Month: March 2023

By Michael Every of Rabobank

The Smartest Guys In The Room

The smartest guys in the room’ is a phrase one hears in markets. It’s also a book and documentary about the US Enron scandal. I sat next to someone who worked under one of the three key Brits involved in the affair while it happened, both of us totally oblivious. They gushed about what good lunches he held while I wrote notes arguing the pre-2008 US economy looked like the pre-1997 Thai economy, which were summarily ignored. Later, this individual was shocked to share that the ‘energy trading’ Enron showed them from behind glass walls on a trip to its trading floor had actually been actors shouting “rhubarb!” into phones. The colleagues who ignored my economic notes were then shocked when global markets collapsed in 2008.

Sadly, ‘the smartest guys in the room’ is a tradition that carries on today: huge scandals like WorldCom, Madoff, FTX, and modern emerging markets disasters; and didn’t-see-it-coming market analysts who don’t realize they are shouting “rhubarb!”

On which note, let me turn my attention to analysis of market analysts. Philosophically, what is it that they do?

Let’s presume markets are efficient and price for all possible information. If so, the ‘correct’ price of EUR/USD is already set. So is the S&P. So is the US 10-year yield, etc. (Which just hit 4% again by the way.) What, then, does one do as an analyst?

Nothing! One can’t analyze the price of FX, stocks, or bonds, etc., because the market says it’s right. One can merely describe that price with nice charts or turns of phrase. Or one can say why the current price is correct today vs. the day before, when it was also correct, via ‘post hoc ergo propter hoc’. However, that assumes new information forces a market bullish/bearish reassessment on a daily basis, which is something only ADHD day-traders do. Worse, that is a very target-rich environment for ChatGPT. Logically, the analysis one can do that ChatGPT can’t is to forecast events the market hasn’t priced for, e.g., the 2008 US economy doing what Thailand’s did in 1997; Brexit; Trump 2016; a US-China trade war starting; or a war in Ukraine.

Yet these kind of forecasts have nothing to do with markets! How does knowing about FX flows tell you ‘Brexit’ or ‘Trump’, knowing about stock trends tell you a US-China trade war will start, or knowing about bonds tell you Russia will invade Ukraine? They can’t. If someone asks a market analyst what the market would do if X happens, they can give a helpful hypothetical answer – but market knowledge is not going to say if it will or won’t happen.

So, what can? Perhaps nothing and nobody; at least, not any one ‘golden rule’. But if anything can, each of the above listed calls required a Liam Neeson-esque “very particular set of skills”: (geo)political-economy, psychological, sociological, geographical, historical, and cultural. Either that or plain good luck – though the odds of getting all those calls right is low, you still might have been that one lucky draw, probabilistically.

However, market analysts only have one too-particular set of skills – economics/finance. Few study (geo)political-science, psychology, sociology, geography, history, or foreign cultures, etc., even as auto-didacts; and even though Keynes said anyone who is only an economist is unlikely to be a good one. Of the few who do, fewer are free to write about these topics vs. up/down x.x%, etc. If so, how is one supposed to do serious analysis backing serious market calls? Surely one can’t.

Therefore, we have commentary: and the financial equivalent of ‘Colemanballs’. “It’s a game of two halves.” “The side that scores most goals will win.” “Anyone could win this game – unless they draw.” Or just reading the football results: “Bonds two, Stocks one.”

OK, so let’s presume markets are not efficient, don’t know what is happening, and price incorrectly. Let’s presume Enrons and Madoffs as well as honest brokers; target and bonus chasers prepared to bend things like Beckham to try to get some green; even central banks like dodgy refs allowing what we used to call Fergie Time. In that case –while recognising the market can steamroller you if you are long and it is wrong, or if you are short and they know you’re caught– the current price is as likely to be wrong as right. For example, where GBP was trading just before the Sunderland result came in on Brexit night vs. where it did afterwards. (“Brexit 1, Remain 0.”)

But we don’t have to presume the above. We can logically impute that either markets are not efficient, or analysts aren’t – because the latter don’t agree among themselves.

