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“It All Adds Up To One Word: Pain”: Traders Forced To Chase Gamma Higher As Stocks Refuse To Drop Despite Dire News And Data

"It All Adds Up To One Word: Pain": Traders Forced To Chase Gamma Higher As Stocks Refuse To Drop Despite Dire News And Data

As we end the…

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"It All Adds Up To One Word: Pain": Traders Forced To Chase Gamma Higher As Stocks Refuse To Drop Despite Dire News And Data

As we end the week, the question - according to JPMorgan's trading desk - is whether the bear market current rally has ended and what that means for stocks moving forward.

While the Banks painted a picture of strength in Consumer and Corporate sectors, bears will point to (lack of) hiring (and outright firing) in Tech and headlines from companies such as AT&T that consumers are behind on payments on their phone bills! Recall AT&T’s management said “we're seeing an increase in bad debt to slightly higher than pre-pandemic levels, as well as extended cash collection cycles. However, it's important to note that customers are making their accounts today consistent with historical patterns and previous economic cycles.”

Here, JPM flow trader Andrew Tyler notes that his conclusion is that the economy is clearly slowing but it is not falling off a cliff, and "while recession risk (within 12 months) is elevated it may take a bit more time to eat through Consumer (~$2T remains in excess cash relative to 2019 level) and Corporate cash piles (SPX had record high cash levels coming into 2022 with near record interest coverage ratios)." Here, we find it amusing how everything still keeps harping about this "excess cash savings" (which have been spent long ago) some two years after the fact, yet nobody talks about the "excess savings" in the form of stock market investments and which are $10 trillion lower in the past 6 months. Or is the psychology of cash savings somehow different from those of short-term speculative market holdings.

Goldman trader Rich Privorotsky concludes the week with a far more downbeat take: it's been a long week, he writes, and the "market has absorbed lots of bad news very well and I think little doubt how one side positioning has been." Privorotsky is amazed that despite negative ytd performance equites have still seen little to no outflows. He thinks that this means "the asset management community cashed up waiting for redemptions that haven’t come."

And echoing what we have been saying for days, the Goldman trader says that in his view, positioning (including the fact that this is the "most hated rally" and certainly including the tens of billions in buying by systematic funds) is largely to blame here, as the "market is pricing all of the upside from rate compression but ignoring the cause (what would drive commodities to go down this much when supply is so constrained...negative growth revisions) and the rally is meant to be sold."

Perhaps, but the question on every trader's mind is how long with the rally last? After all, just one violent bear market rally can make one's entire year in days.

For one answer, we turn again to Nomura's Charlie McElligott who first points to the dramatic action in bonds, where following this morning's contractionary PMI prints out of Europe which confirm a recession has arrived...

... Bonds have gone full tilt VaR event spasm - with the German 2Y yield plunging -25bps, the largest move since 2008..

... as the short-squeeze panic - having now turned into new “long” risk being added - turns violently unstable.

According to Charlie, in a world where all performance dynamics over the past 1-2Y period have been about having a “short” view on Duration (vs “Long” on Inflation / Cyclicality), the sudden and violent return of “Bonds as Hedge” spells further looming pain and reversal for all things “Trend / Momentum”, where positive performance has almost entirely been dictated by “Bond / Duration” Shorts and “Cyclical Inflation” Longs.

Case in point, the SG Trend (CTA) Index is now -5.6% over the past one month (through 7/20/22, and that will update much worse later today), while the Nomura-Wolfe Long Term Momentum Factor is -10.2% over that same 1m period, as UST 10Y has explosively rallied off the lows and seen yields collapse from 3.47% high mid June to this morning’s 2.79%

Nomura then notes that even before this morning's freakish rally, we were already in the strike-zone for more forced short-covering from CTA Trend space in Bonds (USD, AUD, CAD) and MMs (ED$ and ER):

As McElligott puts it "we all get the joke: the post COVID response of unprecedented fiscal and mon policy from global CBs, the pent-up demand release post vaccine, the start-stop lockdowns thereafter, the already broken supply-chain getting broken-er off the back of that, the “bull-whip” effect on demand / inventories, the under-capitalization of traditional Energy / Oil / Gas in the ESG era, the Russia / Ukraine war….has conspired to create this synthetic and steroidally-charged business cycle, where phase shifts are turning faster-and-faster, with break-neck speed."

It's also why we disagreed with McElligott's view presented yesterday that the Fed will take a loooooooong time to pivot, and won't do it in 2023 - not only will the Fed pivot, but it will do it so fast once the economy trapdoors into recession at a record speed, heads will spin.

In any case, amid this liftathon in rates, Nomura here echoes Goldman above and writes that "equities futures refuse to crack lower under the barage of what feels like “perpetual pessimism” and “bad news” and not just recent European “goings-ons,” but also US, where we witnessed SNAP, STX, SIVB, COF, CRSR, SAM etc earnings / guide disasters yesterday on “macro headwinds” stories... but Spooz “no cares.”

