JACK FARLEY: Welcome to the Daily Briefing. I'm Jack Farley. It's Monday, November 23. I'm going to be joined shortly by Tyler Neville, who is a former guy who worked in finance. And he used to trade for an $100 billion fund. He's got a lot of strong views about the market, and I'm looking forward to speaking to him. But before we do that, let's go to Haley Draznin with today's stories.
HALEY DRAZNIN: Hey, Jack. Markets were up on Monday. We saw early gains in the Dow, S&P 500, and the NASDAQ, being driven by promising results from a third coronavirus vaccine. AstraZeneca announced on Monday that it's COVID-19 vaccine is 70% effective on average and up to 90% effective in its large-scale trials. AstraZeneca's vaccine hasn't yet matched the effectiveness of those developed by Pfizer and Moderna, so we saw its shares lower today. But its vaccine has advantages of being much cheaper and easier to store.
Over the weekend, Pfizer applied for an Emergency Use Authorization with the FDA. Its shares were down on Monday. Moderna could seek a go-ahead from regulators in the coming weeks. Its shares were up on Monday. Vaccine successes lately have added to a risk-on mood in markets. And investors have really snapped up assets that could benefit from the end of lockdowns and the loosening of travel restrictions.
We saw the dollar also slipped on Monday, as investor appetite for risk increased. Energy stocks led gains Monday. Oil was up, boosting hopes for a recovery in fuel demand. Oil even hit its highest level since early September. And the prospect of a vaccine has reshaped the oil future's curve with near-term prices rebounding more than later dated ones. Shares in entertainment, cruise lines, and airlines also jumped on hopes of distributing a vaccine, which would reopen the economy and boost travel early next year.
Tech stocks, meanwhile were really under pressure. Facebook and Apple fell. Netflix traded lower. Microsoft and Alphabet dipped slightly. We've seen these work-from-home stocks take a hit, as we look to an economy post-COVID. Investors are trying their best to look beyond the short-term threat of a double dip recession. We could see higher volatility this week, given it is a shorter week with the Thanksgiving holiday. And coronavirus cases continue to surge across the country. Congress is on recess with the Thanksgiving holiday, which also makes it difficult to pass a stimulus bill, making it even more delayed. So all of these could contribute to how the markets will react this week. Back to you, Jack.
JACK FARLEY: Thanks, Haley. Welcome, Tyler.
TYLER NEVILLE: Jack, great to be here. Got one question for you, though.
JACK FARLEY: Yeah?
TYLER NEVILLE: Are you ready to get shoved in a locker today?
JACK FARLEY: Well Tyler, I have to say, thanks so much for coming, and also for what you're wearing. Your outfit, it really says that you're a professional, and that you're taking this seriously. So thanks.
TYLER NEVILLE: Yeah. I'm against the suits, just Dave Portnoy.
JACK FARLEY: Yeah, yeah, yeah. Well, yeah, just everyone at home, Tyler said am I ready to get shoved in a locker. That's because Tyler and I-- Tyler actually used to be my boss. He now works at Creative Studios, which is a different part of Real Vision. But we go way back. And Tyler and I sort of have diametrically opposed views, with regards to the economy, the stock market, but most notably the credit market.
So he and I have kind of been going back and forth. If you've been watching the Daily Briefing for a long time, two months ago I was like, Tyler said this. Tyler said that. And whenever credit spreads continued to decline, Tyler said suck it. So I'm here as a humble man, or as humble as I can be. Credit spreads, and if you look at a chart of the high yield US spreads, or investment grade spreads, they've continued to decline. And that's been a source of strength. And this is the point you make. Making your points for you, so they're not as good good when you say them.
TYLER NEVILLE: Should I just go have a snack now, or?
JACK FARLEY: Investment grade spreads, very low. High yield spreads, very low. So Tyler, I want you to lay out your thesis.
