Global Market Comments
October 7, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOLDILOCKS ON STEROIDS, plus A KERFFUFLE IN PARIS),
(SPY), (FXI), ($COMPQ), (CCJ), (SLB), (OXY), (TSLA),
(TLT), (DHI), (NEM), (GLD), (TSLA)
Posts
Global Market Comments
August 26, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or BEWARE THE NEXT BLACK SWAN) plus (REVISITING UKRAINE),
(SPY), ($INDU), ($COMPQ), (FXI), (COPX), (NVDA), (GM), (GOOG), (FCX), (UUP), (FXE), (FXB), (FXC), (FXA)
Mad Hedge Technology Letter
September 20, 2023
Fiat Lux
Featured Trade:
(THE BOND KING IS WRONG ABOUT TECH STOCKS)
($COMPQ), (UUP), (MSFT)
In the trader's guidebook of how to trade, it’s quite common to cement the nostrum "don’t fight the Fed" into one’s brain.
Many know this.
In 2022, this nostrum served traders quite well as interest rate increases left the tech market in the dust.
Major tech stocks ($COMPQ) from Meta (META) to small-cap Zoom Video Communications (ZM) fell flat on their face.
That was when "don’t fight the Fed" was the smart thing to do.
Fast forward to 2023 and the Fed is still marching towards more interest rate tightening, but astonishingly the opposite has happened, it has paid to fight the Fed this year.
Not only that, the tech-based Nasdaq has gone parabolic, delivering gains of already over 30% in just the first 7 months.
Anyone that hasn’t fought the Fed has been left bloody in the streets like a standard Parisian riot.
One piece of the puzzle that often gets overlooked is one major catalyst to this trade which is the Japanese yen carry trade.
This is how the trade has worked for many hedge funds this year.
Borrow in Japanese yen because the cost of borrowing is still puny compared to yields in Western countries.
Take that yen back over to the Western equity markets and pour them into stocks like Nvidia, Meta, Apple, Tesla, Microsoft, and Amazon.
The strategy has worked like clockwork and I know many traders that have made second and third fortunes off of the back of this trade so far this year.
Traders have boosted short positions on the yen as the currency moved steadily lower this year amid widening divergence between the Bank of Japan’s easy policy and aggressive hiking cycles for other central banks, notably in the US and Europe.
Talking about the Yen is timely as reports of lower US job numbers and increased Japanese wage gains triggered a one-day selloff in the dollar.
We won’t see a complete unwind of the yen carry trade just yet but the carry trade had gotten a little too long in the tooth, so this is profit-taking to readjust positioning.
If volatility stays high then it will continue to unwind, but if volatility stabilizes then the Japanese yen carry trade parade will continue unabashed.
The yen is one of the worst-performing Group-of-10 this year, reaching 145 per dollar last month, a level unseen since November.
What’s next?
Nothing has fundamentally changed.
The US isn’t going into a recession this year and even if credit card delinquencies are up and household net worth is struggling in America, it’s not enough to move the needle to deter the Japanese yen carry trade.
The mild pullback against the US dollar is in fact a golden opportunity for traders to pour back into the short Japanese yen trade.
As long as the Japanese yen remains weak, tech stocks won’t crack because this liquidity is the lifeblood to many tech stocks.
We have been crowbarred into this goldilocks environment of higher equities, higher bond yields, and now US housing is starting to bounce back.
The Nasdaq has been ironclad this year and even if I don’t think it will deliver another 30% to finish the year, the pain trader is higher in tech stocks, marginally higher in bond yields, higher in US housing, and short Japanese yen.
Until we receive some type of concrete confirmation that this pain trade is over, I expect to grind up in the aforementioned asset classes.
Global Market Comments
December 8, 2021
Fiat Lux
Featured Trade:
(ON EXECUTING MY TRADE ALERTS),
(TEN REASONS WHY STOCKS CAN’T SELL OFF BIG TIME),
(SPY), (INDU), ($COMPQ), (IWM), (TLT), (GME)
Global Market Comments
February 9, 2021
Fiat Lux
Featured Trade:
(ON EXECUTING MY TRADE ALERTS),
(TEN REASONS WHY STOCKS CAN’T SELL OFF BIG TIME),
(SPY), (INDU), ($COMPQ), (IWM), (TLT), (GME)
Let me explain how China has created a sudden U.S. tech ($COMPQ) renaissance that will most likely change the face of business and society in the U.S. to a degree we cannot even fathom yet.
To decompress the catalysts and the mechanisms at play in this confusing time in history, it is important to understand how the Middle Kingdom has supercharged American tech being one of the main protagonists.
