WEEKLY MACRO NOTE - All Bubbles Eventually Pop

Read Time: 11 mins (A bit of a long one so strap yourselves in!)

I will go into more detail on Apple in a minute, but if you want to watch a short and entertaining video clip about the psychotic bubble we are still in, then I recommend this 3-minute video by Hugh Hendry, where he reacts to Cathy Woods recently reiterated price target of $2000 on TSLA by 2027.

Funny right? now let’s get into the nitty-gritty.

WEEKLY RECAP

Markets have been in the doldrums for most of April, with tight ranges, low volumes and little to no volatility. While these times can feel dull and boring, complacency here can be fatal when a move eventually gets going.

The SPX lost -0.1% this week and is up 0.52% so far in the month, trading within +/-1% of 4125.
The average daily range from open to close has been about 39 points, less than 1%, and the average gain or loss from open to close has been 13 points or about 0.3%. The average volume has been about 15-20% lower than the average volume during the previous 3 months.

Even the greatly loved Tech sector has been stagnating and is stuck in the mud, as you can see from the price action in the QQQs over the last 3 weeks.

What is even more staggering, if we zoom out a little, is what is going on under the hood.

If we compare the SPY ETF which represents the traditional S&P500 Market Cap Weighted Index to the Invesco RSP ETF which is an Equal Weight S&P Index, where each stock is assigned an equal weight, we see the former hugely outperforming, up 7.3% this year vs the equal weight up 2.7%.

If we remove the Maga Cap techs from the SPY index, i.e, AAPL, MSFT, AMZN, NFLX, META, GOOG, NVDA the divergence in YTD performance is even more staggering.

This so-called Bull Market is really only driven by a handful of companies, the usual club of 7, while breadth is at 15 years lows.

And seen as we are talking about concentration, the combined weighting of AAPL & MSFT in the SPX has hit a new all-time high of 13.3%. So 1/8th of the Index of the 500 largest US companies is composed of 2 companies alone, which is the most concentrated it has ever been. Historically when the levels of concentration in the index have been this high, it has tended to coincide with major market cycle tops, not to mention the downside tail risk these levels of concentration can lead to.

One last chart, to give this even more perspective, is if we compare AAPL to the Russel, which is made of 2000 smaller-cap US companies. AAPL is up 26% YTD, the RUT 3%.

One stock to rule them all? but for how much longer?

I am going to go out on a limb here and call a top in AAPL, or very close to one, and I want to be short the company with a long-held and now reiterated target of $95.

There have been 3 opportunities to short Apple, here comes the Fourth. This is a trade I would expect to play out over the next 3-4 months, even if it takes a couple of weeks to get going. Short interest on apple is currently 0.7%.

Other than the obvious $2.6T bubble this widely owned company is in, management, the CEO & CFO have all been unloading stock ahead of the next earnings call. The fundamentals are deteriorating, computer sales are falling worldwide (Lenovo just slashed another 4200 jobs), trade data out of Taiwan and South Korea continues to be abysmal and we have heard hints of even Apple looking to cut a few jobs.

Even from a longer-term perspective, this is a company which is priced with a growth multiple while revenues are slowing big time. Their Q4 2022 revenues (their Q1 reporting period) were down -5.6% YoY, and the next few quarters are not likely to be much better. Further, on top of the difficulties and costs they are facing diversifying manufacturing out of China, I also think that the Apple store faces increased regulatory pressures for its non-competitive practices over the coming years.

Revenue estimates for this year have come down to a decline of -1.5% which seems quite optimistic, but for 2024 and 2025 expectations are of almost 7% YoY growth, which again, seems optimistic, unless the AR/VR device they are set to lunch fairs 100X better than METAs quest.

The other thing people fail to do is adjust earnings for inflation, but do that and you quickly see Apple’s real revenues have been declining for a few quarters already.

Another Bubble cap stock which I think is in the process of topping out is NVDA, and while I won’t go into the details on this, I think one has only to look at the chart to understand where I am coming from. Not to mention the AI mania-driven price gains, which as a narrative runs its course always reverse and are given back. Short Interest on NVDA is currently at 1.5%.

