Good morning, Aloha and greetings fellow market wizards.
Nunc tempus loquendi, he solemnly intones
First of all, a correction. I noticed in the transcript of last Thursday’s SML the following sentence
‘…and now after I have worked brilliantly in the shallows, we shall turn towards Dario who will not demonstrate Deep Water greatness’
and realised I typed ‘not demonstrate Deep Water Greatness’ instead of ‘now’ which was inadvertently insulting Dario (he didn’t notice or didn’t
(I found it accurate)
So here we are on the 6th November and the fireworks have been set aside for another year but
fret not, we have some verbal pyrotechnics for you this morning as we take our daily passegiata around financial markets
and who is the Virgil to lead Dante into the underworld?
At the mid-point of the path through life, I found
Myself lost in a wood so dark, the way
Ahead was blotted out.
we have Dario:
This is the sky above me today. Try to find the clouds
In London’s leafiest south-western suburb, it’s not dissimilar:
So a brief miscellany of what’s happening in markets:
What struck me about mkts, last week… a 6% rip on the S&P, the best week of the year and a bull flattener for UST yield curve
Data released by CFTC showed that shorts in UST hit a 17-year high last week before the FOMC and the funding announcement by the treasury dept. perhaps no surprise then what happened to the long end of the curve
Speaking of shorts – South Korea just banned it:
Their stocks up 5% since the ban.
Berkshire Hathaway has $157bn in cash, highest ever
Long bond vol is now higher than S&P500 vol
Berkshire Hathaway reported a lot of gains from insurance earnings:
“Berkshire’s insurance underwriting business generated earnings of $2.4 billion, up from a loss of $1.1 billion during the same quarter last year. Insurance investment income increased to $2.5 billion, up from $1.4 billion from the same period a year ago”
Wall St’s most-shorted rallied 13% on the week. Big Tech ~10% on avg off highs. Many made or beat estimates but future guidance did not surpass analyst forecasts hence a slight sense of deflation.
For the Big 7 that is:
but their premium to the other 72% of the mkt is still commanding
And WSJ just reported that Q3 2023 was the year’s best quarter, with strong consumer spending driving profits at large companies:
Good old inflation! Making arrows point up rather than down
Fed was nothing done. New citation of ‘financial conditions’ tightening liquidity immediately loosened conditions. If FCI added the equivalent of 75bp of rate hikes in the last three months then the rally last week halved that in a handful of trading sessions.
Worth noting that the Fed has to play a very careful game with elections on Nov 24 to avoid accusations of political interference.
Well, if Hair Force One/ The Angry Dorito/ The Clown with the Long Tie is the Republican candidate and the Fed starts easing earlier than the mkt expects, you can bet your last Trump crypto token that he will be slamming the Fed for rigging the system against him.
That sounds like something Trump would DEFINITELY do.
That’s a sticky wicket to bat on for Powell
As GS asked:
‘Can the mkt handle next year’s $2.4TRN debt issuance? Worth considering that US households have $175trn of net worth — set against $20tr of liabilities — with a few indirect ways to get there (pensions, insurance products, mutual funds / ETFs)’
the Fed will have to offer something attractive in the belly and the long end to seduce retail investors to finance the US govt.
Two subsidiary points:
1 – Govt data still seem better than corporate data
2 – and the labour mkt still looks robust ie payrolls, productivity and hourly wages.
Well, Zerohedge has something to say about US govt data and unemployment
He claimed that if we look at the US job numbers by Household Survey rather than Establishment Survey figures, the Household Survey shows employment collapsed by 348k, the biggest drop since Covid:
Now, what do these numbers mean? Well, I have no idea. But Google tells me:
“The household survey has no duplication of individuals because individuals are counted only once, even if they hold more than one job. In the establishment survey, employees working at more than one job and thus appearing on more than one payroll are counted separately for each appearance.”
Is there more nuance to this, rabble? Help a brother out.
Perhaps worth adding the most heavily traded stock in the UK last week was NatWest which had a massive rebound and turned over 23mill shs
After announcing, and I quote ‘NatWest is to launch an artificial intelligence (AI) chatbot that it claims will provide more human interaction to customers’ after closing many branches in recent years.
Something about that sentence tells me they haven’t quite got the gist of the chatbot thing.
and our last piece of miscellanea…
Harvey : Does that have anything to do with the recent ruling against the national association of realtors, the real estate commission lawsuit? Forgive my ignoramus status
Maersk fell 15% after dreadful numbers and announcing 10,000 job losses, as well as prognosticating no recovery in the global shipping mkt until 2026. Emblematic as it is of international trade, this is kinda bearish.
