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WEEKEND COLOUR COMMENTARY
For the week ending February 14th, 2020
THIS WEEK'S MUST READ ARTICLE
Sometimes I read an article that is so well done, all I can think is "damn, I wish I had written that." Not only that, but most bearish articles are filled with junk-conspiracy-end-of-the-world drivel, so rarely does a bearish article fall into this category for me. But this piece is the exception.
The first two paragraphs had me hooked:
Do you want to know when the longest bull market in history will end? Dumb question, right? I mean who doesn’t? Certainly, all those aging Baby Boomers with most of their net worth now in the stock market might have more than a passing curiosity about the great bull’s sell-by date.
To credibly answer that question, it’s probably worth pondering what has been the main driver of the extraordinary—and extraordinarily singular—run by the S&P 500 since 2009. By “singular”, I’m referring to the fact that US stocks have crushed those from almost any other country. The main international benchmark excluding the US (the MSCI, ex-US) has essentially flat-lined for nearly 14 years.
This article walks through probably the best bearish argument out there - the heavy reliance on buy backs as the fuel for the U.S. stock market monster bull run.
I encourage everyone to read EVERGREEN/GAVEKAL's David Hay's piece "BYE-BYE BUYBACKS." While you are at it, sign up for David's weekly email - you don't want to miss future pieces like this.
I love the simplicity of David's argument. Too often market prognosticators try to make everything seem way more complicated than reality. It's like they believe the more convoluted, the better the argument. It's harder to write David's piece than most realize.
Lately I have become obsessed with revered Professor Feynman's philosophy. Here is a great story that exemplifies his spirit:
Feynman was once asked by a Caltech faculty member to explain why spin 1/2 particles obey Fermi-Dirac statistics. He gauged his audience perfectly and said, "I’ll prepare a freshman lecture on it." But a few days later he returned and said, "You know, I couldn’t do it. I couldn’t reduce it to the freshman level. That means we really don’t understand it."
I would argue that David's article nailed it and would impress even Feynman.
If you haven't yet listened to Artemis Capital's Chris Cole's appearance on Hidden Forces podcast, then I suggest you put it on your weekend's listening list:
It's episode 122 and you don't want to miss it!
Tuesday, February 11th, 2020
I took a fair amount of heat for this one. A lot of people were quick to point out that my main poster-child for ESG investing, Tesla, fails on the G portion (governance) miserably. Yup, I get it. I am guilty of combining ESG with clean-energy-alternatives. They are two different things.
Long-time reader, Sean Griffin, was kind enough to reach out to help me with the distinction:
It's important not to conflate ESG with certain sectors like renewable energy. The essence of ESG is to add depth to assessing the risk profile of any firm, ultimately looking for those that will be more sustainable businesses! Near-term lots of folks are focusing on the E and some social concerns - this isn't far off previous ideas around responsible investing - but as managers get more sophisticated they are integrating ESG analysis as part of pricing risk more broadly.Frameworks like the Sustainability Accounting Standards Board (SASB) are investor focused and leading the way in the evolving disclosure coming out of corporates. It's a big change from the warm fuzzy CSR reports that we pushed out only a few years ago. New disclosure focuses on material E,S & G risks that have direct impact on cash flows, balance sheets and/or cost of capital. It is about linking sustainability issues to the overall valuation of a business.I'm not saying fade the trend because it's real but the current focus on firms that are 'more environmentally sustainable' misses the larger trend and utility of ESG analysis.
Others highlighted that many ESG ETFs have barely any Tesla in their holdings.
In hindsight, I probably didn't articulate my argument as well as I could have. Right now, alternative new technology "green" companies are the rage. Maybe I shouldn't have ever mentioned ESG and just focused on "green". That's where I think the bubble will come. The fact that most "green" companies are also ESG compliant is really just an afterthought. Lesson learned.
Earlier in the week I put out a twitter request for readers to share their favourite "green" company that might be subject to this coming bubble. I was going to list them in this WEEKEND roundup, but instead decided it deserves its own post. So watch for that next week! And if you are a non-twitter user that wants to share their favourite stock pick for this coming green bubble, please send me an email to firstname.lastname@example.org.
Wednesday, February 12th, 2020
Wouldn't you know it, the moment I highlight a technical breakout, the pattern fails. Eurostoxx looked like they might start a run, but on Friday slumped badly.
I am hanging tight and this is still one of my favourite longs when it comes to equity markets. If anything, I am getting a little more worried about the US stock market and this might end up being more of an all-out spread trade of long EUROSTOXX / short SPX/NDX soon. My "light delta" hedging, got a little heavier Friday.
CHART OF THE WEEK
My buddy Brent Johnson from Santiago Capital tweeted out this witty chart that I had to share.
Yeah, it's an upside down EUR chart. For those who don't know, Brent is the ultimate USD bull. Although I will take the other side of Brent's trade and say I would rather sell this chart as opposed to buy it, it made me laugh. It's also interesting to think about trades from a different perspective. Well done Brent, well done.
MARKET HUDDLE PODCAST
I am getting this email out before our Market Huddle podcast hits the internet, but make sure you tune in later this afternoon. We had the good fortune to interview Martin Pelletier from TriVest Wealth Counsel. It was a blast to chat with a fellow Canadian who used to specialize in the energy sector but decided a move was in order after the 2015 oil crash. Sobering thoughts for those thinking a meaningful bounce is coming for the energy space.
Thanks for reading,
Have a great weekend,