Connect with us

“Record Market Fragility”: Something Snapped In Q1… And What Goldman Expects For Q2

"Record Market Fragility": Something Snapped In Q1… And What Goldman Expects For Q2

As Goldman trader and head of HF sales Tony Pasquariello writes in his first quarter post-mortem, "Q1 is done. boring, it was not."

And, boy, can say that.



"Record Market Fragility": Something Snapped In Q1... And What Goldman Expects For Q2

As Goldman trader and head of HF sales Tony Pasquariello writes in his first quarter post-mortem, "Q1 is done. boring, it was not."

And, boy, can say that again... but before we get into the weeds of what happened (and what may happen) let's first take a look at the obvious - the best and worst performing assets of the past quarter.

Luckily, Deutsche Bank has done the analysis, and in a note from the bank's strategist Henry Allen, he writes that markets had a pretty mixed performance in Q1, with 20 of the 38 non-currency assets in the German bank's sample having a positive return over the first three months of the year. The gains concentrated among risk assets including equities, oil and HY credit, as progress on the vaccine rollout and the prospect of further stimulus in the US proved supportive. In a reversal of 2020 however, safe havens have struggled against this backdrop, with gold the worst-performing asset in the main sample (bitcoin was on the other end) and sovereign bonds also losing ground over the quarter.

A quick detour here from BofA CIO Michael Hartnett, gives us the highlights in the form of the following performance: Bitcoin 103.3%,  oil 21.9%, global stocks 4.7%, US$ 3.7%, cash 0.0%, HY bonds -0.1%, IG bonds -4.3%, government bonds -5.8%, gold -9.6% YTD.

Going back to DB, we are reminder that one of the biggest stories over Q1 has been the massive rise in US Treasury yields. This began at the very start of the year as the results of the Georgia Senate runoffs meant that the Democrats would have control of both houses of Congress under the new Biden administration. In turn, this has given them the leeway to pursue substantial stimulus, with the $1.9tn American Rescue Plan already signed into law, and Biden announcing his American Jobs Plan yesterday. In response, yields on 10yr Treasuries have risen by +82.7bps over the quarter, which is the largest rise in absolute terms since Q4 2016 when Donald Trump unexpectedly won the presidency.

However, the selloff in sovereign bonds hasn’t been confined to the US, with their European counterparts also losing ground as investors increasingly bet on a stronger economic recovery once the vaccine is rolled out. Gilts (-7.3%), bunds (- 2.4%) and BTPs (-0.9%) all fell over the quarter, though their monthly performance for March hasn’t been quite as bad, with only bunds losing ground slightly.

On the other end, for equities, both March and Q1 marked a very strong performance, and in a major reversal from 2020, it was European indices which saw the largest advances. Over Q1, the DAX (+9.4%), the FTSE MIB (+11.3%) and the STOXX 600 (+8.4%) all saw solid gains in total return terms, while banks led the way thanks to higher yields, with the STOXX 600 Banks up +20.3% over the quarter. The US lagged behind however, with the S&P 500 up +6.2%, albeit rising to fresh highs in March, while EM indices were even further back, with the MSCI EM Equities up just +2.2% over the last three months.

Of course, nothing compares to bitcoin, which has exactly doubled since the start of the year...

... but away from crypto, the top performing asset continues to be oil on a YTD basis, with a Q1 performance of +22.7% for Brent Crude and +21.9% for WTI. Oil is still in the lead in spite of the fact that both prices fell over the last month, as concerns over a rise in Covid cases at the global level led to renewed fears about further restrictions and reductions in mobility. Nevertheless, while oil is at the top of the DB YTD sample, other commodities haven’t performed so well, with precious metals the worst, in a mirror image of returns last year.

Bottom line, going back to Pasquariello, he puts it best saying that "on the surface, it was a fine quarter: S&P printed a 6.2% total return on 7.8% realized volatility, and sits within close reach of both the highs and the 4000 level." However, as the Goldman trader expands, "those headlines, belie the degree of difficulty involved in managing professional money along the path -- particularly within the fundamental long/short space."

To illustrate the turbulence below the surface, consider the following Q1 returns:

  • the hedge fund VIP basket (GSTHHVIP) underperformed a basket of widely held shorts (GSCBMSAL) by ... 30%
  • growth stocks (GSXUMFGL) underperformed value stocks (GSXUMFVL) by ... 28%.
  • 52-week momentum winners (GSCBHMOM) underperformed 52-week momentum losers (GSCBLMOM) by ... 18%.

