Since the March 23 low, our Hedge Fund VIP (GSTHHVIP) and Mutual Fund Overweight (GSTHMFOW) baskets have each returned 45%, outpacing the 36% S&P 500 rally by 900 bp. However, a basket of the most popular retail trading stocks (GSXURFAV) has returned an incredible 61%. As we highlighted in May, broker data reveal a tripling of retail trading activity as the market declined.Why are Goldman's clients angry? Because instead of listening to Dave "Stool President" Portnoy, the self-proclaimed king of the Robinhood daytrading army, something they can do for free by just following his twitter account, they are instead paying Goldman a 2-3% commission for what? To underperform by as much as 1600 bps. And those that are not getting angry, they should be, because the conditions that have allowed Portnoy to take the other side of Warren Buffett's airline trade but to also outperform all of the "smartest guys in the room", are the same that are allowing bankrupt Hertz to issue up to $1 billion in worthless stock to Robinhooders: it's the Fed's green light to go crazy and just buy everything, which is the only obvious trade in a market in which the Fed has made failure impossible - something we have been pounding the table on ever since 2013 when we said that the best performing strategy is to go long the most shorted names, a trade that has generated tens of thousands of bps in alpha as BofA "discovered" last year (but sure, call us bears). So in an attempt to win back some goodwill from its clients, Goldman's Kostin lays out several observations on whether it no longer makes sense to pay for a professional financial advisor (such as Goldman), when the Fed has assured that this is a market where 10-year-olds (i.e., the e-trade baby all grown up) can make money hand over fist:
The surge in retail trading activity has amplified the market rotation toward cyclicals and value stocks. High quality growth stocks outperformed during the market drawdown and continued to lead in the first weeks of the rebound, narrowing market breadth and contrasting with past bear market recoveries. Between March 23 and the middle of May, our long/short Growth factor returned 9% and our Momentum factor rose by 2%. This dynamic benefited institutional investors, who had shifted toward growth stocks as the market declined. Since mid-May, however, our Momentum factor has declined by 19% as improving virus and activity data pushed investors toward cyclicals, small-caps, and other economically-sensitive, low- multiple stocks. Stocks with these qualities which were quickly embraced by value-seeking retail investors, and now make up a large portion of our retail basket.
Despite the recent Value rally, the dispersion of stock multiples is still extremely wide relative to history. Last month, the gap in valuations between the highest and lowest valuation stocks registered the widest on record outside of the Tech Bubble peak. During the last few weeks that spread has narrowed, but it still ranks in the 93rd percentile since 1980. Wide valuation dispersion signals long-term opportunity for value investors. However, the volatile rotations in recent weeks underscore just how difficult timing that opportunity can be. We believe most investors should include some value exposure in their portfolios, although the degree will depend on time horizon and risk tolerance, among other factors. In the medium-term, the challenge is determining which laggards are value opportunities and which leaders will experience fundamental growth that justifies current elevated valuations.Yes David, we know the challenge, the problem for you - as you try to earn your pay and provide the solution - is that as the market continues to trade increasingly insane based on the whims of 10-year-olds, not even the most spot on accurate analysis based on fundamentals will matter one bit when the marginal price setters are traders who are still not legal to drink and maybe drive. Which is why the Goldman strategist cops out and takes the easy way out: just keep buying what has worked for the past decade, namely tech, resulting in even narrower market breadth even though it was Kostin himself two months ago warning that "narrow market breadth is always resolved the same way: narrow rallies lead to large drawdowns as the handful of market leaders ultimately fail to generate enough fundamental earnings strength to justify elevated valuations and investor crowding. In these cases, the market leaders "catch down" to weaker peers." Maybe amid the shock of his clients, Kostin is hoping they don't recall what he said less than two months ago:
