Is ARKK and Cathie Woods time up? J.Powells' clock is ticking...Whether it is bitcoin, SPACs, shorted meme stocks, Tesla or other heavily priced in Growth stocks (High Price/Book value), all of these speculative assets have one common factor, that is the cheapness/availability of money. However, this may all change if in the next 2-3 readings inflation pressure are proven to be persistent. Relatively, will be a very in-detail idea, but bear with me.
Firstly, before I get into analyzing other factors, as the chart shows, the current risk-reward ratio on ARKK is skewed towards the short side with a strategy of directly shorting ARKK, or buying OTM puts @105 or 80, with a stop-loss at 130. There are several fundamentals reasons for shorting ARKK:
1) The concentrated positions of ARKK into few names ark-funds.com as ARKK is an actively managed fund where on the way down it would become increasingly problematic for Cathie to cut losing positions, with a potential of a self-enforcing liquidity spiral.
2) The largest holdings such as Tesla are priced in heavily above the SPX price/earnings(Forward P/E =115, SPX P/E= current 35, historical 16, price/book value ratios(28 vs 4.7), which is simply unsustainable in terms of future expected returns, unless Tesla takes over the world, which simply won't happen by any stretch of the imagination. Granted there seems to be a trend continuation on Tesla, although it may as well be a trap if the FED changes the current course (a discussion will follow below).
3) In the last few weeks since the IPO of $HOOD, ARKKs correlation to bitcoin futures has been 60%, although historical correlation since 2017 is only 20%. It begs the question as ARKK accumulates more and more names whose value is directly derived from cryptocurrencies (Tesla, Robinhood, Coinbase, SQ and others), is holding ARKK roughly the same as holding bitcoin/cryptos as they are both primarily driven by the same factor?
Well it all boils down to understanding the key factor, which as mentioned appears to be the cheapness/availability of money. The question is when will money stop being cheap as it is today? The long drawn out debate will the FED taper, or even worse when will the FED start hiking. To understand how the FED sets their policy, it is based on whether or not they are fulfilling their congress given mandates which are price stability (inflation within target range) and maximum employment (unemployment at or below the long term rate ~5%). Currently based on the spot rates, the market is pricing in that there will be 1 hike in 2020 (Forward 1 year rate in 1 year, ~0.36) and roughly 2 more hikes in 2023. With balance sheet tapering (where the FED unloads bonds to the market in return for cash, or does not buys/tapers as much assets), the current projections are within the start of next year. However, plans may change as they quickly did back in 2019. From this chart it can be clearly observed that during the last policy normalization in 2016 (snipboard.io), the FED only started hiking once unemployment went below 5% (roughly the long term unemployment rate). In a normal environment where the FED isn't trapped by their QE policies, where both inflation and real growth rate are far exceeding their targets as stated by Taylor rule(nominal rates = neutral rate + inflation + 0.5 * (inflation - inflation target ) + 0.5 * (real gdp growth - potential gdp growth), the FED is bound to hike. But they've used the maximum employment "excuse" to not do so.
This is why the recent reading where unemployment went down to 5.4% from 5.9% is scary. This meant that the fed is closer to fulfilling their maximum employment mandate, however they are far beyond their inflation target rate of about 2% =>>>> implying higher probability of more earlier hawkish policy to also fulfill the price stability mandate, because they don't have the maximum employment excuse any longer. Based on the recent readings (services PMI 64 vs 60, unemployment and todays inflation) bonds quickly reacted The current 5 year average (breakeven) inflation expectations are back within the inflation target of around 2% (2.5%-forecasting premium ~0.5%, snipboard.io), although this rate can hardly be trusted any longer as the FED holds roughly 1/5 th of the TIPS market.
This is my attempt of shortening this long story, which relates to ARKK, as ARKK experienced two drawdowns in March and May of ~-30 to -20% during the last episodes of inflation fears when the 10 year yields went to 1.75%. This suggests that ARKK is extremely sensitive to yields above 1.5% given its growth factor exposure. A yield steepening caused by less quantitative easing and more likely rate hikes, certainly implies a choppy market ahead (at best) where value is gaining above growth (). SPX at these levels has returned nearly 20% for the year 2021 so far (4450/3750 -1 = 18.5% +~2% div yield), which is more than a standard deviation above the average of ~8%. It is simply unsustainable to continue the current fiscal and monetary policy stances that has driven asset prices higher mainly due to the multiples expansion, without mitigating the inflation risks that are bound to appear.
