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.