The unrivaled market leader this year has been Tech, and we expect it will continue to outperform [ZH: really? that;s not what you said on April 27]. The Information Technology sector has returned +7% YTD, and even following this week’s decline the NASDAQ 100 trades within 1% of its pre-crisis peak. As the market was falling, the sector was supported by its quality attributes, including strong balance sheets and high profit margins, as well as the resilience of its earnings. This year analysts have revised down Tech 2021 EPS by just 5%, compared with a 20% cut for the remainder of the S&P 500. In addition, low interest rates increase the value of the sector’s long-term growth prospects that, in cases like ecommerce and cloud usage, have been accelerated by the impact of the pandemic on consumer and business activity. Major risks to the sector include its popularity, which could cause underperformance in the event of a sharp investor derisking, as well as the possibilities of government regulation and tax reform. While Health Care EPS estimates have been similarly resilient, political risk has suppressed the sector’s multiples, as is often the case prior to presidential elections.And so on. Meanwhile as Kostin, and his very generous clients contemplate the tea leaves and analyze such meaningless "data" as cash flows, growth projections, technical reversal patterns and what not, the rabid army of millennial daytraders rushes from one stock to the next, sending it soaring then plunging with no regard for underlying data, in one truly unprecedented pump and dump scheme, where all those who jump in first make a killing, while the laggards are crushed. As we noted recently, until Powell does something to stop this catastrophic mockery of efficient markets, which are now juiced to the gills with the Fed's trillions in newly printed money, nothing will change. And judging by what Powell just said last week, nothing will change for a long, long time: "The Fed doesn’t believe, and shouldn’t believe, that it can forecast the stock market, and therefore recognize a bubble in real time,” said Princeton University economist Alan Blinder, a former Fed vice chairman, in a Bloomberg Television interview. "They’re pretty easy to recognize after the fact, after they burst. But, in real time, in a predictive way, pretty much impossible." Really? Impossible? How about one look at the chart of bankrupt Hertz... ... whose market cap almost hit $1 billion last week and prompted the company to do the unthinkable: try to sell stock to the hordes of Robinhood daytraders, whose tiny trades are being frontrun all day long by HFT algos which are accentuating the momentum and allowing a handful of small investors to have an outsized impact on the market (below is Robinhood's latest 606 Report: 65.5% of all orders are sold to Citadel). Or how about Chesapeake? Or maybe Fangdd, you worthless career economist. Meanwhile, retail investors - confident they can never lose - and certainly their returns to date justify it, are betting more and more aggressively on the market, in the form of the ever more levered upside bets such as tiny, short duration calls. According to SentimentTrader, one-contract transactions have surged to 13% from roughly 9%. The smallest of traders bought more than 14 million speculative call options in the week ended June 5, an all time high. "We have Instagram influencers and now we have Reddit influencers,” QVR’s Benn Eifert told Bloomberg. "They post a trade idea in an option, in a single name, and within an hour you see hundreds of thousands of call options placed, which is totally insane." Insane? Yes, but it's working, and who can blame them: the Fed chairman himself said he will do nothing to pop the bubble (which he can't see) with tens of millions of Americans out of work. That means that, all else equal, when it comes to market insanity you ain't seen nothing yet. Jim Bianco, president and founder of Bianco Research LLC, agrees, and says that it all comes down to the Fed's only mandate: never again allow a drop in stocks.
"That’s why we’re seeing a giant rush of small retail investors and everybody else into the market,” Bianco told Bloomberg Television Wednesday. “When you go into the market, you go to the riskiest end of the market, so you buy bankrupt companies, you buy beaten down airlines, you buy cruise ships, you buy retailers because they will benefit the most from a support system where everything is targeted, and the markets will always go up."And as they do, and as "retail investors" retire at the old age of 11, Goldman's clients will get angrier by the day until one day, who knows, we may just see riots in the streets with chants of "millionaires' lives matter."
How bonds work and why everyone is talking about them right now: a finance expert explains
Investor confidence in the UK is at a low, and the bond market has reacted dramatically.
The Bank of England is buying bonds again. Just as it was about to start selling the debt it had accumulated as part of its last effort to support the economy during the COVID-19 pandemic, the central bank has been forced to announce a new scheme to shore up investor confidence.
The bank’s £65 billion short-term spree aims to address the slump in bond prices caused by investors rushing to sell after the government’s recent mini-budget. This led to a surge in bond yields that hiked borrowing costs for the government and spread to pensions, housing and the general economy. So far, it has had a limited initial impact on the markets.
We asked an expert in finance to explain what’s going on in bond markets.
What is a bond and what is the difference between bond prices and yields?
A bond is essentially a tradeable IOU. It’s a loan that investors make to issuers such as companies or governments (UK government bonds are often called gilts). A bond has a price at which it can be sold and a yield, which is an annual amount the investor receives for holding the bond, a bit like interest on a savings account, and is expressed as a percentage of the current price.