THE DOLLAR & THE DEBT CEILING

Short-term (6m to 1Y) US Credit Default Swaps have reached all-time highs. Think of these as insurance premiums which pay out in the event of a default of the US Gov on its liabilities.

The VIX at 16 seems incredibly complacent about this, even if the debt ceiling debate has always been resolved in the past, and will likely get resolved once again.

The question is When does it get resolved and What happens afterwards?

Back in early March, while the US regional banks were blowing up, I suggested that the Treasury General Account was being depleted rather quickly and ran the risk of running dry ahead of the anticipated deadline in early June

Fast forward one month and this hunch of mine seems very much to be the case.

This is in part driven by lower-than-expected corporate taxes and capital gain taxes income.

Of course, if Government officials and economists are unable to forecast economic activity, how can one expect them to be able to forecast tax revenue? Who could have possibly thought that Capital gains taxes would have come in lower for 2022? Shocker!

The other factor to consider is that while the Fed used to send the Treasury money via remittances every month, the Fed is currently running at a net loss/deficit on its holdings, so while no one needs to subsidize this loss, because it’s the Federal Reserve, the result is a couple of billion a week less going to the Treasury than they used to. But that’s pennies, what’s a few Billion, when we are talking about Trillions of dollars of debt?

While I do not think the US is headed for default, what everyone needs to be aware of is that the moment the Debt Ceiling issue is resolved, Yellen will start issuing debt again, and likely in large amounts, resulting in a huge drain on liquidity.

Remember my note at the start of the year Can bears swim? where I discussed how Yellen draining down the TGA was adding liquidity to the market and offsetting Fed QT? past the debt ceiling we could have QT on steroids, as we go from Net Zero QT to TwoXQT.

Think of it like this:
Until Now: Powell QT + Yellen QE = 0
Up Next: Powell QT + Yellen QT = 2 QT

The sooner the debt ceiling gets resolved the sooner this kicks into motion, so the latest date should be around June. But of course, I am not the only one talking about this, so does Mr Market, who can oft be as bright as he is stupid, front run this? We shall soon find out!

One last point I want to raise here is about the Dollar. I think a large factor in the US Dollars recent weakness can be tied to the debt ceiling issue, more so than this De-Dollarization narrative swimming around the web.

Personally, I think if liquidity starts to be drained again and market volatility rises, the DXY could make one more trip up to about 110.
But I am not going to lie, and I will admit I am a little less confident in this than I was. I would not want to see the index spend too much time below 100, except for one last washout, so that is sort of the last bastion I would want to defend as a Dollar Bull before taking a step back from this trade.

When you look at various currency pairs you have some odd divergences.
The GBP and the EUR for example have been quite strong, while the AUD & The CAD have been very weak. Of course the former two’s central banks are still tightening while the latter two have stopped.
The CNH has also been quite weak IMO, and when I look at the KRW (Korean Won) which has at times led the CNH, this is weakening quite a bit.

The next Fed meeting in 2 weeks’ time will be quite important in weighing the Fed’s resolve on the Tigher for Longer debate. Many other central banks (from Australia to Canada, South Korea to Indonesia have stopped tightening, and are already looking at possibly easing in the back half of the year.

The BOE remains a shit show (excuse my French), with inflation in the UK still running at 10% but very little resolve on behalf of Gov Bailey to tighten much further, except for piggybacking on whatever decision is taken across the pond over in the Eccles Building.

SENTIMENT

The Fear and Greed index is hovering around the same level it has been in the last three bear markets tops, although in terms of time, it could do with sucking just a few more people in before getting to truly excessive levels.

AAII sentiment indicator sits broadly where it was last week, slightly skewed to the bearish side.

Meanwhile, Asset Managers are as long as they have been in the last 18 months.

On top of this, both CTAs and Vol-controlled funds are now Max long.

From a positioning point of view in CFTC Futures & Options there are a few interesting things to note.

