Month: January 2022

One week after taking an early victory lap when the slumping S&P hit her year-end price target more than 11 months early, BofA’s chief equity strategist Savita Subramanian reminds the bank’s clients of just how devastating the market move in recent days has been with yet another post-mortem of the recent market markets.

In a note published this morning, Savita puts the recent meltdown in markets in context, Savita points out the following:

• The S&P 500’s 7.5% loss marks its weakest start since 2008;
• the NASDAQ’s -11.4% start hasn’t been as bad since 1972.
• 61% of S&P 500 stocks are more than 10% below 52-week highs, 24% are in a relative bear market (>20% drop) with 42% of S&P 500Tech stocks in this category.

And while Savita remains bearish – as we noted last week – writing that it may be too early to buy Tech wholesale, as both InfoTech. and Comm Services are crowded, expensive and in many cases susceptible to rate risk, Bank of America is starting to find “some Tech stocks along with other companies that now look attractive.”

Which is not to say that Subramanian has joined Kolanovic in turning all out bullish: she merely notes that some (much) of the market froth has been taken out to wit: “Equities sold off in tandem with an increase in real yields, popping some bubbles and pushing stocks closer to intrinsic values. The S&P 500 fwd PE dipped below 20 (to 19.6x) for the first time since COVID. But its PE is still 25% above average (15.6x), and tepid earnings growth (see earnings outlook) coupled with the end of free money indicate flattish returns through 2023 (see Is it 2023 yet?).”

The biggest hurdle preventing the BofA strategist from turning full Jim Cramer is that, as she warns, the “Fed’s dual mandate doesn’t including supporting the S&P.” Indeed, it’s true that the Fed took unprecedented action in the early stages of the pandemic to support the economy, with what Savita says was “a notable side benefit being the support of asset prices” – to put it mildly -but going forward that strategist notes that “investors should not assume the Fed will step in to placate volatile markets today: inflation is at multi-decade highs, and the unemployment rate is sub-4%.” Instead, given the Central Bank’s dual mandate, tightening is wholly appropriate. And while some stocks fare well amid rising cash yields, rates and inflation, “the S&P 500 overall may be vulnerable given its disproportionate weight in beneficiaries of low rates / no inflation.”

We disagree: while it is true that the Fed would condone a modest drop – and already has – any accelerating market crash, especially in a country that is hyperfinancialized and where financial assets are more than 6x US GDP…

… would promptly destroy the carefully erected Wealth Effect which has been the only true legacy of the Fed since the global financial crisis, and as such the Fed will certainly step in. The only question, as we have been discussing for months, is what is the strike price on the Fed put.

With that aside, we turn to the topic of this post, namely which are the handful of stocks where even the bearish BofA thinks dip buying can take place. As Subramanian writes, of the 196 stocks lagging the S&P 500 YTD, she has extracted a short list – 15 companies – with strong fundamentals and less macro vulnerability. These are Buy-rated stocks that have underperformed the S&P 500 YTD, offer higher Free Cash Flow to Enterprise Value (FCF/EV) vs. sector peers, and fail to exhibit statistically strong relationships with rates and are labor-light relative to sector peers.

The results are shown below.

 

 

 

As shares of “pre-revenue” companies have been absolutely clobbered during the selloff that has afflicted US stocks since the start of the year, shares of the recently de-SPAC’d Buzzfeed are down 60% from their offering price – the $10/share that’s typical of pre-deal SPACs. 

Shares of the firm, which now trades on the Nasdaq under the ticker “BZFD”, have sunk to a new low below $4 a share during Tuesday’s market ructions. 

We have noted many times that BuzzFeed, a languishing darling of the mid-2010s VC love affair with “hip” “progressive” digital-media companies, has never been profitable, and while it’s revenues have climbed somewhat in recent years, it remains modestly unprofitable. 

Still, with a pesky new union dedicated towards battling with management for higher wages (even while wages at the company remain very attractive compared with the rest of the digital media space), CEO Jonah Peretti has his work cut out for him. 

The company’s market value has fallen without stopping since its December debut trading under the “BZFD” ticker. 

