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Goldman Trader: For All That Hand Wringing Around Value-Vs-Growth, Just Two Trades Matter

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From Tony Pasquariello, global head of hedge fund coverage for Goldman Sachs’ Global Markets Division

Markets & Macro

six bigger picture thoughts and some quick points after not staring at screens for a week:

1. The reflation trade continues to ebb across the rates complex, and post-payrolls one can argue the core of the FOMC now has some cover to wait and see how labor market disruptions play out in H2’21 (while noting I find it very interesting that continuing jobless claims are declining much more quickly in states that ended top-up benefits early). that said, when core PCE prints 3.4% y/y (the highest reading since 1992) and commodities continue to surge higher (pull up a chart of BCOM), it strikes me you’re supposed to keep an eye on the reflation ball in the places where it’s still working … while pressing the “middle seam” framework for sector selection.

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2. Said another way: for all of the ink devoted to value-vs-growth and cyclicals-vs-defensives — and, for all of the hand wringing around what signal the bond market is sending — if one were simply long of some FAAMG and long of some BCOM, you’ve had a remarkably steady hand amidst the oddities that characterized the game in Q2. I give credit to colleagues Matt Fleury and Jeff Currie, from whose fundamental work I had the good fortune to borrow the raw material for this secular/cyclical barbell. I’d also note that factor exposure — and, gross exposure in general — feels cleaner coming out of Q2 than it did coming out of Q4 and Q1 (while respecting the broader observation of length captured in point 6-i below).

3. pulling it together, I continue to like having one foot in NDX and one foot in RTY … perhaps this is essentially S&P exposure by any other name. given how many people are in the pool at current levels, my instinct is the right risk setting for now is a 5 of 10, while admitting this is where I’ve been much too conservative in recent weeks. looking back, the right judgement coming out of the FOMC’s hawkish surprise was to go for the accelerator in US equities; as they say in the trade, fortune favors the bold. bigger picture, tactical punts notwithstanding, I don’t find myself particularly drawn to non-dollar markets relative to the US right now.

4. with respect to positioning and flow-of-funds, here’s how I’d characterize the biggest dynamics in the stock market: the supply side has been immense, principally in the form of new issue (note last week was, quietly, the busiest week YTD for US IPOs, ex-SPACs); alongside this, the defined benefit community in the US have been steady and very significant sellers (as their funding gap has broadly closed). the demand side has also been spectacular, with an emboldened US retail investor driving record inflows into the domestic market (link) and systematic funds steadily adding length. as we look forward to the third quarter, my guess is the temperature comes down on both the supply and the demand side of the equation — but, if I had to pick a side, I suspect it’s the demand story that ultimately proves to be more sustainable, particularly given the renaissance in corporate repurchase.

5. a lot had been made of the richening of S&P put-call skew (which, in contrast to other measures of risk premia on the dashboard, was conspicuously flashing red). while I’m happy to hear the opinion of others, I’m not convinced there was a big signal here. to my eye, with most financial actors carrying significant levels of length these days, the marginal option trade was biased towards portfolio protection. with open interest in S&P calls at 10-year lows — and, with August upside trading on single digit implied vols — I continue to be drawn towards owning cheap right tails. further note that August brings a handful of potentially interesting events (payrolls on the 6th and Jackson Hole on the 26-28th).

6. judging from the discourse of recent weeks, it seems pretty safe to say the natural trajectory of US/China relations is set to worsen (side note: the book 2034 is not light reading on one’s break). and, I can reasonably foresee a significant dose of heat coming down on China regarding COVID transparency and disclosure. I don’t want to make too much of the investment implication here — as a wise manager once said, “economics trump geopolitics” — but, I suspect this variable will play a larger role over time in the financial markets.

as you can probably tell, a week of vacation didn’t result in a grand revision of market views. as the old saying goes: “before enlightenment: chop wood, carry water. after enlightenment: chop wood, carry water.”

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six quotes that stuck out to me:

  1. from CMG in GIR: “most sentiment and positioning indicators remain very stretched and close to their top distribution percentile, leading to investor concerns on potential reversals” (link; specifically note exhibit 1). this underscores my prior point that it seems many people are in the pool these days.
  2. from Matt Fleury in GMD, which echoes of last summer: “Friday was the quietest day of the year for shares traded, but the highest notional USD total of FAAMG options traded. if retail starts chasing these big cap names, there is potential for them to get away from people quickly.” I suppose the corollary here is an argument to allocate some of your premium budget to QQQ calls.
  3. from Peter Oppenheimer in GIR: “the decarbonization revolution will be much more capital intensive than the first part of the digital revolution.”
  4. from a client: “there are only a few times a year to make a lot of money. when those times occur, you need to be involved, aggressive, big. the rest of the year it is best to do as little as possible.” I think this is very true of the discretionary macro space, particularly in the mean-reverting assets — rates, commodities, currencies — while viewing the stock market as a distinct animal.
  5. from @BrianFeroldi: “the stock market is the greatest wealth creation machine of all time, but we don’t teach anything about it in school.”
  6. from @adamdavidson: “Ben Bernanke said that you learn about the nature of normal landmass when there’s an earthquake. you learn about a financial system when it collapses.” TP: if one looks back at the worst moments of 2020 — and, with an appreciation for how significant the policy response was — I think you have to give some credit to the banking system for how it performed under immense pressure (virtually no failures nor significant capital raises).