In working through the presumed drivers of these factor breaks, the Goldman trader points out the following key items:

  1. be it the 82bps backup in US 10-year note yields -- or the worst start to a year in the history of the aggregate index -- the bond market sold off hard, with that came an element of climate change for stock operators.
  2. on one hand, Q1 saw the largest inflows to equity funds on record; on the other hand, as the quarter progressed, some steam came out of the higher velocity vehicles (witness a clear decline in single stock call option volumes, recent outflows from ARKK, and some indigestion in certain corners of the new issue market). ZH discussed this one month ago in  "Another Market Paradox: Wall Street Struggles To Explain Record Equity Inflows Amid Stock Turmoil"
  3. on the fundamental side, the fiscal story in Q1 was eye-popping; a $900bn rush in December was followed by a $1.84bn boomer in March. All of that was deficit financed. Meanwhile, as we learned last week, the next round - perhaps the final round - will be much more complicated with respect to funding and taxes.

If all that is a little abstract for some, here is BofA's CIO Michael Hartnett breaking down Q1 i) by the numbers; ii) by winners and losers and iii) by flows:

Q1 by the Numbers:

  • 608MM global Covid-19 vaccinations,
  • More than $4tn US fiscal stimulus,
  • 200bps jump in US ’21 nominal GDP forecast to >8%,
  • global stocks +$5tn in market cap,
  • Value of negative-yielding global bonds drops $6tn,
  • Worst Q1 return for 30-year Treasury since 1919,
  • Worst Q1 for IG bonds since 1980,
  • Worst Q1 for gold since 1982.

Q1 Winners & Losers:

  • winners = cyclical stocks…energy stocks 29%, oil 22%, banks 23%, copper 13%;
  • losers = bonds & duration…30yr UST -16%, gold -10%, EM LC bonds -8%, US IG bonds -6%, US biotech -4%;
  • tighter financial conditions led to “events”, e.g. GME, Archegos…, but stocks (XHB +22%, XBD +16%) signal “good” rise in rates thus far.

Q1 flows: record inflow to global equity ($372bn), EM ($65bn), value ($35bn), tech ($30bn), financials ($24bn); largest equity inflow % AUM (2.4% - Chart 3) in 15 years...

... although this appears to be reversing with the biggest tech outflows since Sept 2020:

Indeed, while superficially the broader markets rose, there was a tangible bifurcation within risk assets with catastrophic results for some traders. 

Which brings us to the latest note from BofA derivatives strategist Benjamin Bowler, who in a note published last week, reverts to his favorite theme, namely that growing market fragility has made risk-taking extremely risky, despite the overall rise in markets.

As Bowler puts it, in words that could threaten to "cancel" him for being overly honest, "markets are fragile owing to extreme liquidity driving asset bubbles and trading liquidity drying up at record speed during times of stress." He then adds that "while an increasing number of people intuitively accept this fact, modelling this risk can be difficult, and underappreciating the nature of fragility can make risk-managing levered positions challenging. In part, this is because traditional volatility metrics woefully understate today’s still high PNL volatility among US stocks." 

What does Bowler mean by this? Well, consider that as shown in the chart below, so far in 2021, the total market cap being gained or lost in extreme swings among S&P 500 stocks is nearly on par with that of the first half of 2020 (during the Covid crash), despite stock volatility being over 40% lower now.

Notably, there were unprecedented, extreme swings among small cap stocks, which in Q1 set records with 80% more 10-sigma upside shocks this year than ever before according to BofA, which to Bowler illustrates that "there is more risk to managing risk than meets the eye."

In other words, something clearly snapped in the market's "reaction function" to a quarter that saw a gargantuan fiscal stimulus injected into the economy to make the already massive monetary stimulus.

This, in turn, takes us back to the conclusion from Goldman's Pasquariello, who summarizes his market sentiment as follows:

certain impulses changed as the quarter wore on, which presents a different setup for Q2. to be clear, if April and May are THE peak growth months for US economic activity -- perhaps as robust as anything we'll see in the remainder of our careers, -- there's still a lot to play for.

It perhaps not surprising then that looking ahead, one of Goldman's top traders believes that "a reflationary framework is the right place to anchor your risk-taking" although there are a few key caveats:

I'm trying to balance that anchor point against an instinct that liquidity dynamics - and the trading environment - are changing. If that's all mostly correct, the path higher from here is apt to be choppier and risk/reward is not what it was four or five months ago. in practical terms, this argues for a more tactical trading stance where illiquid positions - and recency bias - are the enemy.

