Does the Tail Wag the Dog?

[Gregmal]

Isn’t it crazy how many professionals and institutional investors have chased their tails this year? Been the ultimate contrarian indicators?

 

Star of the year has to be the Tiger cubs. Single-handedly creating the bottom in many tech stocks in June, then went long Lamb Weston in July. But there’s no shortage of champions. Everything from storming the castle in Q1 because FANG stocks are cheap after a 10% pullback from ATHs. To calling 40% declines from the June lows for all the indexes. Then there’s the homebuilders at the lows….why aren’t they trading at 1/3 book? Earnings are gonna slow down! Or the gold bet that just never panned out? How bout we short everything bond because they’re all going to be worthless when the fed has to raise rates to 9% to beat inflation? It’s their mandate!
 

So much laughable behavior from the pros this year. Including all the experts who mocked the Reddit/WSB crowd; how stupid were they? They didn’t know anything and their fundamental research was wrong, they just got lucky. Meanwhile out of the other side of their mouth when the entire market tanks of course all their short thesis’ were “prescient” and “timely” and worthy of taking victory laps on….they’re no different than the meme stockers really. They just wear suites and write better. 

 

So one thing is obvious more than ever. Most people, including the ones who claim to be experts, do not engage in real investing activity and more or less just react to stock price movements. They love it at $100 and hate it at $50 and are giddy or depressed at every up or down in between. I’ve long thought 1 year performance is pretty meaningless unless investing in a clear event driven situation. But it seems these people need it to spin their typical web of bullshit necessary to gather fees.
 

So, how about we list winners. Companies who have executed this year, have bought back stock after the declines took place, who are real longer term, fundamental winners. No requirement for short term stock performance. Who earned their stripes so far this year? 
 

First one that comes to mind for me is Madison Square Garden Sports. Long accused, baselessly as being a bad allocator and having no respect for shareholders, they’ve executed on the business side, paid a $7 special dividend, and nailed the bottom on the share repurchase timing. There is no evidence that in an inflationary environment that their assets would be worth less, in fact, the only evidence we ve gotten this year is that they’re worth more. 
 

Let’s hear about the fundamental winners. I’m in the market for buying awesome assets with great allocators. Lack of institutional shareholder base is a huge plus. Who are some candidates?

Edited December 5, 2022 by Gregmal

[Spooky]

Agree 100%. Most of the "smart" money is just playing short term zero sum games against each other and trying to see into the future which is basically impossible. Reflexivity has also been prevalent, people believe in outcomes so much they will them into being. This creates opportunities for long-term investors that don't put weight into forecasts and can look objectively at the fundamental data. Have to say BRK has put on another capital allocation masterclass between significant share buybacks, splashing some of their cash pile (which is also now generating decent interest) on energy stocks like Chevron + Oxy as well as borrowing more in Yen at multi-decade lows to the USD to up the stakes in the Japanese trading houses. BABA has also been buying back a lot of stock with their free cash flow up (although it seems like they should have / could have bought more) but the situation in China is pretty difficult. Also, shout out to Constellation Software since this kind of environment plays right into their hands since they have the problem of too much cash flow to deploy while the PE firms will find it harder to use leverage to acquire software companies.

[Sweet]

Let’s not forget the oil price predictions at $120 a barrel.

 

Only BoA was calling for it lower.

[Gregmal]

What about crypto? Just today on cnbc you had two headlines. One prediction that BTC is going to $5k and the other that it’s going to $250k. Can at least one of those guys lose their job depending upon where we are in a year or two? Not to mentioned all the fund of fund guys. Pure frauds.

[bizaro86]

11 minutes ago, Gregmal said:

What about crypto? Just today on cnbc you had two headlines. One prediction that BTC is going to $5k and the other that it’s going to $250k. Can at least one of those guys lose their job depending upon where we are in a year or two? Not to mentioned all the fund of fund guys. Pure frauds.

 

But if you hire the right consultants, they can help you select which fund-of-funds is likely to best meet your objectives!

[Gregmal]

I have never met a fund of fund guy who is honest. Objective, how do I maximize the duration of the fee income? Then the fee income. Look for something edgy to sell, that is actually plain vanilla and not edgy at all, so I can tell a story. But thats a different story. Its not world class tail wagging the dog institutional alpha. 

 

Epsilon Energy. Two big, dumb tutes competing to blow out of the stock in June. Company bought back a ton of stock. Growing earnings, no debt, still rolling. 

[LC]

How the hell does someone like Cathy Wood get hired? Well, it's a rhetorical question but at what point does one say, "maybe 100x earnings is too much..."

 

And for those making predictions about the unpredictable, it goes both ways. For every BTC=1MM$, there's a guy calling for 200$ or 300$ oil.

 

It has definitely been an amusing year - Global Financial Stimuli ends and half the world licks its wounds while the other half parades in triumph. 

 

I'm up a whopping 6.5% YTD so I'm just wondering if there's anyone left in the middle, or is everyone else either broke or billionaire? 

[TwoCitiesCapital]

22 minutes ago, LC said:

How the hell does someone like Cathy Wood get hired? Well, it's a rhetorical question but at what point does one say, "maybe 100x earnings is too much..."

 

And for those making predictions about the unpredictable, it goes both ways. For every BTC=1MM$, there's a guy calling for 200$ or 300$ oil.

 

It has definitely been an amusing year - Global Financial Stimuli ends and half the world licks its wounds while the other half parades in triumph. 

 

I'm up a whopping 6.5% YTD so I'm just wondering if there's anyone left in the middle, or is everyone else either broke or billionaire? 

