Have You Ever Seen the Rain?
China has been in the news a lot of late. There has been a lot on COVID, Trade, and diplomatic disputes, but recently we’re seeing something that has the chance to be the biggest of all stories coming from the region in years. As the East coast preps to be pummeled with rain from Tropical Storm Isaias, China has been dealing with an extra heavy rainy season of epic proportions and it’s putting their people and the world’s economy at risk. I found the Tweet storm from The Huntsman and knew it was going to be hard to beat as the best of the week. Granted those crooks over at Eastman Kodak gave it a run for the money. I mentioned that with my new role at Refinitiv, I’ll be going a little deeper into some of the analysis on these stories. There’s a little extra on the Kodak sketchiness and possible Fallen Angels. I recommend a quick look at the last article in the post, especially if you have an interest the more humans going to space. Virgin Galactic gives us a look inside their new spaceship.
Last Week:
Last week was quite an eventful week. We had the mega tech both speaking in front of Congress and reporting earnings, the whole Kodak fiasco, which I’ll talk more about below, a terribly low GDP report (see the chart from this article), FOMC Chair Jay Powell adding another ‘thinking about’ to his raising rates statement, Gold hitting a new all-time high, and we ended Friday with some good old fashioned trading volatility. You know what we didn’t get last week? A real pandemic relief plan from either party. Every time I think our elected officials cannot disappoint us more, they prove me wrong.
This week’s earnings reporters are not as big a players, but it’s hard to follow that lineup last week. This week, 132 companies or 26% of the constituents are reporting, but they account for only 12% of the market cap. Two-thirds of the names are in the bottom half of the S&P 500. The Russell 2000 companies are a larger subset with 36% of names and 40% of market cap reporting. One name to keep an eye on is Mohawk Industries (MHK), who is reporting Thursday. It has a huge upside predicted surprise, two positive bold estimates (significant deviation from the mean by a 5-star analyst), and the EPS revisions have been trending higher. T-Mobile also looks interesting. There’s a big downside surprise predicted for them and estimates have been falling, but they haven’t missed a quarter in about five years. This will be their first report after the departure of the brash CEO, John Legere, and I can’t imagine the new CEO, Tim Hottges, wants to start out on a bad note.
Best of the week:
This week’s ‘Best of’ is actually two articles on the same topic. I found the second article after reading the first link below, which was the original pick for this spot. These are a couple of amazing pieces on how China and the rest of the world would be dramatically impacted if the Three Gorges Dam on the Yangtze River breaks. There is tons of analysis in this rolled out 42 Tweet barrage of information in the first link. If you want to go super deep on China, there are even more links within the analysis here. The second article is from South China Morning Post, it highlights the same problem with the rain in China, but has a few different maps and data points. This article also has an interactive chart showing the results of previous floods. For Refinitiv’s Eikon users, there is the BRI Connect app that can walk you through the nearly 3,500 projects linked to Belt and Road, which might be affected by severe flooding. While Huntsman says a problem with the dam would be an epic global event, you can also look to BRI Connect to see which projects and companies might be closer linked to the Yangtze.
𝐖𝐡𝐞𝐧 𝐓𝐡𝐞 𝐋𝐞𝐯𝐞𝐞 (𝐨𝐫 𝐃𝐚𝐦) 𝐁𝐫𝐞𝐚𝐤𝐬
China’s worst floods in decades
Best of the rest:
In my last post, I shared a podcast talking about Dark Arts around corporate governance. Last week one of those exceptionally fishy situations appeared right before our eyes. On Tuesday, the President announced a $765 million loan/grant to Eastman Kodak (KODK.K) to help produce a pharmaceutical start-up to start making supplies. Regardless of what you think about Kodak being the company tapped to do this, as Ben gets into below, there was clearly some questionable activity before the announcement. According to multiple sources, the conversations started in May. During that time the company insiders made multiple purchases and the company awarded directors a ton of options in late May. As the Dark Arts article points out, many companies award options after quarterly reports, but KODK typically does it in January. Why follow up with more so quickly? We also see some interesting volume in KODK the day before the public announcement. The stock traded up 25% on six times the average volume, this is where our Market Share reporter (iMSR) or Volume Analytics (IVA) app can help alert you. That may have been due to an early leak of the announcement by a Buffalo News station. I also looked through $KODK filings data since May. Not only did a few directors purchase stock after conversations with the government began. That can be explained away. The company also gave out a lot of option grants the day before the announcement. Filing rules give them a few days to release the info, so the info came out after the loan announcement. My calculations have seven insiders up almost $20M as of closing value on just the stock & options purchased or immediately exercisable. Normally, shareholders would throw a fit about this, but 81% of the company is owned by insiders. So we should short the stock right? Well, this huge run up on questionable ethics has caused borrowing costs to spike to north of 200%. This has also caused an increase in implied volatility of the puts. Nine of the top ten open interest option contracts are puts.
