Earnings Weeks

Companies on deck to report 4Q earnings this week (click to enlarge):

Buy your AAPL and TSLA options now.

Chocolates & Nobel Prizes

Came across this old study from the New England Journal of Medicine (2012) that asks the very important question: Does a country's chocolate consumption affect the number of Nobel Laureats it produces?

The study found that there was a strong, significant correlation (r=0.791, p<0.00001) between the amount of chocolate consumption per capita and the number of Nobel laureats per 10 million persons in a total of 23 countries:

Look at the Swiss! But is correlation really causation? 

The article had three explanations:

Hypotheis 1: Since cholocolate helps improve cognitve functions, more chocolate intake in a population provides a more abundant "fertile ground" for producing Nobel winning minds.

Hypothesis 2: Reverse causation (aka the elitist explanation). Smarter people eat more chocolate because they are better aware of the benefits of falavanols in dark chocolate.

Hypothesis 3: We just don't know. This was a purely statistical exercise, not a randomized trial-- it's too difficult to identify a "plausible common denominator." That's seems to be the right explanation. Fun nonetheless.

Robinhood Will Do Anything to Help Hedge Funds #Rigged

Yesterday we wrote about over levered hedge funds getting in some BIG trouble as the WSB crowd bid up highly shorted names like GME and AMC. And probably more than one hedge fund was on the brink of insolvency...Queue the panic at financial institutions and their benefactors at the Fed...

...So retail brokers, like Robinhood and TD Ameritrade, came to the rescue. Trading in GME, AMC, BB, BBY, EXPR, etc. (you get the idea) was halted this morning! The hedgies and institutional investors could still trade them, of course. Whether Robinhood meant to or not, by closing the gate on its users, it arbitrarily called the top (at least for today) and precipated heavy losses for those customers and saved the hedge funds, who were able to close out their shorts in relative peace without losing their firms. (The most shorted stocks-HF VIP long basket dynamic effectively flipped today)

The condemations was justifiably swift and widespread:

 And Ted Cruz agreed with AOC!

CNBC tried its best to defend its institutional backers but got embrassingly called out by the Winkelvie for not doing their jobs...

This evening Robinhood lamely reinstated trading on the above names...so now the same hedge funds can go super long those stocks. Thanks Robinhood! 

Hedge Fund Carnage in Jan?

Melvin Capital was one of the hottest hedge funds around coming into 2021. The $12.5b fund returned 50% net of fees in 2020. Just three weeks later, after an epic short squeeze, it needed a ~$2.8b bailout from fellow hedge funders (and Melvin investors) Ken Griffin and Steve Cohen.  

But the Redditors' GameStop blizkreig may be burying many other hedge funds as well. After all hedgies have to short stuff to "earn" their shrinking 2 & 20 fees. Not only were many of them in the same GameStop short, but now Redditors are using the same playbook and squeezing other overly shorted stocks too. The below (H/T ZeroHedge) chart shows how the most shorted stocks have ripped higher, presumably forcing HFs to cover their positions. 

At the same time to stay "hedged," funds have to sell their long positions. The Goldman Sach's VIP basket of stocks most widely held by hedge funds have tanked this month. Losses on both sides, long and short, particularly when your are levered can be very painful.

So, after the best year in a decade for hedge funds, January could be one of its worst months.

 

Momentum Wins Big in 2020

Venn has a nice recap of 2020 factor performances...and it's no contest. Momentum smoked all other factors and its own historical averages. Not a surprise when the market falls 34% in 30 days and then roars back 68% in the next 280. There were a couple of hiccups in June and November, but Momentum was up pretty much the whole year. (Click chart to enlarge) 

What didn't work? Value! And really badly...again! Just ask Cliff Asness. But the worst factor performance (relative to its own history) was Low Risk. Low beta stocks dropped 31%. As Venn notes, the factor "relies on trusting your risk model, and knowing which stocks are low or high beta. Severe and sudden regime changes can upend risk models and beta estimates, perhaps leading investors to unwind large positions in stocks that they previously viewed as low risk." 

The below chart from Acadian provides a nice illustration of "beta compression:"

Beta compression hit some big-name quant funds, hard, in 2020. No name bigger than Renaissance Technologies. Oh, its vaunted and closed Medallion fund did just fine, gaining 76% (its best year since 2008's 84%). No, it was Renaissance's other funds open to outside investors (with longer trading horizons) that tanked. REIF was down 22% and RIDA 34%! Both are structurally long the low beta factor...because over time there is a demonstrable premia there. But sometimes s**t happens!