 

I'm pretty in the middle. Down about ~15% at this point, but most of that drawdown is from crypto which I was very heavily into. 

 

My fixed income accounts are down less than 4% for the year (and duration appears to be making a comeback) and my equity accounts have done admirably well with my largest positions being Fairfax, Eurobank, Exor, and Altius (all doing MUCH better than the S&P 500 this year).  Have also done well trading booms and busts in commodity names like Stelco and Whitecap Resources. 

 

But i still think equity and risk assets go lower, think duration should be a better hedge going forward 12 months, and am  building out my defensive posturing by take every rally as an opportunity to reduce exposure by more than I added on the dips. 

[Dinar]

I am down 3% year to date.

[Xerxes]

I am down 7% year to date (through Dec 1, 2022).

Not counting crypto. I think crypto is about less than 2.5% of the stock portfolio. So whatever.

I have not bought and/or sold in 2022. 

 

I was one of the fools buying the dip on my exisiting Amazon and Alphabet positions in Q1 !!! but also in Q3 (see below)

 

However, overall net-net, the portfolio was kept afloat by Exxon, Fairfax (thanks all the commentators here), Berkshire, Starbucks, Couche-Tard, Brookfield, which offset foolish behaviour. Starbucks was a new position inititated in May-June, while the rest all multi-year existing long-term positions.

 

I do need to check excatly what contributed by close of Dec 30. I think Berkshire has been flat all year.

 

Planting More Seeds

 

The timely privitazation of Atlas in Sept, provided me with fresh unencumbred US dollars (as a Canadian, a market downturn means expensive USD) which I was able to use to buy the post-September dip on Alphabet, Walt Disney, Berkshire, again Walt Disney, Amazon, all in Q3 and Q4. I would suspect the ROI on these seeds will become apparent in 2024-25, if not in 2023.

 

 

 

[Spekulatius]

Maybe I am nitpicking, but MSGS didn’t really buy back shares, their sharecount is 24.3M shares in Q3 which is actually up from 24.1M 12 month ago due to SBC dilution. The special dividend was welcome though.

 

Companies that actually did buy back shares are COF (-11% share reduction) and PFSI (-16% share reduction) both measured over the last 12 month. COF (which I have been adding to recently) did reduce their buybacks in the last quarter though, presumably  to build up capital for a pot. Consumer recession. They are in economically sensitive business like credit card lending and car lending both of which may have issues if there is a recession (used car prices are coming down a lot recently impacting collateral)

 

I don’t like the business PFSI is in (mortgage origination and servicing) but management seems to be doing a really great job here and they vacuum shares up via buybacks like crazy (16% of outstanding in the last 12 month). Earnings in mortgage origination are down, but that also means they need less capital so they buy up shares at a high clip below book value. This is certainly one to keep an eye on.

 

Are those LT winners? Maybe they don’t have to be - I could see both  companies trading at the same market cap in 10 years and the shareholders would have done quite well.

Edited December 6, 2022 by Spekulatius

[SharperDingaan]

11 hours ago, TwoCitiesCapital said:

 

I'm pretty in the middle. Down about ~15% at this point, but most of that drawdown is from crypto which I was very heavily into. 

 

My fixed income accounts are down less than 4% for the year (and duration appears to be making a comeback) and my equity accounts have done admirably well with my largest positions being Fairfax, Eurobank, Exor, and Altius (all doing MUCH better than the S&P 500 this year).  Have also done well trading booms and busts in commodity names like Stelco and Whitecap Resources. 

 

But i still think equity and risk assets go lower, think duration should be a better hedge going forward 12 months, and am  building out my defensive posturing by take every rally as an opportunity to reduce exposure by more than I added on the dips. 

 

Look a little closer at the magnitude of your swing trade gains/losses, and compare against the magnitude of your YTD gains/losses on holdings that weren't traded. Then look at the magnitude of the gains/losses avoided PTD on things sold, had you not sold them. Was half (or more) of your gain/loss made via trading?, or was it made via simple buy/hold?

 

Between forced trimming, capital repatriation for our UK property, and routine swing trades; most of our gains did not come from buy/hold. We also very much lucked out on crypto (primarily due to sloth/venture distraction), as much of our new capital avoided the meltdown. Point here is that one can't plan these things; but one can't benefit from them either, unless one exposes oneself. 

 

Happily our vodka and caviar found a buyer last week, and the 'collective' chess has seldom been so good.

Fueled by a little Beluga, crackers and caviar for Christmas.

 

SD

[Xerxes]

12 hours ago, LC said:

How the hell does someone like Cathy Wood get hired? Well, it's a rhetorical question but at what point does one say, "maybe 100x earnings is too much..."

 

And for those making predictions about the unpredictable, it goes both ways. For every BTC=1MM$, there's a guy calling for 200$ or 300$ oil.

 

It has definitely been an amusing year - Global Financial Stimuli ends and half the world licks its wounds while the other half parades in triumph. 

 

I'm up a whopping 6.5% YTD so I'm just wondering if there's anyone left in the middle, or is everyone else either broke or billionaire? 

I would argue that Cathie Wood’ product is filling a role and that demand will continue.

 

After all, there are folks that see the Ark

ETF as a product to inject a bit of “innovation” in their otherwise dull portfolio. Those folks determine through % allocation how much spice are they getting. 
 

I see it as just a product that will continue to have demand as long as she stick with the narrative.
 

If she changes the narrative into “oh we want to have a more balance ETF with more companies with cash flows” that is when that Ark product will lose demand. Folks don’t want diluted spice.