For example, this weekend’s Chinese National People’s Congress will see a further direct concentration of economic and financial power under the CCP, on which Bloomberg notes: “While the assumption among many China watchers is that the changes represent a further tilt away from markets that is ultimately bad for growth, recent moves to end Covid Zero restrictions, boost support for the property sector and seek better ties with the US suggest that investors shouldn’t rush to conclusions, according to Tom Orlik, Bloomberg Economics’s chief economist. “The potential positive way of looking at the looming personnel and organizational changes is when Xi has a team around him who he’s familiar with and who he trusts,” he said in an interview on Bloomberg Television. “Perhaps there’s just some more space to get some good things done, to make some pragmatic decisions.”” So who is right, and why? We shall see.

Logically, if one accepts the more sceptical view about markets, or anything, including China, then one has to base one’s view on something else:  

• The recent trend? But it’s only your friend until it ends.

• An economic model? But neoclassical or heterodox, and which of the latter? The former tend to presume markets are efficient too, and as a result forecasts based on them can be wildly inefficient.

• Relative value? But they break down or change when fundamentals change.

• Fundamentals? You mean economics and Liam Neeson’s (geo)political-science, psychology, sociology, history, culture, etc.? They can change too, and certainly are changing now. For example, see “It’s bargaining power, Jim, but not as we know it” from Elwin de Groot for both its Trek puns and its view that Eurozone wage inflation will be sticky this time round. That’s a Shatner-ing revelation I would summarise as: “Can I get a pay rise?” “Yes, you Khaaaaaaan!”

Of course, many don’t have a world view of math or defined political-economy structures, even when looking at political-economy. Just a general ‘what goes up must come down’-ism. Or, worse, a whatever-makes-my-fund-go-up-ism. Until it goes down – which we are seeing rather a lot of at the moment as optimistic 2023 outlooks come undone within weeks of their launch. Again.

‘The smartest guys in the room’.

At a time when the 10Y yield is once again surging (rising to 4.08% from the mid-3% one month ago) and rate bulls are watching the chart below in stunned disbelief as their January gains melt away…

… one bank is sticking to its Treasury long guns. In a note from TD’s Priya Misra, the rates strategist says that she is doubling down on her Treasury Long call.

Reminding readers that she recently initiated a long 10y Treasury as she “thought that Fed pricing was appropriate at 5.25% and bond fund inflows were supportive”, since then both inflation and growth data has been very strong and the market is now pricing a Fed effective terminal rate of 5.5% (target FF rate of 5.7%) and the pricing of rate cuts has also declined” Misra writes. As a result of the recent powerful hawkish repricing, markets are now penciling in the first 25bp rate cut by Mar 2024 and a total of 170bp of cuts are priced in the 2y years after hikes end (down from 220bp in mid-Jan). In addition, global rates have risen, putting upward pressure on term premium.

So why double down now?

As she explains, “we initiated only half the risk in our trade since we were worried about strong incoming data, and we double down on the position.”

The thesis is simple: the hawkish Fed is likely to take policy even more restrictive, “increasing the odds of a hard landing”, and thus a recession which sends yields across the curve sharply lower. Needless to say, strong data remains the biggest risk for the trade since a higher terminal rate will drag the 10y rate higher as well.

“Monetary policy works with a lag and once the savings buffer has been eliminated we think that consumption will slow” Misra predicts, adding that the long TSY thesis is boosted by “bond fund inflows which have continued.”

Authored by Jesse Felder via TheFelderReport.com,

We have already seen an inordinate amount of outright fraud this cycle (see this and this) that has, so far, proven to be a terrific indicator of where we stand in the larger market cycle.

Today, Bloomberg reports that earnings quality for the S&P 500 Index recently fell to its worst levels in at least three decades and this may be an important sign of where we stand in the larger economic cycle.

The way they quantify “earnings quality” is to compare the aggregate net income of all companies in the index (ex-financials and energy) to aggregate cash flow. Normally, cash flow should be greater than earnings because it adds back non-cash charges like depreciation and amortization. When that is not the case it can be a red flag that companies are resorting to accounting gimmicks to make earnings look better than they otherwise would.

“Managers are under so much pressure to deliver earnings that they’re using a lot more accounting than they have in the past to make their earnings look good,” said Sanjeev Bhojraj, alumni professor in asset management at Cornell University.

“If my dollar of earnings has no cash or negative cash, that’s poor quality because all the earnings that I have are just accounting.”

By inference then, companies haven’t employed “financial shenanigans” (to borrow a term from CFRA Founder Howard Schilit) to inflate earnings as aggressively as they are doing today at any point in the past few decades.

