Highway to Hell
Last week, in my last Poor Michael’s Almanack, I mentioned the ongoing discussions at the EU Economic Summit would weigh on markets. Well, there was, what looks like, a pretty decent agreement. Rather the spend time writing this up, I found the team that hosts the Russell Investment podcast did a great job explaining it, plus a few other things in just a seven minute episode. I also mentioned how Tesla earnings had a little more meaning for markets than normal. I'll talk more about that below. Let’s be honest though, the big story of last week was the return of live sports. MLB opening night viewership knocked it out of the park. This is not only big for sports fanatics like me, but also firms like Disney (DIS) and Fox (FOX), and the other regional cable companies that will cover the teams. As the NBA and NHL return over the next couple of weeks, we’ll have nearly a full lineup and the betting/gambling stocks should see some action. I’m watching how DKNG.O reacts. It’s up more than 250% this year, but has stalled since it’s highs in early June.
This week is mostly about earnings. Nearly 40% of the S&P 500 market cap is reporting and about 30% of the Russell 2000. Last week’s hearing before Congress for big tech CEOs was postponed, but some (AAPL.O, AMZN.O, & FB.O) will get to be in the spotlight this week on the earnings’ front. We do have a Fed Rate decision on Wednesday, but the Refinitiv probability model has a 94% for no change with 6% for a quarter point cut. I'm also interested to see the Consumer Confidence number on Tuesday.
Best of the week:
Last week, I told you about Tesla earnings being a bigger event than normal for the company. Report a positive quarter and they would pretty much guarantee inclusion into the S&P 500 in the near future. Well, they did it and investors, well traders really, loved it at first. The stock quickly traded up after hours on Wednesday, then trended lower for the rest of the week. Larry McDonald joined the 'Top Traders Unplugged' podcast to talk about a bunch of topics, but towards the end they started on Tesla. Larry talked about how the companies that see this giant prize of passive flows into their company stock will do anything to get to that. Well, I shared Larry’s piece on that and something else that looks into HOW Tesla has turned its income into the black. The thing is it's hard to trade against this in a cult stock. If you look at the options in the stock, traders are betting like they’re at the roulette table hoping for a double zero. Actually, I think casino odds might be better than these contracts below. I took a look at the top five contracts by open interest set to expire at the end of this week. Catastrophe puts at $100 & $200 are numbers three and one respectively. Number two is 3500 Calls. These aren’t small positions either. Someone bought over 13,000 contracts of the 200 Puts on Thursday @ $0.04. Essentially, paying $54,000 for a trade with lottery ticket type odds. Here’s a fun exercise. Go to TSLA.O EMTO in Eikon and sort by Open Interest.
Larry McDonald – Global Macro Series - Listening time: total time 60 minutes (Tesla section ~10 minutes)
GAMING THE S&P 500 INCLUSION PROCESS
Avoid Tesla Stock After $428M Tax Credits Sale
Best of the Rest:
Governance & Governments
An excellent conversation around the G in ESG. I often think that this factor doesn’t get the love the other two get. Environment and Social seem to be the bigger hitters in this lineup, but Governance is like the guy that sets the table, in my opinion. Mike and Toby get into a few examples of how bad corporate governance can be. The example of J-Crew doling out options to executives just before big earnings beats is just ridiculous, but then when you factor in that someone got fined a decent amount after trading off similar info makes it ludicrous.
Dark Arts: Mike Puangmalai on activism and corporate governance tricks with Tobias Carlisle- Listening time: 60 minutes
These next two are more about governance in governments. Well sort of, but I thought that intro sounded cool. A couple of pensions took their grievances to the courts. Arkansas teachers has a beef that Allianz strategies did not protect from downside risk as they promised to and that they didn’t have proper risk management. The article also references manipulation of the VIX, something you’ll hear discussed in the interview with Certeza’s Brett Nelson on VIX trading. Not exactly the same, but the Kentucky pension system is also suing another giant of the financial industry. They’re claiming that Blackstone and a former executive put them in unsuitable investments.
Teachers’ Pension Lost $774M in Allianz Volatility Funds: Lawsuit
Kentucky sues Blackstone, former KRS execs over fiduciary breaches
This one shouldn’t be a shocker to anyone that understands the budget deficits of these two states. What does shock me is the size of these fees. It seems there is some disconnect to what effect this would have on the firms they are attempting to tax. With Wall St responsible for about 17% of the tax revenues of the state of NY, there’s a huge risk in trying to take more. While revenues might need to increase, there’s a saying CNBC’s Jim Cramer says often, “Bulls make money, bears make money and pigs get slaughtered.”
New York and New Jersey Consider Financial Transaction Taxes
David Enrich joined the Master’s in Business podcast to discuss all things Deutsche Bank. The stories here are fascinating. I don’t know how one bank can screw up so many times. I’ve added David’s book to my wish list and will be listening to this on Audible in the next month or so.
