Why I'm still bullish on stocks; Cassava Sciences faces U.S. criminal probe; I write every one of my daily e-mails; How I do it; What's the Matter with Delaware?; Lassen Volcanic National Park
1) Yesterday's market rally didn't surprise me at all.
As I've written many times in recent weeks, I'm quite bullish on stocks for the rest of the year because I think inflation has peaked, the economic slowdown will be mild, and my colleagues and I at Empire are finding lots of individual stock bargains.
My friend Harris Kupperman also tweeted about some favorable technical factors:
Thread going into the FOMC print – as PMs we all like to talk about global macro, or individual stock picks. Long term, that's what drives price action. Short term, none of that matters. All that matters is fund flows – redemptions, short covering, inflows, sector flows, etc...
Look at 2022, many large hedge funds are down 25%+. Year-end redemption notices start Nov 1. These guys have 3 months to turn it around or get redeemed. Everyone gets redemptions from time to time. Losing half your AUM you were long Ponzi is existential to your career...
Guys will fight like mad to make it back. This isn't about performance for performance's sake, this is about survival. You have to get to flat or your business goes poof. Down 25% and it's poof anyway, so you take a shot. If you guess wrong and end down 40% you were dead anyway.
Therefore, guys are forced to take shots on goal. Fix it by Nov 1 or lose the AUM. How do you fix it?? Certainly not in cash. You can bet big on the short side, maybe use options, but hard to put up big numbers that way. Instead, they're forced to play long-sided...
Every datapoint shows that funds are massively underweight on long exposure. Huge cash positions, low gross, lower net exposure. These guys will all be forced to pivot long. Relative performance is cute when you're down 5 and is down 25. It means nothing when down 20 vs. 25.
The FOMC will do its thing, everyone will see a few hours/days of whipsaw action, but in the end, guys need exposure to save their careers. They are gonna have to buy it. Doesn't matter what Fed or economy or DXY or rates or GDP does. Guys have 3 months to stack basis points...
Think we get a sizable rally into the fall and sort it out from then. Guys just have to be long... As for me, I'm pretty damn long. Have highest exposure since the bottom in March 2020. Laid into GDP sensitive assets in late June. Felt so confident that I'm on vacation...
It is amazing just how many dominant, near-monopoly assets are 2-5x run-rate FCF. These are companies with 30%+ ROIC. Good businesses haven't been this cheap except Feb 2009 and March 2020. Difference is that those times were scary. Now isn't scary. We may have a recession. 🤷♂️🤷♂️
Who cares about recession?? You don't buy amazing companies for the next quarter or three. You buy them because of long-term compounding. When they give away great businesses this cheap, you simply stack them and ignore next . They will eventually be valued on stabilized numbers...
I have continually shat on compounders over the years... It should tell you how cheap things are when roughly half of my book is compounders. I tend to think these all revalue soon. Ponzi was the last bubble, this cycle, guys need cash flow...
Anyway, we all like to talk about stuff that makes us look smart (macro/fx/single stocks/etc.). That's fine and good. We don't talk enough about who's screwed and has 100 days to save his career. Cornered animals do crazy things...
2) Following up on Tuesday's e-mail about pharma fraud Cassava Sciences (SAVA), the stock plunged another 14% yesterday on this news: Cassava Sciences faces U.S. criminal probe tied to Alzheimer's drug. Excerpt:
The U.S. Justice Department has opened a criminal investigation into Cassava Sciences involving whether the biotech company manipulated research results for its experimental Alzheimer's drug, two people familiar with the inquiry said.
The Justice Department personnel conducting the investigation into Austin, Texas-based Cassava specialize in examining whether companies or individuals have misled or defrauded investors, government agencies or consumers, according to the sources, who spoke on condition of anonymity.
3) Some readers wonder whether someone else writes these daily e-mails when I'm traveling...
The answer: In the nearly two decades I've been writing them, I've never turned my pen over to anyone, not even for a single day.
So how, for example, did I write Tuesday's e-mail when I woke up at 1 a.m. and spent the next 12 hours climbing up and down Mount Shasta? Easy... I knew I'd be off the grid that day, so I wrote it the day before.
When I lose access to the Internet and/or my computer for multiple days – most recently three days last August when I did a 54-mile trek in California's Sierra Nevada mountains – I can't write about the latest developments in the markets, but there are plenty of non-time-sensitive things I can write about on these rare occasions.
And they really are rare, as there's Internet access at nearly every spot on earth these days (which is both a blessing and a curse...). I've traveled to 15 countries in the past two years, including Uzbekistan, Ecuador, and Rwanda, and never went more than a couple of hours without a connection.
But how do I keep up with my reading, so I have things to write about, when I'm doing things all day like driving (Monday and yesterday) or climbing mountains (Tuesday)? Again, easy... I download content – Audible books, podcasts, and YouTube videos – onto my phone and listen to it (at 2 times to 3 times speed) as I drive, hike, or climb (see the Shokz headphones I'm wearing in two of the pictures below).
Again, it's a blessing (I'm entertained and educated) and a curse (I'm not fully present in nature), but it works for me...
4) An example of a book I listened to recently while hiking is What's the Matter with Delaware?: How the First State Has Favored the Rich, Powerful, and Criminal – and How It Costs Us All.
I wanted to better understand how and why Delaware became the state in which more than two-thirds of the companies in the S&P 500 are incorporated and, in particular, how its Court of Chancery works, since this is where the epic Elon Musk-Twitter (TWTR) battle royale is being litigated.
After finishing the book, I'm even more convinced that Chancellor Kathaleen McCormick is going to rule 100% in favor of Twitter and order Musk to buy the company at the agreed-upon price of $54.20, as the court is no-nonsense and very friendly to corporations (that's the main reason they incorporate there).
5) Yesterday I drove 90 minutes from Mount Shasta to Lassen Volcanic National Park, which was very pretty, but doesn't hold a candle to, say, Yosemite or Yellowstone.
The park got its name from a big eruption in 1914 (see the upper left picture below), though it was later dwarfed by the massive eruption of Mount St. Helens in 1980, which was 100 to 200 times more powerful and killed 57 people.
There are still some active geological features in the park like the bubbling mud pot in the lower left picture.
I went for a two-and-a-half mile, 2,000 vertical feet hike to the highest point in the park, 10,457-foot Lassen Peak (the parking lot is next to the lake in the far background in the upper right picture). There was a thunderstorm nearby, which you can see behind me in the middle picture, so I really hustled – speed hiking to the summit in 65 minutes and jogging down in 40 minutes.
I then went for a refreshing dip in one of the many beautiful lakes in the park (lower right picture).
I then drove three hours, halfway to Redwood National Park, which I'll be visiting today.
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.