That said, in his final point, Pasquariello writes that if he is wrong on the view that risk/reward is a bit more balanced now, he thinks it will be on the right tail. as the US quickly moves towards herd immunity. In other words, he expects a blow off top in risk assets, due to the following three data points:

  • i. $4.44tr currently sits in US money market funds ($1.5tr is held by retail, $2.94tr is held by institutions). since February of 2020, that $4.44tr pile has grown by … $830bn.
  • ii. US households have accumulated about $1.5tn in 'excess' or 'forced' savings, and Goldman expects that to rise to about $2.4tn, or 11% of GDP, by the time that normal economic life is restored around mid-year
  • iii. attendant to the largest jump in US consumer confidence in 18 years: a record share of respondents said they plan to purchase a home in the coming months. a measure of consumers' plans to buy cars and major appliances also rose. a separate report Tuesday showed U.S. home prices surged to the highest since February 2006.

Pasquariello then shares several "must see" charts (profiled earlier), which also includes the long-term chart of the 30Y TSY, which to the Goldman trader is "the most interesting chart on planet earth right now."

Read the full post here.

Tyler Durden Sun, 04/04/2021 - 15:30

Read More

Continue Reading


Costco Tells Americans the Truth About Inflation and Price Increases

The warehouse club has seen some troubling trends but it’s also trumpeting something positive that most retailers wouldn’t share.



Costco has been a refuge for customers during both the pandemic and during the period when supply chain and inflation issues have driven prices higher. In the worst days of the covid pandemic, the membership-based warehouse club not only had the key household items people needed, it also kept selling them at fair prices.

With inflation -- no matter what the reason for it -- Costco  (COST) - Get Free Report worked aggressively to keep prices down. During that period (and really always) CFO Richard Galanti talked about how his company leaned on vendors to provide better prices while sometimes also eating some of the increase rather than passing it onto customers.

DON'T MISS: Why You May Not Want to Fly Southwest Airlines

That wasn't an altruistic move. Costco plays the long game, and it focuses on doing whatever is needed to keep its members happy in order to keep them renewing their memberships.

It's a model that has worked spectacularly well, according to Galanti.

"In terms of renewal rates, at third quarter end, our US and Canada renewal rate was 92.6%, and our worldwide rate came in at 90.5%. These figures are the same all-time high renewal rates that were achieved in the second quarter, just 12 weeks ago here," he said during the company's third-quarter earnings call.

Galanti, however, did report some news that suggests that significant problems remain in the economy.

Costco has done an incredibly good job at holding onto members.

Image source: Xinhua/Ting Shen via Getty Images

Costco Does See Some Economic Weakness

When people worry about the economy, they sometimes trade down when it comes to retailers. Walmart executives (WMT) - Get Free Report, for example, have talked about seeing more customers that earn six figures shopping in their stores.

Costco has always had a diverse customer base, but one weakness in its business may be a warning sign for its rivals like Target (TGT) - Get Free Report, Best Buy (BBY) - Get Free Report, and Amazon (AMZN) - Get Free Report. Galanti broke down some of the numbers during the call.

"Traffic or shopping frequency remains pretty good, increasing 4.8% worldwide and 3.5% in the U.S. during the quarter," he shared.

People shopped more, but they were also spending less, according to the CFO.

"Our average daily transaction or ticket was down 4.2% worldwide and down 3.5% in the U.S., impacted, in large part, from weakness in bigger-ticket nonfood discretionary items," he shared.

Now, not buying a new TV, jewelry, or other big-ticket items could just be a sign that consumers are being cautious. But, if they're not buying those items at Costco (generally the lowest-cost option) that does not bode well for other retailers.

Galanti laid out the numbers as well as how they broke down between digital and warehouse.

"You saw in the release that e-commerce was a minus 10% sales decline on a comp basis," he said. "As I discussed on our second quarter call and in our monthly sales recordings, in Q3, big-ticket discretionary departments, notably majors, home furnishings, small electrics, jewelry, and hardware, were down about 20% in e-com and made up 55% of e-com sales. These same departments were down about 17% in warehouse, but they only make up 8% in warehouse sales."

Costco's CFO Also Had Good News For Shoppers

Galanti has been very open about sharing information about the prices Costco has seen from vendors. He has shared in the past, for example, that the chain does not pass on gas price increases as fast as they happen nor does it lower prices as quick as they sometimes fall.

