HODL & BTFD

 

I hope all my US readers had a wonderful Thanksgiving. It was quite different for me not seeing any family other than my wife. She took the opportunity to get me to put up extra Christmas decorations. So, I took a queue from the US markets and will have a shorter than normal post. It’s not super short, but I left out a few things that I didn’t have time to write up. I included a few in the 'Just Links' section at the end.

With an off day on Thursday and an abbreviated session on Friday, volumes were obviously lower than normal this week, but the American holiday also has an impact on the Canadian markets. They tend to trade less than half their normal volume on Thursday and about three quarters on Friday. Before the holiday, the Dow Jones closed above 30,000 for the first time. It took less than four years to get there from 20k versus the 18 years it took to get from 10k to 20k. Granted it’s a lot less in percentage terms. We also saw President Elect Biden announce that Janet Yellen would be his pick for Treasury Secretary. 

For this week, I don’t see that much on the calendar. We’ll see the current Treasury Secretary and Fed chief in front of the Senate Banking committee. Also, OPEC meets Monday and Tuesday and we might see news out of that. On the individual company front, keep an eye on Nikola (NKLA.O), they have a lock up expiring on Monday and might see some selling pressure.   

Earnings Watch

I chose to stay away from last week’s names to watch and it was a good thing, because results were messy. Best Buy (BBY) beat on both top and bottom line and almost every metric, but on the call questions about Q4 and holiday sales seem to have sent the stock reeling. The stock traded up in pre-market quickly then traders just pounded it on crazy volume for the day. Deere & Co (DE) was better than expected as well on both top and bottom line. It opened higher for a small win, but it didn’t give you long to take profits as it closed the day lower. 

For this week, we have about 100 listed companies reporting in North America. Salesforce (CRM) on the heels of the rumor it’s buying Slack (WORK.K) is probably the one most are waiting for, but Zoom Video (ZM.O), which I cover below, Snowflake (SNOW.K), DocuSign (DOCU.O), CrowdStrike (CRWD.O) also report in that space. Another group to keep an eye on is the Canadian Banks (RY.TO, TD.TO, BNS.TO, BMO.TO, & CM.TO).  For the second week in a row, I only have two names showing any data anomalies in the estimates. 

• Zoom Video (ZM.O) has 26 analysts covering it. Almost every single one updated their numbers a day or two after the last earnings announcement on company guidance. You can clearly see this in the chart. There was one exception, Summit Insights Group, who went all the way up to $0.88/share. Over the last few months, 5 additional analysts have joined Summit in the 80 cent range. This is giving us a 2 cent or 2.7% Predicted Surprise. The 30 day ATM volatility for options is very high compared to the trailing average and the implied vol is even more elevated in the near term contracts. The options also have a negative 25 Delta skew for the weekly options, which means the call buyers are very aggressive in the out of the money options. With all this, as you might expect the options are pricing in a large move of 14.7% for the week. The company has reported earnings six times, and the average move over that period on an absolute basis is 16.45%. In theory, that makes the options priced on the cheap side for earnings.

• Cracker Barrel Old Country Store (CBRL.O) is one of those companies whose name is a mouthful. It only has 8 analysts following it, but one of them is a major outlier pulling down the mean. Gordon Haskett is way down at -$0.21/share estimate and the next lowest is $0.34/share. Taking just this one low number into account moves the mean up to $0.42/share. The same analyst has the lowest Revenue estimates, but not nearly as far off there as the EPS. There is no SmartEstimate on Same Store Sales, but the IBES estimate is for -16.57%. Coming off quarters of -39% & -41.7%, this would be a good result. It has a crazy low Put/Call ratio, but the majority of open interest in the calls is out in Jan 22 expiry, there is also a large amount of March calls open. 

Best of Week:

Rishi Narang is the founding principal of T2AM. In this interview with Aaron, he is talking about trends in Quant trading, how stat-arb developed, crazy inflows into China, influx of retail quants too. My favorite part was at the very beginning when he talked about the prominence of index rebalance trading strategies. This is where I got my start on the trading desk, and it’s still a big part of the markets today with the dominance of passive investing.
Rishi Narang – Evolving Trends—How Quants Are Earning Alpha - Listening time: 65 minutes

Best of the Rest:

In case you missed it, Bitcoin (BTC=) had a bit of a correction on Thursday. While many professional traders in North American were getting their beauty sleep, the crypto markets were seeing bids taken out. Bitcoin saw an overnight drop of 12% between Wednesday market close and the early rise so Americans could get those turkeys in the oven. All of the other major cryptocurrencies (Bitcoin Cash, Ethereum, Litecoin, Ripple) saw similar dips. During all this, the Coinbase website and app were down due to an Amazon Web Services outage. From Wednesday's high in BTC to Thursday’s low the largest coin was down 17%. A couple of possible reasons for the selloff were suspension of margin accounts at Coinbase and the commentary from the company’s CEO. Brian Armstrong put out some thoughts on Twitter that he feels the US Treasury and Secretary Mnuchin would add some regulations before leaving the office. All that said, as of this morning BTC has rebounded 16% off the lows and taken back about 2/3rds of the value lost. Has Crypto become a buy the dip instrument? 

