge ruled Friday that the Consumer Financial Protection Bureau cannot fire employees without cause, undermining President Trump’s push to weaken the agency. Read

Coinbase Beat: Coinbase delivered strong fourth-quarter results, surpassing expectations with its highest revenue in three years, fueled by a post-election crypto surge that drove prices to consecutive highs. Read

McDonald’s Miss: McDonald's quarterly earnings met expectations, but revenue missed Wall Street's estimates. U.S. same-store sales declined as customers spent less. However, international divisions reported growth in same-store sales. Read

Coca-Cola Beat: Coca-Cola surpassed Wall Street's fourth-quarter expectations, reporting a 6% net sales increase driven by heightened beverage demand. Read

Shopify Beat: Shopify posted mixed Q4 results and offered cautious guidance. It expects mid-20% revenue growth this quarter, slightly below analysts' 24.4% forecast. Due to seasonal trends, the company noted that Q1 is typically its weakest for gross merchandise volume. Read

Hubspot Beat: HubSpot's revenue surged 20.8% YoY this quarter, surpassing Wall Street expectations by 4.4%. Management anticipates a 13.1% increase in sales next quarter. Read

Robinhood Beat: Robinhood surpassed fourth-quarter profit expectations on Wednesday, fueled by a surge in equity, option, and crypto trading on its platform. Read

Palo Alto Beat: Palo Alto Networks raised its full-year revenue forecast, citing strong demand for cybersecurity solutions amid escalating online threats. Enterprises are ramping up investments in AI-driven security tools to counter digital scams and high-profile breaches. Read

The Case For Mag 7: 

According to Bridgewater, investors should not focus only on the valuations of the Mag 7 stocks. Mag 7 stocks need to grow EPS by 14% annually over the next decade to earn a normal risk premium over bonds, below their recent 20% pace. The broader tech sector also needs that growth but has managed only 4% annually over the last decade. The remaining 55% of the S&P 500 must grow EPS by 8% annually, above their past 5% but below tech’s hurdle. Read

Source: Bridgewater, MarketWatch

This is a compelling insight. Below are the key takeaways according to me:

• I think the probability of Mag 7 stocks meeting the 14% growth rate is higher than the other two groups achieving their target requirements to attract risk premiums or excess returns. Hence, I am going to keep doing dollar cost averaging into my favorite Mag 7’s.

• Per the above chart, tech excluding Mag 7, i.e., small-cap tech stocks as a group, have been laggards in the last decade, and hence, investors need to be very selective in this area. There is no point in investing in a broad QQQ index as most of the other 93 stocks in that index seem not to have performed well in recent history. One can always find some gems in this group, but as I said, one needs to be very selective. I sold my QQQ based on this data, as I see no point in betting on a broad tech index. The best course will be to invest in Mag 7s and very few small-cap tech stocks where you have a firm conviction. It’s a winner-take-all market. So, it is better to invest in one Nvidia than multiple semiconductor stocks, or one Meta is better than holding multiple social media stocks.

• As per this analysis, the rest of the 493 stocks in the S&P 500 have lower hurdle rates to attract a premium. Hence, SPY will continue to be a good bet for conservative investors who seek diversification benefits.
  

Key Metric For Long-Term Winners:
One more key insight from Morgan Stanley sharted by Charles-Henry Monchau this week.

In the short term, stock returns are mainly driven by margin expansion due to short-term growth drivers or momentum. However, over the long term, the fundamentals matter the most. Revenue growth and margin are key to stock market returns.

Microstrategy Loop:
MicroStrategy's market cap is twice the value of the Bitcoin it holds. The company continues buying Bitcoins, boosting its stock price. This helps MicroStrategy become more valuable, sell the stock, issue debt, and buy more Bitcoin. It’s a money-making loop for MicroStrategy. Check the Odd Lots podcast for more details. I think buying MicroStrategy to get Bitcoin exposure is not a good idea. Why pay twice for the same asset?