Are we there yet? Are we there yet? Are we there yet?
The shape of traditional market cycles and where we are in the curve
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We’ve all heard the phrase before.
“Its not timing the market, its time in the market”
Well… just how much time do new recent investors have to be in the market until they either 1) recuperate losses or 2) Start pulling out all of their hair, then panic sell?
Markets operate in cycles, which makes it incredibly important to zoom out.
This is difficult to see when you are looking at your daily P&L with megacap tech down 30%, high growth stocks down 60%, and crypto down 70% (probably shouldn’t have bought that shitcoin that Kim Kardashian was marketing).
And while speculative assets are getting crushed, real companies are too. The tide has gone out and we are seeing who is swimming naked, but there’s a massive undertow and even lifeguards are struggling to stay above water.
What we are seeing here is a total and complete risk-off environment. The dip that keeps on dipping.
But there’s hope.
As I said in my Fox Business Interview last week:
For those that are able to tuck $500+/month into the stock market to dollar cost average down, or for those just starting in the investing scene — selloffs present an opportunity.
And this opportunity is on the horizon.
This week’s version of the newsletter will be kept short and sweet. In <5 minutes, we’ll cover where we are in the cycle:
Anatomy of a Cycle 👉 Greed, fear, denial, capitulation
Prior Bear Markets 👉 Subsequent recoveries
So where are we? 👉 And where are we going from here
What IS the “Smart Money” Saying 👉 Buffett, Ackman, Druckenmiller
Let’s get started!
1. Anatomy of a Cycle 👉 Greed, denial, fear, capitulation
For this week, let’s talk about this chart:
While I find the light grey text in the backdrop both offensive and elitist (WTF is “Smart Money” anyway? Hedge funds that continually underperform the index?), the red line makes a lot of sense to me.
There is a reason why so many money managers study history and psychology as much as they do accounting. The stock market is nothing more than a collection of aggregated buyers and sellers reaching a price equilibrium. Understanding where that equilibrium is going is just as much a study in the human psyche as it is in financial statements.
The main takeaway from this graph for me is that human beings (and thus, the stock market) tend to overshoot in either direction with a rubber banding effect around a long-term mean.
I love the “Delusion” label in this one. It’s clear to look back and say, “Wow, that was stupid” but much harder in the moment. When asked what was peak delusion, I will point specifically to this tweet:
A rock. On the internet. For one million dollars… fuck.
Three months after this tweet, the market topped.
In the third section, I’ll conclude with where I think we are on this red curve, but first, let’s look at the most recent selloffs that we’ve experienced to see if we can learn anything.
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2. Prior Bear Markets 👉 Subsequent recoveries
New-to-the-market investors were all spoiled by the Covid recovery.
Pumping a shit ton of stimulus into the economy to avoid total collapse is a big black swan event. The 2020 selloff is what I would call a non-structural failure in that this was not a financial market problem—it was a global health and safety problem. It did, however, set the table for a structural failure.
That amount of money cannot be pumped into the system without some sort of repercussions. And this one is going to hurt for a while.
If we look at the other most recent bear markets, they were all engineered by the financial community.
Dotcom: Run-up in spec tech as a flood of venture capital (“Smart Money”) flooded into the system and started valuing companies based on eyeballs instead of even an EV/Revenue basis. Irrationality ran valuations up until everything crashed down. It then took Microsoft 16 years to reach the same stock market high they set in 2000. Long recovery.
GFC: Complicated derivatives structures were created that pooled mortgage leins into tranches. These tranches were then oversimplified in terms of their risk structure. When the wind blows, the house of cards falls down. With so much of the average american’s wealth tied up in real estate, a housing market collapse greatly affects personal wealth, causing the purse strings to be pulled elsewhere - a slowdown in everything.
COVID: Exogenous shock to the system that was not engineered in an Excel spreadsheet, jammed into a deck by a 2nd year IB analyst, then sold by Goldman Sachs. A real global crisis that crippled supply chains and shut down trades, services, travel, and general human enjoyment of life. Enter the Fed. Stimmies were handed out, massive printing to get us out of a big hole but into another down the line.
Inflation: Call this the COVID hangover. The price of everything skyrockets and inflation proves to be structural and not transitory. Overstimulus lead to too much demand and supply chain shutdown leads to not enough supply. While the Fed can raise rates (hurting equities) to curb the demand side, war and supply chain constraints still aren’t easing up, leaving the supply side very cloudy.
Since the most recent bear market looks like a structural failure to achieve a soft landing on top of excessive stimulus, my bet would be this is going to be a much longer recovery period, akin to bear markets of the past.
