Video Killed the Radio Star

Isn’t it supposed to be the summer doldrums? What happened to Sell in May and Go Away? This summer has not been one of those uneventful years. As we come towards the proverbial end of summer with kids returning to school, I’m wondering what will happen next. I expected this past week to be active on the news front, but I didn’t expect it to be this crazy. I’ve got a slightly longer open this week because of some comments on the week’s news.

Of the two storms that were making their way into the Gulf, Macro was minimal, but Laura was quite a dooze. The storm damages are estimated at about $25B with about $5B to local refineries. The prices of Gasoline barely responded and Crude actually ended the week lower by more than 4%. Also last week, Walmart (WMT) jumped into as a potential buyer for TikTok. Yes, that Walmart. They aren’t going it alone though. The idea is to team up with Microsoft (MSFT.O) to buy TikTok operations in the US, Canada, Australia, and New Zealand for $20-30B.

The big thing that drove the chatter last week was the Fed’s talk coming out of their virtual Jackson Hole symposium, and that's where our title comes from. Fed Chair, Jerome Powell, introduced a new policy framework and with that essentially killed the Philips Curve (the relationship between labor market conditions and inflation). This new policy allows the Fed more flexibility to run inflation hot for an extended period to get us to an average inflation level, but the real shocker came from the changes on goals for maximum employment. While they didn’t specifically set targets, their statement changed from "assessments of the shortfalls of employment from its maximum level" instead of "deviations from its maximum level.” I thought Daiwa’s Michael Moran stated this well, “if the Philips curve is not dead, Fed officials view it as in a coma.”
Phillips Curve is Dead & the Fed Will Respond

Fed’s Elevation of Employment Goal Reflects a Changed World

I saw the picture below on Twitter referencing the Middle Class and thought of Ben’s article from earlier in the week. Many feel the recent actions by the Fed are just squeezing the middle class, but Ben shared some charts that tell a slightly different story.  
What Happened to the Middle Class?

Earnings’ Watch

On my names to watch from last week, Ulta Beauty (ULTA.) crushed their earnings and ended up over 11% on the week, half coming into the report and a nice 5.8% bump after reporting Friday. Dicks Sporting Good (DKS) also crushed it. They ended up 14% on the week, but were up 22% at one point after their stellar report. I think the highlight of that report was their 194% increase in on-line sales. 

With only a small percentage of companies yet to report in the major indices, we’re coming down to the wire. Eight S&P 500 names and 89 Russell 2000 names have yet to report. I wouldn’t recommend you should stop paying attention though. A few mid-cap names have large predicted surprise coming into the week, Five Below (FIVE.O) has a -13.7%, H&R Block (HRB) -20.3%, and Michaels Companies (MIK.O) -20.7%. The one large cap name I’m watching is CrowdStrike (CRWD.O). It’s cloud technology is one of the hot industries. They're coming into earnings with a 4.6% predicted surprise, which is higher than the 3.1% average surprise over the last 12 quarters. The SmartEstimate for this quarter has risen 32% in the last 30 days. The stock was up 2.4% last week and options are pricing in a roughly 9% move this week.  

Best of the week:

What’s going on with the US Dollar is one asset that’s driving many other investments. Commodities, Brent referenced this Short Dollar article in his chart book that appeared on Zero Hedge. The article references info from BofA and Goldman FX research reports from last week. Brent shows a chart on the huge futures in the Euro. It’s the largest in the 20 years this has been around. Traders are super long the EUR futures, which is nearly 60% of the DXY index. When we zoom in on the last six months, we’ve seen this position building, as EUR and DXY move lower. DXY futures have flipped to short since June as well. This conversation had me double thinking my position on the Dollar.

Brent Johnson: The Dollar is Not Dead / Brent's Presentation - Listening time: 79 minutes

More on the Dollar

What’s behind that positioning in the EUR that we show above? The research team at the CME goes over some of the reasoning that the Euro is stronger of late. It’s basically fiscal stimulus and handling of the virus, but they go into some numbers on this.

Euro Surges Against US Dollar Despite Negative Rates

Best of the Rest:

Let’s Make a Deal
I feel that I’m writing about this a lot this year. The set of articles and podcast below touches on the burst of IPO filings we saw last week and the unusually high deal proceeds seen so far in August. The podcast from Tech Crunch talks about each of the filings and highlights of the company, but you can also read through the data.

Global companies raise most funds for the month of August in a decade

Equity Shot: Everyone filed to go public Monday - Listening time: 28 minutes

or read about it - Unity, JFrog, Asana, Snowflake and Sumo Logic file for IPOs in rapid-fire fashion

Indexation
A big shake up in the most popular index in the US. When I say most popular, it’s because nearly every non-finance person I know, still thinks of “The Market” as the Dow Jones Industries. The Exxon part of Exxon Mobile was added way back in October of 1928, when it was still known as the Standard Oil Co. of NJ. The current company is a merger of two children of JD Rockeller’s Standard Oil, with Mobile being the Standard Oil of NY. Also booted were Raytheon and Pfizer. Pfizer was added in 2004, and Raytheon was added just 4 months ago when it took over for United Technologies, which it merged with and had been in the index since 1939. While this is a decent sized event, it’s more in the names and history than in the impact. The Dow had about $31B indexed to it, whereas the S&P 500 is about $12T. I’m watching these stocks this week to see how things play out on the back end of this event.