A Closer Look At The Kodak Chairman's Stock Purchases As Shares Rally 1,500%
The Grifters, chapter 1 – Kodak
Corp Governance "Dark Arts": Part 5
Fixed Income & Credit
The rise of suspect companies at the lower end of the Investment Grade rating has been in the news for quite some time. The chart below from a recent report by S&P’s ratings team came across my timeline from multiple people. I thought this was a good place to highlight the effectiveness of the Starmine Combined Credit Risk (CCR) model. This model is an excellent way to monitor credit on a near real time basis. The model combines three underlying models, two of which monitor daily updated data points, to come to an implied probability of default and rating. The model recently gave some negative signals on Hertz before its announced bankruptcy. I thought it would be good to take a look at potential fallen across the model. What I’ve done is take Investment Grade ratings from one of four providers (S&P, Moody’s, Fitch, or Egan-Jones) and filtered for those names with junk ratings from our CCR model. Having a trader mindset, I also want to look at how the one year CDS is pricing, so I looked at the implied default rate of the CDS vs the CCR model and sorted by those the most underpriced (data as of 7/27). Using a simple pivot table, I took a look at the TRBC Industry groups as well. One name on the individual side stands out, Fannie Mae, and I’ve highlighted it in yellow. It accounts for 2/3rds of the outstanding debt in the total number. While not earth shattering research, this little screen can help you find risks in your portfolio or opportunities to buy under-priced risk.
Credit Trends: The Potential Fallen Angels Tally Holds Steady At A Record High Of 126
The Visual Capitalist team does some great work and I thought this piece on Oil & Gas bankruptcies was relevant this week considering the results from the Fallen Angels piece. I show thirty one companies with suspect ratings above. Companies like Marathon Petroleum, Schlumberger, and ONEOK have high levels of debt with greater than 2% probability of default. The Visual Capital team shows 47 companies with $55B in debt declaring bankruptcy already in 2020. Using our Deal Screener I’m only able to see 30, but there may be companies outside our coverage in that larger number.
Tracking the Growing Wave of Oil & Gas Bankruptcies in 2020
This highlights a TradeWeb discussion on Fixed Income ETFs. They talk about how flows are whipsawing through the crisis period in Q1 & Q2, how ETFs acted relatively calmly as bond spreads and volatility spiked, and how volumes for ETFs were exceptional.
Riders of the Storm: Fixed Income ETFs Pass the Test
While this article highlights electronic trading in European bonds during the early pandemic, I think the US markets were probably performing quite similarly. E-trading was a much lower percentage of trading, but the venues saw huge increases in volumes.
What happened to e-trading in fixed income?
Cross Asset
Jim has been sharing a lot of good content on the Capital Spectator blog of late. This article highlights correlations among asset classes, using certain ETFs as a proxy. This highlights that even when fully diversified across asset classes using ETFs available to US investors, the correlations in a crisis spike towards one. Even something like Crypto currencies showed a correlation on the downside. Even with the high correlations, diversification is still a benefit. I like to look at correlation in two places right now (CORR & DSCHART). CORR has some very good statistics on the current data, but it doesn’t do well with tracking the history of this correlation. DSCHART tracks the history well, but it’s limited in some of the group stats. I learn to code in Python more, I plan on moving this into our newly released CodeBook app.
