Hulk Smash!

 

Why do I have two pictures of The Hulk? Well, in the 'Best of' below Brent Kochuba is going to walk us through how crazy gamma got (Hulk on the left in Thor: Ragnarok) and how dealers have learned to harness it (Hulk on the right in Avengers: End Game). If you're an Avengers fan, you know Banner's secret is that he's always angry. It’s all about harnessing the Gamma as Dr. Banner finally learned to do. 

There’s also a few arguing against inflation. I also found a group of articles discussing EVs. Green Energy and ESG as a possible bubble. I liked the info Goldman Sachs shared about Hedge Funds in their weekly podcast. Off that, there’s also a little section around market structure and volumes. Do not miss the Pzena discussion with Joel Greenblatt either.

Last week was a bit of a roller coaster for markets. Equities were up and down nearly every day. Bond yields were on the move higher again after a slight dip to start the week, but at least we also had a decent rebound in the Treasury auction after that fiasco with the 7yr. The Dollar is still trying to buck the huge weight shorts are putting on it. Bitcoin broke through 60k over the weekend and now looks to make the 58k ceiling a support level. Besides oil, which is in a nice upward trend, everything seems to be near an inflection point. Vaccines and the economic stimulus, or stimmies as the kids are calling it, are causing some rotations in the markets.

This week’s market should be mostly a non-event heading into quad witching on Friday. As you’ll hear from Brent in the ‘Best of’ this week, the run into expiration tends to be a bit of a nothingburger. We’ll probably just trend higher on the major indices into Friday. UNLESS, Uncle Jerome and the Fed throw a wrench at us on Wednesday. There is currently a 93% chance of no change being priced in, but it’s not the rate that worries me. It doesn’t have to be that. A change in tone or a comment could set things off.

It is going to be active in the North American ECM market this week. Three of the seven IPOs expected this week are more than $300M in Olo, Duckhorn, and Vine Energy, which is the first in the Energy space in a bit. We’re also expecting the direct listing from Coinbase, which will be so overbought that I wouldn’t be surprised if it didn’t open until afternoon. Then there are the unlocks of previous deals, which are having a difficult time of late. Last week, SNOW and DASH had a rough week seeing heavy selling volume. I think those two continue to see some pressure this week. There are four upcoming unlocks that might be worth looking at; Unity Software (U), American Well (AMWL), Broadstone Net Lease(BNL), and Sumo Logic (SUMO).

Earning Watch

Last week

Some of the names I mentioned last week had odd weeks. DocuSign might have been the most confusing. It moved up 17% between Monday’s close and Thursday afternoon’s report. Then it has an amazing report, only to sell off on Friday. Thor did quite well last quarter and raised future expectations. While it was up over 11% last week, it was a measured move with no gaps of volume spikes. Kind of like entering a highway with one of their RVs. AMC’s numbers were all horrid, but it was up 38% on the week.  

• SNC saw some updates during the week, so the surprise came down a bit. The surprise here wasn’t as big as expected, but it was still a big miss on the top and bottom line. The stock opened flat, but then quickly traded lower on big volumes. It tried to rebound but sold off again into the end of the day. A number of new positive research was released after the close Tuesday and the stock traded up back to pre-announcement prices on Wednesday and ended the week higher.
• UNFI had a monster EPS beat of more than 50%, or about 45 cents per share. Almost the entire report was strong. The exception was revenue, which missed slightly, but had 12% YoY growth. The stock opened with a bang, then had another move higher into mid-day closing up very strong. Then on Thursday they updated guidance and the stock moved up even more and ended the week higher by nearly 30%.

This week

The names continue to trickle in to close out this quarter. There are not that many companies with a market cap greater than $1B reporting. This week the big fish are Chinese giants Tencent and Pinduoduo, plus Nike, Accenture, Volkswagen, and FedEx. A few other large caps I want to hear from are BMW, CrowdStrike, and Lennar. I have no names to follow this week. Some of the data is alright, but nothing that’s really writing about.

Best of the Week

With no disrespect to Louis-Vincent, Brent’s section on Gamma and its effect on equities is must listen. Don’t get me wrong, I don’t want you to skip Louis. He’s a great 1A here. His point about bonds no longer being as good a hedge for equities as they used to be is just another reason to think about why the bullish bond run might be over. Below is a look at the daily correlations for the 10 year Treasury versus the Russell 1000 over trailing 90 days over the last twenty years. Louis point is good, but it has happened in the past during this bull run. Now, on to Brent. He shows a ton of charts on Weaponized Gamma. First it was Tesla, then GME and then RKT last week. Dealers have started to react faster to these Gamma Squeezes. We saw it last week with GME and RKT. Brent’s data shows it might not be over with GME. His content and views are a must follow. He also covers what to expect this week headed into quad witching. Cuckoo for Cocoa Puffs (guests: Louis-Vincent Gave, Brent Kochuba) - Watch time: 160 minutes (Louis is first 60, Brent is the next 45, then

Best of the Rest

Many traders are positioned for inflation, which you can see here from Pirates of Finance, and a lot more people seem to have an interest in it. Whether it’s short the USD, long Crypto or commodities, many positions are extended as if it’s a foregone conclusion. I’ve highlighted some of pro-inflationist lately, but I thought it was nice to finally hear from the other side. I think these two first two articles have made some good points on things going in a different direction. Like anything else, people get a little overzealous and assume the current projections much further into the future than will probably happen. In the Real Vision interview, Travis mentioned that he thinks much of the expansion in spending after things open up will just be a rotation from other areas. Steve & Travis are also a bond bulls, so they disagree with some of the things we heard from Louis above. In the third link below, Morgan Housel adds to this noting that one of the big inputs to the inflation argument might be being misread.

