🚨Max Stupid Red Alert
Fedstock, Tesla, SMCI, Crypto and more!
We have officially reached Max Stupid Red Alert, at least for Crypto.
In a beautiful twist of irony, it was during a week where Copper-Coin, Oil-Coin, Tin-Coin and other Boomer-Coins finally broke out. And there was much rejoicing among Shrubstack readers.
This parody publication has been consistent that one should maintain a risk-on mentality in pretty much everything until we reach the Ides of March. We are there.
Next week we have “AI Woodstock” and “Fed-stock” that can potentially add to volatility. Meanwhile, yields and commodities are breaking out, Max Stupid proliferates and equities experienced record inflows.
FED-STOCK & THE BOJ
In “We are so Back ... in 2021! - Part 2”, I explained that the best TOP indicator in 2021 was Accelerating Inflation AND Policy makers “crying uncle”.
We find ourselves now in a situation where inflation has been proven sticky, but Policy Makers are motivated to remain focused on the Re-Election Cycle.
It is therefore important to see how Powell addresses the current inflation data. After all, it was only last week that he testified before Congress that they will cut rates before inflation reaches 2%.
The Chart below plots the policy rate implied by the market on the left, and the number of hikes the market is pricing in on the right.
The Market is currently ascribing a 50% chance for a rate cut in June and pricing in 3 rate cuts by Xmas.
A hawkish Powell could easily knock 1 or even 2 rate cuts off that table!
Tamagotchi Yellen is of course lurking in the background and wants Powell to cut ASAP. But I think Powell will have to play a more balanced game this time.
The real Vigilante in the Room is the Bond Market. And the US-10-year yield this week did a little peekaboo above the 200dma and looks like it wants to cause havoc.
The 10-Year is the one thing I would be watching closely all week.
The breakout in commodities is helping my portfolio but it’s definitely not helping the Fed’s job. Check out the correlation between the US 10-Year and CRUDE OIL. At some point the Major Funds and the CTAs will start buying Oil again as inflation protection and then good luck. Incidentally, how much Oil is left in the SPR and can it last until the elections?
Regarding the BOJ meeting, the wage negotiations finished and Rengo, Japan’s largest union group. secured wage increases of +5.28%, compared to +3.8% a year ago. This is the largest increase in 30 years.
The Yen is back to 149, and I think the Japanese Tamagotchi Reaction Function wants to keep it below 150. But their plan has been derailed by the strong US Inflation data. Don’t forget that FX is a Relative Game. You may get one leg right and the other one wrong. Having said that, I still think they will defend the 150 level.
The one trade I discussed that’s more asymmetric is the “Widow-maker”. The chart below is the 10-year JGB. It’s such a clean chart, you’d be forgiven to think it’s an AI stock!
With inflation trending above 2%, and wage increases of +5%, this could turn out to be a monster trade for Macro traders.
In the case of the “long Yen” trade, the hot US inflation data are against you. But in the case of the “Widow-maker”, the hot Inflation data are on your side and the wind beneath your wings.
GOODBYE OLD FRIEND, HELLO NEW FRIEND
On Friday, I said goodbye to my only single name short, Tesla (TSLA), and I said hello to my new one, Super Micro Computer (SMCI).
I expected Tesla to have a tough 2024 as it’s a transition year for the company. The stock is down 35% YTD compared to the S&P +7% YTD. Tesla is now at a key support level and I’m not one to shy away from taking profits and moving on.
SMCI, on the other hand, is up +276% YTD and just entered the S&P on the Ides of March and before AI Woodstock. I wrote about it here.
Ironically, TSLA is the worst performing stock in the S&P YTD and SMCI is the best performing stock in the S&P (ok it just came in the Index but allow me some poetic licence), so it’s not a bad time to switch round my pet short idea.
Regarding trade structure, I have to manage my risk on such a squeezy stock, so I just went with puts at short duration maturities and low strikes and paid stupid volatility levels, but I just had to be in it.
I philosophized it like this:
“THINK BIG, PUNT SMALL”
i.e. I’m thinking big that this can drop like a stone to $600-700 in a few months. But I will only punt small in way out of the money puts, so that if I’m right I’ll make multiples.
MAX STUPID RED ALERT - CRYPTO EDITION
I have officially sounded the “Red Alert”, at least for Crypto.
The readers have to give me credit for being so patient.
I stayed on Amber Alert when the cockroaches re-emerged and when Saylor went on the loose, printing convertible bonds like he’s the US Treasury or something.