The company’s best-known bull, Bustle Digital Group CEO Bryan Goldberg, has said that he bought a “f*** ton” of the company’s shares at roughly $6/share – substantially higher than where its shares are trading today. Goldberg told CNBC that $15/share would be a “key level” for the firm, because it would show potential acquisition targets that Buzzfeed has credibility (while also providing it with the currency necessary to buy): 

The key level for BuzzFeed will be $15 per share, said Bustle Digital Group CEO Bryan Goldberg. At $15 per share, BuzzFeed’s market capitalization would be about $2.25 billion. That approaches a trading multiple of four times revenue. BuzzFeed generated $161 million in revenue in the first half of 2021 and acquired Complex Media earlier this year, which brought in $53 million in the first six months.

Confidence in BuzzFeed’s future prospects may grease the wheels for consolidation. BuzzFeed will need outsider faith in its equity to use it as viable currency for acquisitions. If BuzzFeed can hold steady at a 4x revenue multiple, sellers will feel they’re getting a just price, Goldberg said.

“4x revenue should be the default,” Goldberg said. “But it may take six to eight months to get there.”

The firm recently bough out Complex and the Huffington Post, two deals that have yet to pay off in terms of revenue.

And as management claimed in a presentation to investors given around the time of the company’s Nasdaq debut, Buzzfeed has grandiose ambitions of expanding its commerce business, in addition to its advertising and content businesses.

But whether it executes on this plan or not remains to be seen.

More broadly, shares of “de-SPAC”-ed companies have been struggling over the past year as they substantially underperform the broader market.

That’s quite a roundtrip!

We previously discussed how a mystery put-selling whale emerged just around noon on Monday…

… and helped reverse a historic rout of nearly 5% in the Nasdaq, which then attracted a frenzy of retail dip-buying momentum chasers, who reversed near-record selling in the first half of the day to near-record buying in the second half.

But while there is still some speculation as to who or what may have been behind yesterday’s historic reversal, what is beyond dispute is what a massive difference the reversal meant for the market’s future demeanor, in other words the difference between the market closing down -4% on Monday and just slightly green.

Conveniently, Morgan Stanley has done the analysis and has a stunning result.

As we noted earlier, the bank’s Quantiative and Derivatives Strategies desk estimates that systematic macro strategies (Vol Target Funds, Risk Parity Funds, and Trend Following CTAs) as of this moment, have equity supply of $15-20BN over the next week, or about $3-4bn / day, which is hardly catastrophic: according to Goldman this is less than the daily Buyback bid of about $5bn/day.

But had the S&P closed on its Monday lows, down 4%, QDS estimates the group would have had at least ~$90bn of equity supply over the coming week…

… or more than 4x than the current supply and enough to crush the current extremely illiquid market where top of book liquidity is now down to just $5 million (meaning it takes just $5 million in emini orders to move the ES one tick).

As Morgan Stanley elaborates “most of the forecast supply comes from CTAs as many short momentum triggers are now being hit, with ~50% of QDS’s CTA models are still long SPX and NDX futures as longer-term trend signals are still positive. But vol target funds have not delevered much yet, meaning they remain a future risk.”

Translation: whather or not the PPT/i.e., Fed Club, rescued markets or not, or it was a purely coincidental – if highly improbable – rescue, the reversal yesterday surely prevented what would have been a major crash in the market today as 4 times as much selling flows would have hit, flushing away all bids and promptly sending the market well below 4,000.

Authored by Sven Henrich via NorthmanTrader.com,

On January 2 I stated:

“the party is rapidly coming to an end and the Fed will want to curb inflation without causing a recession which will be a real task. How to accomplish it?

Easy, let markets drop, but not so much that it causes a systemic event but enough that year over year inflation numbers drop, declare victory and then flip flop policy again to prevent any major damage to markets by the time mid terms are on everybody’s mind.”

On January 4th $SPX made an all time high and we’ve gone down ever since.

$SPX -11% from the January highs, $NDX -17%, small caps -20% from their 2021 highs and of course crypto getting mauled. In short everything we’ve been talking about for the last year. Liquidity goes and the bid goes. In this case the liquidity hasn’t really gone at all, they just talked about it. And speaking of liquidity: One source of liquidity that has disappeared, buybacks, is coming back again starting this week and more forcefully into February.

But the main point: If the goal was to fight inflation by letting markets drop to take some of the excess out without actually tightening in a major way: Congrats, mission accomplished.