Another way to approach this issue is to compare S&P 500 Index earnings to NIPA profits (tracked by the BEA). These two figures are plotted in the chart below.

As Gavekal founder Charles Gave recently pointed out (hat tip, David Hay), “When S&P 500 profits diverge dramatically from NIPA profits, it is a sure sign that accounting methods have changed at S&P 500 companies. If S&P 500 profits rise to exceed NIPA profits by 20% or more, it is a signal that companies’ reported profits are being generated largely by their accountants.”

Moreover, there are important economic implications from all of this.

Gave continues, “Usually this means that the economy is on the brink of a recession, and that the stock market is about to take a beating.”

Last year, we crossed that 20% threshold between S&P 500 earnings and NIPA profits.

Perhaps we should add this to the growing list of leading indicators pointing to recession.

Having frequently asked when billionaire activist investor Dan Loeb would revisit the melting ice cube that is Intel, where his hedge fund Third Point revealed an activist stake in 2020 and pushed the company to explore “strategic alternatives” only to quietly unwind the position in 2021 when the stock soared before subsequently crashing…

When is @DanielSLoeb1 going activist on intel again?

— zerohedge (@zerohedge) August 23, 2022

… moments ago we got the answer when CNBC’s Scott Wapner reported that Loeb is turning his attention not to Intel, which just slashed its dividend by 66%, and which some have speculated is too far gone for even a brilliant activist to save as the following chart of its projected revenue shows…

… but to its biggest competitor AMD.

According to CNBC, the hedge fund manager took the bet when AMD shares struggled: AMD shares have underperformed the rest of the sector over the last 12 months, down more than 30% as the Philadelphia Semiconductor Index declined 14%.”

However, unlike Intel which continues to plumb new lows, AMD has bounced back this year by 21% as China opened up its economy and the overall stock market has rebounded. The chipmaker recently reported fourth quarter earnings that exceeded Wall Street expectations for sales and profit, but guided analysts to a 10% decline in year-over-year sales in the current quarter.

The news has predictably sent AMD stock surging.

Authored by Katabella Roberts via The Epoch Times (emphasis ours),

Mississippi has become the latest state to ban health care professionals from providing “gender-affirming care” for transgender youth in what officials say will stop the attempt to “push a sick and twisted ideology” on children.

Mississippi Gov. Tate Reeves, a Republican, signed the GOP-led House Bill 1125, also known as the “Regulate Experimental Adolescent Procedures (REAP) Act” into law on Feb. 28.

Under the legislation, which is effective immediately, individuals in the state are banned from “knowingly engaging in conduct that aids or abets” the performance or inducement of gender transition procedures for Mississippians under the age of 18.

The bill also prevents public funds or tax deductions for prohibited gender transition procedures, noting that the direct or indirect use, grant, payment, or distribution of public funds to any entity, organization, or individual that provides gender transition procedures to individuals under the age of 18 is also prohibited.

It also puts in place enforcement procedures on the Mississippi State Board of Medical Licensure. Any health care professional found to be in violation of the ban will have their license to practice medicine in the state revoked.

‘Sick and Twisted Ideology’

The measure, which also prevents Medicaid from reimbursing or providing coverage for gender transition for persons under the age of 18, allows for health care providers to be sued by their former patients, via their “parent or next friend” within 30 years.

“At the end of the day, there are two positions here. One tells children that they’re beautiful the way they are. That they can find happiness in their own bodies. The other tells them that they should take drugs and cut themselves up with expensive surgeries in order to find freedom from depression. I know which side I’m on. No child in Mississippi will have these drugs or surgeries pushed upon them,” said Reeves in a statement.

In a separate statement on Twitter shortly before signing the law, Reeves said there are individuals in the state who are “attempting to push a sick and twisted ideology that seeks to convince our kids they’re in the wrong body and the solution is to drug, sterilize, and castrate themselves.”

“To these radical activists I only have one thing to say: Not in Mississippi,” the governor wrote.

The signing of the bill makes Mississippi the latest state to enact a ban on gender-affirming care after South Dakota Gov. Kristi Noem, also a Republican, signed a similar “Help Not Harm” bill into law last month.

Read more here…

If you’re active in the markets, it’s almost a certainty that you’ve heard a joke about betting on the opposite of whatever non-stop-stock-picker Jim Cramer suggests to retail investors. 

