Week 2 - Decline and Fall

Ideas expressing weakness in US equities relative to ROW this week

Last Week

Last week’s performance was +1.25%, unlevered had you traded this blog post on the open Monday and held til Friday Source: Last Week’s Write Up . Full breakdown at a trade level here. Download

Big tech and the virus acceleration were separated from the political narrative. I think it is notable that the basket titled “Green Old Deal” was the top performer, with big up moves in Uranium stocks throughout the week. This would be a reinforcement of the narrative that Biden will not do anything too wild re: Green energy, and will likely default to nuclear energy and hydrogen fuel providing the best risk reward given ICLN’s insane run.

Taking book gross up to 1.75x leverage using pnl as a stop loss (also trading more bond products so lower vol book. )

Analysis / Thought

This week was a seminal week, likely in American history as well as in markets.

A Democratic sweep sent clean energy assets soaring, and caused a large sell off in the back end of US rates. Federal reserve commentary has been increasingly nuanced - and largely points to several large trends:

1. A lack of intention to extend duration of asset purchases. I.e. lack of sensitivity around long end financing costs
2. A believe that small businesses need to be bailed out
3. A general believe that Swap lines, munis and non traditional fed actions were justified and “worked well”

Yellen, Biden and Kamala Harris have repeatedly signaled the need to help the little guy. This makes a fairly clear argument for shorting Ultra bonds and going long shorter duration mortgage backed securities, TIPs, as well as municipal bonds (which benefit from tax hikes).

This creates a “trend reinforcing” likely move where 1) US long duration bonds sell off 2) the dollar sells off. 3) Things the fed is buying stay up, and inflation expectations rise.

Inflation will especially be exacerbated by three concurrent trends

1. Exploding costs of international trade due to shipping containers
2. Rising costs of transitioning to Paris Agreement (electrical grid re-wiring, and policy uncertainty)
3. Biden’s insistence on workers’ rights and MMT

It is likely that breakevens will run to 3 or even 4% before the Fed comments due to its language around “maximum” employment, making TIPs incredibly asymmetric especially with the Fed purchasing them.

Thus - IG credit is a preferred funding short, especially on the long end (VCLT). A steepener is no longer appropriate as front end IG credit likely doesn’t benefit from the fed’s most recent comments either.

One potential complication to shorting the Long End would be Joe Manchin’s objection to $2000 stimulus checks. But I believe his clarification on the subject that they should only go out to people who need them is a form of backtracking and he’s unlikely to buck Biden in his first week given that he supported Twitter’s ban of Trump vocally. Joe Biden seemed to suggest on Twitter that Trump should “not be above the law” i.e a willingness to prosecute Trump for inciting riots. This would echo AOC’s increasingly sanguine calls to censure political rivals.

The final thing worth mentioning appears to be a huge acceleration in US unemployment per data tracking. This has not been mentioned much, but increases the likelihood of progressively extreme fiscal actions which will turn the dollar into a dumpster fire vs EUR and CNY. Given heightened social unrest, there will be pressure to do politically popular things such as legalizing sports betting and marijuana.

Given that more Americans voted for Trump than Obama, despite his loss -this might seem like a “consensus building” exercise - but I believe it will backfire. Americans are installing signal en masse (glued at #1 on the app store) - likely planning for a surveillance state to be implemented. The media is highlighting likelihood of further violence. I believe this will come to pass, and the Patriot Act will be invoked to deem protestors as enemy combatants. Big Tech will likely play along, and it will be messy, ugly and unpleasant for years to come.

I think over the next week American equity risk premiums will begin to derate in a relative space to international equities.

I think the US Home Builder (XHB) space is especially interesting as a short. Skyrocketing Lumber prices should weigh on margins, while eviction moratoriums from the Blue Wave are likely not home owner friendly. The long end asymmetrically effects mortgage costs.

On the flip side, Equinix is interesting on the long side as increasing demand for Private data hosting should increase after the cartel-like action of big tech companies.

A slew of positive data out of Europe and the backdrop of China forming internatinoal ties, along with the weak dollar as a matter of policy will likely accelerate US equity sale (in a relative space) into a crescendo.

At the same time stories around vaccine shortages and a perverse incentive to hoarde vaccines to curtail immigration during difficult economic times are quite negative for emerging markets broadly. Saudi Arabia and Russia are primary beneficiaries of Trump’s policies and likely are good funding shorts both on the equity side and through EMLC (credit).