When the price of a bond falls, it signals less demand for the bond because fewer investors want to own it. At the same time, the yield rises, which represents a higher cost of borrowing for companies or governments that issued the bond because this is what they have to pay to investors.
In the days since the government’s mini-budget, yields on 10-year Treasury bonds – which are issued by the UK government – increased from approximately 3.5% to 4.52% – the highest since the 2007-2008 global financial crisis. The expectation of continued increases prompted the recent intervention by the Bank of England.
UK government 10-year bond yields
What causes bond yields to move?
To understand this, it is important to bear in mind that, while people often talk about the interest rate, there are actually a number of rates. This includes the rate at which the central bank lends to commercial banks (the base rate), the rate that banks lend to each other (the interbank rate), the rate that the government borrows at (Treasury yields) and the rate at which households and firms borrow (commercial loans and mortgages).
When the Bank of England changes the base rate, this cascades through all these rates. As such, the Bank of England carefully considers the state of the economy – that is, growth and inflation – when deciding on the base rate.
When an economy is growing, interest rates and bond yields tend to rise. The occurs for several reasons. Investors sell bonds to buy riskier assets with better returns. Firms and households also look to borrow more money in a growing economy, for example, to invest in new machinery or to move home. More demand for borrowing means lenders can charge higher interest on their loans.
Higher inflation often accompanies economic growth because of the increase in demand for goods and services. This tightens supply and causes prices to rise (including wages for labour). The Bank of England, which is mandated by the government to try to keep inflation as close to 2% as possible, will respond to higher inflation by raising base rates, which, as noted, feeds through to the different rates.
Investors will often anticipate the increase in base rates and look to act before it goes up by selling Treasury bonds and buying alternative, higher return, assets. This causes bond yields to rise further. As a result, the Treasury bond yield is often seen as a predictor of future Bank of England base rate changes.
So, if yields are rising, does this mean that investors are expecting future economic growth in the UK?
No, not at the moment. When the government raises money by issuing bonds, it does so over a range of time periods (called maturities), from one day to 30 years. When an economy is expected to grow, the yield on longer-term bonds will be higher than the yield on shorter-term bonds.
This relationship between yields across different maturities is referred to as the term structure or yield curve. An upward sloping yield curve implies a growing economy. At the moment, the UK yield curve is flat, or even downward-sloping across some maturities. My research shows that a falling yield curve is a good predictor of a coming recession.
Yield curve for UK government bonds
It’s important to remember that these different yields act as a benchmark for commercial lending rates of equivalent lengths. The approximate jump to 4.5% in 2-year and 5-year yields has been reflected in mortgage rates, which is why some lenders have pulled available mortgage deals recently while they reassess the lending rates charged to households.
But if the UK economy is not expected to perform well, why have bond yields been rising after the chancellor’s mini-budget announcement?
The rising bond yields we are seeing relate to an additional factor: the amount of government debt. The mini-budget introduced tax cuts and increased spending and investors know the government will need to increase borrowing to meet these commitments. Some estimates put potential government borrowing at £190 billion due to this plan.
An increase in the amount a homeowner borrows versus the value of their home (called the loan-to-value) causes the mortgage rate charged to the borrower to rise. Similarly, an increase in the amount of bonds that the government will be looking to sell (the amount it wants to borrow) will push down the price of existing bonds, increasing yields. More importantly, more debt without growth raises the risk level of the UK economy.
Anticipating this, investors triggered a large-scale bond sell-off after the government’s mini-budget announcement. This contributed to the fall in the value of the pound as investors selling UK Treasury bonds bought US bonds instead, essentially swapping pounds for dollars.
So will the Bank of England’s plan work?
The intervention will have a short-term positive impact, which started as soon as it was announced. But the bank is really only buying time. Any ultimate success depends on the government restoring investor confidence in its economic plans.
Unfortunately, rising yields and borrowing costs for the UK economy is the price we are now paying for the government’s recent fiscal announcement.
