Blogs y opiniones de economia en ingles

The Best Investment Writing Volume 5: Andrew Patterson, Vanguard – The Idea Multiplier: An acceleration in innovation is coming             Author:  Andrew Patterson, CFA is an investment analyst in Vanguard Investment Strategy Group. He has coauthored research on topics including the global economy, fixed income, and equity investing. Run-Time: 28:36 […]

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Never before have greatest fools and Nobel economists been in such cozy intellectual consensus. A combination of factors are coalescing to ensure that this crash is the one that pulls back the curtain on this central bank con job. This impending magnitude of dislocation will ensure everyone realizes that transparent criminality is profound evil packaged as virtue...

"So our wisdom, too, is a cheerful and a homely, not a noble and kingly wisdom; and this, observing the numerous misfortunes that attend all conditions, forbids us to grow insolent upon our present enjoyments, or to admire any man's happiness that may yet, in course of time, suffer change. For the uncertain future has yet to come, with every possible variety of fortune; and him only to whom the divinity has continued happiness unto the end we call happy; to salute as happy one that is still in the midst of life and hazard, we think as little safe and conclusive as to crown and proclaim as victorious the wrestler that is yet in the ring"

- Solon by Plutarch

Former hedge fund manager Hugh Hendry warned back in late 2014 that central bank alchemy would have a Keynesian body and an Austrian tail. Meaning that it would last long enough to convince the masses that it was working and then it would final monkey hammer them at the end. It would all end in tears at some "unknowable" time in the future. He was right. Despite the roller coaster ride since 2015 when China's last bailout failed, the S&P 500 has churned out new highs, sucking in the capital and the dreams of those who have complete confidence in record alchemy. Drugged by the virtual simulation of prosperity and its acolyte QE. Central banks being nothing more than monetary drug dealers administering euthanasia to the zombified masses. 

It's clear that gamblers still haven't figured out that 0% interest rates imply 0% real economic growth. Or maybe they don't care that all returns are a zero sum game. Only their own RECORD misallocation of capital has been driving this Ponzi market ever higher. All convinced in this zero sum game that they will cash out for maximum profit. Unfortunately, they will all soon realize that the only thing more painful than wasted money, is wasted life. 

So what are these "unique" risk factors that I speak of. First and foremost, Millennials discovering investing at the end of the longest cycle in U.S. history are the biggest single risk to these markets. We already saw a glimpse of this earlier this year during the Gamestop debacle. ALL of the major online brokers experienced outages when that pump and dump scheme exploded. Pundits described it as the "democratization of markets". They extolled the boiler room on Reddit as the "future" of markets. 

"A message board destroys a top Wall Street hedge fund. You’ve surely heard about the WallStreetBets/GameStop saga by now. Many investors see it as a sign markets are headed for a crash"

Google searches for “stock market bubble” just hit the highest level ever. And a new E-Trade survey found two-thirds of investors think the market is in a bubble"

Then he goes on to explain how this is all very bullish. Of course he has been right so far in 2021, although September just recorded the worst month since March 2020. We saw this same pattern back in 2018. Google trends "stock market bubble" peaked in February and was trending lower when the market unexpectedly tanked in the fourth quarter. The same pattern is happening now. 

Meanwhile, the amount of dislocation we saw back in February vis-a-vis online brokers was unprecedented even relative to the COVID collapse in 2020. A single stock pump and dump scheme caused more dislocation than a global pandemic.

Here in this chart below, I use Ameritrade as an example, but ALL of the online brokers experienced volume-related outages back in February and March of this year. Even more so than in 2020. Why? Because of the massive volumes of newbie traders democratizing pump and dump schemes.

Millennials have never seen a bear market before, which is why they believe that down markets and margin calls are mere folklore. They are convinced they can ride out any market on maximum leverage. All they need to do is double down and ride it out.

Here we see the equity put/call ratio remains near record lows relative to other major selloffs:

While invincible retail gamblers have been loading up on risk, institutions have been taking down their exposure. This can be seen in this chart of up volume / total volume. The divergence relative to recent all time highs is massive:

The market is disintegrating in broad daylight. This most recent rally high was led by a handful of massively overowned Tech stocks. Now, amid the Fed's impending taper, these last mega caps are starting to lose their bid. It's only a matter of time before the algos step back from this Disneyfied "market" and it goes bidless.

In summary, us "perma bears" have been "wrong" all this time while the masses added record leverage to their Ponzi scheme during a depressionary pandemic. This monetary-fueled asset mania coming at the end of the longest cycle in U.S. history has served its purpose of concealing the weakest and fakest economic recovery in history.  The CBO predicts that the 2021 Federal deficit will be 13.4% of GDP, while the GDP growth rate will be 7%.  Had the same amount of stimulus been applied in past recessions, there would have been no recessions in U.S. history. 

Why mass deception is considered good economic policy is not for me to say. 

Millennials are nothing more than the latest cannon fodder for Wall Street's massive money machine which thrives on monetizing ignorance. And in this society, there is a bull market in ignorance because the IQ bar keeps going lower, and lower, and lower.

Any questions?

"CNBC Documentaries presents “Generation Gamble,” a comprehensive look at the proliferation of online investing, crypto and sports betting apps and how a new generation is being encouraged to act more aggressively towards money and risk. Reported by CNBC’s Melissa Lee, this hour-long original documentary explores a new era where the boundaries between gaming, betting and investing are blurred, and younger consumers are being targeted"

It's transparent criminality, America's latest business model. 

