Welcome to the 9th week of the Coachman’s Report! We’re almost done compiling our trade returns and can’t wait to share them with you; anyways, read on for more trade ideas in this shifting yield curve environment.
“Some people don't like change, but you need to embrace change if the alternative is disaster.”
- Elon Musk
Market Talk
Our Monday reports usually don’t have a market talk component but it’s important to highlight some changes in US Treasuries - Depicted below is the current yield curve, the cause for concern stems from the 2-year maturity which has recently popped its head above a 3% yield. This move has trader’s re-evaluating the interest rate hike timeline as set out by the Federal reserve with the market now pricing in a higher probability of a 75bp hike at the next meeting. This would bring the target overnight rate to a 1.5-1.75% range.
Short: DocuSign, Inc. (DOCU:NASDAQ) | Timeline: 1-3 days
DocuSign, Inc. provides an e-signature solution that enables businesses all over the world to digitally prepare, sign, act on, and manage agreements. DocuSign grew at an impressive rate through the pandemic, as office closures lead businesses to go paper-free. However, those days of “hypergrowth” and a remarkable top-line are now over due to easing restrictions, and businesses returning back to more traditional locations. This showed in the company’s most recent earnings report, as EPS missed expectations by 0.08 or 16.75%, resulting in a gap down in price by about 25%. Taking a closer look at the chart above, traders should move with caution as any news, press, or earnings reports have triggered a rush of buyers or sellers, creating a very volatile environment for us traders to capitalize on. In this case, traders must watch for mass amounts of selling due to bears continuing to take charge through this rough earnings week for DocuSign, while the MACD struggles to break 0.0 while playing a negative divergence, providing additional confirmation for intra-day shorts.
Short: Coinbase Global Inc (COIN:NASDAQ) | Timeline: 3-6 days
With the aforementioned inflation print sending chills up the spines of most bulls who thought that the worst of the damage had been done, the market is likely pricing in further declines into unprofitable, or debt-ridden companies. Coinbase is both the former and the latter, as they are saddled with debts of roughly $2.7Bn. While yes they were once profitable, this ceased to be true in Q1 of 2022 as they posted a loss of around $430M.
High debt companies are being looked at in a new light, or rather valued in different terms now that loans are more costly to finance, and it seems that rates will continue to climb. Coinbase is also susceptible to a decline this week as Crypto has taken a dive over the past 6 months, and a steep dive over the weekend with Bitcoin falling by over 11% from Friday to Sunday, while Ethereum fell by 17.7% during the same time period (note: measurements were from 10 pm MST). With declining prices more people lose interest in purchasing crypto, leading to a decline in active users, which translates to a loss of revenue for the company. Moreover, experienced users are still spooked by reports that in the case of bankruptcy, their assets would belong to Coinbase. This move may prove fatal for Coinbase over the long term, as the trust of a client is paramount to a broker, and the only thing stopping users from venturing to other exchanges. Additionally, Coinbase is currently being rocked by internal staff disagreements as employees want top executives ousted, while CEO Brian Armstrong has come out and bluntly stated “quit if you’re not happy”. (Source)
Furthermore, the book value of Coinbase’s shares is sitting at just below half of the current trading price, making an investment during a stalled-negative growth period extremely unattractive. In short, this week is looking like it’s going to be a tough one for the vast majority of equities. Coinbase is further primed for a decline as in addition to the massive losses sustained by crypto in recent months, Coinbase is also facing a lack of trust from consumers in a now saturated market, internal employee conflict, and the low sentiment surrounding overvalued high growth tech names.
Chart of the Day - Big moves in the short end of the yield curve…
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