Currencies, Old and New

 

Last week was quite messy for equities. Coming into the week, I thought earnings would be the biggest driver of the US and Canadian markets, but virus worries coming out of Europe and this week’s election seem to have had the effect of a weighted vest on a helium balloon. The big names that announced towards the end of the week didn’t help much. You’ve probably digested the themes coming out of the bigger names reporting already, so I will not cover that in detail. I will cover some of the aggregate data and trends in this week’s Earnings’ Watch section. The rest of the post quickly moves away from equities. The ‘Best of’ this week is quant FX, there’s also a couple of energy pieces, an interview on Bitcoin, a couple of things around office real estate trends, and I end with a couple of things around Annie Duke’s work on decision making.

Earnings’ Watch

If you look at the numbers from the roughly 200 names that reported, 85% beat the IBES mean estimates. Those that beat performed positively at first trade, but couldn’t hold it for the full close to close performance. Of the names that beat, only 83, or 50%, opened higher on the next trade and 63 or 38% closed up on the day. The names that did not meet Street expectations were punished. Less than ⅓ opened up or ended the day higher. This is inline with a chart I saw this week that is attributed to Goldman Sachs that shows the day after has been rough for all, but especially for the companies that do not meet expectations. This week we have 133 names in the S&P 500 plus another 94 from the TSX 300. In total, we have nearly 1,000 names reporting in the Americas.

As for my names last week, things were mixed. 

• Avis Budget Group (CAR.O) beat EPS numbers by a very good amount. The surprise expectations going into the announcement was 30%, so it came in from Monday’s number. That didn’t matter than reported 1.13 and beat by 600%. That’s down 200% on a YoY basis, but a positive number was good. At least I thought it would be. The stock traded higher into reporting on Thursday, but opened down 3.7% and closed the day down 8%.

• Gildan Activewear (GIL.TO/GIL) also beat reporting $0.30/share with a 193% surprise. This was down 43% YoY. The stock opened up 3%, but couldn’t hold those gains and ended the day down .3%. The stock opened up again on Friday 3.8% then ended lower again.

• Ameriprise (AMP) was predicting a 9% miss into the event and the company did much better than expected. They reported a $4.27 number, which was higher than the initial estimates before many brokers restated lower, and that was a 191% surprise. It was a volatile day for AMP after reporting. The stock opened higher by 0.25%, then traded down 2%, but ended the day up 1.8%.

Here are a few names to keep an eye on this week. In an attempt to cut down the useless text, I’m now including a table that shows much of the data I often write in the summary as to why I’m watching these names.

One thing each of these three names have in common is a high coefficient of variation, which for you non-nerds is the Standard deviation divided by the mean. It aims to normalize the volatility in the data sets. In this case, these names are not anywhere close to the largest that usually goes to names with very low mean estimates like Callon Petroleum (CPE) and high dispersion.

• Mercadolibre (MELI34.SA/MELI.O) - I’ve included the Brazil RIC here as well, but this company trades mostly in the US. This name caught my eye because of the vastly different opinions from the analysts. Even among the 5-star analysts, Stifel Nicolaus has a $1.07 estimate and UBS has a -$0.10.  

• Genworth Financial (GNW) is a small cap insurance name. They do not have a ton of coverage either, but I have it as a name to watch, because the underlying data caught my eye. It was one of the few names up last week, and has an elevated Starmine Short Squeeze score. Interestingly enough GNW has the highest implied vol of these three names, but it’s actually lower than its trailing averages. The skew and Put/Call Ratio with this name shows some interest in Call buying.

• Exelixis (EXEL.O) is another name with some wonkiness among the analyst community. Only four of 14 analysts covering are included in the SmartEstimate. Those four each updated estimates in the last couple of weeks much lower. The seven analysts included in the Mean, but not the SmartEstimate average EPS is $0.05/share and an average age of 100 days. I’d look at this closer to the Thursday report for some updates. The options here are slightly elevated, but there are many more calls open. There is also a bid to the deep out of the money puts and calls here, but the belly of the vol smile is at the 110-115% moneyness.

Best of the Week:

The conversation is unlike anything I've heard in quite some time. Michael Melvin has moved from academia to BGI and back to academia. He applies quantitative models to trading the FX markets. There’s so much packed into this hour long conversation. They talk about benchmarking, carry & momentum, flow data, QE, China’s importance, machine learning, and trading costs. If you’re interested in diving into this topic more, I recommend some of the papers mentioned, which can be found on the MacroHive site.

Michael Melvin On Quant Strategies In Currencies, Impact Of QE And Machine Learning - Listening time 61 minutes

Best of the rest:

This is one episode of ten that hit the HedgeEye Real Conversations feed this week. They released a bunch of conversations from their HedgeEye Investing Summit. Michael Saylor is a visionary to some and a madman to others. His company, MicroStrategy (MSTR.O) is one of the first to hold a large portion of their balance sheet cash in BitCoin. Saylor believes that holding Bitcoin is actually less risky than holding cash. Michael says that Bitcoin is at an inflection point, big enough to be unstoppable, but still new enough that maybe 10 of 10,000 entities get it. If you’re contemplating Bitcoin, I recommend listening to Michael make the bullish argument.