Coinbase Will Suspend All Margin Trading Tomorrow, Citing CFTC Guidance
Coinbase CEO: Trump Administration May ‘Rush Out’ Burdensome Crypto Wallet Rules

I found this chart from JP Morgan via The Market Ear to be quite interesting. The post states, “JPM's proprietary model shows positioning is rather extreme in the Bitcoin space, especially as institutions have been loading up. Holdings via Grayscale, mainly inst holdings, have exploded higher.” 
KYC in Bitcoin?

Harrison Kupperman, aka Kuppy, has shared his views on Bitcoin before. Needless to say he is quite skeptical, but this post about the arbitrage opportunity makes a little sense when you think about it. His basic premise in this post is that GBTC is one of a few ways for professional investors to get exposure to Bitcoin. This leads to a huge premium to NAV. This in-turn leads to arb trading on those spreads and Kuppy walks through the process and how he thinks it influences the underlying BTC asset. 
Why This Reflexive Ponzi Scheme Will Continue…

Zac Prince, CEO of BlockFi, joined Michael and Ben on the Animal Spirits podcast to talk about the company and basically all things Bitcoin and crypto. The coolest thing I heard in this interview was loaning people money based on Bitcoin assets. I shared this particular episode because of the timeliness with the Thanksgiving day crash in BTC and many other cryptocurrencies and the business of Bitcoin discussion.
Talk Your Book: Investing in Bitcoin - Listening time: 49 minutes

Ben’s post from last week looks at the performance of SmallCap using the Russell 2000 total returns, after a double digit monthly run. It wasn’t that hard, because it’s only happened 17 times since the index came about in 1979. Two of these are in the last two years. From the previous 15 examples, things look positive. Although, we have to keep in mind the very small sample size. I wanted to look at how far above and below the 200 day average the index has moved. No surprise saw the large percentage below during the GFC, but the current performance is near all-time highs. The index has only gone +25% above its 200 day moving average three other times in the last 25 years.
What Happens to Small Caps After a Huge Monthly Gain?

I’m a value investor at heart, so this compilation episode on different people talking about Value investing was nice. Justin puts together a bunch of clips on different topics around value and where it goes from here. 
Is Value Investing Dead? - Listening time: 34 minutes

This is a great conversation on a multitude of topics. Bill Brewster is coming out swinging on his new podcast. If you’re a value fan, I highly recommend listening to Bill any time you can. His line of thinking is great. In his second episode, he brings on a similar thinking to him in Dan McMurtie, PM at Tyro Partners and formerly the anonymous Twitter personality, SuperMugatu. Dan and Bill get into many topics like Dan’s early COVID call, risk management, how a hedge fund manager thinks, and all sorts of great stuff. The thing that was my favorite and really caught me was Dan’s point on buying higher. The idea of being right on an idea and not having the guts to continue to buy after the first move is so right. This is a long form conversation, but it’s so unbelievably worth every minute.

Dan McMurtrie - The Next Market Wizard - Listening time: 136 minutes

There has been a nice rebound in the last month in the Energy sector. Much of this breakout has been on the back of the potential vaccine and end of lockdowns. This Reuters Breakingviews article suggests that these new levels in Crude might become the floor. The reason is increase in demand after the virus and limited supply. The article highlights the drop of capital investment according to Rystad Energy from $530B in 2019 down to $380B this year and $300B in 2021. You can get a sense of this drop looking at the Oil and Gas Rig counts from Baker Hughes. The latest Oil numbers are down 64% from a year ago. This was something I covered in my October 5th edition sharing Art Berman’s views.

Oil’s latest boost has longer-term thrust

An amazing look at some historical events here and how they relate to many topics of today. For example, Jason mentions that bicycles were seen as toxic in the late 1890s. He also is skeptical of the simplifying the role Facebook played in the 2016 election, as he noted that Russia has been trying to destabilize US democracy for 100 years. Here’s another one Jason brings up, the waltz was considered hazardous to your health.
Overcoming Fear of Change with Jason Feifer - Listening time: 66 minutes

Just Links

Boaz Weinstein Versus the Manager Marriage of the Century

California Legal Cannabis Sales Exploded. And California is Cashing In

Just one more month to close out the year. Let's make it count.

Thanks for reading!

Michael