It has been an eventful two weeks, to say the least, so I haven’t been looking much at markets, but rather macro. That being said, I have written a lot on in private conversation, so I’ll summarize some of the stuff that I’ve posted here and there and give an outlook as to what is going on:
On Crowdstrike (~7/19/24):
I’m not a tech native, but I think trying to buy the dip on this event is a terrible idea. I get the sense that nobody knew that this was so embedded in every product — imminently urgent question is why are we paying for this? Any time there is a critical business failure, you get the standard shareholder class actions, guidance changes, compliance issues, etc. Any recovery will take months and who know what an investigation reveals? Recall what I wrote about META in Malt Liquidity 72 (Moth Liquidity, 12/2/22):
The vast majority of money that moves in and around the market is based on the philosophy that whatever is invested in will create future cash flow rewarding current shareholders, who hold a right to their share of the output. When this money sloshes around, it creates market impact, which in turn creates trading opportunity. Note that these investors generally operate with a philosophy that they don’t want to react to day-to-day market movements. They are in it for the cash flow created over time and the movement in share price that will reflect that. So we want to focus on what will motivate them to decide that they want to demand liquidity and increase or downsize their positions.
Investing is driven by valuation — taking snapshots of a company’s performance over time and stringing them together to estimate future outlook. The question valuation asks is very simple: given an investment in a company, what do I own now, what am I expected to own in the future, and how much is it worth at present value? This is what underpins the context of the hilarious screencap from an old SoftBank presentation that serves as my twitter banner,
where Masayoshi Son expressed confusion at the fact that at the time, the market valued the 25 trillion (in yen) in assets held against the 4 trillion in debt held at a 9 trillion market cap. It implied that the future value of SoftBank’s assets was lower than their present value, a jarring indictment on their investing ability.
valuation is driven by snapshots over time. Good examples of this are Phase 3 announcements, significant company news and filings, and of course, earnings. These serve as catalysts — drivers of reassessment and action. The trader is to volatility as a moth is to a flame. We can expect size and price movement to converge around known catalysts. As traders, in between whatever speculation we’re doing in between, we want to scoop up liquidity on entry and sell it back when it’s in demand. We want to ride the impact of less price-sensitive participants. We also know that without size coming in to help us, some trades might have their expectancy significantly affected.
Take, for example, META, a stock that’s been absolutely crushed relative to its peers this year.
Certainly, the company is not going anywhere, and a trade with the thesis of simple reversion back to its usual market beta was definitely a common one. And if you did try that, you’ve been blown out basically all year. What gives?
Prices don’t drop due to sellers “overwhelming” buyers, but rather due to lack of bid. If you are long, you can’t make a return unless bidding is strong. In META’s case, all the big investors who would normally come in and support the price and add to their investment aren’t because of the uncertainty of future cash flows and the unknown return on the cash Zuckerberg is currently lighting on fire to produce the metaverse. They have no certainty in their models, so they won’t bid. (Worth noting is that the voting structure of FB shares at time of IPO directly resulted in this, as any other company without a similar structure would have had an activist buy a stake so they can transform management. This is a solid long thesis if you are expecting such an investor to come in, and why Elliott Management gets such a strong halo effect on companies it shows interest in investing in.)
That’s a longer excerpt that I normally post, but it’s highly relevant here, with the added issue that META, even in crisis, was a company with ultra high margins and a deep moat, even though they were incinerating money on the Metaverse at the time. And look at what happened after! Zuck, after all, has a great track record, and by pivoting he won back the fundamental investors. How does CRWD, a company described to me as “selling software you won’t get fired for buying”, recover from crippling more businesses than the biggest ransomware attack could dream of, when that’s their one job? My guess is this company gets PARA’d: I can’t see fundamental bid returning, so it’ll just sink and languish. Honestly, I’d expect some kind of bargain-bin buyout and asset stripping at some point: Wiz rejecting the 23 billion Google buyout seems notable, though the market cap won’t transfer cleanly.
On Current Events (~7/18-20/24):
When idiots go flight or flight mode, it results in bodycam footage (warning: graphic content).