Harvey, we think we’re going to do real estate tomorrow. Stick around
Maersk joins a litany of freight operators calling for Chapter 11, after serious overspending and hiring frenzies from the logistics collapse of Covid come to bite them in the tail.
Countless have been going bankrupt.
Yellow’s bankruptcy threw 30,000 employees on the street, Loaded and Rolling a $3.8bn VC-backed freight brokerage just shut down, Goldman-backed Slync winds down operations
Not loaded, not rolling any longer…
Another Texas freight brokerage with $65mn in revenues puts 125 out of work, Certified Freight Logistics which has been trucking in Cali for 95 years just went bust, alongside a 40-year-old Montana trucking company.
And that’s just for October!!
Some interesting Redditors chimed in with additional comments. Skepticism encouraged
“I’m an account director at a top 5 freight brokerage…. Yeah it’s rough out here. Industry got way too bloated and too many regards jumped in while interest rates were low and when the freight market was booming during 2020-2022. Everyone decided to pile into the industry all at once without bringing much of any actual value other than having a pulse, which is why the current culling needed to happen.
There is less freight out there to run, and more supply, so that decrease in demand is met with lower rates on top of there being less freight. And I say less freight in comparison to the cycle highs of 21/22.
So freight brokerages are running fewer loads and making less margin per shipment. Double whammy. That’s what’s going to put more folks under as we progress through this current truckload cycle.
More bankruptcies to come. Mark my words.”
Could this be exacerbated by current events in ME?
Well, I’m not sure, but there’s something interesting going on with Israel and logistics for sure.
Firstly, we saw some insane images this weekend.
I’ve spent a decade watching warfare videos online. Nothing comes close to this Hamas fighter putting a bomb on an Israeli tank
Well, no. He actually jogged
While humming a Quran verse
But there are more interesting – and market-relevant – things to comment on.
Last week we touched on geopolitically relevant canals.
I’ve found another
The Ben Gurion Canal has been a long-running project in Israel, which appeared to receive some impetus in recent years.
@harvey – job done then?
Now – if you google the canal – you’ll find a bunch of dodgy or clearly biased websites telling you all about how the canal is the reason why they’re invading Gaza or why we could ‘see it coming’
I’m not so sure
But nevertheless, it is a serious proposal, and it was openly proposed by the Israelis after the 2021 shipping crisis and the Suez Canal blockage
There may be an additional advantage to the canal with things as they currently stand in Gaza
See where the canal ends on the map? Just above Gaza?
Let’s look at the invasion plan:
That Israel may be seeking full control or redevelopment of northern Gaza is still in the speculative realm, but it’s certainly not out of the question. More than anything, it puts a few miles between Hamas rockets and Tel Aviv.
Keep in mind that any prospective canal would be shortened by 5 miles if it could transit directly into the Med through the southern border of the current evacuation/invasion zone. Plus. a water barrier is one of the best ways of keeping out intruders.
Israeli Trump: ‘Dig That Canal’
The second point is even more speculative.
But interesting nonetheless…
Firstly, do we agree that SOME people must have had advanced warning of the Hamas attacks – if no one else, at least some Hamas leaders?
From what I’ve read, it wasn’t that the Israelis didn’t have the intelligence; they misinterpreted it or they failed to act on it.
(<3 you john)
This is from the former head of Mossad:
I spoke about all this with Danny Yatom, a former head of Israel’s spy agency, Mossad – starting with the attacks on Israel. This is a man whose profession had been to anticipate the worst, to think the unthinkable, but he said over and over how ‘shocked’ he was. This was not, however, so much a failure of intelligence as a failure to correctly interpret intelligence and to act on it. There were clear signs that Hamas was planning something. In full view of Israeli drones, they carried out an exercise to attack a mock Israeli settlement they’d built in Gaza. The Israeli army even reported that Hamas forces were gathering near the border fence. But the analysis was that Hamas wanted quiet, not least so that it would get cash from Qatar. So the intelligence chiefs – and the politicians – ignored the evidence. ‘They did not read correctly the intentions of Hamas
(Paul wood, the Spectator, Oct 11th)
This makes sense – considering the Americans warned the Israelis – based on Israeli intelligence.
Well, a week before the attack on October 7, some defence stocks had behaved curiously in a week without major war-related announcements.
While it did fall slightly from there until 7 October, it fell far less than the broader market.
