Mo Money, Mo Problems

 

Each week there seems to be some event that is out of the ordinary and has nearly everyone talking about it. Last week, we had four of them; Bitcoin became a $1T asset class, NASA landed a vehicle on Mars, the House hearing on the GameStop fiasco, and the cold snap in Texas. I’m opening with the House hearings because, in my opinion, they were a complete joke. Most of the politicians have no idea what’s going on and those testifying gave bland standard answers. I mean it’s not like this happened the day before and you didn’t have time to have your staff educate you on the basics. Ask a decent question please. Honestly, this basically was a complete waste of everyone’s time, but at least it was quasi entertaining. The person that impressed me the most was Jennifer Schulp of the Cato Institute. I felt she did a decent job of dealing with the dumb questions and explaining them so non-industry pros could understand some parts of the industry and what was actually going on. What we should have heard being discussed is how these parties think we can prevent it again. Things like blockchain on short positions would help limit shorts to 100% of available shares. I had an easy time picking a headline this week, but then while listening to the song, one section truly stood out to me. People who think this will do ANYTHING to actually help them should know this part.

“10 years from now we'll still be on top
Yo, I thought I told you that we won't stop
Now what you gon' do with a crew that got money much longer than yours,
And a team much stronger than yours?”

Robinhood CEO and others in trading saga testify before Congress at GameStop hearing – as it happened

The internet had some thoughts about today’s GameStop hearing

This week is heavy on Earnings, but here are a few other events I'm paying attention to. Jerome Powell will give his semi-annual talk to the Senate Banking Committee and House Financial Services Committee. We’ll also continue to wait for a relief package out of Congress. Last week, Janet Yellen was saying that she thinks we should err on the side of too much. Finally, I'll have an eye on rates, which I'll cover some ideas on below.

Earnings’ Watch

Last week

Well, I messed up a little last week. I included Groupon as reporting, but didn’t notice they have yet to officially announce their date. The date was our estimated date based on historical patterns, so I’m looking back on only one of my two names. 

• Trade Desk outperformed on both the top and bottom line. The weird thing was it opened down on not that large a print, traded lower in the first two minutes, then exploded higher in the next ten to close the day up nearly 7%.

This week

It’s a big week for US smallcaps and the TSX names. More than 400 Russell 2000 names representing 29% of the index market cap report. For the TSX 52 names also representing 29% of the index. In the large caps indices, the SPX is about 9% and Russell 1000 is 12% of the market cap. With the overlap in these two large cap indices, there are north of 600 names reporting for $6.6T in market cap. Berkshire Hathaway, NVIDIA, and Home Depot are the largest names. I’m also interested to hear from the Canadian banks and to hear what comes out of the near 90 Pharma, Biotech and Life Sciences names. I’m looking at a few specific names below from that group as well as keeping an eye on what comes out of the SVB Leerink Global Healthcare Conference. This week I’ve got more than the usual unusual names to watch. Each has something that stands out and caused me to doubletake.

• Diamondback Energy stands out because of the four bold estimates. Diamondback, the original FANG, has 30 analysts covering it, 28 of which are included in the mean. Four of the five 5-star analysts have a bold estimate. The thing is 3 are higher and 1 is lower than the mean. The Predicted Surprise is still decent at 3% and momentum is positive.

• Sage Therapeutics has an enormous Predicted Surprise and it’s really odd. The mean of $-0.35 would actually be $-1.99 if we take out just two analysts. Citi’s Neena Bitritto and Truist’s Joon Lee have $13.89 and $11.58 per share estimates respectively. Those are more than 3,000% higher and I double checked Truist reports, but do not have access to Citi.

• Denali Therapeutics is also on this list because of extremely high analyst dispersion. This name however has two lower ranked analysts posting way out of line estimates. The Predicted Surprise is negative here because those analysts do not have a large enough weight to impact the SmartEstimate as much as we saw with Sage. I don’t know which way this will go, but it could be a violent move if it’s higher.

