ANDREAS STENO LARSEN: Hi, everyone, and welcome to the Real Vision Daily Briefing. I'm Andreas Larsen from Real Vision, sending to you live Thursday, August 18th. Who is buying tech stocks? That is the question of the day after a big rally in the NASDAQ index over the past month or so. And with me today to answer that question, we've invited an old friend of the show Tommy Thornton from the Hedge Fund Telemetry. Tommy, it's really good to see you again. How are you?
TOM THORNTON: I'm doing great. Nice to see you. Good question, who's buying tech stocks? Those are all in rage right now. Let's do it.
ANDREAS STENO LARSEN: First things first, Tommy. It's obviously a very tricky question to answer or maybe not. But who is buying the tech stocks right now?
TOM THORNTON: Well, people were underweight tech stocks, they were underweight all stocks in June. And in the last Bank of America Fund Manager survey, they said that they saw the highest increase in inflows into the tech sector, mainly mega cap. And so I think that makes a lot of sense. On top of it, if you go back into early June, there were a couple of down gap days that was just brutal.
Those days had the highest percentage of shorting that many of the prime brokers have ever seen. So once we've lifted above those levels, I think all the shorts, they just had to cover and capitulate, and that's what's been happening.
ANDREAS STENO LARSEN: If we look at the positioning right now, I think we can bring up a chart, Brian, showing the positioning in S&P 500 e-minis, for example. The latest data point still reveals a short position in the future space. What's your assessment of the current positioning, Tommy?
TOM THORNTON: Well, one of the problems with Commitment of Traders' positioning is that there's a lot of ways to buy or sell a particular asset with many markets. And when I say that, let's say the S&P, you can buy SPYs, you can buy S&P futures, you can do a lot of different ways of getting exposure. So I think there's a lot of people that are short the futures and possibly long assets like tech hedging it out that way. So it's not necessarily the concern that I would have saying, oh, I'm short the market.
Not at all, because I'm more concerned about the amount of short interest overall in the market. I also look at put/call ratios on individual stocks, on ETFs. And there's been heavy call buying coming back. You've had heavy covering. And we've seen it and I think that that's a risk. Because if let's just say there's some bad news, and there's plenty of catalysts coming up in the next couple of weeks, you have Jackson Hole, you've got jobs data, you've got a CPI coming out and that, to me, any of those could be a risk for the market.
One other risk, and we were talking about this earlier, the energy market. If you have a hurricane, you could see a supply shock that could spike energy prices again.
ANDREAS STENO LARSEN: Yeah. And we obviously entered the hurricane season right now. But Tommy, if we look at your positioning, can you elaborate a bit on how you've positioned into the autumn here in equities?
TOM THORNTON: Right. Well, I've been really fortunate this year, because I've talked about being tactically long and short at different times. And I will be quite honest and say that I am net short, I have a lot of shorts or not all, but many shorts that I started shorting prematurely, not disastrous, but I'm holding them in the red. And it's not necessarily fun. But I feel like this bounce is going to start to wane, especially with the seasonality and those catalysts coming up, which I think that the market's way ahead of itself.
ANDREAS STENO LARSEN: If we look at the sector performance across the US equity market, I think we can throw up a table with the recent performance across various sectors. And obviously, tech has been performing like crazy over the past 20 trading days or so. But energy is actually doing pretty well also. I know you have a pretty constructive view on these various pockets of the energy sector. Can you please elaborate a bit on that, Tommy, in relation to the recent performance?
TOM THORNTON: The last time I was on, I was talking about how short and I got really lucky catching the top and I recently covered all the way down and that worked out well. And now, I'm starting to buy the energy stocks again. I think XLE can still be bought. I have positions in Apache, Halliburton, things that I could identify with DeMark by countdown 13s that were starting to show up. It's still not a perfect bottom, in my opinion, because this might have been either the first or the third wave down of five.
So I think in the whole theater of this market, we're probably going to see a lower high bounce in energy, and then fail and go below. And that's a recession playbook. And I do think recession is on the horizon. If we look at sectors to be short right now, what are some of the sectors that you would mention as a current good short? TOM THORNTON: Well, I think, again, we have some catalysts coming up, and that could spook the markets.
high bounce in energy, and then fail and go below. And that's a recession playbook. And I do think recession is on the horizon. ANDREAS STENO LARSEN: If TOM THORNTON: Well, I think, again, we have some catalysts coming up, and that could spook the markets. I think we have Q3 earnings that are going to be a bit more revealing, the market went up because of the narrative of oh, could have been worse. That type of thing happened in actually Q2 2000 after some really nasty action in the markets from April and May, and the equity markets lifted into Q3, and then all the tech companies had to give terrible guidance and tell the truth about really how their businesses were doing.
