— What is a “Ponzi”?
— What just happened? A contrarian view of the first half 2022
— It’s the 1970’s all over again or is it?– A view from someone who lived every day of it as an investment professional
— Investors continue to stare into the rearview mirror. “Recency bias” has never been a road to riches in the market. It is time to be greedy!
What is a Ponzi?
The obvious association one would make is with a “Ponzi Scheme”, which gives one the impression that it’s not good, to be avoided. Our source below (Kuppy) gives the following explanation, paying tens of billions of dollars for companies with no earnings (“run by known criminals”). I will be more liberal but nonetheless damning, and define them as many legitimate companies that due to management and Wall Street hype attained unwarranted, astronomical valuations.
One example would be Zoom Video Communications, Inc. (ZM-$110.97). At its peak in October 2020 Zoom traded at $588.84. At that value it was trading at 140 times the company’s latest 12 (1Q 2022)month revenues and 141 times latest 12 month earnings. Some earnings did come but so did the end of Covid and the competition. When I am on a video call these days (and there are not nearly as many) my hosts generally set up on Microsoft Teams. There are countless others, HOOD, TDOC, PLTR, RBLX to name a few, down 75, 80 and 90 percent. Add to these names the FAANGMs and you have the 2022 version of the 1970s’ “Nifty Fifty.” You also have a pretty good glimpse into the “dot com” bubble that burst in 2000.
A reasonable (and positive) explanation of a lousy 1st half
“With June now over, we can say that the S&P 500 has suffered its toughest first half since Richard Nixon was in the White House. It was a rout for the history books, with the equity gauge down about 21%. Investors in consumer stocks witnessed a wipeout of $1.8 trillion in market value.” Bloomberg
The end of the zero interest rate policy at the Fed was a body blow to the high multiple, anything-goes sector of the market.
But long before that happened there was a silent capitulation among many money managers who espoused being value oriented but went to the dark side chasing the performance that value stocks were not providing. Below I have included a couple of quotes from a hedge fund guy who blogs under the name “Kuppy.”
“I had multiple smart friends seriously trying to justify paying tens of billions, for unprofitable companies, run by known criminals. After a while, it all made my head hurt, especially as my friends were making money in Ponzi and I wasn’t. Unlike them, I was convinced that it would end—I simply didn’t know when.”
” … After a brutal quarter where the media taunts your idiocy, funds are desperate to simply exit—rather than admit they also owned Ponzis.”
According to Kuppy this is exactly what we saw in the last week in the quarter … capitulation leaving the sector. He now sees the short covering beginning. Ergo, he’s “renting me some ponzis,” looking for a trading pop.
I think what is important here is to recognize that the disastrous action in the former Covid leadership bled through to every sector in the market, guilt by association. All you had to do to lose money was be invested in a common stock. Most everything took it on the chin regardless of valuation, small cap in particular as smaller size equated to bigger risk.
The media screams the “R” word and 1970s redux
I lived it as a financial professional and I can assure you that this is not deja vu, the 1970s all over again! Let me give one key factor on 1970’s inflation vs, today: The price of oil quadrupled in 1973 during the Arab oil embargo. It quadrupled again during the Iranian Revolution. Yes the price of oil (West Texas Intermediate) is up sharply from pre-covid levels but at current writing, having doubled earlier in the year, it is currently up about 80%, a far cry from a quadruple. Yes we all feel it in the pocketbook but it is significantly more manageable. Secondly, the stock market (S&P 500) made its ultimate bear market low in September of 1974. High inflation and rates persisted through 1981 with the market moving considerably higher over that 7 year period closing out 1981 at 122.64, up 93%. The average rate of inflation in 1981 was 10.32%. The ten-year US Treasury note closed 1981 at a 13.89% yield. (verifiable facts)
BTW, we had two recessions during the period encompassed by this data. (verifiable fact) …SO MUCH FOR THE “R” WORD.
Never will you hear the parade of experts and talking heads in the media go into this degree of detail when talking the 70s. To the generalizing and usually ill-informed media the 70s were always terrible years to be in the market when in fact the latter half of the decade (plagued with high inflation and rates) was a great time to make money in the market. Of course, through most of this period most investors, just as is the case today, were laying low, waiting for another shoe to drop that never dropped.
“Recency bias” has never been a road to riches”
Giving more importance in your decision making to the most recent past events versus the current facts on the ground is not a recipe for success in the market … not investing now because you see a continuation of the trend in place.
When I think about “recency” in terms of the stock market it is not just the action of the past six to twelve months I’m contemplating. It is the most recent market traumas, like the recession and collapse associated with the pandemic or the crash resulting from the financial crisis.
Recency bias (looking in the rearview mirror) is the enemy of investment performance. Unfortunately, it appears many do just that. A prime example of that can be evidenced by the poor performance of the bank stocks. They have been hammered just like the rest of the market even though the optimum case for owning them, a rising rate environment, is in place. On top of that the Fed just gave the group a clean bill of health on their stress tests, green-lighting dividend increases for any bank desiring to do so. The street reaction was blah. The only narratives that I can attribute this to would be worry over another 2008 financial system implosion … a looming severe recession causing systemic issues for the industry or a lurking black swan. Given the less-than-stellar risk management history of the banks anything is possible. My bet is that it will take longer than 14 years and less regulatory scrutiny before the next big blow up. Meanwhile, based on the performance of the group, many investors still seem to be gazing into the rearview mirror. In the interest of full disclosure I own a position in BTO (The John Hancock Financial Opportunity Fund).
I think rearview mirror gazing (most recent market trauma gazing) holds true for the general investing population based on the continuing uber-bearish tone of sentiment surveys like the AAII investor sentiment survey (only 22.8% bullish).
Mr. Buffett has advised us to be greedy when others are fearful. By all that I can see it is time to be greedy!
What do you think?
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