Thank you for following along! If you have any questions or points to debate, make sure to leave them in the comments.
-Step_ahead_ofthemarket
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The QQQs in a wedge :
Large caps, SPX futures getting heated up:
Yields
The intermarket picture explainedIn this 10-minute video we aim to explain what's happening in the bond market, and as a result its implications to the USD, to stocks, the USDJPY and gold. Today's US Consumer Price Index (CPI) data due for release on Wednesday at 1230 GMT may be already priced in and prices may not display logical textbook reactions.
CPI @ +99.4% - Looking for Hot 7% TomorrowThe Inflation statistics are heavily skewed with the potential for a large
surprise in store for Chasers.
DX, BONDS, FX, YIELDS appear to have the scoop.
Insiders buying Puts in SIZE.
Crude Oil trade for entry 57-61s after this next retracement.
Economic Activity is slowing to a crawl.
Spending collapsing.
FED wants you to BUY STOCKS.
VIX Shakeout.
Trade Safe, we're
Bonds - US10Y Cannot and Will Not Rise SignificantlyIdea for 10Y Treasury Bond Yields:
I speculate that yields cannot and will not rise significantly until the equity bubble pops.
I think that it will start a wave reaching 0.7 this month.
Why is that?
- There is almost $300 trillion in private sector debt globally.
- Companies used margin debt for share buybacks to boost EPS, creating the illusion of economic growth.
- There is a borrowing cost for private debtors, debt must be serviced.
- 10Y is used as a risk-free rate benchmark for credit derivatives, especially for risk spreads.
- Furthermore, rising yields means that a rate hike would inevitably follow.
- The premium on credit risk is at a record low (BBB).
- Even junk bonds and Greece is negatively yielding.
- Zombie companies are at an ATH (one that isn’t generating enough income to cover the annual interest payments on its debts. With interest rates so low, these zombies have stayed “alive” by refinancing their debts at increasingly lower rates, or simply tacking on more debt to keep breathing. But with rates rising, zombies may be forced to refinance at higher rates.)
- Since debt is increasing, the magnitude that rates can rise before negatively impacting the private sector is decreasing.
Any significant rise in rates will quickly cause mass insolvencies in these zombie companies, which also would cause a cascade of liquidations in yield chasers who had sold credit default swaps - accumulating asymmetric risk. It is a massive, massive bubble, and any significant rise in rates would collapse the equity market and the economy.
The only way to keep equities stable would be for negative rates, but the dollar is without a doubt - rising. As debt rises, liquidity is sucked out of the collateral pool in a proportional amount. You will just eventually get to a point where debt servicing becomes too expensive anyway from a collateral supply perspective. That's the fundamental condition which will eventually bring about the reflexive regression to the mean.
So is it a slow and painful death, or a quick flush?
I'd bet on the latter... more money to be made for insiders who short it.
In fact, I would wager that the Bill Ackmans of the world are betting big on credit default swaps on zombie companies, similar to CDSs/CDOs on subprime mortgages in 2008. People are buying with both hands bonds which are expected to yield less than what they paid for at the maturity. Any change in conditions would cause this to be capitulation into a bid-less market, don't you think? It's pure insanity and there is only one thing to do here.
GLHF
- DPT
Yield Curve: The ultimate predictor of crypto movesThe yield curve, defined as the difference between US 10-year treasuries yield and US 2-year treasuries yield, is an excellent predictor of the next intraday moves in the crypto market. If it is going higher, it means that long rates are increasing faster than short rates and that translates to strong economic activity and higher inflation. Crypto markets love inflation because they serve a hedge against it. Observe the chart, it appears to be a leading indicator on the future direction of crypto prices. Today it really as the case, the yield curve steepened alot (see green vertical line), which was THE signal to buy. You had about 1 hour to load up before the crypto market reacted. Sometimes the indicator has a long lead, sometimes it has a shorter lead and sometimes it may appear even coincident. Now the indicator is not giving any signal, but I just want to show you how great the signal was this morning and the previous weeks!