When millionaires are in fight or flight, it results in political instability. A signal of Eastern bloc instability is when ultra wealthy people start randomly dying — a particularly noteworthy one to me was the “sausage billionaire” being executed in his sauna by a crossbow. I started to expect something major to happen after, and of course, Russia invaded Ukraine. Rich people war over their respective pots when there’s no wealth creation — the domestic instability resulted in another pot being sought out. (Oddly enough, 2 years later, another Russian sausage billionaire died after falling out of a window in India, the Moscow special. I guess they knew too much about how it was being made.)
I’m not sure what form the American millionaire battle will take. The amount of interparty vitriol leaking out to the media is already a bad sign, and depending on how nasty the argument over the nominee gets, you’ll get a good idea of the overall temperature. I’m pretty sure it’ll happen through courts, though, similar to how NY tried to “get” Trump (See: Trading in the Age of Meaninglessness, 3/25/24). Too much can be manipulated in the court system for jurisdiction purposes. (Consider the case of Douglass Mackey, one of the most egregious 1a social media cases I’ve seen.) Nobody ever argued that America isn’t a litigious society first and foremost. There is so much bad blood at this point that I’d be very surprised if things just quieted down after November, especially if Trump wins (as I predicted my 2023 Year-In-Review post, with some conditions.) It’s already started, but I think a mass flood for “safe” jurisdictions will happen. You are likely going to see ~3 big legal wars:
- State tax clawbacks (e.g. CA demanding payment to move a business out)
- incorporation fights (Delaware is no longer as predictable and business friendly)
- compliance/physical requirement deregulation (all the NE has going for it at the moment is proxy to Delaware and the physical data centers.) Keep an eye on the Citadel-backed Texas Exchange project.
There is a decent chance the power structure shifts to the southwest in the next 5 years. Proximity to established CA money is imperative, and it’s easier to fly to TX from, say, Vegas than NY. But being in CA is untenable as a business until the state is reformed from the top down, which is unlikely to ever happen, imo, but at the very least will take 5+ years of legal wrangling. FL simply doesn’t have the infra for big business in the same way, and it’s pretty inconvenient to fly to. It holds value if proximity to NY holds value, which is what I’m betting against. I’m curious to see what state tries to replicate TX next. If R’s get control of AZ (Blake Masters, as unlikable as he is as a candidate, is part of the Thiel network as well, which seems to be dictating the moves of the GOP), I can see a bigger push as chip fabs/high tech manufacturing is already there across the state. WI is another option, but Chicago is already a financial sieve, so it’ll be tied to that to some extent.
On Election Volatility (~7/22/24):
Everything that has gone on since Joe Biden’s withdrawal has been deeply weird. I don’t need to repeat the wild theories that have flown every which way, but there is weird underpricing of election volatility in the term structure:
This is from Monday, and I was remarking that, given that we still don’t know at time of writing why the sitting president fired himself by Twitter post, which nobody has explained yet, overall vol seems underpriced. This isn’t necessarily bad for stocks — as we all know, stocks don’t really move along political news (trade talks going well) — I think it’s a rare overall directionless vol trade. But from a macro perspective, the consideration shifts. With Harris as the presumptive nominee, her odds will be reflected by the yield curve and DXY movement, rather than any prediction market (more on this later, but I don’t like them as a probability proxy):
I stated over the weekend that one candidate is obviously better for yields — D’s will continue to issue more debt at high rates — and the other is better for short dollar. Lo and behold:
Today’s market movement reflects what I expected to happen Monday,
and going forward, I expect more intraday reversals and currency movement. Frankly, with a lame duck administration, I have no idea what kind of stuff they’ll try to pass, which worries me more than anything else at the moment politically. Food for thought, I don’t have a direction here.
The fun part about macro is that it’s a lot of unfalsifiable, high level theorizing, rather than intraday precise prediction. Trade the week to month setups, call yourself a genius if you’re right, call yourself a genius if you made money whether or not what you thought would happen occurred, and if you lose money, it’s because the world is wrong, not you. And nobody has to know after you delete the predictions you made that went wrong.
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