We Are Never Getting Back Together

 

Quite the weird week there last week. All year we’ve been hearing of mergers and IPOs, but last week we saw three mammoth break ups announced. Johnson & Johnson, General Electric, and Toshiba each said that they will split up their business lines. These are bigger than Tom Brady leaving New England or Bill and Melinda Gates splitting up. It seems each no longer subscribed to the bigger is better theme. It might also be because investors are valuing the entire businesses with the multiples of their legacy stodgy units and not the new growth businesses they are trying to foster. Each of the stocks jumped on the news, but then traded off from the positive initial reaction. We’ll see how these break ups go, but I wonder if the executives of the cast off divisions are watching Romcom movies and eating ice cream.

Elon Musk continues his shenanigans on Twitter by posting a poll on whether he should sell stock. The poll ended with 58% saying “yes”, so he ended up selling $5B worth of stock. He wasn’t the only Tesla insider selling either, his brother and another board member sold a decent amount of stock as well.

The other big story from last week was inflation looking like it might shed the transitory moniker. CPI for October showed a 6.2% rise year on year. This makes five straight months of +5% growth numbers and that number is the highest since the ‘90s. This should make those in DC think about their next moves, both in fiscal and monetary policy.

This week there are some big companies still to report. We’ve got a decent deal calendar too. Aside from earnings’ calls, we also have a bunch of investor days. I'll mentioned Ford more below. We’ll see their all-electric F-150 and Mach-E this week at the LA Auto Show. Others like Volkswagen, Kia, and Subaru are planning on showing off their own electric cars.

Earnings Season

I haven’t been able to keep up with the individual reports as much, but I wanted to take a step back this week and look at how global companies that report quarterly are doing. I filtered out Small and Micro Cap names for this and below we’re looking at companies whose FQ ended between August and October. Globally, we’re 84% of the way through the reporting season, so in theory we’re into the tails. Some countries are a little behind, but most are at least 70% reported. The country that sticks out like a sore thumb is China. They’re beating estimates less than 40% of the time both on the top and bottom line. Growth has been terrible and revisions are lower as a group. That said, the price reaction isn’t all that bad, but the companies yet to report look to have even worse numbers coming.

This Week

Just because we’re at the tail end of the quarterly Earnings’ Season, doesn’t mean we still don’t have some important reports coming. There are some big tech companies reporting, like Nvidia, Cisco, and Applied Materials, as well as the big retail names, like Walmart, Home Depot, Lowes, and Target. Lowe’s is one I have an eye on. It’s got a 4.5% Predicted Surprise, a positive bold estimate, and some positive momentum in its EPS estimates.

Equity Capital Markets (via Refinitiv’s IFR)

The highlight of last week was Rivian Automotive’s nearly $12B deal, and that was one of 10 IPOs that raised more than $14B in total. Prices in the aftermarket, as you can see below, were mixed.

We’re expecting another six IPOs this week in the US looking at raising about $2B. Expect this to slow after than with Thanksgiving coming. The two largest are looking like Kindercare, a childcare center, and Sweetgreen, a salad chain, both I know nothing about.

Before I move into the articles this week, I found the Rivian and Ford numbers interesting. Ford owns 95M shares of Rivian, which is about 11% of the company. That’s a value of $12.4B or 16% of Ford’s total market cap. Subtract that off Ford’s $78B Market cap and that’s a pretty low valuation for this company with north of $134B in revenue over the last 12 months. Just something to keep in the back of your head as Rivian possibly takes off.

Best of the Week

First off, this is a long interview. Even at 2.5x it still took me quite a while to listen. That said, it’s worth your time if you want to find out how owning Bitcoin on a corporate balance sheet looks. Michael walks us through GAAP accounting and some of the nuances. I was wondering if some of these rules do not change, if we’ll possibly see more companies getting into these Bitcoin ETFs. There’s a ton more pro-BTC content here, but I just found this accounting topic something new to me and interesting. I know, accounting and interesting in the same sentence?

