Stocks tank

JPM with the note on what’s irking stocks. In short, mid-cycle adjustment to earnings and the Fed. That is the if the latter does push so hard that this ends the cycle…

US: Stocks closed on closed at/near their lows, reversing almost 3%. This follows yesterday’s behavior of a ~2% reversal. USD reversed higher with bonds also catching a bid. VIX thru 25 as investors start to focus on next week’s Fed meeting. Financial media suggesting an immediate cessation of QE and/or 50bps hike in March. Thematically, elements of Growth and Value had mixed performances with Utils/HC/Fins/Energy outperforming and Tech/Materials underperforming. Out best baskets were Crypto, Value-Shorts, and Recent IPOs. NFLX missed after the bell; stock is off ~18% post-mkt.

MARKET SUMMARY

EQUITY AND MACRO NARRATIVE: Speaking to Peng Cheng within our QDS team, he tells us that the retail investor net sold $53mm, with $400mm coming in the last 2 hours. This is notable as it is the first time retail investors have net sold since December 6th. Since December 6th, the retail investor had been net buying, on average, more than $800mm per day.

The above is great color but does not get to the WHY of the sell-off. While the answer includes some combination of technicals, deal gamma, and systematic activity, I think the overarching story is how the Fed is changing investor behavior. The combination of ending QE, beginning QT, and rate hike liftoff has left Equity investors with significant uncertainty. This uncertainty is manifesting itself in a “sell all rallies” mentality with regards to the Tech sector. This selling seems to be led by non-HFs given the information from our Positioning Intelligence team. Here is an excerpt from their weekly wrap:

 Tech – Still selling expensive stocks, but buying others: In the US, Expensive Software (JP1BXSFT) continues to underperform and HF flows have remained negative MTD. Additionally, expensive stocks in general (JP1QVLS) saw very strong selling over the past 5 days (>2z) with particularly strong selling on Thurs; it’s worth noting that periods of large selling in the past year have actually been followed by underperformance among these stocks. Despite the selling of expensive stocks and underperformance, Info Tech was actually the most net bought sector in N. Am. (just under +2z) and gross was added (>1z) for the week. Semis were the main driver, although most of TMT saw net buy skews for the week in aggregate.

With the Fed meeting next week, what should be a non-event now has investors questioning (i) will the Fed end QE next week; (ii) is next week a live meeting or does liftoff begin in March; and, (iii) is the first rate hike 25bps, 50bps, or more. The US Market Intelligence view is: (i) No – while the economy does not really need additional stimulus there is noticeable impact from Omicron without a clear answer as to when Omicron fully dissipates. (ii) The JPM view is that liftoff begins in March. With a 6- 9 month lag between Fed action and economic impact, pulling forward liftoff to January does not have a material impact on the economy and the bond market, and thus financial conditions, reaction would potentially be negative enough to derail the Fed’s attempt at a soft landing. (iii) 25bps. While we have seen the Fed cut 50bps or more, we have not seen the Fed hike in those increments. While Powell seems the most likely Fed chair to attempt this, it seems unlikely. That said, we could see the Fed accelerate their hike schedule form an assumed once per quarter to once per meeting. Even that aggressive of an approach is not being price into markets and would seemingly violate Powell’s preferred data-driven approach.

TRADING DESK COMMENTARY

 JACK ATHERTON (TMT) – PTON: Reading the whole article … Bike production to be paused for two months (February to March) according to an internal memo. Bike+ was paused in December and will do so until June. The Tread is a 6 week pause starting next month. We’ve gone full circle here… both the stock price and the inventory levels! If mgmt over produced relative to demand, there is very little chance the guidance mgmt gave last year is going to be accurate. Current FY22 guide is 3.35-3.45m CF subs, JPMe
o BIG TECH: This headline going under the radar a little but CNBC reporting that the Senate Judiciary Committee voted 16-6 Thursday to advance a major tech competition bill. The bill prohibits dominant platforms (AAPL, GOOGL, AMZN, FB, and TIKTOK), defined by criteria including their user base and market cap, from discriminating against other businesses that rely on its services, in what’s sometimes referred to as self-preferencing. As an example, this might limit AMZN favoring own-brand in its ranking OR AAPL favoring own apps. This bill still needs to get through the full senate and congress so a long way to go but doesn’t help the current backdrop for big tech regulation.
o NFLX: Subs missed… +10.8m Q4+Q1 aggregate net adds vs whisper +13-14m. The other big negative was profitability, FY21 FCF missed the breakeven bar (-
$159m) & FY22 OPM guide of 19-20% (-90-190bps y/y) is well below hopes of up 200bps+.
 Q4: +8.3m paid adds (whisper 7.5-8.0m). Revenue $7.71b vs St $7.71b and FCF -$569m vs St -$509m.
 Q1 Guide: +2.5m paid ads (whisper 5.5-6.0m), Revenue $7.9b vs St $8.15b, OPM 22.3% vs St 25.1%.
 2022 Guide: OPM guide 19-20% (St 22.7%) and co expect to hit +ve FCF (St ~$1b). Completed zero buybacks in Q4 (Q3 $100m, Q2 $500m), $4.4b remaining on the authorization
 RON ADLER (TMT) – More of the same…
o The tape’s behavior is becoming a bit redundant (and irritating for that matter). A vast majority of the session has consisted of traders talking about how “quiet” things are, and some HF’s have picked away from a fairly steady amount of LO supply. Then into the bell, we see more LO supply (albeit not enough to warrant a move such as this) and there has been a bunch of rebalances going on across the street as larger players rotate from growth -> value while others simply hedge or take down risk altogether. More activity is probably going to concentrate into the close…at least for the foreseeable future.
o Megacap tech is offender number one, and skittishness into NFLX tonight coupled with PTON now below IPO Px ($29), concerns from larger players about why stocks like AMZN simply won’t/can’t work (investors worry about the 1Q guide are really saying they’re not going to put on much more risk until they see 1Q earnings and a rate hike or two), and more tech regulation headlines…not to mention the fact that a large swath of the group has minimal valuation support.

The more concerning thing for the broader tape today is financials…if Tech isn’t going to work, Financials need to…and while there were signs of green shoots there, fins were hardly immune to the rollover.

o NFLX – at the end of the day, the biggest takeaway here (aside form a lackluster guide ), NO ONE WILL BE INCENTIVISED TO GIVE GOOD GUIDANCE IN THIS TAPE…MIGHT AS WELL TEMPER EXPECTATIONS FOR THE YEAR. At the end of the day, Q4 was good…and estimates for F22 will come down. NFLX BULLS – DOES THIS CHANGE YOUR THESIS?
o On the operating margin, they cited that 2% was due to currency…which is much more significant than people would expect (and there’s no real natural hedge in NFLX’s business).
o They noted that “while retention and engagement remain healthy, acquisition growth has not yet re-accelerated to pre-Covid levels…think this may be due to several factors including the ongoing Covid overhang and macro-economy.”
o Making some board level changes (need to look more closely into that)

Houses and Holes

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