David Enrich on Deutsche Bank’s Clean-Up - Listening time: 66 minutes
While a little different than corporate governance, insider selling does give us some sense of how insiders feel about their company’s stock value. Granted there can be a number of reasons to sell stock. I’ve always felt insider buying tells you more than selling, but at these high ratios it might be an onerous sign. I saw this Tweet from Helen using our data, and wanted to look at some of the TRBC Business Sector breakdowns. Below are the sectors and un-categorized sorted by total selling over the last seven days.
Insiders seem to have, um, ramped up their selling.
Metals
A few weeks ago, I wrote about all the material I was finding on precious metals, specifically gold. Well, seems all those bullish on the metals are getting paid after last week. Silver has been on a magical run over the last week or so. From the March lows, it’s up 89%. Gold on the other hand is hitting all time highs after plodding it’s way higher all year. Normally, Copper is a strong economy position, but the red metal is rising alongside gold since the March lows. My colleague Guillaume took a look at Silver’s breakout from a technical perspective using our API.
This Year’s Bull Run In Precious Metals Accelerates
Strategy
Mike Pyle is the Chief Global Investment Strategist for Blackrock. Mike was previously on the economic team for President Obama. I loved how he mentions his favorite thing about Blackrock is the sharing and collaboration within the firm. The biggest point I took from his comments was that government bonds will play less of a role in client’s portfolios in the next ten years than they did in the last ten. He also talks about how ESG and Global Diversification will play a role in replacing that bond position. There’s a lot to this conversation in only forty minutes.
Mike Pyle, CFA & Steve Curley, CFA: Restart, Revolution, & Resilience - Listening time: 40 minutes
Jonathan Golub is the Chief US Equity Strategist at Credit Suisse. There are quite a few gems from this conversation. The first idea is that this Earnings’ Season companies are beating on average by 13% and not much reaction to that. I’m not sure what his sample set was, but I used Eikon’s Earning Season app (EARN) to look at the Russell 1000 constituents for this and the numbers agree. The next opinion shared by Jonathan was that varying levels of performance are coming for value and growth as we start the re-opening process. Jonathan thinks value wins if a successful re-opening process, but growth wins if there are delays. The last big one is that gold and bonds are telling different stories. Gold’s run is telling us that inflation is coming, but bonds are disagreeing.
Jonathan Golub - Behind the Markets - Listening time: 31 minutes
Corey’s audience is generally quants, but I find this conversation useful for both quants and fundamental managers. Omer’s team at Omega Point provides fundamental advisors with quantitative analysis of their exposure to different factors and risks. They help take them into the quantimental category. Omer brings up that quants are about 10% of AUM, but roughly of 90% volumes. I found this idea similar to how Refinitiv’s Starmine models help bring the power of quantitative models to the fundamental investor.
Omer Cedar - Quant-Aware Discretionary
An amazing conversation around trading volatility. Brett firm positions itself in VIX futures to take advantage of the roll yield trade in VIX, but does not have exposure to the Vol spike that shut down many firms during the Volmaggeddon of 2018. The big piece that lends to their strategy is that VIX is not a trending asset like most other securities. It’s more of a mean reverting instrument and it doesn’t have a left tail (i.e. a huge downside risk), but it does have a right tail. If you’re interested in learning why those short vol trades that blew up multiple firms earlier this year, I highly recommend this one.
Seeking (VIX) Certainty with Certeza’s Brett Nelson - Listening time: 75 minutes, but you can skip the first 10 minutes if you want to skip over a discussion on skiing in Utah.
No, not Vanna White. Vanna is basically the exposure to changes in option delta with respect to volatility. Vanna is what we call a second-order derivative Greek. Not many off the trading desks talk about it. It’s important here because all the call options have positive Vanna and the desks need to hedge. This is one reason I love being on Twitter. Not everyone has access to these Goldman Sachs reports. I recommend the link too, because there’s another page of the report shared.
Vanna, vanna, vanna - let's all sing it together now
Michael is re-sharing some older interviews here. He’s been doing this a while, so I haven’t heard them all. I’m glad I listened to this repeat. Especially the first guest Campbell Harvey. Cam is a Canadian Economist that currently teaches at Duke. He talks about some of his research around portfolio optimization. Measuring risk and volatility and how skew should play more of a roll in picking a portfolio. This is a must listen for fans of Markowitz or other modern portfolio theory disciples.
A Trend Following Firehose with Michael Covel - Listening time: 128 minutes total, but I really recommend the first 45 minutes.
This is more about personal finance, but the chart made me do a double take. Since 1990, home prices are up about 190% while the monthly payment is only about 40%.
Mortgage Rates Are Insanely Low
This is not really finance related, but the whole story is intriguing. Prefer listening to content,like me, Vanity Fair has a cool feature that lets you listen. 38 minutes, so this is a longer read.
EXCLUSIVE: HOW CARLOS GHOSN ESCAPED JAPAN, ACCORDING TO THE EX-GREEN BERET WHO SNUCK HIM OUT
Thanks for reading. Have a great week.
Michael
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