Stop equating Trump with Fascism

I have heard numerous well-read commentariat equating Trump with Hitler and fascism. The idea of a Trump Presidency has yet to sunk in for the average intellectual. He is yet to come to terms with the fact that a buffoonish reality TV character like Trump was able to compete and win decisively, beating pollsters and pundits.  Perhaps, our intellectual friend is looking for an apt analogy to explain the Trump phenomenon, and the rise of Nazi Party quickly comes to mind for it was a movement that surprised the intellectual of that era.

But Trump's similarities to Hitler are superficial at best. There is no question that white supremacists supported Trump and Trump was only too happy to let the innuendos run and deliver votes. Trump's opportunistic use of divisive issues -- Deportation of illegal immigrants, banning muslim immigration and erecting a border wall, was a well-timed ploy to garner votes. His opportunistic use of dogma highlights the key difference between Trump and Hitler.

Hitler was a committed ideologue. He developed his brand of ideology from his experience during the first world war and refined it in the tumultuous years that followed. He went to jail and suffered setbacks, but these setbacks only toughened his resolve and his ideas. On the other hand, Trump's life has shown that he is easily swayed and has no ideologies (thankfully, or else he may have been dangerous). He is a showman but not a ideologue. Trump's was a democrat before he became a republican. He rants against Chinese and Mexicans ripping off US, but uses the very same countries to manufacture his products (even those red 'Make America Great Again' caps). He calls for ending Washington corruption but has candidly spoken about paying off politicians. In short, Trump's vocal appeals were made not because he felt deeply about it, but simply because  it would work on the airwaves!

Anyone who has followed Trump's life will be scratching his head to figure what exactly does Trump stand for. He is certainly not a conservative nor a liberal, neither a democrat nor a (true) republican. His lack of a committed ideology means that he will end up being rather centrist President, even though at times he may appear to fly off the pendulum. And if he's lucky, this centrist-tilt may not be a bad thing for America or the world.

Golden years of Obama?

Obama won the election in 2008 promising hope and unity, but after eight years Obama's greatest legacy will likely be one of maintaining political and economic stability, and this stability may seem far more tranquil in the tumultuous years to come.

Arguably Obama inherited a country starting at the abyss at the end of 2008, and his immediate task was to stabilize the crisis. But Obama's strategic mistake may have been to take the mantra of stability a bit too far. He had a golden chance to push against inequality -- the taxpayer had bailed out the financial system and the asset owners were on the ropes. Obama administration failed to capitalize on the opportunity to fix the tax code and muscle in a new course for the middle class. Instead, Obama chose to play it safe, pursuing similar asset-bubble policies that caused the previous bubble (low rates, increased leverage), all in the name of not risking the 'recovery'. The recovery has now arrived, and the stock market has boomed but almost all of the gains have been captured by very wealthy elite. Stock market is perhaps no longer a good indicator of the state of the economy given the narrowing public participation in stock markets. The great majority of people gained little from this recovery and they may be wondering if this is recovery, how bad could a downturn look like?

 In social issues, Obama has done little to change the pre-existing trends. Shootings have continued,  race relations have gotten rockier and immigration has remained a thorny issue. Obama's reluctance to stand up and fight has meant that these issues were never addressed head-on. The tearing of social fabric in America is an unfortunate consequence of Obama's policies that will weaken United States on many levels. A strong and cohesive society is a prerequisite for a strong nation.

On foreign issues too, Russian takeover of Crimea, Syrian war or even the Israeli-Palestinian issues, Obama has kept himself limited to eloquent speeches and backed off completely whenever the other side pushed back. In South China sea, US went silent when China asserted control over a few uninhabited reefs. It is no surprise that US allies are nervous, reassessing the value of being a US ally.

Obama, as the first black president and a Washington outsider, did not have the political clout to back him No doubt, he has been repeatedly stymied on even mundane matters like extending the debt ceiling.  But above it all, Obama's personality has been shaped by years in Ivy League and when confronted he prefers lecturing rather than ganging up or slugging. Obama's cool and principled approach towards conflict has only emboldened his no-holds-barred opponents. Trump has often called him a 'disaster' and 'the worst president ever'. A large section of US has loathed Obama from the very beginning and perhaps Obama's style only acknowledges his limits of his own power.

Obama's stability has come at the cost of deferring problems  and This stability is precarious to say the least and the next President will likely not have the luxury, nor inclination to keep the pot of troubles simmering for much longer. The world, by now used to 'preserving the status quo' politics will have to deal with shocks associated with addressing issues. This may make the world yearn of the Obama's golden years.