And I think this last quarter, there were a lot of tech companies that were able to basically make their numbers, they're some of the big ones that can basically pull a lot of different levers to make their numbers. They weren't necessarily great. Apple is growing at around 6% a year. It's trading a little over 25 times earnings. Look, they're the greatest company in the world, but that's not necessarily great growth. And they have a glut of phones. You've heard a lot of semiconductor companies give guidance that's just awful.
Micron, NVIDIA, I think AMD is going to have to tell the truth eventually. Intel has been continuously telling the truth. And that I think is really important. So the markets ignored a lot of this because we've got this momentum, there's a FOMO happening. And I think that the truth will come out in Q3 earnings.
ANDREAS STENO LARSEN: If we look at home builders, last time, we spoke, Tommy, on the Real Vision Daily Briefing, you talked about your daughter buying a house or is looking for house. What's your take on homebuilders and the whole sentiment in the real estate market right now?
TOM THORNTON: I think the real estate market's cooling. We've had six months of declines on sales. We saw that data today. Higher interest rates definitely putting a crimp into the housing market. My daughter did buy a house, she paid under ask. She had to get over a condo, she's got a two-and-a-half-year-old boy and he was tearing up the place. So she got a good price, great house. And so I'm very, very pleased with her.
But I did short ITB today on the Hedge Fund Telemetry Trade Ideas sheet. I think it's had a nice run, well over 20% off the lows, and I think that that's a little premature. Homebuilders have actually been pretty good this cycle. They're more into telling the truth about their earnings, and they've taken some steps. But still, I think you're going to see the housing market pullback, and the Fed wants that to happen.
They have a mandate to crimp and break the inflation cycle here. So I think that's still on the horizon, the Fed actions tend to take a quarter or two sometimes a little longer for the markets to start to notice. And I think we're in this euphoric, oh, well, the Fed's going to pivot and anyone who says the Fed is going to pivot is really delusional in my opinion, they just don't get it.
ANDREAS STENO LARSEN: I think we can bring up a chart on the pricing of the Federal Reserve. Brian, we have a chart on the SOFR three-month curve. And I think right now, the peak is priced to be in in roughly six months from now, just below 3.75% for the Fed Funds thereabout. So a pivot in six months from now, that could still leave rate hikes upcoming, even potential large rate hikes upcoming in September and onwards. I know you've been tweeting a bit about the September meeting for the Federal Reserve. What's your take on that meeting, Tommy?
TOM THORNTON: Well, the base case right now is 50 basis points. I don't think we're going to see anything below that. I think that'd be just poor judgment if anybody mentions that or puts that in their forecast. We could have 75 basis points again. I think the Fed will do 50. But the problem that I think the Fed has is that if inflation is at 8.5%, and you're talking 3.7%, I think that you have to start to think, well, Powell said something really, really stupid at the last meeting.
He is talking about they're getting to a neutral rate. 8.5% to 3.5% is pretty far off in my opinion, that's not neutral. You might have to hike rates much higher than 3.5% or 4%, which is what they're talking about, if inflation doesn't cool off. And having the stock market go up, it actually gives the Fed a lot of cover to continue to hike rates as aggressively as they want. And maybe that was Powell's intention, like, I'm going to be a little bit dovish here, let the market go up, and I can continue to hike rates.
And you've got QT doubling, oops, rewind that. QT is going to double in September and I think that's going to also be something the market will start to notice. They haven't noticed that. Nobody wants to notice that. They want to buy meme stocks and Bed Bath and Beyond and companies that are structurally bankrupt.
ANDREAS STENO LARSEN: Bed Bath and Beyond, let's just talk about that case for a second. Because we've seen a bizarre price action in the past couple of days in that stock. Please take us through how you've experienced that, Tommy.
TOM THORNTON: I'm no expert with meme stocks and congratulations to all that minted money on the way up, and that's fantastic. I do find it to be troubling, though, because a lot of people will get left holding the bag. And the board member, I thought he was the CEO of Bed Bath and Beyond but I was wrong. I had a lot of people telling me on Twitter I was wrong. But he's dumping his 100 and $50 million position.
And that's really strange because I think there was a Form III that he filed on Monday saying that he was buying out of the money calls. And that's just basically someone that's trying to start a gamma squeeze. And I guess that's okay in this world in the old days when you had corporate insider buying out of the money calls to spike the stock. I don't know, maybe that was something that was, well, illegal.
ANDREAS STENO LARSEN: Yeah. Well-put, Tommy. The last sector that I wanted to touch upon in the US equity space is retail. I think it was yesterday when we received news from Target with negative guidance, basically. What do you make of the retail sector? And do you watch any names in particular?
TOM THORNTON: Truth be told, I was short Walmart and Target and Home Depot. And I took nominal losses on those. I think that, again, the market will take the better than feared type of scenario here and they spiked the stocks. I think there's huge inventories in the system, probably 25% higher inventories across the board in all retail in the US. And that's a big number. And what will happen is there's a chain reaction globally because the China data earlier this week showed that orders, new orders were down significantly.
