Arete's Observations 11/13/20

Market observations

Watch for the Fallout From This Extreme Rotation

“In technical terms, the clearest expression of the violence of the turnaround comes from tracking the performance of stocks that have had the greatest positive momentum, relative to the market. Bloomberg’s measure of the pure momentum factor in the U.S. stock market (the FTW function on the terminal), shows that momentum dropped 4% Monday. Since Bloomberg started tracking daily moves in 2008, it had never before fallen as much as 2%.”

“So for many quant managers, this rotation will have felt a lot like the financial equivalent of stepping on a rake and having its handle hit you in the face. Sudden reversals like this have in the past caused serious market dislocations. We don’t yet know if this has left any funds in trouble; this should grow clearer over the days ahead.”

Three observations: One is the market action on Monday after the announcement of Pfizer’s vaccine results was crazy by any standard. FANGs underperformed relative to everything else, the Dow outperformed the Nasdaq, small caps outperformed large caps, and on and on. It was a massive reversal.

Another observation is that nearly all of the retail trading platforms were down at some point during the day on Monday. This suggests that plenty of retail money had been driving prior trends and plenty of it was rapidly repositioning. As such, it also suggests the extremely short-term and flighty nature of such trades.

Finally, John Authers is right to point out the extreme market moves on Monday are the kind that can leave firms in trouble. Further, firms in trouble are often forced to liquidate holdings at inopportune times which can exacerbate dislocations. I suspect we will be hearing about some of these over the next couple of months.

Carnival Announces $1.5Bn Stock Offering One Day After Shares Jump Most On Record

“One day after Carnival stock soared by the most on record, jumping over 39% following the Pfizer vaccine news which gave its shareholders hope that cruises just may return one day ... the $15.2BN market cap company rushed to lock in the gains and raise much needed liquidity by announcing a new $1.5 billion ‘at the market’ stock offering via Goldman and JPMorgan”

Nothing combines luck and desperation quite so much as an opportunistic equity offering. If anyone was wondering if Carnival is really 39% more valuable due to the prospect of a vaccine, CCL management gave its answer as an emphatic, “NO!”


The Morning Dispatch: What's Next for the GOP

“The United States confirmed 133,920 new cases of COVID-19 yesterday per the Johns Hopkins University COVID-19 Dashboard, with 10.8 percent of the 1,237,365* tests reported coming back positive.”

ICYMI, while everyone has been watching the US election, the coronavirus has been continuing to do its thing. Not only have the number of infections jumped to record levels, but the infection rate has recently jumped considerably from the mid-single digit level. While the preliminary vaccine results were good news, it doesn’t change the immediate risks of the virus.

Pfizer's CEO Dumps 62% Of His Stock On COVID Vaccine Announcement

“Despite the sale being perfectly legal under Rule 10b5-1 to avoid accusations of insider trading, the optics aren't great for Bourla, who still managed to top-tick the 52-week-high on the sale on news day.”

To say the optics aren’t good is an understatement. Not only are the timing and price of the sale attention grabbing, so is the quantity – 62% of his holdings. This is not something that happens when someone is confident of creating long-term value. 


Economic Policy for the Beginning of the End of the Pandemic

“This [news on the vaccine] means that the policy response to Covid is no longer about buying time, or managing a pandemic of uncertain duration: it’s about minimizing the cost—in health as well as wealth terms—of a pandemic with an end date.”

“Now that the cost of keeping small businesses on life support is bounded, it’s worth paying; some restaurants, bars, and hotels will get more than they deserve, and would have failed even without a pandemic at some point. But many more are worth keeping, and rebuilding the social capital embodied in a business is expensive.”

Hobart makes a couple of interesting and fair points about the implications of vaccine progress on public policy. That progress does significantly bound the realm of future possible costs and it is important to consider the costs of rebuilding social capital. That said, I don’t agree with all of his points and I am less optimistic that Pfizer’s preliminary results contain a great deal of information content. Nonetheless, it is important to look ahead and avoid being consumed by short-term challenges.


