A Weird Little August Week: “Who Keeps Selling The Nasdaq Into the Close”

By Peter Tchir of Academy Securities

A Weird Little August Week

Let’s ignore, for the moment, that I haven’t been this afraid of sharks since Jaws was released. Seriously, I cannot remember a time when sharks come up so often in conversation, but it doesn’t have anything to do with the macro outlook, so let’s move on.

Equities

I should start with fixed income, but the equity story is simple and fast, so let’s get it out of the way.

Who Keeps Selling the Nasdaq Into the Close?

Since the start of August, we seem to get selling into the close on stocks, led by the Nasdaq 100. No matter what news comes out, how the market performs during the overnight session, or in the morning, there seems to be selling pressure into the close. That is definitely helping build the bear case.

Having said that, I want to highlight the performance of several indices last week:

• Nasdaq 100                             -1.6%
• S&P 500                                   -0.3%
• S&P 500 equal weight             -0.07%
• REIT Index                               +0.2%

I like the outperformance of the equal weight indices and the REIT index. That happens to fit our view on the Rotation out of the Magnificent Seven quite well.

Commercial Real Estate

Since REITs did well, It is a good time to mention the other “scary” conversation I’m having with many people. While sharks might be scary, they are easy to avoid. What is “scaring” many people, and may prove difficult to avoid, is work from office.

I understand there are a lot of issues facing commercial real estate (many buildings traded hands at high prices, many were completed at extremely high costs, vacancy rates are on the rise, financing rates have risen substantially, etc.), I think that as a whole, too much is priced in and the push to “work from office” in some form, is gaining traction. JAWS the summer blockbuster of 1975 could be replaced by WFO as the horror show of 2024! Maybe news reports will shift from asking “It’s 11 pm, do you know where your kids are?” to “It’s 8am, do you know where your office is? Because you’re #$&%#* late!”

Anyways, real estate will remain local. There are regional themes at work. The trends of people and companies leaving certain areas of the country for others, is real which create some losers and winners.

In any case, I do understand that betting on REITS and CRE in the short term, based on being contrarian and some vague view that WFO chatter gains traction, may be simplistic, if not naïve, but that’s where I still am. From Bloomberg TV a couple of weeks ago Commercial Real Estate to Squeeze Higher.

It is something we took some issue with as well, on the day that several U.S. banks were downgraded.

CRE is an issue, and we may not have seen the lows, but it is a process and I’m looking for the rebounds we’ve seen to continue, for now.

Rates

Yields ticked higher, again, by the end of the week. 10s closed the week at their highest yields of the week (4.16%) which was lower than the 4.18% they reached last week. What was slightly strange, is that both 10s and 30s did reasonably well into their respective auctions. You would have expected, given so many bearish takes, that yields would have shot higher ahead of the auction, to help absorb the issuance, but that didn’t really happen. The 3-year auction was great, the 10-year was good, and the 30-year was weaker than those, but not horrible, but that seemed to finally trigger bond market selling. All just weird, except, that maybe so many bought thinking that we rally post auction, that there were a lot of week longs?

I guess you could blame a stronger than expected PPI, but I think we are going back to the “good old days” where everyone admitted they had no idea how PPI translates into future CPI, so we just ignored it. I want to point to one thing the Fed looks at, that was very good. The University of Michigan inflation expectations, where the longer term inflation outlook dropped back below 3%.

Speaking of “scary” the WSJ posted an article titled The Scary Math Behind the World’s Safest Assets (link may be blocked by paywall).  While I think it is a bit on the alarmist side, it seems to touch on some points made last weekend on why the downgrade made sense in U.S. Credit Ratings.

It is also a good reminder, that I need to keep an eye out on the bear case, especially since I do think inflation, largely due to “Geopolitical Inflation” will run above the 2% target for several years.

While I think the piece is a bit alarmist, it seems like a good time for me (and you) to revisit Academy’s Financial Bubbles piece from 2020! On “commonality” we have had with recent financial bubbles (going back to the 1980’s) is they can all be directly attributed to “a safe asset going bad”. Financial bubbles all start with “safe assets” becoming “unsafe”. Government debt becoming “unsafe” would create the mother of all bubbles. I don’t see that as a risk, but I’d also hate to be the person who has focused for years on how bubbles start with safe assets, only to miss this giant bubble.

Still bullish rates here, but having to rethink my longer term views.

Credit

Credit outperformed (CDX 2 bps tighter, Bloomberg Corp Bond Index spreads unchanged) even with over $38 billion of new issue priced last week! Not bad with big supply and a backdrop of equity weakness. I do have to mention that Academy was joint bookrunner on two transactions on one day for the first time ever (McDonald’s and Toyota) and was a co-manager on several other deals.

China

Economic weakness continues. It is something we’ve been writing about and I think current weakness makes it even more important, from China’s perspective to shift a “Made in China” to a “Made by China” policy, which is a risk not being priced into U.S. markets at all. Maybe the risk is too remote, but I think we need to be examining carefully, companies that sell a lot to emerging market nations to see if their products are susceptible to competition from Chinese brands?

We got to discuss this and some other subject on Bloomberg TV on Thursday (starts at the 1:43:50 mark) and I think Tom Keene did a better job highlighting some of Academy’s unique strengths than I ever could.

Bottom Line

It’s a weird time for markets, so enjoy the summer (I’m getting so many OOO replies, that advice seems to be well taken). Don’t take on too much risk and watch out for sharks! (in the water and markets).