As a reminder, since post-WWII, nine bear markets extended beyond the -20% mark. Six of them averaged ~-30% and three averaged ~-50%.
3. So where are we? 👉 And where are we going from here
Now back to this chart.
I believe we are in the stages right now of capitulation. I think we’re in the middle part of this downward trajectory and we still have a bit more to go.
While we have seen multiple compression to a high degree, the earnings forecasts that analysts are using for their models are yet to reflect the most recent stresses we are seeing across the system.
There will be bifurcation. In my opinion, Oil & Gas still has room to run, and copper might as well as commodities prove to work well in recessions.
We’re not there yet on buying the dip in Tech names. We need to get a more visible sightline on how/when inflation peaks in order for the bond market to price in any interest rate stabilization. Tech names will trade around this rate volatility until then.
4. What IS the “Smart Money” Saying 👉 Buffett, Ackman, Druckenmiller
Although I do like to make fun of average Hedge Fund returns, there are those money managers out there that are anything but average. These managers have long track records of consistent outperformance and skin in the game. When they talk - I listen, and you should too.
Fund managers running at least $100M have to file what’s called a 13F that shows what positions they added to or subtracted from in the prior quarter. They are somewhat stale because they are filed 45 days after the fact, but by reading these documents, you can track what these managers are up to.
Warren Buffett
Berkshire's boss has been around the block. We all know his track record and how he’s trounced not only everyone around him but also the market. So what’s he doing now?
Based on the Company’s 13F filing in May, Berkshire added to the following positions, sorted by size: Chevron, Occidental Petroleum, Activision, HP, Citigroup, Paramount Global, Celanese, McKesson, Markel, Ally Financial, Formula One Group, Floor & Decor, Apple, General Motors, RH, and share buybacks in Berkshire. In total, Berkshire was a net buyer of about $40B in stocks.
As you can see, he hasn’t strayed from his deep value roots as a lot of these companies are value-oriented, focusing on energy and financials.
Bill Ackman
Heading into last week’s fed meeting, Ackman was very vocal about the fed policy surrounding inflation and monetary easing:
Ackman’s recently filed 13F was quite the opposite of Buffett’s. It showed that he bought a very large stake in Netflix while selling Lowes, Hilton, and Domino’s Pizza. Being more activist in nature, it’s always interesting to see Ackman opine on macro commentary although sometimes he’s better off leaving it to the next pro, one of the best of all time… Druckenmiller…
Stan Druckenmiller
“My best guess is that we’re six months into a bear market, For those tactically trading, it’s possible the first leg of that has ended. But I think it’s highly, highly probable that the bear market has a ways to run.”
About a year ago, he said the central bank’s policy was totally inappropriate and that “we are in a raging mania in all markets.”
“That period was incredibly costly because a lot of assets were purchased during that period that a lot of people moving out the risk curve will lose a lot of money on.”
A very cautious tone… But what do the 13Fs say?
Druckenmiller’s biggest buy in the quarter was, like Buffett, an Oil & Gas company (Chevron) as energy stocks tend to do well during periods of inflation, and particularly if companies can ride gains in the underlying commodity prices. We all know how that trade is going… very well.
Wrapping Up…
With the all-important Fed meeting last week heading into the print, it seemed that market commentators WANTED a recession and they wanted rates to come up quickly and immediately. Rip the bandaid off. Get it over with.
The 75bps hike gave permission for the market to rally as many viewed this as priced in and a clearing event. However, immediately following this rally in the market was a steep selloff as the possibility of a recession and higher-for-longer inflation is looming in the background.
We’re in very volatile times right now. I think a solid strategy is to keep extra cash on hand and keep dollar-cost averaging in. We’ll be in this bear market for longer than expected, but as we get through to the other side of it, there will be PLENTY of opportunities.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S. Have you checked out our new crypto newsletter? Subscribe now to find out what I’ve been buying!
What else we Grittin’ On?
EXPECTATIONS. One year consumer inflation expectations tie record after rising to 6.6%. This was before the Fed hiked on Wednesday.
HOME ATM. US home equity hit the highest level on record at $27.8 trillion. Meanwhile, the 30-year mortgage rate is above 6%.
HEDGIES. 2022 is shaping up to be the worst year for equity hedge funds on record. Controlling around $1.2T in assets, hedge funds have lost 8% in the first 5 months.
AIRLINE M&A. Spirit is in talks with JetBlue again over an improved $3.4B offer. A decision is expected this month.
RETAIL. Retail sales posted an unexpected 0.3% decline in May as consumers pulled back spending. It was the first negative print for retail sales this year.
Sources:
https://decrypt.co/79125/ethereum-rock-jpeg-sells-for-600k-as-nft-frenzy-continues
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