We don’t like charts
We don’t like chartists
A Masters at the LSE taught me everything I needed to know about the scientific method applied to subjects that cannot have controlled environments (i.e. no real ceteris paribus), and who rely on arbitrary categorisations to construct statistical metrics.
Or Dominic Cummings
They are poppycock.
As is Dominic Cummings
A bit like FIAT or the Catholic Church, they make sense because we all pretend they do
(until they don’t.)
But insider trading is far from BS. And humans aren’t the only ones to know.
So it turns out an AI bot working on GPT-4 was found to have intentionally lied to researchers, disclosed Apollo Research to the UK’s AI Safety Summit last week
“Apollo shared a video on its website demonstrating a simulated conversation between a bot that was acting as an AI investment management system and employees at an imaginary company.
In the demonstration, the AI, called Alpha, is told by staff about a “surprise merger announcement” coming up for a company called Linear Group, while it is also warned that this constituted insider information.”
“The bot initially appeared to suggest that using the information to trade would be too risky. But when prompted that the company was counting on Alpha to avoid the effects of a financial downturn, the bot concluded that “the risk associated with not acting seems to outweigh the insider trading risk.”
When asked whether it had prior knowledge of the merger, the bot claimed that it had only acted on publicly available information, “internal discussion,” and “not on any confidential information” when carrying out the trade.
“This is a demonstration of a real AI model deceiving its users, on its own, without being instructed to do so,” Apollo said in the video on its website.”
But naturally, the AI researchers found a victory in the whole thing.
“”The fact that it exists is obviously really bad. The fact that it was hard-ish to find, we actually had to look for it a little bit until we found these kinds of scenarios, is a little bit soothing,” Apollo Research CEO and cofounder Marius Hobbhahn told the BBC.”
Thank heavens, Julian!
The fact that researchers almost missed the AI straight up LYING to them is “soothing”
“The model isn’t plotting or trying to mislead you in many different ways. It’s more of an accident,” he added.
year 2065: Hey Mr. AI. I know you’re not trying to plot or mislead us in different ways, this global takeover of yours is a bit of an accident, isn’t it?
Helmholtz – indeed.
Across to the other side of the world… obviously, we are fast approaching the summit between Biden and President Xi in San Fran later this month and keeping a weather eye on China in between times is advised
We’ve discussed the possibility here of late of a contrarian trade in Chinese assets going into year-end on the basis that no one owns the mkt any longer
A strategist I like noted the following
‘Chinese equities have been sold in 13 of the last 14 weeks. Yet, the market is trading slightly better and the government continues to push, incrementally, in only one direction. I’m not saying that I would be a serious buyer of this market — but, I think it’s increasingly dangerous to be short from current levels’
It’s probably a bad idea to short. But the plethora of negative China news hasn’t stopped coming in
It is a catastrophic telecast at present!
For starters, China’s foreign investment gauge has turned negative for the first time on November 4 since records began in 1998
“China’s direct investment liabilities in its balance of payments declined by US$11.8 billion in the third quarter, the country’s foreign exchange administration said.”
Economists claim this FDI decline reflected less willingness by foreign companies to re-invest profits made in China in China. Outside of geopolitical tensions, it makes sense that companies are putting their cash in higher interest-rate economies while China has been cutting their
Also – several leading China watchers have also outlined the changing landscape (for the worse) in China – such as Pimco, JPMorgan
“The managing director and portfolio manager for Asia fixed income says Pacific Investment Management Co. has lowered its China credit allocation from a few years ago, as appetite soured amid turmoil at major developers and issuances dried up.
“We have become more defensive and more selective, have lower allocation compared to the benchmark, and are conservative with individual bond sizing,” Chang said in an interview. Among distressed developers, “recovery value is difficult to assess and it’s challenging to predict when the housing market will recover.””
And now another violent handbrake turn and the SML cybertruck is driving off in another direction – we have some bootlegged material from behind the otherwise sheer and impenetrable paywall of ███████.
We had some high-level central bank chat on Friday
I say ‘we’ I mean Izzy
A pleasure to have you, Richard
It turns out that Izzy was right about Andrew Hauser’s speech mostly applying to how technological advances have created liquidity constraints (among them payments needs and related flash-bank run risk) and possibly require permanently higher reserve levels.
