Ellington is bearish HY credit

http://www.valuewalk.com/2015/11/ellington-management/

“There is a silver lining to all this doom and gloom,” the hedge fund writes. “Despite all of these warning signs, the window of opportunity is still wide open, with market prices and implied volatilities now back around where they were before the market swoon during August and September.” In particular, the fund looks to

Ellington cites opportunities in single name credit default swap derivatives, with a particular mean reversion trade in mind.

The S&P LSTA Leveraged Loan 100 Index, which is a total return index designed to track the performance of the largest institutional leveraged loans, has declined almost 5.9% since June, while the CDX HY S24 index has declined by only 0.1%. These indices, which measure similar risks, tend to move in tandem. Most of this divergence has taken place since late September. In October alone, CDX HY S24 returned 3.5%, compared to -0.6% for the S&P Leveraged Loan 100 Index. This outperformance coincided with by far the strongest month ever for high yield ETF flows.18 Using single-name CDS data, we are able to separate out the components of this outperformance since June to better understand whether we think it will revert. Nearly a third of this outperformance (1.23% of the 4.05% difference) is a move in the basis between the CDX HY index and its constituents.

Ellington calls the move “purely technical, reflecting an unusually large premium at which CDX HY currently trades to its constituents.” The differing trading levels “has historically mean-reverted, especially when the basis is greater than 1 percent of net asset value.” Today the variance stands at to 2 percent of asset value. The conclusion the report makes is “two factors are at work: not only has single-name CDS outperformed the leveraged loan market, but the CDX HY index has outperformed single-name CDS.” When prices mean revert from their historical averages, a counter trend is often anticipated, particularly when fundamental performance drivers haven’t materially dislocated. “The price differential creates a large wedge between CDX HY and leveraged loans, which supports our thesis that synthetic corporate credit is especially overpriced today.”

Latest Odey

Odey:

http://www.valuewalk.com/2015/11/odey-stock-crash/

"$2.5 billion Odey Asset Management OEI MAC fund was down 17 percent halfway through October 30 and -23.7 percent year to date. The causation for the pain is a long / short ratio that is significantly leveraged short, an unusual position when compared to the mean average long / short equity hedge fund strategy."

"“Stan Druckenmiller stunned investors in New York recently by announcing that he thought we were already in a bear market for equities,” Odey says, ominously pointing to a market near record highs. “I suspect people will look back on this time and see it as the last opportunity to get out.”"

"Before a crash, “the first thing that goes is a market is breadth, which narrows,” he told investors on a recent podcast to investors. Market breadth, measuring the number of advancing and declining stocks, fell under 30 on Aug 21, indicating more names were negative than positive. “We broke last Sept lows,” he said, indicating trouble for the market.

“On 21st August 2015, the Dow Jones, the FTSE and the global market index gave the first sell signal since 2007 and confirmed that we are now in a bear market,” he wrote in a September monthly report to investors. The resulting rally since the downturn reflects just how bearish participants were on that day. “Only 16% of shares were still in a bull market, down from 48% only a month and a half earlier.”"

"China will be the catalyst for the market downturn. China has run out of policy options."

"When would we buy the S&P? At 10x EBIT or 1452"

"We expect the Yuan to fall by 30%"

"Odey says that while the 2008 crisis was solved by low interest rates ultimately, “this downturn will only be solved by capacity getting written off.” This is a point in the very distant future. In the near term he recommends watching corporate credit spreads reveal that there is a credit tightening taking place, “which is wholly not what the central banks want to happen.”"

- Argument isn't persuasive. Merely says that monetary policy has been overly accommodative, which is resulting in poor capital allocation, and will chaos as the easing is withdrawn.

