The End of Summer

sev361 Capital Market Commentary | September 8th, 2020

Last week, while many were enjoying the final bonfire of the summer, the stock market decided to join in and take its torch to high-multiple valuations in the Nasdaq and technology space. In just three days, an entire three weeks of performance was erased as the Nasdaq 100 Index challenged its 50-day moving average. Although, we are beginning to learn that maybe that massive stretch in big cap tech valuations during August was caused by a very over-anxious SoftBank, joined by an army of tag-along buyers. So, maybe the +11% NDX move in August was not meant to be, and everyone should return their 12-month price targets to more normal levels.

Of course, it wasn’t just euphoric buying in August that caused this last three-day reversal. We’ve also had a skid of more difficult news:

  • The U.S. and China are heading toward canceling each other economically and diplomatically as rhetoric between the two governments builds. This is obviously very bad news for technology stocks.
  • A new COVID stimulus package looks like it is being pushed to after the election. Rather than come together on more aid, the two parties and the White House have moved farther apart. This will put a lid on any upside to Q3 consumer spending.
  • So, what now SoftBank? You just bought call options on $80 billion in technology stocks. Are these positions you are planning to take possession of for the long term, or is this just a new trading strategy? I wonder if Marko at J.P. Morgan was able to convince Berkshire Hathaway to overwrite call options on their Apple Inc. position?
  • The S&P 500 committee passes on adding Tesla to the index. They did everything to post a profit for the last quarter. Guess Tesla will need more than one profitable quarter. Maybe David Einhorn is an informal adviser to the S&P 500 committee?

It’s important to note that not all stocks are getting torched like big technology stocks. Travel and leisure names are moving higher like airlines, cruise ships, hotels and Disney. The restaurants and coffee shops are perking up. Many industrial and material stocks are clawing their way to new recent highs. Even some retail and apparel stocks are being bought at higher prices. SO, it’s not like all money is leaving the U.S. equity market. It is just being rotated around from big valuations and what has worked, to lower valuations and what hasn’t worked. Let’s see if it continues.


Only in 2020 would my weather report today read like the title of a George R.R. Martin novel…

@DaveCBS4: Warnings for fire, freeze and snow over Colorado now thru Tuesday!

Colorado Weather

So, it looks like Washington is going to let the voters decide?

Looks like there won’t be another COVID aid package until after the election as Congress and the White House fall farther away from any agreement. Put a cap on Q3 and Q4 economic upside from any new stimulus.

Tweet from @JimPethokoukis

We are already seeing evidence of reduced spending by the unemployed in August…

@ernietedeschi: BAML seeing a marked slowdown in spending growth among known UI recipients in August.

Unemployed Spending

I always get many questions about the disconnect between the stock market and the economy…

This cartoon is a great reminder that we saw a similar disjoint 92 years ago.

Stock Market Cartoon
(@StockCats)

I see what you did there SoftBank…

Russell 1000 Growth Index vs. Russell 1000 Value Index
(@BofAML)

The market was wondering what the catalysts to all that call option volume were…

And while SoftBank may not have represented all of this spike, many other players followed their trades.

Big Call
(Bloomberg)

The Financial Times broke the news about SoftBank on Friday…

SoftBank is the “Nasdaq whale” that has bought billions of dollars’ worth of US equity derivatives in a move that stoked the fevered rally in big tech stocks before a sharp pullback on Thursday, according to people familiar with the matter.

The Japanese conglomerate has been snapping up options in tech stocks during the past month in huge amounts, contributing to the largest trading volumes in contracts linked to individual companies in at least 10 years, these people said. One banker described it as a “dangerous” bet.

The aggressive move into the options market marks a new chapter for the investment powerhouse, which in recent years has made huge bets on privately held technology start-ups through its $100bn Vision Fund. After the coronavirus market tumult hit those bets hard, the company established an asset management unit for public investments using capital contributed by its founder Masayoshi Son.

Now it has also made a splash in trading derivatives linked to some of those new investments, which has shocked market veterans. “These are some of the biggest trades I’ve seen in 20 years of doing this,” said one derivatives-focused US hedge fund manager. “The flow is huge.”

The surge in purchases of call options — derivatives that give the user the right to buy a stock at a pre-agreed price — has been the talk of Wall Street in recent weeks, as the sheer size of the trades appears to have exacerbated a “melt-up” in many big technology stocks over the summer.

(FinancialTimes)

Single Stock Call Option Volume

Even the retail crowd followed in on the SoftBank trade. Now what will they do?