Apple stock split leads to major Dow Jones shake-up: Exxon is out, Salesforce is in

Why the Dow Jones shook up its members

Volatility & Options

‘The Derivative’ podcast from RCM Alternatives is quickly moving up my list of favorite podcasts. I joked a few weeks ago about skipping the opening, but I think that’s one of the things that I enjoy with their style. This week they talked with Mike Green. Yes, I know I’ve shared so much from him already, but, seriously, his thoughts on volatility and passive are so important to the underlying functioning of markets today. This visit he talks a little more about his early days in the industry and the theories and ideas behind Logica’s strategy. They don’t get into talking about Passive ruling the world until late in the interview, but I think it’s good to hear this again. Each discussion with Mike has a similar voice, but you can get new bits out of each one.

Straddles, SVXY, and (Gamma) Scalping with Logica’s Mike Green - Listening time: 95 minutes

This report from Acadian covers some of the mistakes/deficiencies that Mike talked about in the above interview when it comes to managing money in volatility based strategies. They talk in a little more detail about what the common mistakes are, but seem to agree with Mike that most of these are “recurring and avoidable.” They also took some time to explain the three main priorities that should exist for those using a volatility based strategy. This is a well written piece that’s easy to read and should be understandable for most.   
Volatility Investing: Characteristics of a Well-Conceived Approach

The increase in call volume versus that in puts is the main topic here. Keep in mind that, as noted in the Acadian report, every time someone purchases calls the dealers need to purchase stock to offset that risk, should they be trying to stay delta neutral.  “In any event, the prevalence of call buying is in our view a clear-cut signal that sentiment is extended after a blistering equity market rally since March,” the analysts wrote. The article also quotes Jefferies global head of strategies, Sean Darby, saying that “indicators are beginning to move into the ‘euphoria’ stage.” I’ve noticed over the last few weeks the VIX is slowly moving a little higher and is lessening its negative correlation with the S&P 500. 
Options bets that the stock market will continue to soar have exploded to dot-com bubble levels

For more on this, I recommend Mike Green’s latest post, Let’s Talk About Skew, Baby... 

Mike’s summary; “The bullish narrative of aggressive retail call buying driving markets higher conceals an important market dynamic of decreasing liquidity and an increasing mismatch between buyers and sellers as option volatility selling strategies, like call overwriting, retreat in the aftermath of poor performance. These dynamics drive a scenario of increased fragility that raises prospects for extreme moves in both directions.”

If you’re still not following some of the talk on Straddles and volatility, I recommend this quick article from Kris. I use this simple math when putting on some of my earnings trades. Here are a few that I’m looking at for next week. I have a simple monitor to look at the vol on a 30D straddle, then transform that into a 30D implied move and a 1 week implied move to see how expensive the options are. We also have a new app in Eikon that helps display the probability of the expected move over a period of time. Notice the strong probabilities of a 5% move over the next week. I put in IBM to show what a stock with less vol priced in would look like. Notice Korn Ferry (KFY) here it’s skew is higher than the others.    

Straddles, Volatility, and Win Rates

Lumber

The performance of Lumber has been mind boggling. It’s really a perfect storm of good and bad leading to a parabolic rise in Lumber prices. Following the declining sales on higher tariffs from China, we saw the start of a pandemic. So seeing a further slow down, mills cut production, then COVID further added to production problems. What the lumber industry didn’t see was that commuting costs would be used to build a new deck or a new home office add-on because the PM was no longer going into the office and found that they might work from home more often going forward regardless. This caused a supply shock, then the momentum traders got involved. Now, prices are skyrocketing. I was in my local Home Depot (HD) and Lowe’s (LOW) this week. The lumber aisle was about 70% empty, only the non-treated boards were in good supply. I took a look at the history of Lumber (LBc1) prices. I only see one other period that’s even close to the performance we’ve had recently. Late 1992 to early 1993, prices rose 132% in just over 100 days. This current run is 258% in about the same time frame.

A surprise commodity demand shock - the case of lumber

How Does a Soaring Lumber Market Impact Timber Prices?

Miscellaneous 

I enjoyed this interview because all too often research from the academic space doesn’t make it into actual money management. This conversation took a very interesting turn for me around the 43 minute mark when they talk about the work Partha has done on the predictive aspect of Twitter on earnings and returns. This made me think of the work Refinitiv is doing to show off the MarketPysch data for equities and other assets. If you’re interested in more from Partha, here’s the link to the conversation with Toby that Jack and Justin mention a few times.

Bridging Academic Research and Real World Investing with Professor Partha Mohanram

I’m not going to lie. This is an extremely long episode, even for Jocko, but I think it has a ton of value for people leaders. Over three hours is a lot of time, but they do go through a lot of content from their new book. You may be able to get most of what the book offers in less than four hours. It may be even less, because you can easily speed up Jocko to 1.5 speed. I have to say, I heard a lot of values Refinitiv talks about and displays. I heard one of the favorites of our Chief Revenue Officer, Deb Walton, on being a Learning it All. My favorite was a reference to an old story of two managers discussing staff training. The first manager objects to training saying, “What if we train them and they leave?” The second manager replies, “What if we don’t train them and they stay?”

Don’t Do it Alone. How to Build a Winning Team. “The Talent War.” Recruiting, Selecting, Training, and Mentorship, w/ Mike Sarraille and George Randle - Listening time: 228 minutes

Before you go, please have a look at my colleague’s LinkedIn post. Michael Ehrlich, the Mortgage Community Manager @ Refinintiv, is walking from Manhattan to Montauk to raise awareness for JDRF and Type 1 Diabetes. Michael is not carrying food, so if you’re #LIStrong and live near the north shore, please consider stopping by his route to cheer him on or give him a bite to eat. 

JDRF One Walk - Manhattan to Orient Point NO STOPS - *107 MILES *50 HOURS *NO SLEEP, *NO PACK

Thanks for reading. Have a fabulous week.

Michael