Hey Joe

 

Last week was an active earnings week, but most were drowned out by the US election. Like many others I think I clicked refresh on the election results more than a thousand times. The thing that was most surprising to me was that many seemed flabbergasted that President Trump took an early lead. There was so much talk around this coming into the election that Republicans would come out and vote in person on Election Day, but Democrats would do much more voting by mail-in or early voting. I highlighted this in ‘Battle of Red Mirage’ with the ‘Best of’ from Macrovoices. Even with the vote counting continuing today, the pollsters were still very wrong again. Although, the likelihood of a Biden win is very high, look for President Trump to continue to make 2020, well 2020. The Macrovoices team is at it again, covering the extreme possibilities in their last episode. I also have a few post election topics, but after the ‘Best of’ and the Election post game, I recommend listening to the Cold War II episode from Prof G.

 

Earnings’ Watch

Last week I decided not to be active in any of my earnings bets. The election volatility just scared me away from these types of trades. Of course this was the week, I sat on the sidelines, because each call was spot on and performed well in trading the equities. GNW was the only one though that outperformed the expected move in the options coming into the week.

• MELI - Coming into earnings the Predicted Surprise was about where it came into the week at +42%. The company reported $0.28 for a surprise of 62%. The SmartEstimate for the next quarter by $0.22/share. The stock saw great performance coming into earnings on Wednesday afternoon, it was up 6.6%. On the positive report, the stock gapped up another 6.8% at the open Thursday and closed the week up about 22%, which dramatically outpaced the .NDX @ +8.5%.

• GNW - The day before earnings the Predicted Surprise was slightly higher than at last week’s writing at +40.8% on a mean of $0.07/share. The company reported a nice beat of $0.26/share or 271%. The stock traded up almost 9% in the post market trading on Wednesday following earnings, but only opened up 4.8%. It quickly gave some of those gains away, but rebounded to close up 3.6% on the day and ended basically flat on Friday. Even with the good earnings day, this stock underperformed it’s main index, the S&P Midcap 400 on the week.

• EXEL.O - Before it’s Thursday post close report, the mean of $0.01/share and -64% Predicted Surprise change a little, but the company reported even weaker than predicted numbers. EPS report came in at -$0.10/share, which was a very high percentage because the mean was so close to zero. The stock did not react well. It opened down 5.2% and closed down 6.5%.

This week we do not have as many names as the past two week, but still some big reports are coming. McDonald’s (MCD), Lyft (LYFT.O), Disney (DIS), Applied Materials (AMAT.O), DraftKings (DKNG.O) are some of the most followed names reporting.

Here’s what I have my eye on this week:

• Dillard’s (DDS) has been a battle-ground stock and still looks to be going into their next earnings’ report on Thursday. The event driven trader playing the upside and the shorts smashing it lower. This stock is up 50% in the last month, but 15% off it’s recent highs. Using S3 Partners’ Black App in Eikon, we can see the daily up/downs of the Short interest. Implied volatility is slightly elevated, which can be expected with a high short interest name. The Predicted Surprise is 21%, or about 18 cents/share, but looking at the details this one worries me. Two brokers are way off the mean; JP Morgan (-1.55) and BofA (-2.26), but WedBush recently raised their estimates from -0.41 to -0.02.

• Callaway Golf (ELY) has a large Predicted Surprise of 43.4%. This is mostly due to the fact that only three of the ten analysts updated their numbers following the TopGolf acquisition and guidance in late October. I don’t know how the stock reacts if we get updates before today’s report or if we don’t get updates and the company crushes the useless mean. Options traders have been buying calls mainly on Oct 28th, but there looks to have been some near term contracts opened on Friday. 

• NOVAVAX (NVAX.O) is predicting a 26.1% miss of a $1.73 mean. This surprise came after a recent downgrade from Cantor Fitzgerald from -$0.55 to -$1.02 on Oct 30th. This most interesting thing about the details on this name is the extreme difference in the five underlying broker estimates. Cantor is the lowest, but Ladenburg Thalmann comes in way up at $2.61 and B.Riley even higher at $8.22/share. It wasn’t much, but there was some call buying last week.