In the backdrop - however, the Fed’s unlimited support has led animal spirits interest in trading products - with brokerages seeing triple digit year on year gains. There have not been many mentions of financial transaction taxes. Coinbase is #50 in the US app store, and animal spirits are very much en force. I believe that crypto is a “buy the dip” story and many trading oriented names like VIRT, JPM and MKTX are relatively appealing.

This Week’s book (download)

Download Percentage Weights

1 Gibbons - Decline & Fall (59% of Capital)

The theory of this book is that US equity premiums decline massively relative to international.

• ESGE Europe Index (ESGD):+5%
• ESG EM index (ESGE): +4%
• International energy (IXC): +5%
• Chinternet (CQQQ) : +3%
• ASML (ASML Semi) : +2%
• Sony (SNE) : +1%
• Spotify (SPOT) - Spotify: +1%
• AstraZeneca (AZN) : +1%
• US Low Volatility ETF (USMV): -10%
• Home Builders (XHB) -7%
• US Energy (XLE): -5%
• EMB - EM Debt: -10%
• IAGG - Intl Treasuries: +5%

[ Cut trade from last week Europe Value (EFV) : -5% Yandex (YNDX) - : -2% Hannon Armstrong Sustainable Infra (HASI): +2% US MREITs (REM): -2%

]

2 US “Green Old Deal Book” (28% of Cap)

After last week’s enormous run in Lithium, the risk reward there is less appealing and adding lean to Cameco and Norilsk. Biden’s heavy focus on Autos / American workers should play out this week along with the weak dollar. Pairing that with midcaps.

• Nextera (NEE): +2.5%

• Cameco (CCJ): +2.5%

• Linde (LIN): +1%

• NRG (NRG): +1%

• BHP Billiton (BHP): +1%

• Vale (VALE): +1%

• Norilsk (NILSY): +3%

• Ford (F): +1%

• GM (GM): +1%

• Midcap 400 (IJH): -6%

• Russia (RSX): -5%

• Saudi (KSA): -3%

[Cut: - Ormat (ORA): .5%

• Ballard Power (BLDP): .5%,
• Lithium ETF (LIT): +1%,
• Chile (CHL): +1%
• Thailand (THD): -2%]

3 Blue Wave Laggards (0% of Cap)

This book is getting grouped in to the decline and fall book

4 Virus Acceleration (35% of Capital)

After the debacle with big Tech this book needs substantial changes. Adding in some of the stocks which rely on trading to this book swapping out big tech. Blue Wave narratives likely hurt biotech and benefit vaccine cos.

• Equinix (EQIX): +2%

• Gold (GLD): +1.5%

• Silver (SLV): +1%

• Moderna (MRNA): .5%

• BionTex (BNTX): .5%

• Comcast (CMCSA): +.5%

• MarketAxes (MKTX): .5%

• Virtu (VIRT): .5%

• TradeWeb (TW): .5%

• South Africa (EZA): -3%

• Emerging Markets Local Debt: -15%

• Muni Debt (VTEB): + 10%

[ Trades that are cut : - Facebook (FB): +1.5%

• Google (GOOG): +1%

• Amazon (AMZN): +1%

• Activision (ATVI): +.5%

• Square (SQ): +.5%

• Zoom (ZM): +.5%

• Regional Banks (KRE): -2.5%

• High Yield Debt (HYG): -8%

• TIPs (TIP): +6% ]

5 Commodity Inflation (8% of Capital)

Continue to think this story is intact as shipping costs explode - no need to churn.

• DBA (Agriculture): +1.5%
• Vietnam (VNM): +2.5%
• EM Low Volatility (EEMV): -4%

6 UK Tech Narrative (4% of Capital)

London Housing beat keeps this trade alive – worth owning GBP vs USD as reserve diversification continues

• GBPUSD (FXB): +4%

7 IG Corporate Short (23% of Capital)

At this point, bonds should outright not be owned.

