Forward Note - 2024/01/28
When the Sirens call, be like Odysseus.
One word to sum up this past week? "Uneventful" for index vol traders but "mixed" for those actively involved in TSLA or the semiconductor industry.
The week kicked off on a high note with Netflix's blockbuster Q4 results, exceeding revenue expectations and racking up an impressive 13.1 million new subscribers. This 50% increase from Q3's already notable 8.76 million additions brings their total subscriber count to 260.8 million, with around 8% of this growth occurring in the last six months. Amid stiff competition in the streaming world, such growth levels for Netflix were unthinkable not so long ago, and investors sent its stock soaring by 17% over the week.
However, the excitement was short-lived as Tesla reported a lower-than-expected $25.17 billion in revenue, missing the $25.87 billion mark. More concerning was the mere 3% revenue growth from the previous year, coupled with Musk's admission during the analyst call that demand for their next-gen electric vehicles is waning as Chinese manufacturers gain market share. This news sent the stock tumbling, and Musk’s EV turbulent child ended the week with a 14% decline.
And as if this wasn’t enough, Intel also decided to send some shockwaves to the marketplace and drag the whole semiconductor sector with it. While their results were in line with expectations, it was their cautious outlook for the upcoming quarters that rattled investors. This pessimistic guidance raised doubts about the current high valuations in the sector, particularly NVDA: maybe trading at 80 times its revenue is a little bit … excessive? Just a maybe.
All these hiccups put a dent in the positive momentum observed in the Nasdaq since January and closed the week with a modest gain of 0.62%. The S&P 500 fared slightly better, adding 1%, buoyed by surprisingly robust GDP figures.
The U.S. economy grew by 3.3%, surpassing analyst predictions of 2% and prompting us to revisit last week's poll, where 20% of respondents viewed the U.S. economy as struggling.
With U.S. growth now closer to China's than it has ever been since 2000, it's intriguing to watch the rivalry between these two global growth engines. It also begs the question: where will the next wave of growth originate from?
The big question for next week revolves around the Fed's response to the recent economic growth and the contained inflation: the latest CPE data - Jay Powell’s favorite - came in cooler than anticipated at 2.9%, signaling that everything is still well under control.
The odds of a rate cut at Wednesday's meeting are slim, though. Such a move would be a massive surprise, likely sending the market to the stratosphere.
We're probably in for another round of rhetorical jousting between journalists and the Fed Chairman, delivering a message that the market is already anticipating:
“We are closely monitoring inflation and are committed to bringing it back to our 2% target while sustaining full employment.”
And the journalist/market participant’s answer should be somewhere along the lines of :
“Consumer morale is improving, employment rates are steady, and spending is up. Why wait and risk a recession?”
These are legitimate concerns: while the Mag7 and most SP500 companies still have decent cash reserves, the same can't be said for smaller companies in the Russell 2000. As we highlighted in our Signals du Jour on Thursday, the performance gap is becoming increasingly apparent as investors understand the precarious situation related to high-interest rates.
Could this growing disparity be the first hint of market anxiety? It's a possibility, especially considering how calm the VIX and VVIX have been in 2024. It's tempting to try timing long positions in volatility but remember: the VIX can remain low for extended periods. Recall December 2016 and November 2017, when it never rose above 16 despite… Trump’s first year in office?
Could we be in a similar market regime? It’s hard to say for sure, but the week ahead should bring a lot more clarity to investors' risk perception for 2024.
Meanwhile, let's resist the siren's calls and stay calm during what promises to be a bustling trading week. If necessary, consider taking a leaf out of Odysseus' book: tie your hands behind your back to avoid overtrading while the market dust settles.
In other news
Since the highly anticipated listing of the Bitcoin ETF, the cryptocurrency market has experienced a 20% downturn. Although it recovered some losses last week, closing above $42,000, the expected surge in demand from institutional investors, which was touted to send prices soaring, has yet to materialize.
But it's not been all bad news for everyone. The listing has opened up a straightforward and effective strategy in the newly listed market: the classic cash and carry trade. This involves shorting futures and buying the spot, pocketing the difference. How do you buy the spot, you ask? Well, with the ETF! Replicate at your own risk.
This strategy harks back to the 90s when traders exploited interest rate differences between similar currencies (like borrowing JPY at 0.5% and placing it in GBP at 4%) and is still an important activity for bonds and currencies institutional desks. It used to be a lucrative approach in the crypto exchange world, albeit with risks that are now well-known. The fact that this strategy can now be executed under the supervision of a reputable exchange like the CME bodes well for the business of arbitrageurs, a little less for the speculators.
Thank you for staying with us to the end, and as always, we have a few interesting reads from last week to share:
For insights into monetary policy and macro analysis, we consistently turn to Claudia Sahm's excellent publication, Stay-At-Home Macro (SAHM). Her recent article advocating for a swift rate cut by the Fed significantly influenced this week's Note.
Emile Phaneuf's guest post in
dives into the future of Bitcoin following the listing of ETFs. It's a must-read for anyone interested in the cryptocurrency space.Lastly, here at Sharpe Two, we've been discussing ways to bridge the gap between professional and retail traders. The positive feedback has been overwhelming, and we're grateful for your engagement.
That’s it! Have a wonderful week ahead, and happy trading.
Ksander