Alex here with your latest Friday Macro Musings…
As always, if you come across something cool during the week, shoot an email to firstname.lastname@example.org and we’ll share it with the group.
Latest Articles/Podcasts/Videos —
Your Monday Dirty Dozen [CHART PACK] — I look at buy climaxes, wild speculation, some strangely muted sentiment, and positioning data, then get into virus growth rates and finish with a Russian tech giant breaking out of a huge base….
Articles I’m reading —
There’s a handful of quarterly Investor Letters that I read regularly. Hayden Capital is at the top of this list. Fred Liu, founder of Hayden Cap, always finds a way to impress me with a unique take on investing theory or a left-field approach to analyzing a familiar company. This quarter’s letter did not disappoint.
Liu talks Pareto’s Law and how important it is to make sure he’s structuring his investing process to optimize for this law of returns. He discusses Lee Freeman-Shor’s terrific book “The Art of Execution” and the benefits of portfolio concentration versus diversification. And then gives an update on one of his larger positions, Sea Limited (SE) — a stock I pitched in these pages back in November (link here).
Here’s the link and a section from the report.
“When you’re underwriting your investment thesis on multiple expansion, your upside is naturally capped. Shorter-term investment strategies that rely upon a change in perception (and thus underwrite multiple expansion for returns) can perhaps generate a 20%, 50% or rarely a 100% return (i.e. a 5x P/E stock going to 6x, 7.5x or 10x)… but it’s almost impossible to generate a 1,000% return (5x to 50x).
This means that under this type of strategy, you need to have a very high hit rate, to make up for the narrower range of outcomes (lower expected return per bet). The name of the game is consistency, and the great players will exhibit low volatility in their strategies. The institutional assets in our industry have been shifting towards this style in the last decade, which means more assets chasing after the same investment theses in this style bucket.
On the opposite end of the spectrum, I’m searching for “fat” returns. While a P/E ratio may not expand 10- fold, a company’s earnings certainly can. When you underwrite for earnings growth, your odds of being right are going to be lower, since predicting the future is inherently imprecise. However, if the investment process proves correct, the odds of today’s $1 Billion market cap company becoming tomorrow’s $10 Billion or even $100 Billion company is much greater. Given the magnitude of the payoff, your hit rate can be closer to 50% (or even below), while still making above-average returns.”
Lastly, give this short piece from Axios a read (link here). The article covers the current effort by the President to influence the Fed, by installing a Trump loyalist in Judy Shelton. Unlike Cain or Moore who he failed to get through the vetting process, Shelton is likely to pass the Senate. And if Trump wins reelection then it’s odds on she’ll be picked to replace Powell.
Normally I find most people equate way too much importance between politics and markets. That doesn’t hold when it comes to the Fed. Politicizing the Fed matters. And it can matter a LOT.
It’s still a long way from here to there but each step closer will build a narrative and that narrative will begin to impact markets in interesting ways.
Actually, one more thing and on a completely unrelated topic. If you’re at all interested in tightening up your business writing then give these notes that Jerry Neumann put together on the subject a read. Some useful tips in there. Here’s the link.
Charts I’m looking at—
Retail is getting back in the game… (chart via SentimenTrader).
Video I’m watching —
Peter Thiel was recently interviewed on stage at the Hoover Institute. In this short 35 min talk Peter talks globalization, US-Sino relations, Bernie Sanders, the scourge of political correctness, and why we need to rethink the doctrine of American exceptionalism.
It’s a good interview. Here’s the link.
And I haven’t watched it yet but here’s Munger’s latest Daily Journal meeting (link here). Heard it was a good one. Hoping to give it a look over the weekend.
Book I’m reading —
This week I started reading The Laws of Trading by Agustin Lebron after having a few people recommend it to me.
I’m only 30 pages or so in, so I can’t give an educated take on the book quite yet. Though I am enjoying it so far. What’s refreshing is that it’s not your normal trading book. It’s really a book about decision making and enhancing your mental systems. I’ll give more of an update next week once I’m finished.
Trade I’m looking at —
I have a long backlog of names on my research list. These are ones that have already passed the initial smell test and warrant further digging. This week I added Yext (YEXT) to that list.
Yext is a US-based tech company that is focused on improving internet search. Essentially it’s a cloud platform that allows businesses to more effectively manage their data and brands and sync it to hundreds of different publishers (think Gmaps, FB, Insta, Yelp etc…).
JP Morgan considers the company to be a “category leader that enjoys the greatest mindshare among its ~40,000 customers and strongest credibility among publishers.”
Here are the key metrics for the business via JPM.
There’s a lot to like about the company; interesting category-leading product, killer management team (five former high levels Salesforce execs + digital media legend Michael Walrath as its Chairman), long runway if they can execute well. But, there’s a number of things not to like: decelerating revenue growth, falling guidance, ballooning operating costs etc…
I’ve got plenty more digging to do.
Quote I’m pondering —
O God, I could be bounded in a nutshell and count myself a king of infinite space, were it not that I have bad dreams. ~ William Shakespeare, Hamlet
That’s it for this week’s macro musings.
If you’re not already, be sure to follow me on Twitter: @MacroOps. I post my mindless drivel there daily.
Have a great weekend.