From Russia With Love

 

Nothing, yet everything has changed in the last week. Where’s James Bond when you need him? Russia and Ukraine tensions are still in the news with the back and forth there driving markets in the short term. I’ll have more on why Russia below. I also read a point of view of why we should worry about these events less, when it comes to our investment portfolios.


Canadians are still just hanging out with their trucks in the middle of everything. Inflation and the Fed are still a major concern for global investors. Last week bond traders, different bond now, were a little aggressive betting on a 50bps hike from the Fed in March. Now the probability that it’s just a 25bps point hike is at 78%. I still think there’s too much aggression here, as some think there’s a chance of a pre-meeting hike. I will be VERY surprised if that were to happen. Retail Sales came in rather high again last week, but off the outlandish numbers we’ve been seeing. I’ll be joining The Big Conversation this week to talk about this a bit. One thing I didn’t have much time to investigate last week was the themes coming out of the latest 13F reports. The big one I heard in the news was Mr. Buffett’s purchase of Activision Blizzard just months before Microsoft’s announced acquisition. Remember, the whole Gamestop fiasco started off the 13F filings release.

US markets are closed Monday, but it should still be an active week sort of a continuation of the last two.  Fun tidbit. This week we have Tuesday Twos Day. Check the date.

Earning Watch
Last Week
It continues to be the case for the “new economy” stocks that if they disappoint, they get hammered. Looks like my Lucid reporting date was off, and they’re not expected to report until next week. I did get one thing right last week, sort of. ROKU had a -13% Predicted Surprise and they beat on the bottom line, buuuut they revised lower, and their next quarter was revised down 150%. How is more than 100% possible? EPS went from plus $0.16/share to -$0.08. I’m going to mark it as correct, because the stock got smashed. It was off almost 30% on its first trade but came back some. Shopify opened down 10% but ended the week down 26%. DraftKings dropped 13% on its first trade, even after probably its best weekend. I missed something last week.


This Week
Home Depot stands out as the largest name reporting this week. It’s more than 2x the size of the next largest. As always, Lowe’s will follow closely behind it’s home improvement rival. I think these two are poised for a decent quarter with the numbers we saw last week from the housing side. Also, this week, the Canadian banks report. Here are some names to watch a little closer:

Block, aka Square, reports Thursday and has a -4% Predicted Surprise. That’s only a penny miss on EPS, but there are four 5-star analysts with estimates more than 20% or 6 cents below the mean, which is comprised of 30 analysts.

Caesars has a -31% Predicted Surprise on a mean of -$0.92/share. Morgan Stanley and BofA both have Bold estimates to the negative side off the mean 48% and 32% respectively. The mean has fallen 13% in the last month.

One last one on the positive side is Etsy. The online marketplace has a nice 7% Predicted Surprise. Oppenheimer’s 5-star analyst has a bold estimate of $1 on a $0.79 basis. The stock has sold off a bit and has a high Starmine Short Squeeze score, so positive numbers could cause a violent reversal in trend.

Best of the Week

Jim has had a bunch of amazing guests in his time as a podcast host. These two are some of my favorites anywhere. Lily Francus is a risk theorist and a quantitative researcher at Moody’s. She is also the author of the ‘Midnight on the Market Momentum’ newsletter. You can also find Lily on her Twitter @nope_its_lily. Jesse Livermore is an OSAM research partner and a recurring guest at Infinite Loops. You can connect with him on Twitter @Jesse_Livermore and read more about his work here. I’m sharing this first, because both of these guests are fascinating every time I hear them or read their work. Neither started in finance and “Jesse” doesn’t even work in the industry. This episode gets into a ton on investment philosophy like valuation topics, arbitrage, shorts, and a ton of other topics around the focus of bubbles. Lilly’s point around momentum and how it’s hard to arb out this known model is one of my favorite points. Another thing is when Jim mentioned chaotic normal distribution. I think that’s a much under-discussed topic in our business. So many quote statistics like normal distribution is 100% fact. I also loved the point from Lily that said that bubbles come areas where fundamental value is not 100% known. There’s a ton of backwardation in these assets. The demand for these assets is so much higher now. Think the 90s tech bubble and crypto recently. This was an exceptional discussion and if you like to think about behavioral finance, it’s a must listen.
Lily Francus and Jesse Livermore — Understanding Financial Bubbles – Listening time: 87 minutes

Best of the Rest

I was riding in the car with my father in-law and we passed some area where frackers had purchased drilling rights from the landowners. The landowners had told my father in-law that they were disappointed because not much drilling has happened, so no money in their pockets. He asked me why I thought this might be happening. Why is oil so high, but they’re not drilling these wells? I thought it was a good question, but I didn’t have a good answer. That was until I found this article. The article walks through some of the recent history of the ups and downs of oil, how American drilling impacted the global market. It also comments on a few of the other supply chain problems in the US. The point the article makes is fracking companies didn’t exercise the best business practices and weren’t making too much profit from all the work. As oil started moving higher again, they stopped reinvesting and doing more buybacks and special dividends. A ton of inputs into this market have changed following the GFC and as investors come back to this space they’re much more cautious. That said the author finishes the article by noting that major commodity houses think this supercycle will require an all of the above type of strategy around energy. Below is a look at the sum of CapEx for US Energy names versus what’s happening in the Crude and NatGas futures market. You can see Capex generally follows the price of Crude, but since last year that relationship is less true.
Frackers Restrict the Flow and Raise the Price