TYLER NEVILLE: Yeah, so I'm still overall very bullish. The backdrop is more of a macro thing. Maybe let's start talking about today. Today was kind of like, a little bit of a wash. The market was up 60 bips S&P, and then the NASDAQ was pretty much flat. But you had a lot of dispersion underneath there. You had Apple down 3%, Zoom down 2%, PayPal was up 4%, and Square was up like 6%. So lots going on underneath the surface.
I think you're seeing some reallocation across different parts of the market. And mostly, the biggest thing was small caps were up 2%. So you continue to see that out-performance from smaller companies, which is kind of like-- I think my macro picture is large companies are death by 1,000 cuts, large leveraged companies. And you're seeing the innovative companies that are smaller and made up of equity in their capital structure outperforming.
JACK FARLEY: Interesting. Tell me more about that. Because when I think of sort of the-- US stocks will go up forever, I usually pair that with the narrative that it's the FANG stocks that will absorb this liquidity, because it's the smaller companies that don't have access to the capital markets that are going to lose market share because of COVID-19 and the shutdowns. So why do you think it's going to be these smaller companies that are going to succeed going forward?
TYLER NEVILLE: It's just, in this new administration, I think there's going to be a target on bigger companies' backs. And all the antitrust stuff is probably going to come to fruition to one extent or another. And also, it's just hard to grow when you're mega cap corporation. Think about growing at a $300 billion market cap exponentially. It's just hard to do. So I think you're seeing underneath, as the liquidity is still there and the government's still there with the Fed and Treasury-- and we'll talk about Yellen later-- that's happening underneath the surface. And the FANGS are probably not the best risk/reward anymore. And you're seeing a lot of the beaten up stuff in S&P outperforming the small caps as well.
JACK FARLEY: The S&P is like 12% FANG, right?
TYLER NEVILLE: Still yes. Yes.
JACK FARLEY: Yes
TYLER NEVILLE: So that's the market cap weighted problem with ETFs and stuff like that. But I'm talking below the surface, you're seeing wide dispersion in single stock, which we'll get to eventually as well.
JACK FARLEY: Yeah, so it's not-- when you say a small cap, it's not small cap value stocks? Like the stocks that rallied today, like Occidental Petroleum, or Valero Energy, or cruise liners-- heavily indebted companies that are banking on a quick and speedy recovery-- you're not saying that? You're more betting on the IPOs, the snowflakes, the Zooms. Stuff like that, right?
TYLER NEVILLE: Correct. I think those are-- and those aren't even that small cap anymore.
JACK FARLEY: Yeah
TYLER NEVILLE: Yeah, basically innovative companies that are they're doing something different. And we'll see the performance dispersion later in the talk. But if you want to talk positioning in the market right now, maybe we can get into that.
JACK FARLEY: Yeah, let's get into it. Let's do it.
TYLER NEVILLE: Sure, sure. So right now, the macro backdrop, I'd say, people are a little bit confused, I would say more bearish. If you look at all the surveys, the Bank of America survey, they're coming out and they're saying, look out. Everyone is in the market and kind of on one side of this thing. But if you look at the breadth in the market, there was a great chart JC Parets put on Twitter, who's a frequenter here. And in the New York Stock Exchange stocks, above their 200 day moving average, that measure hit 82% blacks last week.
And when that happens, that's actually typical the S&P will outperform. It's a leading indicator for two years. So that's the first chart we're looking at here. And then, to go further in the futures positioning, you see US equity spec positioning at a three week net low of $26 billion. So that shows you there's some bearishness in actual positioning, versus what they're telling you.
JACK FARLEY: Tell me what that means. Is that just the total aggregate amount of capital on the long side, minus on the short side, for all expirys of the future? Tell me what that means.
TYLER NEVILLE: That's just your speculative positioning for future. So you have your non-speculators that are just using it as hedging. This is probably your hedge funds going out and shorting futures, which they're always constantly hedging out their books. And they use futures to do it in an easy way, or it's market makers on the sell side as well. So generally you don't see this big of a negative position. Generally they get squeezed out. I use it as a contraindicator.
JACK FARLEY: Got it. OK. It's kind of like the institutional version of buying put option on SPY?
