Trouble in the Suez

 

Weeks like this past one are the reason I’m happy I switched from a Marine Biology/Secondary Education major to Finance. You CANNOT make this stuff up. This week's title comes from the Billy Joel song 'We didn't start the Fire', but when I first saw the news about the Suez Canal blockage, I immediately thought about the Austin Powers scene when he tries the k-turn. Well, the internet never disappoints in a situation like this. There were a ton of informative links and Tweets, which are great for understanding how bad this situation is for international trade, but I spent way too many hours looking through the funny ones. Here are some of my more work appropriate ones. You really should go through the ‘Guy with the Digger’ account on Twitter, who created that is very funny. 

In markets, we had a bit of volatility, but late Friday US equities caught a bid. In the last two hours, the SPX was up 1.5%, the Russell 2000 and NASDAQ 100 were up about 2%. That seems to have been around the Biden comments on doubling the vaccine rollout and the Fed lessening bank restrictions. This end of day rally is a rarity of late according to Sentiment Trader research. Rates also halted their eight straight weeks of positive moves. Many energy commodities saw some support from the Suez event, but Crude still ended the week lower.

Here are three stories in the news that caught my eye:

• Canadian Pacific buying KSU for $25B in cash & stock. The proposed merger of Canadian Pacific and Kansas City Southern would create a 19,200-mile system spanning Canada, the U.S., and Mexico (Canadian Pacific).
• Coinbase Fined $6.5 Million For Inaccurate Reporting
• Robinhood Markets, Inc. Confidentially Submits Draft Registration Statement

One final thing from last week is the Treasury Bond Auctions, which went off without a hitch. There were some concerns coming into the week with the lack of enthusiasm for the last 7Y.

Earning Watch

Last Week

Although it was a relatively light week, it was not uneventful on the earnings front. We had some really positive reports out of RH, Darden, and Adobe among others.

• Gamestop was high on most people’s focus list. Even if it’s most because like a car accident, it’s hard to look away. The report on last quarter didn’t go well, as they missed on both the top and bottom line. The stock sold off to open then the short really took it lower on Wednesday and it closed near the lows of the day. However, this stock refuses to go away. From the lows Wednesday, the stock ripped higher by almost 90% to Friday morning’s highs. The stock basically ended flat on post report trading. I honestly have no idea how to think about this stock.

• Moving to a more traditional stock, KB Homes reported after the bell Wednesday. The stock was trading a bit heavy with the lower than expected new home sales numbers that came out on Monday. Then it gapped a little higher the morning before it’s report. When they reported, they beat the Street on the bottom line, but had a decent miss on the top line. The stock was pressured at the open on heavy volume. Then it was off to the races for the remainder of the week. The stock rose 16% from the low Thursday to the to at the weekly high Friday.

This Week

Again we’re light on Earnings’ reports. There are a few notable off-cycle names reporting though. Micron, Walgreens Boots, Lululemon Athletica, Chewy, McCormick, and Carmax are a few of the biggest names. I have nothing noteworthy to follow this week.

Looking ahead 

It's a shortened week for markets with Good Friday holiday off for all but FX traders. Below I’ll cover a possible event in the SPX options to keep an eye on for Wednesday’s quarterly expire. There’s also auto sales reports due out. The ECM calendar is almost always active now. There are four $300M+ traditional IPOs on the docket. Compass is the largest, expected to raise about $880M. The others are Coursera @ ~$500M, Kaltura @ $350M, and Intermedia Cloud @ $300M. Nothing juicy that I can see in the Lockup expiration, just some smaller companies. The big thing to keep a close eye is in the equity space, and it comes up next in our Best of the Week. It's not the traditional article or podcast, but an event that had everyone talking Friday and over the weekend. I've done my best to grab all the important info, but I'm sure there's more out there. 