Lifecycle of a thematic

Thematic investing has been around since the beginning of investing. The emergence of ETFs made it easier for investors to invest thematically  (at first through ETFs  such as Tech (QQQ) or energy (XLE)). Most recently, Blackrock has introduced 'thematic ETFs' (such as AGED for aging, RBOT for robotics) to capitalize on megatrends.

What is Thematic investing? 

Broadly speaking, thematic investing involves buying a group of stocks with exposure to a trend (or pompously called a megatrend) that is expected to persist for an extended period of time. The investor hopes that buying a basket of stocks will protect himself from an stock specific idiosyncrasies, at the same time the portfolio will benefit from the structural tailwinds. History suggests that megatrends do occur frequently and provide huge opportunities who are quick to recognize them. Some of the successful thematics in the recent years have been : Technology in late 1990s, Emerging markets (Asian Tigers) in early 1990s, Emerging markets (China-centric) in mid-2000s, Internet in 2003-2007, Internet in 2009-present ,Energy in 2004-2007, Abenomics theme in 2012-15 and many others. Common among these themes is a  'cycle' that starts with 'faith' and ends in a maniac blowoff top followed by a sharp normalizaion. We can, through empirical observation and generalization, broadly divide a succesful thematic cycle into five stages with very different characteristics.

Typical Stages of Successful Thematic

Faith

The beginnings of a theme starts off with faith -- almost blind faith in the theme. There is great uncertainty about feasibility itself and the roadblocks seems almost insurmountable. Only a handful of investors are drawn to a theme at this stage as investors have typically no analysis that could guide them. Investors' past experience of disappointments and frauds deter all but the faithful at this stage. Investors who can bear volatility, total loss of capital and have long investment horizons are typically drawn into this stage.  For example, in 2000-03, few investors could muster courage to invest in Emerging markets, as ghosts of Asian crisis, banking crises, high inflation and balance of payments crises deterred investors. 

Low liquidity, high volatility, negative (or indeterministic) valuations

Disbelief

At this point, the proof of concept is here, however investors are unwilling to accept the changed reality. Internet stocks in mid-2000s, Energy in 2004, Chinese Internet in 2012-13 etc. are examples of themes at the disbelief stage. In 2004, oil prices began to climb over $30 -- breaking prior highs, that supply-demand imbalance had occurred due to a shift change in demand from China even though numbers were consistently showing rising demand and stretched supply. 

The theme appears 'expensive' at this point. The numbers begun to confirm the theme, but high valuations throw off 'value' seeking investors. Investors need a mindset of 'growth investors' where you are need to think exponentially and not linearly in terms of projected revenue and earnings. 

High valuations, elevated volatility. Liquidity improves. 

Acceptance but underestimation 

By this stage, the theme is no longer proof of concept but well entrenched. Investors accept the new reality (tech in 1997-98, energy/EM in 2006) as numbers rise unequivocally. However, investors long used to linear earnings growth, consistently underestimate the earnings potential. By now, most sell-side is well on to the theme with stock analyst writing beautiful reports and competing with one another to raise target prices. Downside volatility falls, as investors scoop up any weakness. Market gives very little chance to buy weakness. At this stage, the theme is widely featured in mainstream newspaper front pages and becomes known even to the non-investing public. 

Much better valuations, low volatility and high liquidity. 

Mania

By now the theme is well known and well discussed on CNBC, Bloomberg etc. Retail participation is high and analysts are rushing to justify ever higher valuations. Prices rise higher and faster than expectations and analysts keep revising targets ever higher. Valuations tend to rise (and are somehow justified by analysts). Novel theories emerge as to why prices are set to rise (think of peak oil and oil super spike in 2007-8, use of PEGs during 'dot com' mania in 1999-00).  Skeptics are brushed aside by the price action. As shorts get constantly squeezed, few investors are able to hold on to their shorts.
High valuations, high volatility and very high liquidity

Normalization

A period of normalization always follows the mania phase, and most often correction in prices erase all the gains in the mania phase and sometimes well  beyond. This is the period where prices fall back to fundamentals and value emerges. Some successful themes like Tech (in 00, 07) remain intact despite deep corrections (Tech fell 80% in 99-03) but for some themes reality changes permanently (Japan real estate in '90 onwards). The speed of 'normalization' or 'crash' often stuns investors into disbelief, but it is prudent to cut your positions to a lev. Corrections rarely end before the market positioning is completely reversed.
Value emerges, high volatility and high liquidity

The above stylized life-cycle of cycle of a theme is often far more complicated and noisy in practice. Moreover, the market is constantly trying to discount the probability of a failure. There are plenty of instances when a promising thematic failed to deliver, which can only be analyzed ex post. Biotech in mid-2000s suffered a string of failures in FDA trials and remained a weak under-performing theme for almost a decade. While we will be always hamstrung by the fog of the future, we can observe some general rules by taking advantage of the lessons of how previous themes played out. A sense of where we are in the thematic cycle could help investors evaluate their portfolio from a historical perspective.