Inflation Isn’t Happening, and It Likely Won’t. Here Are 7 Charts Showing This

Deflation and Insolvency Risks: Gold and Bonds’ Moment to Shine - Listening time: 106 minutes

The Fed Isn’t Printing As Much Money As You Think

S&P announced the names for this Friday’s quarterly rebalance. Those going into the large cap index saw some significant price reaction after hours Friday. PENN was up ~7% , NXPI +6%, GNRC ~3%, CZR ~5%. Most of the names, sans NXPI, are migrations from somewhere else in the S&P 1500. EXTN is the only full deletion. It's getting bounced from the SmallCap 600. It was down ~6% post close.

NXP Semiconductors, Penn National Gaming, Generac Holdings and Caesars Entertainment Set to Join S&P 500; Others to Join S&P MidCap 400, S&P SmallCap 600 and S&P 100

Energy is on fire, but this conversation makes the argument that the ESG energy investing may have gotten ahead of itself. A few EV companies, for example, have taken over an entire industry. If you follow SPACs, ESG, or energy in general, this is an excellent conversation to make you think about the current opportunities.

Adam Rozencwajg On The Speculative Mania In Green Energy Stocks - Listening time: 58 minutes

My favorite thing about Research Affiliates articles is that they tell you how long they will take to read and then lay out a summary right at the top. They’re written like a true research report, just not 50 pages long. This article does a great job highlighting some of the stretches investors are taking in evaluating this industry. I think it goes well with Adam’s points above.

Big Market Delusion: Electric Vehicles

As you can see, this has already been attempted just a few years back. There’s also a comment quoting something from Michael Mauboussin that a big reason EV failed was due to a factory fire.
https://twitter.com/corry_wang/status/1370880406686466051

Hindenburg Research laid the smack down on Lordstown Motors so good The Rock would be proud. No revenue and no sellable product. Plus, large orders that come from firms with a UPS store mailing address. The CEO responded saying it was half-truths and lies. If half the Hindenburg report is true, then Houston, we have a problem. The company is set to report this week, so they’ll get to comment further on this.

Short Seller Adds Another EV Stock To Its Hit List

https://hindenburgresearch.com/lordstown/

Continuing on the fraud line, Real Vision released an interview with former Enron CFO, Andy Fastow. Andy talks a lot about loopholes as sort of a gateway, but says they are legal fraud. He also highlights ways executives are able to fudge the financials to make things look better. 

White Collar Crime Part 3 — Former Enron CFO Andy Fastow on the Problem of “Legal Fraud” - Listening time: 93 minutes

Here’s another vote for NLP and text based data analysis. What fascinated me here was the years of warning you got from some of these companies, or more disturbing how long they were allowed to run these frauds before being caught. The text analysis also found the most popular pattern was words indicating friendship. The team at Refinitiv is working on some of this. The Starmine Text Mining Credit model already does some of this looking for credit issues a foot in text. The team is also looking at more applications in the event prediction space.

Fraud and Deception Detection: Five Language Fingerprints

If you’re a fan of value investing, this is a must listen. This is a conversation between long-time friends and value legends. The title is perfect here. It’s really a graduate level master class in what value means.

Value Investing Masterclass: Joel Greenblatt and Rich Pzena - Listening time: 59 minutes

Some positive data points for hedge funds in this interview. Launches are on the rise and fees are rebounding again. Regardless of all the blowback some receive these funds are a necessary part of the investing landscape. Niche nimble trading/investing strategies find price dislocations.

How Hedge Funds are Navigating a Volatile Market - Listening time: 17 minutes

There was a report last from BI that retail trading volume has become number 2 behind high frequency market-makers, who are basically the other side of the retail trader. I’m not sure how this data was gathered, but does volume really matter? I mean let’s look at North America volumes. It’s dominated by Pink Sheet names. That’s more than 80% market share for February, but when we look at the actual dollars trading those same trades only have a 0.72% market share. I think this shows the sort of froth coming from retail traders. They’re searching for a lotto ticket. What happens when everyone goes back to the office? Does the person sitting at home with their brokerage account up nearly half the day continue that in the office?

Retail trading volume rivals hedge funds and mutual funds combined

This indicator shows the most speculation since 2000

Let’s talk market structure for a bit. Paul Rowady, director of research for AlphaCution, helps tell some of the stories around payment for order flow, market macrostructure, and how Robinhood is playing the average investor. He also rehashes how last year’s implosion of Ronin happened. Technology’s impact on capital markets has really prevented new players entering the US listed market making game.  

Robinhood, PFOF and the Dark Underbelly of the Options Market - Listening time: 41 minutes

As I mentioned above, there is a sort of a supercycle going on in commodities. In the first chart below, you can see some of the more popular commodity market performance and the currencies that have high commodity dependent economies. The second chart taken from the four in the article shows that more of those currencies are undervalued versus their five year averages.

Commodity price surge leaves emerging currencies adrift

If you ever wanted to know how a capital allocator invested their own capital, this is an engrossing conversation. Ted has worked for or with some legends. He’s spoken to thousands of asset owners and has access many of us will never have.
Ted Seides, Capital Allocators – I Want To Compound My Capital…But I Want To Do It Alongside Of People That I Respect And Trust - Listening time: 75 minutes

Last but not least, I mentioned a strong 10Y Treasury auction in the open. There was also a robust offering from Verizon of about $49B in various terms. The company is looking to finance its 5G rollout.

Verizon bond sale proves thirst for yield

Thanks for reading. Have a smashing week.

Michael