Month: February 2020

Authored by Richard Breslow via Bloomberg,

It’s never in good taste to gloat. Although there is a powerful attraction to do so in a competitive environment. Similarly, no one wants to constantly hear grumbling about how wrong things are and how they have personally been mistreated. But that tendency has virtually become a national pastime. Those are the emotions once again being vented by one group or the other while watching the equity markets perform.

I did hear a very smart guy yesterday sum it all up by saying that it doesn’t matter why, this is a market that just refuses to go down, and we are meant to simply go along. And, for once, it was hard to argue with that sort of flippancy. Especially because it is so easy to argue, and believe, both sides of the debate. With the end result deciding the matter for all practical purposes.

As a case in point, the market was up big overnight, with China’s announcement of a cut in certain tariffs on U.S. imports being cited as the main reason. That was questionably, even laughably, taken as a sign to be optimistic about the global economy and an easing of trade tensions.

No matter that phase one being implemented in full is unlikely to happen. Much more importantly, it came two days after the U.S. Commerce Department published new rules making it far easier to impose countervailing duties on product imports that are deemed to have benefited from “unfair currency subsidies.” The new regulations set a far lower bar than the traditional currency manipulator process used by the Treasury Department to lead to the imposition of consequences.

And it doesn’t require an entire country to be cited. Rather, it can target specific products and industries. Do you believe in coincidences? We also learned yesterday that the U.S. started an anti-dumping probe on imports of Chinese-made vertical shaft engines. I didn’t know what they are either. But if you mow a lawn or drive a go-cart you use one. How do you spell “swing state employers?”

Eliminating unfair trade practices or the next phase of the trade war? The market is in the mood to vote for the former. And so it did. Which is the only thing that matters if you have a position. But this isn’t just a Sino-American issue. The rest of the world might be well-served by reading the press release carefully.

Especially as they will also have learned this week that the U.S. is considering withdrawal from the WTO’s Government Procurement Agreement. The cost of poker may be going up for Europe, Japan, Canada and others as they negotiate their ongoing trade relationships with the U.S..

Traders are watching the market go up and have rushed to conclude that it must mean the economic impact of the virus outbreak will be short-lived. Anyone claiming to be able to handicap that is being presumptuous in the real world, but bang-on in the the current trading environment. Scientists don’t claim to know the answer. Market commentators are much more sanguine.

But as I was assured by someone yesterday, “We’re looking for good news.”

Stocks keep going up. Commodities want to follow their lead, but are having trouble suspending their disbelief. The foreign exchange market has concluded it makes sense to cover dollar shorts and otherwise lay low. Fixed income may be the most interesting story today and through tomorrow’s non-farm payrolls. Ten-year yields tried to move higher overnight but have so far failed right at their resistance zone. There are multiple technical reasons to watch whether they can get through 1.67% to 1.70% and stick. Or if we are watching a dead cat bounce.

After trolling the left with his tweet right after acquittal in the Senate impeachment trial last night, President Trump is set to address the nation at noon ET.

We got a sense of what might lay ahead in the speech as Trump boasted of his acquittal in the Senate impeachment trial during an appearance at the National Prayer Breakfast on Thursday, showing off newspaper headlines that blared the news.

President Trump holds up newspapers with “ACQUITTED” and “Trump Acquitted” headline at #NationalPrayerBreakfast.

Full video here: https://t.co/vu9O8zRwvo pic.twitter.com/WocOH644L6

— CSPAN (@cspan) February 6, 2020

Will he mention Pelosi tearing up the SOTU speech? Will he slam Schiff and Nadler? Will he spark more controversy over Biden’s son and Romney’s aide’s ties to Ukraine? Who knows…

But, we are sure the mainstream media is hoping for a “can’t we all just get along”, ‘kumbaya’ style speech… good luck with that!

These are REAL American Stories.

This isn’t a reality show..pic.twitter.com/OHLDjPVG54

— Benny (@bennyjohnson) February 6, 2020

Watch Live (address due to start at 1200ET)…

Via AdventuresInCapitalism.com,

Don’t worry, this isn’t another detailed article on Tesla. I’ve permanently sworn those off. As far as I’m concerned, there are two camps of investors; those who think it’s a fraud and those who aren’t very good at math.

However, that doesn’t mean that Tesla cannot be a good long or short at the right moments in time – yeah, I know, hypocrisy; right? Well, at least I recognize it for what it is; TSLA is a ticker symbol without any bearing on the actual business fundamentals. You see, ever since the Federal Reserve stepped in this fall with their “not QE” the last vestigial tethers to fundamental underpinnings have forever been cast adrift. There’s a business in the abstract sense and then there’s the meta-narrative which often seems to derive a lot of its meaning from the stock chart. Since charts are mostly influenced by cross-ownership within ETFs, the circular loop of “up-to-the-right=ETF is forced to increase weighting=up-to-the right” can be self-fulfilling.