It all looks like a “garden variety” correction, but some of the charts tell a completely different tale, that of absolute carnage highlighting again the weakness underneath that had been building for months. I talked about it in mid December in The Unraveling before the expected Santa rally:

“A potential Santa rally notwithstanding storm clouds are not only gathering but they are already all around us. I suggest paying close attention, despite the expected upcoming holiday lull….While main indices are making new all time highs & give the appearance of a raging bull market underneath there already is a raging bear market in individual stocks. Not only do prices remain far outside the historical resistance of the upper quarterly Bollinger band, $SPX also remains far above its quarterly 5 EMA. A chart that demands its eventual technical reconnect, a process many of its components have already undertaken.”

This reconnect has now taken place:

And that reconnect has come at a price.

Basically, holy shit:

Nasdaq new highs/new lows:

Almost as bad as March 2020.

But change the reference to a weekly close and all of a sudden you get a different perspective:

Worse than 2020, worse than 2018, not even during the depths of the financial crisis have we seen anything like it.

The monthly perspective knowing the month is not over? Just wow:

Never seen this before. The only thing that came close is 1998, a 20% correction that ended up being a massive buying opportunity for a blow off top move coming.

The first conclusion I draw from these charts is that this sell off in its current state is one of the worst we’ve ever seen in terms of the underlying damage inflicted on individual stocks. But given the time references there is also opportunity the erase these most extreme readings before the end of the week and month. We have 5 trading days left this month and a monthly read like this is simply unprecedented. So there is lot of opportunity to change this reading for the better on a monthly close.

These charts also show that on an individual component basis the carnage underneath is historic.

But it’s not only on the Nasdaq, US new highs/new lows tell a similar story:

See the weekly read and you get an appreciation how severe this correction is:

The previous negative divergences building last year again following the historic script culminating in the roll over we see now.

The monthly perspective:

Yea. Again that 1998 reference.

Principally early January weakness is not unprecedented in context of another correction that occurred before another blow off move. Who can forget 2000:

A dip below the 200MA and then rally. But 2022 has been the worst drawdown for stocks in history so far.

We just came out of the 4th longest period without a tag of the 200MA. Dips below on a tag? Plenty of times below:

And now with an RSI in the 20’s. Yes history says this can get a lot worse, but more often we’ve seen meaningful bottoms emerge from such tags as well.

Bottomline here: The bubble warnings voiced last year due to unprecedented liquidity were largely ignored, investors piled into unrealistic valuations while internals slowly deteriorated last year as indices maintained their trends and now it’s ended in a valley of tears as wide price ranges simply got taken out in a matter of a few weeks.

Yesterday $SPX hit the lows of July, 6 months of buying wiped out:

$NYSE showing an even broader time frame dropping below the March lows:

And small caps losing the entire 2021 price range:

Putting ALL 2021 buyers under water.

We are very oversold and there is plenty of bounce motivation to be had in the days and weeks to come, but be absolutely clear: There is not only tremendous carnage that has taken place, there is massive technical damage inflicted on charts with lots of trapped supply above all of which will be resistance on the way up and as long as indices can’t get above their broken moving averages risk remains lower.

I’ve long contended the Fed overdid it by insisting on buying trillions of assets while fiscal stimulus was flowing through the system already. This excessive inflow of liquidity caused asset prices to melt up into a historic bubble and now investors and traders who chased the liquidity party have paid the price. Not only with massive losses but now with inflation to boot. Well done Fed. And now tightening. Into slowing growth and a massive market correction.

Best of luck:

If markets keep dropping like this we’ll be in a recession before the Fed even raises rates.

— Sven Henrich (@NorthmanTrader) January 24, 2022

The Fed is walking a tight rope, the very tight rope they have laid out themselves by fomenting another boom and bust cycle.

As I also said on January 2nd: “My base expectation for 2022 hence will be much broader price ranges in indices and for the things that haven’t mattered to matter again.”

This expectation has already come to fruition and 2022 certainly is already a very different year. Happy trading.

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Here’s some more bad news for SoftBank: it’s planned deal to sell its Arm subsidiary to Nvidia – once billed as “the biggest semiconductor deal ever” – is falling apart as the two companies have failed to win approval from global regulators.

While much has changed since the deal was struck in September 2020 (for one, a global supply crunch has restricted access to semiconductors, forcing governments to gather their ‘strategic assets’ closely like a squirrel with its nuts), one important fact hasn’t: Following the bloodbath in US-traded tech stocks, SoftBank could really use the cash proceeds from the Arm deal to cover its other losses.

It’s also a blow to the many bankers working on a deal that was valued at $40 billion back in September 2020.

