Stocks & Equities

Rabobank: There Are Only Three Ways That This All Ends


Our problem, in a Canute shell

As posited yesterday morning, Monday indeed proved that Friday’s market price-action had been about end-of-month short covering in bonds, rather than a sudden market recognition that major central banks are ahead of the curve in controlling longer bond yields. Monday was a new day, a new week, a new month, and a new way to show us that inflation is still something bonds are unhappy about.

As such, at time of writing, long bond yields are going up; and so are stocks; and so are commodities. Yet the first and the third trend on that short list risk hitting the second, as we have already seen graphically displayed of late.

To repeat the analogy from yesterday, central banks are going to have to do something other than just expect markets to retreat at their verbal command like King Canute, whom popular British legend says believed the tides would obey him as he sat on his throne on the seashore.

They will certainly need to do more than the ECB did yesterday in sending the signal, genuine or not, that it may be scaling back its QE bond purchases just as at least one governing council member jawboned that it may need to increase it. (Markets, unlike tides, can count.)

They will arguably need to act more like the RBA, which smashed bond bears yesterday with a doubling of its QE purchase at the longer end to AUD4bn. However, it is vitally important that central banks in general, and the RBA in particular, understand that the huge intra-day drop in 10-year bond yields seen in the Aussie market yesterday was the product of follow-through short-covering from the US on Friday (i.e., the tide decided that it wanted to go out) rather than a reflection of shock and awe at the figure of AUD4bn.

The tactical risk for markets is that the conservative RBA, which meets today, sits on its throne with its crown at a jaunty angle, strokes its beard, and proudly announces that it is in full control of the curve. If so it, and then others by extension, are going to get pretty wet, pretty fast.

Yet our good King Canute and the central banks differ: the latter *do* have the ability to control the curve if they really want to; they *can* peg yields wherever they want them to be. Indeed, one can expect the market to start calling for exactly that both in word –and they are, with calls for the Fed to shift to a new Operation Twist focusing QE at the long end of the curve– and in deed, through both higher yields and bear steepening, with every inflation anecdote and data release.

As has been underlined here for years, and many times recently, the only problem with central banks displaying such awesome powers at a time when input prices are soaring is that there is no going back to normal market tides afterwards: no ripples; no waves; and certainly no surfing. The sea will be artificially becalmed – but lots of important things will still drown.

Tactically, let’s see what the Fed’s Brainard and Daly have to say today as they get their latest chance to dip their toes in the water on this key topic. Strategically, however, and given King Canute is NOT applying his powers to the labor market *directly*, where the waters still remain full of sharks and dangerous undercurrents (and no USD15 minimum wage), one has to recognize that there are only three ways that this all ends up: the tide is either coming in or going out, so to speak. Either:

  • Central banks refuse to step in; longer yields rise sharply, and probably overshoot; stocks are dragged down; the US Dollar is pushed up; commodities are dragged down; markets start to panic; governments start to panic; corporations start to panic; and everyone ends up in rags crammed onto the tiny desert island of the short-end of the yield curve under a solitary coconut tree; or
  • Central banks step in; longer yields are crushed, as we saw Monday in Australia; stocks rally further; the US Dollar is pushed down (assuming the Fed is doing this); commodities are pushed up; markets are on fire; governments are free to spend – if they can bothered, which still looks unlikely; corporations are free to build lots of ‘useful’ projects like The World islands in Dubai; and those long assets get to sit on man-made islands drinking cocktails under coconut trees, while those long labour get to swim with the sharks in wave-free seas to serve the drinks to them; or
  • Central banks and governments step in; and they focus on the labour market *directly*, which will have to involve building a whole series of dykes to keep liquidity in and other fishers out, in a proletarian version of The World islands in Dubai where everyone has rolled up trousers and wears a white hankie on their head; and only the rich end up on a desert island, one way or another.

So which of the above is really nautical, and which is nice? That’s our problem in a Canute shell.


Airbnb and DoorDash went public at the same time but see very different paths post-pandemic


(CNN Business)Airbnb and DoorDash went public the same week in early December and were both met with strong demand from investors. But in their first earnings reports as publicly traded companies on Thursday, the two sharing economy businesses signaled very different possible paths forward after the pandemic ends.

In a letter to investors, Airbnb said it is “preparing for the travel rebound” in 2021 after seeing bookings through its platform drop 41% in 2020 as people largely stayed home due to the pandemic.
“As the vaccine is rolled out and restrictions lift, we expect there will be a significant travel rebound,” the company wrote in the letter.
DoorDash, by contrast, has benefited greatly from people ordering food and essential items while staying at home, with revenue of $2.89 billion last year, more than tripling from the year prior. “While the Covid-19 pandemic was a tailwind for all online commerce in 2020, we are proud of the outsized gains we made relative to category peers,” the company said in its letter to investors.
But there’s some cause for concern ahead. While the company said it hopes “markets will begin to open up soon,” it also hinted at a resulting negative impact on its business. DoorDash said that this return to normal could result in “declines in consumer engagement and average order values, though the precise amount remains unclear.”
While shares of Airbnb were essentially flat in after-hours trading Thursday following the earnings report, DoorDash stock fell more than 11%. Both companies remain well above their IPO prices.
For now, both companies continue to face challenges.
Despite strong revenue growth in the fourth quarter, DoorDash’s losses grew, too. It lost $312 million in the quarter, compared to $134 million during the same period a year earlier. The company had turned its first profit — $23 million — in the second quarter of 2020, before reporting losses again in the third quarter.
Airbnb, meanwhile, posted a staggering loss of $3.9 billion in the fourth quarter, with $2.8 billion of that related to stock-based compensation. The company said it lost $4.6 billion in 2020.
In its earnings report, Airbnb focused on the fact that its revenue for the fourth quarter was down “only 22% year-over-year, demonstrating Airbnb’s resilience.” It brought in revenue of $859 million in the fourth quarter, despite surges in coronavirus cases.