Taking a step back, I have always intuitively known that stocks can literally trade at any price, both far above or below fair value. In fact, the only reason I have been successful in finance, is because of my ability to recognize those moments and monetize them. However, I feel that over the past few years, the range of probabilities has widened dramatically. As David Einhorn put it this summer;

In our early training, there was a concept that news was priced in. This meant that for high-multiple stocks, expectations of good results were already baked into the share price, and for low-multiple stocks, bad results were already discounted. The high multiple would often provide a ceiling for prized stocks – such that it took genuine incremental positive news to drive them higher. Conversely, the low multiple on out-of-favor stocks would often provide a floor such that it took genuine bad news to drive them lower.

In this market, such ceilings and floors don’t seem to exist. Prized stocks continue to rise sharply based on the continuation of existing trends, without deviation, and there is no price too low for unloved stocks. 

Stocks now trade simply on charts, which themselves are primal emotions, tied to corporate messaging rather than fundamental values. Every equity name is just a ticker symbol; an esoteric derivative on a fanciful reality. If you aren’t prepared to accept that fact, you’re going to get abused by the “new normal” where facts increasingly do not matter.

I bring all of this up, as I got an email yesterday from a reader who thanked me on Tesla, which struck me as odd since I got the investment spectacularly wrong.

“No Kuppy!! I lost some money, but you saw it for what it was and got out of the way in time to avoid huge losses. You saved me a fortune. People always talk about their winners, but no one talks about the intuition that saved them from a disaster. You should write about that. How did you know to get out?”

I found his email interesting as no one ever does a victory lap about only losing a bit of money, instead of losing a fortune. It’s certainly not the sort of thing that sells newsletter subscriptions. Since I have nothing to sell you, I thought I’d delve in a bit and fill that gap in financial journalism.

So how did I know when to book the trade? Honestly, I didn’t know anything. Everything I do is based on two critical mandates—the first being to not lose money. While the second is to remember rule number one. If the odds are in my favor, I’ll press my bet. However, if the thesis changes, I get the hell out of the way. In terms of Tesla, I thought the stock would collapse due to a business that was imploding before my eyes. When it became clear that they intended to fudge the numbers and the market would cheer; what was my edge? If 1+1= whatever you want it to be; then this isn’t the sort of stock I can analyze. Lots of companies massage numbers, but when Tesla started making up numbers, I knew it was time to get out. I didn’t wait for a pullback; I was all out of my put spreads by 9:40 am and at a $295 basis. I simply had no edge left and I knew it. My skill was recognizing that my investment thesis had forever changed.

A lot of my friends stayed to fight the good fight—they got mowed over. When a stock triples, even a small short position becomes huge and the margin costs become overbearing. There’s a reason I almost never short and when I do, I use VERY tight stops. If I’m bearish, I may buy some put spreads, but shorting is the financial equivalent of Russian roulette—you don’t know when, but eventually you’ll have a career-ender. Nothing proves this better than the past month’s volatility in Tesla. If you want hyperbolic articles that delve into why Tesla went parabolic, there are plenty of opinions out there. Who knows why it traded where it did—the point is that it did and it traded tens of millions of shares there.

In a world where the global central bankers treat every mini-crisis as an excuse to print money, liquidity will eventually ignite in very strange places; EV automobile frauds, fake meats, government regulated celery and fake currencies. I have no idea why these things go up when they do; I just know that they sometimes do.

The number of asset classes randomly going parabolic is directly tied to how aggressively Central Banks conjure up liquidity. My hunch is that these mini-bubble will become increasingly prevalent. As a public service message to readers of this site, please use stops. There is no limit to the stupidity of equity buyers. At least on the way down, as a value investors, we have an edge as an asset cannot sell below zero. On the way up, the losses are infinite. A bunch of my friends learned that lesson the hard way this week.

Every year will have good and bad opportunities, your only goal as an investor is to ensure that you do not get taken out of the game on any one mistake. It is always smart to be careful on the short side—right now, be extra careful. Stocks can and will trade at literally any price, particularly if the Fed is focused on ensuring it happens.

The Chinese doctor who tried to raise the alarm about the new coronavirus before it was even identified has died of the deadly virus.

Dr. Li, 34, was hospitalized on January 12 after contracted the virus from his patient, and he was confirmed to have the coronavirus on February 1, and The World Health organization has just confirmed his passing…

We are deeply saddened by the passing of Dr Li Wenliang. We all need to celebrate work that he did on #2019nCoV – @DrMikeRyan

— World Health Organization (WHO) (@WHO) February 6, 2020

As a reminder, Li Wenliang – who warned the public of a potential “SARS-like” disease in December 2019 – was questioned by local health authority, and warned:

“We solemnly warn you: If you keep being stubborn, with such impertinence, and continue this illegal activity, you will be brought to justice – is that understood?”

Dr, Li was later summoned by Wuhan police to sign a reprimand letter in which he was accused of “spreading rumors online” and “severely disrupting social order.”

In the meantime, local authorities had apologized to him but that apology came too late, and now with 10s of millions of Chinese locked down under martial law, Wenliang was proven very much right.