Trump, Congress Make History

May you live in interesting times...History is being made at a rapid clip. In one week we've had: riots in the Capitol, social media ban on the President and an impeachment (a record 2nd time for one president...in the same year...in one day...with bipartisan support)

Here are the historic headlines from the major newspapers:

From liberal tv to Trump tv:

From right to radical-right sites:

To the extreme-left HuffPost:

 

12 Monkeys: Is Bruce Willis THE Superspreader?

A couple of weeks ago I rewatched Terry Gilliam's 1996 cult-classic 12 Monkeys, starring Willis and Pitt. In the film the planet is decimated by a mysterious virus and Willis plays, James Cole, a time-traveler sent from the future to figure out how it happened. Cole painfully goes through numerous time loops to find the villianous Uberspreader...we'll perhaps this is the guy he was looking for all along:

Apparently, Willis was asked to leave a L.A. Rite Aide pharmacy after he refused put on a face cover...because, you know, as Pitt's Jeffery Goines babbles to Cole: "...[Jim] says, I don't believe in germs. Germs is just a plot they made up so they can sell you disinfectants and soaps."

So, Willis is either thinking what's the point?...I've been in this movie and I know how it ends or, as Jim says, it's all just a marketing ploy by big business. 

Goldman Sachs Planned to 'Storm the Hill' First!

Not literally, of course. (After all, Government Goldman Sachs  is always doing 'God's work' and loves government.) 

The WSJ reports that the venerable bank was sponsoring an event next week for small business owners to meet with lawmakers. As part of the program they had come up with an enthusiastic and unfortunately timed "Storm the Hill" slogan that was prominently displaced on T-shirts and other parenphelia given to partcipants. But after last Wednesday's actual storming of the Hill, GS quickly rebranded the Jan 13 event, now called The Virtual Capitol Hill Day. It also asked participants to hide their swag...and presumably to never speak of its contents again. 

Scary Poll: Insurrection or Liberation?

Unfortunately, it depends... 

YouGov Direct conducted a poll of 1,397 registered voters Wednesday night about the mayhem in the US Capitol. A majority (62%) of those asked considered the pro-Trump supporters who attacked the Congress a threat to democracy (good!). However, while 93% of Democracts and 55% Independents (only?) saw it that way, only 28% (!!) of Republicans felt the same. In fact, a greater percentage of Republicans (45%) supported the storming of the Capitol than opposed it (43%). Scary stuff. (Click to enlarge).

The Year in Markets in One Chart

A great chart from the Visual Capitalist showing how major asset classes performed in 2020 (click to enlarge). Not surprising that in an extremely turbulent year, investors sought safety in the most traditional of assets: silver and gold.

Understanding Our Strange Economy

The NYT has an insightful article that helps explain Why Markets Boomed in a Year of Human Misery. Based on national accounting data, it reveals a complicated economic picture where policy, markets and consumer behavior intersected in unexpected ways. 

It begins with an analysis of the National Income and Product Accounts, which captures how Americans are earning and spending. What it shows is that, relative to the same period in 2019, personal income of Americans (in aggregate) actually increased during this historical pandemic by $1 trillion!

And that was due mainly to Congress and the Trump Administration's surprisingly swift and effective response to the Covid-induced national lockdowns. 

The CARES Act and stimulus checks contributed to $775 billions of additional income. And because of the Paycheck Protection Program (PPP), businesses saw a $29 billion relative gain in income rather than an estimated $143 billion loss in its absence. (Government works! Yay!)

But what about the economic fallout from the historic rise in unemployment in March and April? The cruel reality of income inequality comes into play here. Most of the unemployment was concentrated in lower paying jobs that couldn't be moved online. As the article notes: "the arithmetic is as simple as it is disorienting. If a corporate executive gets a $100,000 bonus for steering a company through a difficult year, while four $25,000-per-year restaurant workers lose their jobs entirely, the net effect on total compensation is zero." So, in aggregate, worker's compensation dropped just $43 billion over the Mar-Nov period, despite mass unemployment.

But this is just half the story. There were big changes in the spending side of ledger this year relative to 2019 as well.

Due to Covid, Americans spent $575 billion or 8% less this year on vacations and services like restaurants, movies, concerts and sporting events. This was modestly offset by increased spending on durable goods (like home office and gym equipment) and non-durable goods (like mineral water, stationery and clothes to look good on Zoom) by about $100 billion. And due to the Fed's interest rate cuts, households saved an additional $59 billion in interest payments.

