The Winds Of Change
FatAlpha Active portfolio dropped in line with the market last month (-5%), while the Market Neutral portfolio jumped +3%. Since inception in September the Market Neutral strategy is up almost 7%. And not only is zero leveraged used, it has been underinvested. While the target gross exposure is 100% it has been running mostly at under 50%!
What happened last month is less important than what I’d like to discuss today. Today I sound a major market alert. The bull market is dead, and investors need to start taking action.
I just published an article on Seeking Alpha titled “A Change Has Come” which express my view on the market. Read it here:
http://seekingalpha.com/article/3875276-change-come
To summarize, technicals have weakened considerably, valuations are not cheap, earnings are in decline, the yield curve is flattening, manufacturing is contracting, and margin debt is off its peak and declining.
For the last two years I’ve repeatedly said that when markets weaken via what I see in the fundamentals and technical then I would reduce my net exposure in FatAlpha Active. In a bear market the net exposure would be zero. So as I saw the above, I took action and significantly reduced my position from a net long of around 95% to around 55%. I believe this to be the best course of action and since taking the decision I feel much more comfortable with the portfolio composition. This is the first time FatAlpha Active has reduced its net exposure so much and it will be a good test to see how the active exposure portfolio does in a bad market. This will complete its cycle as it will have a historical performance in both good markets and bad.
Zerohedge had a piece out in early February which is also a must read:
http://www.zerohedge.com/news/2016-02-07/what-charts-say-now-time-worry
Some of the shorts I entered into include Tesla (TSLA), Monster Beverage (MNST) and Proofpoint (PFPT). You can read an article I wrote on Proofpoint (PFPT) for free here: http://goo.gl/y6WZns. I also wrote a second article just last week on PFPT but it’s for SA PRO subscribers only. The market is repricing these overvalued stocks and is something that will continue as the market weakens further. This is an ideal time, in my opinion, to put on such shorts. We all saw what happened on Friday to LinkedIn (-44%) but I believe it should have been no surprise to the market. The media and talking heads have got it wrong. It had nothing to do with guidance. See my Friday article on LNKD here: http://goo.gl/LtVKpf If you examine the decline in the growth rate of sales then the given guidance should have been expected. What is really going on is the re-rating of all these overpriced stocks.
Those fixated that this is a short-term correction due to the scare in oil should note this quote from Morgan Stanley: “Oil’s role in driving hour-by-hour market moves is overstated. But its place in the broader macro debate remains central,” write the [MS] analysts. “Energy companies are no longer leading equity or credit indices higher or lower. In our view, oil and markets are moving together because they are driven by similar things: concerns over growth, a lack of risk appetite, [and] a relentlessly strong trade-weighted dollar.”
Also consider John Mauldin’s piece “$100 Trillion Up In Smoke” from his free publication “Thoughts from the Frontline”. See a link to Mauldin Economics and a few other favorites (like Yra Harris and Ben Hunt) at my new links page found here: http://goo.gl/72jgVT
In Mauldin’s piece, he reminds us that $70 lost per barrel x 1.7B in proven reserves = $119 billion in lost wealth. That’s over 200 Googles or Apples going to zero! The point is that this loss in value results in a negative wealth effect that is affecting the world. Quote from the piece: “Owners of all these resources are right now experiencing a severely negative wealth effect. They are changing their behavior, and the resulting trends are not good for you if your own wealth depends on their continued spending and investing. We can’t put an exact number on this perceived wealth loss, but it is certainly in the tens of trillions – equivalent to a massive, worldwide bear market in stocks. Yet it is happening beneath the radar, almost unnoticed and unremarked.” I don’t want to take away any more of the article’s thunder so do yourself a favor and READ the piece.
Finally, at risk of repeating myself, I’d like to mention my view from the December letter:
“Pending the August low holds, my base case scenario is for one more final run to the high. Then we will see the market moving sideways until it breaks. I’m focusing on that monthly low and so should you. Once that is broken, all bets are off. The monthly will be in a downtrend, while the daily will be below all significant moving averages. The fundamentals are already broken, and the technical level is the only thing left holding this market up.”
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