Non- Farm Payroll Front RunAAII Bullish sentiment Indicator @ All Time Highs.
ROC irrational optimism abounds - while sentiment remains
extremely negative @ 38%.
Housing Prices remain in an extraordinary Bubble with the 10yr
approaching 1% from YCC.
The ES SPY SPX Trend SLOPE is increasing.
USDX appears to be supportive ~ 92. A weak US DX will shove
assets higher within the Negative DX Trend.
A clear structure of the resumption of Down Trend as the Long
DX Trade which Specs chased is failing.
FX Pairs have clear bias to Higher DX, outsized, but not extreme.
Technical Structures across FX remain DX Bearish.
Yields are telling us Equities would move higher and yet the expectations
for the move higher was not met.
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*** Divergences continue to expand to Negative Extremes.
NFP will be front run, Claims have been declining.
August 6th may provide the Catalyst for Bulls, then again Delta is
beginning to show large gains in New Cases among the Vaccinated.
The Market remains extreme, Caution warranted.
We remain Neutral into NFP.
10 Year Treasury Note into Jackson Hole10yr Yields peaked at ~1.70 as the Federal Reserve began YCC
(Yield Curve Control) well in advance of recognition by the
Retail Bond Market.
With a shortage of T-Bills and Janet Yellen attempting to Fund
the Fiscal Malfeasance out the Curve in order to reduce Short
Term funding.
With CASH mounting in Money Market Funds, there remains a
large pool of Cash with the potential to absorb further issuance
while driving Notes to Bonds Yields even lower.
The issue becomes the non-transitory nature of shortages,
rates of labor, price levels for those of us keeping track and
a number of perversions to the integrity of Data presented.
There is a long history of Intervention Failures, the approaching
one will be historic. Europe has by any measure, already defaulted.
This Point of recognition is quickly approaching in August.
It will spread and generate a panic.
The bread and butter of global macroBefore you trade stocks, bitcoin, FX, bonds or anything you have to try and understand how our monetary system works not to miss the big picture.
This video helps you by providing a 10.000 foot view of the global macro landscape. Don't miss the forest for the trees.
Tune in and enjoy!
Another case againt goldThis chart shows that Gold is currently at or nearing a high in comparison to the US Real yields cycle, and not at the buying price that many think it is. A possible 24% correction is in order IMO.
US10Y Strong rejection on the 1D MA50. Long-term bearish sign?A perfect Channel Down has been formed for the US10Y on the 1D time-frame. The 1D MA50 and 1D MA100 have already been broken. The 1D MA150 (yellow trend-line) is exactly within the Higher Lows Zone from the very bottom of August 2020. Will the 1D MA200 (orange trend-line) get tested right on the 0.382 Fibonacci retracement level?
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10 Yr Yields About to Break?When looking at the 10 Yr Yield chart, the price is currently sitting at a key area of support. A breakdown of that support could lead to a massive move to the downside. This would be enough to send equities and commodities soaring.
A bounce from here should take yields right up to two big areas of resistance - first, the recent high around 1.75 and long term resistance at ~1.98-2.00. A breakout of those levels, although highly unlikely, would signal the market actually pricing in rate hikes in the near future. If that were to happen, I'm also assuming equities and commodities would not like that one bit.
Another probable scenario is a temporary bounce up towards the resistance areas, followed by a rejection of those levels. Then, the most logical place for price to move would be down, down, down.
Don't underestimate how important this move in the TVC:US10Y will be for equities and commodities, regardless of which direction it will be.
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US10Y Direction Will Influence NAS100The US10Y started trending up in February. This adversely affected the NAS100 as growth stocks started to feel the pinch of higher discount rates. The 10-Yr reached a high of around 1.75% at the end of March and then began to pull back (red vertical). This supported the NAS100 and growth stocks in general at first, but yields started to drift and the NAS100 followed. However, from 3rd June (blue horizontal), yields started to decline. Again this has supported the NAS100, which charted an all-time high yesterday. Currently, the correlation coefficient is sitting at -0.88, which shows a strong inverse relationship. Tomorrow's Fed decision is likely to have a large influence on the direction of the 10-Yr and as such growth stocks, through their discount rate adjustment.
