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It was not a good day for the market, with the S&P 500 trading down by about 1.7%. Overall, today had a different feel for me, and I think the main reason is what we’re seeing in some AI-related names like Oracle and CoreWeave, which have both been really decimated over the past couple of days and weeks. It’s also interesting to see their credit default swaps widening quite a bit, along with broader market credit spreads. It paints a picture of a market that is now beginning to doubt the AI trade.
It’s not just happening in the US, either. We’ve seen the same dynamic in SoftBank, a stock we’ve focused on in the past — it had been rising alongside implied volatility, but over the last week or two, it’s given back significant gains. While it’s still up substantially, the pullback is notable. I think this is an interesting development we haven’t seen before.
Despite the S&P being down about 1.6% to 1.7%, the RSP was down less, only about 1.1%. That again gives us a sense that we’re seeing an unwind of the AI-related names, which could simply take us back to where we were before earnings — when the focus was all about the equity-dispersion trade and the volatility-dispersion trade needing to unwind.
Meanwhile, the average repo rate traded today, according to DTCC, was around 4% again. So if you were looking for liquidity conditions to ease, that certainly didn’t happen today. It might happen tomorrow, simply because it’s a non-settlement date, but next week we’ll have more settlements to contend with — including an extra one.
There will be $26.7 billion settling on the 17th, $14 billion on the 18th, and $18 billion on the 20th. That adds up to roughly $60 billion in Treasury settlements next week, which will continue to keep liquidity conditions tight, whether the TGA is drawn down or not, because reserve balances are still extremely low.
Even after this past week, reserve balances are only around $2.88 trillion, which is still at the very low end of the range and unlikely to move materially higher from here. Even if the TGA is reduced back to the $850 billion level, it would likely add only about $110 billion in liquidity — which is not going to make much of a difference at the end of the day.
And almost right on schedule, 1966 continues to play out.
Mike
Glossary by ChatGPT
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AI Trade: A market theme centered on companies expected to benefit from growth in artificial intelligence technologies.
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Credit Default Swaps (CDS): Derivatives that provide insurance against a borrower’s default, with widening spreads indicating rising credit risk.
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Credit Spreads: The yield difference between corporate bonds and comparable Treasuries, reflecting perceived credit risk.
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DTCC: The Depository Trust & Clearing Corporation, which processes and reports U.S. securities transactions.
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Equity-Dispersion Trade: A strategy that trades differences between individual stock volatility and index-level volatility.
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Implied Volatility: The market’s forecast of a security’s future price fluctuations derived from option prices.
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Liquidity Conditions: The ease with which financial assets can be traded without affecting prices, often influenced by funding and reserve levels.
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Repo Rate: The interest rate at which securities are sold and later repurchased in the repurchase agreement market.
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Reserve Balances: Deposits that commercial banks hold at the Federal Reserve, serving as a key component of system liquidity.
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RSP: The Invesco S&P 500 Equal Weight ETF, which tracks the S&P 500 with each constituent weighted equally.
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Settlement Date: The date on which a trade is finalized and payment and securities are exchanged.
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TGA (Treasury General Account): The U.S. Treasury’s operating account at the Federal Reserve, which affects banking system liquidity.
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Treasury Settlements: Payments for newly issued U.S. Treasury securities, which can withdraw liquidity from the financial system.
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Volatility-Dispersion Trade: A strategy exploiting differences between implied volatility across individual stocks and an index.
Disclosure
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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