As I watched some 40 hours plus of sports starting Thursday through the weekend, I had the title in my head, but couldn’t think of how to open the post. Then we had a typical March college basketball tournament. For those outside the US, every March university’s battle in a 68 team tournament for the national collegiate title. It happens for both the men and the women, but the men’s tournament always seems to be a little more chaotic. The tournament extends over three weekends. There are small schools that drive deep in the tournament with no real business doing so (aka Cinderella), there are mid-sized schools that make some noise and punch above their weight, there are the big schools many expect to be there and then there are the blue bloods. The blue bloods are those teams that dominate history and own almost all the records. One or two almost always find themselves playing into the third weekend. Looking back at 2021, here’s how things played out. The blue bloods of assets are large cap equities, small cap equities, and REITs. They’re always there in the running and have won the most. The other big guys that don’t seem to win as much as they should would be commodities, especially gold and oil, emerging markets, and international developed equities. I’d also put Corporate Bond in here. Corporate Bonds are the equivalent of Texas basketball. Huge by size and importance, but never really wins. For the mid-majors, I’d say something like Value stocks, non-Gold precious metals, mid-caps, high yield, and ags. Some of these might be huge markets, but they never own the regular investors portfolio. Cinderella would probably be Bitcoin, maybe something like Lumber or Nickel too. Cinderella’s do well and blow up brackets or in this case your margin account.
The week was a little less volatile than I expected. Not only did the U.S. volatility, as measured by the VIX, come down, but most equity markets were higher on the week. The wild markets in equities were in China or at least Chinese equities. Part of the issue with China was the lockdowns in Shenzhen and the country’s zero COVID policy is crippling the region. Both the Fed and BOE raised rates this week, but equities took it in stride. Bonds, for the most part, did not.
Let’s take a look at how major asset classes performed last week.
Parts of the curve have flattened in the U.S. and the long end in the UK is already inverted. Deutsche Bank’s Jim Reid noted that it takes about three years from first Fed hike to recession, but none of the recessions have happened until the 2s10s have inverted. Ten quarter point rate hike through 2023. There’s no way! Fed Futures are pricing in seven hikes, so they’re a little less aggressive than the Fed. I actually thought I heard someone say that they think the Fed will actually end up cutting at least once as they try to raise rates. Bond market is skeptical of Fed’s `wishful thinking’ on at least 10 quarter-point rate hikes through 2023
Chinese equities were more volatile than a popcorn seed with the microwave on high. One of my colleagues had noted fighting the politburo was pointless. If you think fighting the Fed is tough, this is like fighting a drunk MIke Tyson. No rhyme or reason behind what they do or say. A day after Chinese Internet ETF KWEB got smashed in U.S. markets sending the shares into a well oversold technical position, they jumped so hard, they almost went into overbought territory. I took a look at some other data points and found high volume on the FINRA ADF, which can indicate high retail volume. The option open interest and volumes have been rising too. I wanted to see what volatility on the CSI 300 index looks like. The CSI isn’t exactly Chinese tech, but has a high correlation. You can see the spike in one month implied volatility and also the skew on the far end of the put curve. The 10 delta / 25 delta spread really blew out hitting as high as 16 early in the week. That’s a steep price to pay for far out of the money puts. Protection was getting quite expensive.
Foreign-listed Chinese shares jump as Beijing soothes worries
This week actually looks light following the huge week of news last week. The Economic calendar is PPI numbers from Germany, a bunch of consumer reports for the UK, as well as GDP and University of Michigan sentiment from the United States. We’ll hear from a few consumer goods companies in the form of earnings (Nike) or corporate events (Adidas and Lulu). DA Davidson is hosting their inaugural EV & Energy Transition Virtual Conference. Piper has their annual Energy Conference on the docket too.
Earnings Watch
I’ll be skipping the detailed look at Earnings this week, not enough time with spring cleaning, setting up my garden, plus Six Nations, the NCAA basketball, and wrestling championships on.
Major names reporting this week are Nike, Tencent, Adobe, General Mills, Winnebago, and Nio. There are a few more, but those are the names I have my eye on.
