What a huge bull market May turned out to be! Despite all the poor economic data, reopening fears, increasing China/US tensions and the recent US race riots, global markets have rallied hard and not looked back. Yesterday's strong US job numbers seemed to confirm the market uptrend and investor sentiment seems more and more in the bull phase. I suspect FOMO is sucking in investors daily from the sidelines.
I've done well but as readers may have noticed from my past two posts, I have become more and more cautious about the risks within the markets and the invincibility of this rally. I can't help but be skeptical when others are bullish as is my contrarian nature. For example the 2.5m US jobs added in May figure, how much of that bump can be explained by the requirements of the Payment Protection Program (full loan forgiveness requires 75% spent on payroll over 8weeks)? Remember that States started reopening from late April to mid May so if you were a business given effectively a free option on survival, wouldn't you start rehiring furloughed workers a few weeks before reopening? What matters more is: how many of businesses (and jobs) remain after 8 weeks which will only be seen in the July/August figures.
I have a fondness for pondering and waxing lyrical on the economy and world affairs but I recognise that my real Edge is finding bottom up investment opportunities. I was the most excited at the value I was finding in March/April. As detailed in my earlier posts, I was continuously adding to my long equity positions and such was the margin of safety, I was comfortable over the past two months increasing my Equity exposure by almost 2x. These positions have done well but very few of them remain valuation based mean reversion investments (possible exceptions are the yield and value plays: CQE, Tobacco, Energy E&P). Increasingly, their future out-performance will rely on their earnings growth rates. Because of this I'd been simplifying my portfolio and making adjustments such as:
Increasing my China exposures: e.g. JD, Trip.com, Lexinfintech, Sands China. I'm participating heavily in the recent China ADR IPOs on the HKex (Netease, JD) and expect my allocation to rise further
Increasing the pace of buying on high conviction ideas: Hasbro (unfortunately the price ran off so the position is nowhere near what I hoped it to be), CVR Energy, Charterhall Education
Selling all my US banks and trimming my European banks (still cheap on P/B)
Selling my TEVA bonds (2.x% yield to maturity) - why hold these when CQE is basically a superior returning inflation linked bond?
As prices rise, there is an increasing burden of proof on my investments that their price remains attractive relative to their long term, normalised earnings power AND that the quality of their earnings (into cash) is high or improving.
The few areas where I've 'traded' or reacted to the risks and the current market reality have been:
Getting out of the way of momentum: a) completely reversed my Uber short into a long (but still keeping the Lyft short), b) converted some of my BeyondMeat short into a Put spread strategy, c) closed out 60% my PDD short and will wait on technicals to either cut the rest or reapply the short
Continuing my portfolio hedging Put spread strategy: the VIX term structure has highest Vol for Oct and I've chosen to take on some duration risk by shorting at the money Oct Puts and buying Sep Puts in roughly 1:2 Short/Long ratio, 10% spread and 100-130day duration. The Max Loss for this protection strategy will be no more than 2% of the Portfolio but should be well below that if I close and open positions well
Making money feels great but now more than ever is the time for caution. So while I'm comfortable with my Portfolio holdings and structure today, I'm intently focused on protecting against the risk of absolute loss which often results from hot heads and hot markets - everyone Long feels like a Genius. Therefore I have no intention of chasing prices, adding gearing, up-sizing my % allocation to asymmetrical (bi-nomial) bets or buying derivative lottery tickets.
Greed is only good when others are Fearful.
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