Ports:

Despite mounting shipping delays and cargo backlogs, the busiest U.S. port complex shuts its gates for hours on most days and remains closed on Sundays. Meanwhile, major ports in Asia and Europe have operated round-the-clock for years.

“With the current work schedule you have two big ports operating at 60%-70% of their capacity,” said Uffe Ostergaard, president of the North America region for German boxship operator Hapag-Lloyd AG . “That’s a huge operational disadvantage.”

Generations:

$2 trillion of wealth flows from Baby Boomers to Millennials per year through inheritance, according to Fundstrat estimates.

Over the next 20 years, Millennials will inherit $76 trillion from previous generations.

Millennials tend to prefer higher-risk assets like stocks and crypto.

Baby Boomers are becoming a smaller relative share of the pool of wealth, meaning Millennial asset preferences will fuel a structural shift.

Shortages:

The cost of the intractable semiconductor shortage has ballooned by more than 90%, pushing the total hit to 2021 revenue for the world’s automakers to $210 billion.

That’s the latest dire forecast from AlixPartners, which predicts global automakers will build 7.7 million fewer vehicles due to the chip crisis this year.

Industry:

An estimated 321,000 Americans now work in the [cannabis] industry, a 32 percent increase from last year, the report found, making legal marijuana one of the nation’s fastest-growing sectors. In other words: The United States now has more legal cannabis workers than dentists, paramedics or electrical engineers.

Market share:

Google is so successful that it’s the most searched for term on Microsoft Corp.’s Bing search engine, the company’s lawyer told a European Union court on Tuesday.

“We have submitted evidence showing that the most common search query on Bing is by far Google,” Alfonso Lamadrid, a lawyer for the Alphabet Inc. unit, said at the EU’s General Court in Luxembourg.

Have a good weekend.

We all know that people are susceptible to soft forms of influence. Why do you think companies spend tons of money on wining and dining their clients and why more and more companies introduce rules that their employees cannot accept gifts worth more than a certain amount?

But in the world of internet purchases this social component is increasingly reduced to a couple of emails and phone calls. In many instances, particularly since the onset of the pandemic, buyers often don’t even know how the person they order from looks like. And this leads to worse outcomes for both the buyer and the seller.

A new study tried to assess the impact facial attractiveness has on the decisions of both buyers and sellers. When I read about that study, I first thought: “Here we go again. Another study that shows that attractive people are treated better than unattractive people.” But the results are more interesting than that.

The study asked participants in a lab experiment to take the role of a wholeseller, or a retail customer of the wholeseller. First, the wholeseller was asked to quote a price for the goods to sell. The retailer, once he has been quoted a price is then asked to place an order choosing how many items to order. Depending on the experimental setup, either the retailer or the wholeseller or both would see the face of their counterpart in the transaction or they would not see a face at all. Furthermore, the faces shown to them were standardised and could be either attractive or unattractive, male or female.

Faces shown to the participants in the experiment

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Source: Starostyuk et al. (2021)

The first  result, and probably the least surprising, is that if people were shown faces of their counterparts in the negotiation gave significantly better conditions, that is the wholesellers were offering lower prices and the retailers ordered more items. We humans are social animals and dealing with a human (even if it is just a face on an email as in the experiment) makes us more socially minded and both sides in a trade get a better deal.

The experiment didn’t test for a difference between faces shown in an email or on a screen and personal interaction, but I am pretty sure that the work-from-home crowd does get a worse deal than the people who personally meet with their clients. Similarly, I am pretty sure that when it comes to promotions and other career benefits, the work-from-home crowd that are more remote and have fewer in person interactions with their colleagues and bosses will get fewer promotions and lower bonuses.

In any case, besides the obvious benefits of seeing someone’s face, there are also gender and attractiveness effects. First, women get a better deal, but that is not dependent on the attractiveness of a woman. Wholesellers offer a lower price to unattractive and attractive women alike and retailers order a larger quantity from women than they do from men.

But aside from this gender effect there is also an attractiveness effect, though that effect is less pronounced  than the pure gender effect and – at least in the experiment – it seems to work better for attractive men than for attractive women. Essentially, attractive women are quoted pretty much the same price by the wholeseller than unattractive women, but attractive men are quoted a lower price than unattractive men. And when it comes to the retailer’s orders it is again the attractive men that receive the bigger orders, not the attractive women. The beauty premium seems real, but it is ironically mostly a male beauty premium, not a female beauty premium.

Success has a nasty tendency to increase confidence more than ability. The longer it lasts, and the more it was tied to some degree of serendipity, the truer that becomes.

It’s why getting rich and staying rich are different skills. And why most competitive advantages have a shelf life. Jason Zweig put it: “Being right is the enemy of staying right because it leads you to forget the way the world works.”

It is of course possible to indefinitely maintain whatever skills brought you initial success. Lots of people and a handful of businesses have done it.

But when success is maintained for a long period the greatest skill often isn’t technical, or even specific to your trade. It’s identifying and resisting a few dangerous feelings that can nuzzle their way in after you’ve achieved any level of success.

A few of the big ones:

1. The decline of paranoia that made you successful to begin with.

A common irony goes like this:

• Paranoia leads to success because it keeps you on your toes.

• But paranoia is stressful, so you abandon it quickly once you achieve success.

• Now you’ve abandoned what made you successful and you begin to decline – which is even more stressful.

