Department of Corrections

 

The Department of Corrections in New York City holds itself as New York's Boldest. Traders and investors really do have to be bold right now. Stepping in to buy at a point of inflection is hard. Are you catching a falling knife or are you buying the lows? There’s so much to write about from last week, but I haven’t had the time to really research everything, but in many ways, it was really a week of corrections. We saw a lower than expected jobs number, Fed Chair Powell saying inflation may not, in fact, be transitory, the Omicron variant making its way to the US, Jack Dorsey resigning at CEO of Twitter, huge volatility for Crude, Lumber, most equities, crypto, and volatility. It wasn’t just the downside kind of volatility either.

I’m looking for that volatility to continue into this week. We’ll see a number of points where a change of opinion could come about. We have the CPI number, some big names reporting, and Rivian’s quiet period ending. 

Earnings Watch

Last Week

Earnings reports weren’t much different from the rest of the market. Some extreme volatility can be found in this table below. Highlighted by Marvell Technology’s strong beat and big upside trading, but mostly low lights, Salesforce, DocuSign, Asana, and Elastic were some of the worst.

This Week

We’ve still got some rather large names reporting out of the ordinary schedule. Oracle, Costco, and Broadcom are the three largest. MongoDB and UiPath are a couple of names with strong positive Predicted Surprises at 4.1% and 7.3% respectively. I’m ignoring GameStops giant number. Costco has a smaller surprise at 1.8%, but it also has 2 positive bold estimates. Chewy has seen the most momentum on the estimates side with this quarter's EPS estimate rising by 17% over the last week. The stock’s options have been active and it’s implied vol is the highest it’s been over the last six months. It might be a name to keep an eye on.

Best of the Week

I’m part history buff and part quantitative nerd. I have had an interest in quantitative finance since I was a young trader covering some of the largest quant asset management firms. In this episode, Niels interviews Steve Foerster about his book that covers some of the people that shaped the investing theories of today. They talk about Louis Bachelier, Eugene Fama, Harry Markowitz, and Bill Sharpe. If you’ve never heard those names before, you probably don’t deal with quantitative finance much. Some of my favorite talking points from this; where ‘beta’ came from, call options going back to 600 BC, and derivative investments going back to 2400 BC. Much of what we think of as financial inventions are really just modifications of centuries old contracts.

In Pursuit of the Perfect Portfolio ft. Steve Foerster - Listening time: 67 minutes

Best of the Rest

I’m sharing the last two YouTube videos posted by Brent at SpotGamma, because the volatility in US equities has been impacted by the positioning of the options traders. In the posts, he mentions a few things I found to be interesting. Brent showed 4500 support and 4600 resistance levels and it seems those held on the week. He also noted a possible $8B MOC order on Wednesday. I found each day but Monday had outsized volume at the close, and the individual S&P 500 names also traded about 170% of auction value this week when compared to the prior three months. I’ve also added a few other charts around volatility. You can see the spike in VIX futures, which are still below the index itself. The skew of S&P 500 options is quite elevated as well with traders buying protective puts. Finally, I took a look at how the current vol numbers look versus historical ranges for a few difference assets. 

What's with the Floppy Action? - Watch time: 4 minutes

Market Slingshot? - Watch time: 7 minutes

Accessing newer and smaller niche investment firms is hard for the largest asset allocator. The huge pensions have historically had requirements of track record, minimum allocation amounts, and maximum percentage of fund that kept them from accessing smaller and newer managers. Recently, some of the large players have set aside money to find some of these managers. The article notes Texas Teachers starting its program back in 2005. It now allocated $5.9B to nearly 200 managers. The reason this is a problem is because larger asset owners don’t necessarily have the time to look after a fund they have $25M with when they have north of $25B in assets. Also, being too large an investor in a smaller sub-$500M fund is a risk. This article highlights some new places allocators are finding to allocate to emerging funds.

How Asset Owners Are Solving the Emerging Manager Problem

I mentioned crypto volatility. Bitcoin was crushed on Saturday and there’s some on-chain analytics that indicate that might have been a bottom, for now. Let’s take a look at some of the major BTC corrections of all time from Charlie Bilello’s Sunday Charts. I also heard someone comparing ETH’s relatively stable position of late compared to BTC and the ratio of the two is at an all-time high for ETH.

Bitcoin, Ethereum face largest correction since 19 May; is it time to buy the dip

First, it was crypto and now NFTs. Looks like we’ll have an ETF that lets individuals that have little idea why NFTs have any value, like me, to invest in them. This is more of a news link, but it’s something outside of the normal box.

Defiance ETFs' NFT-Linked ETF Soon to Launch in the U.S.

Smaller UK investment firms, i.e. less than £200M, will not have to unbundle research payments and all firms will be able to stop RTS 27 and 28 best execution reporting requirements immediately. This is a little bit of a surprise, but not all that much because it makes sense from a competitive market perspective. I don’t mean a fair and competitive market for participants. I mean a competitive market for luring businesses to and helping keep them in the UK.

UK regulator scraps payments for research on small caps and best ex reporting in MiFID II scale back

Looks like the SEC is looking to start monitoring Securities Lending a bit more. Sec Lending is big money maker for a lot of people. Especially, when short selling is high. For example, take a look at the data that the FIS Astec app in Refinitiv's Eikon. This comes from lending data to approximate short selling amounts in between the reporting dates. It costs over 7% right now to borrow ARKK shares to short them. This basically means that although the stock was down 5.5% on Friday, the cost to borrow ate into that and took about 35% of that return for short sellers away. As for the SEC proposal, here are some highlights, which you can watch a pretty boring call or read a quick note on. Only lenders would report, and all lenders would be covered, whether or not registered with the SEC. The rule would cover all securities, which means both debt and equity. The idea would be for granular data to be reported to FINRA, but only aggregates would be made public. Data would be reported on the date that a loan is made or modified within a certain amount of time. Short selling seems to be the major focus, which means they plan on requiring whether a loan was made to satisfy a fail to deliver obligation. Finally, if you’re new to Sec Lending, I’ve also shared a marketing piece from Blackrock that summarizes it pretty well.

STA Open Call: SEC's Proposed Rules on Securities Lending

SEC Fact Sheet

FAQ on Sec Lending from Blackrock

I’ve shared some of the work on sleep from Matthew Walker and this interview Bill does with Louisa is just as good. The thing I like about this is that it hits home for me as Louisa is a triathlete and they talk a lot about trading and investing. Louisa’s business was originally focused on how sleep and diet could help athletes obtain their full potential. An encounter with a trading firm brought her into the business world.

Louisa Nicola - Enhancing Performance - Listening time: 62 minutes

One for the Road

This was great. It’s not related to markets, but it is related to something many of us in the US have dealt with. I have refinanced my home three times over the 15 years or so I’ve lived here, so I’ve paid say $5,000 in title insurance for a home that I’ve owned. One of the hosts, Michael, really gets fired up and pretty much matches my level of frustration. This is informative and entertaining as they interview the CEO of Doma on what they’re doing to improve this market.

Down with Title Insurance - Listening time: 31 minutes

Thanks for reading. Hoping this Holiday season doesn't find you in solitary confinement.

Michael