So, in total American households spent $535 billion less in the Mar-Nov period in 2020 than in 2019.

This bears out Larry Summers' point that for many Americans the pandemic "reduced the ability to spend more than the ability to earn." That brings us to the third important component of the economy: Savings. Collectively, Americans earned more and spent less in 2020.

                                                        Savings = Disposable Income - Spending

or,                                                    Savings = +$1,030 billion - (- $535 billion) 

or,                                                    Savings = +$1,565 billion

So, what did Americans do with $1.56 trillion of additional savings? For one thing, they held on to more cash. Deposits at commercial banks are up ~20% since March. Others bought houses, causing housing prices to rise 8% nationally. Many others put money in the stock market, helping the S&P 500 rise 70% from the February lows to end the year up 16%. For the most daring (like the Robinhood day-traders) the stock market became a fun casino and stocks like Tesla its biggest slot machines.

To be sure the Fed played a key role in helping cut short a nasty bear market. Powell & Co. were instrumental in stabilizing financial markets in March when credit markets briefly froze and threatened the sustainability of the economic system. Yet, the dynamics around savings described above may have played a more sustained role in this wild stock market rally that left many puzzled and angry at perceived moral hazard...But who knows? And who knows how stocks will react once everyone gets vaccinated and returns to normal(ish) life. Does the savings trend reverse and money flow out of the stock market? Or are peoples' views of consumption and savings durably modified? 

And it's worth remembering the benefits of aggressive fiscal and monetary policies were not experienced equally across economic strata. Those who avoided major economic damage during the pandemic were largely the same people who were also doing better before it.

Boston Strong: Ben Runs on Dunkin'

This is a funny story of how naturalized Bostonian Ben Affleck became an accidental influencer for Quincy-based Dunkin' Donuts.

Between the T-shirt, coffee and sneakers just about everything in this picture has a Boston-connection!

Summers: The Case Against $2,000 Stimulus Checks

Larry Summers raised some eyebrows a week ago when, in a Bloomberg interview, he came out against the Democrats' (and Trump's) idea of $2,000 universal checks. In a follow-up Bloomberg op-ed, he lays the economic case for his thinking. 

Summers is all for assisting those impacted by Covid-19, including extended unemployment insurance and eviction protections. But he argues that the majority of Americans who are working don't necessarily need it. Because total employee compensation is "now running only $30 billion per month behind the pre-Covid baseline." Measures in the new stimulus bill will add $150 billion per month to household incomes to more than offset this deficiency.

Furthermore, because of the stimulus bills already passed in 2020 household incomes relative to the economy's potential is already at "abnormally high levels" as shown below:

Adding $2,000 checks to the mix, would be moving into "completely uncharted territory" and risks overheating the heating the economy... 

...But, would it really? The fall back inflation argument seems contradictory to Summer's own writings. He wrote a whole paper on why no one knows the reasons interest rates remain so low...and that governments should take advantage of it with more aggressive fiscal policies. Also inflationary pressures are good because it will deflate away some of the debt, all else equal. So, what's the problem?

Now, people may simply save or pay down debt with their stimulus checks, which would be unhelpful. In fact, a Fed paper showed households utilized only 29% of the CARES Act payments for consumption by June 2020. So you'd need to give people money and incentivize them to spend it, like prepaid cards good only at non-financial institutions for 12 months. 

Sure, as Larry suggests, the smart way for Congress to help the economy is through generous targeted support for those most impacted by Covid-19. But that's not going to happen. And $2,000 blanket checks won't bring about stagflation either.

Also this...Musk and Bezos increased their wealth by over $200 billion in 2020. In fact, US billionaires collectively gained more than $1 trillion last year. Hooray! That's enough to cover a $3,000 check to every American man, woman and child.

Tesla Mania!

It was manic year for financial markets and nothing exemplified the the fear, greed and absurdity of the stock market better than Telsa Inc. The automaker's shares went on a tear in 2020, resulting in Telsa becoming not just the highest valued car company in the world by far (even without selling a lot of cars), but also the one of the biggest companies in the world outright. And Elon Musk became the second richest person on earth.

At the same time, the chart below highlights the divide between Tesla's sky high valuations (PE of 1,398) and its fundamentals:

Tesla has a bigger market value than the leading car companies combined. Yet, Tesla sold just 367,500 cars in 2019 and generated $25 billion in revenue compared to 40.5 million cars sold and $1.1 trillion in revenue generated by those same manufacturers. There's growth expectations and then there's whatever this is...but I'm in. The stock market is a casino now and Tesla is its biggest slot machine.