David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.recession pandemic covid-19 economic growth treasury bonds bonds yield curve government bonds government debt mortgage rates pound spread interest rates uk
Zika Vaccine Targeting Nonstructural Viral Proteins Found Effective in Mice
UCLA scientists report positive preclinical results on the safety and efficacy of an RNA vaccine (ZVAX) against the mosquito borne Zika virus that severely…
Positive preclinical results on the safety and efficacy of an RNA vaccine (ZVAX) against the mosquito-borne Zika virus that severely compromises brain development in children of infected mothers, were published in the journal Microbiology Spectrum on September 28, 2022 “Replication-Deficient Zika Vector-Based Vaccine Provides Maternal and Fetal Protection in Mouse Model.” The investigators tested the vaccine in pregnant mice and report the vaccine prevents systemic Zika infection in both mothers and developing fetuses.
“The ongoing COVID-19 pandemic has shown us the power of a strong pandemic preparedness plan and clear communication about prevention methods—all culminating in the rapid rollout of safe and reliable vaccines,” said senior author of the study, Vaithilingaraja Arumugaswami, DVM, PhD, an associate professor of molecular and medical pharmacology at the University of California, Los Angeles (UCLA). “Our research is a crucial first step in developing an effective vaccination program that could curb the spread of Zika virus and prevent large-scale spread from occurring.”
Engineering the vaccine
The experimental vaccine is composed of RNA that encodes nonstructural proteins found within the pathogen that trigger an immune response against the virus.
Arumugaswami said, “Engineering the vaccine involved deleting the part of the Zika genome that codes for the viral shell. This modification both stimulates an immunogenic reaction and prevents the virus from replicating and spreading from cell to cell.”
Eliminating structural proteins that mutate rapidly to escape the immune system also ensures that the vaccine trains the recipient’s immune system to recognize viral elements that are less likely to alter. The researchers packaged the replication deficient Zika vaccine particles in human producer cells and verified antigen expression in vitro.
“We deleted not just the gene responsible for encoding the capsid, but also those encoding the viral envelope and membrane. This vaccine is replication-deficient—it cannot spread among cells,” said co-author of the study, Nikhil Chakravarty, a master’s student at the UCLA Fielding School of Public Health.
Chakravarty clarified, “The deletion itself does not lead to stimulation of immune response but it makes this vaccine safer by rendering it replication deficient. The nonstructural proteins encoded by the RNA packaged in the vaccine stimulate more of a T-cell immune response that can specifically recognize Zika-infected cells and prevent viral replication and the spread of infection.”
The team showed increased effector T cell numbers in vaccinated versus unvaccinated mouse models. Using mass cytometry, the researchers showed high levels of splenic CD81 positive T cells and effector memory T cell responses and low levels of proinflammatory cell responses in vaccinated animals, suggesting that endogenous expression of the nonstructural viral proteins by the vaccine induced cellular immunity. There were no changes in antibody mediated humoral immunity in the vaccinated mice.
“We saw complete protective immunity against Zika virus in both pregnant and nonpregnant animals, speaking to the strength and utility of our vaccine candidate,” said Chakravarty. “This supports the deployment of this vaccine in pregnant mothers—the population, perhaps, most at need—upon further clinical evaluation. This would help mitigate some of the socioeconomic fallout from a potential Zika outbreak, as well as prevent neurological and developmental deficits in Zika-exposed children.”
The investigators administered the RNA vaccine using a prime-boost regimen where an initial dose was followed up by a booster dose. To estimate the durability of the vaccine, the researchers monitored the mice for a month-and-a-half, which is equivalent to approximately seven years in humans.
Chakravarty said, “Since the vaccine is geared toward stimulating T-cell response, we anticipate it will induce longer-lasting immunity than if it were just stimulating antibody immune response.”
The global Zika outbreak in 2016, led to efforts in developing effective therapies and vaccines against the virus. However, no vaccines or treatments have been approved for Zika virus yet.
“Other Zika vaccine candidates mainly focused on using structural proteins as immunogens, which preferably stimulates antibody response. Our candidate is unique in that it targets nonstructural proteins, which are more conserved across viral variants, and stimulate T-cell-mediated immunity,” said Chakravarty.
Epidemiological studies have shown that the Zika virus spreads approximately every seven years. Moreover, the habitats of Zika-spreading mosquitoes are increasing due to climate change, increasing the likelihood of human exposure to the virus.
“Given that RNA viruses—the category to which both Zika and the SARS family of viruses belong—are highly prone to evolving and mutating rapidly, there will likely be more outbreaks in the near future,” said Arumugaswami.
“It’s only a matter of time before we start seeing the virus spread again,” said Kouki Morizono, MD, PhD, an associate professor of medicine at UCLA and co-senior author of this study.