Part of it is healthcare's role in the events, and part of it is tech’s strategic position waiting for a broad-based pivot in how humans internalize and execute business.
The supercharger has been the algorithms.
To explain in the best way I can, I will reference the Founder and CEO of Tesla (TSLA) and Space X Elon Musk who had a wide-ranging and insightful interview with popular podcast personality Joe Rogan.
The much-viewed interview preceded Musk’s threats to leave Fremont, California for greener pastures and transfer operations to the Gigafactory near Reno, Nevada and Texas.
To check out an article about Musk’s dare this weekend to migrate Tesla’s operations to the “Battle Born State” of Nevada, please click here.
In the interview, he delves into the U.S. healthcare system’s conflicting incentive to label anything remotely close to Covid-19 as symptoms associated with Covid-19 (which there is a long list of) that doesn’t differentiate between deaths attributed to Covid-19.
This line of thought is to widen the Covid-19 healthcare footprint to the point where each hospital can request more government funding based on the high volume of Covid-19 activity and required help to fight it.
We all love extra funding, right?
Musk also disagreed on every procedure not related to Covid-19 labeled as “elective” because it equates a pulled hamstring to a triple bypass heart surgery which can truly be life-threatening.
The point that I would like to expand on is that the attempts at widening the net of Covid-19 cases in order to curry favor for more government aid are effectively widening the digital footprint of Covid-19 internet content that is feeding back into the algorithms that are responsible for the majority of stock trades.
What we have here are vicious feedback loops that can’t be broken out of because of the misallocated tagging of Covid-19 that filters into algorithmic trading.
That is why we open up the newspaper, social media platforms, and any content provider and we are swamped by Covid-19 content and everything “associated” with Covid-19 content meaning all content has become Covid-19 content!
The net has been cast wide with homelessness caused by Covid-19, tax revenue shortfalls associated to Covid-19, professional sports seasons cancelled by Covid-19, and even a story about the King of Thailand King Maha Vajiralongkorn holed up in Switzerland with his wife and a harem of 20 other women to “quarantine” because of, yes – Covid-19. To read this story, click here.
Basically, all content is Covid-19 content until it isn’t.
This indelible influence on global governance has been deep with every politician feeling the pressure of continuing the lockdown because of a massive dislocation between the real footprint of Covid-19 and the digital footprint of Covid-19.
Healthcare pros as well have been duped by the wrong data and supporting lockdown policies because of the risk of looking bad due to perceived optics not meshing well with the current digital content being published.
The truth is that the real data is probably 1.5 standard deviations from what is believed to be consensus – a far cry from the gross data politicians and healthcare experts are using to make important decisions with.
Naturally, protecting a tenure as a politician is human nature and the unintended consequences to guarding one’s political career are causing longer lockdown periods.
Nobody wants to put their neck out and appear out of line.
Musk argued the case that the virus’s fatality rate is in fact “5-10X” lower than it actually is because of the concept of too many deaths being falsely attributed to Covid-19 symptoms and the lack of tests meaning many people are living with it but have not been accounted for in the data.
The tech market has taken wind of the discrepancy and the fierce rally calling the data’s bluff working with another set of data.
Then add to the casserole that tech companies successfully missed the “big one.”
The “big one” is defined by a virus that actually kills healthy bodies between 20 and 30 years old with no pre-existing conditions at a high rate.
And in economic terms, the “big one” means not being a hospitality, retail, or transport business.
The strength of the tech V-shaped recovery stems from the notion that this pandemic is not nearly as bad as we think it is.
There is definitely a level of truth in this.
Another unavoidable unintended consequence is the hastening of decoupling between the Chinese and U.S. economy as the blame game accelerates.
As a result, corporate manufacturing will be shipped back to the U.S. and this isn’t your father’s manufacturing either.
We are talking about manufacturing in the vein of Tesla, that will sprout up across the U.S. as artificial intelligence is finally good enough to make manufacturing profitable stateside as more automation takes hold.
Many of these new industrial A.I. manufacturing headquarters, factories, and complexes will be set up in tax-friendly states like Nevada and Texas taking a cue from Tesla.
There have been many analysts in the China camp prophesizing that the Chinese Communist Party (CCP) will apply the virus as a vehicle to push their narrow agenda.
However, Liu Chenjie, chief economist at fund manager Upright Asset has estimated job losses in China resulting from the pandemic of up to 205 million workers.
Click here to read about the devastating job losses in China.
The CCP is more worried about cleaning up the mess at home.