It happens in business, investing, careers, relationships – all over the place.

Michael Moritz of Sequoia was once asked how his investment firm has thrived for 40 years. “We’ve always been afraid of going out of business,” was his answer.

It’s a rare response in a world where most successful people step back, take stock of all they’ve achieved, and assume they can not only breathe a sigh of relief but that their skills will run on autopilot.

A dangerous situation is when your goals (achieving enough success to relax) counter your skills (focus, paranoia, persistence). It hits you when you feel like past hard work entitles you to a break without realizing the cost of that break, however much it might be necessary and deserved. It’s part of why people who quit while they’re ahead are so admirable – it’s often not so much that they gave up, but that they’re aware of what made them successful and when that trait begins to wane.

2. Finding other peoples’ flaws more than you look for your own improvements.

A sad twist to Orville and Wilbur Wrights’ life is that they didn’t make much money from their invention. They were nearly irrelevant as soon as the airplane caught on.

Part of the reason the Wrights fell behind so quickly was that while competitors spent their time designing better planes the Wrights spent their time suing people for patent infringement.

Chasing competitors through court became an obsession. At one point in 1916 Orville demanded that every airplane produced anywhere in the world pay him a $10,000 royalty, high enough that no manufacturer could afford it – which was the point. Competitors, particularly those in France and Germany, ignored the demand and the Wrights spun their wheels in court for years while competitors spent their time designing better planes. By the time the patent wars were over, the Wrights’ flyer was obsolete.

A version of this happens when you see an investor spending all day on Twitter explaining why their competitors are wrong. I often wonder when they find time to figure out whether they, themselves, are right.

Charlie Munger says you shouldn’t have an opinion on something unless you understand the opposing side’s view as well as they do. It’s good advice, but it’s easy to take it too far. It’s almost always easier to find a flaw in a system than it is to discover why or how something might work, in the same way that it’s easier to destroy a relationship than build one.

A dangerous feeling is when your position on a topic centers around criticizing the other side versus evaluating why you’re right – or even better, why you might be wrong.

It’s a seductive trap because pointing out flaws is so much easier and more convincing than finding the obscure force that will make something work. It often signals that you don’t actually understand a topic but you want to be involved, and finding other people’s flaws is all you can come up with because you don’t have your own position to analyze. This may have been true for the Wrights, who were genius in the early engineering days of the aircraft but lacked the skills needed to bring it to the next level.

3. The feeling of mastering a topic, particularly if that topic adapts and evolves.

The first law of hard work is that you expect there to be a payoff. How could it be any other way?

But a dangerous feeling occurs when you want the payoff of years of hard work to be an assumption that you’ve mastered a topic. Or that you don’t need to update your views because you already spent years of hard work learning those views.

You see it all the time in so many industries. Veterans fall behind the younger generation because if veterans admitted that they had to adapt to what the younger generation is doing they’d feel like the hard work they put over their career was for nothing.

Even if you know your field evolves, the idea that what you learned in the past may no longer be relevant is so painful that it’s easy to reject. The longer you’ve been in a field the truer that becomes. It’s hard for a 50-year veteran to admit that a rookie might know as much as he does. But if what the veteran learned 30 or 40 years ago is no longer relevant, it can be true. And the rookie may be more aware of what he doesn’t know, while the veteran is iron-clad sure of his beliefs because he’s worked hard and expects a payoff.

Some things never change, and learning them in one era can help you in the next. But the more your field evolves – the more it involves people’s decisions – the smaller that set of learnings is, and the more you need to fight the urge to think that your long-term experience means you now permanently understand how the field works.

Investor Dean Williams put it: “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.”

More on this topic:

• Why Competitive Advantages Die

• Casualties of Perfection

• Counterintuitive Competitive Advantages

As we head into the final quarter of this year, corporate executives and analysts have to shore up their forecasts for next year’s earnings growth. In a world where corporate guidance on earnings is common place, most analysts are taking their cue from the people who should know best what the prospects for next year are: CEOs and CFOs.

Unfortunately, forecasting is hard particularly the future and corporate executives are no exception. It’s not that they consciously mislead the market. A new paper shows that there is no systematic exaggeration of earnings forecasts by managers. Instead, managers fall for simple extrapolation bias. They look at earnings this year and then simply assume that this year’s growth is a good indication for next year’s growth. But because strong earnings growth tends to weaken over time (and weak earnings growth tends to strengthen), the managers that extrapolate the most and have the highest current earnings growth tend to make the biggest error in their forecasts. This effect is so big that in the long run, companies with the highest projected earnings growth underperform the companies with the lowest projected earnings growth.

This simple extrapolation of current earnings growth becomes particularly fraught with error after a year like 2021. After all, the growth rates many companies saw this year are extremely high and heavily distorted by the low base from the pandemic. For investors, it is worth knowing that this year corporate executives likely overestimate next year’s earnings growth by a wider margin than normal. And it is useful to know which company executives are more likely to extrapolate current earnings into the future and become too optimistic about 2022.

As I said, some fraudsters and con artists aside, corporate executives make an honest attempt at forecasting next year’s earnings accurately. And the ones that do worst are the ones that work at companies that have earnings that are particularly hard to forecast.

Managers in companies with very erratic earnings are more prone to extrapolate this year’s earnings growth into next year. After all, if your earnings are all over the place, it is difficult to make accurate forecasts and you are likely to use current earnings as a stronger anchor for your expectations.