China’s ‘recolonisation’ of Hong Kong could soon be complete

“Last week’s scrapping of what would have been the world’s biggest initial public offering, of Ant Group, obliterates the assertion of optimistic financiers that nothing has changed in the city.”

“You can still go on dancing, you can still go horseracing, you can innovate, you can trade . . . but just stay away from [politics].”

Growing up in Iowa there was a saying, “blink and you’ll miss it”, to describe the small towns you might pass through going from one place to another. The same idea applies to China’s assertion of control over Hong Kong. The speed with which the transition has occurred should not diminish its importance.


Erdogan Fires Turkish Central Bank Governor, Launching Full-Blown Currency Crisis

“In short, we expect this to be the first salvo in what ultimately culminates as a full-blown currency crisis for the Turkish nation, and while Erdogan may try to impose capital controls, it won't last for one simple reason: the Turkish central bank is almost out of FX reserves. And once those are gone, the Turkish lira will promptly go bidless and will follow in the footsteps of the Venezuela bolivar.”

What had started as a slow-motion accident earlier in the year has been picking up pace. As the exit doors to the crisis have continued closing, the probability of a major crisis is increasing. The FT reported president Erdogan seemed to make concessions by acknowledging Turkey would “swallow a bitter pill” if necessary. He also stuck to his guns, however, that “interest is the cause, inflation is the result”.

For now, markets are interpreting the dramatic events as positive news. I am extremely skeptical. Further, while Turkey is just one country, it is a fairly large and very interconnected one. If and when a more definitive collapse unfolds, it will be felt widely.


What the Voters Are Trying to Tell Us

“But elections are educational events. Voters are not always wise, but they are usually comprehensible. They know more about their own lives than we in our information bubbles do, and they almost always tell us something important.”

“In different ways, voters told the two parties that they’d like our politics to be about practical issues. If you want a religious war, go have it somewhere else.”

David Brooks is right to identify elections as educational events. I also think he is right that on the margin, the election did indicate an aversion to a “religious war” at least insofar as it pertains to some of the more extreme issues. Overall, however, I am less sanguine than he is about what the election tells us.

For example, Janan Ganesh reports in the FT that “Americans inhabit distinct mental worlds now. What counts as fact is in dispute.” This is consistent with what I observe as well – and does not bode well for collaboration. He also notes, “Once he [Biden] is sworn in, Republicans are liable to rediscover the fiscal conservatism they unaccountably mislay between Democratic presidencies”. From what I can tell, this too seems to have a good chance of happening.

Further, both parties learned from the election too. First, the fiery rhetoric and religious wars increase turn out. Sure, they can go too far, but increased engagement is good for political parties, even if bad for the country. Second, both parties discovered weaknesses in the other that can be exploited in the future. As such, it is hard to see why either party would back down now.

Social trends

Social Teflonization, The Diff, by Byrne Hobart

“Years ago, a bad incident would have a strong and a lasting impact. Whenever something happened, our bookings would fall and they would stay down for an extended period. People seem to curl up in a ball and obsess about whatever the issue was. It could and it did impact bookings for a really long time. Even after the event left the front page, people would persist in focusing on it. Eventually, they would move on and bookings would recover, but that process seemed to take forever.”

“More recently, we have seen a much more sanguine response. Instead of the incident lingering for a long time, the recovery seems much quicker. People seem to be more apt today to see such events as ordinary with little impact. The events still aren’t normal, but they are seen as less relevant to the broader audience. In effect, the public appears to become inured to such one-off events. They’re still interested in the event and concerned about it, but people seem to continue living their lives with less change. They move on.”

“From a societal point of view, I have to say that it’s discouraging that we’ve reached such a point. It’s distressing that incidents are now so common that society seems to have formed a thicker skin towards them…”

Byrne Hobart reported on these comments by the CEO of Royal Caribbean in 2017. He was detecting not just a change in his business bookings, but a broader change in society. As Hobart sums up, the message was essentially, “This quarter was great, and I’m worried about our society.”