According to Bloomberg, news about the deal’s demise came out of the Nvidia camp; apparently, the company has been telling its own high-ranking employees that it doesn’t expect the deal to be consummated. As a result, SoftBank is stepping up its efforts to take Arm public.

The British microprocessor powerhouse would probably be too large for a SPAC to swallow, as the value of the deal would eclipse even that of Grab’s SPAC-aided market debut.

Surprisingly, it’s not the Brits who are making the biggest stink about the deal: the FTC sued to stop the deal back in December, arguing that Santa Clara, Calif.-based Nvidia would become “too powerful” if it gained control of Arm’s technology. BBG added that Chinese regulators have also pledged to stop the deal if the approval process ever should make it that far, according to one BBG source.

Interestingly, Nvidia’s rivals have also rallied against the deal. Qualcomm, Alphabet, Apple, Microsoft (which has decided to follow in Apple’s footsteps by seeking to build more of its own chips). Though it’s not hard to see why.

If the deal were to close, it would catapult the valuation of US-based Nvidia past that of Taiwan-based TSMC, according to Bloomberg.

With the control of Arm’s assets, Nvidia would become the world’s most valuable chipmaker.

Source: Bloomberg

Understandably, the high stakes have created divisions within Nvidia’s high command, with some resigned to the deal’s defeat, and others pushing for the firm to consider other possible strategies for getting it done.

Should it somehow succeed, the deal would be a major coup for Nvidia CEO Jensen Huang, who has built a graphics-card business into a chipmaking empire. Already, he’s sitting atop the most valuable American firm in his industry, with a market cap north of $500 billion. But if the recent past is any guide – most notably, Qualcomm’s decision to abandon its pursuit of NXP Semis after two years of haggling with regulators – American regulators probably won’t let it happen, especially with the White House so determined to “promote competition” by busting out the old antitrust hacksaw and taking a hostile attitude toward intra-industry consolidation.

All of that is especially bad news for SoftBank, because if it can’t sell Arm to its biggest American rivals, then who else might be allowed to buy it?

In perhaps the best post-mortem of yesterday’s insanity, Morgan Stanley Quantitative And Derivatives Trading Desk (QDS) writes that yesterday intraday volatility was absolutely extraordinary with record cash volume of $1.16tr.

The good news according to Morgan Stanley is that a tame close-to-close return has kept systematic supply at bay, and the rebound in growth stocks helped stem the P/L drawdowns for both HFs and retail traders alike. The bad news according to the QDS trading gurus is that the afternoon rally was likely driven by short covering, and it is hard to draw a read from this into the future – i.e., not much has changed, and the market is still grappling with the concern of a growth shock while the Fed is likely on autopilot.

Below we excerpt from the full QDS notes which lays out several thoughts on the flows, what big reversals usually mean for the market going forward, what the market needs to rally beyond a bounce, and the retail and systematic positioning setup from here.

Flows: The morning saw heavy retail supply, and some traders likely got overly short on expectations of heavy systematic supply. But retail turned buyers in the afternoon, there were signs of single-name short covering as oversold growth stocks led the rebound, and futures went bid into the close. The retail supply from 9:30-12 was a new record for that time period at $3bn sold on QDS estimates*. And when the market was down 4%, QDS estimated that there would be nearly $30bn of forced selling today from systematic strategies and levered ETFs. Traders likely put on shorts on expectations of that systematic supply, and the down 7/8% moves in expensive and unprofitable Tech indicated some derisking. But then retail turned buyers shortly after noon, buying back $2.7bn of what was sold in the morning – the largest amount ever bought in that time period. Shorts were likely covered as long duration Tech rallied ~10% – high short interest names outperformed, and the MS high short interest basket (MSXXSHRT) outperformed SPX by 4 standard deviations today. Then into the close futures had to be covered with MS Trade Pressure showing ~$5.6bn of SPX futures bought on the day (97th 1y %ile), with most that coming through post 3pm

QDS’ client conversations even on the lows today were concerned, but not panicked. This is likely because alpha has been improving even as beta hurts returns. As the market has turned to worry more about a growth slowdown, expensive Tech and the Growth factor fared better, while Value is starting to fare worse, benefiting the typical portfolio skew. Of course it didn’t feel that way on the lows when Expensive Tech was down 7%… but relative strength in growth stocks was a pattern that began last week, and re-asserted itself strongly into monday afternoon.