The Economic Cycle: Painting The Full Picture. This is a very complex topic but I will try to keep it as simple as possible.
This whole story began when the US government printed money to help the economy going and the reserve bank infused money into the market by buying back bonds. These actions did help for a while and the stock market recovered from March 2020 mini-crash, but that printed money caused the dollar index to drop significantly. Consequently, the price of commodities kept rising.
After a while, people started to worry that all those printed money are going to cause huge inflation. Therefore, they started dropping bonds showing their lack of confidence in the economy causing the yields to go up. They instead bought Bitcoin to maintain the value of their money and hedge against a possible crash. That was a good choice because with a limited supply and a high demand Bitcoin acted like gold and went straight up beating other asset classes in returns.
After the election and reopening of the economy, the feds persisted that this inflation is transitory. There are many reasons why they say that including stable inflation expectations, disinflationary technologies, and so on. Due to a phenomenon called “cultural lag” investors believed the feds after a while and when June’s CPI report came out, they almost didn’t react to a whopping 3.5% inflation rate.
This week at the FOMC meeting everyone expects to hear the same thing because Jerome Powell has been pretty consistent with what the feds are going to do in the case inflation got out of hand. They see economic growth in such good health that they are going to start tapering. Unlike, 2013, this tapering is expected to be a relief and lead to a massive bull market.
That said, inflation is going to be around for a couple of years but in the long run, it should go down. And feds are going to stay consistent with their plan to help the economy stabilize over the tapering period.
But what does it all have to do with Bitcoin? A stable economy doesn’t need gold or bitcoin because people would rather have a stable ROI in a productive economy than having their funds held in a volatile asset with a risk of losing 40% of it in a matter of a month.
Of course, the economy won’t stay stable forever and new struggles will come along our way. Whether it’s due to presidential cycles or bitcoin halving or other events, there will be a day that bitcoin will worth 400k.
There is still much to be discussed here, so please feel free to share your thoughts and comment your analysis.
How do you think FOMC meeting is going to affect the market? Are we going to have another Taper Tantrum?
Thanks
The end game is inflation, but the path is unclear.Currently, I think we are in the final stages of this corrective phase. The yield objective is based on the Fibonacci retracements from the second wave, expressly, by the 0.382 to the 0.618 levels.
Detailed decomposition of the current correction in the following picture:
If this labeling is correct, inflation expectations may increase during the rest of the year. Although the title of the publication says long on TNX, the reality is that bonds will lower their prices. Therefore, investors and traders may add risk to their portfolios to hedge their purchasing power (e.g., gold, financial stocks, value-based ETFs, Bitcoin, etc.). Analogous the analysis for yields going down (Government Bonds, Investment-grade corporate bonds, etc.).
Early Warning signal: Yields falling, market crash?Yields falling have been a good predictor of past market corrections. Look at Feb Jan 20, Oct-Nov 18, Jun-Aug 11. Yields falling indicates a flight to safety. Are we in for a stock market crash/correction in the next few months?
Not sure where bottom is, this is just the current trend. Not Fin advice, do you own research!
US Treasury Yield Curve and Inversions.This chart shows three times during the past three decades in which the yield curve inverts. An inversion is when the rate of a shorter term debt security is higher than the rate of a longer term debt security. This is identified on this chart in 2000, 2006, 2019.
Treasury Debt Securities:
Bill; less than one year to maturity at issue.
Note; greater than one year but less than 10 years to maturity at issue.
Bond; greater than 10 years to maturity at issue.
In 2000 the yield of the 3 month US Treasury Bill was about 6.3% while the yields of both the 5 year Note and 30 year Bond were around 5.8%.
In 2006 the yield of the 3 month US Treasury Bill was about 5.1% while the yields of both the 5 year Note and 30 year Bond were around 4.9%.
In 2019 the yield of the 3 month US Treasury Bill was about 2.3% while the yield of the 2 year Note was around 1.8%.