State of Play: "position reached in an activity or process that has not finished yet". Much like the current market position with regards to the future. A little belated, but some great videos to think about:
For macro related thinking, forget the economists, listen to the bond guys and distressed inclined investors: Gundlach, El-Erian, Howard Marks, etc. Druckenmiller's thoughts are always worthwhile listening to and Industry people also give unique perspectives. These people have real skin in the game.
Some of El-Erian's excellent points:
Market is in the third phase (flat-line with rising volatility). To see it go higher we need to believe that at least one of three things will happen: a) Improvement in fundamentals - strong re-opening, b) Meaningful policy actions e.g. Fed buying greater amounts of corp debt, c) Improvement in the system: China/US tensions decrease, global economy recovers in synchronised manner
Information failure: will you infect me? Re-opening doesn't mean re-engagement in the same manner
Default, deleveraging cycle
Fed can inject liquidity but can't deal with credit risk. It's underwriting significant credit risk by buying corp bond ETFs
Most of my worries over the past month have been based around these points:
Fed policy actions: negative rates and buying corporate bond ETFs. I don't believe policy makers in the US have closed all possibility of negative rates and I think the corporate bond purchases will grow in magnitude. The only higher possibility Bull item on the above list. But good in the short term is extremely damaging longer term. Europe and Japan experiments show lasting damage to their banking systems with little impact on real growth. I understand the liquidity dictated needs of such a move, but the new economic reality is: many companies will never recover. Therefore the Fed's corp debt underwriting is simply moving bad debt from the Private sector into the Public sector. I think these bad debts will be treated as 'expensed' like buying X Tomahawk missiles and shooting them into the sky - lots of bang, little to nothing in productivity benefits. I believe the Private sector can price the risk and re-organise financial structures without government intervention. Wouldn't funding fiscal projects and directed bounties be better?
China/US tensions: it's become about political survival. I think the likelihood of de-escalating before the elections is extremely low
Retailers and Restaurants - what is the new norm? Will people be willing to try on clothes like before? Will people do so much browsing and impulse shopping? Will youth hang - eat, buy, socialise like before? If no change for many Consumers, then how does that affect the risk of a Second Wave?
Perhaps that's why Buffet sold down his airlines, Goldmans and isn't jumping back into the market. Even Druckenmiller says he's extremely bearish and his primary market indicator is Liquidity. What's clear is the amount of confidence needed in the US system is greater than ever.
After the big market bounce on Monday from the vaccine hopes, I took the opportunity to trim many of my positions (including JD and BABA which exceed my comfortable risk size range). Additionally I increased my direct SPY short at different 29X levels and bought some more Imperial Brands yesterday after it crashed 8% when it said it would cut dividends by 1/3 (so from 12% div yield to 9% in 2020...) and sold a 1month BAT Put at an effective breakeven price 13% below current price. Also throughout this month I'd completely sold out of some of the 'quality decliners' basket of stocks like Lazard, Darden Restaurants, New Work, Muji. I'm cautious on what the new Retail and Food Services will look like. I still hold some PVH but would prefer to own more Tapestry simply because the later relies more on handbags than fast fashion apparel.
Despite my macro ramblings my portfolio is built bottom up and because of my background, more Asia/China focused. I'm cautiously optimistic on the current exposures but I've tried to limit some of the downside exposure further. For example two trading pairs I have going are:
Long JD, Short PDD: I think JD is structural growth while PDD may be transitory 'bought' growth. They are at similar MCaps but to me it seems like an Amazon vs Groupon type story. Nobody knows if PDD's Users and buying habits are sticky until they cut incentives whereas for JD it has already matured in early product verticals (established buying power, price rationality) and its User base and habits are well established
Long Mengniu, Short Budweiser Asia: Mengniu is a structural consumption per capita growth (lower Tier region milk/capita far less than Tier 1/2) and structurally driven premiumnisation (demand for healthier food/lifestyle). The channel penetration is still still growing (offline PoS and online retail) and the competitive landscape is a story of just two: Mengniu and Yili. Budweiser on the other hand is brand driven premiumnisation with a heavy reliance on the 'on-trade' channels (nightclubs, KTV, restaurants). Beer/capita is falling and the industry still needs more M&A driven consolidation. I doubt they can raise prices in this environment. The valuation difference is huge: Mengniu trades in low to mid 20x forward PE and BudAsia ~40x
I guess my current positioning is more and more defensive vs late March/early April. However I'm also very aware that many investor surveys indicate far greater % bearish investor sentiment. So is all the negativity priced in? In the past it paid to be contrarian in the face of extreme investor sentiment but I have no idea if news and survey samplings are trustworthy, the role of quant funds in today's market and the impact of individuals playing derivatives on low cost online platforms (primarily the Tech names). I know what I don't know and therefore I let individual stocks and ideas' risk/reward assessments decide my positioning.
Lastly some interesting perspectives from a prominent VC investor on Remote Working and Gig Economy:
I currently have shorts on Uber and Lyft (and previously Grubhub) on doubts over cost structure (legal challenges on Contractor vs Employee and max Take Rate legislation), rational competition (in China it only stabilised when there were one or two players left) and hedge on the optimism around the US economy re-opening (I retain doubts on consumer activity rebound and thus utilisation recovery). But I'd previously already had doubts on my Uber Short (e.g. my research indicating there is a cost efficiency case for Uber in some markets e.g. New York's taxi licensing cost) but this investor really bought home some good points on flexible work choices and possible solutions. After Musk won his direct challenge to re-opening in California, I wonder where the legislation priorities will be regarding the gig economy. I will now work on deciding if I'll close out all these positions or whether to establish another trading pair e.g. Long Uber/Short Lyft.
Be humble, be careful.
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