By Ross Silver, Chief Entertainment Officer
My job is to question any all things finance related given the term “investment opportunity” is typically a synonym for “lie”. With that thought in mind, when I look at any news outlet it seems every business could not be doing any better, the economy is on a tear and the stocks I am invested in are working well, yet I am skeptical. Why? Why am I skeptical when the masses are rejoicing and drinking from the punch bowl known as prosperity and equites I have invested in bask in 52 week highs? Well, paranoia was the first thing that came to my mind, which I questioned, so I decided to look up the definition of paranoia and found: Paranoia – a mental condition characterized by delusions of persecution, unwarranted jealousy, or exaggerated self-importance, typically elaborated into an organized system. It may be an aspect of chronic personality disorder, of drug abuse, or of a serious condition such as schizophrenia in which the person loses touch with reality.
Definitions of words, wherein other words are used to describe a word, are the reason why I love the English language. Who needs a therapist when you can turn to a dictionary and learn you are insane and that the thought you are evaluating really means you are delusional, jealous, have a personality disorder, are a drug addict and schizoid. Sorry, back to the task at hand, explaining the what and why of equities…
The growth over value trades seems to be finished. On Friday, in a prescient note observing the factor, style and sector rotations in the market, Nomura’s head of x-asset strategy, Charlie McElligott explained why the most important trade of the past decade – growth over value – is now reversing. One day later, as moves he pointed out last week accelerate, McElligott has published a follow up piece, in which he warns that the value/growth rotation is accelerating, while hedge funds and other members of the buy side are getting crushed, something Morgan Stanley touched upon .
- Another day, another powerful rebalancing OUT of “Growth” (FAANG, Tech / Cons Disc) and INTO “Value” (Cyclicals / Resources)—thus disrupting the performance of “Momentum” strategies, broad “consensual positioning” across Equities funds (HF L/S model) and spurring speculation of “quant fund unwinds” (Momentum Sector-Neutral). This means momentum stocks like FB are not working anymore and stocks like CL are working and money is going to CL from FB.
- However, it’s not just a one week phenomenon: “Cash / Assets” factor (-3.4% today) is the factor category poster-child of “Growth over Value”—and which from the low in U.S. rates in the Summer 2016 through March 2018 was +63.5% as a “market-neutral” strategy; however, since March 9th 2018, the factor is -8.5%. This means Consumer Staple stocks like CL are performing better than FB since March 2018.
- Crowded “long Growth” (and “Momentum”) positioning is “tipping over” with 1) the negative “micro” earnings catalysts of last week sapping sentiment vs high expectations / “loaded” positioning, in addition to the “Value” macro drivers I’ve spoken about as well: 2) the current tactical steepening of the UST yield curve via BoJ “tweak” potential 3) the more-gradual tightening of US Financial Conditions and 4) Chinese outright easing / stimulus ‘pivot’ powering a potential Commodities / Cyclicals recovery (through infrastructure / fixed-asset investment). This means real fear of a downturn is creeping into fund managers heads and they are rotating out of growth and momentum stocks into defense stocks.
- This overall “knock-on” is a “mean-reversion” across the factors, sectors and themes, driving broad “gross-down” / “net- down” flows throughout the Equities universe. This means the days of money chasing momentum stocks like FB and NFLX seem over.
For those of you trying to make sense of what you just read, the fund managers that have playing growth this year are now losing (a lot) and rotating into defensive names. It may seem odd that after a four handle print on GDP that fund managers are rotating out of growth and into defensive stocks but what fund managers are essentially saying is that the GDP print last week was fluff (agreed) and the search for safety is on. This may be the first sign that the near decade long rally in equities is over, take notice.
Another gem I discovered last week is a MASSIVE bet on interest rate volatility spiking. That bet comes in the form of an unnamed multi-billion dollar fund (guessing PIMCO) selling rate volatility puts (betting on volatility increasing) in a way that has friends of mine who sit on trading desks punching their screens thinking they are observing faulty data. The fund making this bet has done this to the point where they are short MILLIONS of put units in long-dated options. Is this why rate volatility has collapsed to near record levels? My guess is yes and for those of you not following, a massive fund is making a monster bet that interest rate volatility is going up. Should this happen, equities are likely heading lower given interest rates will rise leading to higher borrowing costs. The 10 year treasury breaking through the three handle may set this trade in motion…my popcorn is ready!
Watch yourselves out there, the tape looks ugly.
The Characters of Horse Racing
I grew up attending thoroughbred horse races and as a result the track became almost a second home for me. While many of my friends who were also 8 years old attended church or temple on Sunday’s, I was in a car racing down the 405 freeway at 90 mph to get the track so that we did not miss the Daily Double. The tracks I grew up with were Hollywood Park, Santa Anita, Los Alamitos and Del Mar. At some point I want to write a book about my experiences at these tracks because they are some of the funniest (and scariest) experiences of my life. Thoroughbred race tracks are a microcosm of society, in the grandstands are people who have likely been face first on the hood of a police car, the clubhouse is the suburbia crowd and the Turf Club is the white linen table crowd.
One afternoon, I was with my brother at our usual spot in the grandstands at Hollywood Park and we were standing next to a table of geniuses led by a boisterous man named Ray. Ray was amazing, he picked the winner of every race and not only picked the winner of every race but the exact order of finish for each race, quite a remarkable feat. My brother and I were amazed by Ray. “How many times I need to tell you fools? Four, eight, two!” Another favorite was, “Did I not say the 5 was going to eat? Did I not say nobody can run with the 5? Maaaaannn, you guys need to start paying attention.”
One of Ray’s friends pipped up and told Ray to sit down and shut his mouth because “anyone can pick a winner AFTER a race is run.” Ray didn’t listen and after every race kept telling everyone he picked the winner again. My brother and I could not stop laughing and Ray’s friend pointed out to Ray “It ain’t just us laughing Ray, these two kids laughing at you too fool!” These quotes are of course the PG-13 version of what was really said.
This weekend at Saratoga older horses will run in the Whitney Stakes and I like Mind Your Biscuits to win.
I will share another story from the track next month and after including enough of these stories, I can cobble together a book. Next month I will share the story of how I learned how to use a switch blade at the track and also what it was like witnessing my first armed robbery.