Best of the Week:

Ihor Dusaniwsky, MD of Predictive Analytics for S3 Partners, joins Meb to discuss short selling. I think they get into some of the misunderstood mechanics of the short process. Meb talks about the possibility of creating an ETF to buy the most shorted securities, hedging the risk, and just taking in the lending rate. Ihor mentions that this is basically a big revenue stream of the prime brokers. The biggest point made here is that “every short creates a synthetic long position” (@ the 39 minute mark), so this is how we can get to +100% short interest. This was the position covered by Harris Kupperman on DDS a few weeks back. Ihor mentions S3’s Black App, which I use often to get a higher frequency look than the Exchange data that comes in every two weeks. When People Say ‘Shorts Only Kill The Stock Price’…No…There’s A Two Way Street In Their Activity - Listening time: 58 minutes

Best of the Rest:

Election Post Game

Erik does a fantastic job of walking us through the laws that govern the election process and the possible wackiness that can ensue between now and January. 17 states do not have laws against Faithless electors, i.e. the electoral college not going the way of the State’s popular vote. This episode has a nice interview on investing in Gold opportunities with Marin Katusa, but I found this part of the discussion the most beneficial to understand what happens between now and January.

US Election Day Post Game - Listening time: 112 minutes (Election summary, which is where the link takes you to, is 30 minutes)

Ben looks at why the polls might have been so wrong. I used to answer polling questions, but the phone calls have become a huge time suck. The person on the other end must read off the entire answer set every single time. I only do it now, if it's a college run poll. 

Everybody Lies: Pollster Edition

Another thought provoking response to the election narratives that proved to not be true. Investors love narratives. Mark reviews how the “blue wave” equals government spending narrative did not pan out, so it was changed to gridlock is why things are positive.
The failure of ungrounded investment narratives

My colleague, David Aurelio, took a look at how President Elect Joe Biden’s tax plan might impact the S&P 500 forward EPS numbers. Granted Biden will most likely not have a Democratic Senate until 2022 at best, and even if the Democrats somehow win a majority for 2021, as David notes, it will still tax some time.

How will Biden’s 28% Corporate Tax Plan Affect S&P 500 Earnings?

At the polls last week, Arizona, Montana, New Jersey and South Dakota voted to approve cannabis for adult use. That takes us up to 15 total states that have approved it. Business Casual had a couple of episodes last week talking about the future of cannabis. Karan Wadhera, managing partner at Casa Verde Capital and Bruce Linton, ex-CEO of Canopy Growth each joined the show to highlight the business.

Legal weed: The winners and losers - Listening time: 42 minutes

Is legal marijuana a bubble? - Listening time: 39 minutes

Miscellaneous

Nice article explaining the complexity of the VIX and how it’s not just a straight measure of the ATM volatility of the S&P 500. This is a good quick educational piece if you struggle with understanding what the VIX is, plus it includes links to more in depth articles. While we’re on the topic of VIX, I thought the chart of the VIX term structure before and after the election was something interesting. The short VIX positioning was huge and people made a lot of money on this trade as the post event vol crush has been huge.

WHEN A VIX SPIKE DOESN’T EQUAL VOLATILITY

Great conversation around China and tech with Niall Ferguson. Niall highlights the history of ChiMerica and the strengths of each country’s tech sector. He also reminds Americans that the US basically stole technology from Great Britain 200 years ago. You also get a quick summary of the role of Scotland in the global landscape at the beginning.

Cold War II: China Tech vs. US Tech - Listening time: 56 minutes

The chart I wanted to highlight, which was shared as part of Matt Topley’s daily email, is some data from Blackstone’s regular survey of the CEOs in their portfolio of companies, of which Refinitiv is one. This is currently 94 global companies across various industries. Only 27% expected revenues in 2020 to be equal to 2019 levels, but those that expect a one year recovery jumps to 62%, and two years up to 91%. The majority of CEOs see employment levels in the 75-100% bucket.
Wharton Hill Investment Advisors - Quarterly Investment Perspectives: Q4 2020

Vuk Magdelenic, CEO of OverBond, and my colleague, Alex Hardouin, who is head of Rates at Refinitiv, write about some of the new wave trading decisions finally making their way to the Fixed Income markets. Vuk also wrote about something similar on Tabb Forum. The fact that it’s taken 20 years for electronic trading and smart order routing to take hold really speaks to how complex the fixed income markets are. Alex and Vuk walk through how aggregating fragmented pricing data and use some level of AI to more accurately price bonds in a live market. In Vuk’s Tabb article, I found the industry examples that were run through most helpful.
Smarter trading decisions in fixed income

Smart Order Routing: The Next Frontier in Fixed Income Trading Automation

A super quick read to remind you what is liquid and what isn’t. This mostly focuses around real estate, but you can take the idea of this to other asset classes. We saw this back in March, when people started selling bond ETFs, because they could not find a bid in corporate bonds.
What is Liquidity?

Thanks for reading. Hopefully your tension levels have come down a bit after last week. One reminder from me, let's be especially kind to others right now, as many people are under unusual amounts of stress. 

Michael