Now, retail investors can do just that. There is a new pair of products coming to market this week called the Inverse Cramer Tracker ETF (ticker SJIM) and the Long Cramer Tracker ETF (LJIM) that will now allow investors to bet against (or with) the Mad Money host. 

The same group that brought you SARK, the inverse ARKK Fund ETF are the ones putting together the ETFs. The funds are the brain-child of Matthew Tuttle, CEO of Tuttle Capital Management. 

“If he specifically says either buy, buy, buy a stock, then we’re gonna go short that stock at the next practical moment,” he recently told Bloomberg. “If he tells you he hates a stock or sell, sell, sell or something like that, then we’re gonna go long that name again at the next kind of practical entry point.”

The inverse fund “is an actively managed exchange traded fund that seeks to achieve its investment objective by engaging in transactions designed to perform the opposite of the return of the investments recommended by television personality Jim Cramer,” the company said in a prospectus late last year. 

“Under normal circumstances, at least 80% of the Fund’s investments is invested in the inverse of securities mentioned by Cramer,” it says of its strategy. 

The filing continues:

The Fund’s adviser monitors Cramer’s stock selection recommendations throughout the trading day as publicly announced on Twitter or his television programs broadcast on CNBC, and sells those recommendations short or enters into derivatives transactions such as futures, options or swaps that produce a negative correlation to those recommendations.

The Fund’s portfolio generally is comprised of 20 to 25 equity securities not recommended by Cramer. To the extent possible, the Fund’s portfolio is equally weighted. The Fund may invest in securities with any market capitalization and in securities of issuers located in the United States and abroad.

Should Cramer recommend buying any of the securities in the Fund’s portfolio, the Fund will dispose of those holdings. Should Cramer recommend selling any of the securities in the Fund’s portfolio, the Fund will keep those holdings. If Cramer does not take any view on any of the securities in the Fund’s portfolio, the adviser retains discretion to sell positions once profit or loss targets are met, or market conditions such as large swings in either direction necessitate a sale and replace them with securities that meet the criteria of the Fund’s initial portfolio. Under normal circumstances, the Fund will hold positions no longer than a week.

As we said back in October, we’re sure the new ETF will have no trouble attracting attention and investors. Also, as contrarians, we also can’t help but wonder if this public acceptance of Cramer’s uncanny ability to get things wrong is finally a reason to start looking at taking him seriously.

Authored by Zack Voell via BitcoinMagazine.com,

Inscribing bits of data onto the Bitcoin blockchain through Ordinals has captured the attention of cryptocurrency enthusiasts inside and beyond Bitcoin since the start of 2023.

Whether or not Bitcoin “should” be used for this NFT-like activity is a hotly-contested issue and the data coming from the effects of this mini Bitcoin collectives craze is intriguing. Inscriptions could be a short-lived fad, but several early data sets from the first weeks of inscription activity show tremendous interest in this new use case for the Bitcoin network. Diving in, this article provides an overview of six sets of data from the inscription mania.

OVERVIEW OF BITCOIN INSCRIPTIONS DATA

The amounts and weights of pending transactions in Bitcoin mempools around the world are a clear signal of how popular inscription transactions have been to Bitcoin users amid the ongoing mini-craze over Bitcoin NFTs. Throughout most of the current bear market cycle, pending transaction levels in Bitcoin mempools have stayed fairly low, especially when compared to the height of both the 2017 and 2021 bull markets. In fact, a Twitter bot called Mempool Alert tweets every time its mempool empties, and the tweets were posted on a consistent basis for months throughout 2022.

The mempool pending transactions visual below shows the total weight of unconfirmed transactions throughout most of February 2023. The surge in pending transactions directly correlates to the inscriptions craze, which has somewhat subsided toward the end of February.

Source

Inscription transactions are notoriously large, and the block sizes that have come from the inscription craze prove it. For years, the sizes of Bitcoin blocks hovered just below 1.5 megabytes (MB) as the line chart below illustrates. But the vertical increase in block sizes on the far right side of the chart is due entirely to Bitcoin inscriptions.

With these Bitcoin NFTs becoming popular, blocks started being produced between 2 MB and 2.5 MB on average. Several blocks flirted with the 4 MB limit, including the “giant” Taproot Wizard block mined by Luxor in collaboration with Udi Wertheimer and others.