Are Asset Class Correlations At A New Permanently High Plateau?
Below chart is S&P 500 on top and the average correlation to the index of all constituents in blue and average correlation of the global asset ETFs from the article in orange (? - I'm color blind).
Correlation using the CORR app in Eikon for the Global Asset ETFs used in the index
I’ve written about alternative assets a few times, but those were mostly CTAs and trend following. I touched on a few others like wine, art, or farmland, but this post shows nearly all the assets one, with the right amount of money, can invest in.
The Financialization of Everything
Nothing sexy about this article. It’s just good old fashioned storytelling. It’s a longer form piece on the debate around Crypto in the financial world. Many still see it as a farce, but some think it might be one of the only ways to truly keep your money from being “stolen” by the fiat crooks.
Another great Friday conversation from the Real Vision team. If you can, I highly suggest you look into their paid service as well. I’m sharing another conversation with Mike Green around the impacts of Passive investing. The impact on equity and bond markets has been huge and he talks about a few different points in this quick conversation.
Passive Investing Is A Misnomer: Mike Green - Listening time: 38 minutes
I would take this as more of an advertorial than a true informational piece. The research was done by Dimensional Funds (DFA) and the author’s firm uses DFA funds to invest. What stood out to me here was the staggering number of failing funds.
ARE INDEX FUNDS THE BEST WAY TO INVEST?
This hit my inbox as I was on a call getting ready to launch a partnership with MetaStock to give our clients more amazing technical analysis. The topic of the call we’re prepping for ‘Why Technicals matter more today’. I’m trying to get our team to understand that the thing Jack talks about here; Fed, Narrative, and Passive investing. Right now, it’s very hard to value a company by its earnings and fundamentals. Companies that make no products yet are trading at values higher than blue chips with sound businesses. Will value investing come back? I’m sure it will, but now I think Trend and Price matter most.
When Fundamentals Don’t Matter
I’ve mentioned SPACs in a few of my recent posts, but how much do you really know about how they work? Alex Danco writes up a very easy to understand post on how SPACs work and how they are different from the traditional IPO.
Retail
Good quick one from Michael about an interaction with his plumber.
Last week I brought up an interview with Omega Point’s Omer Cedar. Well this week one of his colleagues showed us some of the work that quants are doing with the data coming out of Robinhood.
Is Retail Investor Sentiment Leading to the Collapse of Our Short Ideas?
Miscellaneous
A quite simple article with visualizations to show where the aid packages differ. I think this just shows how wide the gap is and that it might take some time to come to an agreement. Especially, when they take a three day weekend. I mean it’s not like people are depending this on this while being stuck at home.
The Gulf Between Republicans and Democrats on Coronavirus Aid, in 9 Charts
You may dislike Facebook or Social Media in general. You make think Mark Zuckerberg is a geek or a thief for stealing Facebook’s idea initially. Whatever you think of him or the company, you better recognize he knows what the heck he’s doing. When big advertisers were fleeing, he didn’t panic because his business is supported by a fat tail of revenues. This email from the days before they owned Instagram, Insta, IG, or The Gram as the kids say, shows just how shred a businessman he is. He and the other leaders of the mega tech giants performed their duty to appear in front of Congress and I think it just showed how out of their league Congress was.
‘INSTAGRAM CAN HURT US’: MARK ZUCKERBERG EMAILS OUTLINE PLAN TO NEUTRALIZE COMPETITORS
I love Schwab putting money where their mouth is. They are helping establish a $3.5 million scholarship program that will cover costs for Black students pursuing degrees in financial planning.Their current workforce is diverse, but their African American representation is only about half relative to what it is for the entire US population.
Schwab Establishes Endowment for Black Students. What Does Its Own Workforce Look Like?
To infinity and beyond!!! Okay, maybe not really. Regardless of what this means for the investment prospects,this is still a pretty cool reveal from Virgin Galactic (SPCE.K).
Virgin Galactic Reveals Incredible Design for Its Spaceship — See Inside
Comments
Post a Comment