Ground Control to Major Tom

Richard Branson went into space and Virgin Galactic stock (SPCE.K) paid the price. Well, that’s not exactly how it went, but I do think it might have had something to do with it. As David Bowie said, "Am I sitting in a tin can far above the world, planet Earth is blue and there’s nothing I can do". My thoughts are that people may have seen what a $250k trip gets you. While it may be cool, there aren’t too many that might have an interest or the bank account for this. On top of this, the company quickly followed up with a $500M secondary offering. I’m not even sure Ground Control will be able to help this company.

Also, if you were able to watch Fed Chairman Powell in front of Congress this week, you are hard core. I cannot stand these knuckleheads in Washington with their grandstanding in front of the press and asking some of the dumbest questions. I couldn’t even watch the TV with the sound off. The worst I read about was talking at him (you read ‘at’ there correctly) about the Fed’s impact on climate change. I think these elected officials need to do better here. They should all be more educated to what the Fed can and cannot do. I know they have a lot of topics on their plate, but if they’re going to opine on something or be on a committee, they should at least learn a little more.

What really had my brain turning this past week was the bond market reaction to all this. It is perplexing me how bonds are still catching a bid. I’m not an expert in this arena, but a lot of what I’m reading and listening to is telling me these markets are performing a little differently than most expect in these conditions. I did see a good Tweet from Harrison Kupperman yesterday. “Markets are hard to predict. Anyone who tells you otherwise, hasn’t been around the markets long enough...Moral of the story markets are unpredictable and sometimes they do not follow the historical model.” Kuppy wasn’t talking about bonds, but the message is the same.

In more of a news note, Moderna (MRNA.O) will be replacing the acquired Alexion Pharmaceuticals (ALXN.O) at the close on Tuesday. Remember, we saw the research that these additions underperform after these events. Something to keep an eye on as the stock has run up this week. Roughly 15% of this stock is already owned by index/passive managers.

Moderna to join S&P 500, shares jump after hours

Earnings Watch

Last Week

The banks were the big focus last week and they all actually performed quite well versus analyst expectations. BofA missed on revenue by a tick, but otherwise most of the numbers looked decent. The problem is decent wasn’t enough for the markets. Wells Fargo (WFC) was the sole name to perform well after announcing. One of the themes I noticed was the continued strength of their M&A units versus their Trading desks.

This Week

This week we’ll start to see some decent activity. 81 names in the S&P 500 are reporting, which is 16%, but those are a smaller percentage of market cap. For the other major North American indices, about 12% of the Russell 1000 is reporting, as well as, 8% of the Small-cap Russell 2000. In Canada, only 4% of the TSX reporting, but they usually come a little later than the US names. Some majors reporting are IBM (IBM), Netflix (NFLX.O), Chipotle (CMG), and Coke (KO). I’m interested in hearing Verizon’s (VZ) commentary. On the data side, American Express (AXP) looks like it could surprise higher on earnings, but after Banks' performance last week, I’m not confident that will matter.

Equity Capital Markets (via Refinitiv’s IFR)

US capital markets remain hot, but we might be starting to see some cracks. Last week, 12 companies raised $3.6B, but one was withdrawn and another delayed. Also, some companies didn’t trade so well, about 50% of the names closed lower than their deal price. For example, Stevanato (STVN.K) raised $672M, but was downsized and priced at $21, which was the bottom of the range, according to IFR. The stock opened down 20% on Friday.

This week we have another 16 IPOs in the US and 8 listings in Europe. The European calendar is mostly small, but the US has a couple of bigger events. The largest is Ryan Specialty Group, which is the $1.4B insurance firm set for Wednesday. There’s also Core & Main @ $800M on Thursday.

The IFR team notes that there is an incentive to pack in as many deals as possible in case things change in September. It looks like investors are overwhelmed with all the primary listings, secondaries, and more than 50 PIPE financings happening behind the scenes.

Traders may have gotten ahead of the July 20th RLX unlock. The stock took a beating on Friday on heavy volume. That’s too bad for those that have to wait until Tuesday to sell. The company was subject of a class action suit for securities fraud. Another unlock name to watch this week is Lithia Motors (LAD). Their recent secondary, which was 10% of their outstanding shares, unlocks Monday.