@sentimentrader: Maybe some downside volatility would discourage options traders. ‘Twas not to be. Last week, the smallest of traders *increased* their bets on stocks. In a month they have gambled nearly $40 billion on stocks. That’s a notional value of ~$500 billion. It’s not just Softbank.

Retail traders are going all-in

We are reminded of Stan Druckenmiller’s classic quote about chasing tech stocks in 2000….

‘I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.’

Calm remains in the financial markets as credit default swaps fail to follow the VIX higher…

Credit
(@Refinitiv, @themarketear)

And the Fed continues to work their magic by offering stability in the credit markets…

@LizAnnSonders: Fed has accumulated $1 trillion worth of mortgage bonds since March & now owns almost a third of bonds backed by home

Back to the Future

Of course, all of this liquidity pushes inflation expectations—which should elevate many asset prices, including equities…

@TimmerFidelity: If the money supply keeps expanding, #equities could do well alongside hard assets like #gold & #realestate. Will this turn inflationary? If so, it should put downward pressure on valuation multiples. But to what degree might that be offset by a risk-free rate near zero?

Global Money Supply

Stocks have risen while the relationship between Treasury yields and inflation expectations have broken down…

Inflation Expectations vs. Treasury Yields
(@ISABELNET_SA)

If you harvested a fistful of Nasdaq gains last week and are looking for a place to spend, dividend-paying stocks deserve a look…

S&P Dividend Yield

And with dividend payers, you usually find higher-quality stocks…

Quality Stocks

You aren’t the only one selling growth stocks to buy value stocks…

Growth EFT vs. Value ETF
(@SoberLook)

Hats off to this analyst for sticking with their valuation discipline…

LULU downgraded to neutral from buy citing valuation but raising our TP from $340 to $400. Since March, the stock has surpassed our prior TP, and as we approach earnings with the stock near $400, we have to ask ourselves if we can realistically recommend buying LULU at $400 with a call it can go to at least $460 over the next 12 months. And can’t. The stock trades at 9.0x F21E sales and has an EV of ~$50BN, making LULU the most highly valued specialty retail brand ever.

(Citigroup)

As banks tighten credit standards, loans become more difficult to get and commercial real estate prices fall…

Credit conditions softened
(@topdowncharts)

Office real estate is a big slice of the commercial RE market…

Watch closely to see how valuations contract as office workers move to less than five days a week in their old buildings.

Commercial Structures
(@topdowncharts)

And parking garages in the big cities are also suffering…

Manhattan parking-garage operators say they have lost thousands of monthly customers as many residents packed up their cars and moved out of New York City during the new coronavirus pandemic.

“People are calling and canceling permanently saying they are leaving the city,” said Rafael Llopiz, president of the Metropolitan Parking Association, whose members often charge upward of $500 a month for a spot.

Mr. Llopiz said almost all of the parking-association members’ monthly business is residential. Of the 82,000 monthly customers who usually patronize the trade group’s garages, Mr. Llopiz said only 33,000 spaces were filled by mid-August.

Mr. Llopiz said monthly business is usually down about 5% in August. This August it is down 60%.

(WSJ)

Copart explains why accident frequency has risen during COVID…

Accident Frequency
(@bluff_capital)

Friday was jobs day and the U.S. is clawing its way back, but still too many out of, or under, worked…

Tweet from @IntrinsicInv

Copper prices suggest that the rest of the world is picking up…

Iron Ore

Even some bright spots like the Netherlands…

Netherland Retail Sales YoY

Vaccines are being worked on fast and furiously…

Vaccine
(Goldman Sachs)

But we will need to watch this surge of COVID in the Midwest…

Tweet from @Bob_Wachter

South Dakota takes the transmission lead as Sturgis looks to be a super-spreading COVID event…

@Bob_Wachter: 10/ Perhaps more vividly, this figure, built from http://rt.live shows that all but one Midwest state have a transmission rate >1.0, which predicts growing case load. Of note, Ohio (the 1 exception at 0.99) has had conspicuously good Covid leadership by @GovMikeDeWine.

The Midwest Region Map

We have to get the farmers and ranchers back to making money off the land…

Direct U.S. government payments could account for almost 40% of net farm income this year.

U.S. Farm Sector

China has been buying soybeans away from U.S. farmers for three years now…

Soybeans

(@TBPInvictus)

It should be no surprise that our trade deficit is widening as U.S. farmers and ranchers are selling less product overseas…

Tweet from @LizAnnSonders

This chart surprised me…

Some very big annual property taxes, although I do know some states don’t have sales or income taxes.

Property Taxes

(Money)

Same…

Cartoon

(NewYorker)

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