The Best of the Week:

As mentioned above, we had a little bit of volatility last week in equities, but the overall market caught a huge bid in the last two hours of trading. While the overall market was having a good day, many of the big TMT (Tech, Media, and Telecomm) stocks did not. Right off the bat, a few names (TME,VIPS,IQ,DISCA,VIAC) saw big increases in volume. Word on the Street was Goldman was shopping gigantic blocks for sale. Then Morgan and Deutsche Bank joined the party. One thing to notice TME & VIPS traded more relative to the 20 day average volume, but the Viacom CBS and Discovery securities sold off more. Someone commented that this is the type of action you see when certain stocks are in a bubble. The true buyers don’t show up for a while. There were a few other names in the TMT area or China based ADRs that traded a bunch and were down. The one exception that I see here was Baidu. It traded 6x normal volume, but was up on the day. IPO Edge was the first to report that Archegos Capital was the one being blown out of its positions by its prime brokers. Archegos is, or maybe was, run by Bill Hwang. Hwang is a Tiger Cub who has run into problems for fraud and insider trading in the past. CNBC also reported that Teng Yue Partners was affected by this event. They’re an Asia-focused fund run by another former Tiger Management analyst, Tao Li. Rumor is that this is not complete. It might continue in these names, maybe different ones. It's hard to tell, but at this point we've heard from one global bank that they will be taking a loss big enough to alert the public. Nomura traded down 16% in Japan overnight, so it looks like it might be a bumpy ride for Banks today. I’m sure there's still more to come out on this. Finally, is this season two for Tiger King?
EXCLUSIVE: Tiger Cub Archegos Liquidation Triggers Record Crash in Discovery, ViacomCBS – Sources
Traders brace after fire sale of stocks linked to Archegos
Modelling the approximate "Blow Out Portfolio" of 9 blocks sold Friday
SECURITIES AND EXCHANGE COMMISSION v. TIGER ASIA MANAGEMENT, LLC et al

Rumor: Some of the back story on Archegos
Nomura - Possible Loss Arising from Business Activities

Here's a look at who owns the most of these names from their ownership filings. Notice all the Banks holding these. 

A helpful Twitter conversation if you're not sure how a small family office can have a major impact on global banks. Think a smaller version of LCTM.
Can someone explain a swap comprehensively and simply please?

Baidu was one of the liquidation names from Friday, but it did not stay lower. Afternoon trading saw Baidu rally from down 14% to end the day up almost 2%. One of those buyers was Cathie Wood’s ARK funds, who snapped up a total of 480k shares on Friday. Now, that’s only a slim 0.3% of the volume, but it goes to my point above about look at below.
Ark Invest ETF Trades

The Best of the Rest:

Well, I’m sure most of you saw the news about the Suez canal snafu on Tuesday into Wednesday. This thing has been rumored to be on the move at least 3 or 4 times since. In fact, I took my second set of screenshots showing the delays a bit after the first such misinformation, so take that note with a grain of salt. There were a lot of knock-on effects from this. If you look at the first screenshot of the ship, notice the tiny excavator there trying to dig out the front end of the ship. Other pictures show the machines working and these are 50 ton giants on their own. I took a few screenshots from Eikon late Monday night just as the issue started and Saturday evening. You can see how quickly things started to back up in multiple places. Using Reuters news in Eikon, I found a bunch of info. Something like 5% of globally traded crude oil and 10% of the refined petro product pass through the canal, according to Argus. Rerouting around Cape of Good hope (South Africa) would add 15 days to the journey. There were price impacts across energy on Wednesday, it’s believed that this had a major factor in that. It was cool to see how quickly the Refinitiv Product team put together a quick page to follow this. There’s just so much content on this from different points of view. The first link below is one I put in my notes before this became a multi-day event. The Yahoo article highlights the idea to think about what the worst could be. I heard someone else mention what happens if they try to unload and the ship loses its cargo in the Canal. That would be a mess. The WSJ article talks about the pressure Egypt's President is feeling after spending $8.5B to improve the Canal to take in more traffic. The video thinks about the aftermath. Who is responsible? Who pays for it? Finally, another quick one from Goldman Sachs talks about how this and other disruptions are just changing things.

Oil up as Suez Canal ship runs aground, stemming market's recent weakness

JPMorgan suggests a trade to hedge against a worst case scenario

Egypt Expanded the Suez Canal. It Wasn’t Enough.

Suez Canal Blocked : How Much Does It Really Cost And Who's Going To Pay? - Watch time: 9 minutes

How Supply-Chain Disruptions Are Impacting Inflation - Listening time: 9 minutes

I saw this article prior to the whole Suez gaffe. Larger more packed ships don’t move with as much agility, so above. This newer development is having an impact on shipping delay, and might start to increase rates a bit.

Where Are Those Shoes You Ordered? Check the Ocean Floor

This article from the Atlantic wraps both of the above into one theme about improving standards for shipping.

