What’s new
Administrative topics and an introduction
Well folks, its usually in poor taste to start a conversation by talking about the weather, but boy was it a week for the weather. Texas is an ice cube, along with their power grid and their oil refineries. Kidding aside, when weather like that strikes a place like Texas, it ends up being a huge disaster, and this time was no different (due to a lack of climate preparedness, of course, but that is for another newsletter and a different day). Snow and oil don’t play well together, leading to what was a minor boost in crude prices this week up over $60 for a day or so.
We’ll get into this later but the other ‘big’ news item this week was the Reddit/Citadel/GameStop congressional hearing that took place this week. Let’s just say, it was all to similar to the Facebook congressional hearing in 2018 (and this video too if you need another laugh).
Let’s get into some stories.
Did you miss the last edition? No worries! Get it right here and catch up on the madness.
Fundamentals
Where did the markets end last week?
U.S. Indices 5 Day Performance
Dow Jones: +0.25%
S&P 500: -0.02%
NASDAQ: -1.12%
Asia and Europe 5 Day Performance
Nikkei 225: +2.28%
Hang Seng: +1.40%
FTSE 100: +1.54%
DAX: -1.10%
Rates, Spot Prices, and ‘Good to Knows’
Market Madness Portfolio: -0.53%
CBOE Volatility Index (VIX): 22.05
US 10 YR: 1.340%
Crude OIL: $58.93
Spot Gold: $1,783.35
TEDRATE: 0.15
LIBOR (3 month): 0.18238%
U.S. Dollar Index: 90.554
EUR/USD: $1.212
Pound/USD: $1.401
USD/JPY: 105.410 JPY
USD/CNY: 6.455 CNY
Weekly update
An article by Christopher
Financial markets
Equities were mostly down this week and some were, at their best, flat. The fall comes after weeks of new all-time highs and continued upward momentum. It was a short week for trading, with Monday being a holiday here in the states. The same old suspects are to blame for investor woes: economic data (we’ll get into that later on), and stimulus concerns.
Another ongoing trend we’re seeing is the struggling firms jump on borrowing rates typically reserved for the most stable companies. Now, even the most distressed firms can borrow thanks to historically low costs to borrow. This is something to watch as risker companies are typically within the “high yield” debt region because of the high level of speculation around their ability to meet those debt obligations. The higher yield is in place because investors in those debt instruments need more compensation for the higher risk they’re taking. Instead, we’re seeing those high yield firms issue at standard corporate rates, making those investing decisions less clear as it relates to underlying risks.
The real talking point people seem most interested this week was Bitcoin, as it surpassed $50K for the first time and hit $1 trillion in market cap. Cool beans, I guess. I am rather mute on the topic, as you all know, and even more so after seeing this video from WSJ and some musings from other financial professionals that disputed the idea of the decentralization of BTC to begin with. Someone has to be mining all this BTC and that currently is primarily done in China. Last year, China owned roughly 70% of the mining and power that operates the BTC network. And, since possession is 90% of the law, China is quite clearly owning the network. They easily could, and would not surprise me if they did, take ownership over the notional (BTC itself) as well. I’m not sure how decentralized anything really could be if there are countries battling over control of it.
In commodities, the highlight was the crude oil market, both domestically and in the Middle East. Texas was gut punched by a winter storm, leaving millions without water and power, as well as refinery closings. In the Middle East, due to the recovery in prices, Saudia Arabia is set to raise output production, reversing the unilateral decision to cut production late last year. This was seen as a sign of the recovery in the crude market.
Read more here, here, here, here and here.
Economic data and stimulus
As mentioned before, economic data and stimulus are still the usual suspects for financial market worries. The economic data was a mixed bag this week, with a record-setting U.S. retail sales print of 5.3% compared to the expectation of 1.2% which was partially attributed to the $600 stimulus checks recently sent out.
On the not-so-good side of the economic news, weekly jobless claims rose, breaking a multi-week downward trend. The print came in at +861K versus expected +773K. Continuing claims also came in higher than expectations (4,494K versus expected 4,457K). Housing starts for January also printed below expectations (1.58M versus expected 1.658M).
A quick look at yields: U.S. treasuries continued to rise as well, with the US10YR yield surpassing 1.3% as well as the long end of the curve steepening.