• NRG Energy is another name to keep an eye on this week. It’s implied volatility is in the 90% percentile and has jumped 21pts in the last week. It’s Predicted Surprise is -61% with negative momentum in the estimates as well. Someone has been buying puts in this name over the last couple of days. The March 28 puts traded more than 10k contracts on both Thursday and Friday and the March 38 puts also traded north of 10k contracts on Wednesday. There were some big blocks in there amounting to notional bets of more than $2.5M to the downside.

Best of the Week:

Professional Poker player, Chris Sparks joined ‘The Derivative’ to speak about game strategy and a bunch of other topics. I’ve shared some conversations with Annie Duke before around decision making and I think this conversation with Chris around bots and AI also crosses over into trading and investing.

Playing like a Poker Pro in Life/Investments/Career with Chris Sparks - Listening time: 92 minutes

Best of the Rest:

What I find fascinating about this particular situation is the Red/Blue arguments about what caused this. Republicans argue that renewable energy initiatives failed and Democrats say it’s because of the State’s closed off grid and lack of regulation. I think they’re both right. I’ve shared a couple of the articles I found on the subject. Aside from the crazy effects on the prices of the commodities, look at the spikes below in the front month futures for Henry Hub and the gigantic price increases at the regional level, I also found some links to a possible windfall for one E&P name with a pretty well known owner. It looks like there are a few positioning themselves via options for some major upside in Comstock Resources (CRK).

ERCOT Island

Why a predictable cold snap crippled the Texas power grid

How one Texas city avoided disaster during the storm

CFO at Jerry Jones' gas company on rising prices due to Texas freeze: 'Like hitting the jackpot'

The bond markets are starting to freak out just a little. The 2/10 curve is steepening and if you look at the MOVE index, it’s jumped 13 pts in the last week. The MOVE has been moving in lockstep with the VIX for about a year now, but it recently broke that trend. The equity volatility has continued its trend lower as the MOVE jumped. But if you look past last March, you can see this ratio had been higher for a long time. Jason’s article highlights the fact that the curve hasn’t been this steep in a while and it’s generally not a good sign for equities.

The yield curve has done this only 3 other times

I thought this was a useful post by Benn Eifert as the talk about a market top continues to heat up and as bonds are selling off. There have been many battles over the best strategies to counter a market sell-off and the search for yield. Ben links together a few ideas around tail hedging. This is also something Corey Hoffstein has been talking about since he released his Liquidity Cascades paper (best chat about it here). Another thing I’ve heard him say is that the tails are becoming fatter too, aka less rare. If you’re not following these two guys on Twitter, you’re missing some amazing discussions.

“We are long-term investors. Volatility doesn’t matter to our portfolio.”

Should a “moderate risk” allocator keep buying bonds today, or consider being 100% $ACWI and spending 2.4% a year on protection structures (e.g. puts)?

Another big financial news topic this week was the release of the 13F filings and following some of the world’s most famous investors. I prefer to look at the largest holdings changes in dollar value. Below are three different looks at a Screen on North American holdings for North American managers based on the recent 13F filings. Harvest Volatility Mgmt has added to their holdings in some of the world’s largest market cap names. Cathie Wood’s ARK Investments had the two largest position increases in dollar value. The last one is showing changes for the largest percentage of share ownership. This one shows Blackrock continuing to load up on some Canadian REITs. On the sellside, TD Asset has a prominent position amongst the largest sells.

Q4 13F Roundup: How Buffett, Einhorn, Ackman And Others Adjusted Their Portfolios

I love this quick guide around drones from the Morning Brew team. It quickly covers major topics from history to the future of drone use. The craziest thing I saw in this was the chart (below) of the number of drone users in the last 4+ years. There are 58 companies globally that mention drones in their Business Description, 26 of those have a market cap over $100M. This is obviously a very rudimentary search, and doesn’t nearly cover everything. I also looked at the performance of the European based Solactive Robotics and Drones Index. It’s up 190% over the last five years, 60% of that coming in the last six months.