The second group of companies that tend to suffer from extrapolation bias are companies with very salient earnings. A company that has long been loss-making but this year became profitable for the first time ever (or at least in many years) is more likely to extrapolate the success of this year into the future. On the other hand, companies that did poorly this year will be more cautious in their earnings forecasts, even if this year’s poor results were clearly a one-off and are highly unlikely to repeat next year. These are the companies that are more likely to surprise to the upside next year and outperform.

Denial is now the most popular ideology. It's the only "principle" that Democrats and Republicans share in common. Only the details around avoiding reality differ...

The World ex-U.S. has rolled over every three years for the past decade. This year it finally eked out a new high above the 2008 prior all time high, and now it's rolling back over again. Everything about the past decade+ since Lehman has been a con job propagated against the middle class by the very people they bailed out post-Lehman. A mistake that won't be repeated.




China's honeymoon with crony capitalism is ending in real-time. Whereas U.S. policy-makers give scant lip service to tackling wealth inequality, the Chinese government is taking definitive steps to close the gap. Will it work? Yes, but the exact opposite way they expect. Sadly, Ponzi schemes don't go in reverse, therefore they will be successful in wiping out the majority of investors. 
In my last post I asserted that the greatest market risk is due to the moral hazard arising from continuous monetary bailouts. Now, in relation to this Evergrande collapse the PBOC agrees:

"China has sent a “clear message” over its disapproval of expansionary monetary policies, especially the asset purchases widely favoured in major Western countries"
“The long-term deployment of asset purchases could harm market functions...blurring of the boundary between tackling market failures and monetary policy could trigger moral hazards”

Too late. There have already been far too many monetary bailouts during the past decade, and the PBOC participated in the majority of them. Where do they think the name "Ever Grande" came from? At the end of the credit cycle they have decided now is the right time to remove QE asset value support. 
As Warren Buffett says, the wise man does at the beginning, what the fool does at the end.
The U.S. on the other hand is pursuing a model that I call "transparent criminality". There is an abiding belief that as long as everyone knows the system is rigged then it's ok. Everyone knows QE is welfare for the rich. Everyone knows that wealth inequality is at a record high. Everyone knows that Fed members are front-running the stock market. Everyone knows that Robinhood is a front-end to Citadel's HFT dark pool.  Everyone knows that Wall Street is profoundly corrupt and rife with conflict of interest. 
Therefore, it's all ok.
Case in point, housing bubble 2.0 has now achieved dimensions that dwarf the first bubble. But everyone knows it's a bubble, so it's apparently not a problem this time around.

"It's surprising the timing of this," Shiller said. "It came starting in a recession. We're supposed to be depressed and yet we seem to be exuberant in the market."

I have spoken many times about the "politics of inflation". Those seeking to cast aspersion on Biden's policies have succeeded in convincing the masses that prices will ONLY go higher from this point forward. And therefore, buy NOW before it's too late. Coming at the end of the cycle this widespread buying panic can only backfire in the worst way possible.
Any questions?





Similarly, in the oil market we hear the same thing about record inflation. Here is a note from Morgan Stanley claiming that these current oil prices are stifling demand.
However, the inconvenient truth is that today's oil prices are HALF what they were in 2008, not adjusting for inflation. Adjusted for inflation, today's "recovery" oil prices are the lowest since 2008. Meaning this is by far the weakest oil price recovery in the past decade despite RECORD stimulus.
In this geriatric old age home of a society, the bar keeps going lower, and lower and lower. 




Which gets me to this backup in yields that is taking place this week. We've seen this movie before and a few of us even remember the ending.
Specifically, the last time oil stocks led the market such as now was June 2020 just as yields peaked and then imploded.





As yields climb however, they have had the effect of monkey hammering Tech stocks. Here we see that the IBD 50 is back below the February breakout line in what can only be described as a very violent reversal of fortune aka. bull trap:






Has there been a time when reflation plays, Tech stocks, and safe havens rolled over at the same time?
Not since March 2020.





We learned recently that year to date NET stock market inflows in 2021 now exceed the past two decades combined. All it took was a global pandemic. 
What the wise man does at the beginning, the fool does at the end. 



In summary, inequality in the U.S. is going to get "fixed" the same way it's going to get fixed in China - the exact opposite way anyone expects. 
China's crackdown on crypto Ponzi schemes, stock market scams, over-leveraged property developers, Tech oligopolies and wealth inequality is a widely ignored warning as to what is coming worldwide. The U.S. ideology of mass denial is lethal when combined with the policy of transparent criminality. 
The policy and ideology divergence that has opened up between the Fed and PBOC will be a critical factor in this impending meltdown. Per the rules of Globalization, the supply side (China) must not grow slower than the demand side (U.S.), otherwise the currency flows ("hot money") will implode Emerging Markets:

I’ve always wanted to do pro bono financial planning work, but never found the right opportunity. Local FPA chapters will host walk-in clinics which were never my thing. I developed a financial literacy program during my active years in the Junior League, but I wasn’t involved in launching or teaching the courses. I have taken on clients who are below my minimum, but that doesn’t really count. So in earl...

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Episode #355: Sheel Mohnot, Better Tomorrow Ventures “We Think That We’re In The Very Early Innings of Fintech”               Guest: Sheel Mohnot is a co-founder of Better Tomorrow Ventures, a $75m fund that leads pre-seed and seed rounds in fintech companies globally. Sheel is also on the investment committee for […]

The post Episode #355: Sheel Mohnot, Better Tomorrow Ventures “We Think That We’re In The Very Early Innings of Fintech” appeared first on Meb Faber Research - Stock Market and Investing Blog.