In the most recent call, he shared some very good news on inflation (that also puts pressure on Target, Walmart, and Amazon to lower prices).

"A few comments on inflation. Inflation continues to abate somewhat. If you go back a year ago to the fourth quarter of '22 last summer, we had estimated that year-over-year inflation at the time was up 8%. And by Q1 and Q2, it was down to 6% and 7% and then 5% and 6%," he shared. "In this quarter, we're estimating the year-over-year inflation in the 3% to 4% range."

The CFO also explained that he sees prices dropping on some very key consumer staples.

"We continue to see improvements in many items, notably food items like nuts, eggs and meat, as well as items that include, as part of their components, commodities like steel and resins on the nonfood side," he added.


Read More

Continue Reading


“What’s More Tragic Is Capitalism”: BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

"What’s More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years…



"What's More Tragic Is Capitalism": BLM Faces Bankruptcy As Founder Cullors Is Cut By Warner Bros

Authored by Jonathan Turley,

Two years ago, I wrote columns about companies pouring money into Black Lives Matter to establish their bona fides as “antiracist” corporations. The money continued to flow despite serious questions raised about BLM’s management and accounting. Democratic prosecutors like New York Attorney General Letitia James showed little interest in these allegations even as James sought to disband the National Rifle Association (NRA) over similar allegations. At the same time, Black Lives Matter co-founder Patrisse Cullors cashed in with companies like Warner Bros. eager to give her massive contracts to signal their own reformed status. It now appears that BLM is facing bankruptcy after burning through tens of millions and Warner Bros. cut ties with Cullors after the contract produced no — zero — new programming.

Some states belatedly investigated BLM as founders like Cullors seemed to scatter to the winds.

Gone are tens of millions of dollars, including millions spent on luxury mansions and windfalls for close associates of BLM leaders.

The usual suspects gathered around the activists like former Clinton campaign general counsel Marc Elias, who later removed himself from his “key role” as the scandals grew.

When questions were raised about the lack of accounting and questionable spending, BLM attacked critics as “white supremacists.”

Warner Bros. was one of the companies eager to grab its own piece of Cullors to signal its own anti-racist virtues.  It gave Cullors a lucrative contract to guide the company in the creation of both scripted and non-scripted content, focusing on reparations and other forms of social justice. It launched a publicity campaign for everyone to know that it established a “wide-ranging content partnership” with Cullors who would now help guide the massive corporation’s new programming. Calling Cullors “one of the most influential thought leaders in American public life,” Warner Bros. announced that she was going to create a wide array of new programming, including “but not limited to live-action scripted drama and comedy series; longform/event series; unscripted docuseries; animated programming for co-viewing among kids, young adults and families; and original digital content.”

Some are now wondering if Warner Bros. ever intended for this contract to produce anything other than a public relations pitch or whether Cullors took the money and ran without producing even a trailer for an actual product. Indeed, both explanations may be true.

Paying money to Cullors was likely viewed as a type of insurance to protect the company from accusations of racial insensitive. After all, the company was giving creative powers to a person who had no prior experience or demonstrated talent in the area. Yet, Cullors would be developing programming for one of the largest media and entertainment companies in the world.

One can hardly blame Cullors despite criticizism by some on the left for going on a buying spree of luxury properties.

After all, Cullors was previously open about her lack of interest in working with “capitalist” elements. Nevertheless, BLM was run like a Trotskyite study group as the media and corporations poured in support and revenue.

It was glaringly ironic to see companies like Warner Bros. falling over each other to grab their own front person as the group continued boycotts of white-owned businesses. Indeed, if you did not want to be on the wrong end of one of those boycotts, you needed to get Cullors on your payroll.

Much has now changed as companies like Bud Light have been rocked by boycotts over what some view as heavy handed virtue signaling campaigns.

It was quite a change for Cullors and her BLM co-founder, who previously proclaimed “[we] are trained Marxists. We are super versed on, sort of, ideological theories.” She denounced capitalism as worse than COVID-19. Yet, companies like Lululemon rushed to find their own “social justice warrior” while selling leggings for $120 apiece.

When some began to raise questions about Cullors buying luxury homes, Facebook and Twitter censored them.

