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Weekly Update

Weekly Update 17-May-2022

  • Musk “DKs” the Twitter trade much to the market’s liking (for now)

  • Positioning is thought to be light; we still do not think so

  • Disinflation?  Maybe but it does not matter at these levels

  • Housing is not looking any better

  • Consumer Sentiment sinks again

  • Manufacturing is slowing again

  • Retail Sales are slowing, Inventories are rising, the Consumer is pulling back

  • The equity market is only listening to some Fed speakers

  • An absence of news lets oil drift higher

  • Chart Crime of the week

  • Quick Hits

The market seemingly bounced for a variety of reasons.  The latest crypto blowup is behind us.  Positioning has turned too negative, and shorts are overextended.  China is planning on reopening its economy.  The Chinese rhetoric against its Big Tech is cooling.  There are questions as to whether we have reached peak inflation.  Some think the Russian invasion is slowly diminishing in impact as the shock wears off.  And maybe, just maybe, the Fed will not be as hawkish (so they will not raise rates too aggressively).  But we think it all comes down to Elon Musk.  His actions would have played perfectly in The Cigar Store Indian as he is trying to renege on his purchase of Twitter.  Or rather, his bankers cried uncle when Musk’s collateralized Tesla stock continued to plummet.  As we mentioned last week, he is going through the motions to find alternative financing (billionaire buddies, private equity preferred debt, there is even talk that he is looking to sell some of his SpaceX stock).  But ultimately, he wants out of the hastily planned takeover (he is still being sued by the SEC for filing the wrong documents relating to the takeover which we think underscore his boneheaded misstep).  And just as we said last week, Tesla being released from the Twitter shackles is a relief to the market.  Alas, we think all these reasons are just short-term motivations for panicky short covering.  We think there are plenty of ominous signs giving reason to remain cautious.  Credit spreads continue to widen (including interbank financing) assuming the junkier issuers can even raise debt (Carvana did not have any takers on its junk bond, so it had to negotiate at gunpoint with private equity firm Apollo).  Ford is blowing out of its Rivian stake as it can see the writing on the wall.  And as for the Fed, chairman Powell made it clear that it will “keep pushing” interest rates higher until we see “inflation is coming down in a clear and convincing way.”  One interesting take on this was from the bond strategist at BMO, “once the Fed starts hiking, they continue until something breaks.”  However, we would note that Vol is compressing on down days again.  Instead of thinking this is an all clear for us, we think it is an all clear to buy Puts at a cheaper price.  Moreover, 2-yr Treasury yields shot higher today flattening the curve.  And the USD index weakened (against the basket of large Fx like Euro, GBP, JPY, CAD, CHF, and SEK).  If the Fed was tapping the breaks, or if the probability of recession had faded, these markets would be doing the opposite.

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