I recently wrote a post about the empirical observation that the bulk of the alpha generated by active managers is generated by their high conviction bets while their low conviction active bets tend to have a zero or even negative contribution to the portfolio’s active performance. The natural conclusion of that research is that active manages should run more concentrated portfolios focused only on their high conviction ideas. This was challenged by a reader with two interesting reports that argued that concentrated high conviction portfolios were not better due to a host of reasons. I encourage you to go to the comments section of the link above and read the posted notes and my responses.

But one challenge was really interesting. The reader pointed out the findings of the research by Hendrik Bessembinder some of which I have discussed here, here, and here. In essence, Bessembinder shows  that the performance of the US equity market is highly concentrated in a few superstar performers, while the majority of stocks have poor performance and even underperform government bonds. This, Bessembinder argues, means that more diversified portfolios should have a better chance of good performance because they cast a wider net and thus have a higher likelihood of catching these superstar stocks.

I think this is too short-sighted, because while a more diversified portfolio has a higher likelihood of being invested in these superstar stocks, the performance contribution of these stocks to the overall portfolio is smaller. This is a result of the unfortunate reality that every portfolio has capital constraints. No portfolio manager can increase her investments infinitely, either because they are long only and thus can only invest the money they manage, or because they have lending constraints and can’t borrow infinite amounts of money to invest in stocks.

So, let’s have a look at how active portfolios perform in a market where stock performance is highly concentrated. To do this, imagine a stock market with 100 stocks. 99 of these stocks have a return of 0% and one stock has a return of 1000%. The average return of the stock market with all stocks weighted equally is 10%.

Now, let’s assume there are three different investors in the market:

• The passive investor buys all 100 stocks in equal amounts and thus replicates the market.

• The diversified active manager runs a portfolio of 50 stocks all equally weighted at 2% in the portfolio.

• The concentrated high conviction active manager runs a portfolio of 20 stocks all equally weighted at 5% in the portfolio.

To get a feeling for the performance of these three investors let’s first assume that they are all unskilled and no better than chance at picking stocks. The table below shows the resulting expected return of the three portfolios (before fees and costs) and the type I and type II errors. The type I error is the probability of accepting a truly unskilled manager as skilled based on her outperformance. The type II error is to falsely classify a skilled manager as unskilled based on her underperformance. To get an idea of the size of error that can be made by investors I have (unscientifically) just added the probability of a type I and type II error (please no complaints, this is just a back of the envelope calculation).

Performance of unskilled managers with different investment approaches

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Source: Liberum

As expected, the unskilled managers on average create no outperformance over the passive fund. But because the more diversified portfolio has more stocks in it, there is a 50% chance that some unskilled manager will accidentally stumble on the superstar stock and outperform the market due to the higher weight of the superstar stock in the active portfolio vs. the market. Meanwhile, in the concentrated portfolio, there is only a 20% chance that some unskilled manager will accidentally invest in the superstar stock and be identified as skilled, even though she isn’t.

Which brings us to lesson 1: In a concentrated portfolio, it is harder for unskilled managers to pass as skilled.

Now assume we have active managers who are skilled. But skill comes in different shapes. Let’s assume that the diversified active manager has 20 high conviction ideas, while the remaining 30 stocks in her portfolio are low conviction ideas. The concentrated active manager meanwhile also has 20 high conviction ideas but doesn’t invest in any stocks outside these. Now assume that the skill of the active fund manager comes in the form of a 50% better than chance likelihood of finding the superstar stock in the market and classifying it as a high conviction idea. Yet, the fund manager still continues to invest equal amounts of money in each of the stocks in the portfolio. The table below shows what happens then.

Performance of skilled managers with different investment approaches where skill comes as the ability to identify outperforming stocks

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Source: Liberum

In this case, the skill of the active manager leads to outperformance vs. the passive fund. But because the weight given to each stock in the more diversified active fund is 2% while the weight given to each stock in the more concentrated fund is 5%, the expected outperformance of the concentrated portfolio is larger than for the more diversified portfolio. The probability of an unskilled manager to accidentally stumble on the superstar stock and outperform is unchanged to the first case above, but the probability of a type II error (i.e. an active manager underperforming and being classified as unskilled) is lower for the more diversified portfolio. The total likelihood of committing a type I or type II error is, however, the same in both cases.

Which brings us to lesson 2: More concentrated portfolios increase the career risk of skilled managers (i.e. being skilled but falsely classified as unskilled by asset owners).

Now, let’s go to the final iteration of our thought experiment. Assume that the active managers are skilled but not in identifying the superstar stock. Instead, they analyse each stock and based on that analysis, they put a higher weight in their portfolio on high conviction stocks. The more diversified active manager increases the weight of her 20 high conviction stocks from 2% to 3% in the portfolio and reduces the weight of the 30 low conviction stocks to 1.3%. This is not an option for the concentrated active manager because she only invests in her high conviction stocks anyway and thus invests 5% in each of these 20 high conviction stocks. The table below shows that that does to the expected return and the type I and type II errors.

