WEEKLY MACRO NOTE - One Stock to Rule them All

Read time: 10 min

I get asked, almost on a daily basis, “Why is this up?” Why is it down?” “What has caused this move?”

While at times there are some obvious catalysts that drive price action, one should never forget, “the factors that determine activity on an Exchange are innumerable, with events, current or expected, often bearing no apparent relation to price variation” L. Bachelier

I would caution against anxiously trying to explain every tick in the market, and instead would encourage investors and traders to focus on the broader dynamics at play.

TABLE OF CONTENT:

• MEGACAP EARINGS

• WEEKLY WRAP UP

• SENTIMENT

• ECONOMIC CALENDAR

• THE WEEK AHEAD

MEGACAP EARNINGS

It was a busy week, with many of the largest companies in the world reporting their quarterly earnings.

GOOG declined -9.35% after its release.Last week I warned against owning GOOG ahead of earnings, personally, I was short the stock. I do not think this was a particularly difficult trade to make, estimates were too high, and SNAPs earnings confirmed my expectation that Ad spending was slamming into reverse, as businesses struggle with high costs, a weakening consumer and large inventories.

GOOGs revenue growth slowed from +41% YoY to +6%, a major Rate of Change slow down, while operating margins shrunk from +32% to +25%.Remember that +6% revenue growth, when you have inflation trending at +9%, is a decline in real terms.

I will not go through the rest of the details, except for pointing out, as it was a little surprising to me, that YouTube Revenues declined YoY, despite Alphabet being more aggressive in the number of ads they have been showing on the platform.

Looking ahead at the next 2-3 quarters I do not think the picture looks very rosy for any company whose revenue is dependent on Advertising spend.

META declined -24% after posting a -4% revenue decline, while costs explode higher on the huge amounts of R&D they are deploying to conjure up the Metaverse.Most importantly user growth for its various platforms was flat YoY.META is now down 70% from its all-time high and has gone from being a $1T company to being worth $260B within the space of 13 months.I haven’t heard much about those Zuckbucks recently, have you?

MSFT was also punished -7.72%, as it missed estimates and Azure revenue came below target.

AMZN declined -6.80% and would probably have been down more had the broader market not been lifted by AAPL on Friday.The major stand out from AMZNs earnings is that AWS revenue growth slowed to +27% YoY, which is way less than that posted by GOOG and MSFT for the same segments.As a reminder AWS is the only money-making product at Amazon Inc, pretty much everything else remains a loss-making operation.

Had you told me last Friday that the S&P would have closed the week up +4% despite such dismal earnings by some of the largest companies in the World I may have had my doubts.And yet, this week we saw precisely that, with a continuation of last week's counter trend move in play

SPX +3.95% now up almost +12% from the lowsNDX +2.09%, now up +10% from the lowsDJI +5.72% up 15% from the lows

Most of the gains were made on Friday, with the move higher getting going after AAPL posted earnings which were not as bad as expectedAAPL gained +7.56% on Friday alone.

AAPL is the most broadly owned stock in the world, and it continues to do much of the heavy lifting.

It is 6.83% of the S&P500 and 13.83% of the Nasdaq100, by far the largest component in each index, so on Friday, the move in APPL undoubtedly helped drive the broader market higher, and with all the YOLO call option buying going on once those flows get going they are hard to stop.

50% of SPX companies have now reported an average decline in earnings of -3.5%. Moreover, this number is heavily skewed by the 150% growth in the Energy sector, which remain the undisputed leader this year.

WEEKLY WRAP UP

Bonds rallied and rates declined across the board.US2Y -1.23% to 4.36%US10Y -4.86% to 4.01%US 30Y -4.44% to 4.14%

The ECB hiked 75bps and the BOE is set to do 75-100bps next week.Despite thatYields on UK 10Y GILTs dropped -13% to 3.49%Yields on 10Y BUNDs dropped -13% to 2.10%

Even Italian BTPs rallied with the BTP/BUND spread narrowing to 206bps, the tightest it’s been since early Aug.High Yield OAS spreads narrowed to 476bps, as financial conditions loosen ahead of the FOMC next week.

The Dollar Index DXY declined -1.08% as two major players intervened in the FX markets to shore up their currencies.

The BOJ is now on its second week of interventions and despite that, the USD/JPY only declined -0.14% WoW.As long as Japan continues to ease while every other major central bank is tightening, the Yen is likely to remain under pressure, and I think it will not be long before USD/JPY is trading back above 150

The PBOC is now the third major central bank to panic and has had to intervene to shore the decline in the Yuan.USD/CNH closed the week up +0.58% at 7.26, at one point it was trading at 7.4.This is the highest level since 2007.

Meanwhile, the EURO rallied +1.11%, and yet, despite the ECB doubling its base rate, it remains below parity.

The POUND put in its best week since the September crash, and was up +2.82%, as Rishi is hailed as the saviour who has come to restore calm to the British Seas.Frankly, I do not think this move will be sustainable, particularly if the BOE only does a 75bps hike next week. If on the other hand they do 100bps and reaffirm the intent to sell GILTs, then maybe the GBP may have some room to run against the dollar in the short term.