TYLER NEVILLE: Correct, correct.
JACK FARLEY: OK. That makes sense. Well where were we? OK, so you mentioned market breadth, and you showed me this chart. And it's a good chart. I make a lot of charts, so I know shit from Shinola. But this is one of-- you said it's a lagging indicator. I made my own chart, looking at market breadth of the New York Stock Exchange going back to 2000. And it seems to me that it's more of a coincident indicator. It's like, when stocks are going up, this thing is high. And then people can go on TV and say, oh stocks are going up because this is high. And it'll continue to go up, because it's high. What's different about you, Tyler? Why aren't you a talking head who's going on TV? Share with me your knowledge.
TYLER NEVILLE: I mean, it's a coincident indicator for sure. I mean, there's no ironclad thing. I just think that when you have this many stocks above their 200 day moving average, it takes a lot of selling supply to break that. And then also, psychologically when it gets to the 200 day moving average, you generally have institutional buyers that start stepping in to buy the stock. So it's kind of like this rough gauge. It's more of where you're positioned. And I wanted to show it relative to where sentiment is, where you see a lot of the things saying, oh we're at the greed stage of sentiment. But positioning wise, things are looking like not so, so bad for the long term.
JACK FARLEY: And what do you mean by that? Are you referring to the virus, the economic recovery? What's your deal? What are you talking about?
TYLER NEVILLE: Just the stocks. I'm talking straight stock market positioning. I think there is a big difference in what economists say, and guys that talk about the market say. If you look at the actual economic data, things are pretty horrible but improving. And if you look at the stock market, I'm basing that off simple supply and demand of securities. Who's buying? Who's selling? Like a very market structure related thing. I think those two things get criss-crossed more than anything. Where you could say, the economy's horrible, and the virus is spreading, and data is rolling over, that's all true. But there's still an incremental buyer. There's too much capital, and not enough ideas. And if I go on to debt positioning, if that's cool--
JACK FARLEY: Yeah, for sure.
TYLER NEVILLE: So everyone's worried about the debt markets, obviously. And if you actually look under the hood, you see the high yield credit derivative index, the spread's just collapsing. In March, everyone should have been concerned the world was ending. And since then it's almost at lows, which basically allows your corporates to go issue debt in the markets. If you don't read much about debt issuance, here's one deal that just happened. Last week Charter Communications issued debt in 3 tranches for $3 billion. And the demand was so strong, the company only had to pay 3.86% for the 30 year maturity. And then afterwards, yields went lower in the aftermarket. And that's not even the best part.
The best part, or the kicker here, is that Charter said that the use of proceeds were actually for buybacks. So we not only have-- the buyback story died. And now it potentially could be back. And this is a company that's kind of secularly dying, but still has access to the debt markets and the unfunded pensions by the paper. And they can do kind of financial engineering things. So from a debt perspective these companies are still getting funded, even though it's COVID and the economic data looks awful. But 3.86% for a 30 year bond, for a secularly dying company, I don't know. That's pretty incredible. Right?
JACK FARLEY: Yeah, it's a very low yield. If you believe in the cyclical nature of economics, isn't that-- like a low credit spread is basically the exact same thing as-- pointing to a chart with a low credit spread is pretty much the exact same thing as pointing to a chart of a high stock market. Isn't the higher things go--
TYLER NEVILLE: Very, very important--
JACK FARLEY: Does that increase the chance that it will come crashing down?
TYLER NEVILLE: Yeah, but I think credit can stay low. It's like vol. Low vol can stay low for a long time. And credit spreads can stay low for a long time. It's different than-- equity market, where you might have a pullback here and whatever. But I think with all the backstops going on, you'll probably see credit stay. And one of the things is December 31, some the Fed facilities are getting taken back by the Treasury. We'll see if that happens with Yellen on the horizon or whatever. But I just don't think they're going to make this transition any rockier than it has to be. So, that's where I'm at there.