• Base Metals (DBB): +3%
• TIps (TIP): +5%
• VCLT -15%

8 Policy Initiatives (16% of Capital)

Big Tech’s actions likely cause some rough declines. At the same time Microsoft has more/less stayed out of the fray. Interesting risk reward owning a few sketchier policy initiatives vs Big Tech

• Cyber Security (BUG) +3%

• Microsoft (MSFT): +1.5%

• Scotts Miracle Grow (SMG): +.5%

• Canopy Growth Corp (CGC): +.5%

• Innovative Properties: IIPR +.5%

• GW Pharmaceuticals: GWPH +.5%

• Sports Betting ETF: 1.5%

• Nasdaq (QQQ) -4%

• S&P (SPY) -4%)

9: Privacy (1.5% of Cap)

Think the narrative around capital hill continues to reverberate in privacy cryptos vs BTC throughout the week

• Long ZCash (ZEC): +.25% - spot ref 84
• Long Dash (DASH): +.25% - spot ref 125.58
• Long Monero (XMR): +.25% - spot ref 151.65
• Short Bitcoin (BTC) -.75% - 36,000

MACRO TAKES AND HEADLINES

THIS week in Data

Largest Growth In Interest:

• Unemployment Benefits: +658%
• Unemployment +685%
• Microsoft Teams: +361%
• NY.gov (and various state websites) +300%
• Brokerage Interest: (robinhood, IBKR etc) +300%
• Apple Stock: +186%
• Sell Puts: +140%
• AUDJPY: +120%
• EM Bonds: +100%
• Amazon Stocks : +89%
• Credit Check Agencies: +80%
• Silver ETF: +87%

Largest declines in Interest:

• EM Investment management: -85%
• GSuite: -58%
• USDJPY: -50%
• Google Cloud: -40%
• Credit Event: -40%
• CPI: -27%
• AWS -25%
• World Bank: -20%

US Bullish:

• Cyber security breaches in New Zealand will likely boost the sector Source: Twitter
• Treasury announces re-opening PPP Source: Mnuchin, Twitter
• “In fact, securities trading was among the most common uses - across nearly every income bracket - for the government stimulus checks issued in May, according to software and data aggregation company Envestnet Yodlee. For many consumers, trading was the second or third most common use for the funds, behind only increasing savings and cash withdrawals. In fact, Americans that earned between $35,000 and $75,000 annually traded stocks about 90% more than the week prior to receiving their stimulus check.” Seeking Alpha
• Crazy skyrocket move out of DDD after raising guidance for quarter
• Good continuing claims / initial jobless claims 787k vs 800k
• Strong ISM non manufacturing

US Bearish:

• Massive increase in shipping rates due to Green requirements shows how the “energy transition” is probably inflationary and bad for earnings. Source: BBG
• Massive coordinated censorship and deplatforming of Trump supporters shows that the US is transitioning to a non democratic regime, imminently. Underlying Article: Tech Crunch
• Wash Po making sensationalist arguments about further attacks which will inevitably result in Patriot Act application Wash Po
• Weaponized passive investing via State Street imposing diversity requirements. Should raise cost of capital. [Seeking Alpha]
• Seems like Biden is going to Prosecute Trump. Source: Twitter. AOC calling for prosecution. Likely massive increase in likelihood of civil war.
• “Not wealthy and well connected.” Biden. Source: Twitter. Echoed by Yellen. “One thing is clear from the jobs report: We need to invest in small businesses. Not only will they be at the center of the recovery, they have been the hardest hit. We recognize that, and will provide assistance and focus on the businesses that serve the hardest hit communities.” Yellen has repeatedly highlighted
• US red book +5.5% vs +8.9% last
• CAD RMBI -1.7% yoy
• ADP non farm change -123k vs +88 expects - terrible number
• Larger than expected trade balance -68.1 vs -65 expects

Asia Bullish

• Commentary from party on Opening."– At a time when cooperation and coordination are more important than ever, China is expected to continue to open up to the world and safeguard a multilateral trading system." Source: Xinhua
• Singapore GDP -3.8% vs -4.5% expects
• Japan PMI 50 vs 49.7 expects
• Big positive Japan Household spending #: 1.1% vs -1.5% expects

Asia Bearish

• China announcing another “focus on the rule of law”. Seems a bit like another corruption crackdown. Source: Xinhua
• Fiscal discipline. “On the fiscal front, Finance Minister Liu Kun has pledged to make fiscal policy more sustainable in terms of expenditure scale and policy strength, and keep the overall government leverage ratio at a stable level to leave policy space for combating future risks and challenges.”
• Aussie Manu PMI missed
• China Caixin Manu PMI 53 vs 54.8 expects and 54.9 last
• India PMI weaker than expects 56.4 vs 56.6 expects
• Sing Retail sales -1.9% vs -8.5% last