For most of the past three years, JPMorgan strategists had been one of Wall Street’s biggest bulls, and foils to Morgan Stanley’s Michael Wilson who after 2017 emerged as the street’s biggest bear.

Yet, ironically or not, just as Michael Wilson appears to have thrown in the towel and believes that even the global viral pandemic will at best lead to a 5% correction, if that (especially with the S&P trading at all time highs), JPMorgan is turning increasingly bearish, and in a Global Asset Allocation note released overnight by the team of Panagirtzoglou-Kolanovic-Normand, the JPM analysts are turning bearish on stocks, and “tactically trim the risk of our portfolio further and recommend a more modest equity overweight of 5% vs. 7% previously.”

The reason: “the market has been too quick to price in a recovery from the coronavirus pandemic, any re-acceleration in coronavirus cases as a result of factory re-openings or any delay in re-openings beyond next week, would both be negative for markets.” As a result, “despite this week’s equity market rebound we are reluctant to chase short-term momentum” JPM’s strategist warn as they trim the risk of their portfolio further and recommend a more modest equity overweight of 5% vs. 7% previously.

Notably, it was just last month that JPM cut the risk of its portfolio by reducing its recommended equity overweight to a more modest 7% overweight: “the motivation of this change was the strong performance of the equity market, which at the beginning of January had already approached our 2020 year-end targets for US equities, as well as the significant increase in institutional investors’ equity positioning since last November.”

In retrospect, this move was both good and bad: good because, JPM’s more cautious stance “reduced somewhat the drawdown from market moves over the past three weeks which highlighted a vulnerability in equity markets to negative news.” Bad, because stocks appears to have now completely ignored any economic and market risks resulting from the pandemic and are trading at all time highs. 

However, to JPM this is a mistake, and here’s why:

• First, although we recognize that the peak in the rate of increase in the number of new coronavirus cases appears to be  behind us as containment measures thus far appear to have been effective (Figure 1), this could change as factories reopen in China and more people come in contact with each other. In other words, there is a significant risk of an unexpected re-acceleration of new coronavirus cases

• Second, the economic impact of the coronavirus outbreak could prove a lot more severe if factories fail to reopen next week as expected. According to JPM’s Chinese economists each additional week of Chinese factory closure, would suppress the annualized pace of Chinese GDP growth for Q1 by 4-5 percentage points. As such, JPM’s Q1 forecast would be revised to a contraction of 4-5% if the Chinese factory re-opening is delayed by only one week. In addition, a more protracted factory closure could delay the subsequent V-shaped recovery. Meanwhile, as discussed last night, the economic spillovers from China to the rest of the world in the event of more adverse scenarios are likely to be significant. China is a lot more important for the world economy than during the SARS outbreak of 2003. Global PMIs will inevitably take a hit in the coming releases, clouding the macro picture for at least the next 1-2 months. This could remove from the macro picture the positive impulse from the global PMI rebound that propelled equity and risky markets since last October.

• Third, certain institutional investors such as CTAs and other momentum traders likely still have elevated positions in US equity futures, implying plenty of room to propagate further negative news if the closures of Chinese factories prove more protracted than currently expected. As a reminder, we also pointed out over the past three weeks that virtually every investor class is now all in, suggesting the risk of a waterfall liquidation is high in case of a major economic deterioration. In addition, JPM warns that retail investors appear reluctant to support the equity market by as much as the bank had hoped for previously. The reason: “the Great Rotation thesis for 2020, i.e. a sharp deceleration in bond fund buying from last year’s $1tr record pace and an acceleration in equity fund buying, does not appear to be happening yet”

• Fourth, the previous re-steepening of the US curve that, at the end of last year, gave support to the idea that a midcycle adjustment is taking place in the US similar to that seen during 1995/1996, is now reversing. The gap between the 1-month USD OIS rate 2-years forward minus the equivalent rate 1-year forward, had exhibited persistent negativity during 2018/2019, resembling the previous recessions of 2001 and 2007, rather than the mid-cycle adjustments of 1995 and 1998. This leads JPM to conclude that “while it was encouraging that this forward spread had moved closer to zero in Q4 2019, it has failed to enter positive territory on a sustained basis and in fact shifted back into negative territory this year (Figure 5). In our opinion this reduces the confidence to the thesis of a repeat of the 1995/1996 mid cycle adjustment for the US economy which at the time also saw significantly higher equity prices and bear steepening of core government yield curves.”

And so, because of all the above four reasons JPM is selling even more equities, as it prefers “to tactically adopt a less bullish or less pro cyclical stance by cutting our equity OW from 7% to 5%.”

Among JPM’s other recommendations:

• within commodities JPM exits its previous UW in Gold “as both retail and central bank flows provide sustained support.
• The banks raises its allocation to corporate bonds by two percentage points “which reduces the size of our previous credit UW given the tactical reduction in our equity OW.”
• Option markets currently embed below average volatility risk premia. Vol risk premia are particularly low for Eurostoxx50 and MSCI EM indices making them suitable for investors favoring long volatility trades “

And visually:

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