Best of the Week
I’ve shared conversations with Luke before, but I found some of the discussion here with Grant truly disturbing. I’m not sure if I’ve missed some of this in previous appearances because I’m listening at 2.5x, or if Grant was just able to get the conversation there. Luke shares his opinions on how the events in Europe and specifically the sanctions on Russia impact currencies, oil, gold, and pretty much the world economy. If Russia were to say we’re only going to accept Rubles or Gold for Oil, we’re all screwed. The basic idea of this is the U.S. Government debt is limiting its power in this situation and even possibly creating a larger problem for the U.S. and the Dollar. Having US Treasuries as the main reserve asset is a problem and will probably shift to Gold as China is now the world’s largest customer. If you want some insight on how this geopolitical situation might cause a huge shift in much of the world’s assets, this is a great listen.THE GRANT WILLIAMS PODCAST: LUKE GROMEN - Listening time: 80 minutes
Best of the Rest
Ellen Carr joins the Sherman Show to talk about her new book, “Undiversified: The Big Gender Short in Investment Management”, which she co-authored with Katrina Dudley. The bulk of the time is spent talking about the book, which covers factors that tend to push women away from careers in Asset Management. The main solutions hit on three components; how parents talk about money to kids, psychocultural barriers that prevent women from even looking at that career, and how employers can cast a wider net. Ellen thinks it’s the responsibility of everyone in the industry to widen the on-ramp for women. An example Mary mentioned is that men will apply to a job if they think they have 60% of the requirements, but women feel they need to have all of it. She believes many women just don’t have the self-confidence men do. Ellen isn’t just an author, but she’s also a darn good credit analyst. She spends a few minutes talking about the current markets. A good question she posed was, why wasn’t there the backlash of the request of high yield investors in the COVID bailouts versus what happened with banks during the GFC?Women in Investment Management, the Brussel Sprout Utility Sector and Fallen-Angel Bailouts - Listening time: 54 minutes
Mary Childs writes about some of the stories I’ve shared here before. She is a reporter for NPR, so in the first part of the interview she talks through some of her favorites. My favorite part of the conversation is when Mary addresses the rumors around writing her book about Bill Gross. One was that someone offered her $10M to not write the book. Another was that she showed up to Bill’s house in a Girl Scout uniform with brownies. Both are not entirely false, but stretch the truth a bit. Mary’s book, which I haven’t read, sounds intriguing. Mary Childs, NPR’s Planet Money – Bond King Bill Gross - Listening time: 46 minutes
We saw the volatility in the metals market force the closure of the LME last week. The crazy moves have caused angst for the largest commodities trading firms. There are said to be billion dollars worth of margin calls. As the article notes, Trafigura is supposedly in talks with Blackstone to raise $3B in capital. This article touches on some of the problems and how this firms are huge, but not too big to fail. The comparison of Trafigura's size of $90B to Lehman's $640B in 2008. As Kuppy noted last week, some of this ends up hitting the books of all sorts of firms. Why do you think the LME closed and is slow playing this? Below is a chart of Nickel. Notice the gaps in pricing on the right side. Also, you will not see the $100k prices of the cancelled trades. The second chart is the prices of bonds for a few of the world's largest commodity trading firms, Louis Dreyfus, Trafigura, and Glencore. The Current Volatility Is A Risk to Commodity Trading Firms, But They are Not Too Big to Fail
This EIA article highlights a problem I have with the current views on energy from the ESG crowd. We are going to need more and more energy to sustain the growing world population and the increasing percentage that is moving to more developed economies. The chart on the left below shows the projection of electric generation moving from ~4T kilowatt hours to north of 5T. Renewables grow as a percentage, but notice the amount of nat gas and nuclear production doesn’t go down that much. Instead of bringing down, or punishing those industries, we should probably just offer more incentives to renewables to further boost their production. Looking at the U.S. Nat gas production is at all time highs and oil drilling isn’t far off the 2019 highs. After listening to Grant's Current Yield podcast, I went back to look at a chart I created around CapEx in Large Cap Energy companies.EIA projects that renewable generation will supply 44% of U.S. electricity by 2050
I mentioned this in the above summary, but the conversation also touches on Agriculture too. Leigh Goehring and Adam Rozencwajg talk about some of the impacts Ukraine and Russia will have on fertilizer and crops. Opportunities in commodities - Listening time: 41 minutes
The Russian government was able to pay over $100M in interest to foreign bond holdings on Wednesday. They did so by transferring to JP Morgan Chase, who then forwarded the payments to Citibank, who will distribute to individual institutions. This led to a coming in of the Russian CDS curve. They came in from completely insane to mostly insane. The default probability on their five-year debt is still 81%, which is up from 8% at year end.Russia makes interest payment on government debt, averting default
This is an exciting one for me. The video is not from this week, but it's the first time I saw this. For full disclosure, Refinitiv’s parent company, LSEG, recently invested in a Series A round for BondCliq, and we’ve partnered with them on the data side. This is a presentation from Kevin Molloy at the 2021 Neudata Winter Summit on how one may use BondCliQ quotes to provide insights on equities. How Corporate Bond Quote Data Can Inform Equity Strategies - Watch time: 12 minutes
My colleague, Jharonne Martis, produced an update on retail. We’re at nearly 100% of the Retail/Restaurant Index having reported now and 74% have beat expectations. In this update, Jharonne reviews the impact volatile commodities prices are having. She notes that the consumer is still spending, but there are some indications they are “trading down.” Discounters are telling us that they are gaining market share. Of the 186 companies that have reported, 145 mentioned inflation and 175 talked about supply chain problems. My favorite point was the highlight of Same Store Sales numbers for those names that include fuel versus those that do not.Q4 2021 U.S. Retail Scorecard
One for the Road
Ten areas of development that should help us, by us I mean humans, improve life on earth. Number ten was my favorite. As I’ve been learning more about carbon, I’m hoping we can find better ways to tackle this problem. I find it to be unfair to hold developing nations down because the developed nations have already done their polluting. While not all forms of carbon are just industrialized production, it’s going to be everyone’s responsibility to deal with it. Number ten is about a facility in Iceland that pulls 4,000 metric tons of carbon from the air annually. While it’s not that much, about equal to what 900 cars produce, it’s a start. The good news is there are much bigger facilities being built. Looking at the Carbon market coverage according to Refinitiv’s Carbon analysts, you can see the big growth in the market. The end of passwords is cool too, because “you don’t have to remember your face.” 2022 10 Breakthrough Technologies
Thanks for reading. Have bracket busting week.
Michael
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