Separation is in the Preparation

I’m a little later than normal today, as I was up late watching the first week of NFL football. Nothing really on the line, but was just super happy to be watching sports. I saw a blurb that last Thursday was the first day in history that all major American sports were played on the same day. Professional football, baseball, basketball (Men’s & Women’s), hockey, and soccer all had games. Plus, there was a PGA event and US Open Tennis. It was a great day for sports. Well enough useless info. The title today comes from something I heard from NFL quarterback Russell Wilson. I think it sets the theme for the rest of the blog this week. From the looks of the last couple of weeks, traders, investors, and even speculators are preparing for the upcoming election. Many seem to feel there will be increased volatility, but I'm not sure why. 😉 Softbank moving into options spreads instead of being just long stock, increased vol spreads in the calendar. It all says vol is coming. Are you prepared?

This week we’ll hear from the US, UK, and Japan on interest rates. Using the Eikon Interest Rate Probability app, each has more than 90% chance of no changes. BOE is up at 98.7%. Apple (AAPL.O) has a hardware event on Tuesday, but don’t expect any new iPhone news. There are some conferences in health care. Pfizer (PFE), Moderna (MRNA.O), Merck (MRK), and Roche (RHHBY) are all holding some sort of event, so in lieu of earnings you could get some info coming out of those events. AstraZeneca (AZN) will also tell us more about restarting its COVID vaccine clinical trial.

Earnings Watch:

Last week was pretty active. The big earnings plays I was watching were eventful. LuluLemon (LULU.O), which reported strong top and bottom line numbers, didn’t seem to impress with forward guidance. The stock was very weak after reporting. Peleton (PTON.O) smashed all estimates and came out with positive guidance. Even with all that stock ended the week slightly lower than at the time of the report. There were a couple of attempts to move the stock much higher, but sellers ended up having more conviction. This one could have been a short term winner though if you played your cards right. 

This week there are hardly any companies reporting. There is one interesting play though, as FedEx (FDX) reports on Tuesday. There’s a Starmine Predicted Surprise of 7.7% for EPS. The details behind the surprise are what make it interesting. Three five star analysts have Bold estimates being 6%, 15.5%, and 20.9% above the mean, updating those last week. Five of the twenty-two analyst estimates are older than 75 days. Implied volatility is elevated on the option front, and it looks like the calls have been bid up a bit, so this tells me that option traders are expecting a big beat as well. I’m also watching Lennar (LEN), but there is nothing unusual that I can find there. Housing markets have been one hot sector, so I’m interested to hear their commentary. 

Best of the Week:

This one was easy for me. This is one of the best papers I’ve read in awhile. Corey has really outdone himself this time. In this paper, he really puts together the three main factors driving US equity markets these days; the Fed, Rise of Passive, and liquidity. It’s a little bit on the long side and does get into the weeds a bit, but you will really have a great understanding of what’s driving the equity markets today. 

LIQUIDITY CASCADES: The Coordinated Risk of Uncoordinated Market Participants

Best of the rest:

Before getting into some completely new material, I’d like to circle back on a few things that were highlighted last week. First one here is the echo chamber of sorts off the ZeroHegde, FT, WSJ reports on the Softbank option trades. There are a few repeated details in here, but some of there’s also some new charts and points in these two articles.

No, Softbank Didn’t Weaponize Options Gamma

How a retail options craze fuelled SoftBank’s ‘whale’ trade

I also highlighted the dislocation happening with Lumber prices. This week we’ve seen it fall from its highs and do so in quite a volatile fashion. Take a look at the chart below, those dots instead of bars are instances of the contracts trading at limit. Last week the front month traded limit down four times, then traded both limit up and down in the same day. We closed Friday limit up. It’s been fun to watch for someone with no position or direct impact.

