My Buddy Tal, publisher of Beijing Perspective (http://www.beijingperspective.com) sent me the following last week. It’s both prescient and obvious advice. I felt the need to share as I agree completely. If you want more of his notes, I recommend signing up at his site.
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
The first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More
November 7, 2015
Two cents on interest rates
Cent #1) “Anyone familiar with asset markets know that it is expectations that move prices” – George Soros
Cent #2) Every action has a consequence, and each consequence has another consequence (“Second-Order Effect”)
Expectations of long term interest rates post fed hike (if any), are not necessarily the same and not necessarily linear to expectations of long term interest rates pre fed hike.
Cent #1+ Cent #2 = 4 , 8 or potentially 16 Cents
The actual action of an interest rate hike (if any) can create “expectation feedback loop”, in turn, a desire by market participants for higher yields on their investments dollars, this potential shift in expectations is not priced in anywhere in the markets, not in stocks, high yield bonds or real estate, the market is pricing in a small hike, but not a shift in expectations post hike.
Considering the prices stocks, bonds and real estate are trading at, and considering that underlying earnings, rents, cash flows are far from depressed, a small move from lets say 4% cash flow yield to “new demand” of 5% cash flow yield on some assets, (as result of new expectations) can create a 20% decline that could cascade into something more serious. if buyers decide to only step away, that alone is enough to create a decline of that magnitude in some markets.
This is not a prediction, in complex systems no one can predict, but one can and should look for places of vulnerability in the assets they own, and whether or not there is any margin of safety in them, now is a perfect time to do so.
This exercise of demanding margin of safety is necessary for long term survival, you can be plenty wrong if you have enough margin of safety, and if you don’t, a few errors can and will take you out.