• Huge SPX short position of -344K VS a newly minted Long position on the Nasdaq for the first time this year. One point worth making is that single stock short interest is incredibly low, so often the short SPX allows managers to be longer elsewhere. Either way that cannot account for the entirety of the position and clearly there is some big money out there betting on a decline in the Index.

• A newly minted Long position in the GBP for the first time in 15 months, barring a one-week one-off in Feb 2022, and I wonder if this will be a similarly short-lived occurrence.

• A Net Long position in Copper as the price of Dr copper begins to break down - reiterating Copper as a good contrarian short, now $4

ECONOMIC CALENDAR

The main event next week will be the release of advanced GDP data for the US and EU. Consensus has GDP at about 2%, the Atlanta Fed nowcast is at 2.5%. Personally, I think both estimates are a little generous, and while I do not have elaborate models on this, I would guess the end number will be somewhat lower. Rember what will be released first is the advanced estimate, which can easily be revised lower further down the line. GDP is a lagging indicator, as by the time the final number is released we will be more than halfway through Q2.

The other event of interest to traders and market participants is the PCE price index released on Friday. This data point could set the tone for the remaining few days ahead of the FOMC on May 2nd & 3rd.

EARNINGS CALENDAR

This is a busy week from an earnings perspective with around 40% of the SPX reporting. Most of the attention will of course be on the large tech companies and any disappointments there could lead to some non-trivial moves in the indices, given everything we discussed earlier.

Another one which folks will be paying attention to will be First Republic Bank on Monday after the close. I do not have a view on this one.

On the financials front, a month ago I shared a bullish note on WAL & IBKR, which are up 30% and 10% since then. I am now out of those trades and have a neutral stance on the Regional Banks ETF KRE.

THE ROAD AHEAD

One interesting thing that I have heard over the last few weeks, from Volatility experts whose opinions I have come to respect over the years, is the idea that the market might experience a blow-off top over the next month or so due to positioning being so bearish and everyone preparing for the very obvious endgame. By “blow-off top” they mean a +5% or so move from here, not new all-time highs and big round numbers like 5000 or 6000 as many posers out there like to throw around.

It is not an entirely unreasonable concept, markets of course love to screw investors over and get everyone on the wrong side of the boat before tipping them overboard.

The key spot in time and space where such a move could get triggered is in my opinion the first week of May, post-FOMC, and the key level to watch out for would be a couple of closes above 4200 with strong volume, which might trigger a 100-200 point move in the span of a few weeks.

It is not hard to see how such a move could get going if you look at the chart below.

But is this move likely? This call is reminiscent of the very same case these Volatility guys were making back in Dec & Jan of 2021, but the blowoff never came or had already played out, but just wasn’t as exciting as they might have hoped.

The key thing to understand is that such a move would not be Bullish, to the contrary, for the patient and not overleveraged bears it would present the picture-perfect set-up ahead of what will be in all likelihood a bright red summer.

In a way, this seems too easy to me, and almost too obvious, which is why I don’t think it will happen, and moreover, I look at a chart of AAPL & NVDA and I see a blow off which has already occurred.

Either way, as I look at the next week, I think we could see some weakness and volatility come back to the markets, the question is whether bears can gather enough momentum ahead of the FOMC and start closing the SPX below 4000, or if we then have to wait for that event and react to how things play out post Powell’s conference and Apples earnings the day after.

The market seems to be moving in tandem with monthly OPEX cycles, meaning that unless the one just started gathers steam to the downside in the next 2 weeks, then as we get closer to the May OPEX, dealer flows will be naturally supportive again, as out of the money puts decay and dealers have to get net longer. If that is the case bears will have to wait until the June Opex cycle, which starts around the Vixpiry on May 17th for the next leg down.

It’s pretty nuts how impactful these dealer flows around options expires have become, and I suppose this is all the more true when volumes in the underlying are incredibly low. But as with all relationships, they last until they don’t, and so while the roadmap above can be a helpful framework to operate on, things won’t always play out in that way, and unforeseen events can get in the way of them.

One week at a time though, either way, next week I think we see some weakness.

Thank you for reading,

Antonio