Monday’s sharp reversal was a rare event, but the signal power is mixed. Only 8 times since 1928 has the S&P 500 moved down more than 4% and then rebounded to close up on the day. 12 times the market fell 3.5% or more to rebound – events listed below. On average the market rallied in the subsequent few days, but looking out a month the results turned more bearish.

Retail flows remain a wildcard. By midday, retail had sold $3bn on QDS estimates – and the only other periods with such aggressive selling were December 2018 and March 2020. But in contrast to 2018 and 2020, retail turned it around and bought $2.7bn in the afternoon – there have only been 2 other times when net buying between 12:30pm and the close has surpassed ~$2.5bn. Despite the spike in retail activity, retail’s share of market volumes have still fallen.

Still, retail remains an important driver in QDS’s view, and commonly asked question was “how much could retail have to sell?” and “how long will retail selling likely persist?” Retail flows remain hard to predict, but for context retail bought an estimated of $25bn YTD on QDS estimates ahead of the recent selloff, with likely $300bn of ‘above trend’ purchases since COVID. It’s unlikely more than a small portion of that would be reversed though – the only time retail consistently sold equities on QDS estimates was in Dec 2018, with $15bn in supply. While Dec 2018 is becoming an increasingly comparable macro period (‘growth scare + Fed on autopilot’), for retail the driver now is deteriorating P/L (-12% YTD on QDS estimates), while then it was that retail likely had to sell stock before year-end. But if the Dec 2018 similarities continue, $15bn to $30bn of retail selling is likely a reasonable handle for the potential supply (on QDS’s model, which likely captures ~50% of total retail flow, so true numbers are ~2x higher).

Systematic supply should be limited going forward – for now. QDS estimates systematic macro strategies (Vol Target Funds, Risk Parity Funds, and Trend Following CTAs) will have equity supply of $15-20bn over the next week ($3-4bn / day). But had SPX closed on its lows down ~4%, QDS estimates the group would have had at least ~$90bn of equity supply over the coming week. Most of the forecast supply comes from CTAs as many short momentum triggers are now being hit, with ~50% of QDS’s CTA models are still long SPX and NDX futures as longer-term trend signals are still positive. But vol target funds have not delevered much yet, meaning they remain a future risk.

Dealers remain slightly short SPX option gamma, short ~$1bn of gamma / 1% move in SPX on QDS estimates (the 2nd %ile since 2019). This has left the market more free to move intraday, versus a few weeks ago when dealers were buying several $bn of equities on each 1% dip in the market, contributing to high levels of intraday volatility. This also allows the market to ‘gap’ more intraday – seen by S&P 500 intraday autocorrelation rising over the last two weeks to the most positive it’s been since April 2020 (positive autocorrelation = prices trend in the same during the day rather than exhibiting mean reversion from one second to the next).

VIX briefly gapped higher – but future prospects for a sharp vol spike are hard from current levels. While VIX ended the day up only 1 point, at its peak today, VIX hit nearly 39 before resetting lower by ~9 points. This is a stark difference to its lack of reactivity in the last few weeks, which was a result of a lack of demand for customer hedges combined with outflows from long VIX ETPs of ~25mm of vega (10th %ile since 2020 and the 4th time since 2020 that two week vega supply has exceeded those levels). Monday’s price action was different though – at its peak, VIX squeezed higher at a ratio of ~2.5 points per 1% move in SPX, likely a function of market makers that are short vega. But those short vega positions do not grow in a further selloff, which should make it harder for vol to spike sharply from here.

Finally, and most importantly, what does the market need to move sustainably higher? The Fed or rates are unlikely to be the catalyst in QDS’s view – economic growth concerns need to be alleviated. A Fed that is not-too-hawkish could drive another bounce, but near-term, earnings and future growth expectations will likely dictate the direction of the market. While the market volatility started because of the Fed and rates, it is now more about growth – playing out in the rates market where 10 year real yields are up by over 50 bps over the last 3 weeks, while 10y breakevens are down by more than 25 bps – an event that has only happened before in Oct ‘08, March ‘09, June ‘13, and March ’20. From here, rangebound or even lower yields aren’t necessarily going to be bullish for stocks – stocks and yields are following the typical pattern of a growth shock – it starts out with yields higher + equities higher, then initially yields higher + equities a little lower, then as equities start to really move lower bonds get bid from the flight to safety – just like they did in 4Q18.

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