I absolutely think there is truth to this. I have seen it manifest in many ways – as insensitivity on social media and in politics and as complacency towards risk in many investment markets, among others. It does seem like a lot of people have developed an enhanced “ability” to be unaffected when bad things happen. I view this as a transitory phase, but also an unfortunate and potentially dangerous one.


NHS signs up for Tim Berners-Lee pilot to reinvent web

“Sir Tim invented the world wide web in 1989 as an open and collaborative project but has more recently expressed alarm at how it has been exploited by powerful technology companies and is determined to flip it ‘the right way up’ again.” 

“Inrupt’s Solid (social linked data) technology, developed by Sir Tim and a team of computer scientists at the Massachusetts Institute of Technology, empowers users to create their own Pods (personal online data stores). This enables them to control their own data and grant access to third-party apps at their discretion.”

In my mind this development has taken a surprisingly long time to come to fruition. The adage “if the product is free, you are the product” describes the business model of all the big social media companies. I have been astonished at how little most people care about, or are even aware of, this reality. As a result, it is not surprising that startups have been leery of taking on Big Tech powerhouses over the issue of data privacy.

Until now. Sir Tim finally got fed up with the direction his youngster was taking in life and decided to intervene. First, if anyone has the respect and authority to succeed in such an endeavor it is Sir Tim. Second, the time may be right. I’m sure I’m not the only person who repeatedly gets annoyed by banner ads and popups distracting from otherwise useful material. While the people I follow and interact with on Twitter are a small subset of the total, my sense is most would happily pay for the service in return for no ads and better governance on fake accounts and other nuisances. Interestingly, teens are also taking a strong interest in privacy …

How social media is opening a new generation gap

“More seriously, teens are critical about the willingness of older generations, particularly millennials, to hand over photos, locations and other personal information to social media companies in exchange for likes.”

It will be interesting to see if data privacy finally has its day. Privacy is really about trust and without trust the utility of many existing technologies is constrained. I know if I fully trusted Siri or Alexa or Google or Facebook I would use them for a lot more than I do. Perhaps, data privacy could be the next killer app of sorts – enabling technologies to attain ever-higher functionality? Of course, if such a thing did take hold it would present a bigger risk to the Big Tech companies than any antitrust regulations.


Oil producers have more than a pandemic to worry about

“But the bigger concern for the industry is what the futures market is signalling [sic]. Oil contracts for delivery years down the line are changing hands at levels to make oil executives wince.”

An important part of the enormous rotation that started on Monday was the price of oil which bounded up by about 7%. As a commodity closely aligned with global economic growth, this sent a strong signal of the power of the reflation trade. Longer term oil contracts tell a very different story, however. Those prices are barely higher than current ones which means concerns about weak demand and excess spare capacity did not change this week.


Almost Daily Grant’s, November 5, 2020, The Race Is On

“voters in Florida overwhelmingly (some 61% said yay) supported a ballot measure raising the minimum wage by 50% to $15 an hour, becoming the eighth U.S. state to implement that hourly floor.”

“Overall, the decisive result ‘signals to federal lawmakers that this is an issue that they can’t ignore,’ David Cooper, senior analyst at the left-of-center Economic Policy Institute, told Yahoo!”

Because Florida is not some left-leaning state like California, the definitive vote to substantially increase the minimum wage is telling. This issue is not just some plank of a progressive agenda but a much broader statement about ensuring living wages. Rather, the Florida vote may be a good leading indicator of things to come for the rest of the country.

Essentially the message is something like, “for whatever reason labor markets are not functioning in a way that provides fair compensation for low skill jobs.” As a result, government needs to step in to correct the error.

One implication is this is fairly explicit recognition of the failure of free markets and deserves some analysis of the sources of breakdown. Another takeaway is this is an important marker for an eventual return of inflation. In a service driven economy, labor is an important cost. If low end wages increase by a step function across the country, the higher costs will absolutely make their way into consumer prices.

