Position Crowding and Valeant

Position crowding is when a bunch of similar investors own a stock.  When those investors rush for the exits at the same time, the price drops a lot more than expected – perhaps to well below intrinsic value.  Note that we have published several notes on this on the Beachhead site (see Hedge Fund & Position Crowding and Equity Long/Short Post-Crisis: A Structural Analysis of the Decline in Alpha). The poster child for position crowding in 2015 was Pershing Square Capital Management, a highly regarded hedge fund.  Pershing Square ended the year down around 20%, its worst year ever and stunning …

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The Trouble with Oil (Part Two)

Two weeks ago we wrote a post on oil (The Trouble with Oil Part 1)  – why it matters to equities these days, and how the initial market response (and pundit commentary) seemed to miss some key fundamental aspects of commodity supply and demand. What a difference two weeks makes.  A few updates: Oil is up more than 25% from the lows (below $27 per bbl ten days ago, close to $34 today). The focus has shifted from near term demand hysteria to medium and longer term supply issues. The first indication of a policy response – Russia essentially publicly …

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Japan & Abenomics redux

Overnight, Japan’s central bank pushed short term interest rates into negative territory and pledged more monetary stimulus.  For a brief overview of Abenomics, please see our video below. In contrast to the positioning we discuss in the video (short the yen, long Japan equities), many systematic hedge funds appear to have been long the yen recently.  The unwind of those positions likely contributed to the 2% decline in the yen today (that’s a very big one day move in fx land…).

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Why Don’t Value Investors Always Buy the Dips?

In the short run, the market is a voting machine; in the long run, it’s a weighing machine. For fun, let’s assume you’re a value investor looking at GM in late 2015.  Like all good value investors, you want to make decisions based on “intrinsic value” – that is, what a company is worth, not where the stock trades today.  Taped on your wall is Benjamin Graham’s quote, “In the short run, the market is a voting machine; in the long run, it’s a weighing machine.”  You think like a business owner, not a trader. You trawl through the financial …

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The Trouble with Oil

In an earlier post, we talked about market volatility when new risks move to center stage. Well, crude oil is center stage, to say the least.  Why?  Oil at $30 per barrel for a few years would lead to (literally) a world of hurt:  widespread bankruptcies in the oil patch, massive write-downs in bank loans and high yield debt, plummeting capital expenditures and further job losses.  Some emerging market nations would default.  This satisfies the “big downside” criterion. In late 2014, pundits generally thought the decline was a good thing:  every dollar lost by an oil company was a gift …

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An Excerpt from the Mid-Month Update

Given the market volatility, we provided a mid-month update to our investors.  The following is a brief commentary on the markets: For purposes of this update, we’ll highlight some ways in which the situation today is very different from 2008: On the positive side, while the Great Financial Crisis nearly pulled down the US financial system, which choked off the real economy, today US banks are less leveraged and have double ($1 trillion) the capital base relative to 2007.  US household leverage is lower as well. Likewise, there likely isn’t systemic risk from trouble in the high yield market, where …

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Market Psychology and the Investor Narrative

History doesn’t repeat itself, but it often rhymes. So said Mark Twain, or possibly someone else, depending on whom you believe. You might say the same thing about market drawdowns.  While next year’s crisis won’t look quite like last year’s, they’ll share some common traits.  Hence the rhyming. Let’s start with the average investor’s “narrative.”  In order to make sense of a world that is mind-numbingly complex, we make simplifying assumptions.  There are simply too many variables to process at one time.  A technology stock analyst, for instance, is unlikely to be an expert in commodities, macroeconomic trends, central bank …

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