The Dollar Wrecking Ball is now -3.5% of its high, yet I do not think it is done wrecking, and I suspect the Dollar will continue to strengthen well into 2023.

So you see, AAPL was not the only player on the offensive. The Dollar decline and the relief in Bonds provided support for a market that was desperately looking for an excuse to rally.

Another dynamic at play, is that Oct is year end for a large portion of mutual funds, another reason why you should not be reading too much into what was a very clear month-end mark up on low volume. That ends next week.

On the commodities front it is worth noting that Gasoline prices in the US were up over 10% this month, a trend which if it continues, is likely to keep the pressure on inflation elevated for longer.Oh and by the way, our Steaks keep on getting more expensive, with Live Cattle Futures making new cycle highs.

As a reminder US Core PCE inflation, the Feds preferred gauge, reaccelerated to 5.1% in September.

Meanwhile around the world inflation is not slowing and just made new highs in Australia 7.3%Italy 11.9%France 6.2%Germany 10.4%and the list goes on.

If you want to read more about how and why inflation can remain sticky in the face of aggressive policy by Central Banks then you should read the article I wrote about the experience of Arthur Burns and the Fed in the 70s

Lastly, I want to briefly discuss China.

The Shanghai Composite SSE declined -4.05%The Hong Kong Hang Sent Index HSI was down 8.32% and has erased 20 years of growth.

Alibaba BABA is now trading at its all-time low and well below IPO price, while many other stocks in China continue to make all-time lows.

This all follows the confirmation of Xi as leader of the CCP, and while I shall not pretend to be an expert on China, and will avoid the geopolitics of it all, I do think that what we are seeing increases the probability of a move on Taiwan over the next 18 months. I alerted followers to this risk almost a year ago, I increasingly think it may now be almost a coin toss as to whether that happens in 2023/24 or not.But that is my opinion, and in time will be proven right or wrong, regardless even if the probability was say 10-20%, the the magnitude of such a tail risk should not be ignored.

I suppose what I am trying to say is I would not be a buyer of Chinese stocks at these levels on the simple premise that they appear cheap.Cheap is not a catalyst.

SENTIMENT

The term Melt Up has now been popularised and has caught the fascination of many. Consensus appears to be positioned for a Santa Claus Rally.

You will hear many statements claiming that everyone is bearish, meanwhile, it is my impression that the needle has moved heavily into bullish sentiment, and a severe case of FOMO has caught many investors, who once again find themselves chasing stocks at the highs.

It seems to me that most investors are itching for a reason to get bullish again, and are willing to grab hold of any narrative which tickles this fancy, a trend which if it continues increases the risk of dramatic left tail events.

But don't le me decide for you, take a look at some sentiment reports and judge for yourselves how participants are feeling.

Fear & Greed Index is now only 6 points below the highs reached in August.

The AAII Survey shows investors are the most Bullish they have been in three months.At the hight of the last bear market bounce in Aug this survey topped out at 33.3% Bullish.

The AAII Fear & Greed index has also tipped into Greed territory.

The NAAIM Exposure Index shows Active Managers are the most exposed to equities they have been since the late summer.

Meanwhile positioning got considerably net longer.Traders are still net long the Nasdaq by 5.7k contracts, but the thing which truly jumps out to be is the now massive net long position in the Euro.Do trader truly believe the ECB will out Hawk the Fed? by next week the ECBs base rate will be 1.5% and the Feds 4%!

As far as hedging is concerned, investors find themselves once again unhedged:Equity Put/Call ratio is 0.66Index Put call ratio is 1.01SKEW index is at all time low (which is not a healthy indicator of long term tail hedging)VIX has declined to 25VVIX (Volatility of the VIX) just made a new low for the year.

I think the words of Charlie McElliot at Nomura sum things up pretty well"Client demand is totally focused on right tail/crash up, they're terrified about missing the big rally when they don't own any/enough underlying"

ECONOMIC CALENDAR

Another busy week with earnings so I thought it might be useful to share this calendar by Earnings Whispers.

THE WEEK AHEAD

When I look at what lies ahead, the fact is, that regardless of the narrative people may be trying to spin, we remain fairly and squarely in a bear market, the global economy continues to contract (at an accelerating pace, might I add) and an earnings recession is quite clearly underway.

So, if last week I stated that risk-reward favoured the bears, I believe that that is even more the case today.This rally smells of Desperation and speaks of Chase, which usually means Exhaustion is just round the corner.

With the S&P500 now trading at 3900 I do not think this move has much room to move above 4000 and change.Meanwhile below we remain wide open.

The net long in the Euro tells you a lot about expectations, clearly a pivot by the Fed is what is getting priced in here.And I wonder if Powell will or can deliver on this hope.As we have already discussed, bulls in this regard remain their own worst enemies.A 12% rally ahead of the FOMC increases the probability of the Fed staying hawkish.

So while I would not rule out a supported market heading into the FOMC, I do not think that it would take much to break the camels back, and over all, last weeks price action is likely not sustainable for much longer.

There are particular moments in market time, when a set up presents itself and as a trader you must act upon them and executing on your process.This is one of those moments.

Thank you for reading,Antonio

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