The Week That Matters (29th Jan-2nd Feb, 2024)
"Football season just got A LOT more fun." LeBron James
Market Head Fake
“Head fake” is a term used in many sports, but it’s especially common in basketball. A player makes his opponent believe he is moving one way but then, suddenly, changes direction. An investor can experience the same thing with the stock market. He or she believes the market will go one way, and then, the market does the complete opposite.
We are seeing an example of a major market “head fake”. The media has been obsessed with a recession but it’s becoming clear that one might not come. Inflation is dropping like a rock. Jobs remain plentiful. And earnings have been generally better than expected.
The pundits, for the most part, have pushed bearish narratives (don’t they always?) They scared the public into believing we would have a re-run of the 1970s. It was always an absurd take. The economy today is nothing like the one in the 1970s. And the inflation we saw during COVID has few similarities to the rise in prices the US economy started experiencing from the mid 1960s.
Managing such reversals in the market, however, can be a major headache for fund managers. Getting it wrong can lead to major underperformance. As in basketball, the fund manager can be wrong-footed by the market and be forced to play catch up. And that is exactly what is about to happen.
The author would suggest that explains why some of the price action on Friday in South Korea, a traditional beta play on global growth, was so robust. When a stock like Hyundai Motors is up over 9% on volume, you know fund managers from Boston to Singapore are desperately looking for economic sensitive laggards.
This is 2010
The author has argued many times that playing for a recovery tends to be a much more lucrative strategy than hoping for another 2008. Michael Burry had a movie made about him but by being constructive at the lows in 2009, it was David Tepper and George Soros who really crushed it.
The author has argued before that the real money will be made by being optimistic. Consumer balance sheets are much healthier than they were in 2007 and we live in a Victorian Age for technology, where companies with scale, will continue to grow rapidly (Microsoft, Uber, Google).
For the author, the economy feels more like 2010 than 2007. As in 2010, there are signs that the global economy is coming back and earnings from companies are bottoming in key industries. Last week we discussed the semiconductor cycle (TSMC/ASML earnings) and it would appear SMCI is indeed experiencing its Nvidia moment. (Will the Boston accounts chase Advantest in Japan?) But it might also be worth looking at a more traditional business to understand what else is going on.
Komatsu’s earnings this week highlighted one thing: construction spending is very strong EVERYWHERE. It talked positively about construction spend in the US, Latin America and even China.
To be fair, this should come as no surprise. The onshoring policy in the US and Japan has been a major success (was that Trump or Yellen or both?). And if you listen to one of the bell weather names in the industry, United Rentals (URI), construction spend has a long way to go.
Canaries in a Coal Mine
People make careers out of talking about early signs of danger. As some of them “give good narrative,” they get invited to speak at conferences. They get it right maybe once every 8-10 years but their moment of glory tends to be short-lived. For the author, they get far too much attention.
If you remember back to 2010, there were a million reasons to be bearish. Larry Summers predicted there would be massive inflation. Paul Krugman said he was being silly. Paul Krugman was proven to be correct. Stanley Druckenmiller argued it would be a lost decade for equities like he did just before the rally began in September of last year. Stocks ended up doing pretty well over the next decade. And Howard Marx tried to scare everyone that credit was bound to blow up at some point. It never really did.
This week the Zero Hedge crowd had plenty to talk about with Evergrande in China finally going bust and a couple of financials admitting to the market they were overexposed to US commercial real estate. The author would argue they are not “canaries in the coal mine,” indicating impending doom. They do not necessarily matter that much.
Japan’s Aozora Bank, one of the banks in trouble, has always been “loose.” They were the biggest unsecured lender to Lehman’s in 2008 and were somehow exposed to Madhoff. And New York Community proved that buying distressed banks doesn’t always work out. Its purchase of Signature Bank always seemed rash. Maybe getting access to discounted bank deals and buying them really is Jamie Dimon’s superpower!
As for Evergrande, its liquidation is not going to cause a 2008. The Chinese government has been managing its “controlled demolition” relatively well for years now. It is, however, MASSIVELY deflationary just as the big bankruptcies in Japan were in the 1990s. If anything, that is what should be concerning the world. It should, at least, moderate the “inflation is coming back” narrative.
Party like its 1999?
At the Sohn Conference in Sydney in November, the author got the distinct impression everyone had kind of given up on technology issues and growth in general. The big money seemed to be massively overweight private credit, and short public technology names in particular.
It was just an impression, of course, but the overall vibe was a negative one. It is because of this perceived positioning that the author feels we might just see a melt-up soon in markets, led by technology and growth names. It might not be of the magnitude of the tech melt up of 99/00 but it might still be significant.
The earnings from the mega caps have not disappointed on the whole. Those who make a big deal about the outperformance of FAANG just don’t get it. We live in an age where everything grinds towards the large cap, tech compounders (META, APPLE, MICROSOFT). In the Victorian Age of technology we live in, scale trumps everything. Why would you bother with a small cap when a mega cap like Microsoft is growing revenue 17% a year?
It’s not just scale, to be fair. It’s management. We live in an era of incredible leaders. Satya Nadella is 100x better than Jack Welch ever was. Those who criticize Elon Musk ignore what he has been able to achieve in a relatively short period of time (how big will Space X IPO be?). People who are now calling for “Peak Apple” (how many times have we heard that over the last 15 years?) are not paying attention to what Tim Cook is doing with silicon.
Mark Zuckerberg is a case in point. META had amazing numbers, especially when you consider Zuckerberg is ploughing so much into Reality Labs still. In 2018, when the Cambridge Analytica story broke, he reached a low point. In 2024, he is starting to look like a stud, albeit with some odd, otherworldly facial expressions (remember when people thought he was a lizard?). For the author, he is the Bill Gates (the businessman, not his post Microsoft endeavors) of our generation. Like Gates, he has made those in his orbit a lot of money. Would we even know Chamath if he had not lucked out and known The Zuck?
Draftkings (DKNG)
Talking of Chamath, the so-called “King of SPACs,” it’s interesting to note that one of the only successful SPACs that the author can find is still doing pretty well these days! What separated Draftkings/SBTech from other SPACs in 2020 was it had a game plan and it has successfully executed upon it. Today it is the second largest online sportsbook and iGaming site in the US, only slightly trailing behind Flutter Entertainment plc's FanDuel brand. And someone like LeBron James seems more than willing to put his name behind the company.
The author has issues with gambling as an industry but in a market that might start to reward growth stocks with ever increasing multiples, should this one be on your list? The author is encouraged by the improvement in its free cash flow trend. It has focused on user growth but now seems keen to focus on profitability now that it has the scale. It’s not quite an Uber but it’s good enough to have a look at, no?
As always, thanks for reading. None of the above is financial advice. Please do your own research. I wish you the very best in family stuff, business stuff and trading stuff this week.
Best regards
Mateen