We Didn't Start the Fire

 

Many of us couldn’t take our eyes off the TV last week. For all the hating on Mondays, it was by far the easiest day of the week. As I was putting the finishing touches on last week’s post, Bitcoin was coming off its first time above 30,000 and looked like it might do a bit of a prairie dog chart formation*. That’s when something peeks its head above a level, but quickly dives below ground. Late Monday morning, it traded down to 27,600, down 20% from Sunday’s highs. Over the next 100 hours it rose 52% to an intraday high of nearly 42,000. And that was the calm before the storm. Tuesday started off with a bang as Saudi Arabia said it would cut another 1M barrels off their daily production. Nearly everything energy caught a bid, and Crude ended the week up about 9%. Tuesday night we started getting some early predictions on what could happen in Georgia’s two senate races, but it was still undecided going into Wednesday morning. That’s when all hell broke loose. Frustrated with election results, or process, thousands of supporters of President Trump descended on Washington to protest. Things escalated throughout the day, and the most aggressive of those protestors decided to push their way into the Capitol building as the House of Representative gathered to count the Electoral College votes. We’ve all seen the reports on that, so no need to get into any further details. As President Elect Biden spoke the rest of the week, he laid out pieces of his plan once he does take office. Markets reacted when Democratic Senator from West Virginia, Joe Manchin said he would not support the size plan Biden has in mind. This sent Gold (XAU=) and Silver (XAG=) lower down as much as 7% & 12%, respectively, from their weekly highs. Needless to say, I'm hoping for a less stressful week this week.
*Not a true technical chart formation, but one made up by Kevin Muir & Patrick Ceresna of the Market Huddle.

This week we’ve got a few mid-sized IPOs expected. A few Economic reports as well. We finally get to have some fun with earnings reports again. As for below, I've got a lot of content to share this week. The pic above comes from our Best of article, while it's a little more than what actually happened last week at the Capitol, there were a lot of references in the media to the events of 1814. The British didn't end with the Capitol, they also burned down the White House. Jamie does an amazing job of highlighting economic performance around some of the most fiery periods in world history. I have a few longer than normal writing sections this week on Bitcoin and Mortgages, as well as a few more charts there. The long Market Huddle interviews are a tick below the Investor Amnesia post due to its relevance to current events, but it really covers the two biggest themes driving equity markets nowadays.

Earnings’ Watch

Last week I only dove into Bed Bath and Beyond details, but that ended up being a complete belly flop. The stock rose 17% into their Thursday AM report and call options kept trading at heightened implied volatility. If you followed it close though, Wednesday saw a few puts both in and out of the money trade much more than expected volume. The weekly 18 & 22 puts traded heavily. The company disappointed and missed on both the top and bottom lines and said it had weak holiday sales. The stock opened down nearly 15% on heavy volumes, but somewhat rebounded from those lows.

I also included the three other big names that reported last week. Constellation had a nice upside surprise, but it fell just below our 2% threshold. Walgreens and Micron both beat as well, but their analysts were all roughly inline with our SmartEstimate.

For this week, we’ll have our last lighter week of reports, but we’ll hear from a few bigger names. The US Banks are reporting towards the end of the week with First Republic on Thursday then the three bigger names, JP Morgan, PNC, and Citigroup, reporting Friday morning. We’ll also hear from mega asset manager Blackrock on Thursday. I’m particularly interested to see what happens with two of the banks because of the numbers I’m seeing with their estimates coming into this week. I like following the banks, but rarely trade them because there are so many variables that go into what the Street considers a successful report or not. Delta Airlines also looks like it might be challenged to meet the Street’s expectations. I’m also curious to hear from KB Homes (KBH) for an update on the housing market, I’ll talk more about that below.