Your Guide to the Drone Age

European financial markets are shifting away from a London focus. Our partners at Reuters, as well as the Economist, have written on some of the details. Being an equity person, I wanted to see how their equity trading volumes have been changing. Much of European equity turnover is done on the Pan-European exchanges, but Amsterdam is not seeing much more in terms of additional turnover. The LSE, which Refinitiv is now a sister company, has seen a decrease in volumes over the last five years. While it once accounted for roughly 15% of all European turnover, it’s now less than 5%. This is not unsimilar to what the traditional US exchanges are going through on this side of the pond.

Amsterdam’s financial centre gains an edge over continental rivals

How Amsterdam Is Stealing a March on Rivals as Brexit Trading Hub

NASDAQ’s chief Economist, Phil Mackinstosh, took a look at the performance of 200+ names that doubled over a rolling five-day window in 2020. He removed the names from the March bounce, but this research was still useful. I was surprised to see how much of the gains were actually held on to.

The Lowdown on High-Flying Stocks

The numbers coming out of Colorado are amazing. The article notes that the State has brought in nearly $1.6B since February of 2014. While we can’t extrapolate Colorado out to all 50 states, if the federal restrictions are lifted, it is a good indication of how well legal sales might go. I took a look at the performance and flows of eight main ETFs in the US since the November election. Performance of the group has been very good up about 90% since the election and they’ve seen north of $1.8 of inflows, which is about half of total historical inflows. The top three ETFs have taken in 78% of the flows since November.

POLITICSColorado’s Record-Breaking Marijuana Sales Top $2 Billion In 2020

Anyone that has worked on a trading desk has an error story. My largest was north of $500k, and I still remember every detail about it. This mistake from Citi could be close to $1B. Essentially, Citigroup intended to pay interest on a loan, but instead paid off the loan in full to the lenders. As the intermediary Citi had not received the full amount from the borrower, Revlon. According to the Refinitiv deals database, Citi made north of $9 million to be the admin. The way I’m reading this, Citi has not lost this money, they’re just holding the risk. Still a crazy story, and I feel bad for the person that made the mistake.

Judge Rules That Revlon Lenders Can Keep Citi’s Mistaken Repayment

Speaking of errors. Mark posted about an underpublicized paper from 2019 about name/ticker confusion. It’s something I’ve written about in the past. Looking quickly at the paper, which I recommend you click on, if not just for an eyebrow raiser, there were no charts. Here are a few highlights though. 254 pairs were found that can easily be confused with each other. They found 31 of those had moved together within a 10-minute period, another 15 showed “significant co-movements” and 18 more pairs with delayed correlation. That’s more than 60 names being confused with another costing people money and generating brokerage commissions. In fact, they estimated it accounts for north of 6M shares per pair and costs on average $1M per year. Something to think about the next time positive news is expected for Tesla, ticker TSLA.O not TLSA.O like below.

Irrationality and ticker confusion - We are not getting smarter

There was a tequila and a flamethrower that made some money as side hustles for Tesla, but this one is just astounding. Using a conservative calculation, the average price of Bitcoin from Jan1 thru Feb 7th was about $35,000. This means Tesla has about 42,000 Bitcoin from their $1.5B purchase. Trading at north of $57,800 as of my writing, that’s a profit of more than $950M, so Dan Ives’ suggestion of +$1B is easy to consider. Their 2020 net income was $690M.

Tesla bitcoin gambit already made $1 billion, more than 2020 profit from car sales, estimates analyst

Another Elon Musk deal that made headlines last week was SpaceX last funding round. The event is rumored to bring in $850M and really upgrade the company’s value.

Elon Musk's SpaceX valued at $74B in latest funding round

Thanks for reading. Have an amazing week.

Michael