Equities: "Nomura: This Was 'Death By Papercuts' Mixed With Hedge Fund Redemption Panic"
From ZeroHedge:
One day after the midterm elections, when the Dow soared by over 500
points on abysmal volume, the formerly bearish narrative immediately
turned to how wonderful gridlock is for stocks, with Wall Street
suddenly certain that based on historical patterns - according
to which the market has levitated into year-end every single time after
midterms - this year would be no different.
So much for certainty: as of today, all the post-Midterm gains are gone...
... and the market has resumed its downtrend, down 6% since October,
compared to a 10% drop for the Nasdaq as tech stocks got liquidated en masse as sentiment has once again sharply turned against anything that has to do with growth.
Alongside the seemingly random liquidation in the tech sector,
investor fears are rising, manifested not only in slumping prices but
also in the surge of the 30-day vol in the Nasdaq 100 which according to
Bloomberg has
tripled in five weeks, rising to the highest since 2011. As a result,
day-to-day swings are now averaging 1.7%, half a percentage point more
than in February, as prices for options protection in tech have exceed
the rest of the market by the most in seven years, using the difference
in implied vol between the Nasdaq and the S&P 500.
But while there were many immediate reasons for today's 600 points
plunge in the Dow, including the surge in the dollar to fresh 2018
highs, the guidance cut and a warning from a key Apple supplier
confirming that iPhone demand is tumbling, fears over rising rates,
political turmoil in Italy and uncertainty over Brexit, slowing profit
growth and rising negative earnings pre-announcements, the unspoken
catalyst behind today's mass dump most likely has to do with the
previously discussed November 15 mass redemption day faced by hedge
funds, one which we said portends
a November 15 bloodbath as underperforming hedge funds brace themselves
for an avalanche of redemption requests. And all this happened as bond
markets were on vacation, further accentuating the already illiquid
equity moves....
Confirming this, Nomura's Charlie McElligott wrote after the close
that what was already a sloppy situation within the U.S. Equities-space "got even messier, as the (negative) performance-driven de-risk / “de-gross” of the past month has escalated."
Specifically, today saw a "somewhat idiosyncratic" set of circumstances
"pile-on" into the already-stressed environment surrounding the
imminent HF “redemptions notice” date, accentuated by the following
"death by papercuts" factors in stocks:
- The 5% implosion of Apple and its supply-chain following LITE’s
guidance-slash on "meaningfully reduced shipments" from one of its
largest customers (-30.3%), implicating Apple and reduced demand for
iPhones. The news crushed the entire supplier space (AMS SW -22.4%; CRUS
-13.8%; KN -10.2%; AMD -9.4%; SYNA -8.2%; IFX GR -7.1%; AVGO -6.4%; STM
IM -6.4%; QRVO -6.3%) as the three-year “hiding place” in the Apple
phenomenon breaks-down.
- The ongoing destruction in "Growth"-heavy long portfolios (“Cash /
Assets LONGS” are -3.8% on the day, “R&D / Sales LONGS” -2.9%), as
well as large gains in “Value” market-neutral strategies, where despite
actually somewhat lower “Value LONGS” on the day, the Growth companies
which make up “Value SHORTS” in the market-neutral factor strategies are
being crushed—e.g. “EBITDA / EV SHORTS” are -4.1% today, “Predicted E/P
SHORTS” -2.4%
- Another unwind of popular hedge fund positions has to do with the
de-betaing of portfolios in a hurry: "beta longs" are -3.1% on the day,
and -15.8% QTD, the result of unwinding “long high beta, short low beta”
bets, which has rationally corresponded with the Equities L/S hedge
fund performance swoon, as it captures that many funds were long-er the
market than they realized...
...
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