Party on, Dudes

 

Coming into the week most were focused on the Fed. As expected, they did not raise their target rate and also said they do not expect to until 2023. A couple of other things they mentioned were a confirmed their $120B monthly purchases of bonds and forecasting a 6.5% GDP growth rate. Markets seemed to take it well. There was some volatility on Wednesday afternoon, but I’m not sure whether that was the Fed’s doing or if people started their St. Patrick’s Day celebrations early. Equities moved higher, bonds continued their selloff, and the Dollar dipped, but it wasn’t much or held for long. The main message from the Fed and the bulls had me thinking. Essentially, the Fed is saying....

However, with US rates on the rise and traders pricing in higher inflation, some might agree with Public Enemy, “Don’t believe the hype”. Check out the LinkedIn post below that shows the transformation of the US Breakeven rates. Directly below, you can see the slow rise of US inflation expectations over the last year and below that compare it to expectations in Europe. My favorite thing about all of this is that there is no big consensus view on how most markets will trade. Well, expect the Dollar still a bunch of bets that’s going lower over time.

For this week, we’ll start by finishing off the first weekend of the NCAA men’s basketball tournament. The amount of double digit seeds winning the first round was the most ever. Yesterday was just as entertaining, so I hope today’s games continue that. The Sweet 16 games will not start until next weekend. March is far and away my favorite month of sports, because it’s not just men’s basketball. Nearly every major sport, but the NFL, is active. Plus, it has the college winter sports championships.

After I get my sports fix, I’ll be keeping an eye on the Government auctions this week. Roughly $60B each for the two-year, five-year, and seven-year notes. The Dollar is still rejecting the bears, and it’s now approaching its 200-day moving average. The non-commercial short positioning, which had been at ten year highs, flipped back to a net long last week. On the equity side, I’m expecting some volatility post OpEx. There’s also the ECM desks, where we have a dozen IPOs scheduled this week. Digital Ocean, Leonardo DRS, Cricut, and Vizio are the larger or more popular names to follow. Finally, keep one eye on GoodRX (GDRX.O), which has a decent sized lockup set to expire today (Monday).

Earnings Watch

Last week

Here are a few highlights from last week’s reports:

• CrowdStrike surprised to the upside by 58%, but some volatility followed for the remainder of the week.
• Nike had a decent beat, but noted supply chain issues and the stock suffered.
• Dollar General had a small miss and shares got crushed on the open, but they recovered on the day and the week on news they will open a more than 1,000 new stores.
• FedEx had a great quarter on ’unprecedented’ shipping this past holiday season. There’s not a day I don’t see them in my neighborhood now.
• Lennar had a positive report, but the focus was on the spin-off news of it’s non-core businesses.

This Week

We’re still in a period of very light reporting. There are only about 30 names reporting with a market cap over $1B. Only seven names even made my screen, but a couple are worth highlighting. Adobe is by far the largest company reporting this week. There's also Darden, RH (aka Restoration Hardware), and Winnebago that will give us some insight on the economy. Let’s look at two with some interesting data.

• Gamestop is a widely followed name now, so I’d expect most reporting periods to be volatile. However, the 30 day implied vol on the stock has come down a bit in the last week to the 270 range. It’s crazy to say, but that’s ONLY in the 40th percentile over the last six months. There’s an 8% Predicted Surprise here, but I wouldn’t trade this stock with your money.
• KB Homes is a bit of a different story. It’s a less volatile stock with less of a cult following it. The 4% Predicted Surprise might be an opportunity. The big reason for the surprise here looks to be Truist’s estimate that’s from September and all the way down at $0.58 vs everyone else in the $0.90-1.04 range.

Best of the Week

I love this post from Josh Brown. I’m honestly worried that these stimulus packages that were such a pain to get to in the first place will essentially be up in smoke after all this nonsense settles. Call me out of touch, but buying a clip of a highlight or something else like it will not end well. I speak from experience. I spent every free dollar I had on sports cards starting as a 10 year old, then really bad when I got my first job. Back then the marketing gimmick was that they started putting autographed cards into packs. All the thousands of dollars I spend sit up in my attic now worth a few hundred at best. So I’ve been here and done this.

Reverse Wealth Transfer on Steroids

Best of the Rest

Ark put out a $7,000 price target on Tesla last year, but that’s only $1,400 in post split terms. They’re now upping the ante with a $3,000 target. That’s 358% higher from Friday’s close and 150% higher than any analyst covering the stock on the sellside. Don’t worry, they used a Monte Carlo model with 40,000 possible simulations.