The best and the worst performing JSE shares: 2010-2015

http://financialmarketsjournal.co.za/the-best-and-the-worst-performing-shares-2010-2015/

Best on return

Calgro
Finbond
Adaptit
Alaris
Micromega
Eoh
Trustco
Indequity
Santova
Fortress


Best Top 40

Naspers
Mondi
Aspen
Woolworths
Steinhoff
Mediclinic
Richemont
Old Mutual
Discovery
Sanlam


Best risk-adjusted

EOH
CapCo
Coronation
PSG
Calgro
NEPI
Fortress
Mondi
Resilient
Naspers


Worst

Alert Steel
African Bank
Evraz
1Time
Aquarius
Rare
Great Basin Gold
Sea Kay
Delrand

Miranda Mineral 

Jeremy Grantham GMO on markets

"Jeremy Grantham, founder and chief investment strategist of GMO, a $118bn investment house based in Boston, expects the stock market to continue to march higher in the coming year, eventually sucking in retail investors and setting up a serious decline around the time of the US elections in late 2016."

Online Stock Analysis tools

http://quotes.wsj.com/SPG/research-ratings
http://www.nasdaq.com/symbol/spg/analyst-research
http://money.cnn.com/quote/forecast/forecast.html?symb=spg

The life cycle of firms

People tend to parrot Warren Buffett too often. One of my pet peeve "Buffet-isms" is "our favorite holding period is forever". We as humans cannot gauge the future, how the economy will shift, what new technologies will arise, or how consumer preferences will change.

The important message from Warren Buffett is that it is good to have a long term holding period, but personally I think this should be much shorter than 'forever'. You don't want to focus on quarterly performance and overtrade, so a good middle ground is 5-10 years.

A good example of a company that shifts, GAP.
What they sold was just not in fashion anymore. Management, no matter how skilled, cannot fight this trend.

GAP could have been a great buy 10 years ago. But its a very different world now.

Explaining US growth outperformance

PIMCO recently out out a short note talking about US economic outperformance relative to DM peers. Their summary is reproduced below:

Q: The U.S. appears to be the furthest advanced in its post-crisis normalization among developed countries. Why? And what is the chance of a surprise to the upside for growth or inflation? 
Mather: There are three key reasons why the U.S. is furthest along. First, the U.S. was more aggressive in its response to the financial crisis through monetary policy, with interest rate cuts and quantitative easing. Second, private balance sheets were cleaned up more quickly, even if through defaults. Third, new regulation forced banks in the U.S. to recapitalize sooner than those in other countries. Many developed nations simply took longer to respond to the crisis for a variety of reasons, so it is not unexpected that the U.S. is further along in the normalization process.

This is the standard explanation of the US economy since the crisis. In my personal opinion this is an INCORRECT representation of the economic forces that were at play. US came just into a period of surplus, primarily from the fracking boom. This created a jobs, investment and current account boost that outweighed all policy actions that were taken. It's a recurring problem that investment analysts downplay the enormity of the US fracking revolution. 

Book Review - The Bankers New Clothes

Book Review - House of Debt

Book Review - Kings of Capital

From GMO 4Q14 letter

http://www.gmo.com/websitecontent/GMO_Quarterly_Letter_4Q14.pdf

Why GDP isn't the best predictor of EPS growth:
"The biggest reason for this non-intuitive result is that the relationship between GDP growth and earnings per share (EPS) growth that most people assume must be there does not exist in the long run. The two developed countries with the strongest EPS growth between 1980 and 2010 were Sweden and Switzerland, which each had lower than average GDP growth. Canada and Australia, which saw the strongest GDP growth, showed very little aggregate EPS growth. Why? A big reason is dilution. Canada and Australia saw strong growth from their commodity producing sectors, but that growth came from massive investment, which was funded by diluting shareholders. Switzerland and Sweden did not invest as much and did not dilute their shareholders, leaving shareholders better off despite lower economic growth."

It's the GDP growth surprise which has stock market impact:
"If you can find cheap countries that are going to have a big positive GDP surprise over the next three years, you’ll outperform by a whopping 14.1% per year for the next three years, whereas if you are unlucky enough to buy the cheap countries that will have the worst GDP surprise, the outperformance is only 0.7%. Our strongest takeaway at GMO is that even the cheap countries with the worst GDP surprise still outperform, and even the expensive countries with the best GDP surprise still lose. The macroeconomic performance matters, but given how hard it is to predict who is going to do better than expected and the fact that it doesn’t change the sign for either the cheap or expensive countries, we’re sticking with value."

