The pandemic was good to growth stocks. WFH was here to stay, and disruptive innovation was the fragrance of last summer. But as the leaves turned, so did the fortunes of large-cap tech valuations. Q1 2021 brought a doubling in 10Y Treasuries, SPACtacular haircuts, and the very one-sided growth-centric market changed to a broadly economy-focused one. - Is the growth to value rotation here to stay? - Is more pain on tech valuations coming? - Should investors burn the COVID-19 playbook?

1. VALUATIONS GUT CHECK
02 June 2021

2. WAR ROOM
Idea Generation
Macro Coaching
Scenario Updates
HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS
Fed Underwrites Economy
Climate Disasters
Real Estate “Post” Covid
COVID 2.0

3. SCENARIO PULSE CHECK
FED-TREASURY MERGER – Drunk Sailor Spending
CRYPTO MANIA – Crash on China + US Regs

4. sources: HiddenLevers, Atlanta Fed
Reopening trendlines look good
Will earnings growth support these valuation levels?
CAPE only 19% below 2000 Peak
10% Q2
Atlanta Fed
GDPNow
Estimate
Jobless
Claims
falling with
re-opening
VALUATIONS WHERE ARE WE?

5. sources: HiddenLevers, NewArc Investments
P/E Ratios can be misleading
• Peaks occur during recessions,
when earnings drop
• Peaks in 2002 and 2009 were
great buy signals, not sell signals
10y rates inversely correlated with equities
• Higher rates drive up equity risk premium
• 70’s and 80’s showed high rates / low PE
• 2008-Present shows low rates / high PE
P/E peaks mid-
recession
S&P 500 vs S&P 500 P/E Ratio
VALUATIONS HISTORICAL COMPS

6. sources: Gurufocus, HiddenLevers
Energy valuations
not in reopening trade
now cheapest sector
Consumer Cyclical
valuations exploded
re-opening trade ground zero
now most expensive
Tech + Comms
no longer most expensive
P/E Ratios by S&P Sector
VALUATIONS SECTOR COMPS

7. GOOD
S+P 500
2400
-43%
S+P 500
5000
+19%
S+P 500
4000
-5%
UGLY 21 CAPE, LAST TOUCHED AT
PANDEMIC LOWS
44 CAPE, MULTIPLE
VALUATION METRICS NOW
ABOVE Y2K LEVELS
RISING EARNINGS NOT
UBIQUITOUS,
35 CAPE LIKELY UNJUSTIFIED
S+P VALUATION MACRO RISK PARITY
NASDAQ
13K
-5%
BASELINE
10Y
0.75%
-136 bps
10Y
2.0%
+41 bps
10Y
1.6%
FLAT
NASDAQ
16.3K
+19%
NASDAQ
7500
-45%
All Time Highs
Steady
Typical
Recession

8. sources: HiddenLevers,
NASDAQ MOONSHOTS UPDATE
S+P DID CATCH UP
NEW TECH SCENARIO NEEDED
NASDAQ HISTORICAL DRAWDOWNS

9. NASDAQ ROTATION TO VALUE
sources: HiddenLevers
INSIDE COMPANIES OUTSIDE COMPANIES
PELOTON -30%
ZOOM +3%
DOCUSIGN -10%
AMAZON -1%
LIVE NATION +25
CARNIVAL CRUISES +39
DELTA +19
HILTON +14
Current Value Rotation = Mean Reversion
TECH MEGACAPS
FACEBOOK +20% GOOGLE +39%
AAPL +6% SALESFORCE +6%
MICROSOFT +12% TESLA -12%
NETFLIX -8% NVIDIA +25%
2021 YTD PERFORMANCE

10. sources: BLS, Dept. of Treasury, HiddenLevers
1 3
2
1. Sharp increase in velocity of interest rate
movement higher.
2. 02 April: Nonfarm Payrolls not that great.
4. 12 May: CPI released, confirming inflation fears.
2021 rate-driven tech correction: 0.85% up to 1.74%
Now tech has a pronounced inverse relationship with
10-year yields.
NASDAQ EXTREME RATES SENSITIVITY
4
3. 07 May: Downside surprise on Jobs – Nasdaq climbs.

11. NASDAQ IPO + SPAC BUBBLE
sources: HiddenLevers
PAST 2 YEARS
S&P +10%
YTD
Renaissance IPO ETF -10%
WILL SPAC COLLAPSE
TAKE DOWN EQUITIES?
NASDAQ MOST
VULNERABLE

12. NASDAQ TESLA-BITCOIN-ARK RISK CLUSTER
sources: HiddenLevers
increasing correlation of Bitcoin and Tesla, combined with
Ark Innovation ETF's large stake in Tesla

13. NASDAQ MOONSHOTS GOOD
Fed backed into
a corner on hikes
Rising 10y killed
tech rally
10y decreasing
despite high CPI
Rates Ease 10y
1.2%
-39 bps

14. NASDAQ MOONSHOTS BASELINE
Capital gains sell
off not coming
Anti-trust fears
likely noise
Durable rev
streams
Mega-Cap
Rebound
10y
1.5%
-9 bps

15. NASDAQ MOONSHOTS UGLY
late entrant
celebs + athletes
500+ IPOs in 2021
S&P 500 +10%
New IPOs -10%
SPACs Go Splat
10y
1.75%
+16 bps

16. GOOD
BAD
250 SPACs = 50% of 2020
IPOs, causing supply-demand
imbalance
TECH SENSITIVITY TO
RATES NOW EXTREME
IN BOTH DIRECTIONS
ONCE ECONOMY RE-OPENS,
ROTATION BACK TO GROWTH
FROM CYCLICALS
NASDAQ MOONSHOTS MACRO RISK PARITY
10y
1.5%
-9 bps
BASELINE
10y
1.2%
-39 bps
10y
1.75%
+16 bps
SPACs Go Splat
Mega-Cap
Rebound
Rates Ease
S+P 500
3500
-17%
S+P 500
4500
+7%
S+P 500
4290
+2%
NASDAQ
15K
+9%
NASDAQ
15.8K
+15%
NASDAQ
10.3K
-25%

17. Re-opening companies more overvalued than Tech
P/E ratios peak mid-recession, more a signal to
buy than to sell
COVID-19 Playbook for WFH winners likely done
Mega Cap Tech behaving as safety plays alongside
US Treasuries – 10y is now key lever for Tech
VALUATION GUT CHECK WHAT TO SAY