Performance of skilled managers with different investment approaches where skill comes as the ability to increase the weight in high conviction stocks

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Source: Liberum

Now, the outperformance of the skilled manager with the more diversified portfolio disappears while the outperformance of the skilled manager with the concentrated portfolio remains unchanged. The reason why the skilled manager with the more diversified portfolio suddenly no longer outperforms is that while the weight of the high conviction stocks increases the weight of the low conviction stocks declines. If the diversified active manager picks the superstar stock as one of his high conviction stocks, the outperformance will increase, but if she picks it as a low conviction idea, the outperformance will decline. Because there are 20 high conviction stocks in the portfolio and 30 low conviction stocks, the outperformance on average declines and in this case ends up disappearing altogether.

But the more important consequence of this phenomenon is that the probability of a type II error (falsely identifying a manager as unskilled even though she is skilled) increases. Thus, in this scenario, there is a high risk of falsely identifying an unskilled manager as skilled and a similarly high risk of falsely dismissing a skilled manager as unskilled. A diversified active portfolio becomes the worst of both worlds.

Which brings us to lesson 3: In a more diversified portfolio, a skilled manager has less room to create outperformance, which increases her career risk.

Looking at all these three cases in combination, we finally come to the final lesson for asset owners:

Lesson 4: In a more diversified active portfolio asset owners have a higher risk of falsely sticking with an unskilled manager while maintaining a significant risk of firing a skilled manager. Overall, the likelihood of making the wrong decision in selecting a fund is at least as high and sometimes higher for a diversified active portfolio as for a concentrated active portfolio.

Imagine you are an investor, and you are convinced one of the stocks in your portfolios is going to grow strongly. Then, the company beats earnings estimates at the next results season but it also revises its growth outlook downward. It’s easy to dismiss this weaker growth outlook in the light of current strength in the business and you might be tempted to hold on to the stock.

Alternatively, imagine your outlook for another stock is rather pessimistic, but at the next results presentation, the company presents shock and awe results that blow away all the estimates of professional equity analysts. If the results are strong enough, you might well be tempted to change your view of the company and even buy some of its shares given the strong results.

I am oversimplifying things here, but this is what I see happening so often in markets, particularly during results season. Companies can present blowout results that will not only make the stock leap but also change the consensus expectations about the future prospects of the company amongst investors. But is a blowout quarter or even a blowout year predictive of future success?

Meanwhile, companies can manage to beat expectations quarter after quarter and keep their share price aloft while at the same time quietly chipping away at their long-term growth prospects until, of course, one day, they can’t beat earnings expectations anymore and the disappointment amongst investors will tank the stock.

The job of equity analysts, fund managers, and investors, in general, is to analyse corporate results for signals about the future prospects of the company. The problem, however, is that a signal has two components, reliability and strength. A signal can be a reliable predictor of the future but have very low strength like the company’s assessment of long-term future growth prospects. Or it can have large strength but be an unreliable predictor of future results like shock and awe earnings growth in the past quarter.

Of course, we all would love to have signals that are both strong and highly reliable but in the real world that rarely happens. Instead, we investors have to sift through a variety of signals both strong and weak, and focus on the ones that are relevant while ignoring the ones that are not.

Unfortunately, it seems we are doing a lousy job at that. José Astaiza-Gómez has looked at the earnings estimates and buy recommendations of equity analysts and the revisions to these estimates and recommendations. He found that analysts tend to ignore evidence that contradicts their previously held belief about a stock until the signal strength becomes very large (he found a tipping point somewhere around the top 20% in signal strength). Then they revise their opinions and estimates. So, analysts react to signal strength and tend to revise only once the signal has crossed a certain threshold. But do they react to all signals or p0nly the ones that have some reliability in forecasting the future? Unfortunately, he found no evidence that analysts take the reliability of the signal into account when reacting to a signal or revising their forecasts. They are reacting to signal strength but not to signal reliability.

And that is a problem because that opens the possibility of company management manipulating the share price with shock and awe results and the market becoming inefficient because reliable but weak signals are not incorporated ion the share price. Hence, investors who are able to identify signals that have high reliability even if their strength is low can earn superior returns. 

We have harnessed technology to enable an incredible amount of information sharing around business and finance over the last two decades.

I have detailed data on thousands of publicly traded companies at my fingertips. What is their market cap? Who are their largest shareholders? Has the CEO sold stock recently? What is their business model and how do their unit economics compare to last quarter (or last year or five years ago)? I can essentially access the financial health of virtually all household brands at the press of a button.

But when I try to perform the same exercise (accessing data) on humans, including myself, it’s much harder.

What is my cholesterol? Respiratory rate? Resting heart rate? Posture/alignment? Sleep patterns? Blood oxygen level? Blood sugar level? The vast majority of us are totally in the dark on these metrics.

It has never made sense to me that I had access to so much data about businesses, and yet until last year, I didn’t even know what blood type I was.

The good news is — this is changing.

Companies like: WHOOP, Levels, Eight Sleep, Oura Ring, Apple Watch, among others are using sensors and biometric data to provide much more detailed information to consumers. And I believe we are only at the beginning.

The technology is improving quickly and the costs are coming down, allowing for accessibility more broadly.

I bet we will look back in ten years and have a hard time believing we were all managing the stresses of life without the tools and information to help us optimize and make better decisions regarding what we eat, when we eat, when we go to sleep, what temperature is optimal for sleep, when to rest, and when to push.

As a longtime WHOOP member, I can confidently say it has improved my health. I feel like I am flying a plane with radar — helping me see around corners and make small adjustments. It’s so simple. The data is collected passively and the device is not obtrusive (and increasingly invisible). All you have to do is look to Instagram or Twitter to see others expressing similar sentiments about how many of the companies listed above have helped them. Once you experience it, it is hard to go back.