I would argue that the post-virus tech economy is setting up for a quicker than expected recovery.
As fast as the virus hit, the algorithms pushing this pandemic into the arteries of all digital channels will disappear in days, almost as if Covid-19 never happened.
Covid-19 has been the direct catalyst to a myriad of firings at digital newspapers all over the U.S., for example, Vice Media cut 10% of company’s employees — resulting in the elimination of 250 jobs.
As one door shuts - another one opens.
As tech companies have withstood semi-apocalyptical conditions, imagine how well they will do on the other side when consumers finally get their incomes flowing again.
U.S. tech is a shining example of the future being limitless, and complicit or not – China, algorithms, and healthcare experts gave a great assist.
The sushi has hit the fan – supply chains are broken.
Let’s gaze East to the inner workings of the tech world and it is clear that the supply chain has been under pressure since the onset of the trade war but the coronavirus is now making operations untenable.
China was the first to lockdown, but now the rest of Asia has followed suit smothering the rest of the region which is economic suicide.
Feeling out the situation, I picked up the blower to get a better understanding of what was going on in the center of the tech manufacturing world and the outlook appears bleak.
The electronic manufacturing sector in South East Asia is hit hardest by the coronavirus as many of the test equipment and chip producers face an imminent drastic shortage of raw materials, an unprecedented situation that has disrupted production.
One manager whose company produces 5G radio frequency (RF) chips have bottlenecked due to the disruption in the supply chain.
They use raw materials from the United States but also import from China and although they have 85% of materials to make the RF chips, they still have to put operations on ice because the suppliers in China can’t ship the essential 15% of material needed to complete manufacturing.
This batch of shipments is supposed to be the largest quantity of 5G chips from South East Asia in the first quarter and has now been officially delayed until logistic problems can be solved.
The company can still fulfill its quota for 3G and 4G RF chips, but it’s really hit or miss at this point.
And for manufacturing the older chips, they have sufficient stock of raw materials lasting three to four months, and by then they hope to solve the logistic headwinds from China.
In general, if the virus coerces South East Asian societies to shutdown their economy for another 5 months, the entire Southeast Asian electronic manufacturing sector will be decimated as bills and debt payments come due.
In fact, a current shortage of components is forcing prices to surge 10%-20% for active and passive electronic components.
Another prominent manufacturer who produces about 30% of the RF chips for the worldwide market told me that this is the “biggest disaster to ever hit the local electronic manufacturing sector.”
He continued to say that his supply chain has been hit between “30%-40%.”
About 50% of their raw materials come from Japan, and the rest from the United States and China, and because of an ensuing lockdown in Japan, shipment delays will happen for customers in Singapore, China, and the United States.
To make matters worse, testing engineers cannot travel abroad to install test equipment for customers because of international border closures.
This manufacturer projected revenue annual growth of -5% after initially forecasting for +10% in January.
Another executive at a semiconductor test equipment company told me that he fully expects sales to dissipate by 15% in the first quarter compared to last year.
Customers around the world, not only in the U.S., are delaying orders because they aren’t sure whether there will be new equipment to test because of the delay in the production and shipment of electronic components manufactured in China.
The executive sees a turnaround in June if shipping lanes and borders open, which is still a big IF.
How does this affect the end electronic device market like your iPhone or Amazon Echo?
Smartphone manufacturers need to come out with new products by mid-2020 to sneak in that yearly iteration before that window shuts and that timeline will certainly be pushed back.
Building a smartphone is usually done on a razor-tight deadline, but this puts off anything until they can finally get their hands on the parts needed to build out the phone.
If you think the 3rd quarter would be the time that these new phones could hit the market, then think again. It is likely that the coronavirus domino effect will force smartphone makers to sell these devices next year instead of pushing back a whole refresh cycle of revenue.
Apple is coming to the same conclusion with their 5G phone as well.
The tech world is dangerously close to missing one full year of refresh products and the scarring effects could last much longer.
Then there is the issue of demand and the lack of it moving forward for these products.
We must ask ourselves how scarred are tech consumers?
How scarred are tech companies?
What regulations should shape how businesses should be working as we enter into a new tech world and U.S. economy?
The first order of the day after the coronavirus passes is businesses and consumers will need to restock cash reserves for a rainy day.
The first reaction we will see are small tech companies decline quite dramatically in the second quarter because of the nature of high yields not being able to receive financing because of their low credit grades which could result in an initial barrage of defaults.
It will be just a small blip for the behemoth as they can take the financing if they truly need it and many don’t.
