The Times They Are A-Changin

 

There seems to be a lot of change going on in the last few years. Since COVID, things have accelerated quite a bit. Many of the articles shared below have a theme around change. It’s just a different flavor for each. I think Bob Dylan’s ‘The Times They Are A-Changin’ is pretty appropriate for this period. As you read in Raoul’s post below, we are going through a period of change. Dylan notes, ‘as the loser now, will be later to win.’ Dylan wrote in a period of cultural change and the civil rights movement. This movement I'm speaking of is more about the financial aspects of life.

I did not see things playing out like this in the US equity markets this week. Disappointing numbers coming out of some of the mega-caps. As high as they’ve been flying, that is not that unexpected, but for the market to shake that off and push to new highs was surprising. In global markets, the rest of the Americas traded lower, most were in the green in Europe, and all major Asian indices were down for the week. Speaking of green in Europe, world leaders met in Glasgow, Scotland for the COP26 summit. This meeting is for trying to find a way to get to zero-carbon. These discussions focus around the E in ESG and are not easy. While there could be consequences for our one and only planet if we continue without a care, there are also limits to how fast we can move to curb the current ways of life. BofA has noted that about 5% of global equity market value could be lost by climate policy repricing. Think about the side effects we’ve seen from the California ports not allowing older trucks to come and take the backlog of containers because they don’t meet the State’s more stringent environmental hurdles. It’s a balancing act that has global impacts. In the equities market this week, Tesla jumped the $1T valuation shark, and I’ll cover that some more below. Facebook unveiled its new identity, Meta, and the jokes came flying in. There was not a new Saturday Night Live this week, so we’ll have to wait for that gem. We did get some great Twitter comments on the BBQ sauce bookend.

Coming up this week, we’ve got a ton more on the earnings front, some familiar names in the IPO space, and outside that we’re expecting to hear from the Fed. Expectations are that they will start to reduce monthly Treasury and MBS purchases. We’ll also be listening to the language around their views on transitory inflation. The futures market has been increasingly pricing in a couple of rate increases by the end of 2022.

Earnings Season

Last Week - 2 Weeks

Quarterly results are coming in swarms. It’s hard to keep track of them all. Looking at last week, we heard from mega-cap tech with mixed results. Amazon’s bottom line miss was pretty large, but I’m guessing it didn’t sell off that much because of the success of AWS. Since I didn’t look at this last week, I wanted to look for highlights over the last two weeks of reporting. Down the market cap board a little, I’ve highlighted a few names below with some outsized results either in the financial or stock performance. Some major misses were Boeing’s 200% EPS miss, and Spotify EPS missing by 130%. Intel beat by more than 50%, but has sold off by more than 12% on some near term costs associated with its turnaround plans. There’s also Twilio and Twitter, who both beat EPS and have traded down large since their releases.

Next 2 Weeks

Since I’ll be skipping next week’s post, I thought I’d look at the next two weeks of releases. Again we’re seeing a large number of mega-caps reporting, led by Berkshire Hathaway, Disney, Paypal, and Pfizer. You can see in the screenshot below, we’ve got some wider dispersions in the estimates even for the big names. Disney has a 7% expected surprise with large variance in opinions. T-Mobile has a large implied miss, but again huge difference of opinion for analysts. One name I have my eye on is Wayfair. It has an extreme Predicted Surprise of 100% with a ridiculous spread on analysts numbers and has seen the better ranked analysts moving their numbers higher over the last week. For those of you that follow Oil & Gas, there are a bunch of positive Bold estimates for EOG, APA, OXY. There Predicted Surprises are mixed, but estimate momentum has been positive.

*5-star analysts with an estimate far above/below the mean

Equity Capital Markets (via Refinitiv’s IFR)

Last week there were 13 IPOs totaling $7.4B.The average return for this week’s name was 9.7%, which is basically in-line with the 2021 average. The big name was GlobalFoundries, which raised $2.6B. Some other names of interest were Informatica, Rent the Runway, and Udemy. RENT was the worst performer of the week trading down 18% from it’s offer price. They may have pushed their luck by upsizing the size and pricing at the top of the range. IFR noted that 90% of the deal went to the top 20 accounts, so this appears to be a deal not meant to appeal to the masses. On the other side, Arteris raised only $70M with a $670M valuation. It priced on the lower end and ripped up close to 60% by the end of the week.

This week another 11 IPOs are scheduled. The largest expected is German biotech, Evotec at $600M. There’s also some notable names like NerdWallet and Allbirds.

Finally, IFR is hosting an ECM Roundtable on November 17th, you can register below.
IFR US ECM Roundtable - SPACs at a Crossroads - Register

Best of the Week

Trading during the last year or two has changed tremendously. Even with Twitter and other platforms the younger investor/trader had never been able to gather in enough size to really move markets. Jamie founded WSB in 2012, but it really gained steam during the last two years or so. The Reddit thread is currently more than 11 million people and it’s created a ton of sub-threads as well. One of the biggest differences of this community that Jamie discusses is the willingness to discuss losses and to be honest about trades being more along the lines of bets than investing. He also reviews how the AMC and GameStop events impacted the community and how he missed crypto. They also discuss some of the other crazes that the WSB community is focusing on.

