Fed to Unwind Bond Portfolio, US Jobs Recovery, Enthusiasm in the Cycle, MemeLand, and Australia Showing Signs of Normality
(Market Talk #9)
June 6th, 2021, Edition 9
Welcome to Market Talk, where we round up some of the interesting activity that took place in the public markets over the past week in a bitesize format.
Market Talk is released every Sunday and aims to give you the 411 for the week ahead.
If you wish to read this as a webpage, and not an email, then follow this link.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
Africa & Middle-East
10Y Government Notes %
🛢️ Commodities 🛢️
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 48, up from 38 last week, suggesting that we have moved out of fear and into a more neutral sentiment.
The S&P 500 trades above the 125-day moving average by 7.19%, up from 7.02% in the week prior.
With respect to the 50-day moving average, the S&P trades 2.20% above the MA, up from 2.16% in the week prior.
The NASDAQ 100 trades above the 125-day moving average by 3.98%, up from 3.66% last week, and 2.07% the week before that.
With respect to the 50-day moving average, the NASDAQ now trades 1.37% above the MA, up from 1.17% last week, and -0.39% the week before that.
The CBOE VIX stands at 16.42, down from 16.76 the week before.
The 50-day and 125-day moving averages now stand at 18.58 (down from 18.81 last week) and 21.40 (down from 21.51 last week).
Typically we can consider a range between 12 to 20 to be “normal”, with ranges below and above considered low and high. This is contextual, however.
Equity Put/Call Ratio
Here you can see the YTD equity put/call ratio, with the blue, highlighted line representing the past week.
As of Friday the 4th of June, the volume in put options has lagged volume in call options by 56% (reading 0.44).
Finance Twitter Sentiment
The Captain Solutions Fear & Greed indicator analyses sentiment across all the analysts they track, on Twitter, using proprietary AI algorithms. Reports on the past 200 days are aggregated by day.
The current 20-Day moving average reads 37.08, with the 100-Day moving average at 36.11.
The Week Ahead
Here are a few titbits to watch out for in the coming week.
Here, I have compiled some of the events taking place with respect to earnings in the coming week, as well as a collection of interesting insights into the broader market.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by EarningsWhispers.
Fed to Unwind Corporate Debt Portfolio
The Federal Reserve announced last week that it would begin the gradual selling of its corporate bond portfolio throughout the remainder of this year, after having purchased corporate bonds and fixed-income funds in 2020 to stabilise the market.
These measures reduced borrowing costs for many corporations, which was particularly important for those firms which were struggling as a result of the pandemic.
For those of you who may have been living under a rock for the last year, these purchases were part of a global central bank movement that saw banks slash rates, and engage in open market activities to purchase public assets.
For the Fed, this started with rate deductions, to assist aggregate demand and help the economy stabilise and/or rebound faster.
Then came the asset purchases to address widespread dysfunction in key financial markets as well as providing additional support for aggregate demand. For the Fed, in particular, they focussed on buying government securities with the main objective of alleviating certain company’s balance sheet risk limits and easing market dislocation.
Then came liquidity provisions and credit support. This was largely lending to financial institutions and other bodies to support the provision of credit to businesses, ensuring that viable firms could survive the crisis and be able to ramp up production and support employment once the crisis faded.
Now that the recovery is underway and aggregate demand is recovering, the Fed has to begin to sell some of those asset purchases.
“The Fed opted to end the SMCCF (Secondary Market Corporate Credit Facility) over the week, which means that the Fed will outright sell the remaining holdings of corporate bonds (USD 26bn).
The programme is minuscule relative to the USD 120bn a month bought by the Fed combined in MBS and Treasuries per month, but it may hold an important signal value that the Fed has now decided to sell its corporate bond holdings. A better-safe-than-sorry central bank still fearing the stability of the economic outlook would NEVER take such a decision.” - Nordea
“The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic” - The Federal Reserve, June 2nd
In addition to winding down the SMCCF, the Fed will also look to slowly reduce their $120 billion monthly purchases of government securities in the near future.
The corporate debt portfolio will be reduced gradually and orderly, with the Fed looking to begin selling the ETFs soon, before offloading the remainder of the portfolio later in the year.
Some comments from JP Morgan Chase strategists:
“The selling should represent a minuscule portion of secondary trading volumes between now and year-end, and shouldn’t have any material impacts on spreads whatsoever”
Barclays strategist, Bradley Rogoff suggested, “the exit is also unlikely to change overall valuations in the junk-bond market”.
Perhaps most interesting, was the comments from BofA strategists, who think that the Fed’s actions would push spreads wider, noting that it should take:
“Very little selling to convince investors the tightening cycle is underway. The decision was 100% surprising and very negative for risk assets”
The US May Jobs Report Shows Strong Recovery
Data released last week showed that the United States added back 559,000 jobs during May, marking a second successive ‘miss’ on analyst expectations after last month’s meteoric miss. During April economists had suggested 1 million additional jobs, and the figure came in at close to one-fourth of that.
