KTS weekly update Nr. 31 - The 17th of December 2020 - KTS Capital Management
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KTS weekly update Nr. 31
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The 17 of December 2020
U.S. Money Supply M1
• M1 money supply includes those monies that are very liquid. M1 in US has increased by USD 2.3 trillion since the last week of
February to a record USD 6.2 trillion during the week of November 23rd.
• As Mr. Yardeni rightly argues, once we are all successfully vaccinated, this liquidity could well fuel an economic boom during the
second half of next year; it could also, of course, boost price inflation and blow more hot air into the asset bubbles currently
appearing in financial markets and real estate.
• QE successfully replenished bank reserves. Now governments are supplying the private system directly with newly created
money (fiscal spending, bank lending expansion, etc). The 2020 expansion, in broad money supply, was just enough to
compensate for the drop in disposable income- central banks and governments will support further in 2021 and, most likely,
beyond!
U.S. Money supply M1 Red: Bank reserves (proxy for QE) vs (blue) Money supply
2
The new fiscal paradigm
• Every investor knows that as soon as markets claim “this time is different”, bad surprises are around the corner.
• During year 2000, as a young trader, I perfectly well remember “older foxes” on the desk warning me of just that. I had not yet
experienced really bad market corrections and then, with perfect timing, an historic market correction hit the market in 2001 and
lasted through to 2003. As a young trader, I continued buying in order to average down my purchase prices. I continued buying
all the way down, losing a large part of my private wealth!
• Of course, we believe that we learn from our mistakes and become experienced investors. We are confident in our visions and
strategies and have our risk management models to “calibre” the risk in our portfolios.
• That said, KTS genuinely believes that markets are in a new long term bull trend, which is going to stay with us probably for the
whole of the new decade. Of course, we will experience short term corrections, but the uptrend will remain intact. Because, for
the first time in history, global central banks and governments will coordinate their actions; a new fiscal paradigm, supported by
several innovative trends like renewable energy, 5G, automation, artificial intelligent and digital health to mention just a few.
• As Flossbach has argued for years now, investors should not forget their long term views and visions; this will protect them from
short term overreactions. Despite financial behavior being a well know phenomenon, during 2020 we experienced, once again,
investors’ overreactions. Many are still experiencing negative performances YTD, because they sold low before then buying high.
• A lot of investors are still finding negative arguments- how vaccinations might fail (high fatality rates) or the promised economic
growth will not materialise. They advise waiting for a decent market correction before investing. Sounds like Q4 2018 déjà-vu;
remember the huge market rally that followed in 2019. We are confident that markets still have huge upside potential. Especially
because the economy has not yet responded to the massive liquidity injections and normalization, which will impact in Q1 2021!
3
Market’s sentiment
• That said, we have to analyze any short term indicators of market exuberance, to reduce the short term volatility of our portfolios.
• We are reading in multiple reports, that total US call option volume is at the highest levels ever; this is quite alarming.
• Also, % of total U.S. Opening options volume has small traders call buying as ever been at such level (22%) since year 2000
(20%).
• Smart money flow indicators are strongly diverging (selling pressure) from the market index (at highs), insider selling transactions
are at their highest levels and the S&P 500 Index is again experiencing its furthest divergence from the 200d moving average.
• At first sight, an investor would interpret such alarming events as a sell signal, especially combined with the high Fear & Greed
(sentiment ) Index readings.
• But, we have to be careful with such a hasty response. It looks like institutional investors took profits for the year by reducing
positions (confirmed by the outflows of total U.S. equity futures speculative positions), but increasing exposure to call option
purchases to participate in any possible further market upside.
• Therefore, we can assert that investors, especially professionals, are very cautious and have increased liquidity in the short term,
but they will need to re-invest anytime soon. The Fear & Greed Index actually decreased from highs 89 of last week to 76 today,
confirming that the general sentiment is becoming slowly, but surely, more cautious.
• As argued before, we do not expect any big surprises up to the end of the year. Because basically “les jeux sont fait” and we
expect strong inflows into the market during January and February next year. However we recognize that sentiment is
overstretched and, therefore, have hedged 25% of our equity exposure with put options maturing March 2021, 5% OTM strike.
4
Market’s sentiment
• The Smart money flow indicator is diverging from the Dow
Jones.
• Just before the Thanksgiving Holiday, more than 35 million call
options traded: highest volume ever.
• The total U.S. equity futures speculative positioning is
confirming huge outflows from the market.
The Smart money flow indicator / Flowbank / Zerohedge
Highest call options volume traded ever Total U.S. Equity Futures Speculation Positioning 5-week net change
5
Marriott
• We always argued that market laggards were going to recover much sooner, but feel that too much good news has now already
been discounted since the early rally in November 2020. The stock price of Hotel Marriott is basically back at levels pre - Covid19.
In our eyes, some market laggards have already run too high, too fast. We are going to wait for a consolidation phase in order to
build positions.