Seeking knowledge and wealth creation

I was brought up to believe that more knowledge will lead to better understanding of how the world works, which in turn would result in more wealth. Furthermore, I was led to believe that more 'difficult' knowledge, such as maths stats etc is a better form of knowledge, more empowering and hence more likely to lead to more income.

In retrospect, at least in the investment management field, unless you're in the HFT or quant fund field, more analytical knowledge is a distraction and hinders wealth accumulation. A consequence of acquiring a certain skill is that one thereafter engages in activities which utilize that skill, it's hard to just discard what one has expended effort on learning. 

Most of the time, the analytical toolbox doesn't help that much. It won't help you pick the technologies that are transformative, find the new retail offering that has connected with buyers, shed light on management error when embarking on stupid projects. It won't highlight policy possibilities, and how policy decisions will be made.

In the end, for all the numbers and data flitting across our screens, this isn't data mining of natural phenomena, such as lumens of stars etc. It's just humans, ruled by greed and fear. Sometimes mustering the courage to buy something, other times scared that they must sell. If you are honest to what drives the data flow and you respect the underlying forces, you will prosper.

On the SNB move yesterday

Brief Comment:
Always remember, investment management is the game of equilibrium and disequilibrium.
If an FX rate is destined to go somewhere, it will eventually get there, despite any policy wishes.
Policymaker wherewithal also has limits.


Links:

http://acrossthecurve.com/?p=19281
http://www.businessweek.com/articles/2015-01-15/heres-what-the-swiss-central-bank-just-did-and-why-its-such-a-shocker
http://www.bloomberg.com/news/2015-01-15/mayhem-erupts-on-trading-floors-after-snb-s-currency-shocker-.html
http://www.bloomberg.com/news/2015-01-15/franc-s-surge-ranks-among-largest-ever-in-foreign-exchange.html
http://www.bloomberg.com/news/2015-01-15/mild-mannered-jordan-hands-markets-seismic-surprise-in-cap-exit.html

WSJ

http://blogs.wsj.com/economics/2015/01/16/grand-central-swiss-franc-fallout-exposes-crack-in-post-crisis-regulatory-reforms/
http://www.wsj.com/articles/switzerland-scraps-currency-cap-1421320531
http://blogs.wsj.com/moneybeat/2015/01/15/on-switzerland-the-floor-and-losing-faith-in-central-banks/
http://www.wsj.com/articles/snb-shocks-bankers-and-markets-1421342951
http://blogs.wsj.com/economics/2015/01/15/10-takeaways-from-lagardes-swipe-at-the-swiss-national-bank/
http://blogs.wsj.com/moneybeat/2015/01/15/swiss-move-shows-central-bank-cant-operate-in-isolation/
http://www.wsj.com/articles/swiss-shock-tarnishes-central-banks-heard-on-the-street-1421341862
http://www.wsj.com/articles/swiss-franc-move-cripples-currency-brokers-1421371654
http://blogs.wsj.com/moneybeat/2015/01/16/a-franc-question-what-was-the-snb-thinking/
http://www.wsj.com/articles/after-defending-cap-central-bank-chief-scraps-it-1421380750
http://blogs.wsj.com/moneybeat/2015/01/16/why-swiss-bank-mortgage-pain-could-still-hurt-eastern-neighbors/

The 1986 Oil Glut

Just putting some links here (to be continuously updated) on the 1986 oil glut:

Bloomberg: Oil Collapse of 1986 Shows Rebound Could Be Years Away

Brookings - Lessons from the 1986 Oil Price Collapse

http://en.wikipedia.org/wiki/1986_world_oil_market_chronology

http://en.wikipedia.org/wiki/1980s_oil_glut

http://blogs.platts.com/2015/02/06/lesson-from-oil-history/

non-1986 Oil stories
http://blogs.platts.com/2015/02/10/oil-prices-push-towards-60/
http://blogs.platts.com/2015/02/10/opec-strategy-iea/
http://blogs.platts.com/2015/02/05/oil-big-five-feb15/