Bitcoin Is The Best Asset w/ Michael Saylor - Listening time: 148 minutes

Best of the Rest

Speaking of Bitcoin ETFs, Simeon Hyman of ProShares joined The Crypto Rundown on Options Radio Network to discuss this new ETF. They break down the position limit worry that many, including me, have highlighted. Whether it’s first or second month futures, both give a good correlation to BTC. The fund can also add in equities if they run into liquidity issues with the futures. The interview is the first 22 minutes of this program, and the second half is a summary of the crypto markets from the derivatives perspective.

All of Your Burning BITO Questions Answered - Listening time: 50 minutes

This article highlights some recent developments in the institutional crypto space. To no one’s surprise, hedge funds are leading the way here with AUM nearly doubling to $3.8, according to AIMA. Is that from growth in the asset or interest? The article also notes that a growing number (21%) are investing and more (26%) are planning on doing so. There are some barriers that are preventing those percentages from growing like infrastructure, fragmentation, capital efficiency, and settlement. The author notes that we’re starting to see answers to these concerns in aggregators, derivatives, and funding mechanisms.

The Road to Institutional Adoption of Crypto Assets

I’m not sure I agree with all the points Ken makes here, but he’s gotten just a few more things right in finance than I have. He compares crypto currencies to the meme stocks. He doesn’t see a commercial use case for Bitcoin and seems to think it will be replaced by faster speeds and lower costs like Ethereum and other next generation cryptos. Ken also gets into taxation, the Fed, the US Economy, and why tech thrives in the US vs. Europe. The final topic he touches on is ESG.

Ken Griffin Talks Crypto, Digital Currency and The Future of the Economy | DealBook Online Summit - Watch time: 27 minutes

Nice piece on crypto starting to get the support of Prime Brokerage. There’s some discussion of the history and impact of traditional equity prime brokerage and how that helped launch the Hedge fund industry. Then the post turns to Coinbase, Galaxy, and Copper offering prime services to the crypto community. It also mentions that because of air cover from regulation, these firms won’t see much pressure from the traditional prime brokers.

Prime Time in Crypto

This was an eye-opening research paper. I mean it makes sense when you think about it. The paper notes that the 52W high acts like a light to a bug. We’ve seen this argument made with clustering around round numbers too. The paper mentions this as well. Basically, the paper notes that because a large amount of uninformed liquidity appears around the 52W highs and destabilizes the market. The positive here is that because most institutional investors have a bias towards momentum they can buy near the highs with lower impact because of all the retail selling. “For example, the quoted spread averages 106 basis points across our sample of stocks, but only 60 basis points on days when the stock opens within 3% of the 52WH.” This isn’t a short read at 38 pages, but I think it's worth the time. One note is the sample is somewhat small, being Helsinki NASDAQ OMHX, a total of 78 stocks over the time period from 1 January 2000 to 31 December 2014.

Liquidity and Price Impact at the 52 Week High

One for the Road

My favorite part of this article was the mention of WFA, no not WFH, but Work from Anywhere. For years, when I was the young kid on the desk, I had to make it in. NO MATTER WHAT! Two feet of snow, who cares, get up earlier and shovel it. You have to be at the desk by 8:30 the latest. It was one of the reasons I left the world of institutional trading. Now, you can do almost anything from anywhere. Refinitiv just released a mobile app for Portfolio and Order Management via our Alphadesk product. Eventually, we’ll have the ability to execute orders on it too. Mobile retail is one thing, but trading billion dollar portfolios on the move is just amazing. The idea of this article though is that there needs to be balance. Work from Anywhere, but at times you need to be and should be in the office. According to one of my colleagues, this was a topic of discussion at Trade Tech Europe last week.

Heads of trading stress the importance of office interactions as asset managers grapple with hybrid work setups

Thanks for reading. Have an amazing week.

Michael