It’s going to be hard for equities to trade down too far with the crazy amounts of money being allocated to the asset class. Are the overpriced? Probably, yes, but that’s will not matter if the flows continue at this pace. Zero Hedge shared some numbers and charts from Goldman and Bank of America research. Goldman even noted them as being “at extreme levels.” From the charts shared, it seems that most of the equity flows are going into non-US equity fund.
With Money Flowing Into Stocks At A Record Pace, Goldman Does Not See A "Larger Correction" Taking Place


Christian Alexander, of Macro Link, joined Maggie Lake on the RVDB. Christian made a great point here on the job of the Fed. He compared it to landing a plane on an aircraft carrier at night in a rainstorm. Another topic was the whole uphill battle Cathie Wood is facing. Christian thinks many of her positions are being attacked by other funds just because she holds them. They talk about the news out that the SEC is investigating block trading. Trading desks are a huge profit center for the banks, so this could be a very big problem if it turns out the investigation finds some Street-wide wrongdoing.
How Will Hedge Funds Adjust to Tighter Monetary Policy? – Listening time: 36 minutes

Another week of war talk around Russia, so I thought it would be useful to see this sort of analysis on Russia. The country is acting like a cornered animal, which is very dangerous. As Alex’s points out in the second link, the country’s size in economic terms is smaller than the state of Texas. That’s not fair, because everything is bigger in Texas. Both links give some insight on the country’s population problems.
Let's talk about Russian demography
A Russia-Ukraine PSA

Liquidnet shares a report on the evolving European equity market. This piece looks the breakdown of markets from a few different perspectives. I still think how crazy it was to see how fast things moved after Brexit. There is some talk in here about things like Pre-Arranged Trades needing to be done on venue. This talk is coming out of the EU, the UK, and the US. Regulators are looking to make sure all “trading” is done with someone overlooking it.
Liquidity Landscape

Taxing the new legal cannabis market is causing some dislocations. It’s not only taxation, but also difficult red tape and bureaucracy that make doing business in some states very hard. All these difficulties had made the black market, the old school way, very appealing for well intentioned business owners. In fact, there are so many illegal setups that law enforcement cannot even keep up and the punishments are so small that it’s not worth the work.
Why Legalizing Cannabis Strengthened the Illegal Market – Listening time: 47 minutes

Mark Wetjen, who is the head of policy and regulatory strategy at FTX US, provides some insight on how derivatives will play a vital role in institutional investors allocations to crypto assets. Mark thinks Congress is starting to see the benefits of crypto for their constituents. Mark was formerly the CFTC Commissioner and is also currently an advisor to Senate Majority Leader Harry Reid. He views Chairman Gensler’s views on crypto regulation as solid because many of the token act like securities. He agrees with his firm FTX being regulated, as they already hold many licenses, and he thinks supervision is important for investor safety. This interview was a learning experience to help me understand where crypto and blockchain could help the market structure in the future.
Advancing Crypto Derivatives – Listening time: 35 minutes

The battle for listings is global and my firm’s parent company is fighting to keep European companies listed in Europe. My colleague Chris Mayo argues that some of the IPO performance talk is only taking into account the US markets and the UK listings did quite well. His LinkedIn post notes UK IPOs averaged +3.3% versus -23% for the US and -17% for Canada. The WSJ link is behind a paywall, but here’s a quick summary. As the headline notes, Softbank is looking to list Arm Holdings on the NASDAQ rather than the LSE. The US market is huge and home to many big tech stocks. London doesn’t have much tech. The author notes that this is the exact reasoning to list in London. Prior to SoftBank taking the company private, it traded at a nice premium and European investors are starved for some tech. If the company were to list in the US, it would be just another tech stock. $40B is nothing special. That’s not going to get a significant weight in any indices. In fact, it wouldn’t even be eligible for the S&P 500. However, it would be a top 100 company in all of Europe and a top 10 tech name. The author ends with three reasons the US might win out. Big fish, small pond might garner too much attention. Corporate governance in Europe is tight. Local expertise in the US around analysts and investors focused on tech. I think the NASDAQ wins out, but for my company’s bottom line, I would mind seeing them list on the LSE.
SoftBank May Take Its Big British Tech Stock to Nasdaq. It Might Be Better to Stay Local. - WSJ
LSEG's Chris Mayo gives a bigger picture, some of my own data for 2021 IPOs

One for the Road
Last few weeks have seen a bunch of markets moving around on the news about Russia. Many, including myself, place trades to try to take advantage of macro events. The media tries to take advantage of our attention to make things always seem more important or scary. This post notes that these events are hard to trade because predicting the future is hard and knowing how markets might react to those events can be even harder. He thinks we as investors/traders display huge amounts of overconfidence. My PA trades are so small compared to my total portfolio, it’s more about staying in the game than it is making any life-changing money.
Most Investors Should Ignore the Risk of Major Macro Events

Thanks for reading. I hope your week is neither shaken nor stirred.

Michael