JACK FARLEY: Let's talk about-- so sorry for interrupting. Let's talk about the emergency programs that the Fed initiated in March and April-- the emergency lending programs, the Municipal Liquidity Facility, Main Street Facility, PPP of course-- that was the one that was taken up the most-- the Corporate Credit Facility. All of these are set to roll over on December 31. Does that give you a little bit of worry, or not at all?
TYLER NEVILLE: It's on the radar. It doesn't give me worry, because right now the market is saying to me they don't care at all. And the other thing is we are in a gerontocracy.
JACK FARLEY: OK.
TYLER NEVILLE: And they are not going to let this thing go. I said that before. One of my sister's best lines is, beware of acronyms and people with lots of initials. And so, what's to say that they just can't role out another credit facility called the PPU, PPP Unlimited? Who knows? The chances of that--
JACK FARLEY: I mean, I have an idea. Because what they're currently doing directly abrogates The Federal Reserve Act of 1913. So they needed to pass, by an act of Congress, the CARES Act that was passed in March. And now that part is expiring, right? I'm not saying-- look, look, the Fed
TYLER NEVILLE: There was something before you got into the business. When these sort of political things come into the limelight, it's the best. Because it gets the Democrats and the Republicans arguing against each other. And there was one thing back, I think it was like 2014 or 2012, the fiscal cliff. And it was front page news every day, oh the fiscal cliff. And all the Republicans were saying, oh God, watch out for the fiscal cliff. And then they just changed the rules for the debt ceiling, and everything was fine again. And we just kept issuing debt. This stuff happens. And it's great for the media, because they can all argue about Democrats and Republicans. But the end of the day, you have unfunded pensions that need to allocate money, and the gerontologist is not going to let the policeman, the firefighter, the teacher just go to the wayside. They're going to keep these programs up. You got it.
JACK FARLEY: I have a question.
TYLER NEVILLE: Question, [INAUDIBLE]?
JACK FARLEY: I have a question for Professor Tyler. So were there unfunded pensions with teachers, firemen in 2006, 2007 that owned mortgage-backed securities and CDOs?
TYLER NEVILLE: Yes.
JACK FARLEY: And if the Fed-- I mean the Fed tried to bail them out too. But sometimes the wave of defaults is just too big. Right?
TYLER NEVILLE: Yeah, well I think there was two different things back then, which is all the retail holders had a lot of that stuff. They were in the mix. Now everybody that owns this stuff is too big to fail. They just call up their politician, and they say, hey my commercial $100 million property is about the default. And can you give me a bailout, or let me use my accounts receivable as earnings? Like Jim Chanos pointed out.
JACK FARLEY: Yup
That was a great interview. It came out last week, exactly a week ago. Tyler, if I recall, was it really a lot of retail in the 2008 bubble? I feel like it was a lot of retail people buying housing and subprime but--
TYLER NEVILLE: Oh yeah.
JACK FARLEY: --for the loans, there was a lot of Japanese companies, pension funds, a lot of hedge funds. You can just buy a CDO from just a guy on the street. Right?
TYLER NEVILLE: Well no. They weren't buying, but the main function underneath was the retail investor. When they started selling their houses and defaulting, that followed through. I think the government covered that up a little to a lot extent, with the PPP and all these programs. And I just think that that keeps going. Listen, we are talking about a generation of boomers who handed out trophies to guys like us as participation trophies, so that our egos, we can't take losses on anything. We're now a couple generations that can't take losses on anything. Right? And that ethos to think it doesn't follow through to the politics, when the Keynesian printing presses are on full blast, not only in America, but across the world? It's really hard to short this market.
Now, there's some side effects here. And I'll go on to the private markets. I think because you have all these unfunded pensions, the private markets are the place of real growth. It's so hard to be Exxon or some giant company, and pivot to something innovative. It's just impossible. You have too much bureaucracy and people that have done things a certain way.
So everything is now moving to the private markets. And believe it or not, VC funding hit a record in 2020 at $69.1 billion. PitchBook just came out with this chart today. And one of the highlights was, Andreessen Horowitz raised two funds for $4.5 billion. One was just in addition to their flagship fund. And then one was a growth fund that invests