I stayed on Amber Alert when “Retardio”-coin was issued (yes, it exists) and when a ton of sh*tcoins with misspelled politicians’ names were issued like “Jeo Boden”, “Elizabath Whoren” to name a few (Yes, they exist too. I was disappointed not to see a Tamagotchi-Coin though, these kids can’t recognise Genius).
But now the Red Alert has to get triggered as Crypto once again faces the “Stadium” Curse.
A quick lesson in history: Back in November 2021, Crypto.com paid $700m to rename Los Angeles’ Staples Center, home of the LA Lakers, into “Crypto.com Arena”.
Now comes “dogwifhat”, the new meme-coin that is a misspelled “dog with hat” but with a market cap of nearly $3bn, which is as much as Peabody (BTU) and which trades almost $1 BILLION a day. Nothing to see here. No bubble.
The community behind the meme-coin, raised $650k to project the “dogwifhat” on the Sphere.
This sounds like a great idea if you are orchestrating a pump-and-dump: get the monkeys excited, dump your coin to them, move on the next one and call it “monkeewifbowtie”.
Unfortunately for these monkeys, it also triggers the “Stadium” Curse. Here’s how Bitcoin has performed since the “Crypto.com” Stadium naming deal. Just a casual 75% drop in 6 months.
To make it clear, I’m only using Bitcoin as a proxy for the crypto space, which is quite unfair. Bitcoin might drop x% but most of these meme-coins will go to ZERO. AGAIN.
One thing missing to trigger the Red Alert in the Equity Markets is the supply of new IPOs. Crypto, on the other hand, just had this supply of new meme-coins. We got as many meme-coins lately as Chamath SPACs in 2021, though the meme-coins may take longer to go to zero than a Chamath SPAC.
I am a bit disappointed; I must admit. I was hoping the Red Alert in Crypto would get triggered by something cooler than the Stadium Curse. Something like Citadel launching a long/short meme-coin strategy and Goldman launching a desk to cater for their client. And a conversation would be like this:
GS desk calls Citadel meme-coin PM: “Our desk recently initiated on “Elizabath Whoren” and we think with there’s good relative value here against “Nancee Polesi”
Citadel PM to GS: “OK. Buy me $10m Elizabethe Whoren and sell $10m Nancee Polesi”
REDDIT IPO
Back to the Equity Markets.
It’s ironic that just as we raised the Max Stupid Red Alert, Reddit plans its IPO next week. Reddit of course is the birthplace of the meme craze. Twitter’s IPO did so well after all, why not give it a go too?
The irony is that Redditt’s growth depends on licensing its user content to AI firms. They recently inked a $200m deal over 2-3 years with Google, to allow Google to train its AI products using Reddit data. Given the Revenues of Redditt are only $800m, that’s a substantial part of their business.
Can you imagine AI models trained on Reddit users’ behavior? You might as well nuke the world today and be over and done with.
The Federal Trade Commission launched a probe on Friday, so I guess I’m not the only one concerned.
The REDDIT IPO is a Max Stupid milestone. Couple that with the FTC risk on top of it, I don’t know why anyone would touch that crap. Maybe they should also project the Reddit ticker on the Sphere as well before they dump their stock.
FLOWS & A PARTING THOUGHT
We are past the Ides of March. We have AI Woodstock and Fed-Stock ahead of us. Meanwhile, inflation is sticky, and Commodities and Yields are breaking out.
At the same time, this week we got record inflows in US equity funds (source: BAML). The last time we got such high inflows was in … 2021. I really don’t know what else to say. The monkeys usually get this excited towards the end of a big move.
Max Stupid behavior proliferates, and we have raised the Max Stupid Red Alert for Crypto.
The Chart below is Nasdaq vs Bitcoin. The correlation is so strong that the Red Alert for Crypto will have implications for Equities too.
One could argue that Crypto is the Canary in the Coal mine. Or rather the dogwifhat on the Sphere.
Disclaimer:
This isn’t financial advice. This is the equivalent of reading MAD magazine for finance but worse: This is the trading blog of a shrub.
Don’t be Stupid. Seriously. How many times do I have to repeat this ….
"Can you imagine AI models trained on Reddit users’ behavior? You might as well nuke the world today and be over and done with." That's 💯 Shrub. Thank you so much. Enjoy the reminder of the weeken!
The lack of IPOs is weird. There is so much garbage in private equity I'd have thought they'd try offloading by now. I guess the flipside is values might be so low they can't risk being forced to mark down valuations on their books.