Market/Tech/Beta Meltdown – Some Thoughts. Arguably hopeful.

Stocks have been selling off in general, with tech names selling off in particular.  The concerns aren’t about individual names.  It is just generalized selling of broad sectors and categories ahead of earnings.

I see the underlying problem as such – Everyone like “stocks” as the best-of-bad-choices investment option, but they don’t like specific individual stocks nearly as much.  There is conviction in the asset class, but not the individual assets that actually constitute that class.

  • This helps to explain the recent pattern of group run-ups between quarters, big drops in individual names during earnings, and then another group run-up in the following months (until the next round of earnings).  The problem is that individual names are not delivering the performance or promise hoped for from the asset class as a whole.
  • The market is also getting smart to the pattern above.  That magnifies the swings (especially the downswings) as more people get into the same rhythm.  Run up the “story” stocks when there isn’t any news to contradict ever-rising hopes.  Sell them off when the companies to have the temerity to talk about the actual reality of their businesses (which haven’t matched those hopes and dreams).  Run ’em up again…
  • It also makes sense after the last few years of huge lurches driven largely by macro events.  People who tried to analyze and buy/hold individual names with any conviction have had suffered bad performance.  They have often lost their jobs, or at least lost assets.  The surviving investors out there have learned to be top-down and “story” driven.  Which makes it harder and harder for individual names to break out or perform (because the people with the money aren’t looking for individual names).

Of course, the above only suggests that this pattern is about to be broken (with disappointments for the many and high returns for the few).  There are too many wolves hunting too few caribou in the valley of macro/theme/momentum investing.  The few, lean ones left hunting in the adjacent valley of individual company performance are going to feast one day soon.  And so the pendulum starts to swing again.

That swing could start this quarter – particularly with tech stocks.  THis earnings season could mark the beginning of individual company break-outs based on old fashioned stuff like new product cycles, lucky big orders, installed base refreshes, and boring crap like that.  Aided by pent-up long-term demand from years of low investment and short-term demand delayed from the frigid 1st quarter.

  • The economy actually does seems to be picking up.  Particularly capital spending as companies start to see a whiff of higher rates and animal spirits start to revive a bit.
  • It will look even more perky going into the next three quarters because first quarter started out so awful due to weather-related delays/depression.
  • A lot of current investors have probably forgotten about a previously reliable pattern of tech spending/investing seasonality.  1Q always feels grim.  Then things get better.  Expectations follow – building (usually to unsustainably high levels) up to a blowout 4Q.  Managements messaging and tone follows and magnifies this.  The rule was to sell ahead of January earnings reports and buy going into April’s.
  • Right now, you don’t get the feeling many people are actually looking at individual names and forecasting actual likelihood-to-surprise.  Heck, most people out there probably don’t even really know how.  Turnover of people and skillsets is a lot higher in asset management than those 401k ads would lead you to believe…

Unfortunately, I don’t have any great specific ideas for which individual companies will benefit.  That would involve actual hard work and I’ve got a house to paint right now so…  I have a few telecom equipment stocks (INFN, CALX, JNPR) that could do well for various secular reasons.  I also think the broader corporate/enterprise hardware and software makers could do decently (mostly because they have been mostly left for dead).  I expect a lot of other economically sensitive companies that have positioned themselves well during lean times will start to distinguish themselves as things pick up.

What I do see is too many people crowded into an aging investment approach.  Which usually leads to underperformance.  Which eventually leads to money chasing higher performance.  Which crowds the next newly successful investment approach just as it starts to get less and less rewarding.  Which is the underlying human tragedy behind the best title ever of a Wall Street book – “Where Are the Customers’ Yachts: or A Good Hard Look at Wall Street?”  Published in 1940.

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
“Look, those are the bankers’ and brokers’ yachts.”
“Where are the customers’ yachts?” asked the naïve visitor.
–Ancient story

Which reminds me I gotta find me a copy and actually read it someday.  But first I gotta paint the damn house.  Ugh.

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