• Delta Airlines (DAL) has an Predicted Surprise of -5% with an average revision over the past 30 days of -16.9%. UBS is the one broker not included at all in the Starmine SmartEstimate and it’s 32% over the mean @ -$1.68/share. Their estimate was first provided back at the end of September. Look for a possible update this week. BofA’s Andrew Didora is a five star analyst and he has a bold estimate 10% below the mean @ -$2.73. As you can see from the table above there is much dispersion amongst the analysts in this name, which should make for some interesting trading this week.
• Speaking of dispersion, Wells Fargo (WFC) should be another ‘fun’ one to watch this week. Predicted Surprise of -4% and negative recent revisions, which contradict the longer term trend in the Starmine Analyst Revisions model. This one saw a large jump after the last earnings report, then slowly lower since. Coming into the week, we have two Bold estimates, the downside from Raymond James’ David Long @ $0.31/sahre and the upside from Barclays’ Jason Goldberg @ $0.65/share. They are the top two weighted analysts in the SmartEstimate.
• So far we’ve looked at two names with negative connotations. One on the positive side is JP Morgan (JPM). They currently have a 3% Predicted Surprise, but also some real strong momentum in their estimates. This period their EPS number has been raised on average by 14% over the last 30 days. While this company has no Bold estimates, there are a large number of older estimates that I think might see an update before Friday’s report. Four analysts have estimates from as far back as October. Two of them are well below the mean and the other two are 5 star Starmine analysts. Look for any updates there to continue the positive momentum.

Best of the week

Seeing the events happen at the Capitol this week, I knew Jamie would have something extraordinary for me to read over the weekend. He did not disappoint. Jamie covers the last time Washington was under attack. He then also covers the Fall of the Roman Empire, the French Revolution, and World War II France. Finally , he looks at some history from China and close elections. This is a phenomenal piece to learn from history. You don’t have to be a history geek like me to both learn from and enjoy this article. Oh, here’s my favorite part, because it reminds me of something we might see today.

But at the printing office of the National Intelligencer newspaper, in an episode not dissimilar from turning off a Twitter account, Admiral Cockburn ordered his men to destroy all the letter C’s so the newspaper could no longer print what he saw as their lies about him.

Political Conflict & Markets

Best of the Rest

Bitcoin has gone parabolic. I shared something on this asset last week, because in the three weeks between posts, Bitcoin moved from sub 20k to 33k. Well, now it’s over 40k or at least it was before a rough weekend. Good thing they don’t make the hats like they did for the Dow levels. Some say that investors are starting to see it as a replacement for gold. That has caused a rapid rise as more start to invest just a sliver of their assets. Traditional asset managers haven’t really even been able to find a 100% match to invest in yet either. Securities like Grayscale (GBTC.PK), Paypal (PYPL.O), and MicroStrategy (MSTR.O) are some of the proxies. There is obviously a ton of speculative fever to this, but how much can be attributed to that versus real investment? JP Morgan put out a note this week saying we could see Bitcoin at $146k soon. That’s about a 300% rise from the current level, which already is up almost 400% in one year. A chart I saw comparing the post halving event performance has the Bitcoin at $100k in the short term based on the previous events. That chart uses the current price as a base, but I took a look at the simple percentage changes from those events, you can see the 2012 halving was a little more aggressive and the 2016 was less than the current move. Either way, both events saw tremendous price appreciation in the period post halving.

Bitcoin emergence as 'digital gold' could lift price to $146,000, says JPM

If history is any guide we could see $100K in 3-8 months

If you’re not sure, like I wasn’t, what exactly the halving process is, here’s a link.

https://stormgain.com/blog/bitcoin-halving-explained

Ben’s article here takes more of a psychological approach to what attracts us to following Bitcoin. He also refers to an interview he did on his podcast with BlockFi’s Zac Prince, I recommend that if you’re interested in putting some money into this asset.

Bitcoin is a Call Option on Human Nature

The weakness of the US Dollar has been driving many trades. Two of the biggest Bitcoin, we looked at above, and Emerging Markets. EEM is up 79%, outpacing the SPX by 800 bps. The net short position in DXY futures is the largest in the last 10 years and largest since 2007. Many say this might be the most consensus trade on the books right now. Jim is arguing here for a continued slide based on technical and fiscal expectations. My question here is what if that’s all wrong?

Is A Weak US Dollar A Key Macro Theme For 2021?