Real Conversations: Michael Saylor, Founder & CEO, MicroStrategy - Listening time: 66 minutes

I think understanding Michael Saylor’s position on Bitcoin is imperative to the next 10 years or so in corporate finance. Michael talks with Raoul here and covers many different ideas on using Bitcoin. He might be super early, but this might also be the beginning of a trend. North American companies alone hold $2.7 Trillion in Cash and Equivalents. MicroStrategy (MSTR.O) has about $500 Million of that. Not all companies have to convert 90% of their cash to Bitcoin for this to be a real event. Listening to Michael speak and I could not help but think of Thomas Jefferson and those other Founding Fathers that argued vehemently with Alexander Hamilton against the formation of a central bank controlling the currency.

Bitcoin Infiltrates Corporate America (w/ Michael Saylor and Raoul Pal) - Listening time: 121 minutes

This is an excellent episode from my favorite podcast. I recommend it via YouTube, because you can follow the charts from Brent on SpotGamma. Josh Young of Bison Interests looks at oil & gas through a macro lens. This is a good conversation around the actual energy commodities of oil and gas. There’s even a historical mention of whale oil charts. The second interview (47-1:16 mark) brings back Brent from Spot Gamma to review some of the details that will be at play this week around the election and shake out. Some much good info from Brent, but the biggest take I got was all this deep OTM put open interest in the SPX. Check out all the ticks on the chart on the left of the second chart. This put buying could have something to do with the downdraft this week as well. The first chart shows the historical one week pre-election performance of the S&P. As usual, the two interviews end just a little bit longer than an hour in, then we get into Talking Charts, This Week in History, and the last half hour is the fun stuff.

Applying Chicago School to Energy Markets - Watch time: 130 minutes

SpotGamma Election Charts

Justin and Jack do a quick review of the data from Jack’s blog post. Trading portfolios are going to be wildly affected over the next week or maybe month by the election results, but that should not have a major impact on the long term performance of your investment portfolio.

Why Your Politics Shouldn’t Affect Your Investment Portfolio - Listening time: 16 minutes

https://blog.validea.com/the-importance-of-separating-your-politics-from-your-portfolio/

Nice set of charts on the historical S&P 500 1 year returns to keep things in perspective. Yes, things in most areas of equity were negative this past week, but we’re still near the center of the historical distribution. The z-score of -0.03 is basically zero. There is really nothing unusual about our returns this year, SO FAR.

The S&P 500’s Latest Slide Vs. Rolling 1-Year Returns

Pensions continue to be a point of worry for anyone paying attention to them. I bet the vast majority of you reading this have a 401k, so this is not too much of a worry for you personally. That is unless you have a family member that is a public employee, like my wife the teacher. 

What’s Going to Happen to All the Underfunded Pensions?

Nice quick article on a survey of CEOs on their office space.
76% of US CEOs Will Slash Office Space As Remote Work Dominates

Josh Brown, who actually is a CEO, talked about some of the calls he’s getting about office real estate. Josh challenges readers to step up and buy one of the big office REITs. I decided to take a look at the REITs with office exposure throughout the Americas to see which names our Starmine Combined Credit Models thought about these names. A few names in Canada, the US, and one in Mexico have implied investment grade ratings.

Welcome to Hell

This chart from JP Morgan caught my eye. It’s nothing all that surprising when you think about it, but still sort of disturbing for our economic prospects.

For all the science geeks out there, this is both an informative and interesting article. This really dives into the current and future supply and demand around Geothermal energy.
Geothermal energy is poised for a big breakout

I found this to be a fascinating conversation with the former Twitter CEO, Dick Costolo. They really get into the nuts and bolts of the history and strategy of Twitter. This is a platform that many of us use on the daily basis, and some may even invest in. If you don’t have the time to listen to the show, you can check out Ben and David’s notes.

Twitter (with Dick Costolo) - Listening time 82 minutes

Acquired: Twitter show notes

Annie Duke’s recently released book talks about How to Make Decisions. Last week the World Series gave us the latest example of resulting, or more widely known has hindsight. This is a non-business related article that reviews the second guessing of decision made by the Tampa Bay Rays’ Kevin Cash that ended up costing his team game 6 and the World Series title.

Don't blame analytics for the Blake Snell decision, blame the Rays

Speaking of Annie, I thought this article was a good piece on the Democrats’ strategy of fighting the last battle. She goes through the party’s spending in different upper mid-western states and how they’re playing not to lose 2016 again.

Why We Assume What Went Wrong in the Last Election Will Go Wrong Now

Thanks for reading. Have an enjoyable week. 

Michael