ARK’s Price Target for Tesla in 2025

Using S3 data, the authors touch on the fact that short trades values have tripled from $724M to $2.7B since the start of the year. The article mentions the names below as being big targets of the shorts. Muddy Waters’ Carson Block is quoted as saying, ”SPACs are an area of focus.” There’s also a paragraph that post merger companies are attractive because they are large enough to obtain shares and early investors selling early gains.

Short Sellers Boost Bets Against SPACs

Understanding the underlying market structure is important right now. Everyone was expecting some volatility around the Fed and quad witching last week, but much of the positioning was telling us a different story was more likely. Last week, I shared an interview with Brent. This week he’s covering some of the structure that’s likely to set the pace for equities. Brent notes, “options market makers flows would turn starkly negative at a point in time when market liquidity is very poor. So here we are, once again highlighting the risks imbedded in this market due to excessive leverage, low hedging, and lack of liquidity.” i.e PAY ATTENTION to downside risk.

Groundhog Day

Options and Value investing are not two things you tend hear in the same sentence, but as the author notes, “options can be as simple or as complicated as you want." I do think more value investors should think about these, if they’re confident in their stock picks. I love the idea of the cash-secured put. It locks in some return while you wait for your target stock to come down to your level and lowers your cost basis by the premium received.

Options Trading for Value Investors

Raising capital for a new business is hard. Venture Capital is looking for the next titans, but they seem to ignore the smaller businesses or they just try to take advantage of the founder. Crowdfunding might be a better option for both the investors and the founders. This interview also notes that it might be a better route for women founders and help launch more women’s businesses.

Can crowdfunding solve VC’s biggest problems? - Listening time: 37 minutes

This was the talk of FinTwit this week. The astounding number of SPAC deals is creating a mountain of work for the banking analysts. A survey of Goldman Sachs’ analysts shows things have been quite tough for them even compared to their normal demanding work schedules. The one thing I noticed in the shared report was the low number of responses. Only 13 souls were brave enough to even voice their opinions. I’d have to imagine there are more than 13 analysts.

SPACs Post Record Q1 and Exceed 2020 Dealmaking Total

This is a long piece covering what the reopening could mean in various industries and markets. There are different SWOT analyses for Gold, Digital Currencies, US Economy & Equities, Energy & Natural Resources, Airlines, and Emerging Markets.

This Summer Could Be the Start of a New Roaring Twenties

I’ve dealt with a handful of consultants in my day. Whether it was working on their recommendations to transition one of their accounts from one manager to another or a day long presentation when they were representing a mutual client. I think they get a bit of a bad wrap on the Street, because they’re often the one holding firms accountable. This is a good interview about what a consultant’s role is. I also liked the discussion around how lower return expectations are affecting clients.

Mike Welker: Redefining Institutional Consulting With A $100B+ Trend Setter -Listening time: 48 minutes

There are complex parts of this conversation around converts and derivatives, but in the end it’s about risk and how these asset classes trade. I like the discussion around how Sales and Trading works in this space. Working at smaller shops during my career, I was a Sales Trader, but at these larger dealers it’s Sales and Trading. I always like to hear how the different desks interacted at each shop. The second part of the conversation is Dave talking his book at Shaolin, which was fascinating.

Dave Puritz, Founder and CIO, Shaolin Capital Management - Listening time: 55 minutes

Outsourced trading is becoming a large factor in the asset management space. Now, one of the behemoths of the industry is looking to turn their cost center into a profit center. With the rise of passive and lower fees, active managers are looking for ways to reduce their costs. The article also mentions the head of SSGA APAC leaving for an outsourced firm.

AXA IM rolls out outsourced trading services for smaller firms

This is a nice animated version of the US breakeven inflation curve, which is inverted.

US Breakeven Inflation Curve has flipped upside down

Is this the future of home building? If you have yet to see how this works, check out this video. There are so many benefits to building homes like this, but it will also cause another shift in the workforce. The large benefits are that these houses are roughly 30% cheaper to build, they’re fire resistant, water resistant and termite proof. This keeps insurance prices lower as well as things like your other fees. I live in a heavy termite risk area, so my contract for that is like $500 annually.

The first 3D-printed housing community in the US is being built in the California desert

This was a fascinating two part series on Green Energy. I had some green energy links last week, and part one was out, but I wanted to wait to share until both parts were available. The solutions suggested here by Robert are going to require some epic changes and investments.  I’m a huge fan of green energy, but there are too many points of contention. I think Robert covers a ton of these ideas. There will be a part three of this coming out Thursday about how to invest for this new future.
Robert Friedland: What will it take to Green the Global Economy? (p. 1 of 2) - Listening time: 53 minutes
Robert Friedland: What will it take to Green the Global Economy? (p. 2 of 2) - Listening time: 53 minutes

Thanks for reading. Have a most excellent week.  

Michael