I saw this headline on Twitter, and decided to go down a rabbit hole, so now you get to as well. The rates on a 30 year mortgage are continuing to move lower, but last week Treasury rates poked their heads above a key level and outside the technical downtrend. I wanted to see if there was a bigger story to tell in the mortgage space, so I chatted with the Mortgage team here at Refinitiv. They gave me some excellent charts to look at. Our head of Mortgages, “Yes, benchmark interest rates are rising and dealers we've polled expect them to continue rising but mortgage rates may actually outperform a bear steepener --meaning the spread between benchmark interest rates and mortgage rates has room to tighten. This is because the spread between mortgage rates and benchmarks widened out considerably in 2020 ---there is plenty of room for mortgage lenders to keep their rates near current levels even if benchmark 10 year yields go up 20 more basis points from current levels." Let’s take a look at the charts they recommend below.

• In the upper left, we’re looking at a weekly chart of the 10Y UST yield against the mortgage originations. Here you can see the negative correlation that generally exists over time. The trailing correlation averages about -.5 to -.6, but in the last year that relationship has broken.
• The top right is the 10Y UST versus the 30 year secondary MBS rates. This chart is a good look at how mortgage rates slightly trail the 10 year on the way down.
• The bottom left shows our Reuters polling on the 10 year Treasuries. These polls are a few weeks old by now, but you can get the idea that many of our respondents generally think rates are going to trend higher.
• The lower right shows the percentage of applications that are refinances. Once looking at all the other charts, it’s this chart that has me concerned for those that make money off refinancing mortgages.

That said, we can see Canada is still hot in the home sales market. The US home sales market is still doing well, but a rise in rates and slow down of the move out of cities that has been occurring could cause some strife for mortgage originators and the smaller banks that profit off these markets. I took a look at the Canadian and US new housing starts in that last chart. It’s trending higher for the US (bottom), but for Canada the trend is not as strong. For those readers that subscribe to Eikon, you can find these and many more charts on the MBSHOME page.

Mortgage rates drop even lower to new record of 2.65%

Home Sales Hit All-Time Records In Many Canadian Cities Amid Holiday Shutdowns

The Market Huddle is, far and away, my favorite podcast, or since both Kevin and Patrick are Canadian favourite. It blends just the right amount of sophomoric humor and intellect to keep you both entertained and interested. I could share their episodes almost weekly, but this episode might be my favorite ever. This is a very long episode, but worth it in my opinion. Cem Karsan joins to talk about SPX option flow and educate you around the Greeks that are impacting the larger market direction daily. Their second guest is the infamous Harris Kupperman, aka Kuppy, to review his event driven trades from last year and highlight a new newsletter (see below HIGHLY recommend this one). If I’ve learned anything from Kuppy, it has been a few more places to look for hidden gems.

Charming Vanna & Event Driven Trading - Listening time: 142 minutes 

Kuppy's Event Driven Monitor

David Booth, founder of asset management giant Dimensional Fund Advisors, joined the Rational Reminder podcast. He looks back at the origins of Dimensional and the company’s culture.

David Booth: The First Index Fund, Competing Fiercely, and Keeping it Simple - Listening time: 69 minutes

Another legendary personality in the asset management space, was interviewed on the Opto Sessions podcast. Rob Arnott is the founder of Research Affiliates. Rob is one of the pioneers of quantitative investing, but I think his sharing of his ideas is what really sets him apart from the vast majority of the industry. Rob and his firm share nearly everything they do. Any chance you get to hear his thoughts, it’s worth a listen.

Rob Arnott - Contrarian Investing, ‘Nowcasting’ & the Strategies Behind $145bn in Assets - Listening time: 61 minutes

A little opposite to the previous two, but still a legend in the investing space. Carson Block, founder of Muddy Waters, joins The Exchange for a discussion around the risks of being an active and popular short seller. This is a no holds barred conversation around exposing frauds with Carson bringing out the strong language around US listed Chinese “companies”.

The personal risks in short-selling - Listening time: 37 minutes

Thanks for reading. Have an amazing week.

Michael