An awful tempest mashed the air
The clouds were gaunt and few
A black, as of a spectre's cloak
Hid heaven and earth from view
The creatures chuckled on the roofs
And whistled in the air
And shook their fists and gnashed their teeth
And swung their frenzied hair
The morning lit, the birds arose
The monster's faded eyes
Turned slowly to his native coast,
And peace was Paradise
- Emily Dickenson (1830-1886), published 1896
The 800-Pound Gorilla
By definition, a tempest is a violent, windy storm. Market watchers might refer to the wild volatility seen across the landscape of highly shorted names with poor-performing underlying business models, such GameStop (GME) and AMC Entertainment (AMC) , as something of a tempest.
Remember when you were kids and the cousins would get together? The adults might get together and talk the talk of whatever it was that adults would talk about back before the invention of the Internet. Back when they only saw or heard from each other a few times a year. "My, how you've grown.... you look just like your father."
Among, the cousins, the boys and girls would scatter after lunch and either do boy things or girl things. Sounds sexist? Maybe it was, but that was then, and this is now.
After dinner, there was no division among the cousins. Someone, usually the oldest, would get the great idea to tell ghost stories, and then proceed to scare the stuffings out of the others. This would end once one of the youngest would start crying and run back to wherever the adults were gathered.
"Prepare to be terrified."
Does anyone among you really believe that this whole recent and wildly volatile period of (specific) single-stock volatility can be blamed upon the retail crowd alone? Of course there has been institutional participation. Of course Wall Street's brigade of algorithmic trading platforms has greatly exacerbated the price discovery overshoot in both directions.
Does no one amongst us ask aloud just how does an aggregate short position rise above 100%? I tried to short GME earlier this week. I could not get the "borrow." How did others get "the borrow" once the entire float was already borrowed? Same thing happened to another trader I know. We do not use the same platform.
Before I go in deeper, do we really want to blame a group of "young" traders who may have figured something out, more so than those who allowed either short sales of "unborrowed" shares or shares to be "borrowed" more than once? Hello? Ground control to Major Tom.
This is the rub that rubs me the wrong way. It is not OK to say that the short position in a certain stock has reached levels greater than 100% of the float and just let it go at that. Elephant in the room, meet your old friend, the 800-pound gorilla.
Now back to a handful of cousins gathered in a suburban backyard, waiting for and dreading the moment when the adults will decide that the time has come to head back to the city. The oldest speaks in slow and measured tempo. Unless one snoozed right through Thursday, then one is already well-aware of the sudden upward lurch in price discovery for anything related to silver. A single message posted on Reddit's wallstreetbets has been blamed. Front-month silver futures went out on Thursday just below $26 per ounce. (Very) early on Friday morning, I see those very same futures trading at $27.08. The iShares Silver Trust ETF (SLV) ran 5.5% on Thursday. SLV is up another 1.5% very early on Friday. The shares of First Majestic Silver (AG) gapped 21% higher on Thursday and are up another 11.7% overnight. All because someone mentioned a possible short squeeze in silver on a popular message board.
If we believe that "the swarm" (and just maybe those institutions behind momentum-driven algorithmic trading) has the power to so easily outmaneuver "Wall Street" or "the hedgies," then might we need to think about where within the universe of financial markets are the most crowded short trades? I am not just talking about a few corporate equities or silver now.
Supposedly, according to a Bank of America poll, U.S. dollar-related shorts were the second most crowded trade globally as reported by Reuters two weeks ago. The same piece points out that speculative hedge fund positioning recorded by the Commodity Futures Trading Commission (CFTC) for U.S. dollars had been negative since last March, and in early January had posted its largest net dollar short in nearly four months. How's the ghost story going so far?
What if "gamers" figure out how to gun the U.S. dollar? What does that do to the U.S. economy? To commodity prices? To global trade? To the Consumer Price Index? To the federal (state and local) government's ability to service both exiting debt and the expected increase in deficit spending? What about household incomes? Household debt? Houston, we may have a problem.
Got your attention? Now allow yourself to think outside the box. The United States, in case you have not noticed, has enemies. What if there were to be a burst in U.S. dollar valuations created by a short squeeze. How negative would nominal yields go for longer-dated U.S. Treasury securities? Now think: What if those with nefarious intent, through shorting Treasury-related derivative products such as futures and ETFs, were able to provoke a short squeeze in Treasury markets on top of what would already be negative yields?
Remember What I Have Taught
In such an environment, the velocity of money would come to a near halt. Hopes for increased consumer inflation based on negative-yielding Treasury securities would be replaced by hopes for disinflation as U.S. dollar valuations soared. All the while, with velocity stalled, outright deflation becomes a possibility or even a probability.