Switching to a bit of “off-chain” data, the interest in Bitcoin inscriptions is also apparent from Google Search queries. The line chart below is taken from the Google Trends page for search interest in “Bitcoin Ordinals,” and the near-vertical increase in interest over time is impossible to miss. It should be noted that these search trends data sets are scored on a relative basis to search interest in weeks and years past. But of particular noteworthiness is that Google Trends has indexed this phrase at all. Not every term or phrase is indexed by Google Trends, only those with a material amount of minimum search volume over time. That trending data for “Bitcoin Ordinals” made the database at all is remarkable.

Critics of NFTs — and especially of inscriptions on Bitcoin — will occasionally slight the entire type of network use as a form of “privilege” by elites in developed countries goofing around with a serious monetary network. But global trends for Ordinals searches don’t show the U.S. as even a top-five country. Singapore, Czechia, Portugal and Singapore top the list, according to Google’s data.

Sorting by transaction forms included in blocks also illustrates the intensity of the inscriptions craze that kicked off 2023 for Bitcoin. According to data shared to Twitter from a Bitcoin node run by Pierre Rochard, the research director at Riot Blockchain, inscription transactions accounted for nearly 60% of block space near the height of the Bitcoin community’s first foray into Ordinals. As the data visualization below illustrates, that number steadily grew from 20% to 60% within a week.

Community data from groups of inscriptions enthusiasts also present some additional context for this social and technical movement inside of Bitcoin. The bar chart below represents data compiled by OrdinalHub with a list of original inscription Discord groups and their member counts as of early February.

By a large margin, Satoshibles and Taproot Wizards were the largest communities at that point in time. But the sheer number of Discord groups that almost instantaneously were created signals the passion that Bitcoin artists have had for this new use for the network.

At present, many of the Discords are certainly larger than the data in the above chart represent. But by now, some of the data is sure to have been corrupted by bots and various other spoofs (intentional or not) of community data, which makes this data snapshot taken near the communities origins unique.

One final piece of data that deserves inclusion in any analysis of Bitcoin inscriptions is around the money — how much miners are making from “the inscribeoooors” who etch their bits of data into the Bitcoin network. Miners are being paid handsomely for building blocks with inscription transactions.

In the line-bar combination chart shown below, daily amounts spent on inscription transaction fees and the total aggregate amount paid to miners from inscription transactions are visualized. In a few short weeks, well over $1 million has been paid out to miners from inscribers. And this data only captures the on-chain payments — out-of-band payments are not included here, which would make the number somewhat larger.

Even though much of the early data sets show that the intensity of early inscription activity has tapered off relative to its highs toward the end of February, how long this trend will last is unknown. It could be a fad that dies out before the current bear market ends, and inscription critics can then dance on the grave of Bitcoin NFTs. Or it could become a longstanding fixture of demand for block space and regular fee revenue for miners.

The future is uncertain, but the possible effects of inscriptions are impossible to ignore.

2023 has seen stocks start to behave like, well ‘stocks’, rather than simply proxies for the overall market, moving as one with every whimsical headline.

This should not be a huge surprise as Goldman’s Prime Desk noted earlier in the year: 2023 could bring a new market paradigm for stock pickers as, “historical data suggests that higher rates may create more fertile opportunity set for hedge fund returns and alpha generation, marking a shift from the challenges created by the QE era.”

And sure enough, as Goldman’s Brian Garrett pointed out in a note this morning, this is coming to fruition as the market digests 4Q earnings reports and idiosyncratic risks manifest at the individual stock level.

The chart below tracks the “average” S&P 500 stock’s 1 month realized volatility relative to the index itself.

Put another way, the average S&P 500 stock has been ~1.8 times as volatile as the overall market (around one year highs).

However, the chart above is backward-looking – measuring the realized idiosyncratic moves relative to the realize index moves.

Looking forward, the market is increasingly betting on a shift to more macro-driven buying- or selling-pressure as the implied correlation for the S&P 500 for the next month has been rising since early February…

It would appear traders are betting on the imminent arrival of several major event risk elements (payrolls, CPI, and FOMC in the next 3 weeks) will shift the equity market – at least tactically – back to a “it’s all one trade” environment and away from the stock-pickers’ nirvana.