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Real Selling Begins As CTAs Start Liquidating, Dealer Gamma Flips Negative
Whether it was today's abysmal Chicago PMI print, or algos finally googling "pandemic" and realizing that what is going on in China could have catastrophic consequences for the global economy (as explained in "Coronavirus Has The Potential Coronavirus Has The Potential To Trigger A Global DepressionTo Trigger A Global Depression"), today's sharp market drop, which pushed the Dow Jones back in the red for the year, is having adverse consequences for market positioning.
Starting with CTAs (which as we explained earlier this week, have emerged as the dominant price-setter in this momentum-driven market), Nomura's Masanari Takada writes that they have finally emerged as sellers of equity futures as a result of the recent spike in VIX, to wit: "with market volatility on the rise, CTAs appear to be closing out the overlarge long positions they had accumulated in US equity futures. At current price levels, however, we think most of this is defensive unwinding, as we estimate that their recent long positions in S&P 500 futures (net buying since December 2019) break even around 3,270." And with the S&P at 3245 currently, every CTA that bought in the past month is now underwater.
The good news is that CTA liquidation of long positions has been stop-and-go, as even below 3,270, bottom-up buying pressure from Long/Short funds and other bullish investors generally keeps the bottom from dropping out.
What is notable here is that as CTAs dump, Nomura sees traditional equity long/short funds rising to top the list of "stalwart bulls" who persist in their dip-buying:
L/S funds' net exposure to US equity (estimated 30-day beta) continues to ramp up gradually, and we think they remain contrarian buyers even after the market shock caused by the novel coronavirus outbreak. But these L/S funds have been reshuffling their portfolios, replacing some cyclical stocks with defensive stocks, and they have increased their allocations toward low-vol and quality factors. As they also appear to be selectively buying up stocks reporting favorable earnings, we interpret their stance as the more conservative flavor of bullishness.
To be sure, it is rather perplexing that hedge funds which remained on the sidelines throughout most of the post-QE4 ramp, are now scrambling to buy stocks. One possible reason for this may be that dealer gamma was solidly in the green, providing a comfortable cushion for any new longs as stocks rallied. That "cushion" however is now gone, because as Nomura's other quant, Charlie McElligott writes, not only is the prior gamma extreme greatly reduced now - at just 35th percentile since 2013 and nowhere close to as impactful as it was over the past week - and with the S&P now below as the strikes that matter, such as 3250 ($3.4B), 3300 ($4.9B) and 3350 ($3.7B)….. but the S&P500 “Gamma Neutral/Flip" trigger point, which has rested on the 3250-3260 band, has now been taken out, as dealer gamma flips negative, and as dealers are now forced to sell into every selloff.
In short: with CTAs now liquidation and with gamma no longer a "natural" offset to any selloff, should the selloff accelerate here as L/S funds capitulate, the Fed may have no choice but to intervene to avoid a rout.
https://www.zerohedge.com/markets/real-selling-begins-ctas-start-liquidating-dealer-gamma-flips-negative
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WWE Executive Exits Spook Analysts and Erase $1 Billion in Value
World Wrestling Entertainment Inc. plunged as much as 28% on Friday, erasing more than $1 billion in market value, after Chief Executive Officer Vince McMahon ousted two of the company’s top executives.
The news prompted multiple downgrades on Wall Street as several analysts said they have lost confidence in the company’s financial projections. The stock drop was WWE’s biggest decline in nearly six years, sending the shares to their lowest levels since May 2018.
WWE shares plunge double digits as two executives are fired
Evercore ISI, John Belton
Belton cut his rating to in line from outperform and reduced his price target to $50 from $80, saying “the release announcing the changes was vague.”
He believes the timing of these developments, which follow months of uncertainty surrounding several key strategic and financial initiatives, may imply expectations for 2020 adjusted operating income must be cut further. McMahon cited “different views on how to best achieve strategic priorities moving forward” as the reason for the changes.
Loop Capital, Alan Gould
Gould cut WWE to hold from buy, saying he has “diminished confidence” in his estimates given the sudden change. His price target on the stock is now $50, down from $80.
He believes McMahon “was not pleased with the results of the international TV deals” and “wanted to reinvest more of the growing cash flow back into the business.”
Gould lowered his 2020 estimate for adjusted earnings before interest, tax, depreciation and amortization, also known as Ebitda, to $350 million from $390 million. He sees room for number to be less “depending on how successful the renegotiation of the international contracts were and the level of discretionary investment spending.”
Citigroup, Jason Bazinet
Bazinet said Wall Street “may interpret the departures as a new risk to consensus 2020 Ebitda forecasts.”
He suspects that the co-presidents “may have wanted to gradually reinvest incremental US media rights revenues, while Mr. McMahon may want to make more aggressive investments.”
MKM Partners, Eric Handler
Handler was more optimistic, saying “a change in the C-Suite does not necessarily mean more bad news is coming.” He has a buy rating on WWE and a $92 price target.
“Given the known step-up in the domestic TV rights deal, we do not believe the company is in a ‘precarious’ financial position.”
https://www.bloomberg.com//news/articles/2020-01-31/wwe-executive-exits-spook-analysts-and-erase-1-billion-in-value
Shots fired near Mar-a-Lago after driver breaches security checkpoint, sources say
The Southern Blvd. bridge that leads onto Palm Beach has been shut down amid a police investigation.
According to sources, a driver breached a security checkpoint in Palm Beach. Officials fired shots at the driver, but the driver got away.
A heavy police presence was reported near Mar-a-Lago.
Traffic delays are expected at Olive Avenue and Southern Blvd. Drivers are urged to seek an alternate route.
President Trump is due to arrive at Palm Beach International Airport Friday evening.
https://www.wpbf.com/article/mar-a-lago-shots-fired-security-checkpoint/30730684