Why Ships Keep Crashing

Equities

We’ve seen a rise in the influence retail traders have had on equity trading, especially in US equity markets. This article by Institutional Investors highlights a survey done by Brunswick Group. In the survey, they found 27% of responders used Reddit to investigate an investment and 20% have actually made a change from something they found in WallStreetBets. Because of this, we’re now seeing sellside firms like Cowen create tools to help deal with this new form of order flow. You can see the dramatic increase in volumes on the FINRA ADF since March of last year. Much of this volume is not accessible for institutional traders, so I think it’s a great development to take this type of volume into account.

Institutional Investors Have Been Influenced by Reddit — But They Still Don’t Trust It

Cowen Algos Adjust For More Off-Exchange Trading Volume

Barry’s point here is something to think about. Many have warned of the bubble like atmosphere, and I too think there are tons of signals of euphoria. The thing is how long does this last? While tech has appeared to stall with rates rising a bit, Energy and Financials have seemed to have picked up the slack. While there might be some froth in certain places, I think Barry has a point that different sectors have certain behaviors at tops, bottoms, and middles. Looking at the Relative Rotation graph in Eikon, I see 9 of the 11 S&P 500 sectors are sort of stuck in a tight center with limited direction right now. Financials and Energy are leading , but momentum has slowed.

Tech Bubble or Rotation?

This is a long episode of the Market Huddle, but I want to focus on Barton Wang’s segment this week. He covers two major points. His first point is the Fed actions driving liquidity and moving equity markets, which he calls American SICO, Stimulus-Indigestion-and-Crowding-Out. I honestly have to listen to this one again to fully digest it. His second point is around a HUGE options position that needs to be rolled by Wednesday’s month end. This position of about 40,000 SPX 3,985 Calls, which is roughly $220M in Premium or $18B of notional value and more , is impacting dealer positioning ahead of this. 40,000 of these calls we’re opened on New Year’s Eve and Barton is saying this was a short position. This means dealers are long calls and to head short futures. Therefore, they have been buying falling futures and selling rising because they’re long gamma and need to stay neutral. If this position is to be rolled, this means dealers need to buy a ton of S&P eMini futures even up moving into Wednesday. Keep an eye on the options’ market this week.

Tri-Polar World (guests: Jay Pelosky, Barton Wang) - Listen time: Barton 45 minutes / Total 177 minutes

Capital Markets

As I mentioned above there are signs of craziness. SPACs performance was one of those areas. Now, we’re starting to see that unquestioned buying slow. This MarketEar post shows this in a chart.

SPAC trading pops deflate as 'exuberance and greed' depart

The team at Refinitiv has summarized the plethora of deals in capital markets. M&A activity has been pretty heavy as well with SPACs and traditional M&A as well. I thought this post from Capital Group was a good summary of what still lies ahead for us.

The coming M&A wave: 5 key questions answered

As we saw above, companies have a bunch of cash on hand. With so many deals being done over the last couple of years, the question would be is there anything to buy. The answer rhymes with yes. A recent report by CB Insights shows 600+ Unicorns globally. More than 300 of those are based in the United States. There’s plenty of stock available, so this deal craze doesn’t appear to be near the end. You might continue to feel sorry for all the analysts we talked about last week, because they’re going to be working long hours for a while.

$1B+ Market Map: The World’s 600+ Unicorn Companies In One Infographic

Here’s a Tweet that shows all the SPACs trading below $9.75.

Cheap SPACs

Miscellaneous

I’m going to come back to the EV spac again here. I liked this piece because it touches on the reason EV valuations are so insane right now. The Narrative gets overblown when people are excited about something. The author ties in the Dot Com bubble here are well. While the EV industry is much smaller than the huge group of industries that were part of the 90s bubble, the idea is similar. The idea from this article is to learn from a situation to limit the possibility of the same one being made this time or hopefully ever again.

Narratives and hype in verticals

We’ve seen these coming in hot and heavy of late. Big firms like Wisdom Tree, Van Eck, First Advisors, and Skybridge have filed for a Bitcoin ETF. This is the first mega firm. My thoughts are that if Fidelity is filing we must be close.
Global funds giant Fidelity joins the race for the first US bitcoin ETF

Thanks for reading. I hope the rest of your week is smooth sailing. 

Michael