Not the Market from the 1990s, 2000s or the 2010s…

I spent a few years on the buy side at long/short technology focused hedge fund.  I learned a lot over that time.  I feel confident in saying it was the career stop in which I learned the most.  I was being paid to obtain a synthetic MBA as well as learn how to build and run a portfolio.  Over that time, I developed a lot of business friendships with many people smarter than me on the buy side and the sell side.  Almost a decade later, I still regularly engage with analysts, PMs and strategists.  It is rare for a business day to go by without a conversation of some type with a former colleague in the investment business.  I still like to think that most of the sell side analysts in the networking, hardware, cloud and telecom sectors would take my call.  With that said I have been riding the market wave, but I am conflicted with what I used to know and what I see today.  In my tech career I always found selling in the transition space between a maturing market and an emerging market to be the most interesting and dynamic space to be in.  I am beginning to think the equity markets are moving into a transition space.

This is not a market prediction piece.  This is my notebook for the day.  The pieces I am trying to assemble; trying to fit together and understand the relationships between data points if any.

• Any former colleague from my HF days knows that I followed credit religiously. I was chatting with a former PM the other day and I mentioned some fact about credit and his immediate words were “…you following credit again?”  Yep, that is what I do.  Credit and FX coupled with tech.  What more would you want for a good time?  Jefferies called out M2 and credit growth and M2 growth this morning.  M2 grew the fastest since 1959.  They included a chart from the Federal Reserve (left).

• The market structure from days after QE1 (March 2009) have been unlike any market structure prior to QE. If you were a cranky old PM who remembered the 80s and 90s, you have probably been wrapped in your bear suit so tightly for the past ten years that you look probably look like the Duke brothers and I probably agree with your outrage over manipulated markets.  The market is not normal, or it cannot be correlated with anything from history and trying to do that is just pointless.  I have shorted stocks off and on over the past years, but you need to be very careful as short trades decay very quickly in this market.  Ten years ago, it was easy to let a short book run, but not today.  My point, the moment I read or hear a market tactician or trader attempt to explain the market structure today with 2008, 1987, 1984 or any year before the introduction of global coordinated QE, I am all done listening to that nonsense.  Let it go.  Move on.  Learn the new market structure.

• There is a game of musical chairs being played and I think investors need to be very careful. At some point the music is going to stop and there will not be enough chairs.  I cannot tell you that the music will stop next week, next month, six months or a year, but games are being played as companies try to manage expenses, business and manipulate supply chains.  It is hard to find a time in which there was so much uncertainty in the global economy, but it has been offset with the Fed and other CBs stating they have the floor.  I will tell you what the smartest semi analysts are doing today, they are closely looking at letters like this from Microchip.  If you do not want to read the letter, I will provide a quote “Further, starting August 1, 2020, we will not be able to accept any expedite request without an associated expedite fee. This fee is so that those customers who plan their businesses better and give us backlog visibility are not impacted by those who constantly expedite their orders. Please be aware that for standard products, any backlog placed directly on Microchip that is outside of 45 days can be cancelled or rescheduled without penalty, giving you the flexibility to adjust your backlog as your business visibility improves. Please do not place orders in excess of what you need—just place them so that we have the visibility to be in a position to serve you effectively.”  Every professional semi analyst immediately thought “double, triple ordering or worse and too much inventory.” Price increases and expediate fees are inflationary.

• Last year I wrote about how there will a long and lasting disruption to the global supply chain. Ongoing drama with China such as Hong Kong, Huawei, etc. will have a lasting impact on the global chain.  It is complicated and serious exogenous risk investors will need to monitor.  I think of it as another game of musical chairs.  When will the music stop?

• From a former colleague this afternoon “Recovery? Do we have a 5% permanent impairment from all this? 10% ? 15%?” Are we in a second wave of C-19 and when are people going back to work, school, etc.  What kind of impairment should we lay across companies?

• We are on the cusp of earnings season and it will be interesting to see how the numbers and revisions play out.  Numbers go up or go down?  If we do not get a V recovery then it will be a mess at the backend of this year going into 2021.  A former PM wrote to me this afternoon “Q3 will get revised up as well. Then by definition Q4 and next year have to get revised up. But the upward revisions to Q3 and out will be a function of the higher base established coming out of Q2. However, I think that is where the fun ends. Q2 will look like a little V, but by the time Q3 and Q4 happen, I think we will be seeing the shape of that curve really flatten. The sequential trajectory coming out of Q2 will just show slowing. This is what the mo-mo guys hate. Small chance of the sharp V continuing into next year. Too much damage done for next year and the years after that to turn into what the market is implying.“

As always, my thoughts on these matters might be completely wrong.