The Weekly Random Walk – August 21, 2023 From Stephen Colavito
An Aggregation of Various Economic, Market Research, and Data
One Hit Wonders
Because of our travel schedule, we are bringing our best “One-Hit-Wonders” from Playtone Records this week. It’s that thing we do (Tom Hanks movie reference, BTW).
From Dealer Desk
One of the reasons for the low volatility and the grind higher in equities over the last few months has been the long gamma positions held by dealers. For those who don’t know, long gamma profiles led to frequent delta hedging, preventing significant daily moves in the S&P 500 (for lack of a better term, it was a market “safety net”). However, this profile has now turned short, and according to sources at Goldman Sachs, it’s now adding to the swings in the S&P rather than muting them. As we have discussed at nauseum, we continue to expect volatility to pick up in equities over Q3 and Q4.
Correction In AI
Citigroup’s Index of global AI names, CGTSAIAI, has fallen dramatically over the last week and is not at levels similar to those reached at the end of May. The selling began in Asia but is now global, with shares of Apple and Nvidia back to their May levels. Citi’s US Fear and Greed Index indicates that sentiment will drive the S&P lower still.
Q2 Wrap-up
Now that the Q2 earnings season is ending, overall earnings beat expectations, justifying the equity over-weights that developed through Q2. However, over the last three weeks, we have seen a pullback in positioning from discretionary investors, likely due to concerns that earnings may need to improve in future quarters, plus there is less urgency to chase returns. Total net call buying (calls-puts) has turned negative to the lowest level in the last four months. It appears that the bullish sentiment is fading.
Stocks Can’t Look The Other Way
There is an index called “The Recession Gauge,” which is an indicator consisting of 14 recession sub-models. That indicator continues to infer that a slump (recession) is likely, with half of the data points currently activated.
Equities have ignored this index in 2023. As the chart below shows, the S&P typically has a very close relationship with the outperformance of leading versus coincident data. But this year, stocks have rallied despite still weak leading data.
Despite the Fed raising rates, loose financial conditions may be one of the reasons equities have departed from this indicator. However, mean reversion would tell nerds like us that 1) the Conference Board Leading Index needs to improve drastically or 2) equities need to fall closer to the index.
Where Did All The Savings Go
The San Francisco Fed wrote a note that got little attention in the mainstream financial press but one that caught our attention. In the memo, the San Francisco Fed explained that excessive savings of US households would be depleted by the end of Q3 2023. This report and the issue of excessive revolving credit (i.e., credit card debt) that we have highlighted suggest a storm may be brewing in the coming months.
The chart below shows that excess savings totaled 2.1 trillion dollars in August 2021, thanks to helicopter money by the government. Since then, personal savings rates are now below pre-pandemic levels, signaling an overall drawdown of pandemic-related excess savings when inflation was outpacing wages, forcing households to pull from savings to make ends meet.
I welcome you to watch if you have not seen this on YouTube. Someone that was NOT a one-hit wonder was Milton Friedman. This 3-minute masterpiece still applies today and is something our government still hasn’t learned. More importantly, something voters still haven’t learned either.
https://www.youtube.com/watch?v=F94jGTWNWsA
Take-aways, Bullet points, and Various Miscellaneous Things
Continued calls with our counterparts and trading desks led to the same conclusion: no one knows what’s next for the economy and markets. We hate the term “this time it’s different” because old tapes play; however, the circumstances behind this economy (COVID, stimulus, etc.) are different, and this is a “one-hit wonder.”
What seems to be a common trait is that it’s tranquil on trading desks right now. Maybe because kids are returning to school (the nest got empty for us quickly over the last few weeks) or the end of summer vacation, but we would say activity levels are 2 out of 10.
The big surprise this week was retail sales which continue to show strength. The consumer (like the Government) seems to love debt until they don’t. Credit card balances continue to rise as savings continue to fall. That trend did not stop in the month of July.
We continue to like a defensive posture because the data does not appear terrific. September and October are historically volatile months for equities, and nothing in the outlook gives us pause to think that won’t continue.
Interesting that Michael Burry (from the Big Short movie) and founder of Scion Asset Management, has bought put options with a notional value of 739 million against the Invesco QQQ ETF and separate options with a notional value of 886 million against the SPDR S&P 500 SPY. With more than 1.5 billion, which is short against the market, Michael thinks the market heads lower.
Lastly, in the miscellaneous topics category, you will fly through the world's busiest airport if you visit Atlanta (our home). Atlanta Hartsfield-Jackson saw 93.7 million passengers in 2022. That was 20 million over the second busiest, Dallas-Fort Worth, at 73.4 million. We fly out of ATL at least two times a month, and the airport is reaching maximum capacity. Like Chicago or Dallas, we hope Atlanta opens a second airport in the next ten years (there are no plans). Parking and TSA are a mess (even with status and pre-check), and the airport is becoming the “Spirit Airlines” of airports, with people not having a clue about general etiquette. You have now been warned.
We don’t expect things to pick up until after Labor Day week. So next week, again, it will be a bit abbreviated. However, we will try and hit some highlights for you as the week progresses.
Thank you for reading. We appreciate you. Trade and invest with caution
Have a great week.
Stephen Colavito
Chief Investment Officer
San Blas Securities
stephen.colavito@sanblas-advisory.com
General Disclosures
This research is for San Blas Clients only. The opinions represented in this research are that of the CIO, not advisors or officers of San Blas Securities. This research is based on current public information that we consider reliable, but we need to represent it as accurate and complete, and it should not be relied on as such. The information, opinions, estimates, and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate. Some research can and will be published irregularly as appropriate in the analyst’s judgment.
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