So if China orders are slowing, those are orders that go to the US and to Europe and other places around the world, that's not a good sign. And if there still are heavy inventories at these retailers, we're heading into the holiday season and if orders are down, they're going to be really lean, or be real cautious going into the holidays. So look, I think that I was nicked a little bit on those recently, but there's still a big problem with inventories.
And I think the market eventually will start to catch on. It's going to hit margins and I think that's another thing. Inventories are also very high in semiconductors and semiconductors go into just basically everything that you can look at in the economy, and if the semi space is weak, then you've got a problem.
ANDREAS STENO LARSEN: I wanted to play a soundbite for you told me in relation to the debate on when to go short a bubble. It's from a debate between Ash Bennington and Rob Arnott, airing today at the Real Vision platform. So let's listen to the sound bite and get back to that debate.
ROB ARNOTT: Now, the trick is, be careful about betting against bubbles. You don't have to own them but shorting them is very dangerous. The most extreme bubble I've ever seen in the data was Zimbabwe during their hyperinflation.
As you came into the summer of 2008, the Zimbabwe currency, you could see that the currency was in meltdown, you might very well say, I don't want to own stocks in this crazy environment. I'm going to short sell the Zimbabwe stock market. But it's a very volatile market, I'm only going to deal with 2% of my net worth. A little tiny bet. All right, over the next six weeks, their currency fell 10-fold, their stock market rose 500-fold in Zimbabwe dollar terms, meaning 50-fold in US dollar terms, your 2% short position just wiped you out, your net worth is gone.
Eight weeks later, their currency fell another 100-fold, their stock market crashed, and for all intents and purposes went to zero and stopped trading. You would have been right but bankrupt. So be careful about betting against bubbles, because the natural next step in a bubble is up not down.
ANDREAS STENO LARSEN: The entire interview is available today at the Real Vision platform for Essential, Plus and Pro subscribers. The title of the interview is by the way, What Are They Smoking On Wall Street? What a cliffhanger, Tommy, but back to you and your thought process when you decide to short equities in general. I don't know whether you prefer to answer that question while other than what they're smoking on Wall Street.
TOM THORNTON: Yeah, that snippet was a little mind boggling to me. First of all, if you're going to short something, and I'm all fine shorting things, try not to short things that are completely obvious. And that I think is the most important thing. Make sure you're not shorting into something where everybody else in the world is short. And if you're wrong, you don't have to lose all your money being short and exit quicker than losing all your money.
That's just the fact. You have to have risk management, you have to size right. And for me, I like to find ideas after shorts cover. I think right now is a pretty good time that now we've seen a lot of shorts cover. And that will create a vacuum if there is any bad news because the shorts are the natural buyer. And if they're gone, things could drop a little bit more than expected.
So those are little things that I like to do when I'm looking for a short and, again, don't short Bed Bath and Beyond when 44% of the float is short, it's just no, you don't do something like that. Even if it's the most obvious thing in the world, don't do something like that. It just makes no sense. You could be a hero, but the odds are against you when you try and do something like that. I'd take the other side of that trade and go long anytime when I see a real high short interest.
ANDREAS STENO LARSEN: Do you have like a checklist that you go through before you decide to go net short on a single stock or on a net, net basis, on the entire equity market?
TOM THORNTON: Yeah, absolutely. I look at a lot of different factors. One of the main things I look at are DeMark indicators for exhaustion signals. It's the same thing on the downside when I want to buy something as far as on the upside. I look at internal indicators to look at where the market is. And one thing that is really important and a lot of people have talked about this, 50% is the sector that it's in, 30% is the market and then 20% is the individual stock.
So I like to find sectors that get overbought or oversold and then I can shoot against them. I do like to see short interest dropping on certain stocks and certain areas. I also like to see heavy call buying. I'm trying to the back and forth long short manager, I like to see heavy call buying because most of the time people are buying calls. The heavy call buying happens at tops. And I can demonstrate that 100 times.
And when you see people on CNBC, and they're talking about the smart money buying calls and something, really ask yourself, how good are those guys? And why are they telling me now with the stocks at the highs? It just makes no sense. And the same thing as when you see heavy putt buying, you could cause a put squeeze, which is essentially a short squeeze, because people have to get out of those puts if the stock starts to lift.
So those are little checklist things that I do. And try and risk manage, keep my size appropriate. If I have a high conviction, I'll put the max size, which for me is 5%. And I'll maybe start with 2%. Maybe add a little here and there. But I try to keep myself diversified.
ANDREAS STENO LARSEN: We have a question from Mark on YouTube in relation to this debate. He's asking you whether it's possible to assess whether the recent rally in equities is based only on a short squeeze or whether it's based on actual buying.
TOM THORNTON: Oh, I think there's both. And that's evident with the Bank of America Fund Manager survey. They saw the largest increase in tech inflows from their clients. And we're seeing huge covering across the board. So I think it's a combination. But I think that we're getting closer to the short covering ending. And that's why we're starting to