A congressional waste of time
An opinion piece by Christopher
The House Committee on Financial Services wasted their time this week. Now, I have not watched the whole 5-hour event, but it was clear to me from what I did watch that these house members know very little about finance or financial markets (which is sad considering we live in the Google Age, but we know how the people on the Hill feel about Google).
I’ve chatted with some folks in my circles (shoutout Maria and Andrew) regarding our feelings related to how this testimony unfolded. This particular scene went viral, particularly among people who know very little about the plumbing behind the scenes of trades. Now what irritated me about this exchange of question and answer (or lack of answers because the CEO of Citadel was not allowed to explain anything) is that the House rep is asking questions in a form of “yes or no” but are not questions that can be answered that way. Then he just becomes irate because he’s not getting the “yes or no” for a question that would require, at minimum, a five-paragraph essay.
The other thing that is a real kick in the pants to someone who studied and works in finance like myself is the blatant disregard by these House reps to actually like 15 minutes and read online about how things are supposed to work in reality on a website like Investopedia. But no, instead they just assume because they’re on this committee that they instantly have all financial knowledge injected into their brains. This is a job for the SEC to investigate and rule on, not random House reps with little to no finance understanding nor experience (given Rep Sherman had his CPA one would think he’d have more understanding of the financial world, but alas…)
I’d like to step back and say that this is not a piece slamming government. In fact, I like government and I believe a democratic (or democratic republic) style of government is as effective as it can be (when compared to other government forms), but there is a big if here. The government can only be effective IF the people in positions of power take it upon themselves to be educated in the committees they represent and are actually promoting laws that benefit the people rather than their sole political aisle affiliation.
Zooming out to look at the bigger picture, Walt at the Heisenberg Report says it quite well:
My point, though, is that it often feels like humanity is wasting precious time and energy on things that, in the final analysis, don’t really matter all that much. Yes, GameStop exposed the fragility of markets, but how many times have we seen markets essentially break over the past several years? I can count at least a half-dozen. If you go back a decade, you find that “fragility events” (as they’re sometimes described by analysts with a skillful pen), arrived at semi-regular intervals, and affected assets far more systemically important than GameStop. (excerpted from Martians-The Heisenberg Report)
Poking on Rep Sherman one more time. The main thing he was badgering on about was Payment for Order Flow (PFOF) which is all fine and dandy, but he missed the ball in every aspect. He did not allow for the public watching to clearly understanding what PFOF is, why it matters, and if anything critically erroneous had happened regarding Citadel and PFOF.
A final note: as Walt said before, since none of this will matter as we move 5 years or a decade away from now, why did we spend time on this instead of trying to put focus on and bring aid to the people suffering in Texas because of this climate disaster? There is no real sense in having a House Committee get to the bottom of something if they have never and will never understand it anyway.
Watch the testimony here. Read more here, here, here, and here.
Quick Takes
To fill in the gaps
Cathie Wood grows more bullish on Tesla. (via CNBC)
Online gambling continues as investors flock into sports betting ETFs. (via CNBC)
NASA’s new Mars expedition. (via WSJ)
World’s largest asset manager, BlackRock, has ‘dabbled’ in BTC. (via CNBC)
Don’t forget, there were many who lost in the GME debacle. (via WSJ)
Marriott CEO dies at 62. (via WSJ)
BTC breaks above $50K. (via WSJ)
Apple taps Nissan for autonomous car discussions. (via FT)
SEC to weigh more short sale transparency following GME debacle. (via WSJ)
Goldman Sachs prepares to launch Marcus Invest, a premier robo-advisory, to the masses. (via WSJ)
A potential downgrade in relationship between the U.S. and the Saudis. (via CNBC)
Some more on the Texas deep freeze. (via WSJ)
General Banter
What’s on the minds of our editors and writers
A pretty good follow-on to the conversation about government interference in free market Capitalism is the general rationalization for Capitalism, which will be an opinion piece for another day.
Reader’s Corner
A place for suggestions for readers like you
The reader might enjoy A Brief Introduction to the Basics of Game Theory, posted on SSRN. If you’re not on SSRN, you should get on there - mostly free research papers = no brainer!
Well done. You’ve made it through the madness. I’ve worked hard to ensure that you leave this page having learned something, and I hope that it benefits you in your daily adventure. Thank you again for checking in.
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