Such “trading firm despite calamity” matters, as it relates to Charlie's recent observation that this Equities rally is acting VERY differently from the prior bear market bounces during this now 9 month long sell-off, as it indicates a mismatch between extremely negative sentiment & positioning from dour views about economic growth due to the surge of FCI tightening…versus seemingly what might have already been “priced-into” the market.

This goes back to the belief that Markets and the Economy are not synonymous, as Equities/Rates/Credit all have very well captured a large part of this anticipated turn in the business cycle, and well-ahead of the actual “realization” (and Fed pivot).

Indeed, a re-fresh on Nomura's “SPX Sentiment Index” shows “live” sentiment scrambling to “catch up” to the market, versus the legacy “doldrums” we have been immersed in as per the the 50d rolling avg, and currently 3.1% since 2004.

If one plugs this 3.1% 50-day avg trigger in an SPX forward returns test/signal”, it further illuminates what this “mismatch” dynamic has tended to mean moving-forward for US Equities: i.e. a standard “extreme negative sentiment = bullish forwards” signal, with significant SPX excess returns and high “hit rates” on nearly all time series! Or said otherwise, extremely bearishness is extremely bullish!

Here’s the rub: one can argue, of course, those all the prior trigger “hits” with this test do not necessarily occur against a “Stagflationary” backdrop of unmoored inflation into a growth slowdown, that, for at least an additional window of time here, will not allow the “urgent and immediate” Central Bank rescue which we’ve grown accustomed to, versus the past decade’s conditioning to the standard “Cut Rates / Buy Bonds” drill at the first sign of crisis or growth slowdown, which is the point Charlie has been been making this week regarding the inability for CB’s to “pivot” as soon as market’s currently expect (once again, we completely disagree, and we are confident the Nomura x-asset strategist will soon change his mind too once we get a -200K print in an upcoming payrolls report).

As an aside, Charlie is nice enough to observe that the topic of the “Fed Pivot” has illicited an enormous amount on emotion from clients to this week’s notes, and from both sides of the aisle.

  • Some are saying that US is already deep recession, that July will be the Fed’s last hike, and that the first Fed cuts will come as early as Dec ’22 or Feb ’23 meetings…
  • Others believe that due to inflation staying sticky higher and with lagging inputs (like Rent), that the only Fed “easing” next year will come in the form of a premature end to QT in 2H23, and that the currently anticipated “weak” recession will not be enough to slow Labor enough to put any dent into Inflation…hence, the Fed will be forced to stay “tighter for longer”

But going back to equities, and the ongoing short-term rally (as a reminder, we are all trying to figure out how long it will last), the signs of angst from the “earnings shoe to drop” shorts or those simply “underweight” continue to mount, where the negative earnings shoe is dropping real-time (names as noted earlier above), and yet the market isn’t going lower - instead, it continues to grind higher in what Goldman dubbed the "most hated rally" since everyone is positioned bearishly!

The lack of upside positioning is also in single-names too, as everybody's "low risk" tilt has them with no portfolio "beta to beta" on the move higher, especially long-short hedge funds!

All this goes to the now “pulled-forward” bullish point McElligott has been making about a strong report from MSFT being a real potential catalyst next week to seeing this Equities rally go melt-up, before his bearish point about the Fed being “stuck tighter” than the market currently anticipates can take hold out in the medium-term thereafter

  • Everybody in the “top down” macro space has been expecting the “negative earnings revision” in US equities to act as the next risk-off impulse, which then “cleanses” you down to that (arbitrary) 3200-3400 “interesting valuation case” level noted by a handful of prominent Street strategists that many clients said they’d get constructive on market and want to buy on the washout.
  • But as we are beginning to realize the negative earnings events, Equities index refuses to go lower, but that “dip that was supposed to be bot” didn’t materialize, and now, that risks a scenario where these folks are forced into being “buyers higher”

Meanwhile, as discussed yesterday, systematic funds are getting more “signal” on both Price and cratering short-dated trailing realized Vols (SPX 1m rVol from 36 mid-May to now 18), with ongoing CTA covering / long buying now, and Vol Control set to take the baton in weeks ahead, leading to even more circular buying (lower VIX, more buying, leading to lower VIX and even more buying).

CTA trend signals and buy triggers

VOL control setup to "buy" almost all daily change scenarios over the next month!

Looking at the Vol space, McElligott notes that this is what we’ve continued to see for months: Skew flattening a lot with demand for Index Calls over Puts, as most just don’t have the exposure on. This is why Index Call Skew remains bid, Put Skew and Skew remain offered—that same theme over the past few months where the real concern became about “missing the Right tail,” since exposure was so slashed for most managers, hence no need for further downside (VVIX at 2 year lows yesterday, no need for “crash” if by-and-large you don’t have the exposure on).

However, the change seen just the past few days this week on the desk, is that we actually now traders are again seeing resumption in downside hedge interest, which paradoxically adds to the “bullish” point: that they are again nibbling back into underlying exposure, hence, they need to again hedge!