I have done my best in the past to teach you about systemic risk and complexity theory using the "cube" as a model for increasing or even just maintaining the size and scale of economic activity. We already know the policy failures leading to past financial panics were due to a lack of professional interpretation of nonlinear downside risk potential created by increased complexity in networking or connected systems that had not been connected prior to the dawn of the technological age or before the globalization of economies.
Just how much more connected are markets and economies now, now that white-collar workers have been home for 10 months? Where are the underlying networked systems that nobody will anticipate might break down and have a withering effect elsewhere?
Hard assets, kids. I have been preaching this for years. Diversity in portfolio investment is a good thing and diversity across the spectrum of S&P 500 sectors is a good idea as long as one remembers that 60% equity exposure is 60% exposure to one asset class. Precious metals, land, etc. will hold on to a greater percentage of inherent intrinsic value in the event of a breakdown of complex systems. Cryptocurrencies? Only as long as the electrical grid and access to the Internet are not part of any complex breakdown.
I get it. I trade equities for a living. That said, equities and perhaps debt securities as well may have a lot more extrinsic value built into current price discovery, which obviously would be highly elastic (in a bad way) should a number of "black swans" start swimming in the same waters. Our waters. If only Emily Dickenson knew what she put in my head this morning.
Now that I have poured my darkest thoughts out for you, let's cover the marketplace. Equities rallied broadly on high volume on Thursday even though Apple (AAPL) gave up 3.5%, which is a trick in itself. (Yes, I have started to incrementally add to this long position and will continue to do so should the share price fall further.) All 11 sectors moved upward for the session, but moved sideways to lower overnight prior to recovering all of Wednesday's losses. This has created "inside days" for both the S&P 500 and Nasdaq Composite, a sign of trend continuance. The overall trend has been higher, but these indices were rounding, and the very short-term trend seems perhaps to be lower.
Caution will be required on Friday for those interested in putting new cash to work. I do see that the Dow Jones Industrial Average successfully tested its own 50-day simple moving average (SMA), but keep in mind that the Dow Industrials are just 30 names and professionals do not track this index nearly as closely as does the financial media. The S&P 500, the performance of which is key to provoking both portfolio manager action as well as inaction, is headed for a test of its own at that line with equity index futures trading lower on Friday morning.
The index is not really that close yet nor are associated futures, but all that is really needed is one really sloppy day. The level you need to worry about for the S&P 500 is 3714. Some will try to buy that line, and there a battle will be fought, if not this afternoon, then early on in February. But what do I know? That's just what the man in the blackened window is thinking.
1) Everyone saw the GDP on Thursday? Everyone remember the "half-way" back or "reverse square root symbol" economic recovery that we talked about all spring into summer? Yeah, well, that is exactly what happened as economic growth not only slowed for the fourth quarter but on a monthly basis... slowed badly in November and again in December. I'd love to take credit for making such an economic call, but I remind readers (I did mention him at the time) that I lifted that idea myself from Dartmouth economist David "Danny" Blanchflower, a former member of the Bank of England's Monetary Policy Committee (The U.K.'s FOMC). Danny is the one who gave birth to that idea early in the pandemic downturn last winter/spring and deserves credit for making that call.
2) Just a few hours after stating that the online brokerage Robinhood had "no liquidity problems," Robinhood apparently drew on credit lines of up to $600 million in order to meet lending requirements, according to The New York Times. The Times also reports that Robinhood raised separately an additional $1 billion in emergency financing in order to avoid having to place further limits on trading.
Economics (All Times Eastern)
08:30 - Personal Income (Dec): Expecting 0.1% m/m, Last -1.1% m/m.
08:30 - Consumer Spending (Dec): Expecting - 0.5% m/m, Last -0.4% m/m.
08:30 - PCE Price Index (Dec): Expecting 1.2% y/y, Last 1.1% y/y.
08:30 - Core PCE Price Index (Dec): Expecting 1.3% y/y, Last 1.4% y/y.
08:30 - Employment Cost Index (Q4): Expecting 0.5% q/q, Last 0.5% q/q.
09:45 - Chicago PMI (Jan): Expecting 58.2, Last 59.5.
10:00 - Pending Home Sales (Dec): Expecting-0.7% m/m, Last -2.6% m/m.
10:00 - U of M Consumer Sentiment (Jan-F): Flashed 79.2.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 289.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
At the time of publication, Guilfoyle was long AAPL and HON equity.