No Soup for You

Austria announced a full national lockdown because of an increase in COVID cases and Germany put new mandates on unvaccinated people. This seems to have weighed on global equity markets, though were mostly up small on the week. The SPX recorded it’s 66th record close this year. Most of Asia was up as well, but Europe, LATAM, Canada, and US Small-caps were lower. My favorite story of last week was Ken Griffin outbidding a DAO of crypto investors trying to buy a copy of the US Constitution. The bill came to $43.2M for Ken. That’s expensive, but I’m happy he paid up. I did not want to hear nonstop about how this was the next way for individuals to band together to take it to the rich. The worst story of the week was Democratic Senators Sheldon Whitehouse (RI) and Jeff Merkley (OR) voicing displeasure with Fed Chair Jermone Powell. For his ability to fight inflation or unemployment? Nope, but because of his commitment, or lack thereof, in fighting climate change. Huh? This is why I lose more respect every year for elected officials.

Coming off the HUGE expiration of SPX options last week, we might see some more volatility than one might expect for Thanksgiving week. Below is a Zero Hedge article highlighting some of the data around this. I’ve also got an eye on Europe and their energy issues. Some of the power prices are near record highs. The U of Michigan Consumer Sentiment Index is out Wednesday and should give us some insight on how inflation and shipping issues are impacting people. With the Thanksgiving holiday in the US on Thursday, look for a lighter than normal Wednesday afternoon for the US and a lighter half day of trading on Friday. 

Earnings Season

Last Week

Still a bunch of names reporting as of last week. Retail was the focus, but also some big tech names. There were a few nice reports out there. Nvidia, the largest name to report, beat on the top and bottom line and ended the week up almost 13% from their report. One of my favorite names, Home Depot, surprised and traded up nicely. The big winner on the week though was Macy’s, which crushed EPS estimates and exploded to be up more than 20% on 7x average volume. It closed the week up 12.5%, off a little on profit taking. The stock is up nearly 200% this year. Other winners were Kohls, BJ’s Wholesale, Intuit, and Victoria’s Secret. Some losers on the week were TJX, Foot Locker, Riot Blockchain, Petco, and StoneCo.

This Week

We have a lighter week with mostly the tails remaining, the US Thanksgiving holiday on Thursday and essentially an off day on Friday. That doesn’t mean there’s nothing going on. Deere’s report should shed some light on the employment issues in the US. Deere’s had some issues getting it’s workers under contract. It’s showing a pretty negative Predicted Surprise of -7.2% on the EPS and has some negative momentum on that estimate, which has dropped more than 10% over the last week. Other names of interest, for me, this week are Best Buy and Dick’s Sporting Goods. They both have huge positive Predicted Surprise coming into the week and unlike Deere, have positive estimate momentum.

Equity Capital Markets (via Refinitiv’s IFR)

Looks like investors in the IPO space were ready to break for the holiday a week early. Only five US IPOs last week, but three performed quite well. We also had the largest of the year in Canada with Definity Financial. In the US, Kindercare postponed it’s $500 IPO. Yet another EV company came to market. Sono Group is still pre-revenue, so of course it’s got a billion dollar valuation. Sweetgreen was the best performer on it’s opening trade, but didn’t move up much after that.

While it wasn’t a huge week for IPOs, that’s not the only part of the ECM world. There were more than 30 follow-ons for $12B and a huge week for Convertible Bonds with five $1B plus deals and $8.4B total. I don’t often cover convertibles because they’re more of a bond to me, but some of these that went down last week have more equity like exposure than normal. For example, Unity Software priced a $1.5B CB at zero percent coupon and a 57% premium on conversion. Affirm and Digital Ocean had similar size and premiums as well.

Best of the Week

Just an excellent write up from personal experience on what some of the problems facing the shipping industry are, from someone in the industry. Basically, there are too many choke points and no reason for the shipping companies to change.

I’m A Twenty Year Truck Driver, I Will Tell You Why America’s “Shipping Crisis” Will Not End

Best of the Rest

In the article above, we heard from one person's perspective on what’s causing the issues. In this NPR podcast, we hear of a few more examples of regulation and misallocation of resources that continues to limit the possible fixes to this situation we find ourselves in.

Of boats and boxes - Listening time: 23 minutes

A little word play from the author here to open, mentioning that “Exchange Traded Funds” are actually not trading on the exchanges in Europe. There are some players even giving retail investors access to the same liquidity as professionals. ETP volume on the LSE was about 12% last year, which is up from under 9% in 2019. Notice the drop off of LSE’s total market share in late 2017. The London Stock Exchange, proper, had a market share of north of 30% until MiFID II allowed for firms to start using APA (Arranged Publication Arrangement) in the UK and EU. Now, the wider LSE offering still accounts for nearly 30% when you take into account both the LSE and TRADEcho. When you take into account that LSE’s parent, LSEG, also owns a majority stake in Tradeweb, that’s almost 40% of ETF trading via an LSEG subsidiary.

Investors question trading of ETFs off-exchange

Richard Johnson, CEO of Texture Capital and a former colleague of mine, has a new YouTube series. It’s a quick hitter type with one topic for each guest, “If you were building a new market structure from scratch, and could change one thing, what would it be?” and only eight minutes to answer. Mike Masone, the Head of North American Market Structure at Citi, joins Richard for this quick conversation about equity markets in the US and brings up some points around sub-penny quoting and retail flow. Mike thinks allowing exchanges to quote in sub-penny like the market maker/wholesalers are allowed to do would make markets more competitive. This is episode five and Richard’s had a variety of guests in the first four episodes. I recommend checking this series out.

8 Minute Market Structure | Mike Masone - Watch time: 12 minutes

As mentioned in the open, we had a huge option expiration in the SPX index options as well as another $746B in single stock options. This points higher volatility the first day of trading after monthly options expire.

Here's The Names to Watch As Massive Options Expiration Looms

Barry Ritholtz shared this chart in one of his daily emails. Via MPG Consulting we have a look at the life cycle of an industry and where some majors sit on this timeline.

Cannabis Industry Life Cycle Stage

This chart from Goldman Sachs via The MarketEar shows an incredible weighting in exceptionally high valuation stocks, according to EV to Sales ratio. Not much more to say about this one, other than WOW!

Almost 50% of hedge fund longs are in stocks with valuation >10x sales…

One for Road

This one is literal this week. There are a few sites that follow patents applied for by companies, and many that specifically follow the patent freaks over at Apple. Someone went ahead and created a concept car using all the patents the company has filed. Some of the patents might not actually be for an automobile, but conceptually they could be.

Stunning Apple Car concept created using Apple patents

Before I let you go, here are three things I'm thankful for:

1. My general health. Although I'm getting older and small things hurt more than they used to. I'm generally pretty healthy.
2. The ability to work from home. I've been able to deal with a ton of issues this year from my home office. Also, the wasted hours of commuting are no more.
3. Working with great colleagues. Work can be hard when you don't really like the people you work with. I don't have that issue. The team of people I interact with are amazing.

Thanks for reading. For US readers, don't eat too much Turkey.

Michael