Biotechs, Chinese Equites, FANGs: 2015 End Of Year Chartnado by Ice Farm

  • A Tale of Two Years
    • First half –Long Biotechs(+35.0%), Long China (+32%)
    • Second half –Short EM and faux DM(+25.5%), Short Commodities (+22%), long Quality vs Junk (+25%)
  • Theme for entire year? Vampire FANGs (+44%)
  • Ice Farm core view was that equity vol was too low, that faux DMs (Canada) were heading towards recession.
    • Right, but stumbled in delivering
  • Theme Outlook
  • Demographics – older, not wiser
  • Inflation – the Phillips Curveball…
  • Economic Outlook – Logistic growth limited by supply of labor
  • Deleveraging – a function of demographics
  • Inequality – misspecified, but politically powerful
  • Why Civilizations Fail – real time investment implications for China, Russia, Middle East and Japan
  • 2016 Ice Farm best ideas

Biotechs – Healthcare for aging Boomers. Still a favored sector due to demographics, but cost control becomes important now

Biotechs, Chinese Equites, FANGs

And as crazy as it seems, Biotechs are now trading below their historical valuation multiples with significant multiple compression over last year

Biotechs, Chinese Equites, FANGs

Chinese Equities – Coming into 2015 we noted that the idea of a “mania” in China equities seemed a bit out of line

Biotechs, Chinese Equites, FANGs

Chinese Equities – But by May 2015, it had truly morphed into a bubble with over 100% return over the TTM coming from multiple expansion

Biotechs, Chinese Equites, FANGs

Facebook Amazon Netflix Google… “Please Sir, may I have another?” Decelerating growth and big multiple expansion spells trouble for 2016

Biotechs, Chinese Equites, FANGs

… even if DotCom2.0 pales in comparison to Version 1.0 so far…

Biotechs, Chinese Equites, FANGs

As in prior years, the low earnings quality of the R2000 presaged high yield stress… however, earnings quality has been recovering while spreads deteriorate… this is bullish for high yield in 2016 unless the economy tanks

Biotechs, Chinese Equites, FANGs

The improving earnings quality has been driven by rising aggregate earnings. This is similar to late 2006 and suggests we are late in the cycle, but not necessarily at the end

Biotechs, Chinese Equites, FANGs

Non-financial domestic profit margins continue their inexorable decline helped by the decline in energy margins. Still a long way to average and a poor predictor of recessions. A US recession is a late 2016, early 2017 event at best:

Biotechs, Chinese Equites, FANGs

We are unshaken in our view that equity multiples will contract due to Boomer asset shifts… we believed rising volatility in 2015 was likely to begin to accelerate this process…

“…some have even suggested that when Baby Boomers draw down their financial assets to pay for their retirement consumption, selling pressure may generate an asset market meltdown, a sharp decline in asset values. However, that scenario seems unlikely because it is inconsistent with forward-looking behavior on the part of financial market participants; it would require a sharp fall in asset prices in response to a predictable demographic event.”

“Aging and the Macroeconomy”

http://www.nap.edu/catalog.php?record_id=13465

“We find that long-term forecasted demand growth is a significant predictor of industry returns. We also analyze the relationship between stock returns and forecasted demand growth at different horizons. We find that demand growth four to eight years ahead is the strongest predictor of returns.We present a model of inattention to information about the distant future that is consistent with the findings.

http://eml.berkeley.edu/~sdellavi/wp/demogrAERFinal.pdf

Biotechs, Chinese Equites, FANGs

We nailed it…

Biotechs, Chinese Equites, FANGs

See full slides below.