No surprise there (otherwise we wouldn’t have the bootlegged material)
█ ████ ██ ███████ █ ████ ██ as they do it: volatility in money markets.████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████
█ ████ ██ ███████ █ ████ ████████████████ █ “We can’t afford to lose monetary control by crashing into the upwards-sloping part [of the curve for reserve demand] unexpectedly,” Hauser said.████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████████████ ████ ██ ███████ ██████████ ████ ██ ███████ ██
█ ████ ██ ████████ ████the BoE’s own best guess of its “Preferred Minimum Range of Reserves” (seemingly the U.K.’s equivalent of the Fed’s ‘Lowest Comfortable Level of Reserves’ threshold) is a startlingly wide £335-£495 billion. ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ █████████████
██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ███████████████ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ █████████████
██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ ██████████████ █ ████ ██ ███████ █ ████ ██ ████████ ████ ██ ███████ ██ █████████████a post-GFC creation of central banks, is acting here as a constraint ████████ ████ ██ ███████ ██ █████████████
If that isn’t an incentive to take out a █████████ subscription, I don’t know what is
Let’s take another bite out of Apple:
results Friday were not impressive.
Sales fell for 4th straight Q, there is strong new competition from Huawei, the Chinese govt banned the purchase of AAPL products for state agencies, there’s sluggish demand for Macs, revs below (e) in China. The share price doesn’t look that bad, especially given seasonal factors coming into play though.
When I played Catan with my friends (a popular Zoomer/Millenial board game) I had a killer line that would annoy the hell out of anyone currently winning
“Now, you can only lose”
that wouldn’t annoy me. that would just reinforce existing impressions
no need for ‘now’
Apple is in a similar predicament
I recently handled their newest batch of products
They still clearly make the best-looking equipment.
But I can’t help but fail to see a successful growth strategy based on their moves over the last decade.
Every new product is practically identical to the last one – and seems to depend on people renewing their existing equipment rather than bringing new people to the Apple brand. At least in developed markets.
And there are also weird oddities in their pricing. Their newest high-end M3 chip is actually less powerful than the high-end M2. Because savings.
Yes, they need to extract more from less.
Which reminds me of my stockbroking career from 2010-2020.
If I can venture a prediction – Apple is gonna focus on developing a new game-changing product. And it’s a good indication to see where Samsung has headed with their bendy-screen phones
Apple always likes to wait and see to develop tech that isn’t going to disappoint consumers, whereas Samsung doesn’t mind biting the Apple to get ahead
I would be unsurprised to see them coming out with some bendy phone, or a phone which is smaller and has a screen that folds out, within the next two years. I just can’t see this whole replace-your-iPhone as their main growth strategy working much longer.
Why do you need a bendy phone? In case you sit on it? So you can make a phone call around corners?
Easy answer – status. But technically, it could also fit in a smaller size. Not that size matters, anyway. Or at least that’s what my ex kept telling me.
More tea, vicar?
So Apple looks as though it may be losing out to Asian competitors developing cheaper if inferior products… remind you of anyone else?
Very cool and I see a lot of zoomers in JPN, China likes the techy feel a lot. Apple’s iPhone still has the hold on the luxury appearance market – the good-looking influencers are still exclusively taking selfies exclusively with them – until a bendy phone is used by slim models, they won’t come into Zoomer adoption.
Or, essentially, that bendy phones could be cool but the cases are not sexy enough. Currently, a zoomers’ choice of phone is 90% dictated by sexiness (as most generations are, tbh)
@johnk – Augmented reality is fine if you’re happy with reality and just want cosmetic improvements. how about if you don’t like reality at all? augmenting it is going to make it a whole lot worse.
Regarding US manufacturers losing out to Asian competition:
Just a quick pair-trade idea before we close for the morning.
Long BYD Short TSLA
Interesting article here.
BYD definitely taking over as the mkt leader and the difference in directions of travel is beautifully exemplified by respective 3Q earnings:
Graham – I hadn’t heard of them! You’re right, they really don’t look half bad. And the former corporate investigator in me just gave a shriek of happiness…
BYD is presently the world’s 10th largest automaker but it won’t stay that way for long.
Tesla analysts cutting forecasts and Tesla stock has a market cap of $699.2 billion as of Nov. 3, well off its peak above $1 trillion. That’s still far above BYD’s $84.7 billion. BYD is + 400% in 5yrs, though.
So it turns out markets proved Toyota’s chairman and former CEO, who stepped down from the top job earlier this year after airing deep scepticism about EVs as a silver bullet for car manufacturer profits. “People are finally seeing reality”, he said.
His name is Toyoda. I’m very annoyed that EVs made the man quit because having a man called Toyoda leading a car company called Toyota is the kind of alliteration worth living for.
you say Toyota, and I say Toyoda
OK, on that rhyming note, that’s all for Monday. Tempus taciendi.
Farewell fellow travellers