Economists had projected 650,000 additional jobs during May, so the results were ~14% off from that figure.
The Bureau of Labor Statistics reported that unemployment now stands at 5.8%, down from 6.1% last month.
Source: (US Bureau of Labour Statistics)
This marks the lowest level of unemployment since March 2020 (4.4%) prior to the full impact of coronavirus. From March 2020 to April 2020 unemployment spiked from 4.4% to 14.8%.
The unemployment rate for the non-white labour force still remains considerably higher than the white subset, which shows unemployment at 5.1%.
The unemployment rate for Black workers dropped to 9.1% in May from 9.7%, the Hispanic jobless rate fell to 7.3% from 7.9%, and the Asian unemployment rate fell to 5.5% from 5.7%.
Labour force participation remained steady at 61.6% in May, suggesting that the unemployment rate is falling due to people finding jobs, as opposed to dropping out of the labour force.
Some interesting charts, shared by @calculatedrisk (below) highlight that the recovery of job losses appears to be taking place at a much faster pace than it did during the last recession, in 2007.
Source: (Calculated Risk)
We are a long way off full employment but are in a considerably better place than we were one year ago.
The number of permanent job losers (the most difficult to replace) declined to 3.2 million from 3.5 million during May.
Source: (Calculated Risk)
"Among the unemployed, the number of persons on temporary layoff declined by 291,000 to 1.8 million in May. This measure is down considerably from the recent high of 18.0 million in April 2020 but is 1.1 million higher than in February 2020. The number of permanent job losers decreased by 295,000 to 3.2 million in May but is 1.9 million higher than in February 2020." - BLS Report
Wells Fargo discusses the fact that employers are still finding it hard to find workers, and may look to increase prices to combat rising labour costs.
“Wage pressure should persist in the coming months and could further add to the broader inflationary environment. Although economy-wide profit margins remain fairly elevated from a historical perspective, suggesting firms can absorb some of the higher cost, higher infation expectations suggest consumers are more apt to accept higher prices.
Businesses may therefore leverage the current environment to raise prices and offset higher labour costs. It's not just more difficult to find workers right now, it's also more expensive.” - Wells Fargo
Source: (US Department of Labour)
“Despite record demand for workers, the labour market's recovery has entered a tricky phase. Businesses have reopened faster than workers are able and willing to return to work. More than a year on from the start of the pandemic, a declining share of unemployed workers are on temporary layoffs, meaning businesses and job-seekers must make new connections. That takes time.
That said, the past two months of disappointing job gains illustrate that the jobs recovery is likely to be more drawn out than previously thought. With payrolls still 7.6M below their February 2020 peak, a full recovery looks unlikely until late 2022 or even early 2023. The more moderate pace of hiring will keep the Fed waiting a bit longer for "substantial further progress" on the labour market front, although farming wage pressures suggest the Fed may need to broaden out its defnition of progress.” - Wells Fargo
Enthusiasm Phase of the Cycle for US Investors
Sentiment Trader put out a great little memo towards the end of the week titled ‘Where Are We in the Typical Sentiment Cycle?’.
In this piece, they state that:
“For more than six months, investors have had shown at least Returning Confidence and even Enthusiasm. That's according to the latest correlations to a Typical Sentiment Cycle.” - Sentiment Trader
Giving nod to the Justin Mamis sentiment cycle, ST estimates the following correlations between the current cycle and all periods that are similar to the 1990-1991 period. With 1 suggesting perfect symmetry, and -1 suggesting perfect opposite behaviour.
Returning Confidence: +0.77
Source: (Sentiment Trader)
“Based on that, there is a strong probability that we're in the Enthusiasm phase. Last September, the correlations suggested we were moving into the Returning Confidence phase, a good sign. It stayed there for a while, then moved into Enthusiasm near the end of last year.
So, it has been more than six months, 140 days to be exact, that the price pattern of the S&P 500 has had at least a +0.60 correlation to both Returning Confidence and Enthusiasm, while also showing at least a -0.40 correlation to Discouragement and Panic.
That has moved us into the top 15 stretches of time with this kind of confidence among investors.” - Sentiment Trader
Australia’s GDP Back to Pre-Covid Levels
Australian GDP is now back to pre-covid levels, after a better than expected 1.8% growth in Q1, pipping estimates by 30bps.
Noting this because Australia appears to be a few steps ahead in the covid recovery plan than the West, and perhaps represents what is to come for some other countries still struggling with lockdowns and covid cases.
