Monday Dirty Dozen [CHART PACK] #9

The investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long-distance runner.  ~  Barton  Biggs

In this week’s Dirty Dozen [CHART PACK] we look at investment fads throughout the decades before discussing the *ahem* slight optimism over tech stocks… and then take a look at the valuation metrics for the broader market, talk about what Europe has given to investors over the years, take a peek at EURUSD, and end with a look at bonds, plus more…

Let’s dive in.

***click charts to enlarge***

  1. Every decade has its trendy investment theme. In the 60’s it was all about the Nifty Fifty, then gold in the inflationary 70s, Japanese stocks in the 80s, tech in the 90s, oil in the 00s, and of course FAANG today. Will FAANG continue its dominance into the new decade or will we see a new theme emerge? Chart via Alpine Macro.


  1. The thematic has certainly received a helping hand from the pandemic which has forced everyone’s consumption to move to the virtual space. This chart from BofA shows the hockey stick growth in e-commerce as a % of Retail Sales.


  1. Sentiment Trader shows that the trade has gotten a bit over its skis though… Their QQQ Optix indicator recently hit decade highs. ST notes that “In bear markets, this was a disastrous sign for equities. In bull markets, it either led to consolidations or pullbacks.”


  1. The extreme outperformance by these high-growth stocks versus their boring “value” peers has lead to what I assume is the mandatory end of cycle editorial pieces where we question the point of value investing.


  1. After sitting out most of the cycle retail is finally getting into the game and doing so at record levels (chart via Sentiment Trader).


  1. The only long-term bull case I’ve been able to come up with for stocks has been that the risk premium on offer is fat (equities are cheap relative to yields) and honestly what’s the alternative? But, BofA points out that if you normalize ERP then stocks are pretty much dead in the middle of the ERP range they’ve been in all decade. BofA goes onto point out that “On a statistical basis, the 20.4x S&P 500 fwd PE puts the market over 1.5x standard deviations above the average of 15.4x and three-quarters of the way to the Tech bubble high of 25x.”


  1. And UBS writes that “A significant loosening of liquidity has driven re-rating of the market. But the rise in multiples is disproportionately high relative to the decline in real interest rates and credit spreads. We estimate that even if credit spreads were to go back to their tights, current equity market valuations are too high by around 3x. It is possible that the equity risk premium on offer rises in a non-linear fashion as rates approach zero, but current multiples look stretched even accounting for this.”


  1. BofA examined the SPX across 20 valuation frameworks to determine historical cheapness. Red boxes indicate where the market is “richer” than average.


  1. You would think that such high valuations would be reflective of stronger than usual fundamentals but, errr…. That’s not exactly the case. BofA shows that “the proportion of non-earners within the Russell 2000 is above levels typically seen heading into recessions (and near all-time highs reached during prior recessions) — and this was largely before the impacts of COVID-19/should only get worse”.


  1. If you bought European stocks back in 99’ at the introduction of the euro you’d be down 22% today which is better than the 87% you’d be down if you’d bought European banks over 20-years ago.


  1. I was hopeful that we’d see a tradeable bounce in EURUSD. But, alas, I think those hopes have been dashed. EURUSD Relative growth fell through the basement floor recently. FX is driven by speculative flows and speculative flows chase expected risk-adjusted returns which hinge on growth (higher relative growth = stronger EPS and higher yields). EURUSD has been coiling very tightly. Expect a big move soon.


  1. I’m fairly bearish on US stocks over the next 12-months. Luckily, there’s plenty of other markets to trade. One of my favorite trades at the moment is to be long bonds. This chart from @macrocharts shows that spec positioning is giving us plenty of fuel for the move higher. Also, all my bond indicators started flashing another buy signal last week. Plus, the tape looks strong.

Stay safe out there and keep your head on a swivel.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.