July 20th - What is Risk?
I've amended my last internal only blog for public consumption. This was originally published the morning of July 20, 2020.
A lot of the content I consumed last week had more of a bearish tilt, which makes me question the direction these markets will take over the next few weeks. No, it’s not what you’re thinking. If many are still bearish and we have a Fed backstop, how do we not continue to move higher? Earnings’ Season is back with 25% of the S&P 500 reporting this week.The reports this week are expected to be messy. When will we start to get some forward looking guidance? There are a few things, outside Earnings, to watch this week that could affect where we end the week. One of the biggest is probably not even on your radar. The EU Economic Summit extending into this week could have a major impact on global markets. I don’t think there’s been enough coverage of this in the Americas. What is it? Well, the EU leaders are trying to settle on an economic aid package for the region. As of my writing this, there is still no agreement. Angela Merkel says there’s a risk of no agreement. Also, this week five companies (AZN, JNJ, MRK, MRNA.O, & PFE) working on a COVID vaccine are testifying before the House Committee of Energy and Commerce. Finally, Senate Republicans are expected to release their plan for additional stimulus spending. Of course, both parties agree that there needs to a package, but they don’t want to give in to each other and make it look like the other helped in any way. Dealing with a pandemic during an election season, just seems to highlight the wacky in our elected officials.
This week’s post circles back on a few things from previous post in SPACs and retail traders, but the big topics this week are US Bank earnings, Macro, Volatility, Risk with some Crypto.
Best of the week:
I would necessarily call this the most
interesting, but it is quite newsworthy. The current $100M in assets bar is
relatively easy to make for most new funds. According to this
Reuters article the average size at launch in the Americas is $230M.
Raising the bar to $3.5 billion would still keep roughly 90% of the value of
assets reportable, but only about 10% of the firms. This would have a huge
effect on any strategies and analysis on fund holdings.
Best of the Rest:
Macro & Volatility
Some much in this one episode. They open
talking about the virus, but the meat and potatoes of this comes from Lyn. I
loved the talk around the Dollar, Jobs, Gold, and Swap lines. At the end, they
discuss the possibilities around the November election. Not just the
Presidential election, but also how a possible split government might affect
markets. This is an excellent listen if you’re interested in hearing a
perspective on how global economics are showing cracks. There are just too many
good charts here to pick just one.
Lyn
Alden: The Road to Inflation Listening time: 72 minutes
Chris Cole posted a chart this week highlighting what the options markets are telling us about the upcoming election volatility. Regardless if you understand exactly what Chris is showing, you can see how much higher the numbers compare to the previous three elections.
https://twitter.com/vol_christopher/status/1283515164529172486/photo/1
This is a weekly recap/discussion type podcast around Volatility. I wanted to highlight this one topic covered towards the end of the episode. A listener asks the pros why does everyone use IV30, or 30 day Implied Volatility. There’s a quick 5-6 minute answer on the history and reasoning this is the industry standard for volatility. Looking at Refinitiv products, you’ll notice we have a default RIC for each equity with the Implied 30 ATM volatility and in our DataStream charting, options default data item is IV30.
Why
do traders use IV30? Listening time: 6 minutes (not full podcast)
I included this one, because it was another mention of the overweight tech sentiment and the suggestion of a move to the S&P 500 Equal weight index. Lyn had a few charts in her presentation as well. This might be the most efficient way to stay long, but lighten up the exposure, if weary of the high valuations, to the mega-techs that are driving the index today.
High Frequency in Economic data is a lot
different than HF data in trading. In economic data, daily data is super high
frequency. DataStream has 14.1 million economic data items, and 0.03% are daily
frequency. These alternative data points are decent indicators that might be
able to give analysts some early signs of recovery.
Six
High Frequency Indicators for a Recovery
Banks
Normally, I will not share a daily brief
that talks about current events. Most of you have already read the news by the
time you get this post, but Ed’s rant was very good this week. He mentioned problems with press reports around Jobless claims, but my favorite part was his
talk around the Banks reporting this week and how it shows a divide between
Main St and Wall St. Generally speaking, the large banks with more exposure to
Sales and Trading, specifically Fixed Income, had the best quarters and
performed best this week. Truist (TFC) stands out on the chart, because the
stock performed well prior to the earnings release, but the earnings reaction
was negative. The size of the trading units vary by firm, but Goldman’s trading
revenues are roughly 50% (the highest of major banks) of their total quarterly
revenue and Wells Fargo (WFC) is the lowest at around 5%. Some banks like US
Bancorp (USB) do not really even mention their trading units in the earnings
release. The growth numbers were amazing. Bank of America (BAC) was on the
lower side at 29% increase YoY and it’s Trading revenue is only about 10% of
its total. They are mostly tied to the consumer & business banking. The
last screenshot below is the Loan Loss provisions from Screener. These last two
quarter are multiples of the average over the last five years. The large banks
are starting to tell the story that the economy may not come back as quickly as
the equity market has. I’ll be keeping an eye on this metric as the smaller
banks report.
*I found the info for Trading revenues
for most banks in their Earnings presentation in our Events app.
Some companies don’t share the slides, so I needed to go to the filings.
Daily
Briefing – July 16, 2020 – The Reopening Has Stalled: Ed Harrison Listening
time: 30 minutes
The heavier dotted line here is the XLF ETF
Risk
This one is on the longer side, but there
are some fabulous charts in here. Choosing only one to show was hard. The
basics of this research was that asset owners are looking for differentiated
performance and random asset classes. I’ve heard arguments for Farmland, Wine,
Art, Crypto, but finding something that’s not going to blow up your portfolio
is hard. I picked this chart because of all the talk around Private
Equity. This chart is a highlight of a section that argues for using small cap
value to replace private equity.
Re-examining
Diversification: 20/20 Perspective
This is one of the shorter research pieces I’ve read. With the selloff earlier this year, many people have been discussing the best possible options for portfolio protection.
The
Winter’s Tail - Protecting Against Equity Selloffs
I think a lot of this has to do with Earnings, but this chart is quite staggering. Keep this in mind when holding any overnight positions heading into Earning Season.
I’ve shared some articles about what risk
is, like the one above, but this article by Nick attempts to give you another
view on risk. Nick argues that many of us equate risk with portfolio or asset
volatility, but as we saw this year risk are the things we don’t expect. Think
crude going negative or your crypto-exchange being hacked.
Miscellaneous
This is a long episode with two fantastic
guests. Nancy Davis ran one of Goldman’s prop trading desks as a 24 year old.
She talks about Rate Volatility and her firm's IVOL ETF that helps mitigate the
AGG’s exposure to mortgages. The second interview is the founder of SPAC
Research. I wrote a little about how SPAC deals were influencing the amount of
new equity offerings this year. Ben’s research is meant to help those
understand the value within each company. I looked over the Filings for some of
these and there is tons of legalese and it's hard to get through for someone not familiar
with this type of company. This is important because there are still
18 more that have filed to go public.
Volvexity
(guests: Nancy Davis, Benjamin Kwasnick) Listen/Watch time: 110 minutes
Would a few hundred dollar change your life? I highly doubt it for anyone reading this post. If you invested it, and it multiplied maybe it could help a little. If you bought a lottery ticket or bought Tesla (TSLA.O) options, it might be able to pay off your student loans. This is one of the reasons people in the lower income brackets by lottery tickets and the next generation are slinging options on Robinhood. People are looking to make a jump not a slow climb.
Wealth Inequality & Lottery Tickets
Options traders set new speculative record
How to Deal With Jerks, Bullies, Tyrants, and Trolls
Listen time: 40 minutes
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