PROVIDING THE BIG PICTURE ON MACRO AND CREDIT SINCE 2009 Martin Tixier – Strategist
PLAN 1 EXECUTIVE SUMMARY 2 THE RETAIL CROWD IS ON OVERDRIVE 3 LIQUIDITY DOESN’T EQUATE SOLVENCY 4 WATCH FED LIQUIDITY 5 CONCLUSION Private and Confidential June 2019
WHEN ROBINHOOD TRADERS ARE GIVING STOCK TIPS 1 EXECUTIVE SUMMARY – 15 TH OF JUNE Private and Confidential April 2015
MACRO THOUGHTS “As the story goes, one day in 1929, Joe Kennedy is getting his shoes shined. The boy began to give stock tips as he polished Kennedy's oxfords. In that moment, it struck Joe that he needed to leave the market.” • Since the lows of March, everything “high beta” has been on overdrive and US valuations are increasingly looking lofty on the back of poor fundamentals thanks to the COVID-19 onslaught. Rally has been epic in areas such as Russell 2000 • Cracks in in the market are appearing – From Hertz retail mania, to accounting fraud with Wirecard which is typical of late cycle events, and now this: New Leveraged ETFs Own Leveraged Funds That Own Leveraged Companies • We believe the market is at a critical juncture. It’s either more up or we see a break. It is hard yet to see a catalyst apart from the usual “exogenous geopolitical risk” given the huge amount of liquidity sloshing around. • Treasury balance at Fed is +1trln. so the correction in stocks could come a bit later we think, maybe October in conjunction to a potential COVID-19 “second wave”. Private and Confidential June 2019
2 THE RETAIL CROWD ON OVERDRIVE Private and Confidential April 2015
THE RETAIL CROWD ON OVERDRIVE • The net number of calls minus puts bought to open is now TWICE as high as the prior peak in February. Graph source - Sentiment Trader- Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • Kevin Warsh, former FederalReserve Governor, highlights an economy / finance contrast in the Fed's policy approach. • In addition to posing reputational and other risks for the central bank, this fuels bigger concerns about the widening MainStreet / WallStreet disconnect … • Last time GINI coefficient was sky high was 1929. So yes, here comes another bubble. Graph source - Bloomberg - Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • The poor are getting poorer. • The share of assets held by the bottom 50% has followed the Fed’s assets (inverted) remarkably close. • Monetary stimulus is severely amplifying the wealth gap. • Wait until the Federal unemployment insurance runs out. Graph source - Otavio (Tavi Costa) - Bloomberg - Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • But, options traders are still not betting against current rally in S&P…put/call open interest ratio hovering near lowest level since Jan, while market’s continued to surge off 3/23 lows (notwithstanding today’s pre-market weakness) . Graph source – Liz Ann Sonders - Bloomberg - Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • In our book rising correlations are a bad sign. It means that “diversification” will not play in your favor when the market will turn. We think you need to start thinking “defense” after the huge rally, and the euphoric retail crowd going “all in”. . Graph source - Bloomberg - Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • The “Dash” for “Trash” • “A ‘garbage’ portfolio, an equal-weighted portfolio of all the listed US companies with a credit default swap of more than 1,000 basis points as of 1 April, 2020. " Graph source - Man Group - Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • A record breaking 56% of S&P 500 stocks are on a MACD sell signal now Graph source - Sentiment Trader- Twitter Private and Confidential June 2020
THE RETAIL CROWD ON OVERDRIVE • Corporate earnings are getting more disconnected from stock prices today. Earnings dropped by 16% in Q1, the biggest drop since 2008, & are poised to fall again in Q2, yet the S&P has recovered most of its 34% plunge after setting a record in February. Graph source - Bloomberg - Twitter Private and Confidential June 2020
3 LIQUIDITY DOESN’T EQUATE SOLVENCY Private and Confidential April 2015
LIQUIDITY DOESN’T EQUATE SOLVENCY • A timeline of Fed actions in response to the Coronavirus crisis between January and June 2020: Graph source – Twitter Macrobond Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • If you wonder just how 'abundant' #liquidity is, just take a look at US M2 Money Supply growth. At 23.1% it's almost 10 percentage points above the highest level ever recorded before the Covid19 crisis. Graph source – Twitter – Jeroen Blokland - Bloomberg Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • With the latest US JOBLESS CLAIMS coming at 1 508J vs 1 300k expected, fundamentals continue to be very challenging for the “real economy”. Graph source - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • A disappointing weekly report for jobless claims. While both initial and continued jobless claims fell, the falls were far smaller than economists had expected. Ongoing claims remained above 20.5 millions in the first week of June Graph source – Twitter – Macro Markets Daily Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • May housing starts much weaker than expected at +4.3% (974k ann.) vs. +23.5% (1.1m) est. & -26.4% (934k) in prior month … building permits also weaker than expected at 14.4% (1.22m) vs. 16.8% (1.25m) est. & -21.4% (1.07m) in prior month. Graph source – Liz Ann Sonders - Bloomberg - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • Credit Bubble? You bet ! • Total corporate liabilities as a proportion of GDP hit a record high *before* the pandemic and emergency stimulus measures. Graph source - CreditSights - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • This year's high-grade U.S. corporate-bond sales have already exceeded last year's total. Graph source - Bloomberg - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • Both IG and HY are still experiencing massive downgrades with the Up/Down ratios of both plummeting in Q2 for a YTD ratio of 0.17 and 0.09 respectively. • For reference, Moody's up/down ratios for March 2008 to March 2009 was 0.18 for IG and 0.14 for HY Graph source - Efficient Market Hype - Bloomberg - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • The face value of defaulted non-financial corporate bonds has jumped to $70bn in Q2 2020 —the largest on record, IIF says. US firms account for two-thirds of the total. Graph source - IIF - Bloomberg - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • Leverage is on the way up as issuers have added debt while EBITDA has fallen & if 1Q stats w/ only 1 month of COVID shutdowns are any indication, issuers are going to do a dance with agencies to maintain ratings. Graph source - CreditSights- Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • This is a troubling picture to keep in mind. • Economic activity vs financial conditions: Graph source - CreditSights - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • A reminder of a slide from a June 2019 presentation on the “bubble“ in Commercial Real Estate with prices now almost 50% higher than their 2008 peak. • Action in CMBX series 9 and 12 shows that some players are still in “short” positioning mode. • The apartment vacancy rate in San Francisco rose to 6.2% in May, up from 3.9% only three months ago Graph source – Tracy Alloway – Nomura - Bloomberg - Twitter Private and Confidential June 2020
LIQUIDITY DOESN’T EQUATE SOLVENCY • The pandemic’s CRE domino effect: Graph source - Twitter Private and Confidential June 2020
4 WATCH FED LIQUIDITY Private and Confidential April 2015
WATCH FED LIQUIDITY • FED has been watching credit spreads so no wonder they are now playing the ECB playbook and adding corporate debt to their balance sheet, but, again, liquidity doesn’t resolve solvency because the FED on it’s own cannot drive up Aggregate Demand (AD). Graph source – FRED - Twitter Private and Confidential June 2019
WATCH FED LIQUIDITY • Don’t fight the FED when it comes to “Credit Spreads”. An epic rally. Graph source – Jeroen Blokland - Twitter Private and Confidential June 2019
WATCH FED LIQUIDITY • The Fed is “putting a floor in this market. This is a market that investors can’t lose,” President & CEO Jim Bianco says. “Now, I don’t believe that’s going to last forever and I think we’ll run into trouble down the line, but not now.” Graph source – MS - SOBERLOOK- Twitter Private and Confidential June 2019
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