What is actionaly, is that this is actually “unstable” type behavior that does often coincide with “Spot Up, Vol Up” periods:

  • Scramble to grab upside obvious in the megacap Tech faves of old yesterday: TSLA (1.1mm Calls bot yday), META (295k Calls) and GOOGL (250k Calls)
  • Take TSLA alone, which “IS” the US Equites Options market in one singular security, the numbers added-up to an absolutely “un-possible” ~+$1.4B of Net $Delta ADDED yesterday btwn bot Calls / sold Puts alone…blowing out anything we’ve seen over at least the past 1m period

And over the course of the day yday, we saw massive screen buying of over 200k contracts in SPX strikes from 3980 to 4020 in the same day / yesterday Calls, in an attempted “Gamma Squeeze” which was the driver of that move into the close!

And lo-and-behold, the S&P rally has seen us scramble back into stabilizing “Long Gamma” territory for Dealers across risky-asset Options, on just ridiculous “Net $Delta” added in recent days and off the lows last month—US Equities (SPX, SPY, QQQ, IWM combined) at +$670B vs 1m ago and +$429B versus 1 week ago:

As McElligott concludes, "between the moves in Bonds and Equities, it all adds up to one word: PAIN", which will likely be the prevailing condition at least until Powell gives the all clear in either direction.

Tyler Durden Fri, 07/22/2022 - 12:53

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Economics

Here’s Why Royal Caribbean, Carnival Stock Are Good Buys

Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it’s the destination not the journey for the cruise lines.

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Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it's the destination not the journey for the cruise lines.

For the past two years, since the covid pandemic hit in late-February 2020, the cruise industry has taken one punch after another. And, while the situation has improved from the extended period when cruises were not allowed to sail from United States ports, that does not mean that it's back to 2019 for Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

The industry has done a remarkable job bringing operations back to near-normal. All three cruise lines not only have put all their ships back in service, they're also still moving forward with plans for new ships and other investments including improvements to private islands, and developing new ports.

That being said, Carnival just reported its second-quarter earnings and the market did not like the numbers at all. Shares of all three cruise lines were down double digits on Sept. 30, but traders clearly missed that aside from rising costs and a loss (both of which were expected) the cruise line largely delivered good news.

Image source: Shutterstock

Carnival Did Well in Areas it Controls  

Carnival reported a GAAP net loss of $770 million for the quarter. That was driven by higher costs with the company specifically citing advertising expenses and having some of its fleet unavailable to produce revenue.

While the company's year-to-date adjusted cruise costs excluding fuel per ALBD during 2022 has benefited from the sale of smaller-less efficient ships and the delivery of larger-more efficient ships, this benefit is offset by a portion of its fleet being in pause status for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining enhanced health and safety protocols, inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.

If you're investing in any cruise line you have to do so on a very long-term basis. That makes profitability less of a concern than the company building back its business and Carnival showed some very positive signs in that direction.

  • Revenue increased by nearly 80% in the third quarter of 2022 compared to second quarter 2022, reflecting continued sequential improvement.
  • Onboard and other revenue per PCD for the third quarter of 2022 increased significantly compared to a strong 2019
  • Total customer deposits were $4.8 billion as of August 31, 2022, approaching the $4.9 billion as of August 31, 2019, which was a record third quarter.

  • New bookings during the third quarter of 2022 primarily offset the historical third quarter seasonal decline in customer deposits ($0.3 billion decline in the third quarter of 2022 compared to $1.1 billion decline for the same period in 2019).

Carnival (and likely all the cruise lines) is being hurt by prices generally being depressed and some passengers paying for their trips using future cruise credits from cruises canceled during the pandemic. That's not really what matters though. Carnival has been increasing passenger loads and getting people back on its ships.

"Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels," Carnival CEO Josh Weinstein said. "We expect to further capitalize on this momentum with renewed efforts to generate demand. We are focused on delivering significant revenue growth over the long-term while taking advantage of near-term tactics to quickly capture price and bookings in the interim."

Basically, cruise prices are cheap right now because it's more important to get customers back on board than it is to maintain pricing integrity. That's a tactic that could hurt long-term pricing, but the cruise industry is less vulnerable than other vacation options because there have always been large pricing variations based on the calendar and the age of the ship being booked.

It's a Long Voyage for Cruise Lines

Carnival was trading at its 52-week low after it reported. That's a pretty major overreaction given that the cruise industry was barely operating in the fall of 2021.

Yes, the industry has a long way to go. All three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates is a challenge, but it's one Carnival (and its rivals) have been meeting.

That has come with some shareholder dilution. Carnival sold $1.15 billion in new stock during the quarter, but the company has over $7.4 billion in liquidity. Weinstein is optimistic (he has to be, that's part of his job) about the future.

"During our third quarter, our business continued its positive trajectory, achieving over $300 million of adjusted EBITDA and reaching nearly 90% occupancy on our August sailings. We are continuing to close the gap to 2019 as we progress through the year, building occupancy on higher capacity and lower unit costs," he said.

Usually it's easy to dismiss a CEO making upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it returned to sailing. Both Royal Caribbean and Norwegian have followed similar paths and while meaningful shareholder returns may take time, these are strong companies built for the long-term that made a lot of money before the pandemic and should do so again. 

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Spread & Containment

Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Economics

Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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