Bloomberg / Flowbank
6
Economist Robert Shiller
• Economist Robert Shiller, who is a very conservative investor, also recognizes that equity valuations are actually not expensive
taking into account the 0% yield environment. Finally, more and more well recognized economists are starting to accept the
concept of a new fiscal paradigm.
• As contrarians, some investors could argue that the upside potential of markets must be capped because, nowadays, even the
most conservative economist is now becoming bullish on equities. But, there are still plenty of economists, who still “stick” on
historical metrics. In fact, the economist Albert Edwards reacted to the comments of Shiller by saying- “Shiller is comparable to
the economist Irving Fisher back in 1929, who predicted that the stock exchange would stay at high levels for a long time, just
before the crash!
• We have the perception that there is still a lot of skepticism around and, for this reason, we are still not anxious about the new
bull market cycle ending.
• The best example is the average exposure to equity markets of German pension plans: under 10% according to Flossbach.
Having most of their portfolios at 0% yield, pension plans will be forced to increase their equity exposure. As in Germany, Swiss
and probably pension plans worldwide could need to increase their exposure to equity markets, whereby the maximum exposure
is set by law at 25%. This is not going to happen though, because most of the current managers still have fresh memories of the
huge capital losses in the insurance sector during the crisis of 2001-2003. In our eyes, an increase to somewhere around 15% is
the most likely outcome. If such a move did occur and we believe, slowly but surely , it will happen, the trading volumes on the
Robinhood platform will be literally “peanuts” compared to the volume traded once the pension plans and institutional investors
arrive.
7A bearish case for USD and DXY Index
• Quite a simple but clear chart explaining the weak
fundamentals of the USD.
Source: Alpine Macro
8Commodity index
• The commodity index reached a 6 years high. Iron ore and copper futures reached a 7 year high.
• Stimulus package are slowly, but surely, “kicking in” to the worldwide economy. As argued, commodities are also a pillar of the
renewable shift. Therefore we stay invested in our best in class Fund Bakersteel Electurm, which is invested in rare metals and
gold.
Bloomberg / FLowbank
9General news
• Following the Google case, the U.S. Government and 48 State Attorneys Generals filed wide-ranging antitrust lawsuits against
Facebook, arguing that the company must split up. As we have explained before, we are going to experience more pressure on
the tech. giants.
• Bill Gates argued over months that we were not going to experience any normalization before the end of 2021. Surprisingly a few
days ago, it looks like he is now turning more positive because of the vaccine’s success and he foresees full normalization already
starting from spring 2021!
• The Bank of Japan recently became the nation’s top holder of stocks, owning more than USD 430 billion’s worth. Therefore, the
central bank of Japan is the new “whale” in the market together with the Government Pension Investment Funds!
10Netflix effect
• It is incredible the magnitude of the influence of social media and streaming services nowadays and we should defininately not
underestimate such powers.
• A recent example, of such, is the serial “Queens Gambit”, which has aired on Netflix since October 23, 2020. The show has
already had a powerful effect on the viewing masses: 62mln households have watched the show and inquiries for “chess sets”
are up 250% on eBay. Meanwhile, the queries for “how to play chess” in google search has hit the highest volume in 9 years. The
original novel The Queens Gambit is now a New York Times bestseller, 37 years after its release. The number of new chess
players on chess.com has increased by 5 times.
• This is massive!
11Long VIX June 2021 as Hedge Trade
• An investment provider is advising to buy VIX Futures with maturity 2021 as a hedge. The futures contract is already trading up
by over 25%. KTS already had such experiences, having been trader of the “book of the bank”. In the case of a volatility spike,
we know for sure that only the front month future (1 month, probably also 2 months maturity) is going to react, but not the 6 months
forward maturity. Which, on the contrary, is going to lose premium. Therefore, we advise against such a purchase.
BCA Research
12DISCLAIMER
This report has been prepared by KTS Capital Management AG (“KTS”) / VICTRIX AG (“VICTRIX”) and is intended
for information purposes only and does not constitute an offer or an invitation by, or on behalf of, KTS/VICTRIX to
make any investments. Opinions and comments reflect the current view of The Investment Team of KTS/VICTRIX
and not that one of a third party. We assumes no obligation to ensure that other such publications are brought to the
attention of any recipient of this publication. Investments in the asset classes mentioned in this publication may not
be suitable for all recipients. This publication has been prepared without taking into account of the objectives,
financial situation or needs of any particular investor. Before entering into a transaction, the investor should consider
the suitability of the transaction to his individual circumstances and objectives. This publication does not constitute
investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or
appropriate for individual circumstances, or otherwise constitutes a personal recommendation for any specific
investor. We recommends that investors assess the specific financial risks as well as legal, regulatory, credit, tax and
accounting consequences with a professional advisor. The information and data herein are obtained from sources
believed to be reliable but no guarantee can be made that the information is accurate or complete....
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