While all of the information can feel overwhelming at first, over time the companies who will dominate this emerging category will have superior user experience to surface information in a way that is easily digestible and actionable.

In WHOOP’s most recent release 4.0, it announced the ability to export data to your doctor, physician, and or loved one. I would not be surprised if in time we can easily grant access to our data, in real-time, to our primary care physician or cardiologist — which will lead to much more personalized care.

Outside of Apple and Google’s efforts, there will be a $100 billion+ company built in this space. It’s exciting to see the seedlings of this movement happening right in front of our eyes. I suspect it will seem obvious in the not too distant future.

Episode #354: Shawn Merani, Parade Ventures, “The Seed And Pre-Seed Stage, You’re Betting On People”               Guest: Shawn Merani is the Founder and Managing Partner of Parade Ventures, a pre-seed & seed stage-focused venture capital firm. Previously, Shawn was a co-founder and partner at Flight Ventures, investing in early […]

The post Episode #354: Shawn Merani, Parade Ventures, “The Seed And Pre-Seed Stage, You’re Betting On People” appeared first on Meb Faber Research - Stock Market and Investing Blog.

Zillow Group, Inc. (Z) stock plateaued after experiencing ups and downs transitioning into 2021. The real estate-focused media company could not maintain the record highs of early February 2021 yet still outpaces the S&P 500. Hedge funds were buying as Zillow outperformed the S&P 500, rising by approximately 105.1% compared to the S&P’s gain of about 37.7% since the start of 2020.

Zillow operates an online real estate marketplace with mobile and website applications. It generates revenue by selling advertisements to property management companies and real estate agents who place listings on their network. Zillow has a portfolio of brands, products, and services to provide real estate information and connect prospective buyers with real estate professionals and lenders. Zillow also sells advertising space to other businesses such as home organizers, insurance agents, and general contractors. Many homeowners are drawn to the Zillow.com website for its simple property valuation tool that provides a “Zestimate” of a house’s value; these Zestimates bring views in to see the advertisements and may also result in Zillow making an offer on a home. One of Zillow’s other related services is an iBuying program called Zillow Offers that allows the company to make real estate investments such as buying, fixing up, and reselling houses for a profit.

Hedge Funds and Institutions Are Buying

In the second quarter, aggregate 13F shares held by hedge funds increased to about 101.7 million from 99.3 million, an increase of approximately 2.4%. Hedge funds created 22 new positions, 60 added to an existing one, 36 exited, and 53 reduced their stakes. Institutions are also buying the stock, and aggregate holdings increased by about 1.6% to approximately 196.7 million from 193.7 million.

(WhaleWisdom)

Favorable Estimates

Analysts estimate that year-over-year increases will bring earnings to $1.29 per share by December 2022, up from December 2021’s predicted $1.05 in earnings. Revenue estimates are also encouraging, forecasting approximately $6.6 billion by December 2021 and rising to about $9.9 billion by December 2022. The 13F metrics between 2015 and 2021 reflect Zillow’s rising stock value with a peak in early 2021.

(WhaleWisdom)

Mixed Actions by Analysts

While Zillow saw growth through 2020 into the start of 2021, drops in the stock’s price factored into mixed analysts’ feedback. For some analysts, earnings were not strong enough to justify higher ratings and price targets. Brian Nowak from Morgan Stanley lowered the firm’s price target on Zillow to $153 from $155, maintaining an Equal Weight rating on the shares. Nowak shared optimistic revenue estimates but still sees Zillow’s iBuying business segment as continuing to “re-rate lower.” Piper Sandler analyst Thomas Champion noted the strong home sales market and kept an Overweight rating on Zillow’s stock. Meanwhile, Zelman & Associates upgraded Zillow to a Buy following a recent decline in value and after previously downgraded its stock rating to Neutral.

Better Days on the Horizon

Though Zillow’s stock value has fallen since February 2021, it continues to outperform the S&P 500. The U.S. housing market has seen soaring prices and high demand for inventory over the past year, offering continuing opportunities for Zillow’s business model. Zillow’s real estate marketplace has the potential to continue to see growth in parallel to the housing market. Analysts’ earnings predictions and the stock’s currently lower value may be attractive for long-term investors.

Alibaba stock is probably one of the most controversial right now. It comes with risk, but what about the potential rewards? Check it out!

The post [video] Alibaba Stock Analysis ($BABA) | My Thoughts supported by a Risk and Valuation Assessment appeared first on European Dividend Growth Investor.

The preferences of retail investors for sustainable investments over traditional investments are well documented. Investors are even willing to accept lower returns or higher costs for the benefit of owning sustainable investments.

And in the past, it was justifiable for advisers to charge higher fees for managing portfolios that are sustainable compared to traditional portfolios. After all, with a lack of sustainability information and a sustainable products, it required considerably more effort to build a sustainable portfolio than a traditional one.

But today, the availability of information is much better, and sustainable funds are available everywhere. The hard work today is less about identifying which stocks or funds are sustainable, but which ones of the many sustainable funds are engaged in greenwashing and which ones do a really good job.

Yet, advisers seem to continue to charge higher fees for sustainable portfolios while not exerting any more effort to manage these portfolios when compared to traditional portfolios. A recent study recruited 345 advisers in the United States for an experiment. They were asked to create equity portfolios for hypothetical clients some of which wanted sustainability criteria integrated into their portfolios while others didn’t. Once the advisers had selected the stocks for the client portfolio, they could charge the clients a fee for managing it. 