Best of the Week:

Josh Brown, aka the Reformed Broker, shared a comment from one of his recent videos. The comment was that a few months of red in the account of the Robinhood/WSB bets group disbanded most of the groups in 2018, but eventually new people came back in for this last run. The commenter noted that “it’s a vicious cycle and I believe it will cause more harm than good to my generation, with respect to investing, over the long term.” Josh focuses on the sense of community for these traders. This one paragraph basically summarizes the last 18 months or so of retail trading, “There are many versions of this in the stock market. They are growing larger, with audiences into the millions. Scaling. The longer the audience spends together, the easier it is for their attitudes and ideas to gel into something that can be directed. Something that can be channeled into a tidal wave.”

Community

Best of the Rest:

The BLS reports on PPI were hot. With or without Food and Energy and year over year or month over month, the June numbers were very strong. All those extremes from the US numbers, but the market doesn’t really care. Jeff Snider is making the case against inflation being a real risk.

And Now Three Huge PPIs Which Still Don’t Matter One Bit In Bond Market

I saw this chart Tweeted out by @Not_Jim_Cramer, which shows an overvalued state for US large cap equities based on trail PE and the YoY CPI. The index looks like it’s only been “expensive” three previous times in its more than 65 year history. I’m not sure how relevant this is statistically, but it’s still interesting.

Stretched valuations plus today's CPI send Peter Lynch's "Rule of 20" valuation method into orbit

E-trading is seeing significant growth and is even nearly 50% of corporate bond trading volume in Europe. This article reviews some details from a Coalition Greenwich report. While European electronic volumes are higher as a percentage than the US, it’s overall volumes are much smaller. The article quotes Wendy Wyatt, a PM at DuPont Capital saying that she hopes corporate bonds eventually go more electronic, sort of like the equity markets.

Electronic trading in U.S. corporate bonds is finally taking off. But it’s still early days, says this investor

This one is a little different than the things I normally share. It’s more into the actual trading workflow. Some of my favorite topics discussed in this webinar were the latest trends and developments in automation, static rules vs. adaptive learning, and compression of trading desks to now become multi-asset and E/OMS changes needed to support this.

Evolution of OMS/EMS for Equities - Watch time: 62 minutes

If active equity managers are going to turn the tide versus passive, they’re going to need to up their game. Fixed Income managers are crushing it though. This report from SPDR Research head, Matt Bartolini shows where managers are doing well and where they need to step up.

Charting the Market: Tide Turns on Active Manager Performance in Q2

Many people know about the CBOE suite of vol products. Simon Ho used them like everyone else, but he thought there was an opportunity because of their high costs. This lead to the creation of the SPIKES from T3. Simon talks with Dean about how these came about and why they work. T3 is now also working on vol surface for assets like Bitcoin and has created the BitVol index as well. I’ve included an old article I found that explains how SPIKES and VIX differ.

Simon Ho, Founder and CEO, T3 Index - Listening time: 49 minutes

SPIKES Versus VIX: How to Take Advantage of the Differences

I’ve been learning more about Convertible Bonds of late. The offer we have at Refinitiv is fantastic, but I haven’t understood the market enough to know just how good it actually is. There’s a lot covered in this conversation, but the part I found most interesting and timely for my personal learning was the discussion around corporate debt, converts, arb trade structure, and credit spreads.

The Kaoboy of Convertible Arb with Michael Kao - Listening time: 67 minutes

One for the Road

I found this one a little different than most episodes I normally like. Kyla Scanlon joined the ValueHive podcast to talk about creating content for Finance Tik-Tok. I’ve had somewhat of a skeptical eye on this previously, but listening to Kyla, I think there may be some value here. As she mentions, to be able to summarize a complex financial topic into a 60 second video is hard and you really need to understand things. Maybe sticking to FinTwit only is for the old folks like us Gen-Xers.

Tik-Tok, Creator Economies, and DAOs - Listening time: 44 minutes

Thanks for reading. I hope your week takes off.

Michael