With increasing concerns over the loss of millions, Cullors eventually stepped down as executive director of the Black Lives Matter Global Network Foundation, as others resigned.  At the same time, the New York Post was revealing that BLM Global Network transferred $6.3 million to Cullors’ spouse, Janaya Khan, and other Canadian activists to purchase a mansion in Toronto in 2021.

According to The Washington Examiner, BLM PAC and a Los Angeles-based jail reform group paid Cullors $20,000 a month. It also spent nearly $26,000 on meetings at a luxury Malibu beach resort in 2019. Reform LA Jails, chaired by Cullors, received $1.4 million, of which $205,000 went to the consulting firm owned by Cullors and her spouse, according to New York magazine.

Once again, while figures like James have spent huge amounts of money and effort to disband the NRA over such accounting and spending controversies, there has been only limited efforts directed against BLM in New York and most states.

Cullors once declared that “while the COVID-19 illness is tragic, what’s more tragic is capitalism.” These companies seem to be trying to prove her point. Yet, at least for Cullors, Warner Bros. fulfilled its slogan that this is all “The stuff that dreams are made of.”

Tyler Durden Sun, 05/28/2023 - 16:00

Read More

Continue Reading


Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after…



Under Pressure From Fat Activists, NYC Bans Weight Discrimination

Discriminating against fat people is now illegal in New York City, after Mayor Eric Adams on Friday signed off on a ban that will affect not only employment, but also housing and access to public accommodations -- a term that encompasses most businesses. 

We're in safe company using the word "fat," as champions of the cause refer to themselves as "fat activists." With the mayor's signature, two more categories -- both weight and height -- are added to New York City's list of protected personal attributes, which already included race, gender, age, religion and sexual orientation. 

As Mayor Adams signs the law, self-described (and everyone else-described) fat activist Tigress Osborn consumes more than her share of the backdrop (James Messerschmidt for NY Post)

Embracing one of 2023's innumerable strains of Orwellian brainwashing, Adams declared, "Science has shown that body type is not a connection to if you’re healthy or unhealthy. I think that’s a misnomer that we’re really dispelling.”

Even the Centers for Disease Control and Prevention say obesity is an invitation to a host of maladies, including to high blood pressure Type 2 diabetes, coronary heart disease, stroke, gall bladder disease, many types of cancer, mental illness and difficulty with physical functioning. 

“Size discrimination is a social justice issue and a public health threat," said Councilmember Shaun Abreu, who introduced the measure. "People with different body types are denied access to job opportunities and equal wages — and they have had no legal recourse to contest it," said Abreu. "Worse yet, millions are taught to hate their bodies." 

A full 69% of American adults are overweight or obese, but our woke overlords would have us believe the real "public health threat" is a nice restaurant that doesn't want Two-Ton Tessie working the reception desk, or a landlord who's leary of a 400-pound man breaking a toilet seat or collapsing a porch.  

The enticingly-named Tigress Osborn, who chairs the National Association to Advance Fat Acceptance, said New York's ban "will ripple across the globe" -- perhaps something like what would happen if the hefty Smith College Africana Studies graduate were dropped into a swimming pool.  

Councilmember Shaun Abreu said he gained 40 pounds during the pandemic lockdowns and noticed people treated him differently

The New York Times reports that witnesses who testified as the measure was under consideration included "a student at New York University said that desks in classrooms were too small for her [and] a soprano at the Metropolitan Opera [who] said she had faced body shaming and pressure to develop an eating disorder." 

Some have dared to speak out against the measure. “This is another mandate where enforcement will be primarily through litigation, which imposes a burden on employers, regulators and the courts,” said Kathryn S. Wylde, president of the Partnership for New York City, speaking in April. 

Implicitly putting the weight ordinance in the same category as Brown vs Board of Education, Abrue said, “Today is a monumental advancement for civil rights, size freedom and body positivity and while our laws are only now catching up to our culture, it is a victory that I hope will cause more cities, states and one day the federal government to follow suit.” 

Taking effect in six months, the law has an exemption for employers "needing to consider height or weight in employment decisions" -- but "only where required by federal, state, or local laws or regulations or where the Commission on Human Rights permits such considerations because height or weight may prevent a person from performing essential requirements of a job." 

We pray there's a federal exemption for employers of strippers and lap dancers. 

Think we're joking? We remind you that the chair of the National Association to Advance Fat Acceptance is named "Tigress" -- and this is her Twitter profile banner photo:

via Tigress @iofthetigress
Tyler Durden Sun, 05/28/2023 - 15:30

Read More

Continue Reading