Capital markets

Immediately prior to the election, investors were concerned about a contested election, a split result that would handcuff governing authority, the expiration of temporary pandemic benefits, and increasing infection rates. Check, check, check, and check. And yet the volatility index has fallen since the election. Is this the “social teflonization” of markets?

Implications for investment strategy

The End Game Ep. 10 - Chris Cole, November 4, 2020

“In today’s environment, most people are just layering on additional correlated bets either through risk premia, through leverage, through credit, or through liquidity, in essence to meet their retirement return targets and … it’s a disaster in the making ...”

“I’m wondering … if the endgame isn’t a transition from a world where illusion and fantasy rule and have the upper hand … to a world where that belief disappears and what we’re left with … is the reality?”

Grant Williams and Bill Fleckenstein have done a brilliant job with their “Endgame” series of podcasts in which they have hosted several of the best thinkers in the investment business. Chris Cole from Artemis Capital is one of those and his comments may well have the most direct relevance to many investors.

His first point is that most investors are overly exposed to “long GDP, short volatility”. The primary example of this is the 60/40 portfolio. His reading of financial history is the same as mine: The last forty years stand out as an anomaly relative to the broader history. Unfortunately, most investor portfolios have been specialized to conditions that are unlikely to persist.

He lays out the case for broader diversification in a research piece entitled, “The allegory of the hawk and serpent”. I completely agree with Cole’s assessment that most portfolios are very poorly protected from the most likely changes to come. I also agree with the assessment that many of those portfolios, pensions included, are leveraging up on strategies that have the most risk.

Grant Williams’ suggestion that the endgame may be the transition from fantasy to reality also holds significant implications for investors. Record high valuations are fantasy. So are record low credit spreads and mortgage rates. So is much of what we observe in the investment landscape. When liquidity fails to continue supporting the fantasy for whatever reason, a very different investment landscape will unfold and with it, a need for very different strategies.

Principles for Areté’s Observations

  1. All the research I reference is curated in the sense that it comes from what I consider to be reliable sources and to provide meaningful contributions to understanding what is going on. The goal here is to figure things out, not to advocate.

  2. One objective is to simply share some of the interesting tidbits of information that I come across every day from reading and doing research. Many of these do not make big headlines individually, but often shed light on something important.

  3. One of the big problems with investing is that most investment theses are one-sided. This creates a number of problems for investors trying to make good decisions. Whenever there are multiple sides to an issue, I try to present each side with its pros and cons.

  4. Because most investment theses tend to be one-sided, it can be very difficult to determine which is the better argument. Each may be plausible, and even entirely correct, but still have a fatal flaw or miss a higher point. For important debates that have more than one side, Areté’s Takes are designed to show both sides of an argument and to express my opinion as to which side has the stronger case, and why.

  5. With the high volume of investment-related information available, the bigger issue today is not acquiring information, but being able to make sense of all of it and keep it in perspective. As a result, I describe news stories in the context of bodies of financial knowledge, my studies of financial history, and over thirty years of investment experience.

Note on references

The links provided above refer to several sources that are free but also refer to sources that are behind paywalls. All of these are designed to help you corroborate and investigate on your own. For the paywall sites, it is fair to assume that I subscribe because I derive a great deal of value from the subscription.


Please direct comments or feedback to


This commentary is designed to provide information which may be useful to investors in general and should not be taken as investment advice. It has been prepared without regard to any individual’s or organization's particular financial circumstances. As a result, any action you may take as a result of information contained on this commentary is ultimately your own responsibility. Areté will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. 

Some statements may be forward-looking. Forward-looking statements and other views expressed herein are as of the date such information was originally posted. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Areté disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.

This information is neither an offer to sell nor a solicitation of any offer to buy any securities. Past performance is not a guarantee of future results. Areté is not responsible for any third-party content that may be accessed through this commentary.

This material may not be reproduced in whole or in part without the express written permission of Areté Asset Management.