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Retail Traders On The Driver's Seat

Updated: Sep 25, 2020

BentinPartner Weekly

Dear Reader,

Stocks retreated last week, bowing under pressure of profit taking in the US tech sector after Tesla dropped sharply on Tuesday.

To mitigate the impact of Tesla related blues, some observers argued that it was reassuring to see some heat going off this ticker but hopes still dominated among Tesla investors that they could stick with it as long as they are properly diversified with Amazon and a few other covid related disrupters. Perhaps last week’s shift favoring value was just one of these days… because what is driving equities nowadays is “intangibles” not “tangibles”, meaning that old fashioned PE metrics (both the way “price” is calculated and “earnings” interpreted) and book value do not work anymore.

However, a battery of factors compounded the idiosyncratic Tesla weakness last week namely; looming US elections and the risk of contested results; Congress being unable to strike a new fiscal deal a few weeks before the elections; building trade tensions with China; rising pockets of geopolitical or social tensions (mounting risk of a Taiwan military standoff, Turkey arguing with Greece, Belorussia social unrest, risky India/China border incidents), a revival in the number of Covid infections around the world (the numbers of infections in India rose by 1mn last week) and mounting evidence that the QE economic recovery is turning out to be slower than expected (US jobless claims started to increase again last week).

We’ll have to find offsetting positives to revive risk appetite going into November and it is hard to see too many of them at the moment, besides the Fed FOMC likely to confirm this week that it will look past and away nascent inflation numbers for a while before starting to think about thinking to raise rates. Last week showed some not insignificant increase in US inflation numbers (US CPI rose by +0.5% mom in August after rising +0.4% and +0.6% over the previous 2 months) while a Harvard Professor argued that inflation may not be as low as stated to justify rates being as low for other reasons than lightening the burden of exploding global debt levels.

Wild fires in Oregon, home to beautiful lakes, rivers and waterfalls also contributed to dampen sentiment, which will serve as another eye opener on climate change related calamities. Some positive news emerged from Chinese economic data last week (China’s exports rose for the third consecutive month by 9.5% yoy showing the strongest gain since March 2019 and the trade balance with the US rising to USD34.24bn in August from USD32,4bn), fueling a more positive narrative there.

Last week, the spread between 1m implied vols for the Nasdaq (VXN) and the S&P 500 (VIX) reached its widest since 2008, underscoring investors’ preference for large cap growth stocks and the fact that the Nasdaq remains driven primarily by speculative call purchases.

Another interesting statistic was the historic inversion of retail traders now originating the majority of all call buying. Softbank was finger pointed for doing the same (and mostly the right thing until proved otherwise) as retail traders. Still, it drew the ire of Softbank investors to the point that the company announced it might go private again (to avoid being caught in the public eye) which would go hand in hand with increased borrowing, yet another mostly negative side effect of ZIRP which will also exacerbate the injustice of taking interesting companies (such as indeed Softbank…) away from the “public” investment landscape.

Over the past week, the S&P500 sold off by -3,3% (3,8% YTD) while the Nasdaq100 sold off by -5,9% (27,2% YTD). The US small cap index sold off by -3,0% (-10,0% YTD, Z-score -2,2).

CBOE Volatility Index dropped by -20,0% (95,0% YTD) to 26.87.

The Eurostoxx50 gained 1,7% (-9,5%), outperforming the S&P500 by 5 %. European markets outperformed as tech underperformed, driving flows more towards value and cyclical sectors.

Diversified EM equities (VWO) dropped -1,5% (-2,2%), out-performing the S&P500 by 1,7% while local currency debt markets behaved quite well despite a distinct bearish undertone for global equities and perhaps some confirmation that this asset class is gaining in attractiveness whatever happens to risk appetite.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,5% (-3,0%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,1% (-2,0%). GBP suffered a blow from renewed Brexit related tensions as London said it may renege on its previously agreed exit deal. GBP weakness could accelerate if BoE decides to cut rates to zero (-10bps) in response to a slowing in the UK rate of recovery witnessed in Q3.

10Y US Treasuries rallied -5bps (-125bps) to 0,67%. 10Y Bunds dropped -1bps (-30bps) to -0,48%. 10Y Italian BTPs dropped -3bps (-43bps) to 0,98%, underperforming Bunds by 2bps. US 30-year mortgage rates dropped to an all time low last week at 2.86% but not all is good news in the US real estate market. The number of empty rental apartments nearly trebled to 15’000 in New York compared from last year. There is also a looming severe problem in commercial real estate (with one hotel in four nearing foreclosure and 25k retail stores also expected to close this year with half of them in need of relief). This could end up being the next hot spot for the Fed to focus on.

US High Yield (HY) Average Spread over Treasuries climbed 8bps (160bps) to 4,96%, driven by weaker stock prices. Still with USD300bn issued so far, US HY is just USD30bn away from having a record all time high issuance year as yield starved investors continue to pile on more credit risks.

US Investment Grade Average OAS climbed 2bps (38bps) to 1,39%. In European credit markets, EUR 5Y Senior Financial Spread climbed 5bps (13bps) to 0,65%.

Gold gained 0,3% (27,9%) while Silver dropped -0,7% (49,7%). Major Gold Mines (GDX) dropped -0,3% (40,6%).

Goldman Sachs Commodity Index sold off by -3,8% (-30,5%). WTI Crude sold off by -9,8% (-38,9%).

Over the week end and next week…

S&P +25 points (delivering a nice algo sucking sound); Nikkei +0.5%

Ø For the Tennis lovers, here was a nice rally…Thiem won the New York Open yesterday…

Ø The Fed (outcome on Wednesday), BoE (Thursday) and then BoJ (Friday) will meet this week.

Have a nice week ahead.

Marc Bentin, BentinPartner GmbH

Founder, Chief Investment Officer


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