Jaime Rogozinski - Founder of WSB (WallStreetBets) - Listening time 59 minutes

Best of the Rest

Along the lines of the WSB interview, Raoul Pal, founder of Real Vision, posted this thread about how the younger segments of the financial community are forcing change. Raoul notes that millennials are hitting their prime investing age. According to Pew research they are now the largest demographic, but then only own 5% of wealth. Essentially, Raoul notes that they are not following the slow and steady, get in line asset growth playbook.

Raoul Pal : Actually this time is different

Another thing that looks to be changing is the amount of flow retail investors/traders/bettors now amount to. This article notes a move of more institutional flow to the closing auction and increase in retail flow has garnered interest from the buyside. According to Redlap Consulting, nearly half of the 30 global heads of trading they reached out to said they’d like to engage with retail flow. That’s a small population, but could still give some insight. The article also highlights the difference between retail flow in the US vs. in Europe. I’m not too sure I see this being possible though with the payment for order flow landscape. Many retail providers send their orders to wholesalers that pay for that right. When I worked for Fidelity Capital Markets, we had an algo that allowed for access to the Fidelity retail flow. There was always an internal debate as to what was better for the client and firm to send that retail flow to market makers or cross against institutional flows.

Retail flow: the new El Dorado for the buy-side?

With Tesla hitting that mythical $1T market cap number, people began to point out the number of differences between it and the others with that level of market cap. For example, it’s the first junk-rated company to meet that mark. That said, there’s only 5 other companies over this amount, so not much to compare to. Facebook, oh sorry Meta, is next up to hit this mark at $880B. Telsa got over the top on news that Hertz inked a massive deal to purchase 100k Model 3s. I took a look at a few data points and one that I found was how much the stock tends to stay ahead of the Street’s price target. Also in that first chart, I looked at performance since last year’s addition to the S&P 500. Piper Sandler shared the second chart on the supposed Tesla killers. I’m still astonished that companies like Volkswagen, Chevy, and Ford have yet to mount a serious threat to Tesla.

We may need to start thinking about Tesla at $3 trillion

I’ve been trying to get into crypto lately. Only Bitcoin and Ethereum though, not this new Doge 2.0, Shiba Inu. The data you can look at because of the blockchain is amazing. In this interview, the guest goes into the on-chain data that can help quantify some of the ownership and try to make sense of sentiment. Below are the couple of charts that Willy and Preston talk about, which are from the YouTube version of this. Preston is a huge Bitcoin bull, but if you want to learn more about the technicals of supply and demand, this is a great session.

Willy Woo & Bitcoin On-Chain Data Analysis - Listening time: 68 minutes

With the launch of BITO and BTF going well so far, I thought it was useful to share this podcast on what happened this week. BITO trading volume was huge. It traded more than $1B notional on the opening day, which was the second largest opening day, but the largest was basically a single trade. That’s what is known as bring your own assets (BYOA), where an asset owner basically has a fund created for it. This podcast also covers why the listings are done as such with regards to the legality. The biggest point that I think comes up is the funds are seeing so much inflows that they’re close to hitting position limits in the futures market and being forced to buy the out month contracts. This will add some complexity to the trading of the futures. Right now, BITO holds almost 3,900 contracts and the CME limit is 4,000 contracts.

The Bitcoin ETF Race Is Over—and Also Just Beginning - Listening time: 29 minutes

Global government bonds, unlikely equities, got hammered this week, especially on the front end of the curve. You can see the rise in major bonds over the week, but the huge spike in Aussie 2Y. As the article notes, this was the biggest three-day change since 1996 in those notes. Canada, which is the highest on this first chart, jumped the most since 2009. The second chart shows the weekly change in 2Y rates over the last 15 years. These jumps set off some risk re-allocation.

Global bond rout raises prospects of 'VaR' shock

One for the Road

I’ve seen hedge funds in all sorts of shapes and forms, but these guys seem focused on sucking the life out of the newspaper industry. The article focuses on Chicago’s Tribune, but this fund controls more than 200 papers nationally and is the second largest owner in the nation. They’ve taken a quite ruthless profit motivated effort to gather up more and more. I raise this because as the article notes, when there is limited local news, “it tends to correspond with lower voter turnout, increased polarization, and a general erosion of civic engagement. Misinformation proliferates. City budgets balloon, along with corruption and dysfunction.” This is a long form article, but worth your time.

A Secretive Hedge Fund is Gutting Newsrooms

Thanks for reading. I'm off again next week as I'm travelling to see family.

Michael