Europe Bullish

• Bizarre launch of IMF Russian page – might suggest thawing tensions. Source: IMF Twitter
• Digital Euro contract will likely be outsourced. “Certain practical arrangements regarding the distribution of and access to a digital euro could in principle be outsourced, but would need to be subject to strict Eurosystem supervision.” Source: ECB
• Switzerland procure.ch PMI 58 vs 54 expects 55 last
• Major beat in UK mortgage approvals 105k s 82.5 expects, surge in mortgage lending (+1b beat)
• Huge beat in German retail sales 5.6% vs 3.9% expects
• German unemploymgnet gains -37k vs +10k expects
• Large French Consumer confidence beat: 95 vs 91 expects, 89 last
• Spanish Service PMI major beat: 48 vs 45 expects, 39.5 last
• Massive German Exporst #
• Large beat in German Factory Orders

Europe Bearish

• German PMI miss 58.3 vs 58.6 expects
• Large decline in BOE cosumer credit -1.54$B vs -1.5 expects
• Italian Service PMI disastrous: 39.7 vs 45 expects
• Europe markit Composite PMI Miss 49.1 vs 49.8 expects(still accel)
• Decline in Europe service sentiment -17.4 vs -15 expect
• Disastrous retail sales #: -2.9% vs +.8% expects (Eurozone)
• Iran enriching Nuclear Source

Commodity Bullish

• Surging covid infection rates. “Over the past week, the coronavirus case count has averaged 247,000 as of Friday, more than 3.7 times the summertime peak in late July. With Thursday’s COVID-19 related death toll exceeding 4,000 for the first time in a single day, the nation has averaged 2,982 deaths a day over the past week, the highest during the pandemic.” Source: CNN
• Larger than expected Crude draw -1.6m BBL vs -1.5B last, then massive Crude Oil inventory number -8M bbl vs -2.1 M BBL expectations - no possible explanation other than hoarding

Commodity Bearish

• Once again huge distillate stock # – 6.4M bbl vs 2.3 M expects
• Refinery Utilization 1.3% vs .6% expects

Bond Bullish

-Swiss CPI -.8% vs -.7% expects

• French CPI 0%

• German CPI -.3% yoy – so deflation

• Eurozone Core CPI is -3.% yoy

• The Chicago Fed considers muni buying: “According to our estimates, the MLF appears to have reduced Illinois muni yields by more than 200 bps, thus helping to alleviate some of the budgetary pressures. In all, our results suggest that the MLF has been a helpful addition to the Fed policy toolkit.”. Source

• Fed paper establishes a framework that Monetary Policy affects other countries, which is almost always a basis for further easing. “The sizeable role of production linkages in transmission of U.S. monetary policy has a number of important implications. First, if international trade in intermediate goods continues to grow and global supply chains become longer and more complex, the impact of U.S. monetary policy on other countries is likely to increase as well. To the extent that this transmission channel is independent of capital flows and related policies, the results present one of the mechanisms by which capital controls may not be effective in insulating economies from foreign monetary policy actions.” Source

• Digital Euro comments. Mid 2021 Launch. Would allow rates to go deeply negative in Europe. “Key quote: Anonymity may have to be ruled out, not only because of legal obligations related to money laundering and terrorist financing, but also in order to limit the scope of users of the digital euro when necessary – for example to exclude some non-euro area users and prevent excessive capital flows”. Source: ECB

• Commentary from the fed is very much focused on employment and allows for substantial inflation overshoot. “As announced in the September statement and reiterated in November and December, with inflation running persistently below 2 percent, our policy will aim to achieve inflation outcomes that keep inflation expectations well anchored at our 2 percent longer-run goal.3 We expect to maintain an accommodative stance of monetary policy until these outcomes—as well as our maximum-employment mandate—are achieved. We also expect it will be appropriate to maintain the current target range for the federal funds rate at 0 to 1/4 percent until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment, until inflation has risen to 2 percent, and until inflation is on track to moderately exceed 2 percent for some time.” Source: Fed, Clarida

Bond Bearish

• ISM Manufacturing prices out of control: +77.6 vs 65.7 last
• Biden says $2k checks. Source: Twitter

-"“I myself would have no inclination or think there’s any need to think in the near term about adjusting the duration of the maturity of our purchases,” he said." -[Source: Bloomberg, Clarida]