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    Market Craziness and Mr. Spock’s Vulcan Salute

    By Gregory Silberman, CFA

     

     

     

     

     

    Figure 1 - source: Death to Stock Photo

    The whole world is a very narrow bridge; the important thing is not to be afraid.

    -Rabbi Nachman of Breslov

    Here are a few things you may not know about the Jewish people and religion:

    - The population of Jews in the world is similar to the margin of error in the Chinese census

    - The Vulcan salute, used by Mr. Spock on Star Trek, was taken from the Priestly Blessing of Judaism

    - You don't need to be Jewish to get into the "next world"

    - There is a firm belief in reincarnation which is known as Gilgul

    Talking about the next life, the above mentioned Rabbi Nachman of Breslov made the following promise:

    “Bear witness to my words. When my days are over and I leave this world, I will still intercede for anyone who comes to my grave, says these Ten Psalms and gives a penny to charity. No matter how great his sins, I will do everything in my power, spanning the length and breadth of creation, to save him and cleanse him....”

    Crazy stuff hey?

    You are free to believe or not that’s your freedom of choice.

    I’m a hedge fund manager so I figure why not hedge? What have I got to lose?

    A few $’s and a few days travel for eternal life … hmm that’s a good trade in my books.

    So I’ve done it!

    And I had so much fun the first time I went again.

    I traveled to a small town in the Ukraine called Uman for Rosh Hashanah (the Jewish New year) which begins on Sunday September 13th this year. This Wikipedia page tells you more about the annual pilgrimage.

    Figure 2 - source: SomeCards

    Fast Markets

    When we began putting down our thoughts for this article we entitled it random musings from a mind tired of watching paint dry aka. the S&P 500 bouncing in a tight range for 6 months.

    At that time my comment was that the only one having fun here is the equity long/short guys - finally good businesses were being rewarded and bad were being gutted …. They’ve waited a while for those fundamentals to bubble up and the market to take notice.

    At the same time we had been raising the yellow – caution - flag because the S&P500 had gone into a deep range bound slumber since March of 2015. In essence the market made very little upward progress from as far back as November 2014. On many occasions our advice was simply do nothing - wait until the market resolved either up or down from the range.

    That LONG and LOW VOL slumber has ended.


    Figure 3 - S&P500 March 2014 - August 2015

    In fact warning bells had been ringing for months, from a collapsing energy patch, deflating commodities and a tumbling Chinese Stock Market. Yet all the while mutual funds moved to record-low cash allocations indicating they were all in.

    The point we are trying to make is that investors have moved into a psychological position of high greed!

    Anecdotally we know that to be true as we see retail investors moved into ever riskier ‘growth’ investments, often complained that cash was not earning a return (as opposed to protecting precious capital) and even now are anxious to buy on the dips.

    A downside break of this ferocity– after a 6 month+ period of low volatility - seldom leads to mere corrections but often indicates a Bear Market or at the least a period (measured in months) of heightened volatility In order to neutralize the bullish greed it is our opinion that a longer period of fear is required. Also markets tend to do what most people consider improbable. That is, the Investors Intelligence sentiment survey from last week indicated only 22.5% of advisors are bearish of which most are expecting a 10% correction or less. In other words, advisors remain supremely bullish so the smart money may want to go the other way?

    What to Do from Here?

    As of now we are running on the thesis that this is akin to the 2011 European Debt Crisis (the first time Greece popped into the news) where we faced a scary fall in equity prices during Q3 but by the end of the year much of that was regained. That is, China as big as it is may be, could turn out to be a large, noisy storm in a tea cup.

    Let’s consider for a moment whether we are in a 2008 repeat scenario?

    To do that we need to consider where the major excesses are in the market.

    For me it’s clear, the major excess exists in the investment grade and high yield markets as companies have been tapping those markets for capital at extremely low rates (and to use for share buybacks).


    Figure 4 - Investment Grade Corporate Bond ETF; 20+ Year Treasury ETF (black line)

    Investment Grade made a high in early January and has been trending lower throughout most of the year. However, this has generally been in sympathy with interest rates movements (see correlation with black line which is US Treasuries).

    In other words it’s the prospect of higher rates that IMO would disturb this debt mound, not a Chinese contagion.

    Hence we have consistently been saying the Fed would delay rate hikes this year due to week global economic growth … so for now interest rates will be low and may move lower in a flight to safety – stemming this crisis for the time being.

    SIDENOTE: One wildcard here may be the pending defaults of energy high yield credits. At current Oil prices Jim Rickard has the losses pegged at ~$1 Trillion (that’s with a T) which is potentially larger than the losses from subprime and Alt-A in 2008. We will have to monitor closely how this works out as Oil hedges start rolling off producer’s balance sheets (2016?).

    SIDENOTE X2: It is with interest we read about disappointing returns from high profile University Endowments. As an extension to that we are waiting to hear about pension fund returns disappointing … given that interest rates are so low, we figure a crisis of underfunded pension liabilities will soon bubble up to add to market woes.

    Where we are focusing our Research

    The magic of online marketing is that your product (supply) solves someone’s problem (demand) when a common keyword connects the two.

    Hence keywords drive everything in the online marketplace. When supply and demand meets, revenue flows and an army of back office functions can take place.

    As a social scientist and a market practitioner, this intersection of supply and demand around a keyword fascinates me. Something happens at that point which the market at large has not yet priced in. The point of sale is still far enough away from quarterly consolidated financials that there may be an opportunity to capture alpha.

    Hence it’s with great interest that I am channeling our research into using google search trends to predict or model company revenue trends.

    As with most areas of research the academic papers disagree as to whether this space can be mined successfully. I believe it can but more research is required.

    If you’re interested it’s all out there and free for your perusal so take a look at Google Search Terms predict market movements.

    Pour Conclure:
    The market has a lot to digest over the coming months. Is it then a coincidence that the Jewish New Year is also known as the Day of Judgement?

    As the saying goes on that day it is decided for the coming year, “… who shall live and who shall die, who shall be healthy and who shall be sick, who shall have peace and who shall be harried, who shall die by fire and who by water, etc. etc.” 

    Pretty scary stuff, which keeps Jews coming to synagogues on those days even if they don’t come any other time of the year ?
    So with that I leave you with the traditional saying of L'shanah tovah tikatevu meaning "May you be inscribed for a good year"

    As always send questions my way
    Greg

    Postscript: Out of Africa

    Alas there is no Rosh Hashanah Ukraine trip for me this year; I am heading back to Africa as it were.

    After a decade hiatus I will be returning to South Africa for a two week vacation to celebrate a family wedding, a barmitzvah and the Jewish New Year of Rosh Hashanah. I am a little nervous to see what’s become of my beloved Africa in the interim. But I will admit to an alternative motive as well. Having endured a crushing bear market, both commodities and emerging markets have totally lost their appeal to investors … which is exactly the setup I favor.

    I believe it will be the infrastructure build out of Africa (and India) that will create the next BOOM in real things! Forget about Route 66, say hello to the Cape Town to Cairo expressway!!

    [By the way why can’t the government in the USA use some of its Trillion Dollars of printed money to repair the antique bridge system littered across the country?]  

    Anyway, now is the time to do some scouting for investment bargains in emerging markets which I intend to do with vigor and report back to our clients and readers on my findings.

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    Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

    Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices. Advisory Services offered through Atlanta Capital Group. Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.

    Main picture source: Death to the Stock Photo

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