Strategy
While it does take foresight (and to a certain extent faith) in the early stages of a theme, once you do pick a theme you believe is going to be sucessful, history suggests that the best strategy is to hold on until the mania period is underway when a theme is well known, liquidity is high, analyst bullishness and valuations soar. The usual mistake of investors is to get off too early in a structural thematic story.

Stock selection
Investing in a theme usually means the rising tide lifts all boats, but it can be dangerous to ignore stock selection in the thematic investment process. One of the biggest societal changes in the last ten years has been the rise of smartphones which have become ubiquitous and increasingly powerful. However, such an obvious theme was a very difficult theme to play. In mid-2000s the smartphone market was in its infancy with blackberry dominating the email on phone system, and Microsoft's PocketPC system (sold by vendors like HP, Compaq and Dell) dominating the 'computer' system on a handheld device. Nokia was the biggest phone manufacturer using its own operating system Symbian -- another clunky operating system for phones.  If one had invested in the smartphone theme -- arguably the greatest technological theme of the last 10 years -- without stock selection, they would have lost heavily despite being right on the theme. One can make a similar observation about social networking theme (remember Myspace/Friendster?). Tech industry has increasingly been disruptive and evolved into a winner-take-all model. In technology related themes, stock selection should be carefully factored into the thematic approach and one needs to be aware about disruptive technology. As a result, the thematic approach needs to be supplemented by continually re-assessing the stocks involved and industry trends re-evaluated.

Conclusions
Today once again, we have many promising themes that look likely to shape our society in the coming years.  Many emerging tech themes such as robotics and EVs have already passed the 'proof of concept' stage. However, like in the past, we are likely under-estimating the change these themes will bring. And once again, stock selection is likely to prove critical in playing these themes. With benefit of hindsight and risk of generalization, we can draw some conclusions on thematic investing.
- If you feel you are on to a successful theme, stick to it and stay long. The most common mistake is for investors to cash out too early.
- Pay little attention to valuations for a large part of the theme time-cycle. Valuations tend to very expensive in the early/mid part of the cycle.
- Pay attention to stock selection, especially in tech-related themes, and watch out for disruptive forces in your theme.


Happy thematic investing!

Market going up..

Despite the gloom and doom out there, I think in the short term market is going up. My proprietary model (more on that later)  is up 7% for the year (with 15% up this month) suggest in the short term market will go up. Here are the reasons why:

 * Sentiment is very very bearish. Huge short positions have been built in the anticipation of a greek default. Investors are very bearish too (last week's AAII bullish reading was only 25%, close to panic levels).
* Data has actually started to stabilize and improve (Today's durable goods report is another good set of data). Despite what has been written, there is currently little confirmation of start of a new recession.
* Europeans have finally begun to realize the gravity of the situation. Hopefully their inept leaders will realize that it's cheaper to bailout Greece than to bail out themselves in case of financial meltdown.

I think we are beyond the 'panic' selling that we saw in August and September, the market will now focus on PMIs and health of global economy and unless these readings hit lower than the already weak expectations, I expect market to go up -- maybe up to 1250-1265 level before November.

Model Update: 

Current Position: Long SPX
My proprietary model flipped from short SPX to long SPX on September 21st with SPX at 1162.

Welcome to Hail markets!

Welcome to a cool new market commentary blog. This will be a no holds barred, bare-knuckle commentary on Mr. Market. I work for a Global macro hedge fund and this commentary is loosely based on principles that buy side looks for. I will also publish my proprietary e-mini (S&P 500) model that has provided me with an excellent compass in this directionless, often chaotic world. Typically our time horizon for trades will be short - 1 day to as long as 3 months. I will publish when to buy and sell the trades and my performance will be for all of you to judge and comment.

 Hopefully this blog will provide value to both you and me and in this process, let's make some money.