Before the vaccine candidate can be tested in humans, the researchers will be test it non-human primate models.vaccine preclinical genome genetic rna pandemic covid-19 spread
Butter, garage doors and SUVs: Why shortages remain common 2½ years into the pandemic
The bullwhip effect describes small changes in demand that become amplified as they move down the supply chain, resulting in shortages. The pandemic put…
Shortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.
Want a new car? You may have to wait as long as six months, depending on the model you order. Looking for a spicy condiment? Supplies of Sriracha hot sauce have been running dangerously low. And if you feed your cat or dog dry pet food, expect empty shelves or elevated prices.
These aren’t isolated products. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal and many more items have also been facing shortages in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon.
In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began.
I have been immersed in supply chain management for over 35 years, both as a manager and consultant in the private sector and as an adjunct professor at Colorado State University - Global Campus.
While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.”
What is the ‘bullwhip effect’?
The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages.
Imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end.
The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount and that gets amplified by wholesalers, distributors and raw material suppliers.
The onset of the COVID-19 pandemic, which led to lengthy lockdowns, massive unemployment and a whole host of other effects that messed up global supply chains, essentially supercharged the bullwhip’s snap.
Cars and chips
The supply of autos is one such example.
New as well as used vehicles have been in short supply throughout the pandemic, at times forcing consumers to wait as long as a year for the most popular models.
In early 2020, when the pandemic put most Americans in lockdown, carmakers began to anticipate a fall in demand, so they significantly scaled back production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.
Computer chips aren’t one size fits all; they are designed differently depending on their end use. So chipmakers began making fewer chips intended for use in cars and trucks and more for computers and smart refrigerators.
So when demand for vehicles suddenly returned in early 2021, carmakers were unable to secure enough chips to ramp up production. Production last year was down about 13% from 2019 levels. Since then, chipmakers have began to produce more car-specific chips, and Congress even passed a law to beef up U.S. manufacturing of semiconductors. Some carmakers, such as Ford and General Motors, have decided to sell incomplete cars, without chips and the special features they power like touchscreens, to relieve delays.
But shortages remain. You could chalk this up to poor planning, but it’s also the bullwhip effect in action.
The bullwhip is everywhere
And this is a problem for a heck of a lot of goods and parts, especially if they, like semiconductors, come from Asia.
Most of this stuff travels to the U.S. by container ships, the cheapest means of transportation. That means goods must typically spend a week or longer traversing the Pacific Ocean.
The bullwhip effect comes in when a disruption in the information flow from customer to supplier happens.
For example, let’s say a customer sees that an order of lawn chairs has not been delivered by the expected date, perhaps because of a minor transportation delay. So the customer complains to the retailer, which in turn orders more from the manufacturer. Manufacturers see orders increase and pass the orders on to the suppliers with a little added, just in case.
What started out as a delay in transportation now has become a major increase in orders all down the supply chain. Now the retailer gets delivery of all the products it overordered and reduces the next order to the factory, which reduces its order to suppliers, and so on.
Now try to visualize the bullwhip of orders going up and down at the suppliers’ end.
The pandemic caused all kinds of transportation disruptions – whether due to a lack of workers, problems at a port or something else – most of which triggered the bullwhip effect.
The end isn’t nigh
When will these problems end? The answer will likely disappoint you.
As the world continues to become more interconnected, a minor problem can become larger if information is not available. Even with the right information at the right time, life happens. A storm might cause a ship carrying new cars from Europe to be lost at sea. Having only a few sources of baby formula causes a shortage when a safety issue shuts down the largest producer. Russia invades Ukraine, and 10% of the world’s grain is held hostage.
The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and decreased production. A strong U.S. economy and consumers flush with coronavirus cash led to a surge in demand in 2021, and the system had a hard time catching up. Now the impact of soaring inflation and a looming recession will reverse that effect, leading to a glut of stuff and a drop in orders. And the cycle will repeat.
As best as I can tell, these disruptions will take many years to recover from. And as recent inflation reduces demand for goods, and consumers begin cutting back, the bullwhip will again work its way through the supply chain – and you’ll see more shortages as it does.
Michael Okrent does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.recession unemployment pandemic coronavirus covid-19 congress lockdown recession unemployment europe russia ukraine
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