Tech balance sheets also need healing after this bout of craziness.
Not getting caught off guard will now be the new normal.
Even if tech dips into the $2 trillion relief package – it has a long-term cost associated with it that tech businesses must absorb.
How that impacts economic growth is tough to decipher now but it most likely will punish tech growth companies whose mantra is growth at any cost.
There will be a massive rebalancing and redefinition of what outperformance means because the government inherently will be playing an outsized role in our lives for years to come and what that means to lower tech profits and worsening stock multiples will play out in the tech markets.
Don’t underestimate trading algorithms.
The “Buy the Dip” psychology is broken and computerized trading has completely flooded the market with its personality.
That is exactly the dynamic of the current tech market, and it will mountain of generous offerings to reverse the trend in the form of monstrous stimulus and cash handouts.
As we entered 2020, the sentiment was sky-high, geopolitical tensions relatively calmed and three recent interest-rate cuts from the Federal Reserve drove tech stocks to record levels.
For 10 years, traders and the algorithms they harnessed were handsomely rewarded by aggressively betting against elevated volatility.
Cogent chart trends are the algorithms’ lustful partner in bed and now that every single short-term model is flashing sell, sell, sell - there isn't much bulls can do to fight back.
Many tech hedge funds have settled on similar conclusions - the best defense right now is unwinding portfolios to return to cash.
Incessant margin calls roiling any logical strategy has struck fear into many traders who levered up 10X.
What you could possibly see is the Minsky moment: That stability ultimately breeds instability because the only input in which becomes the difference make is volatility producing massive violence on upside and downside moves.
The ones who can absorb elevated risk are nibbling and unleveraged hoping to time the turn when stocks finally react positively to good data.
The current battle in the fog of war is that of two different economic scenarios that have direct influence in which ways the algorithms flip – either shutdown the country ala Wuhan, China for an extended period of time or send the troops back to work.
Hedge fund billionaire Bill Ackman gave his 2-cents restating his passionate plea for a 30-day-shutdown to fight the coronavirus pandemic.
Former Goldman Sachs CEO Lloyd Blankfein is in favor of sending back the asymptomatic younger generation workers sooner than later.
Initially, Blankfein gave his backing for “extreme measures” in order to flatten the curve, but promoted healthy workers returning “within a very few weeks.”
Blankfein's argument rests on that if people don’t go back to work, the economy might become too damaged to recover from inciting another crash.
This contrasts starkly with Ackman’s idea of “testing, testing, testing”, which would theoretically dismantle the potency of the virus but take longer for the economy to restart.
U.S. President Donald Trump has relayed his desire to open up business by Easter Sunday.
So as mostly professional politicians hash out a towering aid package of over $2 trillion, firms will get more of an indicator of how and when the business world opens up again.
Trading algorithms are on a knives edge because of the uncertainty – until they are illegal – it is something we are stuck with.
These trading formulas are preset based on biases that start with a series of inputs and the most critical input is volatility or better known as the fear index.
If the lockdowns are extended, the flood of negative news will force algorithms to sell on the extra volatility.
When things go bonkers, many of these preset formulas sell which exacerbates the down move further simply because more than enough people have the same preset algorithm.
Cutting position size when market volatility explodes is not a farfetched theory and is quite a common trading nostrum.
Even if many of these trades would be good long-term bets, many trading algorithms are focused on short-term trades and by this, I mean milliseconds and not days.
Another input into trading algorithms are Twitter feeds.
The platform is scraped for keywords from mass media news sources and synthesized into a specific output that is fed into a computer algorithm.
These headlines offer insight into what the sentiment is for the trading day – negative, positive, or neutral.
This scraping of data is especially relevant in today’s chaotic trading world where 10% moves up or down in one day is the new normal.
Because of Dodd-Frank Wall Street reform, many of the big banks have shuttered trading operations hurting the market’s liquidity situation causing spreads to widen and down moves to accelerate.
But now that the Fed has landed the Sikorsky UH-60 Black Hawk on the helipad and the money is waiting to helicopter down as they have announced “unlimited” asset buying and guaranteeing of corporate bonds to aid financial markets.
How does computerized trading roil markets?
Here is an example. A recent trading day included more than $100 billion of selling, the worst week since the financial crisis and was triggered by a hedging strategy called “vol targeting”—using volatility as a central input in trading decisions—and other systematic tactics.
Funds making decisions based on volatility, including some with names such as volatility-targeting funds and risk-parity funds, have risen in popularity.
Risk-parity funds manage an estimated $300 billion.