Both Australia and New Zealand still have very low case counts, and the countries are entering the colder phase of their seasonal cycles. So, it will be interesting to see if cases being to spike once temperatures drop.
Throughout the country, restrictions are easing, with the exception of Melbourne, which extended lockdowns for another week (ending on 10 June). Restrictions were imposed on 27 May after some locally acquired cases.
“Pent up demand and the lagged effects of stimulus measures for household spending is still powering the Australian economy along. But with total (real, seasonally adjusted) GDP of AUD501bn in 1Q21, more than the previous pre-Covid high of 497bn in 4Q19, the period of most rapid catch-up has now probably passed. GDP growth is likely to be driven less by "recovery" and "stimulus" in the coming quarters, and more by underlying growth prospects.” - ING
Contribution to GDP was more balanced in Q1. For the last few quarters, the contribution was largely dominated by rebounds in private final household consumption spending.
“This spending contributed 0.7pp to the 1.8% total GDP growth in 1Q21, much less than the 2.4pp contribution in 4Q20, or the 4.0pp surge in 3Q20. The trend contribution of household consumption since 2013 has been about 0.3-0.4pp per quarter, and we would anticipate consumer spending reverting to levels just a bit higher than this towards the end of the year and into 2022.” - ING
MemeLand is Back (It Never Left)
Elon Musk proves once again that all you need to make money is 50+ million Twitter followers and a memecoin.
During the weekend, Musk this cryptic tweet:
Sending the coin soaring, obviously.
It’s an interesting way to interact with the metaverse we all participate in. Not something I pay too much attention to, but it does make me question the ethics of the man who is supposed to be the operator of Tesla. If he has been buying these tokens, or front running them, then thats questionable behaviour.
This is hilarious, of course, but it feels like super-late cycle nonsense to me.
Between this, dogecoin pumping, and the activity in AMC, it makes you wonder what is going on.
Hilariously, during the AMC debacle, which saw prices rise by 80% within a week, AMC Networks (Ticker AMCX) also caught a bid as investors mistook the security for AMC Entertainment (Ticker AMC).
I have seen this happen countless times. I recall the time when Zoom Technologies (Ticker ZOOM) caught a bid back in 2020, being mistaken for the well-known video service Zoom Video Communications (Ticker ZM).
Someone should really build a stupidity arbitrage strategy for when moments like this occur. You might only get a small handful of opportunities each year, but it could be a compelling low activity, low time spent in the market, strategy. (Not financial advice).
There is nothing new under the sun, however. This Forbes article front-cover from 1998 will testify to that.
As entertaining as it is, the reality is that the amount of capital flowing between the likes of cumrocket, dogecoin, and AMC, is not big enough to disturb the overall market.
These pockets of wild speculative behaviour are almost always present. Whilst they might be opportunities for the astute speculator, they can be largely ignored by the majority of the investing public.
If you have not listened to the below episode of Panic with Friends, featuring Dan McMurtie of Tyro Partners, I highly advise you do. Dan frames this kind of activity in a really interesting light.
JP Morgan’s Guide to the Markets for May
Last week, JP Morgan released an updated “Guide to the Markets” relevant as of May 31st.
I will save the discussion on my end but will leave the link here (it’s free).
These are always useful to pour through, so I figured I would share the link here in case anyone was not familiar with them.
In this edition, they draw some interesting parallels between the covid-induced recession and prior market downturns.
Source: (JP Morgan)
📰 Brain Food 📰
Here is a shortlist of a few interesting pieces that I have read over the course of the week, to feed your mind.
Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the green link after the source subheading.
1) ”Employee Stock Options: Theory and Practice”
Length: Light Read
Source: (Legg Mason Capital Management)
Scribed by Michale Mauboussin back in 2004, I came across this piece during an interaction on Twitter regarding stock-based-comp (credit to @ebitdaddy90 for sharing).
A quick 8-Page read, but one that shares some great insight into the relationship between corporate governance and stock option grants. Great for those new to the topic, and for seasoned investors.
“Why should companies offer employee stock options at all? Options make sense if they motivate employees to create sufficient corporate value to offs et the dilution they cause. Fundamentally, options are a motivational investment, and like any investment an option’s benefit must exceed its cost to shareholders. Evidence that ESOs motivate superior performance is ambiguous at best.”
2) “Stop Stressing About Inflation”
Length: Light Read
Source: (The Big Picture)
A super quick note from Barry Ritholtz, founder, chairman, and CIO, at Ritholtz Wealth Management. Written back in February 2021, Barry assumes that the “forecasts of the return of inflation have been greatly exaggerated”.
He discusses inflation/deflation drivers, and how inflation expectations are often worse than the inflation that actually materialises.