The fundamental numbers still don’t make sense

GameStop’s Roller Coaster Ride Resumes

GameStop GME +35.7% had another huge move up on Wednesday after the company announced the CFO was resigning the company. Normally a stock declines when a CFO suddenly departs but GME increased over 100% yesterday, moving from $44.97 to $91.71, an increase of 104%. It continued the move in the after-market, rising $76.29 to $168, up an additional 83%. The market cap at Wednesday’s close was $6 billion and in the after-market was $11 billion.

The Wall Street Journal reported that, “GameStop’s finance chief was forced out of his role as activist investor Ryan Cohen pushes for a digital transformation of the ailing videogame retailer.” In this type of situation it could make sense for a stock to move higher but not to double. Wednesday’s rebound and the follow-through in the after-market is probably being driven by the Reddit crowd. They need to be very wary of another steep rise followed by another sharp fall.

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Some Words Of Comfort For Everyone Panicking This Morning


Watching the market’s panicked reaction this morning as the reality of the recent surge in first breakevens then real yields, is finally appreciated by the “cubic zirconium” hands, the momentum chasing algos and the puking CTAs, can’t help but bring a smile to the face of any market cynic who has seen this hilarious market reaction ever so often when markets freak out over a modest if rapid rise in yields (putting the 10Y in perspective, it is at 1.35%, well below any level it traded at prior to the Covid crash of 2020 and financial conditions are still just about the loosest they have ever been).

So, with the world seemingly coming to an end – if only for all those WallStreetBets traders who have never seen a 3% drawdown in their trading careers – here are some very quick words of comfort from Deutsche Bank’s Jim Reid who – unlike so many this morning – gets that there will be no real rise in rates “for the most of our careers.”

Here is Reid:

I did a CoTD showing real yields back over 200 years and highlighted that the only time real yields are negative for any period of time are around episodes of high debt. Given today’s debt levels, it’s likely real yields will stay ultra low for as far as the eye can see even if we’re seeing some cyclical pressure now.

And the punchline:

So with debt so high and likely to go notably higher, it is likely that real yields will have to stay artificially low for a very long period of time. Any return to something close to long-term averages would have grave consequences for debt sustainability. The Fed would likely step in well before this point.

Financial repression and QE will likely be alive and well for the rest of most of our careers.

Why this matters? Because as the IIF forecast back in November, “if the global debt pile continues to grow at the average pace of the last 15 years, our back-of-the-envelope estimates suggest that global debt could exceed $360 trillion by 2030—over $85 trillion higher than current levels.”

Needless to say, $360TN in debt will never happen if rates rise from current levels without apocalyptic consequences.

What this means is that the Fed will never again allow rates to go up again or even approach reasonable levels, or else everything – not just stocks – but global economies and society will crash. It also means that the Fed’s nationalization of the bond market which started with purchases of IG bonds and junk ETFs last year alongside the tsunami of liquidity unleashed last March, is about to be complete.

So for everyone panicking about rising rates and liquidating stocks (such as what the CTAs did this morning) over fears of imminent rate hikes…  don’t.

The Only Reason To Be “Bearish” Is “No One Is Bearish”


I had to do a double-take recently when reading a CNBC headline that stated: “The only reason to be bearish is there’s no reason to be bearish.”

It is indeed hard to argue the point. As the article explained:

A majority of investors finally agree the V-shaped recovery is at play,” according to the Bank of America Global Fund Manager Survey. Plus, a record percentage of money managers believe that global growth is at an all-time high.”

Key Findings

  • More than 90% of investors believe the economy will be more robust in 2021, with a consensus it’s a V-shape recovery. For the first time since January 2020, chief investment officers want to increase capital spending rather than improve balance sheets.
  • Fund managers’ allocation to cash is down to 3.8%, the lowest since March 2013. Such was just before the “taper tantrum” era under former Federal Reserve Chairman Ben Bernanke.

When “everyone is in the pool,” it is an excellent time to remember a basic premise of investing from our post on trading rules: 

Opportunities are made up far easier than lost capital.” – Todd Harris

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Frankly, we’ve had it with the constant stream of lies from Robinhood and neverending bullshit from the company’s CEO, Vlad Tenev.

With Tenev scheduled to testify on Thursday, alongside the CEOs of Citadel, Melvin Capital and Reddit, the apriori mea culpas have started to emerge – if a little too late – the former HFT trader spoke late on Friday on the All-In Podcast hosted by Chamath Palihapitiya, who had strongly criticized Robinhood over the trading restrictions, and Jason Calacanis, a Robinhood investor, and said that “no doubt we could have communicated this a little bit better to customers.”

What he is referring to, of course, is Robinhood’s outrageous decision to restrict the buying of 13 heavily shorted stocks on Jan 28 that had been driven to record highs, including GameStop, whose shares had surged more than 1,600%.

And then he decided to pull the oldest trick and deflect attention from his own mistakes by blaming “conspiracy theories.”

We are confident that this week’s Congressional hearings will quickly get to the bottom of this critical question of just how profitable this orderflow – which it paid Robinhood $362 million to procure – is for Citadel, because anything less will confirm that this latest hearing is nothing but a kangaroo court meant to appease retail investors that someone in Washington is doing something… when in reality everyone knows that what Citadel wants, Citadel gets and there is no sign that Citadel will ever tire of making billions out of the same orderflow for which it paid subpennies on the dollar to Robinhood.

As for Robinhood’s trite virtue signaling of taking from the rich and giving to the poor, all it took was 30 billion subpenny rebates from Citadel for the firm to remember who really calls the shots.