At times like this I’m happy I’m poor

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Baruch, dear readers, has no money.

Don’t feel sorry for him. He’s rich in many other ways and is just trying to milk your sympathy. All he really means is at this very moment he doesn’t run any money. His brilliant strategic idea for reinventing himself is in progress, and boy, let him tell you, he has to beat the billionaires off with a stick. But as of yet no deal has been signed, so there’s no capital to deploy or protect. This means he can view the current market carnage with a certain amount of distance, mixed with a blob of sympathy for those less fortunate than he, i.e. the ones in the market right now.

As of now, US futures are predicting a bloody morning in the US (often the harbinger of a sunnier afternoon, however). What does Baruch think? At times like this, thoughts turn darker. Here are a few observations, in no particular order:

  • WTF is up with the VIX? Of all the indicators it’s the one I like best to time whooshy markets, and it’s not just not spiking, it’s narcoleptic. That’s a bit scary, telling me the selling is a bit more orderly than it should be. Probably not a good sign.
  • The fact that the growthiest of the growth stocks are being attacked isn’t great either. Growth is supposed to outperform in a rising rate environment. What we saw on Friday in Cloudy/Big Data-y growth looked terminal multiple related; if earning estimates in your out years didn’t get crushed, the multiple they’re willing to put on the out years just died. Tableau (DATA), Splunk (SPLK) and Salesforce (CRM) have been among the “new tech” darlings, and the reaction to DATA’s guide has been cruel, -50% or so, with widespread collateral damage. That one may take a few years to get back to its previous highs if it ever does*. 3 things going on in this space I think. Macro is biting, the Amazon, Azure and other cloud channels gaining more leverage and offering their own-label competing products, and in the case of Tableau and maybe a few others, IT managers have made the products available to desks, but are the people at the desks really using them? Migration might be slower than people think. Meanwhile, DATA’s management point to low visibility and onboarding too many lower productivity sales dudes. Could be true too.
  • Another way of saying “low visibility”, by the way, is “we haven’t got any sales at the moment”. Like “extending sales cycles” (or “they’re not buying anything anymore”) it’s one of those wonderful euphemisms we see so often in the business world to make something unpleasant sound nice. My favourite is still “upgrading staff” (or “firing people”).

  • Oil and China and Emerging markets are reputed to be at the epicentre of all this, with the idea that the lower oil goes, the more stress we get in the energy complex, which was 30% of TOTAL capex in the S&P500 in 2014, and in the form of reserves, the store of huge amounts of real balance sheet assets, used to offset debt. A bugaboo there is some developed market credit event. China is the nexus of many nightmares, and EM has been crap for ages anyway. The point is this: the real economies in the EU and US are supposed to hold us up, but amid all the market shenanigans no-one’s (OK apart from this guy) mentioning Reflexivity, the idea of the negative feedback loop of falling stock prices and psychological unease in the minds of purse-string-holding business executives in the “everywhere else” bit of the economy. This, the great Soros maintains, is a factor that drives downturns longer and lower than they look like they should. Anyway, something to think about for the next few weeks.
  • Amid the talk of Policy Error at the Fed, the thing that really makes Baruch fret is the idea of the Austrian chickens coming home to roost. I should probably explain. I don’t really know if the Fed made a policy error by raising rates last year, it’s one of those things we’ll only know about much time has passed. I also think that at some point rates have to be raised, duh. My great fear, no doubt shared by many, is that the near decade of “unconventional” policy, not to mention the preceding decades of not-really-very-conventional monetary policy either, may be the actual policy error. In a nutshell, this is the Austrian critique of Keynesianism (remember that?). Crisis follows crisis, each one needing a more extreme monetary solution than the last, which precipitates the final crisis where no sane solution remains. That bloody Greenspan, it’s all his fault. Or Ayn Rand. Yes, let’s blame her, she was seriously weird

If I’ve got you thoroughly miserable now, cheer up; you shouldn’t really believe all this. It’s really above my pay grade. Baruch’s suggestion is to observe these ideas, integrate them with your own if you like, and move on. These are the sort of dark thoughts that Baruch generally has at stock market bottoms, and he’s been worrying about this sort of thing since 2001, yet made most of his performance since then being super long stuff. Extra bearishness may be right this time but how can we know before the fact? All we can really do is keep dry powder until there’s some definite change in conditions — the Saudis deciding to stop pumping oil would be a good one. Or evidence of some deep cyclical sector beginning to turn, maybe, and semiconductor stocks have had some decent bits of news recently. What about deep, cathartic mini crash, with climactic technical indicator-thingies (maybe like the VIX)? That would be nice. Could be today.

And all the time we should still be scouring the market for those opportunities that exist outside of all this macro Sturm und Drang, those businesses at bargain prices where we can get our heads around the fundamentals and say this, here, is mega cheap; in 2-3 years time I have a good chance of making big money. I’m hoping my fund project is going to have some spectacular entry points when I can get it started. The most important fact is, lower prices are good for those with capital, or future earnings to invest, and that’s most of us. So let’s keep an open mind, and stave off hopelessness. Don’t panic. Or if you do, make sure it was early.

* Maybe that starts now! 64x 2017 EPS, but consensus EPS should be growing at 88%! A bargain, clearly.

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