The result was that on average, the sustainable portfolios were offered at a fee 5bps higher than a traditional portfolio. You may say that this additional charge is reasonable given that advisers have to be more selective when picking their stocks and have to include additional information.

When the researchers asked the advisers before they selected stocks what the outcome of the result was, the advisers openly acknowledged that they expected sustainable portfolios to come at a higher fee, but they also expected that they would spend more time selecting stocks and constructing these portfolios.

But when the researchers tracked the work of the advisers in selecting the stocks and constructing the sustainable portfolios there was no meaningful difference. In fact, both in terms of time needed to select the stocks and construct the portfolio as well as in terms of clicks to collect the information about the stocks there was no difference visible. Unconsciously (or maybe consciously), advisers charged their clients a higher fee for the same amount of work and effort. And personally, I don’t think this behaviour is sustainable in the long run.

Tech Women #ChoosePossibility I reached out to about 100 women tech entrepreneurs across the country and asked for their help in shaping this perspective. Through a simple survey, coupled with public data collection, a picture starts to emerge of some of the women who are and have been building tech companies successfully in the Valley for the last 20 years. 1 change that can fix the VC funding crisis for women founders S...

The post This Week in Women appeared first on The Belle Curve.

We have achieved perfectly virtual markets to match the virtual economy. The Monetary Cargo Cult is convinced they have discovered the El Dorado motherlode...







The pandemic was the most deflationary event in modern history - an unprecedented lockdown of the global economy. An event that spawned the final epic stage of the post-2008 global credit bubble as record liquidity flowed out into every asset class, secured by a larger tranche of debt. The exact same central bank bailout cycle we have witnessed multiple times over the past decade. Each time amid the abiding belief that we have successfully borrowed our way out of a debt crisis. 
China Evergrande is a mirror image of the global economy. A property developer that has piled on ever-more debt with each successive round of monetary bailout until it reached its Madoff Moment wherein asset values have now fallen below liabilities leading to negative equity and an incipient margin call.
The majority of pundits were claiming last week that the Chinese government would never allow Evergrande to default on its debts. However, this week the company began defaulting on its debts. Now, these same morons are claiming that this Evergrande default is NOT another Lehman event. They claim that this is an isolated event that will have no systemic impacts. They ignore the fact that Evergrande is merely a symptom of a much larger problem.
The problem is moral hazard and the fact that central banks have orchestrated non-stop monetary bailouts since 2008. Now, global speculators no longer fear risk or leverage. They embrace both. Ironically, it's precisely because markets did not sell off this week on news of the default that Beijing has been emboldened to pull the plug on this massive Ponzi scheme. Had markets feared default and sold off into the event, then the PBOC would have orchestrated yet another bailout. Moral hazard complacency has now reached back into the central banks that created it in the first place emboldening them to pull the plug on their own Ponzi scheme. 
Likewise, the Fed this week warned that QE "tapering" is coming at their next meeting which is a mere five weeks away. Deja vu of September 2008, they were more concerned about "inflation" than the dominoes already falling in China. There was not one mention of Evergrande or contagion. 
We must remember that the same "relief" rally took place in September 2008. October however was not quite as kind.
We also learned this week that U.S. margin debt hit a new all time high in August:






Sadly, the price-weighted Dow is now a better indicator of overall market health than the market cap weighted S&P 500. The inevitable result of a central bank manipulated liquidity rally concentrating all gains into a handful of massively overowned deflationary Tech stocks. The prime beneficiaries of the virtual economy.
Here we see this is by far the Dow's longest stretch below the 50 dma in 2021. If this wave count is correct then the next stop is the 200 dma (red line) which is -10% from the top. If that line is breached then the wheels come off the bus.  






This chart shows that the 90 day average of down volume over total volume is the highest since the 2020 crash, and before that the 2018 crash. We have never seen this much down volume on such a nominal pullback in the market - an indication that institutions have been selling into strength. To the usual end-of-cycle bagholders. 
What we have to realize is that there is a class of "investors" who have been told that they MUST own stocks no matter how much risk there is in the market. They have been brainwashed to believe that buy and baghold is the only way to increase wealth.
They will soon be disabused of this misdeception.




As a measure of complacency and delusion, we can see that the largest IPO pump and dump in history is only "getting started". Looking back at this "Black Swan event", market historians will cite the mass overload of junk supply as a key factor in this impending meltdown.



Wall Street will continue to dump junk until the casino breaks,  which by the looks of market breadth, will be anytime soon.









Gold is continuing to warn that "inflation" is a hoax propagated by those who traffic in conspiracy theories and ad-sponsored disinformation.





Likewise, Bitcoins are heading for a third wave down at all degrees of trend. The clearest indication of imploding social mood:





In summary, this society specializes in turning a blind eye to deflation and  mass poverty. For them, exploitation is merely a business model.
It is their FATAL blindspot and indicative of Third World values.
Momentum speculators took this Evergrande default as an opportunity to bid the riskiest stocks further into the stratosphere.  The pattern is deja vu of 2018, however, this time gamblers have made an ALL IN bet on central bank welfare for the rich.
I predict that this time around it will be all central banksters can do to keep the Treasury bond market from exploding. By the time they get that under control, everything else will be a smoking crater. 
As always, the burden of truth falls on those of us not suffering from dementia.