“Inflation occurs when one or more factors combine to drive prices higher. Often, wage pressures raise prices for good and services, filtering into the general economy (1960s). Sometimes, the combination of a weakening dollar and rising commodity prices send input costs higher, which kicks off an inflationary spiral (1970s). Third, there are times when the cost of capital becomes so cheap it sends anything priced in dollars or debt off into an upwards spiral of (2000s).
But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years.”
3) “The Joys of Compounding”
Length: Moderate Read
Source: (The Rational Walk)
I spent some time this week reading through some back issues of @rationalwalk‘s blog, where he writes a lot of great reflective subject matter.
This one, sharing some lessons from the Gautam Baid classic, ‘The Joys of Compounding’, was a personal favourite.
“Do you need to be a good person with a sense of humility to succeed in business and investing? An honest answer would be that there are plenty of examples of terrible people with poor ethics who seem to do quite well in terms of building their net worth. Most of us probably know at least a few people in this category. If your only goal in life is to accumulate wealth, it would be naive to suggest that the only path to a large bank account is to be a good human being.”
4) “Cloudflare on the Edge”
Length: Dense Read
As I am in the initial stages of gathering insight into a future deep dive target, Cloudflare, I have been collecting reputable pieces of work from respected writers and investors. This one, by Ben Thompson, was really great.
“This potential reality presents a big problem for Amazon, Microsoft, and Google: what scales on their side is the cloud as a whole, from management to interface to purchasing; individual developers are meant to stay in their regions. Yes, all three companies guarantee that data in one region won’t go elsewhere, but it’s a development nightmare: you have to maintain different apps with different data stores in different regions.
Cloudflare, meanwhile, can use the same capabilities that seamlessly transfer Durable Objects to the nearest data center, to follow local compliance data sovereignty laws at a granual level”
5) "End of Mean Reversion?”
Length: Moderate Read
Source: (Saber Capital Management)
A super interesting piece on the dynamic between power laws and mean reversion, and the ability for big tech players to seemingly ignore the effects of gravity and the laws of large numbers.
“On one hand, the internet has lowered barriers to entry, which is good for competition. Starting a business has never been easier. Big tech companies collect a tax on this burgeoning small business ecosystem, but in return they provide valuable services.
Instagram, YouTube and TikTok help you build an audience, Shopify might provide the backend infrastructure to help you sell online, Stripe handles payments, AWS lets you scale computing power and storage needs without big capital investments, and Google and Facebook help you find new customers.
If you’re in retail, you might deal with just one tax collector and have Amazon handle all of the above. These services can become costly as your business grows, but none require a big up front investment."
6) “No More Bear Markets”
Length: Light Read
Source: (The Irrelevant Investor)
Another from Batnick this week. In this piece, he discussed the idea that bear markets may no longer be multi-year, draw out, experiences. Instead, they may become sharper, faster, and more frequent. A nice quick read.
“So the question is, was 2020 an outlier? Or will the next recession and bear market follow the same script?”
“Remember when it took an hour to download a song? Remember when it took 6 months for a movie to go to DVD? Remember when bear markets used to last more than a few months?
Everything moves faster these days, especially financial markets. We’re seeing stocks rise and crash and rise and crash again in a matter of months.”
7) “Digitising Real Estate, Redfin”
Length: Dense Read
Source: (Investment Talk)
Some shameless self-promotion to round things off now.
As part of the recurring deep-dive segment, this month’s business of choice was Redfin, the digital real estate brokerage.
In this piece, which is basically a book at slightly over 100 pages, we dig into the history, the current business model, the competitive environment, competitive advantages, financials, the proxy statements, and just about everything you need to know about Redfin.
“Redfin was officially founded in Seattle, 2004, as a discount real estate brokerage, by David Eraker, Michael Dougherty and David Selinger.
The original idea was fashioned by Eraker, with Dougherty and Selinger joining shortly after.
Within two years, all three of the original founders were absent from the company.
In a story that contains betrayal, lawsuits, and a rough start for this fledgeling technology-centric real estate start-up, we will now break down the core fixtures in Redfin’s corporate history.”
🍬 Ear Candy 🍬
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
Arnold Van Den Berg - A Must Listen Life, and Investing, Discussion
The Business Brew
I gather I have shared a lot of the discussions held on Bill Brewster’s ‘The Business Brew’ but they are so damn good, it’s hard not to. The aim here is to share the best thing I listened to during the week, and this interview with Arnold Van Den Berg fits the bill.
The discussion ranges from investing, mindset, to Arnold’s recollections of being a young Dutch Jewish boy, born in 1939, during the reign of the Nazi party.
Probably the most inspirational interview I have listened to this year, let alone this week.
Host: Bill Brewster
Guest: Arnold Van Den Berg
Thank you for reading Market Talk and have a great week,
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Lead Analyst at Occasio Capital Ltd