Monday, March 29, 2021

Morning Note: The Danger of "Resulting"

Last Friday Goldman Sachs, Credit Suisse and Nomura found themselves in the unenviable position of having to dump some $20 billion worth of a handful of Chinese tech stocks and U.S. media firms as their hedge fund client Archegos Capital Management got way over its skis. And there's no way to know at this juncture if the mess is yet over...

Take a look at the latest action in Viacom:

Of course the commentary from Wall Street and the financial media is pretty much "keep walking, nothing to see here folks, get on with your business."

And, frankly, I tend to agree, at least for the time being. However, the following from Bespoke Investment Group (which would be the consensus view) this morning troubles me a bit:   emphasis mine...
"While other funds may be caught in the mess, we fail to see how this specific car crash of a trade ends up propagating across the financial system via counterparty default. Index volatility agrees: VIX closed at 52w lows Friday and is up less than 1.2 points as of this writing. Finally, these sorts of parabolic gains and waterfall selloffs appear to now be part of the investing landscape. Get used to the GMEs and Archegos of the world, because they seem to be happening with more frequency even if their fall-out is contained."
Well, two things: The VIX is up 2.48 points (13%) as I type, and "parabolic gains and waterfall selloffs" tend to be "part of the investing landscape" at serious market tops as well! 

I.e., While I don't suspect we'll see a major market collapse tomorrow, Bespoke's folks are just a bit too sanguine right here for my taste...

You see, it's typically not a "specific car crash" that ultimately signals a major market break, it's when accidents occur on a more frequent basis (as traders/investors tend to drive far more recklessly toward the end of the race) that we need to pay attention.

Recall our SP500 daily rate of change chart all the way back to 1928. The areas with the greatest vibrations often spelled trouble:

Asian stocks leaned green overnight, with 11 of the 16 markets we track closing higher.

Europe's hanging in this morning as well, with 15 of the 19 bourses we follow in the green so far.

U.S. major averages, however, are struggling early in the session: Dow down 146 points (-0.45%), SP500 down 0.71%, SP500 Equal Weight down 0.80%, Nasdaq 100 down 0.70%, Russell 2000 down 2.23%.

The VIX (SP500 implied volatility) is up 13.57%. VXN (Nasdaq 100 i.v.) is up 9.40%.

Oil futures are down 0.98%, gold's down 1.31%, silver's down 1.83%, copper futures are down 1.47% and the ag complex is down 0.59%.

The 10-year treasury is down (yield up) and the dollar is up 0.20%.

Utilities, Verizon and Consumer staples are our only core positions in the green so far this morning. Our biggest losers being MP (rare earth miner), TAN (solar), banks, oil services and ALB (lithium). All in, our core portfolio is off 0.79% to start the day.

A friend recommended Annie Duke's Thinking in Bets over the weekend. I had already read it, and, yes, it's definitely worth recommending. In fact, I've quoted her a few times herein.

Here's from a December of last year blog post. It speaks volumes about the danger of confusing all positive short-term results with quality decision making. I suspect that Archegos was doing just fine with all of those levered positions -- thus thinking they were good decisions -- until they weren't:
"In a nutshell, Annie Duke captures what I view to be probably the greatest, albeit hidden, danger that more than any other explains how too many folks ultimately fail at the game (the art) of investing.

It's the too-often destructive (eventually) -- at times devastating -- belief that short-term positive results always stem from quality decision-making:
" I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.""

Have a great day!

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