Risk parity is an approach focused on allocation of risk, usually defined as volatility, rather than allocation of capital.
That is what we have now – a cesspool of risk parity hedge funds layered by high frequency funds layered by short/long vol funds layered by arbitrage funds all levered 15X.
The take into consideration that they are supercharged by massive volume-based computer algorithms and trying to head for the exit door at the same time.
Ironically, this could be one of catalysts for shares to recalibrate and head back up north as traders start to front-run the peak of the health crisis.
Let’s hope that it happens sooner than later and that the government doesn’t manage to screw up delivering the helicopter money.
One man's heaven is another man's hell.
Zoom Video Communications (ZM) is the hero of video conferencing software.
Few companies are navigating the coronavirus situation better than Zoom. Their better-than-expected fourth-quarter earnings and forecast is a great omen for the coronavirus driving future demand for the company’s remote-work tools.
Even without the coronavirus, the company is doing spectacularly.
(ZM) delivers best in show teleconferencing services including video meetings, voice, webinars and chat across desktop and mobile devices, and has been the beneficiary of the dreaded coronavirus that has quarantined workers forcing them to rely on Zoom’s video app tools.
The virus has bolted by the 100,000 customer mark with at least 3,500 Corona deaths.
The panic has been overblown, and the same hysteria has seeped into the broader tech market triggering deep selloffs in almost every tech company.
The elevated awareness and adoption of the company’s video conferencing platform will allow the company to post an even better performance next quarter.
The migration into the company’s free app remains robust and it is unclear whether those users can be converted to paying ones. However, paid growth is still hitting on all cylinders.
Revenue crushed it at 78% to $188.3 million from $105.8 million a year ago.
In total, sales in 2019 were $622.7 million, up 88% year-over-year.
Zoom Communications is attracting more influential customers with 81,900 accounts with at least 10 employees, a 61% uptrend from the past year.
VMware Inc. (VMW) and Johnson & Johnson (JNJ) are two of Zoom’s largest accounts.
Zoom's first-quarter revenue guidance was strong as well predicting between $199 million and $201 million.
Another growth lever will be the mobile segment which has signed up more than 2,900 accounts with more than 10 employees in its first year after launch and will shortly be available in 18 countries.
Total operating margins surpassed expectation of 10%, by more than doubling, to 20.4%.
Ultimately, Zoom's robust Q4 results and guidance underline the company's smooth pathway to elevated revenue drivers as the world goes into pandemic mode because of Covid-19.
It was somewhat underwhelming that management cited a limited revenue benefit from the situation with a go-forward increase in costs as usage increases.
That could have been sorted out more delicately and keeping costs down is one of management’s responsibilities.
The positives still outweigh any minor negatives as the company has been able to capitalize by seizing mind share and expanding the funnel.
Zoom Communications has not been able to escape the recent volatility in shares as the 12% boost from a positive earnings report was met with a 13% haircut the following day as the broader Nasdaq was pummeled.
The Covid-19 virus is delivering agony to investors as the swings are simply hard to trade in and out of.
Making it even more difficult is fogging clarity breeding uncertainty stoking wild risk-off moves even when the central bank announced an emergency half-point rate cut.
The current issue is that short term, markets can behave as irrational as ever and trading algorithms are programmed to digest headlines by not only the volume but the potency and relevancy as well.
If every news wire sent out a story that free money was dropping from the sky, the market would be up 10% irrespective of whether it is true or not.
That is the world we live in where over 85% of the trading decisions and volume are executed by automated software and the exaggeration doesn’t discriminate in which direction it trends in.
So, we are stuck in this negative feedback loop where national headlines are almost entirely concentrated on the coronavirus and that is mainly the data that is fed into short-term trading algorithms.
Unfortunately, the tech market weakness is becoming a self-fulfilling prophecy and new headlines of Northern Italy being quarantined and New York announcing a state of emergency is poised to be the next catalyst for a volatile upcoming trading week ahead.
Short-term traders need to understand that this isn’t just a “buy the dip” event and the deep in the money call spreads that had cushions of 8-10% were blown out in just a few days.
Long term investors should be using every dramatic selloff to add slightly to their positions incrementally lowering their cost basis.
It is hard to know when the coronavirus phenomenon will pass by but at the speed in which we are trending, U.S. school cancelations and further cities and states announcing highly negative events are in the pipeline for next week.
The bottoming event could eventually come in the form of US Corona cases topping 10,000 or cancelling the Olympics in Tokyo, but until then, the negative health headlines appear to be the new normal for the short-term and until we are fully washed out.
