James Litnsky of Chicago-based JHL Capital Group has his eye on volatility triggers. Managing nearly $1.2 billion in customer assets, Litnsky, in a July 27 letter to investors reviewed by ValueWalk, pointed to insight from JPMorgan’s Jamie Dimon regarding the US Federal Reserve unwinding its nearly $4 trillion balance sheet headlined the core causation for a “tide change.” But the “tell” to the forthcoming volatility regime might be seen in stocks such as Amazon and Facebook, which are priced beyond any apparent logic.
JHL Capital Group: Fed balance sheet maneuvers have not worked, as "tide is going out"
Since the 2008 financial crisis, the combined balance sheets of the central bank troika – the Fed, ECB and BoJ – have grown by more than 300%, ballooning to nearly $14 trillion from $4 trillion. But despite this historic strategy shift where negative interest rates and unusual asset purchases bent economic textbooks beyond recognition, “all three economic zones have had lackluster growth.” US GDP, for instance, grew only 2.1% per year on average since 2010, while Japan grew at 1.4% and Europe grew at 1.1% -- well below historical averages during periods preceding quantitative easing.
This experimentation is ending and it will result in “a big change in the tide,” JPMorgan chief Jamie Dimon told a conference in Paris July 11. “The tide is going out.” Other analysts have been watching for a slower reduction and a gentle transition.
Dimon said that central banks “don’t know how this is going to play out” but speculated the process to withdraw quantitative easing is going to be “more disruptive than people think.”
From Litnsky’s standpoint, this is a likely volatility trigger. “The Federal Reserve’s transition marks a real regime change,” he told investors. “This change is being well-telegraphed and expectations are that it will be very gradual. Yet, with equity markets at record highs, markets may not be fully appreciating the set of probabilities around what might happen now that one of the biggest financial asset buyers is officially selling.”
JHL Capital Group: "No doubt" central banks have inflated asset prices, tech stocks likely first hit
JHL Capital Group says there is “no doubt” central bank asset purchases have “helped bid up global prices for stocks, bonds, real estate and even collectibles, like art, in recent years.”
From his standpoint, the delicate surgery the Fed is currently performing with a September reduction in its balance sheet scheduled likely to readjust asset prices to various degrees. “What rate of reduced Central Bank purchases will be enough to raise the overall cost of capital? When will risk premia reprice across all asset classes?”
That “repricing” could first be seen in technology stocks, which he places into two categories.
There are tech stocks achieving growth at a reasonable multiple, such as Facebook, Apple, Google and Microsoft. Even her, the market price assumption is based on perfection:
GOOGL and FB are priced on the assumption that they will retain virtually unimpeded monopolies on global digital advertising for many years to come. Compounding their current revenues at the growth rates implied by the market generates very large numbers a few years out. This implies that there will be no further competitive reactions, changes in the media landscape, new entrant technologies or regulatory intervention. These are difficult assumptions to make.
Stocks that could see a significant “repricing” during a downturn are what Litnsky calls “collectibles,” tech stocks that “are valued based on future, and difficult-to-quantify profit prospects, rather than on foreseeable cash flow. They are valued more like en vogue art work because price is simply a function of a limited supply meeting a large and growing demand.”
But these stocks are likely to hit some turbulence. Amazon, in particular, could be on regulator radars as they are beginning to threaten powerful business interests in a number of realms, not just retail.
It is the combination of central banks withdrawing a stimulative matter that has gripped markets like a drug and a technical value readjustment in stocks such as Amazon, which is boasting a 250.8 price earnings multiple this morning.
JHL on the catalyst to break the levee- Angst over Amazon
JHL Capital Group is concerned that anti-trust and protectionist moves could hurt Amazon which could be the catalyst for the collapse of FAMGA and the entire market.
“Global Central Banks may turn from large buyers in the market to sellers,” Litnsky wrote, pointing to one of two major market risks. “Simultaneously, governments may increasingly scrutinize these technology behemoths. We will be following these developments closely as they unfold.”
The hedge fund thinks that big tech could be the battle of the 2020 elections just as big pharma and banks were themes in prior elections.
Specifically with regards to Amazon, JHL notes that not only is their bipartisan anger, but AMZN is viewed lately by some as being too aggressive in IP and services, which could help garner support for anti-trust action.
JHL Capital Group notes some prominent politicians are weighing in on the Bezos giant. The letter states:
Senator Cory Booker gave an interview last week questioning where antitrust enforcement is with respect to AMZN and GOOGL. President Trump recently tweeted about the “Amazon Washington Post” in reference to the company’s monopolistic power and tax avoidance maneuvers.
JHL Capital Group is long The New York Times, Indian based companies - MakeMyTrip Limited, DLF Limited, and has become the largest shareholder in Secure National Resources, and MP Mine Operations, related
Despite being basically flat for the year, the hedge fund called 2017, the most difficult year in the ~$1.2B hedge fund firm's 11 year history.
Eric Rosenberg, an analyst, left the firm to join JHL's seeder, Ranger.