Lumber futures climb to a record and more than double for the year, as pandemic boosts demand

Lumber Poised to Fall With Autumn’s Approach

LVMH has decided to pull its offer to buy Tiffany (TIF) in a $16 billion deal that’s been on the docket since October of 2019. LVMH is pulling out all the stops to try to break this deal. They’ve claimed mismanagement, but in case that doesn’t work LVMH is also claiming a letter from the French government is forbidding the deal. Dealbook does a good job here of highlighting some concerns.  Below we can see the price bump when the deal was announced, and we also see two other times when the market thought the deal was in doubt. TIF recovered a bit from the recent lows after the news about the deal possibly breaking down, and is currently trading 5% below the deal price. Looking at the options, are pricing in a 54% chance the stock is that 5% higher in one month and 67% chance it’s there in 2 months.  I’m wondering if LVMH would have to pay the $575M termination fee.  

The Case of the LVMH Letter

After the bullish announcement of a $2 billion investment from GM, we also had a detailed look at Nikola (NKLA.O) from the bearish point of view, if you couldn’t tell from the title. This is the report that saw lots of airtime last week. This is a long form research piece, but the basic idea of the report is that Tesla’s success put some pressure on GM to improve their electric offering. The report alleges that Nikola CEO, Trevor Milton, has a history of sketchy behavior. The main claims against Nikola here are that they are attempting to take advantage of the hype and exaggerating what they can actually do today. After reading this report, this seems to be a similar battle that played out in the early days of Theranos. Just like Theranos, Nikola is fighting back. 

Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America

This was surprising, but not all that much.Sharing the link to this, as there are also some good comments around IPOs that would make a good conversation. 

IPOs usually don’t turn out all that great...

Macro and other asset classes

Great discussion on China with the head of Asia Economic Research at UBS, Tao Wang. Tao discusses the input into their analysis, even some of the real time data like traffic congestion and coal consumption from power plants. They also talk about the virus and trade disputes. I think this is a good listen if you’re interested in China. 

China w/UBS's Tao Wang  Listening time: 53 minutes

We’ve all heard the alphabet soup of recovery type. Lately, the K shaped recovery is being talked about more. I saw this visual from JP Morgan shared via The Market ear site. 

The K-shaped recovery is likely to converge

I’ve had my eye on the constituents of the DXY of late. After interviews with both Dollar bulls and bears over the last few weeks, I’ve been following currencies a little more closely. I’m no expert by any means, but I do know how to read a chart and look at option positioning. TradingView put out some commentary around a technical formation in the JPY, but I’ve also noticed some dislocation in the 2M/1M spreads of ATM IV. Five of the six component currencies look to be pricing in some additional volatility, but the JPY has the largest spread. This chart book I have in Eikon that uses FX Option Volatility surface RICs. Granted the vol is less than in March on a nominal level, these spread having me keeping a closer eye on the DXY. 

USDJPY - Applying options to better trade spot FX

Short report from one of our partners, Overbond. It seems the long bond futures are getting a bid to them in the morning. This article highlights some of the trading desk talk around the long bond, but I also noticed the 10 yr was seeing similar bids the week before last. I don’t see the same action last week though. 

A RED-HOT TREASURY TRADE STARTS TO UNWIND EVERY NEW YORK MORNING

There are so many charts here so they’re hard to share. I will share this table that shows the top  alternative energy usage by country. Iceland is insane. I became aware of this watching a documentary on Netflix with Zac Efron on Iceland.If you’re interested in how they do it, I’d recommend that episode. Within Eikon, there is an excellent forecasting team in the Power generation area. Take a look below at some forecasts on the Mica Dam, which is in British Columbia and is the head of the Columbia River that runs 1,200 miles to Portland. The dam produces 2,800 megawatts of power, which powers 650 thousand homes. This page also covers the other hydro plants on the Columbia as well. 

Charting the Flows of Energy Consumption by Source and Country (1969-2018)

Miscellaneous

I loved this article. It’s along the lines of the fat pitch quote from Warren Buffett. I think I’ve been doing a pretty decent job of this in my trading account. It’s less than 5% of my portfolio and I still only have active trades in less than 50% of that account most of the time. I prefer not to trade for the sake of trading. I’ve made that mistake before and lost a lot of money. 

Master The Art Of Doing Nothing

Thanks for reading. Have a wonderful week.

Michael